According to Paul Krugman, it was adherence to the Gold Standard that helped push the United States into depression in the 1930s. What I find interesting, however, is the mentality he exposes about himself as he presents his case for wild inflation:
What E&T (Eichengreen and Temin) show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy — even in the face of total catastrophe.
I think we’re more flexible now.
Yeah, breaking contracts, debasing the dollar, all that stuff that is associated with honesty and integrity. It is not difficult to see why Krugman would scorn such things.
{ 16 comments }
There is a growing amount of discussion in the MSM about the gold standard, the FED as the culprit, etc. Most who mention this don’t admit to reading Mises, but I know you are reading this comment right now. Hello Paul!
Those, like Krugman (and Greenspan – though I digress), must defend their position and ever louder – this is a clear sign that they are on defense and that they are aware that a growing plurality understand the truth.
Today on CNBC, the discussion of the potential collapse of the dollar occurred (I do not have acces to the link at the moment), with the guest being asked “How long until…? Could it be 40 years?” He responded yes, or 4 months. China and Russia could announce that certain contracts (for energy, for example) will now require payment in gold. With this, the move away from the dollar would begin.
China’s recent statements about “concern” regarding the dollar referred to “commodity based money” a few times. I don’t think they meant corn.
There is a growing amount of discussion in the MSM about the gold standard, the FED as the culprit, etc. Most who mention this don’t admit to reading Mises, but I know you are reading this comment right now. Hello Paul!
Those, like Krugman (and Greenspan – though I digress), must defend their position and ever louder – this is a clear sign that they are on defense and that they are aware that a growing plurality understand the truth.
Today on CNBC, the discussion of the potential collapse of the dollar occurred (I do not have acces to the link at the moment), with the guest being asked “How long until…? Could it be 40 years?” He responded yes, or 4 months. China and Russia could announce that certain contracts (for energy, for example) will now require payment in gold. With this, the move away from the dollar would begin.
China’s recent statements about “concern” regarding the dollar referred to “commodity based money” a few times. I don’t think they meant corn.
I think you should stop sniping at Krugman – he just doesn’t worth the effort. Too easy a target, no honour in it
Snipe at Roubini, he is a worthier target.
Krugman could be the name of an orc.
If the Fed has issued $35,000, convertible at the rate of $35/oz., then things will be fine as long as the Fed’s assets are worth at least 1,000 oz. But if the Fed’s assets fall in value to 500 oz., they face a choice of either (1) staying on the gold standard and maintaining convertibility at $35/oz., (2) devaluing to $70/oz and maintaining convertibility at that rate, or (3) suspending convertibility and watching the dollar fall to $70/oz. All of those options are unfortunate, but given the loss of assets, the fed must cope. Maintaining convertibility at $35/oz. is the worst way to cope, since it invites a bank run, causing the money supply and the fed itself to collapse. (Of course, after the initial pain, that might be a good first step toward free banking.)
More and more people are starting to ask what the heck do these economists really know? They believe in bailing out Wall street and more debt. Common sense I hope hits the masses soon!
Mike,
If the Fed were to monetize gold they would have to set the dollar minimum the price of gold bullion today. But due to additional demand for gold because now everyone need some as money, this would drive up the dollar price of gold even more. You need a free market to determine the exchange ratio between dollar & gold in order for a new gold standard to hold. Otherwise it would likely fail. My guess would be that a dollar would be worth around 1/5,000 of an ounce of gold – probably something like that. Who knows, maybe a lot less considering the number of new dollars recently created. If you were to simultaneously circulate paper dollars and gold together and the dollar’s price was controlled at an artificial level more valuable than its real value, compared to gold, then all the gold would disappear & become horded from circulation. Gresham’s law.
I agree with Miklos. We already know where Krugman stands. He is not worth all this effort.
To be fair, Krugman is implicitly right: the gold standard was not meant for a big government, which is why it was linked to morality. Of course, being a neo-keynesian, his opinion regarding the gold standard is not surprising. Even Greenspan (aka I-messed-up-playing-central-planning-so-let-me-throw-Ayn-Rand-under-the-bus* guy) in his address to the Federal Reserve office at Minneapolis recognized this fact back in 1997.
*To be fair, he didn’t say Ayn Rand, Newsweek did. But until I hear him clarifying his statement to the congressional committee, I shall call him as such.
@Miklos Hollender
I fully support you! Krugman is broken clock, and there is no need we Austrians advertise him free. I understand he writes for “great” NY Times, but anyway as you said there more worth Keynesian picks:
Nouriel Roubini
Joseph Eugene Stiglitz
I think it is pretty clear at this point that Krugman is a shill for central planning and as such, he will make every effort to trash common-sense ideas since central planning is the complete opposite.
We need to get rid of the idea of the dollar and learn to think of money in terms of Oz and grams.
“If the Fed has issued $35,000, convertible at the rate of $35/oz.,”
Indicates that we still have not made that shift.
Re establishing the value of the dollar in gold can and should only be a transitional state to protect existing accounts, savings and pensions. It should have a time limit at the end of 5 years the dollar is phased out in both accounts and on the streets. It must be replaced with gold coinage, gold notes [I'm designing them but need help] and silver and nickel coins with only purity and mass printed on it. We must return to our currencies being weights not a state designated ‘name’.
My comment awaiting moderation at the site:
Oh, please Paul don’t expound on another area you are entirely ignorant of, money.
You can’t tell the difference between the kind of labor dollars present in your hypothetical babysitter economy and real money. Which shows that you don’t understand money.
Labor dollars don’t even work as well as barter. Why? Because there is an implicit assumption in labor dollars that every persons work is equivalent in value. At least with a labor barter system a doctor would get thirty hours of car washing labor for his one hour of doctoring.
Your babysitter economy has failure built directly into it as it assumes one hour of winter babysitting is not worth one hour of summer baby sitting. Yet your script values both equivalently. Of course it’s going to fail and of course your imagined script has NOTHING to do with money, or free market systems.
I like the discourse. I’ve been thinking of this issue for some time but continue to pound my head against the wall.
Labor/Land as a base probably is closest, this was also the conclusion of Ben Franklin; however, a maybe a Labor Based system with value based on the labor required to extract something essential for humans, like maybe FOOD, should be choosen.
Here’s just, oh out of the box for now, an idea, maybe something like the amount of time required to harvest, purely by hand with no implements, the easiest constituent needed to meet the Minimum Daily Requirement for, something like, Carbohydrates, then everything else would fall in place.
But, how much is Labor Worth. Unfortunately, all values ever established were based on Gold, Silver, Tobacco, Beads, Cows, etc. But generally now in the resent past its been Gold and/or Silver.
That’s as far as I’ve got……..
If we allow the state to tie the dollar to a fixed gold price, the state will lie and cheat as it has in the past. Any elementary text book in international finance lists all of the ways a state can get around the restrictions that gold places on it. States always consider themselves above the law in matters of money and contract. If the people force the state to adopt a gold standard, the state will simply claim to be following while printing money as fast as possible. Then, when the economic crisis, that the state caused by printing money, hits, it will convince people that the gold standard didn’t work and should be abandoned. All of this has happened in the past many times and no one learns from history.
The best way to achieve a gold standard is to leave the existing system in place as is. If the people ever elect a president who favors a gold standard, all he has to do is select a Fed chair who will adjust interest rates to target the price of gold, as Greenspan did in his first term. That way, people will know when the Feds are cheating because the price of gold will make it obvious. People will be able to protect themselves from the results of the Fed’s cheating, and it will be harder for the state to persuade people with its lies.
Something similar could be accomplished by targeting the price of land in the US, since the amount of land is fixed. The backing for money, or the target price of money, doesn’t matter, as long as it is something for which the quantity is fixed. Targeting labor doesn’t make any sense, since there is no standard unit of labor and the amount of labor grows with the population and its value changes with productivity increases.
We must catch up to Bastiat in thinking about money: it is not wealth; it is a measure of wealth. Any device used for measuring must not change. Kilometers must stay the same length every year and liters must contain the same volume. In the same way, money as a measure of wealth must remain fixed in quantity because its quantity is what we use to measure real wealth.
Fundamentalist: “Targeting labor doesn’t make any sense, since there is no standard unit of labor and the amount of labor grows with the population and its value changes with productivity increases.”
Labor is the target that all other values are measured against, but only for the individual that is doing the measuring. My Time is my value. I measure everything I buy against it, because it is ultimately the only thing I have to pay with, and the only measure I have for comparing anything of value outside myself. And the same is true for you and everybody else.
Fundamentalist: “Any device used for measuring must not change”
With this I assume you are referring to monetary metals. If our time on this planet is our primary measure of value, then, this statement is absolutely correct for there to be any consistent comparison between your value and mine. If we wish to exchange, either goods or services, then we must agree on a relative value, a value that matches each of our estimations of the items of exchange as they relate to our own self worth. To do so, we compare our valuation of a weight of metal to the items of exchange, and settle on a price. This is the process of money creation. I value gold, You value gold. I value the items of exchange, You value the items of exchange. I measure the items using my standard of value relative to gold, You measure the items against your standard of value relative to gold. We compare measurements, change our estimations to compensate for perceived differences, and cut a deal to exchange. The consistent value of gold as it compares to our own consistent value of self worth, makes the measurement of value of the items of exchange possible.
When the currency of the realm is changing over time, then the possibilities of fair exchange over time diminish with the length of time. If I am comparing my value, my self worth, to a device such as the dollar, which is decreasing in value over time, then any valuation I make today, is worth less, tomorrow. The real devastation comes when I get a job. I agree to X dollars/hour at the time of hire, only to have my self worth depreciate from the moment I take the job. By the time I get a raise, I am working for less than I am worth, and the raise may only be great enough to compensate on that day. By relying on a medium of exchange that has a constantly decreasing value, You, me, and everybody else with something to offer, can only realize true value for a short period exchange. After that, the price must go up, because the value of ourselves is unchanged, or increasing.
But with gold as a standard, the value fluctuations it might undergo due to production, storage etc. are relatively minor over time, and offer a way to make long term valuation exchanges possible without much in the way of change.
The evil in inflationary currency, is the decreasing of value over time. It causes a diminishing return on any exchange over time, relative to the individual and his self worth. It’s a bleeding of value from the body of society as a whole.
Talk to an accountant today, and ask them to explain the velocity of money. It is truly amazing how much they understand this phenomenon of devaluation, and yet cannot see the cause! This blindness is the blindness of familiarity. As my dad used to say, “They can’t see the forest for the trees (in the way)”.
It’s interesting that so many people talk about a gold standard, when we already have one. As long as each individual has the ability to purchase and sell gold in the market, then we always know the value of our dollars (not the other way around). Consequently, it takes more dollars to purchase gold when interest rates are lower (no return on lending capital), the debt is less likely to be repaid, or when the government issuing the currency is not trusted to maintain the level of dollars (or private credit in the form of dollars is destroyed/created). Gold is understood to be an asset that pays no interest, therefore is not really different from money. The only difference between dollars and gold is the future capital that the government will pay if you purchase it’s debt in the same bills. That payment intices people to use currency, rather than gold (in most cases, unless the above situations occur.)
Fundamentalist, above, states it well: “If we allow the state to tie the dollar to a fixed gold price, the state will lie and cheat as it has in the past.” Knowing that this is the inherent tendency of governments / welfare states / democracies – as long as gold is available for sale and purchase in the economy, then we have the best gold standard we could likely hope for. If the governments want capital back, then they will be forced to implement fair trade policies and reduce manipulation from excessive spending or other monetary/fiscal actions to support their currency in circulation, and ultimately pay individuals and other governments a fair rate in return – in our case through devaluation, future taxes, or possible default (synonomous with devaluation). The tragedy of the commons comes to mind – even though the minority abused our capital, everyone pays!
Fortunately, more people are becoming concerned with government policies. It will be interesting to see how politicians deal with the mess they’ve made.
Comments on this entry are closed.