The Economic Schools of Thought

Economics Economics Questions
21

There is some evidence of this. I don’t recall the exact source.

Central banks lease their gold out for short sales, suppressing the price. Central banks don’t fully disclose the amount of gold leased out, making it hard for professional traders to measure the effect of these sales on the price. Central banks carry leased gold on their books at face amount, even though the loan is unpayable.

For example, Ron Paul complained that Fort Knox hasn’t been audited in awhile. Is all that gold still there, or has it been leased out for short sales? If there’s nothing to cover up, then why hasn’t there been an audit?

When central banks sell gold, they announce the sale in advance to push down the price. If central banks were interested in maximizing revenue, they would quietly sell their gold. Pre-announced large sales show an intention to manipulate the price.

From time to time, the commodity exchanges change their rules, cheating people who are long gold and silver futures. The most notable example is what happened to the Hunt Brothers, but there are other instances.

There is a limited supply of gold, and it’s getting harder and harder for central banks to manipulate the gold price downward. That’s one reason that gold has had an excellent bull run the past few years.

Even if you believe the CPI is an accurate measure of inflation, the price of gold has not reached its CPI-adjusted historic maximum! By itself, that is evidence of substantial market manipulation.

Central banks have an incentive to manipulate the gold market, because gold is a generally accepted proxy for inflation. Gold investing is hard for the average person, due to regulation of gold/silver dealers.

There are plenty of other websites that complain about manipulation of the gold market. You may google them.

I don’t mind manipulation of the gold market. That means I should buy gold! (I haven’t bought any gold or silver yet.) During a hyperinflationary collapse, the people who convert their savings to tangible goods first benefit the most.

I consider agorism to be the broadest possible economic and political philosophy, in the sense that it attaches zero legitimacy to taxes, government, or State regulation of the market.

When you say “agorism is not a serious economic philosophy”, it’s like someone a couple hundred years ago saying “‘The earth is not the center of the universe’ is not a serious scientific philosophy.” I consider a TRUE free market to be a bigger mental shift than recognizing the earth isn’t the center of the universe. Once you realize “Taxation is theft!”, then you can’t morally accept ANY form of government, because government is always based on theft/taxes.

I don’t consider agorism and a true free market to have any pre-defined rules, other than the immorality of government. Some concepts are obvious, such as respect for individual property, the non-aggression principle, and the right to form contracts.

Be careful when you say “X works for a university and X is an anarchist!” The label “anarchist” covers a lot of pro-State philosophies. For example, I consider Noam Chomsky to be a pro-State anarchist. By touting corrupted versions of anarchy, a stateless society in general can be discredited.

22

I’m sorry to bring the bad news to you, but newworldeconomics.com isn’t the best place to get your information from. They clearly don’t have an understanding of basic economics.

First of all, the US didn’t have a gold standard in the 20s. We had a gold exchange standard, which is different. A gold standard necessitates full reserve banking, since all currency are really simply “certificates” in terms of gold (i.e. a 1/2 ounce gold certificate would be worth half of a 1 ounce gold certificate and would be redeemable for a 1/2 ounce of gold at the bank where it was printed). If the bank practices fractional reserve banking, meaning, if it prints more certificates than it has gold, it will go out of business when other banks demand that they exchange their certificates for gold. So there is a huge profit incentive to NOT practice fractional reserve banking in a free market. However, a gold exchange standard is different. It is when you have a fiat currency controlled by a central bank. The central bank arbitrarily sets the value of one unit of currency to gold. For example, one dollar could be pegged to 30 grains of gold (or one ounce of gold would be worth $16). The problem with this system is that the central bank can move the peg (i.e. to 20 grains making one ounce worth $24) or remove it completely (like Nixon did in the 70s).

Historically speaking, the gold exchange standard has failed precisely because the government has a tendency towards monetary expansion and will devalue currency while exchanging that currency for a below market rate for gold. Once this trend cannot be followed anymore due to excessive monetary expansion, the government will remove the peg so it can continue inflation. This was precisely the case in the US. The peg was moved twice (in the 30s and 70s) due to monetary expansion and then removed in the 70s because the Fed was expanding the money supply to pay for the Vietnam war.

Now, this is where newworldeconomics.com gets completely ridiculous. Rothbard was a student of Mises, who was an Austrian economist. Mises was not a classical economist, and certainly not all economists in the late 19th century were Austrians. The Austrian and the classical school are two completely distinct schools of economics. The Austrian school still exists, the classical one doesn’t.

Rothbard’s view of the Great Depression wasn’t original, it was simply the view that all Austrian economists held, including Mises and Hayek. The Federal Reserve Act was passed in 1912, creating the Federal Reserve (essentially, a semi-nationalized bank cartel) in 1913. The Fed had (and still has) the power to expand the money supply at will by controlling things like the reserve rate, interest rate, etc. When the interest rate and reserve rate is set artificially low, you see monetary expansion occur. Now, normal monetary expansion in a free market is not bad. Gold, silver, palladium, or whatever else is the standard is mined, it is transformed into gold and enters the market as currency. However, in a fiat currency system, when the central bank expands the monetary supply, it does so through the banks. What happens in this type of system is an artificial lengthening of the production system to create a more capital-intensive economy. First, I’ll explain how a free market grows and then I’ll explain why credit expansion (which needs fiat currency or bad government regulation to occur) is bad.

In a free market, when people choose to save and/or invest more, there will be more money to invest in capital goods with longer and more production rates. What consequently happens is a decrease in the demand for consumer goods (such as clothes and food), which causes price deflation (a good thing in the free market). Since more people are investing and saving, companies that specialize in consumer goods will consequently invest in capital goods like machinery to make their production cheaper to remain profitable. People will also invest more and more in capital goods like houses and automobiles, since you need to save before you buy these products. What will also occur will be an increase in the supply of loanable funds, since more people would be investing in CDs with banks (loans to banks that the banks then loan out to others). What generally happens in such a case is that more and more workers are forced to leave jobs that focus on consumer goods (i.e. less people making toys) since there is lower demand and entrepreneurs are replacing their workers for capital goods. However, these workers will find jobs in more capital-intensive industries like housing, automobiles, machinery, etc. since there will be a higher demand for workers in those areas (due to the increased saving and investing). Even the monetarists Anna Schwartz and Milton Friedman recognized that price deflation and amazing economic growth occurred in the late 19th century in America under the (true) gold standard (and hence no central bank manipulation).

The above is what happens in a free market when people choose to save, increasing the number of loanable funds. The situation is a win-win situation where price deflation of consumer goods occurs and real wages rise (due to deflation). However, central banks that have been lead by incomplete economists don’t understand this vital piece of information. They instead believe that spending is key (hence things like GDP and GNP) and believe saving is bad because of Keynes’s “paradox of thrift.” So they believe that they need to control (not really “control” per se) the money supply and expand it to ensure a constant rise in consumption. These central bankers use the Phillips curve as their justification.

The Phillips curve is an economic curve based on empirical data in the UK that the higher wages rise the less unemployment there is. Keynesians took this same curve, and in all their glory, concluded that “higher wages = inflation” (that’s what happens in a society with fiat currency) and therefore, you need monetary expansion to combat unemployment. So the Keynesian Phillips curve is “inflation = less unemployment.” However, this is entirely false, as we have seen in the late 1800s when there were higher real wages and less deflation.

So people who use Keynes’s Phillips curve use it to justify monetary expansion. However, monetary expansion creates a disequilibrium in the economy. Without a change in spending/saving (time preference) of the general population, an increase in the money supply makes capital goods much more profitable, since it lowers interest rates at banks. Therefore, you see temporary booms in capital-intensive industries like housing. This temporarily reduces unemployment and can even eliminate it, leading to accelerating wages (and hence inflation). People also begin investing more directly via the stock market in these capital-intensive businesses since the economy seems to be doing well. But when the full circle comes around and the extra credit dries out, you see a huge crash in these capital intensive industries, like housing. When this happens, the stock market loses value suddenly, people become unemployed when their businesses that were heavily investing in capital go bankrupt, demand for all kinds of goods fall due to high unemployment leading to even more unemployment, etc. The only way to prevent such a boom from busting is to accelerate the rate of credit expansion. This will only devalue the currency. This cannot be sustainable and will eventually lead to the collapse of the currency as it becomes completely devalued due to hyperinflation, at which point a true, deep depression (market correction) occurs.

So yeah, that’s the gist of it. In conclusion, saving is good, it’s how an economy grows rapidly, while credit expansion leads to improper signals in an economy, leading it into a temporary bubble that will soon have to “pop.” This is the situation we are in now. Bernanke is trying to expand credit even faster than before to prevent a recession, and we’re seeing even worse economic conditions and worsening inflation. Are you ready for stagflation, part two?

23

Why do you keep pimping that site? I don’t think there was anything great about your posts, so why would any of us want to go read more ridiculous posts about how monetary expansion did not create the great depression.

credit creation is not inflationary

Ok, please stop or FSK will blow a gasket. You’re striking at the root of the debt virus.

24

This is a fundamental flaw in the typical discussion forum. Unless you have a moderation/killfile feature, you keep seeing posts by fools.

The key to fair moderation is that everyone has their own moderation preferences. Rather than assigning a unique global score to each post, a better moderation system assigns a different score for each user.

For example, Digg presents the same frontpage to each user. A better Digg-like engine would present everyone with a different frontpage, customized to their personalized interests.

I already responded to the “credit expansion is not inflationary” comment. Even from 1913-1933, the US dollar was debt-based money, although it was still gold-redeemable. Fractional reserve banks expand and contract the money supply via their fraudulent money creation process.

25

Wait… Are you saying that credit creation is not inflationary? Doesn’t an increase in the money supply mean that the currency will depreciate in value and therefore lead to price inflation, unless the expansion of supply of goods outstrips the expansion of supply of money?

26

I probably should not bother replying to these posts.. as some of you guys seem more interested in the religion of Rothbard rather than in reasoned debate. Im was not looking for a flame war, i was looking for a debate. (Guess i came to the wrong place.)

The post about the FED manipulating the price of gold.. The central bank can not manipulate the value of gold, the only thing they can manipulate is the value of the currency. If they sell their gold reserves. The price of gold will go down temporarily. However once they have done that they no longer own the gold.. and have lost any power to lower the price of gold. The central bank has no power to change the demand for gold.. and it has no power to increase the supply of gold. Sure it can sell off its supply.. but then it has to buy gold back again if it wants any gold reserves. So the net effect is zero. Its just the same as if you owned a large amount of gold. You dont have the power to manipulate the value of gold and neither does the central bank.

The only thing the central bank can do is manipulate the value of the currency.. and that will change the price of gold. This is how a central bank, or private banks in the past where able to peg their currency to the price of gold. They dont manipulate the supply or demand for gold, they only manipulate the supply of the currency, they cant manipulate the demand for the currency. All they can do is manipulate the supply of the currency and that is enough to affect the value of the currency, wich is enough to affect the price of gold. A gold standard is any currency system where the price of gold stays the same. There are many mechanics to do this, it matters less wich one is used.

The post about fractional reserve banking being evil.. if i had a penny every time i have heard that argument, the people who keep going on about it simply do not understand how banks work. The reason i link to “that site” is because i dont feel like writing yet another post about these common missconceptions. I like the site because he has facts to back up his theories, he is a economic historian. So here is yet another one about fractional reserve banking:

“Fractional Reserve” Banking

http://www.newworldeconomics.com/archives/2006/070906.htm

The “Money Multiplier”

http://www.newworldeconomics.com/archives/2007/102007.html

About the post against inflatin and keynesiansim.. yupp inflation is bad, but so is deflation. Thats what most Rothbardians “do not get”. A money supply that is not increased when the economy is growing will cause deflation. The money supply needs to be increased to keep the currency pegged to gold. Inflation happens when the money supply is increased to much, and deflation happens when it is not increased enough relative to the demand for money (aka the economy). Sure some parties love a currency with loosing value (borrowers, producers, employers, exporters), and others love a currency with gaining value (savers, consumers, employees, importers). A stable currency (compared to the value of gold) is the best compromise.

“The Gold Standard in a Nutshell”

http://www.newworldeconomics.com/archives/2007/062407.html

“Gold Standard Fallacies”

http://www.newworldeconomics.com/archives/2007/081907.html

People who say that credit/deposit is money, that banks create inflation, and therefore are evil.. are actually arguing for govt regulation of private banks.. that is a very un-libertarian idea and protectionist idea. Anyone can create credit.. you can lend out your money to friends.. you can even borrow money from other friends and loan out that.. and make a profit on the interest spread. Should the govt tell you you cant do that? Hell no, and the same goes for govt regulations of private banks.

If you guys are really interested in debate and reason.. you will read other points of view (like the above links) and not lable everything you dont like to hear as lies. Politics might be a religion, but economics should be a science.

Supply side economics of the type found on that site has allot in common with libertarian ideas about small government, free market and stable money, no taxes or tariffs or regulations etc. It really just is classcial economics improved.

Cheers

27

Look, don’t post nonsense here and then refer to rebuttals as “religion”. So far all you’ve done is stridely pronounced Rothbardian economics to be mistaken. If I had a penny for every crank who tries to paint Rothbard as a loon…

-Jon

28

Wow. Great way to start your post!

29

Fractional Reserve Banking is evil. It’s a method of institutionalized counterfeit. It’s not a misconception that some people get the new money before others, which allows them to drive up prices only after they have spent the new money, punishing everyone who receives the money at a later date.

If increasing the monetary supply was necessary and just, we would increase every individual’s current money supply fractionally so that the new money was distributed equitabily and purchasing power and prices rose simultaneously.

Of course, this would confer no net benefit (better to introduce half pennies in my opinion).

The author of the site you keep linking to, is badly informed on economics. It’s concerning that someone (without a statist motivation or agenda) would commit so much time and energy to debunking the truth with half truths.

30

Why don’t you reply to my post? I refuted the two articles you posted, showed how those articles are historically inaccurate and misleading, etc. I even provided you with basic info about the Austrian theory of the business cycle.

Many central banks have large supplies of gold. Now I don’t know if what fsk is saying is true or not, but it is possible that they sell at times, which would drive supply up, which would mean a lower price of gold.

Fractional reserve banking has been historically illegal, you need to google the difference between an irregular deposit contract and a mutuum contract. Fractional reserve banking

I doubt that the person/people who wrote those articles are economic historians if they don’t even understand the basic history of the Austrian school.

Both are refuted below.

Monetary contraction is bad, but not price deflation. Historically speaking, when we had the international gold standard, price deflation and economic growth existed side by side.

Monetarist economists (not Austrians) Milton Friedman and Anna J. Schwartz, in reference to the period from 1865 to 1879 in the United States, during which practically no increase in the money supply occurred, conclude that,

“The price level fell to half it’s initial level in the course of less than fifteen tears and, at the same time, economic growth proceeded at a rapid rate… Their coincidence casts serious douts on the validity of the now widely held view that secular price deflation and rapid economic growth are incompatible (A Monetary History of the United States 1867-1960, p. 15 and statistical table on p. 30)”

Monetary expansion always causes price inflation, and when it is done through the banks, it causes a disequilibrium in the structure of production to occur (explained in my last post refuting your points).

The writer of these articles doesn’t have an understanding of what the gold standard is. A gold standard is when the accepted currency are certificates worth certain value of gold. For example, you might be using a certificate that is redeemable for 30 grains of gold at a bank.

A gold exchange standard is when a currency (like the USD) is pegged to gold for a certain price. For example, before Nixon removed the GES, the dollar was pegged to gold. The problem with a gold exchange is that the peg can be moved or even eliminated, whereas it is illegal to change the value of a gold certificate (you can’t lower the 30 grain certificate’s value to 20 grains, etc.).

There is nothing wrong with borrowing money from your friend and then lending it out. That is normal, it is a mutuum contract and has been practiced for thousands of years (i.e. today it is known as the certificate of deposit). What is wrong is accepting to hold someone else’s money redeemable at any time and then loaning it out. While transactions are occurring between different banking accounts and money is being taken out, you are loaning that money out. Essentially, you are creating electronic money.

As an example, say I am a bank and you put $100 in an account. I’ll take $90 of those dollars and loan them out the other window for say, 9 months. However, the account is redeemable at any time, it is not a mutuum contract but an irregular deposit, so you take out $50 one day when you need it to pay something.

Essentially, I (the bank) just created $40, since you deposited $100, I loaned out $90, and then you took out $50 (100-90-50= -40 or negative $40, which means I had to create $40 to make up the difference). Of course, since forgery is illegal, banks usually make up the difference via long term low interest loans from the central bank (the Fed). This just fuels credit expansion, inflation, and harm in the economy.

Economics is a science and you have clearly failed. I responded to your post in an academic fashion, yet you fail to even try to refute anything I said. The site you are using is more religious than scientific, as it has gotten loads of economic theory and historical fact wrong.

No it isn’t. They don’t even have a basic understanding of economic theory or history.

31

Governments holding 50% of the gold in existance, they have a lot to work with if they so wished. I don’t see why they’d do it, or any evidence that they are doing it though.

32

The key arguments:

“Why don’t you reply to my post?”

Your post mostly was about what happens when a currency looses value, about what happens when the price of gold goes up. I agree thats bad, everyone knows its bad. What im saying is that an increase in the value of a currency is (aka a decrease in the price of gold) is equally bad, but in different ways. The rest of your post was about credit being money (wich i have already replied to), and about the causes of the business cycle (I agree on inflation making it worse.. but its not the cause of it. I’ll leave that to another discussion).

“Monetary contraction is bad, but not price deflation.”

This is the key disagreement i have with far reaching consequences.

Without an increasing in the monetary supply the price of gold will go down. The more things of value (including gold) there are being traded in the economy, the less money there is chasing each good. This is an increase an purchasing power, and the change can be seen in the change in the price of gold. An decrease in the price of gold and an increase in the purchasing power can also by decreasing the supply of money. To the man on the streets the effects are the same, and he will not be able to tell them appart. From the effects it is hard to argue that one is good and the other is bad. You have to realize that like anything of value, the value of money is not only set by the size of the supply but also the size of the demand. Saying that the supply of money whould be kept stable, regardless of the demand, is saying that the value of the money should not be stable. There is a difference between money with a stable value, and money with a stable supply. Money with stable supply has increasing value. Now Rothbardians might say thats a good thing. Everyone likes to see their purchasing power increased without doing anything. Everyone likes a free lunch after all. But as with everything, some parties will gain and others suffer. Another way of saying the same thing is: How do you measure the value of something? You measure its relative value to everything else of value. So if the relative value (to every other thing of value) of the currency has increased more, than the relative value of gold has increased then you have a deflating currency. Without a increasing supply of money, a growing economy will increase the value of the currency but not (much) the value of gold. Thats why gold is so special, because its value is so stable. So in this case what makes the value of the currency grow, but not the value of gold grow, is the fact that the demand for the currency grows more than the demand for gold. People simply rather do trade in paper currency than in gold, wich means increased trade will increase the demand for the currency more than gold. So in order to keep the paper currency from gaing value compared to gold, you need to increase the supply of the currency.

As i mentioned earlier, importers, employees, consumers, savers, lenders will like a currency in wich the price of gold (and prices in general) is decreasing. Basically any party of a trade who already completeded the “giving something away” part of the trade, and has yet to get “get something in return” part of the trade. Money basically delays the completion of trades. (When you work, you only get something in return when you spend your wage.) So on the other side of the trade there is the party who have already “gotten something” but not yet “given something away”. Its the borrowers, employers, producers, bill payers, exporters. These guys like the opposite type of currency, one where the price of gold (and prices in general) is increasing. The best compromise between the two parties of every trade, is a money where the price of gold (and prices in gereral) stays the same. This way the fact that money separates in time “the giving and the taking” part of every trade, does not matter. A currency with a stable value will mean that a millionaire today is just as rich as a millionare a hundred years from now. Sure the stuff that theses people buy will be completely different, however they will still be considered equally rich compared to everyone else. If someone burried his life savings in the back yard.. and someone finds that money a hundred years later.. the money will still be still be worth a lifes worth of savings. Its value will not have increased, like it would have if the money had been invested and put to productive use a hundred years ago. I think that is fair, as burying money in the back yard is money not doing anything productive. That money had no part in shaping the future economy, it did not expand it or make it more efficient, so the value of that money should not have increased.

Okay so now back to the credit not being money discussion.

“Monetary expansion always causes price inflation. When it is done through the banks, it causes a disequilibrium in the structure of production to occur”

No, this is false both in theory and practice. In theory you are dismissing the demand for money alltogether, you are simply saying the value of money is set solely by supply, and thereby prices will increase regardless of what happens to the demand of money (aka the economy). I have already talked at length about the effect of demand of money on prices. When it comes to the credit supply, wich is not money.. there is no relationship to price inflation at all. Anyone can create credit, you dont need banks to do that. Imagine you lent a dollar to your friend, what you are left with is a promise to repay on demand, your friend lends that money to his friend, and what he is left with is a promise to repay on demand.. and it keeps going like this until every person in the world has lent that dollar to someone else. There now is billions of dollars worth of promises to repay of money on demand out there. This does not matter as there is only one person out there (the lst person to borrow the money) that actually got to buy anything with the money. Say he bought a candy bar, so only the price of candy bars will have gone slightly up. All those billions of dollars did not drive the price up of anything, simply because you cant buy anything with credit. You cant buy anything with promises to repay on demand. Thats just another way of saying that you cant buy anything with debt. Okay so you might be able to convince a shop owner. you know, to sell you stuff on debt, you simply give him the credit note. What that means is that you will no longer get back that dollar note you lent to your friend. Your friend will give it to the shop owner instead. You still owe your other friend a dollar, and will have to find another dollar to repay him. You see? No money is created by credit and debt. No inflation is created.

In practice, if you look at the history.. you will see there is plenty of evidence that an increased money supply alone does not causes price inflation. You will see that the base money (the stuff the fed creates) has been increasing much much faster than prices in general (i have another link to “that site” if you like). And when it comes to credit.. well massive credit booms and busts have had little effect on prices. The best example of this is during the 20s when the US was on a gold standard (wich means the value of money was stable), there was lots of credit creation but no price inflation. Prices did not change until the dollar went off the gold standard and the value of money was deliberately decreased by increasing the supply of money.

“Many central banks have large supplies of gold. […] it is possible that they sell at times, which would drive supply up, which would mean a lower price of gold.”

Yes, but any power to manipulate the value (not only the price) of gold (threw gold supply increase) would be temporary, it would be a one way street. Once they had sold their gold, they would have lost their power to affect the value of gold. And if they wanted this power back they would have to buy back the gold, negating any effects it had on the value of gold. Gold value is subject to the law of supply and demand, just like all other things. It does not matter if the FED sold all its gold reserves to some rich oil king in the middle east. It matters not in what vaults, and in what country, and who owns the gold reserves of the world. As long as the demand and supply for gold on the international market has not changed the long term value of gold will not have changed. Well what if that saudi king is not willing to sell that gold no matter what price? Well in that case his demand for gold is greater than anyone elses.. and the value of gold will reflect that.

“Fractional reserve banking has been historically illegal, you need to google the difference between an irregular deposit contract and a mutuum contract.”

When you put money in a bank you are lending money to the bank on short term, and the bank lends the money out to borrowers on long term. You are left with is a certificate of deposit. That deposit certificate contractually means the bank has to give you back money on demand. As long as the bank is able to give back money on demand it has not broken its contract. It does not matter what it does with the money you lent it.. if it kept it in a vault, buried it in the ground, invested it, or lent it out. As long as it can keep its contract of redeemability on demand it has not broken its contract. when you open a bank deposit account, the contract says that you will get back the money on demand. It says nothing about wether the money will be stored in a vault, or if it will be invested. The same goes for people lending or saving money to eachoter, without the bank as a middle man.

Anyways that is enough for today. I’d rather not spend much more time debating this as i have had this very same conversation probably ten times now. Its the same old flawed Rothbardian positions about 1) credit/deposit being money, 2) the value of money being set simply by the money supply (demand does not matter), 3) the credit supply affecting price. I dont mean to rude, but if these core arguments are flawed then many other Rothbardian positions about the economy will also be flawed. I have discussed why these 3 issues are flawed, but have not heard any direct response on these key issues.

Dont take it personally, Rothbard was just a man with some ideas about how the economy works (or maybe how it should work). Im just pointing out there are some core problems with the ideas.

Cheers

33

Price deflation would be pretty negligent, you are making too much deal about it. Fair money is whatever buyer and seller agree to use. Imposing a central bank strategy on the people is immoral and disastrous. Not all Austrian economics think gold is the best money; e.g. Walter Block has written this piece on the optimum quantity of money.

I also don’t get why you get so agitated about Rothbard and it surely isn’t of good tone to call people of Rothbardeans. If you don’t like his views on monetary policy, you got to at least admire his work documenting accounts of monetary history. He has written so much, it’s very disrespectable to brush him off as an idiot because you don’t agree about some work of his.

Politiceans couldn’t care less if their policies are sustainable or not. If they can keep doing it for their term, they will. If they wanted to reduce the price of gold, for some obscure reason, as fsk suggested, they would have no problems selling a bunch of the gold they have. It’s so much anyway, and when eventually they needed more they would sell military protections or pressure in some other way, some country to pass over their gold reserves to them.

34

“Price deflation would be pretty negligent, you are making too much deal about it.”

The amount of price deflation caused by increased demand for money, can be seen in the growth of todays money supply minus the growth of the price of gold. If the economic growth (aka increased demand for money) had no effect on the price level of gold (and prices in general), one would expect that a 5% increase in the oney supply would (after a year or so) cause a 5% increase in the price of gold (and prices in general). However in practice it would be unlikley that the price of gold had changed much at all, because the growth of the econmy would have caused price deflation to eat up that price inflation. Sure 5% deflation a year might not sound much.. but just think about how destructive 5% of inflation is. In the long run even small amounts of inflation or deflation it has big effects.

“Fair money is whatever buyer and seller agree to use. Imposing a central bank strategy on the people is immoral and disastrous.”

Im not saying we need a govt run central bank. Competing private banks could just aswell issue their own currency. Im saying that the most popular currency would be the one that was pegged to the price of gold. For a currency to be pegged to gold, there needs to be a mechanism for the supply of the currency to increase when the deand does. This does not need to be a human currency manager, it could just aswell be a computer that sold and bought its own currency on the open market, or it could be a proise to the public of redemability for gold on demand (this is just another way of saying the bank will buy its own currency for a fixed amount of gold). The currency of stable value would be more popular than the curreceny with growing value simply because borrowers, employers, producers, importers, bill payers would not agree to trade or sign contracts denominated in a currency with increasing value.

"Not all Austrian economics think gold is the best money; e.g. Walter Block has written this piece on the optimum quantity of money."

Even before reading the article, the title made me smile. It sounds like some optimum unchanging value for the size of the money supply is possible, when its clear (to some of us) that the size of the money supply should not be set by a constant value, but by the variable called demand for money. The demand for money can best be seen by comparing the value of the currency against the thing with the most stable value known to man. Gold. Well, i wont go threw all that again.

The article is a good read and it gets frustratingly close to “getting it right”. That the optium quantity of the supply of money, should be set by the demand for money, as seen in the market set price for gold. He makes some references to the benifits of the the free market increasing the supply of money. And that there are some benifits of paper money as opposed to commodity money. However he fails to connect the dots.. and in the end the writer only implies that maybe a paper money backed by some fixed ratio of gold is best. So close, yet so far.

The value of a paper money backed by 100% gold reserves, woule be no less valuable if half the gold was stolen from the reserves. The value of the paper currency is not set by the amounts of gold reserves, it is set by the demand and supply of the paper currency. In fact there would not have to be any reserves of gold at all, and that could be made public. And the currency managers would not have to buy or sell any gold at all. As long as the supply of the paper money was decreased or increased with changes in the demand for the paper money the value would stay stable. The supply of the paper money could be kept scarce enough compared to the demand, that the paper money would be just as valuable as gold. People would not care what made the currency value so stable, or that the oney was so stable because it was pegged to the price of gold. They would use it anyway, simply because it would prove itself to have such a stable value compared to every other thing of value.

“I also don’t get why you get so agitated about Rothbard and it surely isn’t of good tone to call people of Rothbardeans. If you don’t like his views on monetary policy, you got to at least admire his work documenting accounts of monetary history. He has written so much, it’s very disrespectable to brush him off as an idiot because you don’t agree about some work of his.”

The same could be said for Keynes. He was probably a good guy, wrote lots and probably had lots of ideas. Its just that his idea about monetary policy was so destructive (because inflation of the value of money) that makes people so agitated when it comes to keynesiansim. Similar things could be said about Rothbards. He was a good guy (he was a libertarian after all), he wrote lots, and had some good ideas. Its just that his ideas about monetary policy is so destructive (because deflation of the value of the currency), and the fact that noone seems to understand that they are destructive, that makes me a bit agitated. If we are ever to have a currency with stable value, we dont need to worry so much about the keynesians messing it up, as we have to worry about the people closer to home messing it up. Its really not that hard to make the dollar a stable currency. It could be done overnight, all the FED would have to do is skip its interest rate target, and put in its place a gold price peg. Problem solved.

Cheers

35

You’re basically advocating free-banking then. You’d get your points across much more easily if you dropped your provocative attitude and did away with the swipes at Rothbard (especially the amusing comparison to Keynes.)

-Jon

36

DriftWood, you didn’t respond to a single point of mine.

Stop regurgitating the same shit over and over again and actually start debating.

37

I responded to the core rothbardian assumtions that your posts where based on. I did not want to put in the time of refuting the specific points one by one. I’ll take the time to do that as you keep asking for it.

“US didn’t have a gold standard in the 20s. We had a gold exchange standard, which is different.”

You have to ask yourself what is the purpose or goal of the gold standard, and what is the mechanism or means to realize that goal. The purpose of the gold standard is to use the value of gold, the thing with the most stable value known to man, as money. This stability in value makes is perfect as the reference point against which all other things of value are measured, and makes the value of gold the best unit in which money is denominated. There purpose is to make the value of money and gold the same. There are many mechanisms to do this. One should not confuse the means with the end.

Any mechanism that makes the value of gold and money the same is a gold standard. One old fasioned way to do this is to use gold as commodity money, aka to use gold coins. This is fine although impractical. People started using gold deposit receipts as money. Rothbardians are arguing that there should be one receipts for every gold coin in deposit. However what Rothbardians fail to realize that this one to one relationship does not ensure that the value of gold receipts and the value of gold itself is equal. I know its seems like logical but its not, but check this out. The value of the receipts will be higher than the value of gold simply because there is more demand for gold receipts than for gold. Why would there be more demand for gold receipts? Because gold receipts and gold is not the same thing. Gold receipts has all the positive qualities of gold, because the receipts can be exchanged for gold. But gold recepits also have some positive qualities that gold does not have. They are easier to carry around, every receipt is of identical value to every other receipt (no two gold coins on the other hand are of identical weight), their value does not ware out (gold coind weights change threw ware and tear), they are harder to counterfeitin (part of the gold in gold coins can be replaced by less valuable metals). So all this means that there will be more demand for gold receipts than for gold itself.

If the supply of gold and gold receipts are kept equal, this will manifest itself in the gold receipt having larger value than gold. On the open free market people the price of a good would actually become a bit different depending on if the preson payed for it in gold coins or in gold receipts. However this difference in value between gold and gold receipts would mean that noone would ever pay for anything in gold coins. They would alawsy deposit the gold, in exchange for a gold receipt, and use that to pay for everything (because the value of gold receipts worth be worth slightly more). So this would mean that all the available gold supples in the world would flow into deposits, in echange for receipts. If any new gold was discovered it would immidiately flow into a deposit. The deposit holder would not actually have to mint many gold coins as they would never be used anyways. They could just keep unminted gold in their deposist. Most people would never have seen gold coins, as there wa no use for them. Gold would just be gathering dust in vaults.

There is something funny about.. digging gold out of the ground just to bury it back into some vault. As far as the man on the steet cared they could just left the gold in the ground to begin with, and avoid all the trouble of digging and burying. The man on the street would be right. If half the gold reserves where stolen or lost, noone would know. And if they knew they would not care as long as the value of the gold receipts was atleast as much as the value of gold itself. The value of the gold receipts would not be atlest as much as gold itself as long as the receipts kepts their quality of gold exchangeability. So due to the fact that gold coins where so rarely used and the few people ever requested to exchange a a gold receipt for gold.. the gold depositors could safely decrease the amount of gold it stored. It could decrease its gold holdings to the amount of gold receipts that get redeemed for gold on a regular basis. To cover any spikes in gold redemability it could, it it found itself short of gold, it could alwasy buy some gold when it needed it. As long as the supply of gold receipts compared to the demand for gold receipts, was the same proportion as the supply of gold compared to the demand for gold, the value of gold compared to gold receipts would be equal.

You see? The supply of gold receipts MUST be larger for the value of gold and gold receipts to be the same. This is not just theory, this is the way gold standards worked for the past couple of hundred years. Its how the gold standard worked ever since gold coins where replaced by gold receipts as the preferred money.

Okay that is enough for today. If you want i can debate your other specific points at a later time.

(Edit: Paragraphs fixed..)

Cheers

38

Are you allergic to paragraphs?

-Jon

39

Actually, no you didn’t.

False. The gold standard is when gold is currency. The gold exchange standard is when national currency is arbitrarily given a value in gold, but that value can be changed or abolished at the whim of a nation’s central bank or government.

No, that doesn’t mean that gold receipts would have greater value. It means that people would prefer to use receipts over coins, which would encourage banks to print receipts so they can get more customers.

Saying receipts would be worth more than the commodity they represent is absurd. Receipts represent the commodity. Nobody says, “Oh, the price of corn on the stock market went down, but that’s only on the stock market, in real life it is different” or “oh, the price of gold ETFs went up, but that’s only ETFs, gold isn’t worth more.” A receipt and the commodity are linked: higher demand for receipts means that gold is worth more, because it’s higher demand for gold.

A greater demand for receipts might mean that hard forms of gold won’t be used as currency, so what? The price of receipts and of the commodities they represent are linked legally and economically.

Yes, people would know when their local bank fails. A lesson in economic history should serve you right. Do you know why the Panic of 1819 happened? New England banks demanded Midwestern banks exchange their receipts for gold, but the Midwestern banks printed more receipts than the gold they had. Those banks failed and consequently, there were “runs on the banks” and we were thrown into a very deep depression.

If this is how gold standards have worked historically, please provide specific examples with reliable sources. But saying that receipts and commodities are priced differently is just ridiculous. Receipts represent the value of gold, so the more receipts are used (the higher the demand), the more they are worth, and consequently, the more the gold those receipts represent are worth.

40

“The gold standard is when gold is currency. The gold exchange standard is when national currency is arbitrarily given a value in gold, but that value can be changed or abolished at the whim of a nation’s central bank or government.”

If you look beyond the mechanics, what is the effect on the value of money in the two different gold standards? Its the same, the value of money keeps in sync with the value of gold. If the value of gold goes down, the value of money goes down the same amount, and if the value of gold goes up, the value of money goes up the same amount. The value of gold and money will always be the same. This price of gold will always be same. It will be fixed, it will be stable. It does not matter what this initial fixed number is, as long as it stays fixed.

In the case of gold coins, the demand for gold and money is kept the same automatically.. you cant separate the demand for money from the demand for gold (same goes for supply). So the value always stays the same. With a gold receipt you can, and there is nothing that ensures that the demand is kept equal. There is nothing that says that at any given time there will be exactly the same amount of people doing trade with gold coins as there is people trading with gold receipts. People simply prefer gold receipts over gold, this difference in demand, creates a difference in value.

This is not the whole story. This is where it gets real interesting. As the demand for gold and gold receipts will drift appart, and their values drift appart (because supply is constant). There is another factor that counteracts this, increasing value gap because of the, gap in demand. The supply of gold in the economic system will automatically be reduced until the value of gold and gold receipts are again the same. How does this happen? Well as people use less gold, and more gold receipts for trading.. and the value of gold receipts in this market grows.. people will take any gold they have and deposit it in exchange for gold receips. This will actually increase the supply of gold receipts and reduce the amount of gold in the market. This will continue until their values are again the same.

So the important part of gold receipts is that it can be exchanged for gold on request, not that the fact that they are backed by gold. This is a important distinction. So a bank (or central bank) that promises to exchange one gold receipts for one gold coin, is just another way of saying that it promises to buy gold for one receipt, and it promises to sell gold for one receipt. The promise is to keep a price fix, between gold and gold receipts. This is what keeps the value of gold and gold receips from drifting appart. If gold recipts gets more valuable than gold.. that is if the market price for gold to gold receipts are no longer one to one.. Then people will take advantage of the below market price fix, of the bank, and sell them gold in exchgange for gold receipts. This way the amount of gold in the market is decreased and the amount of gold receipts are increased, which means that gold gets more valuable again and gold receipts get less valuable again.. until they once again are the same. The system works the same the other way around..

So again the only thing that keeps the value of gold receipts and gold the same is the fixed price peg of the banks. This means its not the amount of gold in reserves that sets the value of gold receipts, its the fixed price peg. So this means the amount of gold reserves does not matter, as long as the bank keeps its one to one price peg, then the forces of the free market will ensure that the value of gold and gold receipts stay the same. So the bank could make it known that it owned no gold at all, and that it would just buy gold off the market, to be able to keep its promise to exchange gold receipts for gold. And vice versa. Its quite an amazing thing once you get your head around it.

Anything with an amount of demand, and an amount of supply, has a value. Everything of value can be compared to the value of everything else. As long as people can distinguish between a thing and a thing, their value will be different. Gold and gold receipts are not the same thing, their demand will be different and their value will be different.

So in the end, saying that the demand for gold receipts is demand for gold.. does not hold up if you think about it.

Saying receipts would be worth more than the commodity they represent is absurd. Receipts represent the commodity. Nobody says, “Oh, the price of corn on the stock market went down, but that’s only on the stock market, in real life it is different”

The difference between gold and gold receipts, is a bit similar to the difference of a commodity and its paper future contract. The corn futures contract is a promise to exchange the paper corn for real corn at a specific date and place. The price between corns futures contracts that will exchange for corn at years end, and the price of corn at years can be very large. Speculators only affect the price of paper corn, as they have no demand for real corn or keep any supplies off the market. They alwasy sell the futures conbtract, even at a loss, before they would have to pick up the corn. The closer in time it gets to year end the smaller the difference in the price between corn and its corn futures contract will get. At years end, the one to one fixed exchange rate between corn and the corn contract will ensure that their equal value.

Even if we make the example a bit simpler by taking time out of the equation..say we have a contract that at any time can be exchanged for a given amount of corn. Still the value and price of the contract and the corn its exchangable for could be a bit different. The demand would be different because corn is good for eating, while the contract would be better for storage. Say instead of having a big stockpile in some warehouse, and having to pay storage and risking the corn going bad.. you could just carry around some of these contracts in your wallet. So the value and price of corn would be a bit higher or lower than real corn depending on wether you where hungry or wether you where stockpiling. However forgetting about these small differences in inherent value, the fixed price peg would bring back the values together. The values would be kept relatively the same, becuse of the fixed exchange rate between the two. The value of the corn contract would be worth about the same as real corn (give or take), not because at all times there was some specific corn gathering dust in some specific warehouse with your name on it, but because you would get the promised amount of corn when you requested it. You would not care if that corn had been stored in a warehosse all the time, or wether it had been growning and only harvested yesterday. You see what im getting at? Its not the size of the corn stock pile in some warehouse that sets the value of the corn contracts value, its the promise that the contract will be exchanged on request for a specific amount of corn that sets its value. This is a fundemanetal difference. I hope you see it.

Cheers