Remember, its not just addressing the gold standard, but soundly answering the questions. I don’t see any sufficient response in your redo about the development of paper notes as speculation on future gains. That is, the goldsmith is investing in a project, and if it fails the goldsmith loses money. So if all his lenders ask for their gold at once, he’ll have to sell his other property to pay. But that is part of investment risk. To limit all investment to actual gold on hand would be to say there can be no such investment. It would limit productivity and cause the kind of economic stagnation found in pre-modern society. Rather, value of a nation’s currecy is based on many other considerations, not only gold on hand. I’m getting close to asking you to read Adam Smith’s Wealth of Nations, or at least some of the more relevant parts.
Our economy is based on mutual investment in each other with the promise of future rewards. You can point out ways that this might be abused, but that is only to say that there should be protections against abuse, not that the entire system should go back to the dark ages (I mean that literally, since the gold standard represents a form of money from before the modern era when work ethic and investment were at a low).
What I’d like you to do is bring up abuses from centralized banking, put them in the context of the benefits and necessity for such a system in our world of work based on future returns, and then discuss ways that these abuses can be protected against without proposing solutions that would not solve the problem and set us back 6 centuries. I take the Greenspan quote in this way: if it could be done, a gold standard would help stabilize the economy, but given the nature of the world economy this cannot be done.
Actually, I do think you should read Robert Heilbroner’s “Worldly Philosophers.” This will give you a good sense of how the Modern economy differs from the Medieval. That way you don’t have to read all of Smith, but it does show how Smith successfully demonstrated that the Wealth of Nations is not in the amount of gold the nation has (which it would be if the gold standard were correct), but in the talent of the people. Thus, investing in the work and product of the people is what becomes the standard for currency, not gold. The more talented nations will be those with the most valuable currency–everyone will want what they have.
I think you’re confusing the legitimacy and economic gains from lending out time deposits, and then problems of credit expansion/inflation and boom-bust cycles resulting from lending out demand deposits. I need to run to school so I’m sure someone else will explain, but read Jesus Heurto de Soto’s book “Money, Bank Credit and Economic Cycles”. It’s somewhere here on Mises.org.
As to the “Worldly Philosophers”, I’ve read it. The guy, if I remember correctly, fails to mention Mises, and possibly Hayek too. He fails to mention the Austrian school or if he does only does so in passing (Bastiat reference). Moreover, I don’t believe anyone here is asserting that wealth is in gold. Gold is just a medium if exchange. You’re committing the same fallacy Keynesians and Monestarists do when they think inflation will do good for the economy (magically creating wealth by multiplying credit). Except you’re now applying this straw man to us?
The initial post was word for word the email my professor sent to me, not mine. I am trying to write a paper showing that the gold standard would be better for the economy and better for developing value and human talent in a given country. But gold seems to be inhibiting this venture, in his view. He is assuming that going back to the gold standard would mean we would go back to very slow growth. His responses are assumption laiden, but I just don’t know how to respond sufficiently. It must be remembered that I am relatively new in studying the Austrian Tradition.
You’re taking on a rather difficult task. Regardless, your professor is wrong: investment should only take place out of accumulated savings. These are its proper source. Your professor might be right that the gold standard would not be able to sustain the current unnatural levels of investment, but then again these are neither sustainable nor desirable. It is amazing how people otherwise cognizant of market economics can ignore such basic facts. Moreover, I’m not sure why he brought wealth into it. Gold is the medium of exchange, facilitating transactions, apart from its nonmonetary role. So his comment is neither here nor there.
Also, I get really irritated with the tired argument of “we can’t go back to the Middle Ages.” This ignores historical perspective. People weren’t moping around in the Middle Ages telling their children to hold everything until the technologically advanced, secular democratic future got there. They were doing what people do in every age: trading, working, copulating, etc. In fact, given that there were a zillion different jurisdictions for goods and labor to move across, vast no-man’s lands inhabited by bandits, no automated manufacturing, etc., somebody with a modern bias would have to conclude that there could only be a subsistence/barter economy with no resources for aesthetic pursuits. Wrong on all counts, of course.
This is where he heads off the rails. He’s right that ideas, not commodities, are what creates wealth. He’s also right that currency in and of itself is not wealth. Paper that has been declared legal tender is, IMO, “backed” by all the goods and services available for exchange and consequently, paper money is a commodity suitable for use as currency. So, I think he’s right on that count as well. But then he fails to take the next step: what is it that makes Swiss currency valuable over, say, the currency of Zimbabwe, and the answer is purchasing power. And the more dollars you print, the less those dollars have of it. Gold solves this inherent problem of paper currency because it cannot be expanded beyond the pool of real savings necessary to extract more of it, ceteris paribus.
That is a major assumption on his part. Someone should tell him that maybe it was not the monetary system that cause little investment and low work ethic it was the fact that everything was owned by a king and they had a fuedal system and were dominated by institutions such as religion. How hard are you really going to work in life when your spot in life is set? Furthermore the best economic theory was mercantilism!!! It was the reformation and development of a liberal society that allowed society to flourish. In fact that logic is starting to get to me. ‘Well, the roman empire had private property and it collapsed, so private property causes societies to collapse.’ Dumb.
But your prof is right in saying gold, or no money for that matter, is real wealth. It reminds me of bastiat’s saying “starving on piles of gold” (he was talking about the horrors of mercantilistic tariffs). In fact i would read bastiat’s “what is money?” If you are new to this stuff, this made it click for me. It is set up as a dialogue between two guys.
I spoke to my professor again and he sent me this email in quotes below. He thinks that an international gold standard and central banking would both have abuses. It seems that he is arguing that value and talent can be fostered more if we as a culture strive toward what is of true value, i.e., pursuing intellectual and spiritual growth in the form of studying philosphy, theology and doing good works in connection to our personal talents to use for the common good. If people used their talent and resources to pursue intellectual growth instead of all their passions going toward a boxing match or routinely attending brothels, for example, it would affect our economy in a positive way. Abuses would be few and far between because most of the culture would be good stewards of their capital.
“I think we’re agreed that a central bank is not the solution (something outside the market that tampers with value apart from supply and demand) and it can be abused. But neither is gold the solution. It can also be tampered with, abused, and affect value apart from supply and demand. What is needed is a standard of value that cannot be so abused. Interesting, pure supply and demand is not the solution either because it is too volatile. It changes as people change, which can be minute by minute. True value does not change. But this requires that people know what is of value. So what do we do in a situation where people do not know what is of value, and demand what is not of value, and want currency to spend on what is not of value? What we need to figure out is how to produce a system that is productive of the good, and protective of the good. I think the intention of the persons you mention is most likely good, it is to detach value from personal interests. But due to their own failure to see what is of value they may not know how to do this.”
I don’t think he is a star trek fan, but it seems that he has an Adam Smith mentality of the wealth of nations being in the potential and value of the people and their talents.
Indeed; my comment was in response to the last line of: “But due to their own failure to see what is of value they may not know how to do this.”, which to me, reminded me too much of a soft-parentalist “guiding around to help make the best choice” due to some appointed sense of self-importance. I could be being a bit harsh, though. Perhaps you should ask him what he thinks of adam smith & classical liberalism?
I am somewhat in shock. This guy is an economics professor? Or is he a philosophy professor, even more ignorant of economics than most of them? An economist, in his capacity as such, should know better than to criticize the preferences of people.
He is a philosophy professor who teaches business ethics. He’s actually a very good professor who teaches socratically and gets students really involved in discussion, something that is rare nowadays since many professors would rather lecture than take time to consider different points of view. I’m not sure if he was critizing people’s preferences per se. I suppose he has been trying to get me to look at the root causes of abuse which is based on what could be of temporal value instead of affecting the generations to come with what is of lasting value. Intellectual growth, for him, is lasting because one can pass on knowledge and wisdom to others. And knowledge and wisdom (coupled with acting out your beliefs) is all you can take with you into the next life. Wasn’t Adam Smith a philospher before he wrote Wealth of Nations?
I wonder what he means by “true value”. He argues against volatility, yet life is volatile. To imply that value is a constant is really counter-intuitive.
By his logic, the 100th cookie I eat has the same value as the first, regardless of what my taste buds and stomach tell me.
Anthony, I think that where economists don’t distinguish between what people prefer and what would be best for them, they’re wrong. The professor in question is perfectly correct in saying that many people would be better off in a society in which individuals were brought up to value different things than they do in our current society. I don’t see why that should be so controversial, unless you’re such a subjectivist about value that you wouldn’t even be comfortable saying that there’s nothing “subpar” about the soul-deadening existence of a greedy, money-hungry materialist who doesn’t care about anyone but herself, and who is perfectly comfortable with squashing anyone between her and her empty goals, which are rooted only in her feelings of ambition and inadequacy. That being said, I don’t see that as a problem for libertarianism, unless the next step were going to involve forcing the “proper” unbringing upon people, and coercively preventing them from seeking alternative lifestyles to the “optimal” ones, as determined by some central power. But I’m not sure that the professor in question would endorse that.
This is where he loses me. True vaule always changes. It’s called progress. A shovel, hundreds of years ago extremely valuable as one of the few tools used in the production of food, is worth far less today, with the use of tillers, tractors, etc. Likewise, people do know what is of value, to them. They may disagree with your professor, or everyone else, but such is life. Value, like beauty, is in the eye of the beholder.
Wow. Well, he’s a philosophy professor who’s waded into an economics problem. But that being the case, hard currency is the only thing that can keep the financial system honest. For an ethicist he’s being really obtuse. In fact, you should point out to him that inflation has the effect of increasing time preferences so people become more short-term in outlook. The ethos becomes one of “get while the gettin’s good.”
Inflation also benefits the asset-owning class at the expense of the wage-earning class, whose income does not keep pace with rising prices. And when the economy contracts and the Fed continues inflating, the wage-earning class in addition to probably being laid off as economic activity decreases is unable to take shelter in falling prices.
God I’m glad I graduated in 1988. And in the business school! I don’t dare imagine what it’s like in the humanities departments.