Yesterday two readers of the Wall Street Journal weighed in against hard money. Steve Connor rejects the idea of a gold-backed dollar because the supply of gold can’t be controlled, using the hypothetical example of “a technological breakthrough enabling inexpensive extraction of gold from seawater,” with the result being a a gold-water hyperinflation, I guess. Mr. Conner is also concerned that untrustworthy foreigners have all the gold and control its supply.
So Connor supports “the fiat dollar backed by our economy and managed by the Fed Board of Governors.” Connor holds the view of John Law, who believed that silver was inferior to paper money backed by a nation’s land because more and more silver could be mined and coined, thus diminishing its value. Meanwhile land is in stable supply and can be made more productive.
Ludwig von Mises anticipated Conner’s concern in Human Action.
It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made.
Conversely, the second letter writer, John King, claims “There will never be enough precious metal to correspond to the increasing value of all goods and services being produced and used in our growing world economy to meet some arbitrary ratio.”
Again Mises answers:
The main objection raised against the gold standard is that it makes operative in the determination of prices a factor that no government can control — the vicissitudes of gold production. Thus an “external” or “automatic” force restrains a national government’s power to make its subjects as prosperous as it would like to make them. The international capitalists dictate and the nation’s sovereignty becomes a sham.
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With a hard money standard or better yet, market determined money, government would be powerless. No government of the USA could have afforded to participate in The US Un-Civil War, WWI, WWII, Korea, the Cold War, Vietnam, etc. We would have PEACE!!!!!
Could you imagine how the government bureaucrats would feel if they could not just get wealth extracted through inflation? They would not only be depressed at their lack of theft but they would be crushed by their feelings for those the government supports. We would have a bubble in the Psycho Therapy industry.
We, in effect, have market determined money. The money traders and the commodities market determine the value of the US dollar with respect to the other currencies.
Astonishing how people can reject a monetary medium which MIGHT, SOMEDAY, IN THEORY be easily debased in favor of one which already is, and always has been, very easily debased. Seems Connor’s argument leads to the exact opposite conclusion he wants it to.
Connor is right in one way: the current monetary system IS controlled, but it’s being controlled by a group of people who have little interest in monetary neutrality or economic stability. That’s the problem.
Great line from “The Quotable Mises”:
“The simple statement, that money is a commodity whose economic function is to facilitate the interchange of goods and services, does not satisfy those writers who are interested rather in the accumulation of material than in the increase of knowledge.” – Theory of Money and Credit.
do money commodities operate different then non-money commdities??
If you want to see how Gold is slowly but gradually replacing fiat currencies, go to Vietnam. CNN has a story on it. http://edition.cnn.com/video/data/2.0/video/business/2010/06/15/stevens.vietnam.gold.cnn.htmlIn my opinion, you do not need to formally replace the current fiat currency with a Gold Standard. As people gradually realise that fiat money is actually worthless, they will seek for alternatives to store and secure their wealth.
Older Vietnamese who have lived through the Vietnam War do not trust fiat currency as much as children simply because they have witnessed the collapse of the fiat currency. Our generation has not experienced such event, until we do, fiat will dominate.
interesting article, thanks for posting it. I came across this piece also that discusses some topics related to the gold standard, including a bit from Edwin Viera, who wrote the book “Pieces of Eight”
http://www.goldalert.com/stories/The-Meaning-of-a-1200-Gold-Price
The supply of gold can never inhibit economic progress as long as the prices of other goods and services are free to rise or fall without government intervention. Even the invention of a low-cost method of extracting all of the gold from all of the oceans’ seawater would not add a sufficient amount of gold to the total supply to cause the devastating inflationary impact that government printing presses have had in the past. Witness Zimbabwe today, or Germany post WWI to name only two instances. Statists worldwide hate gold because it is a form of money they haven’t figured out how to counterfeit. That is why it is the only sane choice for consumers. The fact that governments can’t print gold certainly has contributed to its increasing value in terms of fiat currencies.
Gold Standard And Entrepreneurship.
Once the commodity money (one that cannot be corrupted by the ego-driven, like gold for example) is selected by the market the stock of money is a non-issue. All prices are relative and so they simply adjust in an unhampered free market economy. If there are prices that do not adjust quick enough to meet the needs of the people then an entrepreneur will alertly find a way to bring about a remedy to that situation.
or fail by the entrepreneur load as people at mises say they do during boom busts.
“boom busts” would not exist without government interference in the economy… read up about the Austrian Business Cycle on this site you get the background you need to understand the arguments.
About gold, “logically” it could be the most useless, worthless, unpractical, burdensome currency on ever. That’s totally irrelevant. It’s what the markets chose when the government manipulations fail. People can pine and cry over how bad a currency they think it is, but that won’t change the truth. It won’t change that the market has a different opinion of what a good currency is than they do. Of course, most of the time people who think they know better than the market are idiots.
It’s what the markets chose when the government manipulations fail.
Actually, that would have to be silver…silver (or electrum, which is mostly silver) was the first known money, and silver was the main money until Britain went on to a de facto gold standard due to Gresham’s law when the (gold) guinea was overvalued by fiat against the (silver) pound.
@David C.
And every once in a while they are right. When they are, they get huge profits.
Steve Connor rejects the idea of a gold-backed dollar because the supply of gold can’t be controlled,….
can the supply of other goods be controlled even when not using gold as money???
with technology at its present state is it very likely a way of getting gold out of seawater would occur??? can that even be done??? if it can wouldnt it need numerous other supporting industries to to that??? thousands of new gold mingin ships, crews, new minters needing molds and casts to make all the new coin….wouldnt this in itself limit the the hypothetical becasue of other human needs??
“a technological breakthrough enabling inexpensive extraction of gold from seawater,”
Gold concentration in the ocean runs in the order of 1 part in 10^12 (i.e parts per trillion).
This means that a 100 meter cube contains of the order of 1 gm, or $40 worth of gold. To put this into perspective, this is 1 billion liters, 6 million barrels of salt water. This is of the same order of magnitude as the US daily oil consumption.
We may as well argue that there is an asteroid composed of solid gold, or that we will never exhaust the supply of hydrocarbon fuels because the planets Jupiter and Saturn and their moons contain an almost inexhaustible supply.
I think what they were thinking is more along the lines of atomic synthesis. Take the protons and neutrons out of the oxygen atoms in water and fuse ‘em together to make gold ones. It’s possible to do with today’s technology, however the cost is far more than the cost of the metal that’s produced, so any business who tried that today would go bankrupt rather quickly. It’s plausible that mass production in this way will be viable in the future, however. How far into the future is anyone’s guess.
I wonder if those letter writers think that Professional Charlatan is a growth industry. Might be true, many people like them are credulous enough to fall for the canards they get from the “real” news.
I have a friend, bless her, who told me (parroted toward me is more like it): “I’m not invested in gold because you can’t eat gold — instead I’m invested in NATGAS.” Ha, oh well, I suppose I should be happy that she is smart enough to be putting her savings into any commodity.
Watch out, though, for the manufactured “rise” of the diamond-as-money fraudsters…
While an economy backed by fiat money is clearly more prone to inflation than one backed by hard money, it would seem true to that an economy backed by hard money would be more prone to deflation, assuming over time that the real output of the economy grew at a faster rate than the supply of gold. If the gold stock (and therefore money supply) was increasing at 1% per year while real output was increasing at 3% per year it would stand to reason that prices would fall at 2% per year.Is this a correct assumption? Was this in fact the historic experience when the economy operated with hard money? How does one rationalize their support for a gold standard with the likelihood that the economy would be prone to deflations which arguably are more damaging to employment and societal wealth creation than inflations?
Well you seem to be using the wrong definition of inflation/deflation. You’re using inflation to mean “rising prices” and deflation to mean “falling prices”.
But yes, with free markets and commodity (market selected) money, prices would tend to gently fall over time as production expands relative to the money stock. This is a good thing. Goods and services get less expensive in money terms and living standards rise for most everyone.
Prices were pretty stable under hard money.
Why should prices getting cheaper be a good thing in deflationary environment? Goods and services are getting cheaper but you’re getting paid less. Only technology and productivity gains result in improved purchasing power which benefit people regardless of a mildly inflationary or deflationary environment. Alternatively it would be said that in a deflationary environment money is getting more value and therefore harder to get. Prices may have been relatively stable throughout the 1800s but it was the technological advancement of the 1900s that made the serious changes in the standard of living for people in the West regardless of inflation.
In a true sense of deflationary (decreasing money supply), every dollar of savings increases in purchasing power as it is held through time. Every dollar you earn becomes more valuable as you hold it. What is wrong with that? It sucks for debtors (like most modern governments). Howard Katz has a number of articles on Kitco that explain why the paper aristocracy has propagandized against deflation – because it destroys their power to extract wealth from the citizenry through inflation.
Katz cites statistics that real wealth, the kind you eat and live in, grew for the majority during the Depression – the exact opposite of the view commonly held. Consumption of meat and butter went up. Charitable giving went up. This can only happen in a period of increasing real wages.
The propagandized boom was in the 40′s, when people couldn’t any of the things they wanted. Fuel, meat, rubber, everything was rationed. Which sounds more like a real boom, and which sounds more like a depression?
Meh. There are winners and losers with inflation and likewise with deflation. Sure if you earn $100 when money was cheap then it’s pleasurable to see your $100 get more and more valuable however once it’s spent it’s gone and now to earn another $100 is considerably more difficult than before deflation.
Your $100 becomes more valuable, and however much you worked to make that $100 will likely still make an amount of money that will buy as much as your $100 would before, so what’s the problem with deflation in your example? You’re better off than if there were none, where your $100 would buy no more now than as when you first earned it.
It’s all about purchasing power of peoples’ time not nominal terms per se. What the average Americans gets paid in nominal terms would shock someone from a century ago however the purchasing power people get from their wages and salary overall is much better. Too many Libertarian types look at the low, low prices of the 1800s without taking into account the purchasing power people had back then. If you adjust yesterday’s prices into today’s prices you’d realise goods were really expensive back then despite the low nominal prices.
Deflation sucks for debtors such as people paying off mortgages. Wiki claims there are 44.4 million houses with mortgages. http://wiki.answers.com/Q/Number_of_Home_Mortgages_in_the_US
and 90 million houses http://wiki.answers.com/Q/How_many_houses_are_there_in_the_US
so roughly half the home owners/buyers would be hurt by deflation. Then there are the foolish people who are making car payments.
The people who are helped by deflation are those who are on a fixed retirement and those who have much more income than they can reasonably spend – say anyone with more than $10 million in invested liquid assets.
If the supply of money is stable, than the actual amount of it is not important. Money is a medium of exchange for you to trade your goods and services for the goods and services of others. An increase in the efficiency of production means that you’re able to get more value from less effort. The gradually dropping prices would be a reflection of cheaper production, not a shrinking money supply (which would still not be nearly as harmful as an inflating one).
For the first 20 or 30 years after WW2 increased productivity did improve purchasing power for the working class. Then the owners of production learned there was no down side in keeping the benefits of increased production for themselves.
How can you have been reading this site for so long (10 years?) and still not have learned a thing? I’d expect you’d pick something up by osmosis, even if you go out of your way to avoid actually reading anything…
Indeed… 10 minutes of reading “Economics in One Lesson” could have saved you from using such a blatant fallacy in an argument.
A shrinking money supply only means one thing – someone produced a good or service, provided it into the economy, then refused to take anything out in return. A shrinking money supply means people are chartiably giving away their product or service for free.
An expanding money supply only means one thing – a member of society is taking out of the stock of goods and services without having produced anything to trade for in return. This individual gets all of his goods and services for free, taking away from others involuntarily while not providing anything to the system.
Which looks worse? To create money means that someone out there gets to enjoy something for nothing. There is no way to fairly create a fiat money as it always benefits the first one who gets a hold of it at the expense of everyone else.
Synthetization of elements like gold will evolve gradually, just like mining technology always has. Sea mining is just a step on that road. Heavy, instable and extremely rare elements, which are more valuable than gold atom for atom, are already being synthezised at high costs since decades. (Like roentgenium, the only metal which is believed to be more noble than gold.)
Technology will not change gold prices drastically over night. Informed speculators will short sell gold far in advance. Their time discount and risk premium will make gold prices trend only slowly towards the projected lower production costs of the future. A fiat currency, on the other hand, can loose value drastically in a second (because of looting politicians, mad politicians or a surrender after a sudden military attack, just to mention a few scenaria which have actually happened again and again. A fiat currency is an enormous “national security” vulnerability!)
Who knows? Gold could be extracted from the waste products of a desalination plant?
At the same rate as paper currency can be printed? It would be some desalination plant that could triple the world’s supply of gold overnight the way that the printing presses in Zimbabwe did with their paper money.
These critics don’t have a leg to stand on. The dollar is so debased that people who know very little about investing have been pushed into the stock market in hopes of preserving and growing their wealth, only to find it vaporized by the very same wizards who have been chanting, “print, print, print!”
This is terribly sad and unjust. An honest person who works hard should be able to save — for retirement, for a rainy day, or for a dream — without mastering the arts of speculation and investing. His money should retain its purchasing power. That possibility is gone, killed by the central bankers, the governments and all their cheerleaders and partners-in-crime.
All of this has resulted from the out-in-the-open conspiracy which is implicit in Keynesian economics. That is, the individual must not be permitted to save, to prepare and provide for himself. He must be made dependent on the government, which will pay him a subsidy when he loses his job, falls ill, or applies to college. If he doesn’t spend his money, the government will spend it for him.
The government is now the supreme decision maker, not only for itself but for everyone.
Doesn’t compute! With zero money inflation . . say a person defers consumption by saving 10% of his net income by saving money under his bed. If he does this for 50 years he will have accumulated enough savings to retire 5 years. Then what? If he loans the money to a banker at 4% after 50 years he will have 16.6 years income to live on. But where did the money come from? The bank loaned the money to people who had credit cards and paid the bank at 12%/year, the bank keeping the difference?
OK, it does compute but this system requires many more foolish people than wise people. That’s life!
The bank loaned the money to people who had credit cards and paid the bank at 12%/year, the bank keeping the difference?
Only stupid people pay interest on credit cards. I pay the bank $40/year for my credit card, get a month’s free credit on my purchases, and pay 0% interest. It’s a good deal.
But no, that’s not where banks get the money from.
My answer to John King: yeah, so what? That just means the value of money will decrease relative to the value of goods produced, meaning prices will go down. Who is complaining about cheaper goods?
Most people are indoctrinated with the “infinite demand for money” hysteria, where, in a world with deflation, the demand for currency money would increase so profoundly, everyone would hold onto money and would not buy anything else. The irony, that the computer their typing on is rapidly losing its value even as they type, is lost on them.
I guess in a world where people could eat money…
Yeah, in their ideal world, computers and all these other modern devices would constantly cost more, rather than drop in price by 10-20% each year for a model with a given set of features. Of course they say, “well look, computers do drop in price, so where’s the (price) inflation?” The answer is that their price drops are enough to counter inflation and still be significant.
If the lower prices are nominal drops (i.e. caused by deflation) then who cares? People want to hear about price drops in real terms.
EXACTLY! Which is why I claim that that money inflation of a few percent a year is immaterial or advantageous to the working class. All the worker cares about is how many hours he needs to work to pay the bills and have enough left for a couple of beers. In the years after WW2 due to increased productivity, good labor contracts, and other freak circumstances, the typical worker did a little better every year for the most part of 30 years. Then unions went out of favor, off shoring became common, and our owners learned they could keep the net from increased productivity. Maybe Marx was right.
Live as a regular citizen in Cuba for a few years and say that… or maybe you would like to go back in time an live in Stalinist Russia? China under Mao? I for one wouldn’t miss your ignorance.
The efficiency of mainstream propaganda against deflation demonstrates that idiocy is abundant among men. How they manage to convince us that falling prices for consumer goods and producer goods is a bad thing? Who complains when one buys a 32” LCD TV for half the price it had a year before? Instead of arguing against such obvious nonsense one should better wonder how can be people stupid enough to believe in absurd myths and evil enough to spread them in case they make profits of it.
Since inflation means rising prices due to more money in circulation (money being created) then deflation means lower prices due to less money being in circulation (money being destroyed). Yes deflation is as pointless as inflation – some win, some lose. Ideally the money would somehow be stable and no one gets a free ride. Everyone’s (hopefully) for productivity gains resulting in new goods being cheaper in real terms.
Monetary deflation makes consumer good prices and wages fall together; that’s good for creditors and thrifty savers and bad for debtors (prominently the government).
Technological improvement makes consumer good prices fall relative to wages, because less labor is involved in each unit of product. Consumer good prices also fall relative to gold, because even large improvements in gold extraction technology and much less relevant, since most of the gold is already extracted anyway. So, when technology advances, gold and labor increase their price relative to almost everything else, and people have more wealth and spare time.
In a free market, money that was increasing in purchasing power would also have a very low interest rate, possibly even zero if the value was increasing quickly enough. The expected higher future value would be canceling out the discount of satisfaction in the farther future against satisfaction in the nearer future.
Also, just logically, if for some (stupid) reason the value of the money rising made it less desirable as a medium of exchange, the process would be self regulating. The market would turn to alternatives, bringing the medium back to an appropriate level. But money that is becoming more valuable is, by definition, something that people will continue to want.
I’ll start off here by being honest, I am new to Austrian economics, encountering it mostly from my background in philosophy, so please forgive me if my two cents really turns out to be two Zimbabwen cents worth…
It seems to be ridiculous to worry about drastically inflating the gold money supply through advanced and expensive chemical processes to bring gold out of salt water. I mean, that is a labor and capital intensive production process, unlike the printing press that the Federal Reserve already owns and controls today, right now. They worry about theoretical inflation of gold as a bad thing, yet don’t apply it to the massive overproduction of fiat currency? This seems absurd to me.
In regard to the “Which is better, inflation or deflation” debate, all I have to say is a commodity money favors the virtuous by design. This is where the whole Morality and Economics collide, and where these laws of human action overlap between the two spheres. It is good for a man to be wise about his wealth, be prudent about his future planning, to possess self-control and cultivate deferred gratification. A gold-based currency that favors the prudent Saver seems to be the most rightly ordered society. A society with a fiat currency that- in directly inflating (debasing) its currency- is directly dis-couraging savings, dis-couraging long-term planning, dis-couraging self-control.
If the value of the money is always decreasing, one’s incentive is to either spend now and reject saving, or to gamble in the markets (or in Vegas) in the hopes of keeping just ahead of the silent thief of inflation. It would seem to me that blaming the one who prudently saves (“hoards!”) because he is destroying the economy by not over-consuming, not plunging into debt, is (1) an economy not worth saving and is (2) an economy that cannot last. Is this not common sense?
Something you said is quite right~There are many ways to earn money or save money. Last week, i have bought a Premier Jerseys at a discount.
@AMDGomer
You’re absolutely right. It is common sense, which by itself puts you miles ahead of mainstream economists.
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