The Fed and the rest of the government seem to think that their job is always to be sure that the stock market averages and the price of homes is never to be allowed to fall too far below their most recent peaks, and to flood the economy with as much new and additional money as may be required to accomplish this. Keeping up housing prices is an especially remarkable goal, inasmuch as only a year or two ago, all of the complaining was about how far housing prices had climbed relative to the ability of people to afford them. One would think that a sharp reduction in home prices is the very thing needed to solve that problem and that the process needs to go a good deal further than it has, in order to do so.
For the present and the foreseeable future, there is probably nothing that will stop the Fed from continuing with its inflation.
Is there anything that can be done to stop the potential destruction of the real value of all dollar-denominated savings and long-term contracts by a flood of inflation? Is there anything that can protect people from a possible tsunami of inflation in the United States?
There is something that could be done. There is a financial life raft, as it were, that could be made available to everyone, that would enable people to salvage at least some significant portion of the real value of their savings and contracts denominated in fixed sums of dollars. It is something much more urgently needed, aimed at a much more realistic danger, and much more feasible than efforts to control global warming, say.
What is it? It is the enactment of a creditors’ protection bill, whose essential provisions would be the insertion into all outstanding contracts of a limited, contingent gold clause, and the removal of all legal obstacles to the inclusion of such clauses in all future contracts. FULL ARTICLE
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The argument in favour of a return to the gold standard, and thus creating a finite supply of money, is still the only area of the Austrian School that I’m not 100% convinced by.
Surely the rationale for living in a capitalist system is to create wealth, so if currency is merely a medium for expressing and trading that wealth, then surely expanding that medium (albeit not at it’s current pace) is natural. We’ve had a gold system before and inflation was indeed nominal compared with today’s rate, but it was still existent as the increase in the money supply was reasonably consistent with the amount paper money held against gold; have we ever had – in a mature economy – a situation where prices were forever decreasing? Is this not the ideal we can infer by a constitutional limit of the money supply?
To my knowledge, neither deflation nor inflation is the goal of our Libertarian theorems, but sound money that will act as merely a medium, facilitating sound investments.
The calculation problem states that only a market could deliver this, but I’m still not sure how.
Do I have this right?
State-mandated changes to existing contracts = economic freedom?!?!?!?
Hello? Am I missing something here?
Lee, I believe Reisman (and Rothbard) have both demonstrated in their works why the amount of money does not matter. The money supply can remain constant and if productivity increases, the purchasing power of that money unit will rise. None of this necessitates an expansion of the money supply. In what direction a free market will go ultimately depends on whether falling prices will be the dominant trend.
In response to Tom, I think the point that Prof. Reisman is making is that prior to the New Deal these clauses were quite common. The manipulation of the government caused them to disappear. If we were to return to a gold standard, would not the government have to perform some kind of intervention to get the country in the position to do that? I would support legalizing the ability to write contracts in that manner, but I wouldn’t support mandating it unless it were in conjunction with a larger group of proposals to get the country on the gold standard.
Finally, I think an interesting side-note is that convertible bonds typically have specialized shops or desks trading them. Putting a value on a bond with embedded options is more difficult (though becoming more commonplace) than traditional bonds. However, there are programs that can value these bonds properly such as Barra.
I would see the plan as being beneficial to the parts of Wall Street engaged in convertible arbitrage or valuing portfolios with option-embedded bonds or risk management services. Traditional Wall Street iBanks would have to balance the reduction with what could be a slowdown in the underwriting of debt.
Anything that moves money toward the gold standard–whether it is a small step in voluntarism like Dr. Reisman’s or the full usurpation by jack-booted crusaders of all paper obligations with gold–favors creditors and annuitants/pensioners at the expense of debtors and annuity/pension administrators. The political feasibility of Dr. Reisman’s proposal therefore rests on the same base of support as any more extreme proposal.
I fail to see how legislation protecting gold clauses is going to happen any sooner than any other step toward a gold standard. We’re still left waiting for a sea change in the balance of pressure groups or a hyperinflationary crisis.
As far as the sea change, I see that those who stand to benefit are being paid off; banks receive the benefits of the Fed’s cartelization, and pensioners get tax-funded welfare schemes. As far as hyperinflation, the last half-dozen or so crises elsewhere have just seen people adopt some other fiat currency which happened to be better managed. I haven’t heard anything about the proliferation of gold contracts in Zimbabwe, for example.
Please permit me to humbly suggest, Dr. Reisman, that you either consider your proposal just another dream for an unforseen future or spend more effort explaining how such a proposal by itself can shift the unfortunate status quo in which we live.
So to be clear, Reisman is calling for a liberalization on current restrictions, not an intervention. As he says: ” A gold clause should by no means be regarded as interference with the freedom of contract: it would be a major step in undoing such interference.”
Gold clauses are good. Inserting gold clauses into existing contracts ex post facto are evil.
Lots of people contracted with the intention of taking advantage of inflation, and the counter parties are responsible for evaluating their own risk. Changing the rules of the game is cheating someone.
I didn’t see anything in Dr. Reisman’s article about anybody being *forced* to add a gold clause to a contract, merely that one should be *allowed* to do so, and that, if there is a gold clause, it should be honored by the courts.
jeffrey,
To the extent that Prof. Reisman advocates merely removing restrictions on new contracts, I completely agree. But he goes further than this:
“…the enactment of a creditors’ protection bill, whose essential provisions would be the insertion into all outstanding contracts of a limited, contingent gold clause…”
Who is to say that those existing contracts were not entered into for the explicit purpose of hedging against inflation?
This is a classic example of intervention begetting further intervention.
Todd, I really think this is just a language issue. He means that such a bill would permit contracts in gold. I sense that Reisman is less sensitive to these issues of language because he is a minarchist – i.e. he does believe that there is a role for government (as Mises did, and Hazlitt too). Still, his suggestion liberalizes current law.
>if currency is merely a medium for expressing and trading that wealth, then surely expanding that medium (albeit not at it’s current pace) is natural.
Not at all, a medium of exchange serves its purpose regardless of the total quantity. If only $1 existed in the whole world, people would just deal with paper bills and coins with denominations such as 0.000000000001 (which would just be called a pico or something, for convenience). In Zimbabwe, a hamburger costs something like 1,000,000,000 monetary units. In both cases, the numerical values used are totally irrelevant.
>have we ever had – in a mature economy – a situation where prices were forever decreasing?
Yes, for example, the computer industry. A 1 GB memory chip is much cheaper now than a couple of years ago.
>Is this not the ideal we can infer by a constitutional limit of the money supply?
I think population increases, which would dilute the money supply, would be more or less neutralized by gold mining, which would increase the money supply. So the purchasing power of gold would be quite stable. Nothing like the 15% inflation rate of fiat currency injections we have now, or the hyperinflation going on in Zimbabwe.
I agree this is not entirely clear, so I hope Dr Reisman himself will comment on it. But he does write, later on:
“The parties entering into new contracts should be free to include whatever degree of gold-clause protection is mutually agreeable.”
So: if the mutually agreeable degree of gold-protection is 0%, then 0% it will be.
PS. He also writes:
“As a matter of principle, the parties entering into new contracts should be legally free to agree to whatever degree of gold-clause protection they wished, all the way to 100 percent.”
By the same principle, of course, they should be free to agree all the way down to 0% – if they so wished.
“I haven’t heard anything about the proliferation of gold contracts in Zimbabwe, for example.”
Well, I don’t think workers and peasants in Zimbabwe commonly have gold or silver coins sewn into their mattresses – which is the most probable reason why hyperinflation in Zimbabwe hasn’t resulted in a spontaneous re-monetization of gold and silver.
Also, I don’t know whether there are severe restrictions on the ownership of gold in Zimbabwe, but Mugabe being the kind of fellow he is, it would suprise me if there weren’t.
But isn’t the lesson for us in the West that we should be prepared for hyperinflation the day it comes, and put at least part of our savings in gold and/or silver?
Fascinating idea, though I doubt it will ever happen. Meanwhile, couldn’t a creditor protect his investment by hedging in the futures or options market? For example, if you have $1 million invested in bonds and you want insurance against inflation, you could by futures in gold and roll them over as they expire until the bonds mature.
Lee, money is capital. More capital is used for money, less remains for exchange. More is cheaper, less is dearer. Any expansion of money leaves less capital for dearer exchange. Unchanging amount of money leaves less for cheaper exchange, i.e. more capital to be exchanged by less capital.
Wealth is purchasing power, and thus, agrees with dearer money. Dearer the money, cheaper the exchange. Cheaper the exchange, cheaper the prices and more can be saved. More savings afford better division of labour and expansion of production. Better division of labour provides more work and more work, better pay.
It explains why gold has been the money of merchants. It is unlikely any government today would embrace the gold standard, but there is nothing that inhibits merchants to do it by themselves. Much wealth is already transfered through off-shore and this, not by malice, but for the protection of their purchasing power. More is exchanged off-shore, less remains on-shore and the more difficult the government’s calculation will be. Government will recognize only what it is forced to recognize. Hansaetic League and their separate jurisdiction was the effect of their previous decision to trade in separation from local authorities and their purchasing power was a consequence of their decision to abstain from trade with governments. In any period of time people generally believe that they live in unique circumstances, but it is seldom so. Great commercial wealth and purchasing power is always an individual enterprise and never the domain of government. In Sumer, Greece, Rome, Baltic region, on back of whom Hansaetic League was established, to the anglo-saxon wonder of today were all the result of individual decisions, of people deciding to do what is right, be good and faithful. So is gold standard. It is up to producers to decide how to exchange, not from government to pray!
I believe gold standard is true and shall be chosen as a standard of exchange when the time is ripe, but I doubt if any government will aide or if this aide would do a good at all.
I can’t see the justification for governmental modification of contracts. However, permitting any future contracts to contain such clauses should be unobjectionable and, as Prof. Reisman says, highly desirable. All new financings would have the freedom to be contracted in this way. Such new financings would potentially grow by hundreds of billions every year. (Also, any optional renewals or extensions of old contracts would have the freedom to add a simple “gold clause.”) In a few years the anti-inflation lobby could become a reality and constitute a historic turning point.
I can see what Reisman wants to achieve by inserting a gold clause into EXISTING contracts, but it’s NOT simply a restoration of the clauses which Roosevelt struck out. Two wrongs don’t make a right.
>>>To be accepted with any degree of confidence, the enforceability of new, partial gold-clause contracts would have to have the benefit at the very least of a joint resolution of Congress directing the courts to uphold them.< <<
... And a future congress could equally well rescind them. I see little protection there. Constitutional protection would be more reassuring, but I can't see much clamor for that until the currency has already collapsed.
And what's special about "25%"?. It seems to come from here:
>>if prices were to start rising rapidly, the price of gold would almost certainly rise even more rapidly. Thus, for example, if prices in general were to rise on the order of 5 times over the course of a decade or two, say, the price of gold might very well rise by 10 or even 20 times.<<
Is there any eveidence for this? Why should gold appreciate so much faster than other goods, if inflation is the common driving force?
Reisman for President!
I’m trying to learn and have a few questions:
Why don’t market interest rates take inflationary risks of the money supply into account?,
Instead of a gold clause, can’t you add a contractual provision that reprices the contract for changes in the money supply based on some publicly available measure? Don’t you get to the same place?
Reisman for President!
Bubba,
We like gold because its price is not mandated by the State, as the “market” interest rates are. I don’t think I know what the market interest rate is, as all banks fall under the sway of the Federal Reserve. Since the Fed influences the interest rates, they are hardly going to admit that what they do is inflationary; they are supposed to fight inflation, right?
The problem with the publicly availible measure is again its objectivity. Certainly gold is not the best function for gauging the increase in money, as it is not used as money itself, so the exchange rate between gold and dollars must be completely false. The addition of demand for gold as money would come out of nowhere, and additionally you would have a decrease in the demand for dollars if such an event occurred. What would be the eventual result, I don’t think anyone here would dare guess, save that gold would be worth thousands of dollars to the ounce.
As far as I know, I can’t think of any accurate measure of the changes in the money supply. M3 probably comes close, but that depends on figures released by the Fed… and how likely are they to shroud the figures in mystery and ambiguit? Very.
“>have we ever had – in a mature economy – a situation where prices were forever decreasing?
Yes, for example, the computer industry. A 1 GB memory chip is much cheaper now than a couple of years ago…”
Which is quite irrelevant, the reason for their cheapness has to do with a multitude of natural factors remaining constant, the amount of transistors one can etch into a finite piece of matter is going up, but the quantity of matter is not, hence one can charge relatively the same prices, there are always limits to efficiency.
This is one of the things I hate about market fundamentalists, they believe in the perpetual motion machine, a little physics and a little less idealogy goes a long way.
Perhaps I’m missing something here, but it occurs to me that the most efficient and (relatively) politically expedient means of accomplishing what Professor Reisman is trying to acheive would be to simply remove the dollar’s status as legal tender. This would automatically allow debt contracts to be negotiated in gold, silver, rupees, cows, bellybutton lent, or whatever.
And wouldn’t this be easier to pitch politically? Opponents of gold clauses – namely monetarists, Keynesians, and other proponents of state monopoly of the money supply – would undoubeted depict the proposed gold clause law as a measure designed soley to protect creditors at the expense of the “little guy.” The revocation of legal tender status, however, could be pitched as a measure to open the door for financial innovation in debt markets.
I don’t suppose for an instant that pitching such a proposal would be easy, or that it would stand a chance except in a period of rampant inflation, but it would seem to be more politically viable than the gold clause. Again, someone correct me if I’ve missed something.
Good job, Professor Reisman, in initiating good discussion.
I do support a return to a gold standard for the obvious, Austrian reasons. However, adding a gold-clause to a contract is essentially just adding insurance against inflation (a function that the interest rate itself is used to perform currently). This lessened risk is a cost to the lender and a benefit to the borrower – and it has a cost that the borrower and lender must agree upon. Since neither the lenders or borrowers have any practical control over government inflating the money supply in the future, it seems there is no practical way to determine, let alone value this inflation risk. So, it seems that for most people the contract terms would end up a wash with or without a gold-clause.
No such changes can be made without a revolution. A revolution does not exist until the general public is educated. The odds of educating the public is similar to my winning tomorrows mega buck lottery (I did not buy a ticket).
Gold clauses would certainly facilitate trade, which is a very good and important goal. But let’s not forget that no matter how widely adopted, gold clauses can never give us the “equivalent” of a gold standard. That’s because the government would still be able to create money and go out and acquire resources with it — steal the resources, in effect. The only way to prevent this form of theft is a 100% gold standard.
like ghost of brutus, i’m unconvinced by the professor’s suggestion.
gold clauses in reisman’s contracts not being subject to usury provisions suggests that gold is treated as money. therefore not subject to taxation. this has the same effect as repealing legal tender laws. legal tender still is the crux of the matter.
sadly, rather than facilitating the greater use of precious metals, governments are going to want to close the exits as much as possible to save their beloved printing presses. brace for a raft of punitive tax measures on inflation hedges. not to mention a campaign of vilification towards the barbaric relic and the “hoarders”.
1. This is already being done, not only gold perhaps, but many big contracts are hedged in other markets.
2. This cant save the past creditors, like millions who paid into government retirement, and foreign nations holding dollars and dollar denominated assets like China, Japan and Arab countries.
People need to realize that US government amassed a debt that it can not possibly pay. US has to write off his debt somehow. And the only way it can do that without causing a bloody revolution is to inflate the money supply and devalue the currency much further.
Us owes 50 trillion dollars to retirement fund. The money is not there and current liabilities are paid from tax revenues. Federal budget is 3 trillion a year. They can’t raise thaxes and even if they do, revenue wouldnt rise inline. There is a limit.
Even if US made drastic spending cuts like 1 trillion a year, and we all know it is nearly impossible otherwise Ron Paul would be leading the presidential race, they still can’t pay it off.
Also US owes more than 5 trillion dollars to foreign central banks. This debt can not be paid also.
Dollar already has price inflation of over 10% and people lending money at 5-6% are losing capital. Many people are duped by the official CPI numbers but the fairy tale is coming to an end.
Also especiually since 2000 FED was exporting inflation to China and Arab countries. This has been taking a toll over there so the excess money is coming back to the US. All those soveirgn funds are not bringing real capital that is saved, but they are biringing back the inlfated phony capital that FED created out of thin air in the first place.
Pretty soon people will be adding inflation premium to interest and then the FED will lose its ability to manipulate interest rate.
The more it lowers the rate, the higher the rate will be on the market.
And then it will have to contract the money supply or, hyperinlfation.
I can’t say I like the idea of being forced to put a gold clause in a contract I negotiate. What if I want a silver clause, or a platinum clause? Why not a clause based on the Dow Jones Industrial average, or Microsoft shares? We as individuals should be free to decide this rather than having laws that force us to pick gold.
Also, wouldn’t the gold-clause prop up the gold miners at the expense of other producers of potential inflation-hedges? More government medling in the economy and such? I agree with ghostofbrutus that this is a legal tender issue, and free banking is the answer.
Stevee, the market fundamentalists that you disdain are correct. If I were to take your rebuttal to its logical conclusion, then we would only truly see value being added if computer parts grew in size with each improvement. Consumers would go for the jumbo-sized parts, knowing that they are getting a good value (literally, more computer for their money!).
It is not that the raw materials are becoming less scarce, but that chip-makers are able to get greater performance out of the same materials, by using improved manufacturing processes. These new processes represent often enormous investments of capital and labor that continue to pay off. We see the added value by consumer preference for the newer, faster chips.
Stuff and nonsense! You want to make it so the current, usurous, government-partnered debt industry will be protected when the results of such things as their own fractional reserve lending come back to bite them on the ass! HA! You can’t insert new clauses into pre-made contracts without the consent of both parties. Forget it. Greedy bastards.
If contracting parties wish to hedge against generally changing prices of goods and services, or against the changing price of any particular good, what prevents them from doing so now? For example, various contracts are indexed by the CPI all the time.
I think there’s a self-contradiction in opposing the kind of partial gold clause that I have proposed be inserted into existing contracts. The opposition is based on the belief that such insertion woud be an interference with the freedom of contract. This claim is made on the grounds that the parties may have contracted precisely on the basis of the government’s having arbitrary power over the purchasing power of the monetary unit and one of them (the debtor) may want it to continue.
If the parties in fact had agreed that the government should have the arbitrary power to determine the purchasing power of what is paid and received in the settlement of contracts, then no reasonable objection could be made to the government’s now deciding to use that power to limit its further use of that power.
The fact is, however, that no creditor has ever entered into a contract payable in a fixed sum of paper money in anticipation of the purchasing power of that money so radically declining that what he will receive is likely to be of substantially less purchasing power than what he lent. If that were the anticipation, credit markets would soon cease to exist in that money.
The existence of credit presupposes a monetary unit whose future purchasing power can be more or less be reliably estimated. When the government accelerates inflation even to the level seen in the United States in the 1970s, credit markets break down, as witness the virtual disappearance of long-term fixed rate mortgages in 1979, after a few rounds or prices rising more rapidly than could be compensated for by inflation premiums in interest rates. The market was beginning to form the idea that no inflation premium would be sufficient, because, however high, inflation could soon be even more rapid.
The implication of this is that once inflation becomes more than modest, it necessarily violates the creditors’ rational understanding of the terms of the contracts into which they entered. It thus represents a defrauding of creditors and therefore a violation of their freedom of contract. Stopping that process is not a violation of the freedom of contract but an attempt to uphold it.
I find it the very height of gall for anyone to believe that his freedom is any way violated because he is deprived of such opportunities as being able to pay the proceeds of a life insurance policy with less purchasing power than is required to pay for the postage stamp needed to mail said proceeds. (This is an example out of the German inflation of 1923.) If he borrowed money in this expectation, then he deserves to be disappointed. His freedom is certainly not violated because he his prevented from fulfilling it. To the contrary, the freedom of those whose wealth an unrestrained policy of destructionism would have brought him is given a measure of protection.
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