Paul Krugman on gold buggism – so right, so right
4 March, 2013 at 19:27 | Posted in Economics | 16 Comments
The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!
Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already eighty years ago in Essays in Persuasion:
Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.
Allowing this debt deflation process – the analysis of which was later developed by Irving Fisher and Hyman Minsky – would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.
So why would anyone want to reinstate a gold standard? The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and – even harder than with “independent” central banks – force countries to pursue restrictive economic policies that at all costs keeps inflation down.
Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):
We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses…
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The fact is that people are starting to get tired QE, fiat money and fractional reserve banking which Keynes created. At least in the gold standard money has a value which is very different from money today which in many cases are worth less than the paper they are printed on.
Comment by marc— 4 March, 2013 #
I definitely agree with Marc. Gold has a real value whereas this paper money is so blown out of proportion it’s ridiculous. The paper money problem has only added to the issues for and against minimum wage laws.
Comment by hoyc52— 4 March, 2013 #
“Gold has a real value”
Why don’t you buy gold then? It’s not complicated. If you want gold and don’t want dollars, use your dollars to buy gold. Are you stupid or something?
Comment by p— 5 March, 2013 #
This guy! How do you know I haven’t bought gold? Why do you assume I own dollars? I wasn’t aware that this was such a sensitive issue ha ha
Comment by marc— 5 March, 2013 #
“QE, fiat money and fractional reserve banking which Keynes created”
WTF? Are your really that ignorant? Keynes “create” QE, fiat money and “fractional reserve banking”?
You guys are COMPLETELY delusional.
Comment by p— 5 March, 2013 #
ha ha this guy is funny!
Comment by marc— 5 March, 2013 #
Ho ho ha ha. Make a coherent argument which isn’t filled with cliched nonsense and facile blather. Make a statement that doesn’t demonstrate your rank ignorance. Go on, try it. I’m sure you can do it if you try really really hard.
Comment by p— 5 March, 2013 #
I do not understand. If I am “ignorant” why cant I make an “ignorant” statement?
Comment by marc— 5 March, 2013 #
The gold standard is absurd. Why go through all of the effort and environmental damage to dig it up, just so people can hide it in vaults?
Comment by Dismayed— 5 March, 2013 #
Keynes “created” fraction reserve banking? No, that existed for centuries before Keynes was even born.
Comment by Lord Keynes— 6 March, 2013 #
It comes down to trust. Fiat money is tied to the people’s trust in the financial system. People are losing faith in the system and searching for a way to ensure their economic future. Gold has lasted longer than fiat money over hundreds of years. And no, I do not own any gold, but I do see the loss of trust over the last decade and the reason people are hedging against the system.
Comment by William— 5 March, 2013 #
While I agree completely with the reasons why a Gold standard is bad economically, I have some sympathy with the reasons that some find it attractive, namely bringing some honesty to the monetary system. The monetary system as a political play thing hasn’t exactly served us that well either. That said I’m against purely on the economics.
Comment by Dave Holden— 5 March, 2013 #
Government recognition of gold as money is NOT libertarian. If one thinks about it, government money (legal tender for government debts only) can ONLY be inexpensive fiat if we are to have genuine liberty wrt what we use to pay private debts.
So a gold standard is not libertarian. Rather, it is government privilege for special interests.
Comment by F. Beard— 5 March, 2013 #
” gold has value” Only as long as you can trade it for something you can actually use to increase your standard of living. Which makes have no more intrinsic value that paper. it;s value is entirely based on what one thinks it will be worth in the future.. useless and based on hope some other sucker will give up his tangibles for it.
Comment by steve m— 6 March, 2013 #
“The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!”
False. The results were so great that it was during this time that the US surpassed the UK as the world’s dominant economy. They don’t call it an industrial revolution for nothing.
“Implementing a new gold standard today would only lead to a generally falling price level. Sounds great? If you think so, read what Keynes wrote already eighty years ago in Essays in Persuasion:
“Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.”
False. Real wealth is not transferred from debtors to creditors in a context of falling prices. The rate of return can always change to reflect the new inflation premium, the same way interest rates can change to reflect the inflation premium in a context of rising prices.
If your belief is that real wealth is transferred from debtor to creditor with falling prices, then it is necessary that you also believe that real wealth is transferred from creditors to debtors in a context of rising prices that we have had since the early 20th century.
Why is it immoral for real wealth to be transferred from debtors to creditors, but it is allegedly not immoral for real wealth to be transferred from creditors to debtors?
“Allowing this debt deflation process – the analysis of which was later developed by Irving Fisher and Hyman Minsky – would land us in a situation where output and wages would fall and unemployment and the real burden of debt would increase. The only winners would probably be banks and financial institutes.”
False. Output and wages do not fall in a context of falling prices, because costs also fall. Falling prices alongside falling costs does not reduce the quantity of goods or labor demanded.
Buying twice the goods or twice the labor for half the price does not reduce goods purchases or labor hours purchases.
“So why would anyone want to reinstate a gold standard?”
1. Minimizes business cycles because it minimizes the extent of booms. That helps workers, employers, and output.
2. Check on government expansion and thus protection of individual liberty.
“The best surmise is probably that it’s a question of ideology and politics. Libertarians and market fundamentalists that advocate a return to gold, want to restrict the possibilities of governments to intervene in the economy and – even harder than with “independent” central banks – force countries to pursue restrictive economic policies that at all costs keeps inflation down.”
So that must mean that you don’t favor a gold standard due to ideology and politics. Progressive and social democratic fundamentalists who advocate for a continuance of government monopoly over money, want to expand, and not restrict, the possibilities of government to intervene in the economy.
“Still not convinced of why a return to gold is a bad idea? Then, at least, remember what Keynes wrote in The Economic Consequences of Mr Churchill (1925):”
“We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses…”
It’s hilarious that in all your paperbug propaganda, you did not once cite or reference any economist who isn’t biased against gold, ignorant of gold standards, or otherwise hateful of peaceful free market activity.
Stat the true believer!
Comment by Geaorge— 6 March, 2013 #
(1) Plenty of countries have industrialised without a gold standard. There is no necessary connection between the two.
Furthermore, the US was one of the most protectionist nations on earth in the 19th century, which completely contradicts libertarian myths.
(2) As for the results of the US gold standard being “great” that is palpable nonsense. The 1870s and 1890s were periods of serious economic crisis:
http://socialdemocracy21stcentury.blogspot.com/2013/02/us-unemployment-graph-18691899.html
http://socialdemocracy21stcentury.blogspot.com/2012/09/rothbard-on-us-economy-in-1870s.html
http://socialdemocracy21stcentury.blogspot.com/2013/02/19th-century-deflation-and-recession-in.html
(3) ” then it is necessary that you also believe that real wealth is transferred from creditors to debtors in a context of rising prices that we have had since the early 20th century.”
Not necessarily real wealth but purchasing power certainly is. And, yes, that is right and contributes to wealth equality, since creditors by and large are far richer than debtors.
(4) “Output and wages do not fall in a context of falling prices, because costs also fall. Falling prices alongside falling costs does not reduce the quantity of goods or labor demanded.”
That is false. Falling prices puts strong pressure on wages. The whole neoclassical and Austrian theory is based on flexible wages falling to an equilibrium level to clear the labour market.
And deflation and recession are certainly related:
http://socialdemocracy21stcentury.blogspot.com/2013/02/19th-century-deflation-and-recession-in.html
(5) “Minimizes business cycles because it minimizes the extent of booms. That helps workers, employers, and output.”
The gold standard did not minimise business cycles.
Balke and Gordon’s data (see below) find that pre-1914 output volatility was worse than the post-1945 period.
Balke, N. S., and R. J. Gordon, 1989. “The Estimation of Prewar Gross National Product: Methodology and New Evidence,” Journal of Political Economy 97.1: 38–92.
Comment by Lord Keynes— 6 March, 2013 #