Ben Bernanke has studied and written [0] extensively about this topic; a copy of a speech he delivered at Washington and Lee University in 2004 can be found at [1] for those interested.
"Helicopter" Ben famously said that the Great Depression could have been averted by throwing $100 bills from helicopters to pump liquidity into the economy.
I believe the implementation of this concept via the Fed (bank of banks) is the real issue. Basically, liquidity goes to the banks. Anyone having a relationship with banks gets access to this liquidity and benefits. Of course, we plow these "gains" back into assets (hard or stock market), this drives up prices, and we get asset inflation. For the person renting an apartment, leasing a car, and with credit card debt ... well, they lose. The trickle down doesn't work. You can interpolate and extrapolate from this brief comment, and I believe that this is the fundamental source of the expanding rich/poor divide.
The Fed cannot do helicopter money. It is not connected to the "real" economy directly, only through the banks as middle-men. Helicopter money comes via fiscal policy.
As for so-called "asset inflation", I like Cullen Roche's take:
> In any case, I would argue that most of the asset price appreciation of the last 10+ years appears largely rational in the sense that it is supported by corporate fundamentals (record profits, record GDP, etc) and other robust economic data that is consistent with a growing economy. It isn’t just a fictitious boom as many “asset price inflation” narratives like to imply.
> As for inequality – asset price inflation would tend to exacerbate inequality since it will disproportionately benefit those who own assets. This makes sense. But as I like to always point out, inequality is a policy failure, not a market failure. After all, a capitalist economy will always veer towards monopolistic behavior if we allow it to. The extent to which we allow that to happen is not a failure of capitalism, it is a failure of policy makers to contain capitalism.
> In any case, I would argue that most of the asset price appreciation of the last 10+ years appears largely rational in the sense that it is supported by corporate fundamentals (record profits, record GDP, etc) and other robust economic data that is consistent with a growing economy. It isn’t just a fictitious boom as many “asset price inflation” narratives like to imply.
The PE ratio for the S&P 500 is currently ~28X, which is roughly double it's historical average and ~50% more than the average from 2010-2020. Is it really supported by corporate fundamentals?
> The Fed cannot do helicopter money. It is not connected to the "real" economy directly, only through the banks as middle-men. Helicopter money comes via fiscal policy.
Exactly. All those people talking about money printing don't understand that money doesn't exist in a vaccum. Every dollar created is backed by one dollar of debt which ads up to a net worth of $0.
So the Fed cannot helicopter money for the obvious reason that they cannot ever pay that money back. The government can borrow and spend money into the economy because it can tax its citizens. The money will come back one day.
I imagine that's more of an issue now than during the Great Depression. Back then you could easily put that money into large pools of labor, whether assembly lines at factories or agriculture or infrastructure projects and gave a pretty good return on investment. Now a large pool of labor at a company is treated more like a liability, and yeah just putting money into real properties may get you a better return than anything that directly benefits any meaningful number of people. Even if the money goes towards something like infrastructure - the cost of equipment is one thing, but I imagine there are plenty of instances where a handful of lawyers and beaurocrats involved in a project get paid more than some massive crews that do the actual labor combined.
> Basically, liquidity goes to the banks. Anyone having a relationship with banks gets access to this liquidity and benefits.
Ding ding ding. This is a key issue. If you want to bail out the economy, you need to do it to increase aggregate demand, and therefore the best way to do this is to give money directly to the people. The programs in place since 2008 (1) benefit people with capital (2) leave the poor and the working class in the dust, and (3) are paid for by milking the taxpayers directly, or indirectly through inflation.
Banks are leacherous middleman in normal operation. Theoretically they are providing a valuable service of evaluating risk and allocating capitable to the most profitable ventures. But in practice the incentives are totally misaligned, since they do not get accurately punished/rewarded for doing a shit job. Not to mention old-fashioned corruption, understood as giving undue benefit to a party/parties due to their personal connections.
> Great Depression could have been averted by throwing $100 bills from helicopters
A lot of people don't know this, but the main reason Calvin Coolidge suddenly, and without warning, decided not to seek reelection in 1928 was that he couldn't find any helicopters. Hoover was set up.
I have an hypothesis that the same could happen with deflationary cryptocurrencies if they become used widely enough in financial institutions that central banks decide they should tie part of the monetary system to them.
I don’t think you’re the only one with this hypothesis. There’s a couple bag holders I know who share that view. It’s a confusing one, IMO, but it’s interesting to think about.
100% Agree. From everything I've read, our being able to print money is an indispensable tool during financial crises. Fixing the great depression and the great recession depended on this ability.
If the world transitions to cryptocurrencies whose supply is unmanaged or fixed, that will not be possible and presumably will be stuck during financial crises.
Not the OP, but this is a smug and not very helpful comment. The Roman empire era covered 1000 years in the West and 2000 years in the east. Can you be more concrete?
All printing money does is transfer wealth from savers (people long the currency) to debtors (people short the currency) without their consent. Large financial crises occur because this keeps happening. Bitcoin is a way out, as savers learn it's foolish to be long fiat currency.
I don't understand how printing money could not cause inflation, it sounds like mental gymnastics to me. Expand the money supply without expanding the value that money represents and the money now represents less value than it did before, I don't see how that could ever not be the case.
> Expand the money supply without expanding the value that money represents and the money now represents less value than it did before
Prices are a function of money supply and velocity. Inflation can rage while no money is printed because velocity surges. Just as deflation can fester while central banks print as velocity toys with absolute zero.
> Inflation can rage while no money is printed because velocity surges. Just as deflation can fester while central banks print as velocity toys with absolute zero.
What are some good examples of this? Historically it seems to me like major inflation issues usually coincide with an expanding money supply, not the other way around
This is exactly Japan's lost decade - lots of government debt and only deflation - mainly in the 90s.
I think the difference is Japan is a a country with all its needs met. People already had enough money to spend on basic needs (unlike post WW1 Germany or Zimbabwe recently) so additional money didn't change that but there was a housing bubble.
Not only this, but it's also a matter of whether money supply expansion outpaces the growth of goods and services in the economy or not. As long as the growth rates roughly match, even without velocity decreasing, you wouldn't necessarily get inflation. It's way more complex than just "print money == inflation."
You want a little bit anyway. Simplistically, if all you have in your economy is 10 dollars and 10 hamburgers, then hamburgers will probably be worth something like a dollar each. If you go to 20 hamburgers but stay at 10 dollars, now hamburgers are worth $0.50, which is great for dollar holders, not so great for hamburger makers. A healthy economy, however, is not one in which actors are incentivized to hoard currency. You want economic actors to be incentivized to produce goods and services. If you grow to 20 dollars and 20 hamburgers, that is price neutral, but you don't really want price neutrality. You want it to be more lucrative to produce goods and services than to hoard currency.
There is some valid concern that this can harm retired savers, but we developed a solution to that a long time ago that doesn't require deflationary currencies. We split ownership shares of the companies that produce goods and services and trade them publicly so people can get a cut of the wealth growth without needing to become producers themselves. Retirees can own appreciating assets by buying stock in companies that make stuff, rather than holding their life savings as cash under a mattress.
It's much more complicated than that. For example, "printing money" doesn't necessarily expand the money supply [1], since the money supply isn't composed exclusively of central bank-issued money. And then there are other variables at play.
> I don't understand how printing money could not cause inflation
Suppose the government prints one dollar and shortly thereafter everyone goes bankrupt and collapses the money multiplier. This will definitely result in net deflation.
OK, that's extreme, but it should prove a point in extremis. But it is possible that the government could print money and suddenly people stop... paying off their debts, or something. Maybe they start thinking that dollar-denominated-capitalism is pointless because it's all cronies that get it anyways, and just exit the economy. Or like, screwing the poor through inflation triggers some sort of revolution and all the banks selectively are levelled by anarchist activists.
So "printing money" could definitely cause deflation in some scenarios. You probably don't want to be participating in an economy that takes that turn.
> Expand the money supply without expanding the value that money represents
Literally the only way to increase the money supply is increasing the underlying assets' value overall.
It's because people are somehow led into believing that the government can arbitrarily print money, everything that's normal seems like mental gymnastics.
Who said anything about inflation. It's about central planners arbitrarily moving around purchasing power in the system.
If I have $10 and you have $10, and then someone prints $10 and gives it to you. You went from having the same purchasing power as me to double mine, without any change to the available goods and services.
> lenders have always had a way out in this situation: investing
Yeah, that's why we're investing in a fairer monetary system, where this power to create money arbitrarily doesn't exist.
Do you even know what a hedge is? The perfect hedge against inflation is a large basket of consumer goods and services, because it correlates perfectly with inflation. Anything else correlates less perfectly with inflation and therefore is a worse hedge against inflation compared to a basket of goods and services.
You're talking about consumer price inflation, I'm talking about monetary supply inflation.
A basket of consumer goods and services is a nonsensical way to hedge monetary inflation under anything but the most extreme conditions, since those things should be getting cheaper as production processes/technology/understanding of the world improve.
But, unless you're a central bank or something, why do you care about monetary inflation instead of consumer price inflation? How is it going to affect you? Consumer price inflation is the one that affects you.
Uh, because they're stealing the purchasing power that I worked hard to obtain, and then using it to bail-out debtors without my consent.
Also, I don't really care what the price of a "general basket of goods and services" is (whatever that means). I care about the prices of the specific things that I want now or will want in the future.
Edit: And I would say my personal CPI seems to track money supply inflation pretty closely.
> because they're stealing the purchasing power that I worked hard to obtain...
"Purchasing power" is exactly CPI inflation, not monetary inflation.
> And I would say my personal CPI seems to track money supply inflation pretty closely.
This I can buy. If the CPI figures are wrong, then we need to get ones that are right. But CPI inflation is still the one we actually care about.
Why should we not care about monetary inflation? Well, say the population doubles. Either the monetary supply has to double, or each dollar is worth twice as much. (In case you think "that sounds good": it stinks if, say, you owe a mortgage and each dollar you pay back is twice as valuable.)
Yes, I know that's not why the monetary supply inflated over the last 15 years. The point stands: CPI inflation is the one that actually affects us.
> The point stands: CPI inflation is the one that actually affects us.
If your only purpose in life is to be a "consumer", sure. But changes in relative purchasing power between people also distort you're ability to affect the world. Increasing purchasing power of a bank or home owner relative to a saver through policy decisions increases their power to affect the world relative to the saver. This ability to arbitrarily choose winners and losers is not what you want in a monetary system IMO.
Edit: ability to affect the world as well as freedom to act, since you can substitute money for your own time.
I'd argue that the only person stealing purchasing power from you is yourself. Read some books, get an education, have ambition, work hard, take care of yourself. If you did that, instead of blaming others for your failures, your purchasing power would be fine.
My purchasing power is fine, because I became a bitcoiner. I was pretty angry during the financial crisis though, and am letting it come through in this thread.
I need healthcare, real estate, educational services. I hear that they are not appropriately represented in CPI. Personal basket of goods and services can be quite different from the tracked CPI
Confirmed then, you have no clue what hedging is. A hedge is not an investment, you fool. A hedge is position that is intended to offset an exposure. A successful hedge can very well be a terrible investment.
Sure, so you want to hedge against a bank run (even though bank deposits are insured)? I don't think you're making any sense but, anyway... what kind of hedging instrument do you intend to use against a bank run and why?
Bitcoin doesnt have good monetary properties? Go back to your textbook:
- Medium of exchange: bad. Caps out at a few transactions per second, transaction cost go up massively when actually used.
- Unit of account: Terrible. Because of price volatility you denominate BTC in terms of USD - something priced in BTC has a different price depending on the minute you look at it
- Store of value: Hilariously terrible. Storing value has to do with *low price volatility* something which Bitcoin does not have. The average price might be up over time, but this is *speculation*, not storing value! If you store value you want as close to what you put in as possible, not more (or less).
People claiming Bitcoin is a "store of value" don't understand what the word "storing" means, nor the textbook definition.
So condescending. That's because Bitcoin is not widely used as money yet. Those things don't all happen at the same time, they happen sequentially.
- collectable -> It's cool, I want some.
- store of value -> it holds value better than any other money. (Bitcoin is here)
- medium of exchange -> People request it in exchange for goods and services because it holds its value over time.
- unit of account -> People denominate prices in it because it's a widely used medium of exchange.
Edit: My initial point was Bitcoin has properties that make it suitable for use as money: divisible, portable, easy to verify, doesn't degrade over time, etc.
This is not true. Printing money may or may not cause inflation. And inflation may or may not benefit debtors at the expense of creditors. Unexpected inflation usually does. Expected inflation usually doesn't.
While printing money doesn't create value by itself, not printing enough really puts the economy into a gridlock. I tried to give an intuitive explanation here:
"Imagine an isolated village where people farm for subsistence. This is a village disconnected from the world that has not had a currency up to now. People rely on barter instead. Every fall, villagers usually produce excess food to have something to eat in the winter, even if, the real returns on the investment is low. Because of spoilage, crops stored for the winter are only worth 90% of their usual real value. 10% rot away in storage. That is, these crops have a return of negative 10%.
One day, this village mandates its government to create a currency that always keeps 98% of its real value on a yearly basis (2% inflation) even during times when private savings assets can’t retain this much. The government puts money into circulation by buying part of farmer’s crop during the summer (civil servants have to to eat).
Most farmers produce enough food for the summer, sell some of their crop and keep their money to be able to buy something to eat in the winter. They do not produce a crop to store for the winter since it would only return -10% on their initial investment and the central bank promised money would keep value at a rate of at least -2% (plus maybe a bit of interests).
What happens when winter comes? People have cash but few have anything to sell because they didn’t reinvest in the production of a crop to be stored!
In this situation, it’s going to be very difficult for the government to control inflation because there will be too few goods for the amount of money people will want to spend.
If the government does manage to control inflation, it will be through high taxes or by depressing the nominal value of the crops of the few farmers who did store something for the winter. The central bank might do this by giving high enough interests payments on cash to prevent people from wanting to spend it immediately.
In any case, people won’t eat much during the winter because the food will simply not exist.
The point is, government money can easily jam markets and crowd out productive investment."
Venezuela, once one of the richest coutries on Earth with more oil than Saudi Arabia thought this way too.
Turned out great for them. By all metrics they should be Western Europe level rich and yet many young kids find it more profitable to mine coins in runescape 12 hours a day rather than actually get a job, strange how that happens hey, if only they printed more Bolivar this all could have been avoided?
Venezuela also nationalized every sector of the economy and handed the reins to Chavez/Maduro's corrupt buddies. Not sure why you think hyperinflation is a problem as opposed to a symptom of their failed institutions.
There isn't 1 kind of economic crisis. Monetary expansion works well when you're dealing with a credit crunch, but it doesn't work great when your issue is lack of supply.
name a country that did monetary expansion during a credit crunch and also didn't do monetary expansion when there was a lack of supply. Note my bar is low: In "classical keynesian" theory, there should be monetary contraction during lack of supply, but I REALLY don't recall any country just "burning" reserves (deleting zeros off of ledgers at the biggest banks).
Not to say it can't happen, but there are quite a few new institutional and regulatory safeguards that (in spite of the attempts by some to neuter them) exist now that did not exist pre- and during the great depression that make such a thing happening again, or to the extent that it did, quite hard.
The more interesting question is whether there is the political will, let alone ability, to accurately and quickly respond to events as they are happening, rather than with extreme delay. Covid-19 (granted as much a public health crisis as an economic one) showed that American domestic problem solving has grown rather fragile and inflexible.
>Not to say it can't happen, but there are quite a few new institutional and regulatory safeguards that (in spite of the attempts by some to neuter them) exist now that did not exist pre- and during the great depression that make such a thing happening again, or to the extent that it did, quite hard.
So it's interesting. 1 of the key rules is that you cannot borrow money to invest. You know what ive never seen all my life until recently? THAT! My bank and others that have nothing to do with me have been advertising, 'you can borrow $5000 to get your investment fund going!'
People said the reason the great depression happened was stuff like this.
I personally dont expect it's a depression level event. I think most people were hoping for this because it's better than extreme inflation like the 1980s. HArdly a prediction given inflation is so high already.
The United States at least is actively in a great depression. It's just being papered over with currency debasement so rich people don't notice.
But if you actually visit parts of this country that are outside of the wealthy, coastal bubbles, you'll see first hand the real world devastation that's happening to people. It's why there's a major opioid epidemic in the Midwest. It's why homelessness is exploding. It's why rampant, degenerate speculation in stocks and crypto is going crazy and rife with scams and conmen selling hope to the hopeless. It's why populists like Trump and Sanders have so much political energy behind them.
And all of this is pre pandemic. I'm sure the past two years have added a new level of devastation.
People are depressed and dying everywhere, but us winners in our gilded bubbles have the privilege of being able to look away and continue living in our illusory, drunken stupor.
If there's a great depression and few people are noticing, then it isn't that great. The great ones aren't subtle. I live in the rural southwest. Business isn't booming here. But it isn't that bad either, yet. Maybe we're in the "so far so good" phase, but there's a big difference between the fall and arriving at the pavement.
Would it not be a Great Depression if it impacts millions of Americans for years or decades if the academic elite don’t see it from their ivory towers to document it?
The great depression effected a much larger percentage of the population in a much more negative manner
You seem to be talking about local economic difficulties in some regions of the country. Which isn't a great thing but not nearly as terrible as the great depression.
The impression that I get from the media is that a lot of people have quit their jobs to become full time retail traders now that the market is booming. And there is a labour shortage affecting production and logistics
And when the market crashes, as it always does, many of these people will be in the red and that would greatly affect consumption..
That's not the result of a hidden depression, it's the result of intentionally giving control of society to capital and then capital throwing labor under the bus through wage and environmental arbitrage. It's the system working as intended, a feature not a bug. If we enter an actual depression, it will compound on top of the inequality.
> It's just being papered over with currency debasement
It's also papered over by things like Norman Borlaug's agricultural revolution and supply chain innovation. Even with crappy broken supply chain, americans are not starving in the streets at depression-levels. But a whole lot of other stats support your hypothesis. Like mass exoduses from state to state.
As the machines churn out more and more of the essential things we need to live, and as we need fewer and fewer humans to keep the machines running, we're left with an overabundance of humans who don't know how to live without a job driving them.
I think a lot of people miss that the Great Depression wasn't just about economic breakdown. People were literally depressed and society seemed aimless. It wasn't FDR's social programs that broke us out of that. It was kicking ass in WWII and emerging the victorious badasses ruling the world. THAT is what broke the spell of depression and injected vigor in American society.
>The United States at least is actively in a great depression. It's just being papered over with currency debasement so rich people don't notice.
There are technical defintions. USA's GDPgrowth is at 6.7% and inflation is at 5.4%.
china is at 0.2% gdp growth and 0.7% inflation. The numbers are scary bad if you exclude all of capitalist china. China is at 300% debt to gdp and on the verge of collapse. Greece was what 250% peak during their collapse? That's the importance of taiwan, hongkong, shenzen, and others. It's not the USA that's of concern.
>But if you actually visit parts of this country that are outside of the wealthy, coastal bubbles, you'll see first hand the real world devastation that's happening to people.
> It's why there's a major opioid epidemic in the Midwest.
This has far more to do with marijuana legalization. They cant legally market their own product but they can FUD their competitors.
>It's why homelessness is exploding.
Far more related to rising minimum wage rates. There's a >95% correlation between homelessness and minimum wage in california. That's basically causation.
>It's why rampant, degenerate speculation in stocks and crypto is going crazy and rife with scams and conmen selling hope to the hopeless. It's why populists like Trump and Sanders have so much political energy behind them.
Oh yes, check the bloomberg link above.
>People are depressed and dying everywhere, but us winners in our gilded bubbles have the privilege of being able to look away and continue living in our illusory, drunken stupor.
That's actually a super interesting factor. Is there any relationship between psychology depression and economic depression. This was analyzed heavily during the great recession and it certainly seems like it is connected. Which is an argument for single-payer psychiatry. If a society could eliminate depression, economically we would likely be hugely benefited at a higher rate than the cost of the psychiatry.
The article begins with the idea that the causes of the Great Depression are not known or too numerous to pin down. It then continues by claiming that "recent scholarship has resulted in striking agreement on the reason for the crisis." The cause of the Great Depression was the gold standard, according to the article:
> ... The constraints of the gold-standard system hamstrung countries as they struggled to adapt during the 1920s to changes in the world economy. ... Central bankers continued to kick the world economy while it was down until it lost consciousness.
What this article ignores, like countless articles before and since, is the Roaring 20s. Articles like this treat the Great Depression as an event that hit the US economy out of the blue. But even superficial study of the ten years prior reveals something obvious: a massive, compounding, technology-fueled asset bubble.
The article also ignores the event that kicked off the Roaring 20s: the depression of 1920-1921:
This depression resolved itself under a gold standard regime and with minimal intervention by the Federal Government and Federal Reserve.
50 years ago the US abandoned the last vestiges of the gold standard. Today we find ourselves in the middle of a technology-fueled asset bubble. The US president talks, without a hint of embarrassment, about the need to borrow to continue to service debts. This is, of course, the very definition of a Ponzi scheme.
Whatever this comes to, we won't have the gold standard to kick around. It's been out of the picture for decades. What happens when the world's governments decide to outdo each other on how much currency they can conjure into being?
Anybody is welcome to download the Robinhood app, and buy FAANG/FAGMAN stocks with all your disposable income. Then you, too, will be contributing to the leading cause of the next "Great Depression", plus, you'll come out of it having become quite Rich.
> This is, of course, the very definition of a Ponzi scheme.
Most Ponzi schemes don't have the authority to levy taxes on the largest economy the in world, nor are they backed by the most powerful military force humanity has ever seen.
It's extremely HackerNews-ish of you to propose that the author of the article ignores your pet theory.
The author of the linked article is Barry Eichengreen, widely recognized as the premier scholar of the Great Depression. The article references about 900 pages worth of other articles, believe me: your pet theory about the 1920's events is considered in the conclusion. They're not ignoring it because they read fewer books than you.
> The US president talks, without a hint of embarrassment, about the need to borrow to continue to service debts.
Governments don't work like a household. What matters is borrow costs and use of funds. If a government can borrow and the net growth generated is greater than the interest rate on the debt, it's a good thing to borrow. Like any business debt.
A government can be in debt forever, the only thing that matters is borrowing costs and growth rate (and how the growth is generated see eg. Chinese real estate for malinvestment).
That's right. If a individual accumulates too much debt, then the individual can choose to discharge obligations through bankruptcy resulting in loss of credit, or death of the debtor, and ultimately the lessor is on the hook for the risk, and those two parties with agency over the debt contract are the only two who directly must suffer consequences. (yes there is tangential collateral damage, like if there are dependents, but it's not a whole lot).
If a government goes into debt, it externalizes the consequences of the spending to the public. "well, we vote for our representatives who spend". But that's not true. Suppose you were 16 (or, even more extremely: -1 years old), and couldn't vote against representatives voting for something stupid, like, say the US government invading Iraq. You are still on the hook for paying off the costs of those decisions. Sovereign debt is an end-run around the principle of "no taxation without representation", and it's in a much more morally questionable place.
Or, you can choose to reject the principle of "no taxation without representation", which if you are happy to do that explicitly and publically I will shut up.
Finally, the burden of amortizing sovereign debt is often achieved through the printing press, which in the long run causes inflation. Households usually can't do this. This disproportionately hurts the poor, so that adds onto the moral objection to sovereign debt.
> Or, you can choose to reject the principle of "no taxation without representation", which if you are happy to do that explicitly and publically I will shut up.
That "principle" covers some territory a lot broader than the specific way you're requesting it be interpreted. The idea that those born into a country cannot be held accountable for debts accrued before they were born—or anything relating to the situation of the budget before they have a say in government, I suppose—is, I think it's fair to say, not a common interpretation of the slogan's meaning, now or (most certainly) in the past.
That's not even to say you're wrong, morally or whatever, but your tactic of trying to pin someone down with these words isn't a good one.
> but your tactic of trying to pin someone down with these words
Sir, this is hacker news.
Ok, but seriously, to put it in a less-memey way. Many of the posts that I post about topics where I feel like "the word must be spread" are performative but interesting. I actually don't give a shit about convincing the parent poster of mine. Most of those people are going to be closed minded, bias-confirming, and unreceptive to rethinking their belief structures. I care about giving ideas to receptive people who are reading it with a memorable twist. Probably most people have not considered the injustice of sovereign debt explained in the context of "taxation without representation". These folks can then digest what I have to say, and re-articulate it with their own personal touch (possibly more effectively than the way that I did), and then spread the word to 100 unreceptive people with a low yield (say, 2%) and 100 more receptive people, who will then spread it, etc.
Anyways, given your response it seems to already have worked. Here you have given an alternative way to deliver the same message. Fantastic. Also, my response has enough upvotes for me to think, "gee, here are X more people now have this brainworm about the fundamental unfairness of sovereign debt".
> It's extremely HackerNews-ish of you to propose that the author of the article ignores your pet theory.
What pet theory is that? All I did was to mention two historical episodes that preceded the event under discussion, and which the paper fails to mention.
> The author of the linked article is Barry Eichengreen, widely recognized as the premier scholar of the Great Depression.
So what? We're talking about the paper, not a person.
> The article references about 900 pages worth of other articles, believe me: your pet theory about the 1920's events is considered in the conclusion.
On what pages does the paper take up the issue of the speculative bubble leading up to the Great Depression?
> Governments don't work like a household. What matters is borrow costs and use of funds. If a government can borrow and the net growth generated is greater than the interest rate on the debt, it's a good thing to borrow. Like any business debt.
A main MMT talking point. Yes, I've read Kelton's book and yes, a government that prints its own currency is not like a household.
MMT is an experiment. For all our sakes, I hope its proponents are right.
> A government can be in debt forever, the only thing that matters is borrowing costs and growth rate (and how the growth is generated see eg. Chinese real estate for malinvestment).
What if malinvestment looks like investment until it doesn't?
>Governments don't work like a household. What matters is borrow costs and use of funds. If a government can borrow and the net growth generated is greater than the interest rate on the debt, it's a good thing to borrow. Like any business debt.
If that was an attempt to show a difference from households, I don't see it, since those thing are equally true of households.
A house hold can spend to consume or invest, and I was only replying to the remark you made, not whatever new argument you might make later to salvage it.
In many ways, the concept of "printing money" is too simplistic to describe how the banking system and monetary systems interact with each other, especially once you get your head around the fact that money is (almost always) "created" endogenously through the expansion of balance sheets.
You can't just think like a customer going to the bank; you have to think of it like a number of actors in a complicated network of credits and debits as well as global trade with imports and exports.
The gold standard was abandoned because it is a terrible idea for civilizations that have technologies like accounting systems and currencies that are difficult to counterfeit. Tying economic expansion to the ability to mine and store one type of element doesn't make any sense.
There are countless asteroids out there with quadrillions of dollars of precious metals. Does that mean the first private company to create a currency "backed" by a claim to one of them is worth more than the US economy? No, of course not. The US economy produces food, shelter, water, goods, services, etc etc. It's worth far more than a chunk of atoms. Even if you could magically spirit those atoms into a vault somewhere, what do you do with them at that point?
Modern monetary theory is doing just fine, and so are all of the nations issuing fiat currency, selling bonds and notes, building infrastructure, and providing fertile ground for markets to do interesting things. Nostalgia for the gold standard is just way for people to claim the superiority of economic theories that are simply not useful anymore.
How's that gap between the rich and the poor going?
Look, the US was on the gold standard between 1850 and early 1900s, and not only recovered from a civil war, but ALSO freed all of its slaves AND went from a backwater country to a world superpower, and reduced inequality all at the same time.
The gap is reported to be increasing, but is that actually regarded as a problem by the ruling class? They may actually prefer this, as it gives them greater chunk of power and secures their position.
In other words, the gap may be increasing and we don't like it, but this may very well be the intended "how is it going".
One case in point: in 1970's, instead of giving employees their share of profits from productivity increases, the system gave them an easy way to get into debt instead (the credit card).
The US was on the gold/silver standard from 1792-1850. Was that the reason it continued the genocide of millions of indigenous people, took their land, and then imported millions of slaves to farm that land? Maybe there are other possibilities for history other than the currency system during a given time period.
I remembered there were a series of financial crises leading up to the Civil War, and sure enough, the first use of fiat currency in the US was to solve a financial crisis caused by the gold/silver standard:
'In 1853, the U.S. reduced the silver weight of coins to keep them in circulation and in 1857 removed legal tender status from foreign coinage. In 1857 the final crisis of the free banking era began as American banks suspended payment in silver, with ripples through the developing international financial system. Due to the inflationary finance measures undertaken to help pay for the U.S. Civil War, the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in specie (gold bonds); this led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender. It was a fiat money (not convertible on demand at a fixed rate into specie). These notes came to be called "greenbacks".' [1]
Technically Continental Dollars were zero interest bearer bonds, but they were also issued to help finance the Revolutionary War[2].
So, your argument for the gold standard is not only logically incoherent, but even if it was, it's completely ignorant of the history of currencies in the United States.
> So, your argument for the gold standard is not only logically incoherent
Wrong. The argument is a refutation of the idea that economic growth cannot happen while on a gold standard, that it will be disastrous. It is an existence statement, not a universality statement.
> The argument is a refutation of the idea that economic growth cannot happen while on a gold standard,
This is correct. Rapid economic growth happened on the gold standard. The issue is not about long term economic growth, but volatility. Hard money creates an environment with lots of rapid inflation and deflation and very strong boom/bust cycles. That volatility has costs (human costs of the pain of mass layoffs) but also benefits (weaker companies are more rapidly weeded out). After the Great Depression, it was decided that the costs outweigh the benefits, but it's a legit question that should not be so readily dismissed.
You don't know that the rapid inflation and deflation relative to today isn't because of poorer coordination in the liquidity of markets, in the supply chain, because we didn't have airplaneswe didn't have computers etc.
It's like pointing out that people were starving in the streets during the depression. Well yeah. We didn't have modern agriculture, freezers were a luxury, Flintstones gummi vitamins weren't a thing for kids etc.
Who said economic growth cannot happen on a gold standard? I said it's a useless technology for civilizations that have better ones. You responded with an incoherent argument and a claim that 1850-early 1900s is a time period that shows the value of representative currency.
Instead of the straw man and the red herrings, please explain how abandoning the gold standard in order to survive the Civil War is evidence of how effective it is. Here's more context that might help:
"The beginning of 1862 found the Union's expenses increasing, and the government was having trouble funding the escalating war. U.S. Demand Notes — which were used, among other things, to pay Union soldiers — were unredeemable, and the value of the notes began to deteriorate. Congressman and Buffalo banker Elbridge G. Spaulding prepared a bill, based on the Free Banking Law of New York, that eventually became the National Banking Act of 1863.
Recognizing, however, that his proposal would take many months to pass Congress, during early February Spaulding introduced another bill to permit the U.S. Treasury to issue $150 million in notes as legal tender. This caused tremendous controversy in Congress, as hitherto the Constitution had been interpreted as not granting the government the power to issue a paper currency. "The bill before us is a war measure, a measure of necessity, and not of choice," Spaulding argued before the House, adding, "These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government, and preserve our nationality." Spaulding justified the action as a "necessary means of carrying into execution the powers granted in the Constitution 'to raise and support armies', and 'to provide and maintain a navy'".
> [the gold standard] is a terrible idea for civilizations that have technologies like accounting systems and currencies that are difficult to counterfeit. Tying economic expansion to the ability to mine and store one type of element doesn't make any sense.
Hear me out. I will first start a counterstatement with two supporting points (I'm sure it's easy to find more supporting points too, but let's keep this simple).
It is a terrible idea for a civilization that exists in a system with finite resources to use a currency that is unbounded and exponential. The disconnect between the nominal economic substrate and raw reality will lead to broad class theft and environmental destruction.
"even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
Now, let's unpack what he says very carefully. In short it is this:
"we need to keep our society looking like it's humming by posting great employment numbers, and the most effective way to do this is to incrementally cheat the labor class out of the value of their wages"
2. As for environmental destruction, surely you can see how putting society on a compounding treadmill of devaluation encourages consumption as a driver of economic growth (if we fail to post a positive growth number, we WILL have at least a transient economic crisis), and it's patently evident that we buy more, shittier things that need to be replaced, because there is diminished opportunity cost for saving your money to buy something better and more robust: but hey, it's good for circular flow.
--
Now, if you accept that an unbounded currency is terrible for a society in a finite resource regime - then, in the big picture it doesn't matter too terribly much what is restricting the expansion of the nominal basis[0]. What matters is that something restricts the expansion. If that's physical mining of metals, the capacity to expand the currency is soft-capped to a certain rate that flexes with real economic performance -- and hard-capped to the total amount of metal in the earth; if that's some digital ledger that can't be expanded, that would be fine too, but anyways the point is it's bounded.
Or, maybe you like environmental destruction and screwing the poor. If you do, you should probably say that up front, instead of hiding it behind difficult-to-unpack-ese like Krugman does.
[0] in the small, probably cryptocurrencies (which burn to make CO2) are better than mining, which dumps mercury effluent into the environment, and maybe there will even be efficient cryptocurrencies that burn up less CO2. But all are better than, say, an economic system that has the unboundedness property AND is propped up by paying off defense contractors that build depleted uranium tipped rounds that are dropped on civilians halfway around the world.
> It is a terrible idea for a civilization that exists in a system with finite resources to use a currency that is unbounded and exponential. The disconnect between the nominal economic substrate and raw reality will lead to broad class theft and environmental destruction.
Well, this is certainly a different argument than "1850-early 1900s is a great example of the benefits of the gold standard"
> 1. For class theft, don't just take my word for it, take Paul Krugman's
Or, take his word on why the gold standard is a bad idea? (written before the EU was a thing)
"Why not emulate our great-grandfathers and tie our currencies to gold? Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy..."
> As for environmental destruction, surely you can see how putting society on a compounding treadmill of devaluation encourages consumption as a driver of economic growth (if we fail to post a positive growth number, we WILL have at least a transient economic crisis), and it's patently evident that we buy more, shittier things that need to be replaced, because there is diminished opportunity cost for saving your money to buy something better and more robust: but hey, it's good for circular flow.
I agree that inflation can drive part of the problem in the constant pursuit of growth and profit at the expense of the environment. The problem is that moving to a gold backed currency wouldn't change any of that. We know this because the regulations introduced by the EPA in 1970, just as the US moved completely off the gold standard, are the reason that the US has cleaner air and water. Along with the fact that corporations externalized the environmental costs of our consumption habits to Southeast Asia. None of that would be different if the US had stayed on the gold standard.
> Or, maybe you like environmental destruction and screwing the poor. If you do, you should probably say that up front, instead of hiding it behind difficult-to-unpack-ese like Krugman does.
Ignoring the mild annoyance of this insinuation, it remains completely ridiculous. What was the life expectancy in the height of the gold standard? What is it now? What countries are the most carbon neutral, the most environmentally sound, and have the highest standard of living? Are they using a fiat currency system?
The difference is in policy. Most of the EU is beating the US on every metric for the average person because of their laws. Individuals in those countries have rights to food, shelter, healthcare, and education, and because those governments are legitimate and relatively uncorrupted, those rights are not only recognized but realized. Having the ability to build homes, schools, and hospitals without having to dig gold out of the ground first is part of the reason why they are able to do it.
> in the small, probably cryptocurrencies (which burn to make CO2) are better than mining, which dumps mercury effluent into the environment, and maybe there will even be efficient cryptocurrencies that burn up less CO2.
Finally, we can agree. Gold makes about as much sense as cryptocurrency. When used as a mechanism to try and restrict the money supply for a given economy, they complicate the situation with zero benefits for the economy or the environment.
> But all are better than, say, an economic system that has the unboundedness property AND is propped up by paying off defense contractors that buil...
Food for thought. In 1964 you could take two silver dimes and purchase ~1 gallon of gas. Gas was ~20 cents per gallon. Dimes were 90% silver.
Fast forward to 2021. You could take two silver dimes to a coin dealer, sell them for fiat currency, and purchase 1 gallon of gas. Gas is ~$3.50 per gallon, silver is ~$23 per oz, and 2 silver dimes from 1964 contain ~5grams of silver.
But using 2021 dimes, you need 35 dimes to purchase a gallon. Precious metals have kept their value. Fiat currency has lost nearly 90% of its value since moving off the gold standard. The government needs more money, they print it. Based on their promise to pay it back later, with cheaper inflated currency.
Paper currency representing a given quantity of gold/silver/etc is a good idea. When you divorce it from that backing value is when governments print money to inflate. We all lose when that happens.
As I have said many times on HN, a gold standard protects the wealth of the people from government excess. That is also why the gold standard was ended by government.
The inflexibility of a gold standard is a benefit. More gold or an increase in gold value is required to represent greater wealth. The gold can be traded for or mined. However, the gold standard ensures that the dollar you earn today maintains purchasing power for as long as you care to keep it. Your gold backed dollar can't be made worthless in a generation by the excess of politicians seeking money, power, and control.
Politicians are people subject to all the same emotions as you or I. Money and power are powerful motivations for corruption. There is access to a lot of both in government. The gold standard was a check on greed at the government level and in turn a restriction on the power government had to manipulate the economy for the benefit of a few.
> More gold or an increase in gold value is required to represent greater wealth.
Not true. A restriction in supply can raise the price, and the discovery of new sources can lower it. Plus wealth is entirely subjective. Would you rather have a warehouse full of food, water, and ammunition during a crisis, or a warehouse full of gold? (Hint: people may not want to trade food for a soft metal that can't be fashioned into anything but decoration.)
> The gold can be traded for or mined.
It can also be lost in a shipwreck[1] contributing to a banking panic[2].
> However, the gold standard ensures that the dollar you earn today maintains purchasing power for as long as you care to keep it. Your gold backed dollar can't be made worthless in a generation by the excess of politicians seeking money, power, and control.
Of course it can. Private banks failed all the time, despite claiming that you could trade their notes for gold/silver. Governments can simply abandon the gold standard (and they did).
It all comes down to the fact that gold backed currency does not solve the primary problem of credibility and corruption at the levels of institutions and governments. It only adds another variable. Your ability to trade your paper for gold is still dependent on the ability and willingness of that bank or government to make the exchange. If they say no, what are you going to do?
The next step you could take is to refuse currency and to use only gold/silver/clam shells/whatever to do your transactions, which simply puts you at a huge disadvantage in any modern economy. Literally no one is going to do business with you if they have to add the burden of authenticating your clam shells to buy your product or rent your time.
In the end, there is no functional difference between "We promise that we will give you a grain of gold for this dollar if you ask" and "We promise to not mismanage this currency into hyperinflation." During an existential crisis, both promises may be broken. Hell, they probably will be broken. But the promise on the paper you're holding isn't going to matter either way.
Yes, all of those bad things can happen. A gold standard is not perfect. The goal isn't to be perfect. It is to have a currency that is fair to the greatest number of people. Gold is a currency trusted by all, fiat is a currency of force.
In crisis I would rather have the food, water, and ammunition. What a silly strawman. A warehouse full of survival supplies is incredibly valuable during crisis but it is not durable and must be maintained when not in crisis. For the long term representation of wealth I would rather have a vault of gold just like every nation on the planet. Nearly everything else degrades in a fraction of a lifetime. Gold will be exactly the same after sitting untouched for millennia. For the long life of nations this is extremely important. For the comparatively short life of a human this is less important but still valuable.
A casino is the best analog that I can thing of at the moment. When you want to play in the economy of a casino you are required to change your dollars for chips. You have to trust that the casino is not going to steal your dollars and will actually give them back. They practice full reserve banking where every dollar represented by chips is in their vault. The same is true for a gold standard economy as practiced sans full reserve. Gold is the money, banks do the job of verifying gold and exchanging for easily carried and traded tokens, dollars. You have to trust that banks or governments aren't going to steal your gold. If you don't trust them you change your dollars back to gold. If a lot of people lose trust you get bank runs. With fractional reserve banking there isn't enough gold to pay back every dollar and you get crisis and bank failures.
With any currency its value comes down to trust. A gold standard allowed people a way to keep their wealth in a durable form in times of low trust with no conversion cost. It allowed people to "take their ball and go home" so to speak. No governments needed to trust another country's fiat. The money exchanged in trade had a real, verifiable, persistent value.
Yes, a gold standard has some problems. Barring straight barter with physical gold it is still the fairest most robust currency system humans have come up with. Whatever excuses the US Government gave for ending the gold standard it still acted unconstitutionally. The government was facing a damaged economy and dwindling gold reserves as people and countries redeemed dollars for gold. The government saw their dwindling gold reserves as a problem instead of a function of a gold standard. This is the same as a casino seeing a lot of people cashing chips in and seeing their dwindling cash supply as a problem. In both cases it is a loss of trust in the token issuer that caused their supply to dwindle. It wasn't a problem with the currency it was a lack of trust in the issuer that the issuer saw as a reduction in "their" money that needed to be stopped. It was never "their" money to start with. It always belonged to the people. The people were just taking their ball home.
> Gold is a currency trusted by all, fiat is a currency of force.
> You have to trust that banks or governments aren't going to steal your gold. If you don't trust them you change your dollars back to gold.
> With any currency its value comes down to trust.
Do you see the problem here? The entire argument for the gold standard always goes back to trust of the institution that is promising to exchange paper for gold. There is a long, long history of banks and governments unable to produce lumps of metal when demanded, and that has caused panics and recessions. Even if they were sound but had logistical issues moving gold around and exchanging it.
Again, there is no difference between a piece of paper that promises to be worth some amount of gold and a piece of paper that promises not to mismanage a fiat currency. They both depend on full faith in the institution that made the promise.
> A gold standard allowed people a way to keep their wealth in a durable form in times of low trust with no conversion cost.
If they had the physical gold, there is always a conversion cost. A lot of immigrants use gold as a bank of sorts, and they always lose a few points when they sell and buy back. In a crisis, as we both agree, gold is worthless, or at least worth a lot less as everyone tries to sell theirs for food. Holding paper that should be exchangeable for gold has no more inherent value than a fiat currency.
> It allowed people to "take their ball and go home" so to speak. No governments needed to trust another country's fiat. The money exchanged in trade had a real, verifiable, persistent value.
It allowed people to have a piece of paper with a promise that they could "take their ball and go home" so to speak. No governments needed to trust another country's fiat, they needed to trust they weren't lying about their gold reserves and their management of it. The money exchanged in trade was a promise that it was backed by a real, verifiable, persistent value.
> Whatever excuses the US Government gave for ending the gold standard it still acted unconstitutionally. The government was facing a damaged economy and dwindling gold reserves as people and countries redeemed dollars for gold. The government saw their dwindling gold reserves as a problem instead of a function of a gold standard. This is the same as a casino
The government saw their inability to manage the money supply when it was tied to gold as an existential crisis to the Union. If you were in charge, based on your arguments here, you'd rather let the south secede or win the Civil War than tarnish the reputation of the gold standard. That's a bit more serious than a casino going bankrupt.
> It wasn't a problem with the currency it was a lack of trust in the issuer that the issuer saw as a reduction in "their" money that needed to be stopped. It was never "their" money to start with. It always belonged to the people. The people were just taking their ball home.
And when many of those people tried to take their ball and go home, there was no gold for them to collect. The system failed because the institution was mismanaged, or because there was a panic and they couldn't handle the logistics of moving lumps of metal around. That's the whole reason the world has moved away from the gold standard. I'm not sure how you see the long history of it's repeated failures as evidence that the problem is not the gold standard, but the lack of a perfect implementation of it.
Would you be happy with no paper certificates for gold and just use gold coins? From your earlier argument I suspect the answer is no.
Every single argument you have made is that governments and banks cant be trusted with paper money even when it is backed by gold. So, why do you push for fiat currency?
If government and banks are not to be trusted with paper money then hard currency is the only solution left that doesn't require trust in anybody.
> Would you be happy with no paper certificates for gold and just use gold coins? From your earlier argument I suspect the answer is no.
Everyone's answer is no. Even during the prime of the standard, people made transactions on paper currency promising they represented gold because no one is going to lug around heavy coinage, spend the time to authenticate it (since it's easier to counterfeit than modern paper/plastic currency), or have to decide between making trips to banks or having a pile of it they have to constantly guard.
> Every single argument you have made is that governments and banks cant be trusted with paper money even when it is backed by gold. So, why do you push for fiat currency?
Because for every person who isn't part of the aristocracy close to centers of power, there is no difference. If a currency is mismanaged, it doesn't matter whether it promised gold or low inflation. During all of the previous crises, the first things banks and governments did is suspend specie payments.
> If government and banks are not to be trusted with paper money then hard currency is the only solution left that doesn't require trust in anybody.
If you want to live in a nation state with a credible legal system, and I think everyone does, you have to trust them to some extent. You have to trust that they won't take away your property by force, throw you in jail to take your wealth, allow someone else to do those things without consequences, or mismanage their currency to the point where it hyper inflates.
Credible governments have things like the FDIC so normal people don't have to worry about their local credit union going under as long as their account has less than $250k in it. Since the average liquid net worth of Americans is less than $50k[1], that pretty much covers everyone. It has virtually ended the problems of bank runs and panics except for black swan events like 9/11.
Even for things like the 2007 Financial Crisis, being on a gold standard wouldn't change anything. The policy mistake of removing the firewall between traditional banking and investment banking as well as leverage limits would have still led to over-speculation and CDO Ponzi schemes. The gold standard would have just added another knot to the crisis as well as provided some video footage of huge crowds trying to get specie payments and walking away empty handed. Nations like Canada avoided that entire crisis, except for what was unavoidable due to their relationship with the global economy.
Not too worried about it. It only happens during wartime for G20 nations, the last being in the 1920s/1940s. When those nations were on the gold standard.
Before your examples Europe had the Great Bullion Famine during the 15th century that caused deflation across the continent due to the lack of gold. This was ended when the Spanish started flooding Europe with vast amounts of gold from the Americas, which then caused massive inflation instead.
Housing wouldn't cost a million$ if not for inflation. There has always been demand, and people always found ways to meet it. But with inflation, especially high rates, your mortgage was paid back with dollars worth less than when the house was first purchased or built.
How is this a concession to the old? Why is it that someone worked for 30 yrs to pay off their mortgage shouldn't get the same treatment, mainly "appreciation" due to inflation that everything else gets?
Honest question - is this the same argument we hear about "forgiving" student loans, meaning having people who didn't sign up for them, agree to them, utilize them, or even go to college, pay of the debts of those who did?
Gas is more expensive because fossil fuels are more difficult to extract, we have some environmental standards instead of none, consumption has skyrocketed, and there's an organization called OPEC that maximizes the price. Pretending that none of that would be true if dimes still had silver in them is ridiculous.
If you had taken those same two 1964 dimes and put them in a DJIA index fund, you'd have $7. That's because storing shiny things in a vault does not contribute to economic activity. It doesn't invent anything, manufacture anything, provide any service, or create any new markets.
No one thinks that their economy would be better off with a huge stockpile of gold instead of a huge stockpile of CPUs. No one thinks that a reduction in mining capacity should restrict the amount of currency available for business loans. Representative currency is a vestigial technology that is no longer useful.
Precious metals are not typically considered as drivers of economic activity. They are used as hedges or backstops. Your $7 in an index fund after 57 yrs doesn't sound that productive being only 2x what the value of the silver is.
Modern monetary theory isn't doing fine and neither are the countries with fiat currencies. They're all in absolute crisis because their economies are built on ever-shifting quicksand.
The "gold standard" isn't a theory of economics, it's an observation. Money is a medium of exchange - a mechanism for judging the relative value of unlike goods. That is literally impossible if the thing used as money is non-economic, like fiat currency. The money must be itself a tradeable commodity. Commodities that are useful as money have all the traditional traits you learn in elementary school, and gold is the traditional and current best fit for those traits.
Belief in the viability of "monetary policy" and fiat currencies always comes from a belief that no one can really know how economics works, so whatever anyone does right now might not work in the future. Well, obviously that's going to be true of people who refuse to learn what economics as a field actually is.
> Modern monetary theory isn't doing fine and neither are the countries with fiat currencies. They're all in absolute crisis because their economies are built on ever-shifting quicksand.
Okay. What countries use representative currencies and how are they doing?
> The "gold standard" isn't a theory of economics, it's an observation. Money is a medium of exchange - a mechanism for judging the relative value of unlike goods. That is literally impossible if the thing used as money is non-economic, like fiat currency.
Are you saying the world economy is literally impossible?
> The money must be itself a tradeable commodity. Commodities that are useful as money have all the traditional traits you learn in elementary school, and gold is the traditional and current best fit for those traits.
You just said money a medium of exchange. As long as both parties agree to the transaction, and it wasn't a barter, whatever wasn't the good or service was the money.
And you don't mean the money must be a trade-able commodity. No one is going to walk around with a set of weights and tubs of water to determine the purity of coins so they can buy or sell a sandwich. You're making the argument that if the currency could be exchanged for lumps of metal at a treasury office that it would somehow be an improvement.
> Belief in the viability of "monetary policy" and fiat currencies always comes from a belief that no one can really know how economics works, so whatever anyone does right now might not work in the future.
I honestly have no idea what you're saying here. Which economists claim that no one can know how economies work?
> Well, obviously that's going to be true of people who refuse to learn what economics as a field actually is.
So far the fiat currency system has been a part of the most rapid progression of technology and trade in recorded history. I'm not saying it was the driver behind it, but that has been the dominant currency system in place for the last 70ish years. It absolutely has flaws, and absolutely can be ruined by corruption and poor governance. It also works so well that people who hate fiat currencies still use them every day. I'd bet .225 ounces of 99% pure gold alloy that you bought your lunch with it.
> So far the fiat currency system has been a part of the most rapid progression of technology and trade in recorded history.
There is an argument to be made that the progress would have occurred regardless of the currency system in place. That is to say it is nothing more than coincidence that fiat was in place during this period of progress. The progress is the result of capitalism not the currency system. However, had this progress occurred under a gold standard we would have been much better off. Fiat monetary policy has bled value from the economy for nearly 90 years. All of that value lost to inflation would still be in the economy if we had stayed on a gold standard.
Where do you get this notion from? If you separated the economic system from the global economy during the biggest expansion of the economy ever, we’d have been even better off? Based on absolutely what information?
The growth would have happened anyway. The economic system is just a way to trade wealth and keep score. It doesnt matter if it is fiat currency, gold or grains of sand that are traded. Being on a fiat system allows an outside player to siphon value out of the economy for their own gain the same as a tax. If we had been on a gold standard during this amazing growth period the only way an outside party could siphon off wealth is with taxes.
If we were on a gold standard and the government took 2% of every single transaction for the last 90 years we would still be better off. Inflation is a tax that is compounded over time.
Globalization has exploded since we got off the gold standard. It was heavily slowing the world economy down. There just isn't enough gold to represent all the amazing things people want to do.
With globalisation happening about the same time as coming off the gold standard I understand the conclusion.
There are two flaws in the logic leading there. First, globalisation is the result of the technonogy, particularly transportation and materials, available. Second, even with a gold standard the value of gold increases over time. A single unit of gold is able to buy more as the economy it represents grows. On the ground, with dollars pegged at an amount of gold, you would see this as prices decreasing as they were for the history of the US gold standard.
>Money is a medium of exchange - a mechanism for judging the relative value of unlike goods. That is literally impossible if the thing used as money is non-economic, like fiat currency. The money must be itself a tradeable commodity. Commodities that are useful as money have all the traditional traits you learn in elementary school, and gold is the traditional and current best fit for those traits.
If "money" is a physical medium of exchange then advanced economies do not have or need "money".
Our modern banking system simply lets people promise each other goods and services. It's effectively a system built around relationships.
I honestly don't understand the obsession some people have with the gold standard. Even when the US had the gold standard, the US never had gold reserves that matched the dollars in circulation. Not once. Ever. Also, the gold standard doesn't stop sovereign devaluation as happened by FDR in the 30s.
Historically gold existed as a currency because it had some useful properties:
1. Unusual appearance;
2. Relatively scarce;
3. Inert;
4. Fungible; and
5. (This is a big one) Density. Up until the modern times it was the densest material someone could be expected to have (eg Iridium, which is denser, wasn't common in the Middle Ages). Why does this matter? Counterfeit currency, as was a problem with anything based on silver.
Currencies only have value because people give them value.
There's a lot here but this jumped out at me:
> The Germans fell into a policy of financial excess, ending in hyperinflation. Their experience was considered one of the object lessons proving the value of the gold standard.
No mention of the Treaty of Versailles here. Germany was forced to pay war reparations. Those were denominated in deutschmarks. Hyperinflation actually "solved" Germany's reparation debt problem. In a way, Germany was incentivized for hyperinflation. The importance of that cannot be overstated.
you forgot verifiable. you don't need advanced technology (not much more than a black rock) to get a good estimate of the purity of gold which can be used as a neutral negotiating point in an exchange. Due to its relativistic quantum mechanical properties, gold lowers the activation barrier of creating trust between two parties.
I suppose you could use archimedes principle in its original form to verify density of gold, sure, but I think GP was referring to transportability. If anything it's to do with #1. But calling it "unusual" makes it seem like it's just a human whim and human subjective standards of desire that make it valuable, where it's very important to be explicit that there is an intrinsic property of gold that gives it subjective utility beyond mere preferences.
> I suppose you could use archimedes principle in its original form to verify density of gold, sure, but I think GP was referring to transportability.
Under 5. point, the one about density, GP wrote: "(This is a big one) Density[...] Why does this matter? Counterfeit currency, as was a problem with anything based on silver.".
What made you think that he was talking about transportability there?
ok fair. I didn't fully understand the point and wasn't aware that gold was, say, denser than lead. (not a metallurgist, just a biochemist), and I was fixated on the deficiency of point #1. Thanks for pointing it out. In either case, verifability of gold is thus a product of TWO easily assessed properties, not just one.
>Even when the US had the gold standard, the US never had gold reserves that matched the dollars in circulation.
The US Dollar is/was originally defined as a measurement of silver, and based upon the Spanish Real - the same coin you hear in piratey accents as a "piece of eight" because it was usually cut into 8 pieces to make change. The US absolutely had metal to back every dollar in existence for about 100 years, though it wasn't gold. The real "gold standard" era was a stopover/band-aid effect of the growing disparity in value due to bimetallism, and came into effect after "The Crime of 1873".
I believe German reparations were shielded/unaffected from inflation. The allies were smarter then that. Germany did get a pause in reparations payments when hyperinflation drove their economy to possible collapse which led to reparations being paused then cancelled. They paid 16% of the reparations agreed to. Then after WW2 they agreed to pay half of the rest.
German hyperinflation was useful for getting rid of internal debts that the government of Germany had borrowed from it's citizens during the war. It also led to collapse of pensions
> I believe German reparations were shielded/unaffected from inflation
It was all much more complicated than that. Hyperinflation wasn't intended as a simplistic way to repay reparations. It had a number of motivations. For one thing, Germany also had alot of private debt outstanding. And from the perspective of the exacerbated Allies, the most important motivation behind hyperinflation was to drive the Allies back to the negotiating table; which it did. Except the renegotiations proved a mixed bag for Germany, giving them enough breathing space to standup their economy (not long after hyperinflation, Germany had a surfeit of foreign investments), but nonetheless leaving the political albatross of reparations in place.
The basic point is that Germany didn't naively step into hyperinflation. For the most part it was strategic and temporary--it only lasted a few years, after all.
USD were gold backed. Paying USD debts is the same thing as letting gold flow out of the country. If you believe gold is everything, then simply by having less gold the German currency becomes worth less. If Germany has no gold then the currency becomes worthless (=$0).
> the US never had gold reserves that matched the dollars in circulation. Not once. Ever.
This cuts both ways. Proponents of "sound money" and the gold standard ignore this unwinding of the relationship. So pointing to the roaring 20s or the economic booms of the late 19th century as evidence of the power of sound money really say nothing of the sort.
Proponents of the "gold standard caused the Great Depression" also ignore that this relationship was tenuous at best. This article is typical of that mindset -- it wasn't the gold standard per se, but it was gold-standard-era-thinking that caused the Great Depression.
The only people who are offering a coherent story here are the MMTers who really take a look at the role of the state (and, probably more importantly, the law) in the story of money. While I disagree with many of the policy proposals from MMT proponents, I think that view is descriptively accurate for the most part. Where I think they fall short (and I am working hard to challenge my own views here) is in their picture of inflation, which I feel is very incomplete.
It's worth noting that MMT is related to chartalism. I found Debt: The First 5000 Years very persuasive, though I only got about 1/4 the way though so far.
Oh good I'm glad I'm not the only one who has started it and not managed to get through the whole thing in one go. It's very good, but very dense. I should also finish reading it at some point...
> I think that view is descriptively accurate for the most part. Where I think they fall short (and I am working hard to challenge my own views here) is in their picture of inflation, which I feel is very incomplete.
The real economy has a surplus of X amount of real resources. You use the resources and are better off than not using the resources.
> Germany was forced to pay war reparations. Those were denominated in deutschmarks.
This is not true. Reparations had to be paid in Goldmarks, foreign currencies, and commodities. But inflation was used to meet the state's other expenses, including paper mark-denominated war bonds.
Another example of not bothering with the context of the situation:
> I am dismayed by the way writers insist on reporting the collapse of a currency as a “monthly inflation rate” with some ridiculous figure associated that helps a normal person not-at-all understand anything (e.g., Yugoslavia in 1992-94: highest monthly inflation rate = 313,000,000%!!!!)
> They had a war. Their government collapsed. They couldn’t tax. They couldn’t produce. Their currency collapsed. The idea that “313,000,000%” tells us anything of interest is ridiculous. A few newspaper headlines on peace treaties, troop movements, famine, reconstruction—literally anything— would be infinitely more informing.
You forgot the most important one, which is, has been, and always will be:
6. The inability for a central bank to print gold.
I understand the various arguments for fiat money in advanced economies, and many of them make sense, but the one thing that should stop everyone from advocacy of CB-printed fiat is the Cantillion Effect [1].
Any system in which the first-at-the trough benefit exclusively to the detriment of those last-at-the-trough is prima-facie wrong. It causes MORE inequality than any tax structure, redistribution plan, or Elysium-style Capitalist dystopia you could ever dream of.
If you advocate for management of money supply by printing of fiat, that's not necessarily bad. But there are no Bernanke-style helicopters coming to distribute it fairly or evenly. It's always: Blackrock and Citadel first, you twenty-third. And that's not a system of money supply management that's even remotely just.
Until the Federal Reserve stops handing free money to Larry Fink that may eventually get to me, much too late, at money velocity cycle #18, whilst publishing press releases bemoaning THE VERY INEQUALITY THEY CREATE, I'm going to stack gold and cryptocurrencies. I have no interest in their lies, and you shouldn't either.
Compared with the OP and much of this thread, there is a simpler view:
Here I outline Asset Bubbles, Fractional Reserve Banking, and the Money Supply 101:
In the 1920s, the US blew a stock market bubble. Lots of people bought stocks on margin, that is, with loans from commercial banks and using the stock as collateral. The banks got the money not from "the Gold Standard" with so much attention in the OP but from fractional reserve banking, that is, loaning out deposits of savers, demand deposits. Due to the crash of the stock market, suddenly at the end of Black Tuesday, 10/29/1929, lots of the loans could not be paid back. The borrowers were broke. Then the banks were broke. Then savers were broke. Much of the money supply had been from the loans from the fractional reserve banking, and with the stock market crash that money had in effect been destroyed. So, we suddenly had a huge reduction in the money supply.
The people who suddenly were broke weren't spending much money, and, thus, their vendors had reduced revenue and fired their workers who then weren't spending much money, and we were in the Great Depression.
The source of the bubble was fractional reserve banking, not really, directly the Gold Standard: With or without a Gold Standard, we can still use fractional reserve banking to blow asset bubbles that can pop and destroy much of the money supply -- we came close for the same song, second verse with the mortgage bond crash in 2008.
So, after 10/29/1929 the US was buying less and, thus, England, Germany, etc. were selling less and also went into a Great Depression. Then also the US was not selling as much to England, Germany, etc. and went into a deeper Great Depression.
On 12/7/1941, Japan attacked Pearl Harbor and, thus, got the US into WWII. As a result, using borrowed money, War Bonds, the US started massive war production so that everyone who was willing and able to work had 1-3 jobs. Then 90 days later, say, 3/7/1942, over 12 years since the stock market crash of Black Tuesday, 10/29/1929, we were out of the Great Depression. Slam, bam, thank you, Ma'am, in 90 days we were out of what we had been in for 12+ years since 10/29/1929.
Yes, we can suspect that with some real understanding of the economy we COULD have been out of the Great Depression in 90 days after, Black Tuesday, 10/29/1929, that is, on about 1/29/1930. The 12+ years in the Great Depression caused lots of serious harm just here in the US, some of which is still with us. For the world, one could argue that the Great Depression was the main cause of WWII that killed 50 million, maybe 100 million, people. Fumbling with the real causes of the Great Depression seems, say, unfortunate.
The War Bonds in effect increased the money supply, and at the end of the war we stayed out of the Great Depression.
Yes, we can control fractional reserve banking via reserve ratios, stress tests, etc.
Lesson: Yes, sound money is important. What to do with gold as money is also important. But the key failure that caused the Great Depression was the pop of an asset bubble puffed up with borrowed money from irresponsible cases of fractional reserve banking while this and that about gold was essentially irrelevant. Simple, 101 level stuff.
Good write up. Bank runs mean nothing when operating on a 1-to-1 ratio. The shock itself is mathematically impossible without Fractional Reserve Banking.
What do people think of the thesis expressed in The Bitcoin Standard that the replacement of the gold standard by fiat currency led to a short-termist mindset among people? In other words, we now have artificially high "time preference" as a result of our currency inflating and the resulting disincentive to save money.
The book also argues that fiat currency encourages people to get into debt and risk bankruptcy as a result. In doing so, it increases demand, drives prices up, thereby further incentivising people to borrow money, creating a vicious spiral of debt and increasing prices.
While the former sounds strange to me, I find the latter to be interesting. But I'm not an economist, so I don't know whether my summary is accurate.
You got that backwards. Gold leads to extreme short-termist mindsets. Just read up on the Great Depression. During a recession people hold onto money to isolate themselves from losses in the real economy. People would rather speculate on currency than do real work that may be unprofitable today but highly profitable in 5 years. If you have a company that is losing money, then simply holding onto interest bearing money nets a superior return. The strange part is, what do you spend the money on, now that the company is gone? Even stranger, that company might not be needed today but it certainly will be needed in 5 years when the economy has recovered.
If your money goes up in value you would burn down the rain forest today to earn as much money as quickly as possible. You would sell your company and fire everyone to get your hands on money that goes up in value or at least doesn't lose value in a recession. Unfortunately, reality doesn't work that way. You cannot wash this year's dishes in January. You cannot grow all the food you will ever eat in your 20s and then preserve it until you are 90 years old. So your money is going up in value and you stop working. Who's making the damn food? Who's washing the dishes? Either the young or nobody.
If your money goes down in value you want to burn down the rain forest as late as possible because burning it down today will leave you with money that decreases in value. Burning it down tomorrow lets you avoid your money going down in value. Inflation raises the expected value of future cash flows. It encourages you to exchange decaying money for durable goods that decay at a slower rate. This is important because the real world decays through aging (living organisms and materials like steel). If money decays at a slower rate than the world then people will pretend that the world doesn't decay and perhaps accelerate its decay. If money decays at a faster rate than the world then people will try to minimize decay in the real world.
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[ 3.2 ms ] story [ 125 ms ] thread0: https://www.nber.org/system/files/chapters/c11482/c11482.pdf
1: https://www.bis.org/review/r040305e.pdf
I believe the implementation of this concept via the Fed (bank of banks) is the real issue. Basically, liquidity goes to the banks. Anyone having a relationship with banks gets access to this liquidity and benefits. Of course, we plow these "gains" back into assets (hard or stock market), this drives up prices, and we get asset inflation. For the person renting an apartment, leasing a car, and with credit card debt ... well, they lose. The trickle down doesn't work. You can interpolate and extrapolate from this brief comment, and I believe that this is the fundamental source of the expanding rich/poor divide.
As for so-called "asset inflation", I like Cullen Roche's take:
> In any case, I would argue that most of the asset price appreciation of the last 10+ years appears largely rational in the sense that it is supported by corporate fundamentals (record profits, record GDP, etc) and other robust economic data that is consistent with a growing economy. It isn’t just a fictitious boom as many “asset price inflation” narratives like to imply.
> As for inequality – asset price inflation would tend to exacerbate inequality since it will disproportionately benefit those who own assets. This makes sense. But as I like to always point out, inequality is a policy failure, not a market failure. After all, a capitalist economy will always veer towards monopolistic behavior if we allow it to. The extent to which we allow that to happen is not a failure of capitalism, it is a failure of policy makers to contain capitalism.
* https://www.pragcap.com/lets-talk-some-more-about-assflation...
The PE ratio for the S&P 500 is currently ~28X, which is roughly double it's historical average and ~50% more than the average from 2010-2020. Is it really supported by corporate fundamentals?
[0] https://www.multpl.com/s-p-500-pe-ratio
Exactly. All those people talking about money printing don't understand that money doesn't exist in a vaccum. Every dollar created is backed by one dollar of debt which ads up to a net worth of $0.
So the Fed cannot helicopter money for the obvious reason that they cannot ever pay that money back. The government can borrow and spend money into the economy because it can tax its citizens. The money will come back one day.
Ding ding ding. This is a key issue. If you want to bail out the economy, you need to do it to increase aggregate demand, and therefore the best way to do this is to give money directly to the people. The programs in place since 2008 (1) benefit people with capital (2) leave the poor and the working class in the dust, and (3) are paid for by milking the taxpayers directly, or indirectly through inflation.
Banks are leacherous middleman in normal operation. Theoretically they are providing a valuable service of evaluating risk and allocating capitable to the most profitable ventures. But in practice the incentives are totally misaligned, since they do not get accurately punished/rewarded for doing a shit job. Not to mention old-fashioned corruption, understood as giving undue benefit to a party/parties due to their personal connections.
A lot of people don't know this, but the main reason Calvin Coolidge suddenly, and without warning, decided not to seek reelection in 1928 was that he couldn't find any helicopters. Hoover was set up.
https://benoitessiambre.com/specter.html
If the world transitions to cryptocurrencies whose supply is unmanaged or fixed, that will not be possible and presumably will be stuck during financial crises.
You might want to add to your reading list the history of the Roman empire.
https://www.google.com/search?q=currency+debasement+roman+em...
Inflation rate higher than the deposit interest rate (negative real interest rate) is causes the wealth transfer.
"Savers", in reality, lenders have always had a way out in this situation: investing.
As in every investment boom, there are Ponzi schemes and during this one it happens to be Bitcoin.
Prices are a function of money supply and velocity. Inflation can rage while no money is printed because velocity surges. Just as deflation can fester while central banks print as velocity toys with absolute zero.
What are some good examples of this? Historically it seems to me like major inflation issues usually coincide with an expanding money supply, not the other way around
I think the difference is Japan is a a country with all its needs met. People already had enough money to spend on basic needs (unlike post WW1 Germany or Zimbabwe recently) so additional money didn't change that but there was a housing bubble.
You want a little bit anyway. Simplistically, if all you have in your economy is 10 dollars and 10 hamburgers, then hamburgers will probably be worth something like a dollar each. If you go to 20 hamburgers but stay at 10 dollars, now hamburgers are worth $0.50, which is great for dollar holders, not so great for hamburger makers. A healthy economy, however, is not one in which actors are incentivized to hoard currency. You want economic actors to be incentivized to produce goods and services. If you grow to 20 dollars and 20 hamburgers, that is price neutral, but you don't really want price neutrality. You want it to be more lucrative to produce goods and services than to hoard currency.
There is some valid concern that this can harm retired savers, but we developed a solution to that a long time ago that doesn't require deflationary currencies. We split ownership shares of the companies that produce goods and services and trade them publicly so people can get a cut of the wealth growth without needing to become producers themselves. Retirees can own appreciating assets by buying stock in companies that make stuff, rather than holding their life savings as cash under a mattress.
[1] https://lazardfreresgestion-tribune.fr/wp-content/uploads/20...
Suppose the government prints one dollar and shortly thereafter everyone goes bankrupt and collapses the money multiplier. This will definitely result in net deflation.
OK, that's extreme, but it should prove a point in extremis. But it is possible that the government could print money and suddenly people stop... paying off their debts, or something. Maybe they start thinking that dollar-denominated-capitalism is pointless because it's all cronies that get it anyways, and just exit the economy. Or like, screwing the poor through inflation triggers some sort of revolution and all the banks selectively are levelled by anarchist activists.
So "printing money" could definitely cause deflation in some scenarios. You probably don't want to be participating in an economy that takes that turn.
Literally the only way to increase the money supply is increasing the underlying assets' value overall.
It's because people are somehow led into believing that the government can arbitrarily print money, everything that's normal seems like mental gymnastics.
If I have $10 and you have $10, and then someone prints $10 and gives it to you. You went from having the same purchasing power as me to double mine, without any change to the available goods and services.
> lenders have always had a way out in this situation: investing
Yeah, that's why we're investing in a fairer monetary system, where this power to create money arbitrarily doesn't exist.
My point is that equity: public or private, has always been an alternative everytime lending money isn't worth the while.
Bitcoin brought nothing to the table.
When people specify Bitcoin or Gold as a particularly good "hedge for inflation" they betray the fact that they failed Macroeconomics 101.
Everything that isn't the currency is a "hedge for inflation".
Edit: I'd argue this is because it has better monetary properties than the alternatives.
A basket of consumer goods and services is a nonsensical way to hedge monetary inflation under anything but the most extreme conditions, since those things should be getting cheaper as production processes/technology/understanding of the world improve.
Also, I don't really care what the price of a "general basket of goods and services" is (whatever that means). I care about the prices of the specific things that I want now or will want in the future.
Edit: And I would say my personal CPI seems to track money supply inflation pretty closely.
"Purchasing power" is exactly CPI inflation, not monetary inflation.
> And I would say my personal CPI seems to track money supply inflation pretty closely.
This I can buy. If the CPI figures are wrong, then we need to get ones that are right. But CPI inflation is still the one we actually care about.
Why should we not care about monetary inflation? Well, say the population doubles. Either the monetary supply has to double, or each dollar is worth twice as much. (In case you think "that sounds good": it stinks if, say, you owe a mortgage and each dollar you pay back is twice as valuable.)
Yes, I know that's not why the monetary supply inflated over the last 15 years. The point stands: CPI inflation is the one that actually affects us.
If your only purpose in life is to be a "consumer", sure. But changes in relative purchasing power between people also distort you're ability to affect the world. Increasing purchasing power of a bank or home owner relative to a saver through policy decisions increases their power to affect the world relative to the saver. This ability to arbitrarily choose winners and losers is not what you want in a monetary system IMO.
Edit: ability to affect the world as well as freedom to act, since you can substitute money for your own time.
No need for name calling.
Also, maybe try to form an actual coherent argument, rather than continuing to claim I don't know what I'm talking about.
- Medium of exchange: bad. Caps out at a few transactions per second, transaction cost go up massively when actually used.
- Unit of account: Terrible. Because of price volatility you denominate BTC in terms of USD - something priced in BTC has a different price depending on the minute you look at it
- Store of value: Hilariously terrible. Storing value has to do with *low price volatility* something which Bitcoin does not have. The average price might be up over time, but this is *speculation*, not storing value! If you store value you want as close to what you put in as possible, not more (or less).
People claiming Bitcoin is a "store of value" don't understand what the word "storing" means, nor the textbook definition.
- collectable -> It's cool, I want some.
- store of value -> it holds value better than any other money. (Bitcoin is here)
- medium of exchange -> People request it in exchange for goods and services because it holds its value over time.
- unit of account -> People denominate prices in it because it's a widely used medium of exchange.
Edit: My initial point was Bitcoin has properties that make it suitable for use as money: divisible, portable, easy to verify, doesn't degrade over time, etc.
"Imagine an isolated village where people farm for subsistence. This is a village disconnected from the world that has not had a currency up to now. People rely on barter instead. Every fall, villagers usually produce excess food to have something to eat in the winter, even if, the real returns on the investment is low. Because of spoilage, crops stored for the winter are only worth 90% of their usual real value. 10% rot away in storage. That is, these crops have a return of negative 10%.
One day, this village mandates its government to create a currency that always keeps 98% of its real value on a yearly basis (2% inflation) even during times when private savings assets can’t retain this much. The government puts money into circulation by buying part of farmer’s crop during the summer (civil servants have to to eat). Most farmers produce enough food for the summer, sell some of their crop and keep their money to be able to buy something to eat in the winter. They do not produce a crop to store for the winter since it would only return -10% on their initial investment and the central bank promised money would keep value at a rate of at least -2% (plus maybe a bit of interests).
What happens when winter comes? People have cash but few have anything to sell because they didn’t reinvest in the production of a crop to be stored!
In this situation, it’s going to be very difficult for the government to control inflation because there will be too few goods for the amount of money people will want to spend. If the government does manage to control inflation, it will be through high taxes or by depressing the nominal value of the crops of the few farmers who did store something for the winter. The central bank might do this by giving high enough interests payments on cash to prevent people from wanting to spend it immediately.
In any case, people won’t eat much during the winter because the food will simply not exist.
The point is, government money can easily jam markets and crowd out productive investment."
https://medium.com/@b.essiambre/the-world-deserves-a-pay-rai...
Turned out great for them. By all metrics they should be Western Europe level rich and yet many young kids find it more profitable to mine coins in runescape 12 hours a day rather than actually get a job, strange how that happens hey, if only they printed more Bolivar this all could have been avoided?
Fundamentally as well it's the baby boomer's fault. Right before the great depression was when the boomers of the american civil war were retiring.
The 1980s inflation and crashes were WW1 boomers and now is the WW2 baby boomers retiring.
History repeats.
The more interesting question is whether there is the political will, let alone ability, to accurately and quickly respond to events as they are happening, rather than with extreme delay. Covid-19 (granted as much a public health crisis as an economic one) showed that American domestic problem solving has grown rather fragile and inflexible.
So it's interesting. 1 of the key rules is that you cannot borrow money to invest. You know what ive never seen all my life until recently? THAT! My bank and others that have nothing to do with me have been advertising, 'you can borrow $5000 to get your investment fund going!'
People said the reason the great depression happened was stuff like this.
I personally dont expect it's a depression level event. I think most people were hoping for this because it's better than extreme inflation like the 1980s. HArdly a prediction given inflation is so high already.
But if you actually visit parts of this country that are outside of the wealthy, coastal bubbles, you'll see first hand the real world devastation that's happening to people. It's why there's a major opioid epidemic in the Midwest. It's why homelessness is exploding. It's why rampant, degenerate speculation in stocks and crypto is going crazy and rife with scams and conmen selling hope to the hopeless. It's why populists like Trump and Sanders have so much political energy behind them.
And all of this is pre pandemic. I'm sure the past two years have added a new level of devastation.
People are depressed and dying everywhere, but us winners in our gilded bubbles have the privilege of being able to look away and continue living in our illusory, drunken stupor.
Would it not be a Great Depression if it impacts millions of Americans for years or decades if the academic elite don’t see it from their ivory towers to document it?
The great depression effected a much larger percentage of the population in a much more negative manner
You seem to be talking about local economic difficulties in some regions of the country. Which isn't a great thing but not nearly as terrible as the great depression.
And when the market crashes, as it always does, many of these people will be in the red and that would greatly affect consumption..
How true is this?
It's also papered over by things like Norman Borlaug's agricultural revolution and supply chain innovation. Even with crappy broken supply chain, americans are not starving in the streets at depression-levels. But a whole lot of other stats support your hypothesis. Like mass exoduses from state to state.
As the machines churn out more and more of the essential things we need to live, and as we need fewer and fewer humans to keep the machines running, we're left with an overabundance of humans who don't know how to live without a job driving them.
I think a lot of people miss that the Great Depression wasn't just about economic breakdown. People were literally depressed and society seemed aimless. It wasn't FDR's social programs that broke us out of that. It was kicking ass in WWII and emerging the victorious badasses ruling the world. THAT is what broke the spell of depression and injected vigor in American society.
There are technical defintions. USA's GDPgrowth is at 6.7% and inflation is at 5.4%.
china is at 0.2% gdp growth and 0.7% inflation. The numbers are scary bad if you exclude all of capitalist china. China is at 300% debt to gdp and on the verge of collapse. Greece was what 250% peak during their collapse? That's the importance of taiwan, hongkong, shenzen, and others. It's not the USA that's of concern.
>But if you actually visit parts of this country that are outside of the wealthy, coastal bubbles, you'll see first hand the real world devastation that's happening to people.
Oh for sure. You can read about the failure of krugman from his own words. https://www.bloomberg.com/opinion/articles/2019-10-10/inequa... Which he still doesn't understand how much failure he has had.
> It's why there's a major opioid epidemic in the Midwest.
This has far more to do with marijuana legalization. They cant legally market their own product but they can FUD their competitors.
>It's why homelessness is exploding.
Far more related to rising minimum wage rates. There's a >95% correlation between homelessness and minimum wage in california. That's basically causation.
>It's why rampant, degenerate speculation in stocks and crypto is going crazy and rife with scams and conmen selling hope to the hopeless. It's why populists like Trump and Sanders have so much political energy behind them.
Oh yes, check the bloomberg link above.
>People are depressed and dying everywhere, but us winners in our gilded bubbles have the privilege of being able to look away and continue living in our illusory, drunken stupor.
That's actually a super interesting factor. Is there any relationship between psychology depression and economic depression. This was analyzed heavily during the great recession and it certainly seems like it is connected. Which is an argument for single-payer psychiatry. If a society could eliminate depression, economically we would likely be hugely benefited at a higher rate than the cost of the psychiatry.
> ... The constraints of the gold-standard system hamstrung countries as they struggled to adapt during the 1920s to changes in the world economy. ... Central bankers continued to kick the world economy while it was down until it lost consciousness.
What this article ignores, like countless articles before and since, is the Roaring 20s. Articles like this treat the Great Depression as an event that hit the US economy out of the blue. But even superficial study of the ten years prior reveals something obvious: a massive, compounding, technology-fueled asset bubble.
The article also ignores the event that kicked off the Roaring 20s: the depression of 1920-1921:
https://en.wikipedia.org/wiki/Depression_of_1920–1921
This depression resolved itself under a gold standard regime and with minimal intervention by the Federal Government and Federal Reserve.
50 years ago the US abandoned the last vestiges of the gold standard. Today we find ourselves in the middle of a technology-fueled asset bubble. The US president talks, without a hint of embarrassment, about the need to borrow to continue to service debts. This is, of course, the very definition of a Ponzi scheme.
Whatever this comes to, we won't have the gold standard to kick around. It's been out of the picture for decades. What happens when the world's governments decide to outdo each other on how much currency they can conjure into being?
You're welcome.
...
So do you use that often in polite company...?
Most Ponzi schemes don't have the authority to levy taxes on the largest economy the in world, nor are they backed by the most powerful military force humanity has ever seen.
Which is why we have inflation. No reserves needed. The price levels incorporate the distance between the means and the living.
The author of the linked article is Barry Eichengreen, widely recognized as the premier scholar of the Great Depression. The article references about 900 pages worth of other articles, believe me: your pet theory about the 1920's events is considered in the conclusion. They're not ignoring it because they read fewer books than you.
> The US president talks, without a hint of embarrassment, about the need to borrow to continue to service debts.
Governments don't work like a household. What matters is borrow costs and use of funds. If a government can borrow and the net growth generated is greater than the interest rate on the debt, it's a good thing to borrow. Like any business debt.
A government can be in debt forever, the only thing that matters is borrowing costs and growth rate (and how the growth is generated see eg. Chinese real estate for malinvestment).
That's right. If a individual accumulates too much debt, then the individual can choose to discharge obligations through bankruptcy resulting in loss of credit, or death of the debtor, and ultimately the lessor is on the hook for the risk, and those two parties with agency over the debt contract are the only two who directly must suffer consequences. (yes there is tangential collateral damage, like if there are dependents, but it's not a whole lot).
If a government goes into debt, it externalizes the consequences of the spending to the public. "well, we vote for our representatives who spend". But that's not true. Suppose you were 16 (or, even more extremely: -1 years old), and couldn't vote against representatives voting for something stupid, like, say the US government invading Iraq. You are still on the hook for paying off the costs of those decisions. Sovereign debt is an end-run around the principle of "no taxation without representation", and it's in a much more morally questionable place.
Or, you can choose to reject the principle of "no taxation without representation", which if you are happy to do that explicitly and publically I will shut up.
Finally, the burden of amortizing sovereign debt is often achieved through the printing press, which in the long run causes inflation. Households usually can't do this. This disproportionately hurts the poor, so that adds onto the moral objection to sovereign debt.
That "principle" covers some territory a lot broader than the specific way you're requesting it be interpreted. The idea that those born into a country cannot be held accountable for debts accrued before they were born—or anything relating to the situation of the budget before they have a say in government, I suppose—is, I think it's fair to say, not a common interpretation of the slogan's meaning, now or (most certainly) in the past.
That's not even to say you're wrong, morally or whatever, but your tactic of trying to pin someone down with these words isn't a good one.
Sir, this is hacker news.
Ok, but seriously, to put it in a less-memey way. Many of the posts that I post about topics where I feel like "the word must be spread" are performative but interesting. I actually don't give a shit about convincing the parent poster of mine. Most of those people are going to be closed minded, bias-confirming, and unreceptive to rethinking their belief structures. I care about giving ideas to receptive people who are reading it with a memorable twist. Probably most people have not considered the injustice of sovereign debt explained in the context of "taxation without representation". These folks can then digest what I have to say, and re-articulate it with their own personal touch (possibly more effectively than the way that I did), and then spread the word to 100 unreceptive people with a low yield (say, 2%) and 100 more receptive people, who will then spread it, etc.
Anyways, given your response it seems to already have worked. Here you have given an alternative way to deliver the same message. Fantastic. Also, my response has enough upvotes for me to think, "gee, here are X more people now have this brainworm about the fundamental unfairness of sovereign debt".
You make a very good point. I stand corrected. :-)
What pet theory is that? All I did was to mention two historical episodes that preceded the event under discussion, and which the paper fails to mention.
> The author of the linked article is Barry Eichengreen, widely recognized as the premier scholar of the Great Depression.
So what? We're talking about the paper, not a person.
> The article references about 900 pages worth of other articles, believe me: your pet theory about the 1920's events is considered in the conclusion.
On what pages does the paper take up the issue of the speculative bubble leading up to the Great Depression?
> Governments don't work like a household. What matters is borrow costs and use of funds. If a government can borrow and the net growth generated is greater than the interest rate on the debt, it's a good thing to borrow. Like any business debt.
A main MMT talking point. Yes, I've read Kelton's book and yes, a government that prints its own currency is not like a household.
MMT is an experiment. For all our sakes, I hope its proponents are right.
> A government can be in debt forever, the only thing that matters is borrowing costs and growth rate (and how the growth is generated see eg. Chinese real estate for malinvestment).
What if malinvestment looks like investment until it doesn't?
If that was an attempt to show a difference from households, I don't see it, since those thing are equally true of households.
A business spends to generate ROI.
You can't just think like a customer going to the bank; you have to think of it like a number of actors in a complicated network of credits and debits as well as global trade with imports and exports.
There are countless asteroids out there with quadrillions of dollars of precious metals. Does that mean the first private company to create a currency "backed" by a claim to one of them is worth more than the US economy? No, of course not. The US economy produces food, shelter, water, goods, services, etc etc. It's worth far more than a chunk of atoms. Even if you could magically spirit those atoms into a vault somewhere, what do you do with them at that point?
Modern monetary theory is doing just fine, and so are all of the nations issuing fiat currency, selling bonds and notes, building infrastructure, and providing fertile ground for markets to do interesting things. Nostalgia for the gold standard is just way for people to claim the superiority of economic theories that are simply not useful anymore.
How's that gap between the rich and the poor going?
Look, the US was on the gold standard between 1850 and early 1900s, and not only recovered from a civil war, but ALSO freed all of its slaves AND went from a backwater country to a world superpower, and reduced inequality all at the same time.
https://voxeu.org/article/american-growth-and-inequality-170...
In other words, the gap may be increasing and we don't like it, but this may very well be the intended "how is it going".
One case in point: in 1970's, instead of giving employees their share of profits from productivity increases, the system gave them an easy way to get into debt instead (the credit card).
It's quite high - as high as it was in 1850, when we were on the gold standard. So... what's your point?
I remembered there were a series of financial crises leading up to the Civil War, and sure enough, the first use of fiat currency in the US was to solve a financial crisis caused by the gold/silver standard:
'In 1853, the U.S. reduced the silver weight of coins to keep them in circulation and in 1857 removed legal tender status from foreign coinage. In 1857 the final crisis of the free banking era began as American banks suspended payment in silver, with ripples through the developing international financial system. Due to the inflationary finance measures undertaken to help pay for the U.S. Civil War, the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in specie (gold bonds); this led banks to suspend the conversion of bank liabilities (bank notes and deposits) into specie. In 1862 paper money was made legal tender. It was a fiat money (not convertible on demand at a fixed rate into specie). These notes came to be called "greenbacks".' [1]
Technically Continental Dollars were zero interest bearer bonds, but they were also issued to help finance the Revolutionary War[2].
So, your argument for the gold standard is not only logically incoherent, but even if it was, it's completely ignorant of the history of currencies in the United States.
[1] https://en.wikipedia.org/wiki/Gold_standard
[2] https://en.wikipedia.org/wiki/Early_American_currency#Contin...
Wrong. The argument is a refutation of the idea that economic growth cannot happen while on a gold standard, that it will be disastrous. It is an existence statement, not a universality statement.
This is correct. Rapid economic growth happened on the gold standard. The issue is not about long term economic growth, but volatility. Hard money creates an environment with lots of rapid inflation and deflation and very strong boom/bust cycles. That volatility has costs (human costs of the pain of mass layoffs) but also benefits (weaker companies are more rapidly weeded out). After the Great Depression, it was decided that the costs outweigh the benefits, but it's a legit question that should not be so readily dismissed.
It's like pointing out that people were starving in the streets during the depression. Well yeah. We didn't have modern agriculture, freezers were a luxury, Flintstones gummi vitamins weren't a thing for kids etc.
Instead of the straw man and the red herrings, please explain how abandoning the gold standard in order to survive the Civil War is evidence of how effective it is. Here's more context that might help:
"The beginning of 1862 found the Union's expenses increasing, and the government was having trouble funding the escalating war. U.S. Demand Notes — which were used, among other things, to pay Union soldiers — were unredeemable, and the value of the notes began to deteriorate. Congressman and Buffalo banker Elbridge G. Spaulding prepared a bill, based on the Free Banking Law of New York, that eventually became the National Banking Act of 1863.
Recognizing, however, that his proposal would take many months to pass Congress, during early February Spaulding introduced another bill to permit the U.S. Treasury to issue $150 million in notes as legal tender. This caused tremendous controversy in Congress, as hitherto the Constitution had been interpreted as not granting the government the power to issue a paper currency. "The bill before us is a war measure, a measure of necessity, and not of choice," Spaulding argued before the House, adding, "These are extraordinary times, and extraordinary measures must be resorted to in order to save our Government, and preserve our nationality." Spaulding justified the action as a "necessary means of carrying into execution the powers granted in the Constitution 'to raise and support armies', and 'to provide and maintain a navy'".
https://en.wikipedia.org/wiki/United_States_Note#The_Legal_T...
> [the gold standard] is a terrible idea for civilizations that have technologies like accounting systems and currencies that are difficult to counterfeit. Tying economic expansion to the ability to mine and store one type of element doesn't make any sense.
Hear me out. I will first start a counterstatement with two supporting points (I'm sure it's easy to find more supporting points too, but let's keep this simple).
It is a terrible idea for a civilization that exists in a system with finite resources to use a currency that is unbounded and exponential. The disconnect between the nominal economic substrate and raw reality will lead to broad class theft and environmental destruction.
1. For class theft, don't just take my word for it, take Paul Krugman's: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi...
"even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis."
Now, let's unpack what he says very carefully. In short it is this:
"we need to keep our society looking like it's humming by posting great employment numbers, and the most effective way to do this is to incrementally cheat the labor class out of the value of their wages"
2. As for environmental destruction, surely you can see how putting society on a compounding treadmill of devaluation encourages consumption as a driver of economic growth (if we fail to post a positive growth number, we WILL have at least a transient economic crisis), and it's patently evident that we buy more, shittier things that need to be replaced, because there is diminished opportunity cost for saving your money to buy something better and more robust: but hey, it's good for circular flow.
--
Now, if you accept that an unbounded currency is terrible for a society in a finite resource regime - then, in the big picture it doesn't matter too terribly much what is restricting the expansion of the nominal basis[0]. What matters is that something restricts the expansion. If that's physical mining of metals, the capacity to expand the currency is soft-capped to a certain rate that flexes with real economic performance -- and hard-capped to the total amount of metal in the earth; if that's some digital ledger that can't be expanded, that would be fine too, but anyways the point is it's bounded.
Or, maybe you like environmental destruction and screwing the poor. If you do, you should probably say that up front, instead of hiding it behind difficult-to-unpack-ese like Krugman does.
[0] in the small, probably cryptocurrencies (which burn to make CO2) are better than mining, which dumps mercury effluent into the environment, and maybe there will even be efficient cryptocurrencies that burn up less CO2. But all are better than, say, an economic system that has the unboundedness property AND is propped up by paying off defense contractors that build depleted uranium tipped rounds that are dropped on civilians halfway around the world.
Well, this is certainly a different argument than "1850-early 1900s is a great example of the benefits of the gold standard"
> 1. For class theft, don't just take my word for it, take Paul Krugman's
Or, take his word on why the gold standard is a bad idea? (written before the EU was a thing)
"Why not emulate our great-grandfathers and tie our currencies to gold? Very few economists think this would be a good idea. The argument against it is one of pragmatism, not principle. First, a gold standard would have all the disadvantages of any system of rigidly fixed exchange rates--and even economists who are enthusiastic about a common European currency generally think that fixing the European currency to the dollar or yen would be going too far. Second, and crucially, gold is not a stable standard when measured in terms of other goods and services. On the contrary, it is a commodity whose price is constantly buffeted by shifts in supply and demand that have nothing to do with the needs of the world economy..."
> As for environmental destruction, surely you can see how putting society on a compounding treadmill of devaluation encourages consumption as a driver of economic growth (if we fail to post a positive growth number, we WILL have at least a transient economic crisis), and it's patently evident that we buy more, shittier things that need to be replaced, because there is diminished opportunity cost for saving your money to buy something better and more robust: but hey, it's good for circular flow.
I agree that inflation can drive part of the problem in the constant pursuit of growth and profit at the expense of the environment. The problem is that moving to a gold backed currency wouldn't change any of that. We know this because the regulations introduced by the EPA in 1970, just as the US moved completely off the gold standard, are the reason that the US has cleaner air and water. Along with the fact that corporations externalized the environmental costs of our consumption habits to Southeast Asia. None of that would be different if the US had stayed on the gold standard.
> Or, maybe you like environmental destruction and screwing the poor. If you do, you should probably say that up front, instead of hiding it behind difficult-to-unpack-ese like Krugman does.
Ignoring the mild annoyance of this insinuation, it remains completely ridiculous. What was the life expectancy in the height of the gold standard? What is it now? What countries are the most carbon neutral, the most environmentally sound, and have the highest standard of living? Are they using a fiat currency system?
The difference is in policy. Most of the EU is beating the US on every metric for the average person because of their laws. Individuals in those countries have rights to food, shelter, healthcare, and education, and because those governments are legitimate and relatively uncorrupted, those rights are not only recognized but realized. Having the ability to build homes, schools, and hospitals without having to dig gold out of the ground first is part of the reason why they are able to do it.
> in the small, probably cryptocurrencies (which burn to make CO2) are better than mining, which dumps mercury effluent into the environment, and maybe there will even be efficient cryptocurrencies that burn up less CO2.
Finally, we can agree. Gold makes about as much sense as cryptocurrency. When used as a mechanism to try and restrict the money supply for a given economy, they complicate the situation with zero benefits for the economy or the environment.
> But all are better than, say, an economic system that has the unboundedness property AND is propped up by paying off defense contractors that buil...
Food for thought. In 1964 you could take two silver dimes and purchase ~1 gallon of gas. Gas was ~20 cents per gallon. Dimes were 90% silver. Fast forward to 2021. You could take two silver dimes to a coin dealer, sell them for fiat currency, and purchase 1 gallon of gas. Gas is ~$3.50 per gallon, silver is ~$23 per oz, and 2 silver dimes from 1964 contain ~5grams of silver.
But using 2021 dimes, you need 35 dimes to purchase a gallon. Precious metals have kept their value. Fiat currency has lost nearly 90% of its value since moving off the gold standard. The government needs more money, they print it. Based on their promise to pay it back later, with cheaper inflated currency.
Paper currency representing a given quantity of gold/silver/etc is a good idea. When you divorce it from that backing value is when governments print money to inflate. We all lose when that happens.
Politicians are people subject to all the same emotions as you or I. Money and power are powerful motivations for corruption. There is access to a lot of both in government. The gold standard was a check on greed at the government level and in turn a restriction on the power government had to manipulate the economy for the benefit of a few.
Not true. A restriction in supply can raise the price, and the discovery of new sources can lower it. Plus wealth is entirely subjective. Would you rather have a warehouse full of food, water, and ammunition during a crisis, or a warehouse full of gold? (Hint: people may not want to trade food for a soft metal that can't be fashioned into anything but decoration.)
> The gold can be traded for or mined.
It can also be lost in a shipwreck[1] contributing to a banking panic[2].
> However, the gold standard ensures that the dollar you earn today maintains purchasing power for as long as you care to keep it. Your gold backed dollar can't be made worthless in a generation by the excess of politicians seeking money, power, and control.
Of course it can. Private banks failed all the time, despite claiming that you could trade their notes for gold/silver. Governments can simply abandon the gold standard (and they did).
It all comes down to the fact that gold backed currency does not solve the primary problem of credibility and corruption at the levels of institutions and governments. It only adds another variable. Your ability to trade your paper for gold is still dependent on the ability and willingness of that bank or government to make the exchange. If they say no, what are you going to do?
The next step you could take is to refuse currency and to use only gold/silver/clam shells/whatever to do your transactions, which simply puts you at a huge disadvantage in any modern economy. Literally no one is going to do business with you if they have to add the burden of authenticating your clam shells to buy your product or rent your time.
In the end, there is no functional difference between "We promise that we will give you a grain of gold for this dollar if you ask" and "We promise to not mismanage this currency into hyperinflation." During an existential crisis, both promises may be broken. Hell, they probably will be broken. But the promise on the paper you're holding isn't going to matter either way.
[1] https://en.wikipedia.org/wiki/SS_Central_America#Sinking
[2] https://en.wikipedia.org/wiki/Panic_of_1857
In crisis I would rather have the food, water, and ammunition. What a silly strawman. A warehouse full of survival supplies is incredibly valuable during crisis but it is not durable and must be maintained when not in crisis. For the long term representation of wealth I would rather have a vault of gold just like every nation on the planet. Nearly everything else degrades in a fraction of a lifetime. Gold will be exactly the same after sitting untouched for millennia. For the long life of nations this is extremely important. For the comparatively short life of a human this is less important but still valuable.
A casino is the best analog that I can thing of at the moment. When you want to play in the economy of a casino you are required to change your dollars for chips. You have to trust that the casino is not going to steal your dollars and will actually give them back. They practice full reserve banking where every dollar represented by chips is in their vault. The same is true for a gold standard economy as practiced sans full reserve. Gold is the money, banks do the job of verifying gold and exchanging for easily carried and traded tokens, dollars. You have to trust that banks or governments aren't going to steal your gold. If you don't trust them you change your dollars back to gold. If a lot of people lose trust you get bank runs. With fractional reserve banking there isn't enough gold to pay back every dollar and you get crisis and bank failures.
With any currency its value comes down to trust. A gold standard allowed people a way to keep their wealth in a durable form in times of low trust with no conversion cost. It allowed people to "take their ball and go home" so to speak. No governments needed to trust another country's fiat. The money exchanged in trade had a real, verifiable, persistent value.
Yes, a gold standard has some problems. Barring straight barter with physical gold it is still the fairest most robust currency system humans have come up with. Whatever excuses the US Government gave for ending the gold standard it still acted unconstitutionally. The government was facing a damaged economy and dwindling gold reserves as people and countries redeemed dollars for gold. The government saw their dwindling gold reserves as a problem instead of a function of a gold standard. This is the same as a casino seeing a lot of people cashing chips in and seeing their dwindling cash supply as a problem. In both cases it is a loss of trust in the token issuer that caused their supply to dwindle. It wasn't a problem with the currency it was a lack of trust in the issuer that the issuer saw as a reduction in "their" money that needed to be stopped. It was never "their" money to start with. It always belonged to the people. The people were just taking their ball home.
> You have to trust that banks or governments aren't going to steal your gold. If you don't trust them you change your dollars back to gold.
> With any currency its value comes down to trust.
Do you see the problem here? The entire argument for the gold standard always goes back to trust of the institution that is promising to exchange paper for gold. There is a long, long history of banks and governments unable to produce lumps of metal when demanded, and that has caused panics and recessions. Even if they were sound but had logistical issues moving gold around and exchanging it.
Again, there is no difference between a piece of paper that promises to be worth some amount of gold and a piece of paper that promises not to mismanage a fiat currency. They both depend on full faith in the institution that made the promise.
> A gold standard allowed people a way to keep their wealth in a durable form in times of low trust with no conversion cost.
If they had the physical gold, there is always a conversion cost. A lot of immigrants use gold as a bank of sorts, and they always lose a few points when they sell and buy back. In a crisis, as we both agree, gold is worthless, or at least worth a lot less as everyone tries to sell theirs for food. Holding paper that should be exchangeable for gold has no more inherent value than a fiat currency.
> It allowed people to "take their ball and go home" so to speak. No governments needed to trust another country's fiat. The money exchanged in trade had a real, verifiable, persistent value.
It allowed people to have a piece of paper with a promise that they could "take their ball and go home" so to speak. No governments needed to trust another country's fiat, they needed to trust they weren't lying about their gold reserves and their management of it. The money exchanged in trade was a promise that it was backed by a real, verifiable, persistent value.
> Whatever excuses the US Government gave for ending the gold standard it still acted unconstitutionally. The government was facing a damaged economy and dwindling gold reserves as people and countries redeemed dollars for gold. The government saw their dwindling gold reserves as a problem instead of a function of a gold standard. This is the same as a casino
The government saw their inability to manage the money supply when it was tied to gold as an existential crisis to the Union. If you were in charge, based on your arguments here, you'd rather let the south secede or win the Civil War than tarnish the reputation of the gold standard. That's a bit more serious than a casino going bankrupt.
> It wasn't a problem with the currency it was a lack of trust in the issuer that the issuer saw as a reduction in "their" money that needed to be stopped. It was never "their" money to start with. It always belonged to the people. The people were just taking their ball home.
And when many of those people tried to take their ball and go home, there was no gold for them to collect. The system failed because the institution was mismanaged, or because there was a panic and they couldn't handle the logistics of moving lumps of metal around. That's the whole reason the world has moved away from the gold standard. I'm not sure how you see the long history of it's repeated failures as evidence that the problem is not the gold standard, but the lack of a perfect implementation of it.
Every single argument you have made is that governments and banks cant be trusted with paper money even when it is backed by gold. So, why do you push for fiat currency?
If government and banks are not to be trusted with paper money then hard currency is the only solution left that doesn't require trust in anybody.
Everyone's answer is no. Even during the prime of the standard, people made transactions on paper currency promising they represented gold because no one is going to lug around heavy coinage, spend the time to authenticate it (since it's easier to counterfeit than modern paper/plastic currency), or have to decide between making trips to banks or having a pile of it they have to constantly guard.
> Every single argument you have made is that governments and banks cant be trusted with paper money even when it is backed by gold. So, why do you push for fiat currency?
Because for every person who isn't part of the aristocracy close to centers of power, there is no difference. If a currency is mismanaged, it doesn't matter whether it promised gold or low inflation. During all of the previous crises, the first things banks and governments did is suspend specie payments.
> If government and banks are not to be trusted with paper money then hard currency is the only solution left that doesn't require trust in anybody.
If you want to live in a nation state with a credible legal system, and I think everyone does, you have to trust them to some extent. You have to trust that they won't take away your property by force, throw you in jail to take your wealth, allow someone else to do those things without consequences, or mismanage their currency to the point where it hyper inflates.
Credible governments have things like the FDIC so normal people don't have to worry about their local credit union going under as long as their account has less than $250k in it. Since the average liquid net worth of Americans is less than $50k[1], that pretty much covers everyone. It has virtually ended the problems of bank runs and panics except for black swan events like 9/11.
Even for things like the 2007 Financial Crisis, being on a gold standard wouldn't change anything. The policy mistake of removing the firewall between traditional banking and investment banking as well as leverage limits would have still led to over-speculation and CDO Ponzi schemes. The gold standard would have just added another knot to the crisis as well as provided some video footage of huge crowds trying to get specie payments and walking away empty handed. Nations like Canada avoided that entire crisis, except for what was unavoidable due to their relationship with the global economy.
[1] https://ofdollarsanddata.com/wp-content/uploads/2020/06/liqu...
https://en.wikipedia.org/wiki/Hyperinflation
https://en.wikipedia.org/wiki/Great_Bullion_Famine
A long period of deflation followed by a long period of over-inflation doesn't scream stability to me!
That's basically a concession to the old at the expense of the young. We basically have the gold standard in housing and it's not good.
How is this a concession to the old? Why is it that someone worked for 30 yrs to pay off their mortgage shouldn't get the same treatment, mainly "appreciation" due to inflation that everything else gets?
Honest question - is this the same argument we hear about "forgiving" student loans, meaning having people who didn't sign up for them, agree to them, utilize them, or even go to college, pay of the debts of those who did?
If you had taken those same two 1964 dimes and put them in a DJIA index fund, you'd have $7. That's because storing shiny things in a vault does not contribute to economic activity. It doesn't invent anything, manufacture anything, provide any service, or create any new markets.
No one thinks that their economy would be better off with a huge stockpile of gold instead of a huge stockpile of CPUs. No one thinks that a reduction in mining capacity should restrict the amount of currency available for business loans. Representative currency is a vestigial technology that is no longer useful.
The "gold standard" isn't a theory of economics, it's an observation. Money is a medium of exchange - a mechanism for judging the relative value of unlike goods. That is literally impossible if the thing used as money is non-economic, like fiat currency. The money must be itself a tradeable commodity. Commodities that are useful as money have all the traditional traits you learn in elementary school, and gold is the traditional and current best fit for those traits.
Belief in the viability of "monetary policy" and fiat currencies always comes from a belief that no one can really know how economics works, so whatever anyone does right now might not work in the future. Well, obviously that's going to be true of people who refuse to learn what economics as a field actually is.
Okay. What countries use representative currencies and how are they doing?
> The "gold standard" isn't a theory of economics, it's an observation. Money is a medium of exchange - a mechanism for judging the relative value of unlike goods. That is literally impossible if the thing used as money is non-economic, like fiat currency.
Are you saying the world economy is literally impossible?
> The money must be itself a tradeable commodity. Commodities that are useful as money have all the traditional traits you learn in elementary school, and gold is the traditional and current best fit for those traits.
You just said money a medium of exchange. As long as both parties agree to the transaction, and it wasn't a barter, whatever wasn't the good or service was the money.
And you don't mean the money must be a trade-able commodity. No one is going to walk around with a set of weights and tubs of water to determine the purity of coins so they can buy or sell a sandwich. You're making the argument that if the currency could be exchanged for lumps of metal at a treasury office that it would somehow be an improvement.
> Belief in the viability of "monetary policy" and fiat currencies always comes from a belief that no one can really know how economics works, so whatever anyone does right now might not work in the future.
I honestly have no idea what you're saying here. Which economists claim that no one can know how economies work?
> Well, obviously that's going to be true of people who refuse to learn what economics as a field actually is.
So far the fiat currency system has been a part of the most rapid progression of technology and trade in recorded history. I'm not saying it was the driver behind it, but that has been the dominant currency system in place for the last 70ish years. It absolutely has flaws, and absolutely can be ruined by corruption and poor governance. It also works so well that people who hate fiat currencies still use them every day. I'd bet .225 ounces of 99% pure gold alloy that you bought your lunch with it.
I wonder how much money that is.
There is an argument to be made that the progress would have occurred regardless of the currency system in place. That is to say it is nothing more than coincidence that fiat was in place during this period of progress. The progress is the result of capitalism not the currency system. However, had this progress occurred under a gold standard we would have been much better off. Fiat monetary policy has bled value from the economy for nearly 90 years. All of that value lost to inflation would still be in the economy if we had stayed on a gold standard.
If we were on a gold standard and the government took 2% of every single transaction for the last 90 years we would still be better off. Inflation is a tax that is compounded over time.
If "money" is a physical medium of exchange then advanced economies do not have or need "money".
Our modern banking system simply lets people promise each other goods and services. It's effectively a system built around relationships.
Historically gold existed as a currency because it had some useful properties:
1. Unusual appearance;
2. Relatively scarce;
3. Inert;
4. Fungible; and
5. (This is a big one) Density. Up until the modern times it was the densest material someone could be expected to have (eg Iridium, which is denser, wasn't common in the Middle Ages). Why does this matter? Counterfeit currency, as was a problem with anything based on silver.
Currencies only have value because people give them value.
There's a lot here but this jumped out at me:
> The Germans fell into a policy of financial excess, ending in hyperinflation. Their experience was considered one of the object lessons proving the value of the gold standard.
No mention of the Treaty of Versailles here. Germany was forced to pay war reparations. Those were denominated in deutschmarks. Hyperinflation actually "solved" Germany's reparation debt problem. In a way, Germany was incentivized for hyperinflation. The importance of that cannot be overstated.
Under 5. point, the one about density, GP wrote: "(This is a big one) Density[...] Why does this matter? Counterfeit currency, as was a problem with anything based on silver.".
What made you think that he was talking about transportability there?
The US Dollar is/was originally defined as a measurement of silver, and based upon the Spanish Real - the same coin you hear in piratey accents as a "piece of eight" because it was usually cut into 8 pieces to make change. The US absolutely had metal to back every dollar in existence for about 100 years, though it wasn't gold. The real "gold standard" era was a stopover/band-aid effect of the growing disparity in value due to bimetallism, and came into effect after "The Crime of 1873".
German hyperinflation was useful for getting rid of internal debts that the government of Germany had borrowed from it's citizens during the war. It also led to collapse of pensions
It was all much more complicated than that. Hyperinflation wasn't intended as a simplistic way to repay reparations. It had a number of motivations. For one thing, Germany also had alot of private debt outstanding. And from the perspective of the exacerbated Allies, the most important motivation behind hyperinflation was to drive the Allies back to the negotiating table; which it did. Except the renegotiations proved a mixed bag for Germany, giving them enough breathing space to standup their economy (not long after hyperinflation, Germany had a surfeit of foreign investments), but nonetheless leaving the political albatross of reparations in place.
The basic point is that Germany didn't naively step into hyperinflation. For the most part it was strategic and temporary--it only lasted a few years, after all.
This cuts both ways. Proponents of "sound money" and the gold standard ignore this unwinding of the relationship. So pointing to the roaring 20s or the economic booms of the late 19th century as evidence of the power of sound money really say nothing of the sort.
Proponents of the "gold standard caused the Great Depression" also ignore that this relationship was tenuous at best. This article is typical of that mindset -- it wasn't the gold standard per se, but it was gold-standard-era-thinking that caused the Great Depression.
The only people who are offering a coherent story here are the MMTers who really take a look at the role of the state (and, probably more importantly, the law) in the story of money. While I disagree with many of the policy proposals from MMT proponents, I think that view is descriptively accurate for the most part. Where I think they fall short (and I am working hard to challenge my own views here) is in their picture of inflation, which I feel is very incomplete.
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
The real economy has a surplus of X amount of real resources. You use the resources and are better off than not using the resources.
This is not true. Reparations had to be paid in Goldmarks, foreign currencies, and commodities. But inflation was used to meet the state's other expenses, including paper mark-denominated war bonds.
If you look at the major examples of hyperinflation, the majority fall into three buckets:
* Losing a war that results in money printing to fund the effort.
* Large foreign denominated debts that require domestic money printing.
* Regime changes generally coinciding with civil war or social upheaval.
See Roche (2011):
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102
A quick history:
* https://clintballinger.com/2020/04/30/airplane-crashes-arent...
Another example of not bothering with the context of the situation:
> I am dismayed by the way writers insist on reporting the collapse of a currency as a “monthly inflation rate” with some ridiculous figure associated that helps a normal person not-at-all understand anything (e.g., Yugoslavia in 1992-94: highest monthly inflation rate = 313,000,000%!!!!)
> They had a war. Their government collapsed. They couldn’t tax. They couldn’t produce. Their currency collapsed. The idea that “313,000,000%” tells us anything of interest is ridiculous. A few newspaper headlines on peace treaties, troop movements, famine, reconstruction—literally anything— would be infinitely more informing.
* https://clintballinger.com/2021/01/12/the-myth-of-hyperinfla...
6. The inability for a central bank to print gold.
I understand the various arguments for fiat money in advanced economies, and many of them make sense, but the one thing that should stop everyone from advocacy of CB-printed fiat is the Cantillion Effect [1].
Any system in which the first-at-the trough benefit exclusively to the detriment of those last-at-the-trough is prima-facie wrong. It causes MORE inequality than any tax structure, redistribution plan, or Elysium-style Capitalist dystopia you could ever dream of.
If you advocate for management of money supply by printing of fiat, that's not necessarily bad. But there are no Bernanke-style helicopters coming to distribute it fairly or evenly. It's always: Blackrock and Citadel first, you twenty-third. And that's not a system of money supply management that's even remotely just.
Until the Federal Reserve stops handing free money to Larry Fink that may eventually get to me, much too late, at money velocity cycle #18, whilst publishing press releases bemoaning THE VERY INEQUALITY THEY CREATE, I'm going to stack gold and cryptocurrencies. I have no interest in their lies, and you shouldn't either.
[1] https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
Here I outline Asset Bubbles, Fractional Reserve Banking, and the Money Supply 101:
In the 1920s, the US blew a stock market bubble. Lots of people bought stocks on margin, that is, with loans from commercial banks and using the stock as collateral. The banks got the money not from "the Gold Standard" with so much attention in the OP but from fractional reserve banking, that is, loaning out deposits of savers, demand deposits. Due to the crash of the stock market, suddenly at the end of Black Tuesday, 10/29/1929, lots of the loans could not be paid back. The borrowers were broke. Then the banks were broke. Then savers were broke. Much of the money supply had been from the loans from the fractional reserve banking, and with the stock market crash that money had in effect been destroyed. So, we suddenly had a huge reduction in the money supply.
The people who suddenly were broke weren't spending much money, and, thus, their vendors had reduced revenue and fired their workers who then weren't spending much money, and we were in the Great Depression.
The source of the bubble was fractional reserve banking, not really, directly the Gold Standard: With or without a Gold Standard, we can still use fractional reserve banking to blow asset bubbles that can pop and destroy much of the money supply -- we came close for the same song, second verse with the mortgage bond crash in 2008.
So, after 10/29/1929 the US was buying less and, thus, England, Germany, etc. were selling less and also went into a Great Depression. Then also the US was not selling as much to England, Germany, etc. and went into a deeper Great Depression.
On 12/7/1941, Japan attacked Pearl Harbor and, thus, got the US into WWII. As a result, using borrowed money, War Bonds, the US started massive war production so that everyone who was willing and able to work had 1-3 jobs. Then 90 days later, say, 3/7/1942, over 12 years since the stock market crash of Black Tuesday, 10/29/1929, we were out of the Great Depression. Slam, bam, thank you, Ma'am, in 90 days we were out of what we had been in for 12+ years since 10/29/1929.
Yes, we can suspect that with some real understanding of the economy we COULD have been out of the Great Depression in 90 days after, Black Tuesday, 10/29/1929, that is, on about 1/29/1930. The 12+ years in the Great Depression caused lots of serious harm just here in the US, some of which is still with us. For the world, one could argue that the Great Depression was the main cause of WWII that killed 50 million, maybe 100 million, people. Fumbling with the real causes of the Great Depression seems, say, unfortunate.
The War Bonds in effect increased the money supply, and at the end of the war we stayed out of the Great Depression.
Yes, we can control fractional reserve banking via reserve ratios, stress tests, etc.
Lesson: Yes, sound money is important. What to do with gold as money is also important. But the key failure that caused the Great Depression was the pop of an asset bubble puffed up with borrowed money from irresponsible cases of fractional reserve banking while this and that about gold was essentially irrelevant. Simple, 101 level stuff.
The book also argues that fiat currency encourages people to get into debt and risk bankruptcy as a result. In doing so, it increases demand, drives prices up, thereby further incentivising people to borrow money, creating a vicious spiral of debt and increasing prices.
While the former sounds strange to me, I find the latter to be interesting. But I'm not an economist, so I don't know whether my summary is accurate.
Fiat currency encourages growth and stability
If your money goes up in value you would burn down the rain forest today to earn as much money as quickly as possible. You would sell your company and fire everyone to get your hands on money that goes up in value or at least doesn't lose value in a recession. Unfortunately, reality doesn't work that way. You cannot wash this year's dishes in January. You cannot grow all the food you will ever eat in your 20s and then preserve it until you are 90 years old. So your money is going up in value and you stop working. Who's making the damn food? Who's washing the dishes? Either the young or nobody.
If your money goes down in value you want to burn down the rain forest as late as possible because burning it down today will leave you with money that decreases in value. Burning it down tomorrow lets you avoid your money going down in value. Inflation raises the expected value of future cash flows. It encourages you to exchange decaying money for durable goods that decay at a slower rate. This is important because the real world decays through aging (living organisms and materials like steel). If money decays at a slower rate than the world then people will pretend that the world doesn't decay and perhaps accelerate its decay. If money decays at a faster rate than the world then people will try to minimize decay in the real world.
So if anything, extremely low inflation is bad.