A perennial among the nostrums of statist “economists” is complaining about the populace’s penchant for buying and holding precious metals, notably gold. The French used to be mentioned frequently in this vein. FDR, of course, just made it illegal for Americans to own gold bullion or coin after 1933.
So it’s tiresome and worrisome to see the Christian Science Monitor chiming in with an actual FIGURE for what percentage of economic growth the Indian economy loses each year to the ownership of gold and other such reliable stores of value. Not addressed is the possibility that, if forced to invest money they spend on gold, Indians might choose to invest outside India (that is, as long as they are allowed to do THAT).
Of course, from a different viewpoint, one might ascribe the same or even a greater shortfall of economic growth to the combined effects of the government’s suppression of a medium of exchange whose long-term value people could rationally place some faith in, and its oppressive, not to say corrupt, regulation of its financial markets generally. One wonders just what Diana Farrell (quoted in the article) has in mind when she mentions “serious financial reform.”
I think we can be pretty sure she has nothing in mind resembling what any Austrian would.
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Maybe I am just an idiot, but shouldn’t the same be said of every tangible asset such as land, houses, etc. if you are going to make the same claim for gold?
Another gold article, this one by Samuelson in Newsweek. I haven’t read Rothbard’s America’s Great Depression yet, but it take it the collapse wasn’t due to the rigidity of the gold standard:
I think you’ll find that far more of India’s wealth is stored in banks in Dubai, Singapore and Hong Kong than is stored in gold!
CSM: “It would be better if the money locked up in the glistening yellow metal went instead to finance new start-ups or better roads, boosting the Indian economy over the long term, economists contend.”
What I like about the Austrian approach is its focus on human action which tends to dissolve repugnant and fallacious air-headed mainstream economic thinking. Take the above concept of “money locked up” in gold. What does that mean? Let’s think about an Indian buying more gold (or any commodity as Yancey points out). What’s happening to the money he spends on the gold; does it get “locked up” in the vault of the previous gold holder who now owns less gold than before and now owns more Indian currency? There is absolutely no reason to assume so. This is simply an exchange of two commodities between two people. On net, more Indians hold more gold; on net more non-Indians hold more Indian currency. What these new holders of more Indian currency chose to do with it is unconnected to the fact that more Indians are now holding more gold.
The new non-Indian holders of Indian currency will either save/invest in India or buy Indian consumables, depending on their time preference. More non-Indians now constitute the time-preference ratio of the Indian economy. Also, yes, they could simply increase their holdings of Indian currency depending on their valuations of that monetary unit. But there is nothing special about who it is who decides to increase his cash holdings in Indian currency, and there is nothing inherently un-economic in doing so. At any rate, only the concrete data of the market will dictate this outcome and the increased holdings of gold by Indians is not part of the issue.
CSM: “It’ll take a long time to break the gold habit,” says Shiv Taneja, a former Bombay journalist who is now the Asia Pacific director of Cerulli Associates, a US financial services consultancy. “It’s not going to happen in the next five or 10 years; rather, it may take one or two generations. But I’m confident it will happen eventually.”
Is it just me or are these jackasses truly sickening the way they talk as if they have even a clue about what is going on and talking as if the people, acting in their own best economic interests are foolish. What perfect irony it will be when time shows these sages to be the real fools that they are.
the will of jesus. or aolhometown
You’re right Mathew, the collapse wasn’t due to the gold standard.
NW: “But the gold standard’s very rigidity led to its collapse in the Great Depression. Too little gold fostered banking and currency crises. On April 5, 1933, President Franklin D. Roosevelt ordered Americans to surrender their gold coin; the country effectively went on a paper-money standard.”
There was too little gold? How about there was too much paper money. As described in Rothbard’s fantastic America’s Great Depression, the FED and the banks had been inflating deposits way past the banking industry’s ability to redeem in specie throughout the twenties. There was no gold standard. When the inevitable fed spurred credit contraction occurred, the liquidations of 1929 followed.
The Keynesians see the fed as the savior of the market and gold as the culprit behind the depression. Ha! How can those guys do anything but make you laugh.
Excerpt from Joe Salerno’s “An Austrian Taxonomy of Deflation”:
“From the beginning of 1875 until specie payments were resumed on January 1, 1879, the U.S. money stock contracted by about 8.6 percent, as esti-mated by James Kindahl (1971, p. 475).20 Yet from 1876 through 1879, real GDP growth averaged a phenomenal 5.20 percent per year, a growth rate that was in excess of 25 percent greater than the average annual growth rate for the period 1876–1913(Bullard and Hokayem 2003). As a result of the coexistence of monetary contraction and real output growth, during the period 1876–1879 the CPI declined by 3.96 percentper year while the GDP deflator fell at an annual rate of 3.82 percent (Bullard and Hokayem 2003). The remarkably high rate of real output growth during a period of monetary con-traction and declining prices—a period that was identified by the NBER as the longest contraction in U.S. history—even led Friedman and Schwartz (1971, pp. 87–88) toobliquely question the conventionally held relationship between falling prices and real output.”
From a lecture on Martin Van Buren, the speaker informs us that from 1839-1843, the money supply fell by 1/3, the same as the Great Depression period of 1929-1933. Yet while the length and depth of the contractions were comparable, the Great Depression years resulted in 25% unemployment and GDP loss of -30%, while 1839-1843 showed a 16% increase of GDP and no bread lines. This is also a period in which Van Buren cut taxes and spending was cut by about 10% (in real terms, during a time when the federal government was already very lean).
Concerning above, I would say that is not the “rigidity” of the gold standard or deflation that causes recessions and depressions. Rather, I would attribute the economic woes usually associated with gold and/or deflation to price rigidity. If you take a laissez-faire approach such as Van Buren, you can withstand a deflation and still experience growth. If you threaten the markets like Hoover or Roosevelt into keeping prices high, then you will have massive unemployment and will not be able to liquidate past malinvestments.
The fact that the deflationary episodes of 1839-1843, 1875-1879, and 1920-1921 are not held up as shining counterexamples to the Great Depression means that freedom fighters have a lot more work to do in educating the public that less government is the best medicine to economic downturns. Else, we will continually hear in our textbooks the Roosevelt “saved” capitalism.
It seems to me that even IF money were really “locked up” in gold, that would be a pretty safe place in which to lock it. To say locking it up in gold is bad is just to state a value judgement.
Holding wealth locked in a stable (fixed total quantity) medium of exchange amounts to an interest-free loan to everyone else (because it is merely delayed consumption, so more of total wealth remains unconsumed). This is assuming unchanging productivity.
If productivity grows, the prices deflate relative to the stable medium of exchange, so the same quantify may be exchanged for greater amount of goods then at the time of acquiring the medium of exchange, which amounts to the positive return on investment.
One may think of holding gold as investing in a total market index fund – i.e. in the every enterprise (including personal finances of every person) on the market.
But, then, I guess this simple observation never crossed minds of the mainstream economists.
Averros, you are almost right, but you haven’t allowed for the reverse effect, productivity improvements in gold production. The cyanide process is an example.
The effect you describe does operate, but from a different cause: Pigou’s real balance effect. Even with a finite stock of bullion, you get indefinite deflation as bullion is “locked up”, so the value of the stored gold can rise indefinitely in real terms. Ultimately, people not only feel wealthier, they are wealthier in terms of purchasing power and enough gets released (over decades long time scales) to keep the economy working as needed. It’s a self balancing mechanism.
The only catch is that it has rarely operated in full because of intervention, sometimes prompted by bullion being removed from parts of the wider economy to the parts where this saving is happening. That’s one reason why the west intervened in the east in search of the fabled wealth – traders and raiders were trying to get back the bullion that had flowed east in exchange for eastern goods (hence the Indies trade, the opium wars, and even the US War of Independence).
The CS monitor policies would prevent this mechanism working and claim that the reason there is no stabilisation shows that intervention is needed. What it actually shows is that the situation has been perturbed and distorted so far from the natural stability that natural restoring forces would have a long and painful transition. So there is some argument for a managed transition, e.g. going onto a bullion standard with a deliberately high bullion price (in terms of real goods). The only way they could be right in general is if there were some market imperfection like a Tragedy of the Commons working to make individual saving decisions fail to aggregate to making the right signals in aggregate. This is a distinct possibility – it has happened elsewhere, notably in the labour market – but that too is usually an indication of distortions needing to be removed. In any case, I don’t see any obvious signs of that in the bullion market (which is what we have now instead of any bullion standard).
If that miffs you pick up the 7 Dec. 2005 edition of the Wall Street Journal, front page. Under the scoring “Lessons of the 30′s”: subhead “Long Study of Great Depression Has Shaped Bernanke’s Views”. Deflation psychopathology has a voice, and a face, and a name: Bernanke.
USA may feel not happy about the fact that Indian people hold total 10 thousand tons gold, the price going up each dollar per ounce, Indian people’s asset will increase 330 million us$. But USA hold less than one thousand tons gold.
Indian is a big winner of the commodity boom.
China built its infra-structure at very large scale from 1995 when the commodity price was low. And China almost finished those infra-structure at relative low cost, so China is also a big winner.
P.M.Lawrence –
you are right, of course; I assumed fixed quantity of gold, and Pigou’s effect is a different way of looking at the very same thing.
What I wanted to point out is that holding gold is practically equivalent to investment in the world economy — and not any kind of evil as journalists seem to assume.
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