What exactly is the point of submitting a simple introduction-to-bitcoin story to HN? People here have seen, uh, a couple of bitcoin stories already.
If the point is driving people to buy some bitcoins, then this is not the forum for that. And people really need to be aware of simple-minded manipulations that can be and are played with the bitcoin market.
What's the point of submitting stories about security problems? What's the point of submitting stories about Google? What's the point about submitting stories about Rails?
People are interested in it and that's why it gets upvoted. If you're not interested just don't read it.
"If you're not careful, you might have your private information stolen online. You may even lose money to an identity thief!"
"Google is a large technology company which runs the world's most popular search engine."
These are NOT good stories for HN, because the people here /know this already/. There is nothing wrong with introductory stories as such. In the case of bitcoin, there is also a suspicion of an ulterior motive in promoting bitcoin stories.
As for "don't read it" -- forums are damaged when the noise (and spam) level is high. I can express my opinion by commenting, unless a moderator tells me not to.
I'm not the GP, but I'd be equally annoyed if people were continually posting stories about Google or Rails or security problems that added nothing new to the conversation.
At this point, the Bitcoin story has been pretty well picked over, and I'm not convinced there's anything new to say.
And, the fact that the stories continue to get upvotes is precisely what is troubling.
Well, truth of the matter is, once posts hit the front page, additional discussion (number/rate of comments) seems to be the greatest determinant for whether a post will stay up top.
So really the only way to get the stories to fall off is to stop talking about them.
HN is the target of opportunity by a distributed pump and dump scam. They are attempting saturation coverage to increase the value of their bitcoin holdings. It is exactly equivalent to why a company incorporated to sell pool cleaners would pivot to biotech and then get touted on Yahoo Stocks as beng in late stage trials for a pill that would cure 30 pct of cancers.
How did BitCoin pivot, though? Seems to me it has been BitCoin from the start, and seems unlikely to change.
Also how is it a scam, if the technology is open? It is exactly clear what BitCoin is and does. Everybody can take the specs and program their own client. Nobody can claim "BitCoin cures cancer" or something that.
Now if the current exchange rate is justified is another question. Also obviously people holding BitCoins are interested in making it more popular, as that is also related to the exchange rate.
I don't think that automatically makes it a scam, though. It is not so different from people invested in Google or Apple (either via stock or via technology usage) are interested in making Google and Apple more popular, as it increases the value of their investment.
Then again, perhaps the whole world is just a scam.
I think the fact that Bitcoins is being discussed in the Economist is an interesting data point unto itself. Just means its awareness is entering mainstream media territory.
Article says: "Many economists put at least part of the blame for the severity of the Depression on the strictures of the gold standard, as countries clung to gold and put off stimulus."
Many economists disagree, for example George Robinson who wrote "Monetary Mischief" in 1935. I'll summarize his arguments.
First: the gold standard was not overly restrictive. People routinely did business in gold contracts, and there was plenty of liquidity. It is false to think that you must have "enough" money to equal the total amount of economic activity in any given group of people. Money is traded at the margin, e.g. if I pay you a dollar, and you pay someone else that dollar, we just did two dollars worth of business with only one dollar.
Second: "Stimulus" is what caused the problem in the first place. The Fed's policies enabled the monetization of the WWI Liberty bonds, and the monetization of common stocks, which led to rampant speculation and malinvestment. When the policies were finally removed, and they had to be removed eventually, the economy shriveled and suffered from its malinvestment (in stocks such as GE and Consolidated Gas, in Florida real estate, etc.) More stimulus is not the answer to a problem caused by too much stimulus. That's like prescribing a heroin injection as a treatment for heroin withdrawal. It "works" in a sense, but postpones solving the actual problem.
Third: the U.S. economy suffered a monumental crash in 1921, but that was not followed by a prolonged depression. That's because the people were allowed to suffer and sort out the consequences of their previous malinvestement and put their future affairs on a more solid footing, without relying on that next heroin injection so to speak.
A quote from that 1935 book:
"Our present difficulties sure did not arise from any scarcity or failure of gold, but, to the extent that they had monetary origin, sprang from monetizing property through the banking process at a very high price level, which had later to be demonetized at a much lower price level. We tried to make gold too efficient. In this we undertook a form of managed currency. The Federal Reserve system had an opportunity to restrict the money supply, but did not understand the matter, and failed completely."
Another interesting quote:
"Now of course it was all done in the name of necessity, as such things usually are. In his radio address on the subject the President said that there was not enough gold in the world to satisfy all the contracts made in its name, quite as if gold were only a medium of exchange and payment, and our only medium at that, and not at all our standard or measure of value."
It's not a big surprise that you were able to find one economist from 1935 who disagreed. It would have been more surprising if you hadn't been able to. In any event, this is not a situation where a contemporary analysis necessarily has a closer view of the situation; far from it, as someone in 1935 didn't see what the next 75 years brought.
So: I didn't downvote, but I remain unimpressed with George Robinson's contemporary analysis, as it consists simply of two unsupported assertions.
He writes a whole book to support those assertions, but I only had time to hit the high points here.
I have no interest in getting all religious or dogmatic about gold, silver, bitcoin, US dollars, Euros, or any other form of money. My real point is: let individuals decide what forms of money they wish to use, without harassment.
Clearly the practice at the time of banks lending money to buy stocks and Florida real estate, using stocks as collateral for those loans, was insane and unsustainable. In effect, common stocks were indeed monetized, and this led to an enormous boom in the money supply which enabled and encouraged the mis-allocation of capital. When that stops, people suffer, no doubt about it.
It was just sick what certain people did back then to keep prices propped up artificially high. They would spy on farmers to make sure they didn't produce too much, and if they did, they'd go in and burn crops and slaughter hogs. This while people were going hungry. I had a neighbor who, as a 14 year old boy, was hired to drive around the countryside spying on farmers. A dry cleaner who charged too little for his services was imprisoned. The authoritarians fought deflation tooth and nail, and years of misery was the result.
In 1935, a lot of very intelligent people thought that the Soviet model was the answer (I don't mean George Robinson in particular). It turned out that those people lacked some information and perspective, and were probably guilty of wishful thinking. So why should the 1935 date of this book impress us, in itself?
P.S. The story of Westerners who relocated to the Soviet Union in the 1930s is fascinating. And very sad, for the most part. There were tens of thousands of such people. I am sure Google will find references.
Sure, such as Walter Duranty, the famous admirer of Stalin. But I like to discuss specifics. I disagree with Walter Duranty and Stalin on many points, and I agree with George Robinson on many points. I'm willing to discuss all of these things on their own conceptual and moral merits, beyond many of the overly high-level responses I've seen here.
I believe (though I obviously can't know) the reason you are getting down votes is that you are making an explicit appeal to authority ("An economist from 1935 disagrees") against another appeal to authority (the "Many economists" from the article). But the thing is, "many economists", who have the added benefit of decades worth of observations and accumulated knowledge in the field of economics are almost certainly _much_ better authorities than someone from the 1930's.
Which doesn't prove any points, because appeals to authority never really do. But if you open your argument with an appeal to a weak authority, the rest of your argument will look weak as well. I imagine you wouldn't have been down voted if you had just left out the bits about George Robinson and let the arguments stand on their own.
You're probably right about the downvotes, but the article itself made an appeal to authority and majority (i.e. "many economists"), and I wanted to counter that with a specific exception, and I see no harm in citing him by name.
On your other point, I don't put much stock in the decades worth of obfuscation that have followed, such as the silly praise for breaking windows, or digging holes and filling them back up, or other activities only sustainable by confiscating or devaluing property.
Here's the thing about gold. I don't care if anyone uses or does not use gold to settle business. I just don't want anyone interfering with people who do choose to use it. (Same goes for bitcoin etc.) That is to say, no harassment, no fines, and no jail time. That's all I ask.
For your information, the phrase about "digging holes and filling them back up" is probably one of the most distorted quotes in all of economics.
Keynes essentially asked his readers to compare three possible scenarios in a situation where the private sector does not provide enough job opportunities due to a lack of aggregate demand. The scenarios are:
(1) mass unemployment
(2) the state providing employment in work that is considered useful
(3) the state providing employment in "digging holes and filling them back up"
Keynes point was that the order of desirability is: (2) is better than (3), and (3) is better than (1)
He was not in any way advocating in favour of (3), he was merely pointing out that even though (3) looks stupid, it is still better than (1).
Keynes was making hay out of a disaster. The banks enabled a speculative boom, resulting in a massive mis-allocation of capital for many years. Then when the boom ended, they had mass unemployment. No surprise there.
Keynes was wrong to think that (3) is better than (1). All that does it take capital forcibly out of one individual's hands and put it into the pocket of someone doing something useless. You might as well save him the trouble of digging the ditch.
I didn't downvote this (I don't have that awesome power yet, anyway), but I think I see why people might.
Your arguments are phrased in such a way that it's unclear what's being said. Maybe you got this directly from Robinson, maybe you're doing a bad job summarizing - we can't tell.
Example: "The Fed's policies enabled the monetization of the WWI Liberty bonds, and the monetization of common stocks". What does that mean? Monetization means transforming something of value into a monetary payment. Social Security is a monetized benefit, Medicare is not - you can't take your share and spend it on a car. Stocks and bonds were always monetized: you can buy them and sell them at any time, pledge them as collateral, whatever. So what did the Fed do? It's kind of annoying when you read something which is said with great passion, but you can't really tell WHAT was just said without further explanation. And there are several example like that in your post.
You wrote: "monetization ... what does that mean?"
In a nutshell: at the time banks would lend money to people for the purpose of buying stocks and real estate, and as collateral for those loans, they would accept already inflated stocks.
On the one hand you might sanguinely say "oh that's just trading on margin", and in a way you'd be right. But it had gotten to a point where the "collateral" only had value because of the insanity which had gone before. Not to mention that the banks were lending the newly issued money on a fractional reserve basis. I don't oppose fractional reserve in principle, but in this case it amplified the insanity by a factor of 10 or so.
So the investor went off with new "money" from the bank in hand, and hauled off and put it all into Consolidated Gas. Yay, happy days -- that stock kept racing up. In the meantime, the investor had debt service (interest expense) to contend with, and keep in mind that many of these stocks were paying no dividends or miniscule ones at best.
Eventually many investors end up with a cash flow problem, and they are forced to liquidate. This drives down stock prices, and then even more liquidate. After all, there's no sense holding a stock that gives you net negative cash flow and negative capital gains.
Regarding the monetization of war bonds, I quote this: "At the end of the Liberty Loan campaings, our banks held very large amounts of United States bonds and it was their habit thereafter to use these as security for Federal Reserve credit when they wanted it, in preference to rediscounting commercial paper."
And further: "The difficulties in this situation were these: (1) that the United States bonds were not, like the prime commercial paper, due to be liquidated by the natural process of consuming goods and paying for them, and (2) that the United States had agreed to pay in gold on demand [... but could not]"
On this latter point, the financing of war has always been a major driver of monetary inflation, even during periods of an alleged gold standard. World War I was an utter catastrophe in so many ways.
The funny thing about the 1920s boom is, it was ultimately grounded in real productivity gains: principally, technological innovations such as the electrification of manufacturing plants. So it certainly was not all an artificial mania like tulip bulbs. But it became that way with the aid of banks, principally the Fed but also others.
I understand that. Yes, it was a problem that banks were lending money to people so that those people could trade the stock market. That's described as ONE of the causes of the Great Depression in every standard history. However, this is not called monetization, and it was not a policy of the Fed. The Fed didn't even have the power to regulate this type of loans; it got expanded powers as a result of the Great Depression.
Imagine if someone came here and said: "the problem in the crisis of 2008 was that the big banks RADICALIZED the financial markets, and then UNLEVERAGED government money to make good their losses." People don't disagree with this, once it gets deciphered to something that they understand, but it's going to get a downvote for being not very understandable as phrased.
Monetization is a technical term, and I won't quibble with you over that. However ...
You wrote: "it was not a policy of the Fed."
Yes, the whole phenomenon was baked into Fed policy even at its founding in 1913.
Quote: "We undertook in the Federal Reserve Act (1913), (I) to reduce the reserve requirements of the banks; and (2) to substitute for "gold and other lawful money" as bank reserve, the single item, credit at the Federal Reserve banks, which in turn need be gold-secured only to the extent of 40 percent, which the remaining 60 percent could be commercial paper and United States bonds."
In short, Fed policy allowed banks to operate with less solvency than they had before. This enabled massively speculative loans which would not have been possible otherwise.
Robinson is not making a good case here - the Federal Reserve Act was, at the time, seen as strengthening banks by making their reserves more liquid. If Robinson wants to argue that it had the opposite effect, he will need a lot more than his opinion. If he is right, then there should have been fewer bank failures in the decades preceding the FRA; but in fact, history is full of them. The post-1913 banking system functioned well for decades, including during a world war. Obviously it had its weaknesses, but where is the proof that the pre-1913 system would have been better in the same circumstances?
Also, he is carping about the wrong thing - he complains that the Fed was only 40% secured by gold, but the Fed is not the entity that failed; the banks did. It wouldn't have mattered if the Fed was secured by pure unobtanium.
In short, I'm not convinced by any of this - it's basically just one guy's opinion from 1935.
Edit: The "depression" referred to in this post refers to the global economic instability that led to the collapse of the Bretton Woods System. It does not refer to the Great Depression. I was not able to address that due to time constraints. Please see child posts for clarification:
"Many economists disagree, for example George Robinson..."
I have been studying economics for a while and I have never heard of this George Robinson. I tried to google for some information on him and all that I can come up with is line noise. If George Robinson was an economist of some repute then he should at least have some published research available, but I am unable to find anything.
Side Note: Obviously, there is no formal licensing process, but in order to call themselves an economist, it is generally accepted that someone should have a graduate degree in economics or a related field. If someone is discussing Macroeconomics, then they really should have a graduate degree in order to be taken seriously. Macroeconomics is an incredibly complex subject and a layman's knowledge is not sufficient in order to have a good grasp of it.
Just for the record, it is actually commonly accepted by modern economists that the gold standard was responsible for the severity of the depression, but stimulus was not the reason for this. The real problem with the Bretton Woods System was that it functioned as an implicit dollar peg for the countries that were in it. Other currencies were pegged to the dollar and the dollar was pegged (at constant rate) to Gold.
Thus, other countries in the Bretton Woods System ended up taking on the risk of America's monetary policy, and American monetary policy had to be managed in such a way that it was perhaps not always in America's best interest. This is the principle argument against a modern global gold standard. To properly manage such a standard for the benefits of all participants would require a superhuman amount of even-handedness and situational awareness, and all of this would be for a system that basically approximates the system that we have today (in which countries are, mostly, free to set their own monetary policy to benefit themselves).
Now, for the idea of a gold standard here in America. The principle objection to this is that it would tie America's currency to a commodity. This seems like an obvious observation, but there are some geopolitical implications here that I rarely see mentioned. Let me put it like this: "Meet the new boss, same as the old boss"
Yes, a lot of people have disagreements with the Fed. You can voice those disagreements, and we can make alterations to the Fed's structure as needed, but if the dollar was set on a gold standard tomorrow, then America would lose control of its monetary policy. Voicing your disagreement at that point becomes a little bit more complex.
That last line sounds a little bit extreme, but you need to think about it. Constantly, I hear people talk about gold as though making the dollar dependent on it would alleviate all concerns about the monetary supply. People seem to think that we adopt the gold standard, then, poof, suddenly there would be no monetary policy. This is completely untrue.
Like dollars, the amount of gold in the market at any given time is a mutable value. Gold can be added to the market and gold can be taken out of the market. If the dollar depends on gold, then we would still have a federal reserve bank. The only difference is that it would not be based in the U.S. and under American jurisdiction.
Now, here's a question to think about. Who would comprise our new federal reserve board? Let's take a look at the top ten board members[1]:
Rank Country/Region Gold production (kilograms)
1 China 320,000
2 Australia 210,000
3 South Africa 210,000
4 United States 205,000
5 Russia 205,000
6 Peru ...
This phrase is the anti-science. No science operates based on "commonly accepted". Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression.
How could the use of gold as money cause anything when it was banned by executive order, and the citizens were required to turn it in? Are you going to argue there was a massive underground black market. You don't make that argument, and from my studies no such market existed because people feared the repercussions of being caught with this banned substance.
"The circumstances of the case were that a New York attorney, Frederick Barber Campbell, had on deposit at Chase National over 5,000 troy ounces (160 kg) of gold. When Campbell attempted to withdraw the gold Chase refused and Campbell sued Chase. A federal prosecutor then indicted Campbell on the following day (September 27, 1933) for failing to surrender his gold.[4] Ultimately the prosecution of Campbell failed but the authority of federal government to seize gold was upheld."
A great response! Let me see if I can shed some more light on this topic.
"This phrase is the anti-science. No science operates based on \"commonly accepted\"."
Exactly! And, there is a very good reason for this. Economics is not a science. It is a social science that makes some use of the scientific method. Within this context, meta-analysis becomes extremely important for drawing pertinent conclusions. This is just a side note, because it seems that we have crossed our wires somewhere.
"Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression."
I should have been more clear. I was referring to the global economic instability (generally manifesting itself as a number of depressions across the Bretton Woods countries) that preceded the collapse of the Bretton Woods System.
I have to apologize, but when I see "gold standard" I immediately start my Bretton Woods rebuttal. It is a reflex reaction from spending too much time arguing with Austrian economists.
Of course, the grandparent post was referring to the Great Depression. Well, all is not lost. Dr. Scott Sumner (my favorite practicing economist) has a nice starter post on the Great Depression:
I wouldn't say that phrase is actually anti-science.
Science is fundamentally a social institution where groups of people can great bodies of knowledge that can be used to make accurate predictions about the world. This body of knowledge is imperfect and so periodically people challenge it, making predictions where they hope their theories will be right and the standard model will be wrong. The thing is, there are many more ways to be wrong than to be right, and the large majority of people trying to challenge established knowledge are wrong.
Because of this we generally ought to use commonly accepted views until people challenging them can point to ways that their theories can make predictions that are superior to accepted theories. New theories might be intuitivly appealing, but if they can't pull their empirical weight they shouldn't get anywhere.
In fact, my reading of George Robinson's theory is that it would predict that the US economy would be much more unstable after going off the gold standard, when in fact it tended to be more unstable before we did. Now, if his book actually did predict "fewer but worse" recessions maybe we should look into it, but I'm worried that it doesn't.
I think I have a better way of making the point you're trying to make. You're rebutting the claim that reliance on the gold standard made the depression worse.
However, in the early 1930s, the monetary use of gold was criminalized in the USA. In fact, possession of gold itself was illegal for individuals (with the exception of jewelry) until sometime in the 1970s!
while many people refused to turn the gold in as the government demanded in the 1930s, they instead shipped it overseas, and at any rate you couldn't do contracts in gold or make payments in gold without risk of getting in trouble.
This action effectively invalidated much (maybe most?) of the countries wealth, and so it is no surprise that the result was a great depression, or a prolonged depression.
Further, rather than adhering to a hard money position, as is popular for political economists to posit today, the actual position was inflationary. This position is well argued by Rothbard in his book "America's Great Depression".
The reason the myth of "hard money" prolonging the great depression persists, is because governments want an inflationary monetary policy to allow them to spend without the fiscal restraint that would be imposed by having to raise via taxes and fees, all the money they want to spend.
Your position is absolutely right, and you've been attacked by others for citing someone with the "fallacy of appeal to old foggies". Rothbard's analysis was done in the 1970s, I believe, and is effectively contemporary. (Or at least I'm not aware of any serious attempts to refute it.)
Unfortunately, in popular culture the science of economics does not get much respect, going against the popular political perception of inflation being "good" and I've gotten banned from hacker news for making economic arguments like the one I've just made. Which is why this is the first post from a new account. (It is unfortunate that Hacker News does not tolerate differing opinions. But as anyone can see from this post, the salient fact-- that gold was banned-- is undisputed historical fact that blows the operating theory out of the water... and thus I have contributed to this discussion historical facts that are relevant to it. Should I be praised for that? Or banned for disagreeing with the party line? (or for pointing out that I've been banned in the past? I think the censorious nature of this site is employed to keep hidden its intolerance... so I might get the ban for that... but you never know because there is no warning, you just suddenly get the ax. My last account's karma was about 1,200 acquired over 6 months of contributions.) Consider this warning about the nature of this site the payment I require for going thru the effort of making a new account to contribute this critical historical fact to the discussion.
Headline fail. If they're going to introduce an article with the words "What about economists?" they should maybe quote at least one (rather than make a vague hand wave to "critics say")
Critical thinking fail--just because an article quotes an economist doesn't mean that economists in general believe something. A journalist can almost always find a token quote to support a position. Token quotes don't prove anything and you should not be demanding them.
You're making a straw-man argument. GiraffeNecktie isn't asserting that a quote would prove something, just that the headline "What about economists?" would lead the reader to expect the opinion of at least one economist to be referenced in the body.
Where do you see that I was suggesting that having a quote from a single economist proves that "economists in general believe something"? My complaint was that the headline lead me to believe that I would get some perspective from at least one (and hopefully more than one) economist. Instead, it seemed to repeat the criticisms that I've read on a few random blogs (i.e. from non-economists).
Would it really matter if they had quoted some economist, honestly? As cynicalkane said, for any one virtuous, wise economist they had chosen to hear, they could get the exact opposite position from another one...lending the whole exercise to be another form of mental masturbation. Not very informing or interesting.
You have to interpret the headline in the context of the publication. It's an article in The Economist, whose main target group, not surprisingly, is economists and people who are generally interested in economics. In the headline, when they said "economists", they have clearly meant their readers. The article leaves it to its readers to decide whether BitCoin is exciting or not. In context of all this, I think it's a good subtitle for this article.
Economists are no more the target audience of The Economist than they are of The Wall Street Journal.
The Economist originated as an organ of the free trade movement, particularly concerned with the repeal of the corn laws. I believe that the title was meant to articulate that free trade was a more principled and intellectually defensible political position than protectionism.
I can't say I think the title reflects the contents of the article well enough, but I guess The Economist is suggesting that their evaluation is economically sophisticated.
While the historical context you have provided is certainly very interesting and it's something I didn't know about, I stand by my assertion that, at least today, the target audience of The Economist is economists and people who are generally interested in economics.
The original article about Bitcoin that appeared on the Economist blog contained a wealth of technical information and a balanced debate on its merits and problems. This article reads like a poorly summarized version of it. This is unfortunate, considering it is based directly on the original article:
The recent demonstrations of Bitcoin's volatility, on the one hand, and security issues, on the other, seem to have a lot of people spooked, and rightly so.
I think one way this could play out is that people might remain wary of using Bitcoin for large transactions or keeping large quantities of Bitcoins around; but small transactions are another matter, and I have no trouble imagining people keeping $20 worth of Bitcoins in their wallets to spend in small bits (pun intended).
In short, we may finally have here the solution to the micropayment problem.
Why would you need to store your coins a bank? Most people use banks because they make it easy to buy things. If vendors accepted bitcoins you could easily transfer them without needing a bank.
Though bitcoin banks probably will be much different (e.g. they won't be able to spend bitcoins of their clients as modern banks do. Transactions will be signed both by client and bank, so you will need both to spend it).
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[ 3.2 ms ] story [ 103 ms ] threadIf the point is driving people to buy some bitcoins, then this is not the forum for that. And people really need to be aware of simple-minded manipulations that can be and are played with the bitcoin market.
People are interested in it and that's why it gets upvoted. If you're not interested just don't read it.
"Google is a large technology company which runs the world's most popular search engine."
These are NOT good stories for HN, because the people here /know this already/. There is nothing wrong with introductory stories as such. In the case of bitcoin, there is also a suspicion of an ulterior motive in promoting bitcoin stories.
As for "don't read it" -- forums are damaged when the noise (and spam) level is high. I can express my opinion by commenting, unless a moderator tells me not to.
At this point, the Bitcoin story has been pretty well picked over, and I'm not convinced there's anything new to say.
And, the fact that the stories continue to get upvotes is precisely what is troubling.
So really the only way to get the stories to fall off is to stop talking about them.
Also how is it a scam, if the technology is open? It is exactly clear what BitCoin is and does. Everybody can take the specs and program their own client. Nobody can claim "BitCoin cures cancer" or something that.
Now if the current exchange rate is justified is another question. Also obviously people holding BitCoins are interested in making it more popular, as that is also related to the exchange rate.
I don't think that automatically makes it a scam, though. It is not so different from people invested in Google or Apple (either via stock or via technology usage) are interested in making Google and Apple more popular, as it increases the value of their investment.
Then again, perhaps the whole world is just a scam.
Many economists disagree, for example George Robinson who wrote "Monetary Mischief" in 1935. I'll summarize his arguments.
First: the gold standard was not overly restrictive. People routinely did business in gold contracts, and there was plenty of liquidity. It is false to think that you must have "enough" money to equal the total amount of economic activity in any given group of people. Money is traded at the margin, e.g. if I pay you a dollar, and you pay someone else that dollar, we just did two dollars worth of business with only one dollar.
Second: "Stimulus" is what caused the problem in the first place. The Fed's policies enabled the monetization of the WWI Liberty bonds, and the monetization of common stocks, which led to rampant speculation and malinvestment. When the policies were finally removed, and they had to be removed eventually, the economy shriveled and suffered from its malinvestment (in stocks such as GE and Consolidated Gas, in Florida real estate, etc.) More stimulus is not the answer to a problem caused by too much stimulus. That's like prescribing a heroin injection as a treatment for heroin withdrawal. It "works" in a sense, but postpones solving the actual problem.
Third: the U.S. economy suffered a monumental crash in 1921, but that was not followed by a prolonged depression. That's because the people were allowed to suffer and sort out the consequences of their previous malinvestement and put their future affairs on a more solid footing, without relying on that next heroin injection so to speak.
A quote from that 1935 book:
"Our present difficulties sure did not arise from any scarcity or failure of gold, but, to the extent that they had monetary origin, sprang from monetizing property through the banking process at a very high price level, which had later to be demonetized at a much lower price level. We tried to make gold too efficient. In this we undertook a form of managed currency. The Federal Reserve system had an opportunity to restrict the money supply, but did not understand the matter, and failed completely."
Another interesting quote:
"Now of course it was all done in the name of necessity, as such things usually are. In his radio address on the subject the President said that there was not enough gold in the world to satisfy all the contracts made in its name, quite as if gold were only a medium of exchange and payment, and our only medium at that, and not at all our standard or measure of value."
So: I didn't downvote, but I remain unimpressed with George Robinson's contemporary analysis, as it consists simply of two unsupported assertions.
I have no interest in getting all religious or dogmatic about gold, silver, bitcoin, US dollars, Euros, or any other form of money. My real point is: let individuals decide what forms of money they wish to use, without harassment.
Clearly the practice at the time of banks lending money to buy stocks and Florida real estate, using stocks as collateral for those loans, was insane and unsustainable. In effect, common stocks were indeed monetized, and this led to an enormous boom in the money supply which enabled and encouraged the mis-allocation of capital. When that stops, people suffer, no doubt about it.
It was just sick what certain people did back then to keep prices propped up artificially high. They would spy on farmers to make sure they didn't produce too much, and if they did, they'd go in and burn crops and slaughter hogs. This while people were going hungry. I had a neighbor who, as a 14 year old boy, was hired to drive around the countryside spying on farmers. A dry cleaner who charged too little for his services was imprisoned. The authoritarians fought deflation tooth and nail, and years of misery was the result.
P.S. The story of Westerners who relocated to the Soviet Union in the 1930s is fascinating. And very sad, for the most part. There were tens of thousands of such people. I am sure Google will find references.
Which doesn't prove any points, because appeals to authority never really do. But if you open your argument with an appeal to a weak authority, the rest of your argument will look weak as well. I imagine you wouldn't have been down voted if you had just left out the bits about George Robinson and let the arguments stand on their own.
On your other point, I don't put much stock in the decades worth of obfuscation that have followed, such as the silly praise for breaking windows, or digging holes and filling them back up, or other activities only sustainable by confiscating or devaluing property.
Here's the thing about gold. I don't care if anyone uses or does not use gold to settle business. I just don't want anyone interfering with people who do choose to use it. (Same goes for bitcoin etc.) That is to say, no harassment, no fines, and no jail time. That's all I ask.
Keynes essentially asked his readers to compare three possible scenarios in a situation where the private sector does not provide enough job opportunities due to a lack of aggregate demand. The scenarios are: (1) mass unemployment (2) the state providing employment in work that is considered useful (3) the state providing employment in "digging holes and filling them back up"
Keynes point was that the order of desirability is: (2) is better than (3), and (3) is better than (1)
He was not in any way advocating in favour of (3), he was merely pointing out that even though (3) looks stupid, it is still better than (1).
Keynes was wrong to think that (3) is better than (1). All that does it take capital forcibly out of one individual's hands and put it into the pocket of someone doing something useless. You might as well save him the trouble of digging the ditch.
Your arguments are phrased in such a way that it's unclear what's being said. Maybe you got this directly from Robinson, maybe you're doing a bad job summarizing - we can't tell.
Example: "The Fed's policies enabled the monetization of the WWI Liberty bonds, and the monetization of common stocks". What does that mean? Monetization means transforming something of value into a monetary payment. Social Security is a monetized benefit, Medicare is not - you can't take your share and spend it on a car. Stocks and bonds were always monetized: you can buy them and sell them at any time, pledge them as collateral, whatever. So what did the Fed do? It's kind of annoying when you read something which is said with great passion, but you can't really tell WHAT was just said without further explanation. And there are several example like that in your post.
You wrote: "monetization ... what does that mean?"
In a nutshell: at the time banks would lend money to people for the purpose of buying stocks and real estate, and as collateral for those loans, they would accept already inflated stocks.
On the one hand you might sanguinely say "oh that's just trading on margin", and in a way you'd be right. But it had gotten to a point where the "collateral" only had value because of the insanity which had gone before. Not to mention that the banks were lending the newly issued money on a fractional reserve basis. I don't oppose fractional reserve in principle, but in this case it amplified the insanity by a factor of 10 or so.
So the investor went off with new "money" from the bank in hand, and hauled off and put it all into Consolidated Gas. Yay, happy days -- that stock kept racing up. In the meantime, the investor had debt service (interest expense) to contend with, and keep in mind that many of these stocks were paying no dividends or miniscule ones at best.
Eventually many investors end up with a cash flow problem, and they are forced to liquidate. This drives down stock prices, and then even more liquidate. After all, there's no sense holding a stock that gives you net negative cash flow and negative capital gains.
Regarding the monetization of war bonds, I quote this: "At the end of the Liberty Loan campaings, our banks held very large amounts of United States bonds and it was their habit thereafter to use these as security for Federal Reserve credit when they wanted it, in preference to rediscounting commercial paper."
And further: "The difficulties in this situation were these: (1) that the United States bonds were not, like the prime commercial paper, due to be liquidated by the natural process of consuming goods and paying for them, and (2) that the United States had agreed to pay in gold on demand [... but could not]"
On this latter point, the financing of war has always been a major driver of monetary inflation, even during periods of an alleged gold standard. World War I was an utter catastrophe in so many ways.
The funny thing about the 1920s boom is, it was ultimately grounded in real productivity gains: principally, technological innovations such as the electrification of manufacturing plants. So it certainly was not all an artificial mania like tulip bulbs. But it became that way with the aid of banks, principally the Fed but also others.
Imagine if someone came here and said: "the problem in the crisis of 2008 was that the big banks RADICALIZED the financial markets, and then UNLEVERAGED government money to make good their losses." People don't disagree with this, once it gets deciphered to something that they understand, but it's going to get a downvote for being not very understandable as phrased.
Monetization is a technical term, and I won't quibble with you over that. However ...
You wrote: "it was not a policy of the Fed."
Yes, the whole phenomenon was baked into Fed policy even at its founding in 1913.
Quote: "We undertook in the Federal Reserve Act (1913), (I) to reduce the reserve requirements of the banks; and (2) to substitute for "gold and other lawful money" as bank reserve, the single item, credit at the Federal Reserve banks, which in turn need be gold-secured only to the extent of 40 percent, which the remaining 60 percent could be commercial paper and United States bonds."
In short, Fed policy allowed banks to operate with less solvency than they had before. This enabled massively speculative loans which would not have been possible otherwise.
Also, he is carping about the wrong thing - he complains that the Fed was only 40% secured by gold, but the Fed is not the entity that failed; the banks did. It wouldn't have mattered if the Fed was secured by pure unobtanium.
In short, I'm not convinced by any of this - it's basically just one guy's opinion from 1935.
http://news.ycombinator.com/item?id=2670994
"Many economists disagree, for example George Robinson..."
I have been studying economics for a while and I have never heard of this George Robinson. I tried to google for some information on him and all that I can come up with is line noise. If George Robinson was an economist of some repute then he should at least have some published research available, but I am unable to find anything.
Side Note: Obviously, there is no formal licensing process, but in order to call themselves an economist, it is generally accepted that someone should have a graduate degree in economics or a related field. If someone is discussing Macroeconomics, then they really should have a graduate degree in order to be taken seriously. Macroeconomics is an incredibly complex subject and a layman's knowledge is not sufficient in order to have a good grasp of it.
Just for the record, it is actually commonly accepted by modern economists that the gold standard was responsible for the severity of the depression, but stimulus was not the reason for this. The real problem with the Bretton Woods System was that it functioned as an implicit dollar peg for the countries that were in it. Other currencies were pegged to the dollar and the dollar was pegged (at constant rate) to Gold.
Thus, other countries in the Bretton Woods System ended up taking on the risk of America's monetary policy, and American monetary policy had to be managed in such a way that it was perhaps not always in America's best interest. This is the principle argument against a modern global gold standard. To properly manage such a standard for the benefits of all participants would require a superhuman amount of even-handedness and situational awareness, and all of this would be for a system that basically approximates the system that we have today (in which countries are, mostly, free to set their own monetary policy to benefit themselves).
Now, for the idea of a gold standard here in America. The principle objection to this is that it would tie America's currency to a commodity. This seems like an obvious observation, but there are some geopolitical implications here that I rarely see mentioned. Let me put it like this: "Meet the new boss, same as the old boss"
Yes, a lot of people have disagreements with the Fed. You can voice those disagreements, and we can make alterations to the Fed's structure as needed, but if the dollar was set on a gold standard tomorrow, then America would lose control of its monetary policy. Voicing your disagreement at that point becomes a little bit more complex.
That last line sounds a little bit extreme, but you need to think about it. Constantly, I hear people talk about gold as though making the dollar dependent on it would alleviate all concerns about the monetary supply. People seem to think that we adopt the gold standard, then, poof, suddenly there would be no monetary policy. This is completely untrue.
Like dollars, the amount of gold in the market at any given time is a mutable value. Gold can be added to the market and gold can be taken out of the market. If the dollar depends on gold, then we would still have a federal reserve bank. The only difference is that it would not be based in the U.S. and under American jurisdiction.
Now, here's a question to think about. Who would comprise our new federal reserve board? Let's take a look at the top ten board members[1]:
This phrase is the anti-science. No science operates based on "commonly accepted". Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression.
How could the use of gold as money cause anything when it was banned by executive order, and the citizens were required to turn it in? Are you going to argue there was a massive underground black market. You don't make that argument, and from my studies no such market existed because people feared the repercussions of being caught with this banned substance.
http://en.wikipedia.org/wiki/Executive_Order_6102
"The circumstances of the case were that a New York attorney, Frederick Barber Campbell, had on deposit at Chase National over 5,000 troy ounces (160 kg) of gold. When Campbell attempted to withdraw the gold Chase refused and Campbell sued Chase. A federal prosecutor then indicted Campbell on the following day (September 27, 1933) for failing to surrender his gold.[4] Ultimately the prosecution of Campbell failed but the authority of federal government to seize gold was upheld."
"This phrase is the anti-science. No science operates based on \"commonly accepted\"."
Exactly! And, there is a very good reason for this. Economics is not a science. It is a social science that makes some use of the scientific method. Within this context, meta-analysis becomes extremely important for drawing pertinent conclusions. This is just a side note, because it seems that we have crossed our wires somewhere.
"Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression."
I should have been more clear. I was referring to the global economic instability (generally manifesting itself as a number of depressions across the Bretton Woods countries) that preceded the collapse of the Bretton Woods System.
I have to apologize, but when I see "gold standard" I immediately start my Bretton Woods rebuttal. It is a reflex reaction from spending too much time arguing with Austrian economists.
Of course, the grandparent post was referring to the Great Depression. Well, all is not lost. Dr. Scott Sumner (my favorite practicing economist) has a nice starter post on the Great Depression:
http://www.themoneyillusion.com/?p=4161
Science is fundamentally a social institution where groups of people can great bodies of knowledge that can be used to make accurate predictions about the world. This body of knowledge is imperfect and so periodically people challenge it, making predictions where they hope their theories will be right and the standard model will be wrong. The thing is, there are many more ways to be wrong than to be right, and the large majority of people trying to challenge established knowledge are wrong.
Because of this we generally ought to use commonly accepted views until people challenging them can point to ways that their theories can make predictions that are superior to accepted theories. New theories might be intuitivly appealing, but if they can't pull their empirical weight they shouldn't get anywhere.
In fact, my reading of George Robinson's theory is that it would predict that the US economy would be much more unstable after going off the gold standard, when in fact it tended to be more unstable before we did. Now, if his book actually did predict "fewer but worse" recessions maybe we should look into it, but I'm worried that it doesn't.
However, in the early 1930s, the monetary use of gold was criminalized in the USA. In fact, possession of gold itself was illegal for individuals (with the exception of jewelry) until sometime in the 1970s!
while many people refused to turn the gold in as the government demanded in the 1930s, they instead shipped it overseas, and at any rate you couldn't do contracts in gold or make payments in gold without risk of getting in trouble.
This action effectively invalidated much (maybe most?) of the countries wealth, and so it is no surprise that the result was a great depression, or a prolonged depression.
Further, rather than adhering to a hard money position, as is popular for political economists to posit today, the actual position was inflationary. This position is well argued by Rothbard in his book "America's Great Depression".
The reason the myth of "hard money" prolonging the great depression persists, is because governments want an inflationary monetary policy to allow them to spend without the fiscal restraint that would be imposed by having to raise via taxes and fees, all the money they want to spend.
Your position is absolutely right, and you've been attacked by others for citing someone with the "fallacy of appeal to old foggies". Rothbard's analysis was done in the 1970s, I believe, and is effectively contemporary. (Or at least I'm not aware of any serious attempts to refute it.)
Unfortunately, in popular culture the science of economics does not get much respect, going against the popular political perception of inflation being "good" and I've gotten banned from hacker news for making economic arguments like the one I've just made. Which is why this is the first post from a new account. (It is unfortunate that Hacker News does not tolerate differing opinions. But as anyone can see from this post, the salient fact-- that gold was banned-- is undisputed historical fact that blows the operating theory out of the water... and thus I have contributed to this discussion historical facts that are relevant to it. Should I be praised for that? Or banned for disagreeing with the party line? (or for pointing out that I've been banned in the past? I think the censorious nature of this site is employed to keep hidden its intolerance... so I might get the ban for that... but you never know because there is no warning, you just suddenly get the ax. My last account's karma was about 1,200 acquired over 6 months of contributions.) Consider this warning about the nature of this site the payment I require for going thru the effort of making a new account to contribute this critical historical fact to the discussion.
The Economist originated as an organ of the free trade movement, particularly concerned with the repeal of the corn laws. I believe that the title was meant to articulate that free trade was a more principled and intellectually defensible political position than protectionism.
I can't say I think the title reflects the contents of the article well enough, but I guess The Economist is suggesting that their evaluation is economically sophisticated.
Cf. http://mitpress.typepad.com/mitpresslog/2007/01/from_corn_la...
Evidence?
As others have pointed out, this article lacks some research.
http://www.economist.com/blogs/babbage/2011/06/virtual-curre...
I think one way this could play out is that people might remain wary of using Bitcoin for large transactions or keeping large quantities of Bitcoins around; but small transactions are another matter, and I have no trouble imagining people keeping $20 worth of Bitcoins in their wallets to spend in small bits (pun intended). In short, we may finally have here the solution to the micropayment problem.
Though bitcoin banks probably will be much different (e.g. they won't be able to spend bitcoins of their clients as modern banks do. Transactions will be signed both by client and bank, so you will need both to spend it).