Hoisted from the comment section
Lots of commenters drone on endlessly, with nothing interesting to say. In contrast, this short comment by “Lorenzo from Oz” has 3 or 4 very insightful observations:
This is remarkably deja vu. The euro is an artificial gold standard, Austrians are still burbling on about the years-ago boom and credit expansion while too many folk who should know better are worrying about inflation despite the utter lack of any evidence that it is, or is likely to be, an issue. Though Bernanke is more competent than Roy Young or Eugene Meyer, the Fed is shackled to a damaging conception of its purpose. It IS the 1930s rerun.
History does not repeat itself, but it does rhyme, to quote old Sam Clemens.
I blame Hayek and Keynes. Their flashy brilliance got in the way of of seeing the contemporary issues clearly and economics has been paying for it ever since.
(It is also a pity that Friedman did not quite believe enough in his expectations analysis of the Phillips Curve to realise that it also operated against relying on monetary quantities. But he did a lot to get economics out from under how the Hayek-Keynes imbroglio framed macro.)
To reward Lorenzo, my next post will discuss Australia.
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1. June 2013 at 08:13
“I blame Hayek and Keynes. Their flashy brilliance got in the way of of seeing the contemporary issues clearly and economics has been paying for it ever since.”
I blame Meltzer and Krugman. Same reason.
1. June 2013 at 09:22
Well, if Australia is continuing their impressive streak of no recession then can Lorenzo or someone explain to me how they managed to avoid the conceptual mistakes the rest of the Western world seems to have trapped itself in?
1. June 2013 at 09:26
Jim, These errors occur most often at the zero bound. Australia’s policy of heavy immigration kept RGDP growth high enough that, when combined with their 2.5% inflation target, nominal rates never fell to zero.
1. June 2013 at 12:39
I don’t blame Hayek and Keynes. The historical context was the rise of totalitarianism as intellectually and morally justified, and the false-third way promoted by the Fabians and others which used social liberty as a fig leaf for Fascist economic policies.
I do agree that Friedman did bring those attitudes into disrepute. I spent some time rewatching his PBS series “free to choose” recently–it’s on YouTube. Beyond arguing his point of view to the public in his usual articulate, friendly way, the videos are fascinating to watch the arguments his intellectual opponents made. We both came a long way and not so far thirty years hence.
1. June 2013 at 16:01
“Lots of commenters drone on endlessly, with nothing interesting to say.”
Someone has been channeling PK. Ease up on the douchebag throttle.
1. June 2013 at 18:20
Speaking of droning on endlessly with nothing interesting to say, here’s Lorenzo.
1. The Euro is an artificial gold standard? Oh really? So if a country is unable to inflate that country’s currency because such inflation is managed by an external institution, implies that country is on an artificial gold standard, then by that logic, all 50 states in the US are on an artificial gold standard, because all 50 states use the currency of an external institution, and none of the states are able to inflate that currency. Similarly, each and every county in the US is on an artificial gold standard. And so are all cities, and neighborhoods. Indeed, to whatever extent an individual uses and pays taxes in a currency that he or she does not manage/issue themselves, that individual is on an artificial gold standard.
We’re all on an artificial gold standard!
Lorenzo’s right. We should abolish all these artificial gold standards, and allow each individual to be sovereign in terms of money. Only tax the individual in a currency of their own choosing. That’s the only way to abolish these artificial gold standards.
After all, Lorenzo is not just a myopic nationalist, right? He’s not just arbitrarily stopping at the arbitrary country level and claiming that at “this” level, the currency should be managed, by of course the state! Anyone?
2. Churlish choice of word: “burbling.” This is Lorenzo revealing his intellectual immaturity and topical ignorance. Just because Lorenzo believes in magical fairies that can fix credit expansion distorted economies…in the continued presence of credit expansion, really just shows his impatience, which is of course founded on a refusal to accept what psychological discomforts him.
3. Zero blame on monetarism in the positive sense. Always “not enough is the problem” fetishism.
———–
Really, if that post qualifies as something other than “droning endlessly”, and something other than “not interesting”, then wow, talk about a very, very, *very* non-credible judgment.
1. June 2013 at 19:30
Dear Lorenzo,
“The euro has some resemblance to the gold standard in the sense that both are international standards, constraining the exchange rates of the countries that use the euro or gold. That is about the limit of the analogy, though. Economists should cease making it because it says more about their lack of knowledge of the two systems they are trying to compare than it helps to illuminate anything.”
http://www.freebanking.org/2013/05/19/the-euro-is-not-much-like-the-gold-standard/
Also, what gold standard are you referring to? A gold standards under central banking? Canada’s gold-based Free Banking system was remarkably successful, and even the pre-Banking Acts US system, hampered by bad regulations, was not as bad as most people think.
“Here’s what I propose as the middle ground for the advocates and critics of the gold standard: central banking and a pre-World War I-style gold standard are incompatible. If you want the gold standard in durable form, you can’t have central banking. If you want central banking, you should not mix it with the gold standard.”
http://www.freebanking.org/2013/05/03/the-middle-ground/
2. June 2013 at 05:42
Tyler, Check out the comment right after yours.
John, You are confusing Canada’s gold standard (which was not effective) with their banking system, which was effective. Check out Canadian RDGP and price data for 1929-33.
3. June 2013 at 08:06
Scott, I really do think it is time that people should stop treating the collapse of the interwar gold-exchange standard as proof that “the gold standard” had failed. That the interwar arrangement depended for its survival on central banks in creditor nations piling-up sterling balances, and that it was therefore exceedingly vulnerable to any collapse of such forbearance (let alone to the decision of any participating central bank to stockpile gold), ought to be patently obvious.
In fact, the faults of the gold exchange standard had much more in common with those of the subsequent Bretton Woods arrangement, which suffered a similar fate (with French authorities once again dealing the death blow), than to those of the pre-WWI gold standard.
Finally, Canada, whatever monetary system it employed, could hardly avoid suffering dire consequences from the collapse of the U.S. economy, upon which it depended for the sale of a very large share of its GNP, while the collapse of U.S. aggregate demand itself, which took place while the Fed was awash with excess gold reserves (notwithstanding a stiff 40% backing requirement for FR notes) cannot readily be attributed to any binding gold-standard constraint.
3. June 2013 at 10:50
George. Good points. But in my view the current euro-mess is more like what would have happened had the interwar gold standard been run on less interventionist (classical) lines. I.e. a sharp slowdown in NGDP growth, but not a massive decline in NGDP.
I would add that there are many similarities in terms of individual countries losing policy flexibility, and overall policy being tighter than the system mandated (as you correctly point out.) The ECB’s mandate would allow for a more expansionary ECB policy, if they were so inclined. (Current policy is producing falling NGDP in the southern European sector, which largely explains the depression in that region.) Falling NGDP was not a problem under Bretton Woods, although of course a “lack of policy flexibility” was, and this led to its ultimate collapse.
I agree about Canada, but surely if they had not allowed their NGDP to fall in half the Canadian depression would have been at least somewhat milder.
3. June 2013 at 13:20
Wow, thanks. I did a post on Friedman and expectations.
http://skepticlawyer.com.au/2013/04/15/check-your-expectations-3-milton-friedman-not-going-far-enough/.
I took the euro as artificial gold standard from Thomas Sargent
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4526
John S; if a proper gold standard and central banks are incompatible, we have never had a proper gold standard–the 1873-1914 standard was managed by the Bank of England as primus inter pares among the central banks. Indeed, joining the gold zone was about have BoE management, in the same way as the euro was about a Deutschmark for everyone and a Bundesbank for everyone.
3. June 2013 at 13:28
Nice quote from Friedman on the gold standard is here:
http://russellandduenes.wordpress.com/2009/08/04/milton-friedman-on-the-gold-standard/
I would add that the historical experience is that gold, silver and bimetallism standards make one very vulnerable to the actions of other countries–FDR’s silver policy drove China off the silver standard, for example.
3. June 2013 at 13:35
I posted on the vulnerability of gold etc standards to the actions of others here:
http://skepticlawyer.com.au/2012/07/17/going-for-gold/
3. June 2013 at 17:18
Lorenzo, Thanks for the links. If we were on gold today, soaring gold demand in Asia would be causing deflation in the US.
3. June 2013 at 20:10
“If we were on gold today, soaring gold demand in Asia would be causing deflation in the US.”
Surely, if we had been on a gold standard all this time, the demand for gold would look considerably different, would it not? You couldn’t possibly predict what demand for gold in Asia would be like in such a counterfactual world.
Gold isn’t the only potential base money in a Free Banking system. Selgin’s proposal of freezing the current fiat base and allowing alternative base monies would be less disruptive than a wholesale transition to gold. The Greenfield-Yeager idea of separating the medium of account and the medium of redemption is also worth consideration (perhaps allowing financial assets like stocks to be used as MOR and interbank settlement).
But gold has a very long history, and it worked well in Canada and Scotland. Where it coincided with poor economic performance, like in 19th cent. Australia, real negative supply shocks, irresponsibly high govt debt (which wasn’t restructured post-Barings, as in Argentina), and unpredictable events like the Barings Crisis and the Federation droughts were to blame, not the gold-based Free Banking system. A gold-based Free Banking system would likely have worked well in the US system had private banknotes not been taxed out of existence by the Nat’l Bank Acts.
The correct answer isn’t gold–it’s what the market chooses. Gold is one of many potential choices for base money in a free market banking system.
http://www.freebanking.org/2012/02/11/more-on-the-gold-standard-with-regret/
3. June 2013 at 20:36
Lorenzo, despite quoting Selgin, you seem to not understand Free Banking. The point isn’t to go on gold exclusively–it’s to end the central bank’s monopoly on base money and allow banks the freedom to choose the media of settlement and redemption.
“if a proper gold standard and central banks are incompatible, we have never had a proper gold standard”
Not true–see the sections on Canada and Scotland. http://menghusblog.files.wordpress.com/2012/02/the-experience-of-free-banking.pdf
“Nice quote from Friedman on the gold standard is here”
I love Friedman, be he also holds many misconceptions about various gold standards.
“If, for example, an honest-to-goodness gold standard, in which 100 percent of the money in a country consisted literally of gold”
100% backing of money by gold! Not only is this both unnecessary and undesirable, but no such system has (to my knowledge) ever existed in history.
“It has always tended to develop in the direction of a mixed system containing fiduciary elements such as bank notes and deposits”
Sure. These are positive developments.
“Once fiduciary elements have been introduced, the temptation for government itself to issue fiduciary money is almost irresistible.”
Non sequitur. It certainly wasn’t the introduction of inside money that led to govt control over the monetary system. As you note in your own post, govt meddling in money far predates fidiciary money and central banks. But just b/c it has always been so doesn’t mean such control should persist forever.
3. June 2013 at 22:29
John S: I am sympathetic to free banking. But Scotland and Canada are pretty limited cases, suggesting that there are other factors at work in making them such unusual cases.
I am less sympathetic to attempts to ring-fence the interwar experience from gold standards generally. Sure, there were inherent difficulties but the use of a gold exchange standard was effectively required if there was to be any gold standard at all, given the shifts in price levels during the Dynasts’ War (aka WWI).
It seems likely that the 1870s extension of the gold standard (when the US, Germany and France all became gold-standard countries, along with various lesser economies) was actually bad for Britain, since it put the British economy under sustained deflationary pressure, depressing domestic investment. UK and US per capita GDP growth marched together up until 1870s, when the US started pulling ahead. But the US had access to cheap land while neither had any particular institutional or technological advantage (hence the previously similar growth rates), so the deflationary pressure was somewhat ameliorated in the US’s case.
There is a mystique about gold I distrust, since the mystique encouraged some disastrous policies. Besides, historically, silver has been a much more important monetary metal.
3. June 2013 at 22:31
Note: I concede US per capita GDP was higher than the UK’s. My point is that were growing at similar rates and then the US’s started growing at a faster rate.
8. June 2013 at 13:46
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