Stupid? Viscount d’Abernon can’t even imagine
A couple years ago Doug Irwin sent me this great Time magazine article from January 1931:
Gold may well be Question of the Year in 1931. What heads of central banks all over the world are going to do about gold is just now their closest secret, the subject of earnest, secret conferences (TIME, Dec. 1 & Dec. 15).
Last week England’s noted elder economist Viscount d’Abernon of Stoke d’Abernon, who was her Ambassador to Germany directly after the War, spoke up, as more active financiers cannot very well do. Said he: “This depression is the stupidest and most gratuitous in history!” All the existing essential circumstances “except monetary wisdom,” he declared, favor a return to prosperity and well being. Gold is the thing about which 1930 was stupid, about which 1931 must be wise. “The explanation of our anomalous situation,” declared Lord d’Abernon, “is that the machinery for handling and distributing the product of labor has proved inadequate. The means of payment provided by currency and credit have fallen so short of the amount required by increased production that a general fall in prices has ensued. “This has not only caused a disturbance in the relations between buyer and seller, but has gravely aggravated the situation between debtor and creditor. The gold standard, which was adopted with a view to obtaining stability of price, has failed in its main function. In the meantime people wrangle about fiscal remedies and similar devices of secondary importance, neglecting the essential question of stability in standard of value.” Most startling, provokingly cryptic was Lord d’Abernon’s conclusion: “The situation could be remedied within a month by joint action of the principal gold-using countries through the taking of necessary steps by the central banks.” This amounted to saying that if things do not look up within 30 days five men will be largely to blame: Governor Montagu Collet Norman of the Bank of England. Governor Eugene Meyer of the Federal Reserve Board (U. S.). Governor Clement Moret of the Bank of France. Governor Bonaldo Stringher of the Bank of Italy. Governor Hisaakira Hijikata of the Bank of Japan.
Comments:
1. It got lots stupider in 1931, and even stupider in 1932.
2. And it would be still stupider to repeat the mistakes of the Great Depression, after having studied them in school.
3. Even stupider would be to refuse to boost demand when you had no gold standard constraint, when you didn’t need to coordinate monetary policy with the world’s major central banks.
4. And how about this beauty:
In the meantime people wrangle about fiscal remedies and similar devices of secondary importance, neglecting the essential question of stability in standard of value.
D’Abernon looked around in early 1931 and saw on one side a bunch of austerians who didn’t see any need for demand stimulus. On the other side he saw proto-Keynesians who imagined a bit of fiscal stimulus could overcome the monetary neutron bomb. And he wondered whether the whole world was going crazy.
I know the feeling.
Tags:
6. June 2012 at 05:24
Here’s what the great man looked like: http://upload.wikimedia.org/wikipedia/commons/0/0e/Sir_Edgar_Vincent%2C_Viscount_d%27Abernon_%281857-1941%29_Financier_%26_Diplomat.jpg
6. June 2012 at 05:42
At any given time of turmoil, there are sane people who know exactly what’s going on. But no one listens to them.
6. June 2012 at 05:43
The only thing left out of his story was wage stickiness and unemployment (and hence the utter folly of propping up wages). Otherwise, spot on.
6. June 2012 at 05:52
What’s more stupid about today is the 1930 Fed didn’t have the Full Employment and Balanced Growth Act of 1977 that mandates balanced growth and full employment, with no particular emphasis on price stability.
That Act didn’t just add the full employment policy goal, it restated the purpose of the Fed in entirety to obligate it to coordinate with the responsibility for economic outcomes congress delegated to the President in the very same Act. If there is a conflict in visions between the President and the Fed Chairman, the President’s plan wins (is supposed to). This is just another reason, in a legal aspect, why having this rather explicit inflation target that precludes any possibility of fiscal stimulus working is highly inappropriate.
6. June 2012 at 06:17
What’s more stupid about today is the 1930 Fed didn’t have the Full Employment and Balanced Growth Act of 1977 that mandates balanced growth and full employment, with no particular emphasis on price stability.
Whats even more stupid is that as recently as 2003 the ECB and Fed gave extremely strong credence to the monetarist perspective. I was recently reminded by Lars Christensen that the ECB actually had a target for m3 growth of 4.5%. On the conference today i think i heard Draghi say M3 growth was less than 3%. ugh. Nope its all good nothing to see here!
6. June 2012 at 06:29
Except there was no gold standard 1931-1932.
There was a monetary system containing relatively large quantities of credit expansion, which ceased having the character of money when debt defaults and bankruptcies that took place post-1929 literally erased a portion of the aggregate money supply.
A real gold standard, a 100% reserve gold standard, contains zero credit expansion, and the aggregate money supply that exists will not be erased upon the failure of any debtor. Half the country’s debtors can default, and the money supply won’t move a cent downward.
Milton Friedman in his later life said that the Fed should be abolished, and that there should be an amendment for 100% reserve, but if the Fed has to exist, then he said it should target a constant growth in aggregate money supply M3, with zero credit expansion. He would have said the Federal Reserve System failed because the Fed made M3 growth grow too high 2006-2008 and they made M3 growth too low, indeed negative, 2009-2011.
This would not have happened with a real gold standard, because once gold comes into existence, it stays in existence.
Also, a real gold standard would not have allowed a fall in NGDP that is caused by a reduction in the aggregate money supply, because in a real gold standard the aggregate money supply does not fall.
As intelligent as Fed economists are, as powerful as the Fed’s private police force is, they could not even perform at least as well as a real gold standard. Nay, they performed far worse.
6. June 2012 at 06:41
I think the way to sell this to the austerians on the right is this:
Cutting gov’t spending is very hard. Paying down gov’t debt is also very hard. But with NGDP targeting, we can inflate both nominal amounts away at once, and avoid recession even as we move to fiscal balance by holding nominal spending below inflation.
Unfortunately I do not think you will ever move the left off of statism, and they will probably complain that inflation hurts the poor, but if unemployment falls that shouldn’t amount to much.
6. June 2012 at 07:04
Every so often Britain produces ‘great minds’. But it´s the americans that say which ones are going to have influence. Pity they didn´t ‘peddle’ Lord d´Abernon or Ralph Hawtrey, instead choosing to ‘idolize’ Keynes
6. June 2012 at 07:05
Scott kind of off topic but I attempted to open a dialouge between you and Stephen Williamson. Evidently it was not well received.
http://newmonetarism.blogspot.com/2012/06/more-on-unconventional-open-market.html
http://diaryofarepublicanhater.blogspot.com/2012/06/republicans-gloating-over-walker.html
In the second link see dwb’s comment in comments section.
6. June 2012 at 07:24
dwb:
I saw Lars’ post about M3, and I find it amazing that there seems to be a collective amnesia about what has worked in the past. I don’t know that much about what governs the ECB, just stuff that I’ve picked up from blogs and news stories, and I don’t know if there are provisions in it that allow for counter-cyclical policy. It seems impractical to have to go through a daunting political process to blunt the blow of a financial crisis.
The congress here in the US, on the other hand, already figured out what the Fed should be doing and where the economic goals are set to keep from having to go through the same thing. When people talk about the full employment mandate, or any of the other ones, the conversation generally lacks the context of the Act I referred to, as if all of the Fed’s responsibilities and obligations exist in a vacuum. They don’t. The Act was a major coordination effort and refocusing of the whole of the Federal Government, not just the Fed, on overall economic outcomes, and it sets the President’s economic agenda as the lead (and the will of congress).
If the President and congress are wrong, they have the right to be wrong and it is their problem because they are held accountable by the people. If the things they do create inflation, it is Bernanke’s responsibility to tell them, but he still has the obligation to comply. If Obama says he wants to stimulate the economy with fiscal stimulus, and congress supports that view by giving him the money and legal authority to do it, the Fed is obligated to support it. There shouldn’t be any question at all about whether the Fed will support the tax increases and spending cuts that are due at the end of the year. It is only because there is a serious problem with ethics within the Fed that there is any threat of going over the ‘fiscal cliff’.
6. June 2012 at 07:32
TallDave,
Let me be an austerian stand-in.
I have strong austerian instincts, and the main intuitive problem is that NGDP targeting sounds too good to be true. An austerian’s first fear when he hears your plan is that you are proposing something that is going to lead to runaway inflation. (Austerians know what it looks like when you inflate away debt.) And the idea that you won’t even need the inflation that you’ve just given the Fed a mandate to create sounds too good to be true squared.
(Yes, I believe that the models say it will work, but to a non-economist, “the models show I am right” is not a convincing argument, because all economists say it at some point and I am not qualified to flyspeck models).
Here’s how I would argue to an austerian. (It’s what convinced me).
1) Friedman and Schwartz say that the great mistake of the great depression was tight money. You think Friedman’s right, don’t you? (Austerians pretty much have to – the alternative is that FDR or war spending was necessary to end the Depression). In that case, look – we’re making the same mistake now!
2) The alternative is fiscal stimulus! At least try NGDP targeting, or sooner or later you are getting stimulus 2 out of desperation.
3) What the h*ll? Assuming you have controls in place to make sure that inflation doesn’t go beyond 5% or so,* what’s the worst that can happen?** If you are not prepared to p*ss on a spark plug at this point, you are not paying attention.
4) Look at this list of smart conservative believers! .
* Yes, 5% won’t meet Scott’s target when real growth is negative, but you will never sell more inflation than that to a conservative who hasn’t drunk the monatarist Kool-Aid to agree to more inflation than 5%.
** The fear, as I recall from EconTalk discussions of QE2, is that once you inflate the base money supply too far, if velocity takes off, you may not be able to reduce the money supply fast enough. I have no idea if this fear is credible.
6. June 2012 at 07:44
It is only because there is a serious problem with ethics within the Fed that there is any threat of going over the ‘fiscal cliff’.
amen. Its not Fisher’s job to “keep the pressure on Congress” as he had said many times. It’s Fishers job to print money, in the appropriate amounts, to neither allow significant inflation or high unemployment. period. social and fiscal policy is the responsibility of elected officials. thats why we have a voting booth.
The Bernanke testimony tomorrow will be interesting: I view the questions to Bernanke as code for what kind of policies the various members will support. If we get a lot of focus in the questions on price stability, not on unemployment, I would have to say the Morgan Warstler hypothesis on Fed behavior is false. I would have to say the focus on price stability is merely because that zeitgeist has taken over certain members.
6. June 2012 at 07:49
@Mike Sax
i did not mean to suggest it was not well received, i actually have no idea (but i can never resist hyperbole and that gets me in trouble). SW’s blog is one of those that is snark central so you can never predict what kind of response you will get, if any.
6. June 2012 at 07:51
I love great depression posts as much as the next commenter here but maybe were due for a ‘blow off some steam post’ on taxes or the war on drugs.
6. June 2012 at 08:04
The stupid started in 1925 .. and 1914.
And the stupidity was on the part of the Bank of England.
What the Bank of England did has nothing to do with a “Gold Standard”.
There policies involved changing standards (i.e. no standard at all), capital controls, the replacement of circulating gold currency with changing fiat cash, etc. You had dramatic inflation and dramatic deflation, as a chosen British policy. The “gold standard” didn’t chose these arbitrary policies, nor did it dictate them.
Can anyone be honest about this?
6. June 2012 at 08:04
The stupid started in 1925 .. and 1914.
And the stupidity was on the part of the Bank of England.
What the Bank of England did has nothing to do with a “Gold Standard”.
There policies involved changing standards (i.e. no standard at all), capital controls, the replacement of circulating gold currency with changing fiat cash, etc. You had dramatic inflation and dramatic deflation, as a chosen British policy. The “gold standard” didn’t chose these arbitrary policies, nor did it dictate them.
Can anyone be honest about this?
6. June 2012 at 08:11
The means of payment didn’t fall short “naturally”, it was made short by explicit British and Bank of England policy.
“The means of payment provided by currency and credit have fallen so short of the amount required by increased production.” — 1931, Viscount d’Abernon
John Hobson and a million other cranks — mostly businessmen — advocated this view for a century.
Anyone who who has a product priced so that no one wants to buy it makes this argument.
It was a dominant view in America across the 1920s, popularized by Foster & Catchings, and widely praised by figures like Herbert Hoover.
And hundreds of top economists _soaked_ in the theory, trying to win massive prize money writing on the topic.
This stuff was not unknown when Keynes wrote his 1936 book.
6. June 2012 at 08:12
Looking and waiting for your explanation of what happened in Estonia.
6. June 2012 at 08:29
Greg,
Scott’s right, IF you are going to be in the Euro making REAL and intelligent Austerity (spending) decisions is the correct path.
This is one of MANY things that DeKrugman intentionally confuses.
Not all Austerity is created equal. Spending Cuts > Tax Increases
And when you do Spending Cuts and achieve productivity gains (no loss of services) are NEVER austerity.
6. June 2012 at 08:39
J Mann — Good points. I think this will become an easier sell on both aisles as time goes on and there is still no robust growth to be seen.
6. June 2012 at 08:45
Greg Ransom:
The stupid started in 1925 .. and 1914.
And the stupidity was on the part of the Bank of England.
What the Bank of England did has nothing to do with a “Gold Standard”.
There policies involved changing standards (i.e. no standard at all), capital controls, the replacement of circulating gold currency with changing fiat cash, etc. You had dramatic inflation and dramatic deflation, as a chosen British policy. The “gold standard” didn’t chose these arbitrary policies, nor did it dictate them.
Can anyone be honest about this?
Other than “There policies”, what you said is exactly right.
You see, fiat standards are based on deceit and violence. They MUST straw man the gold standard as responsible for the calamities that can happen by moving away from a gold standard. Because they didn’t have an unlimited ability to print money, that means it was a gold standard. They conceive of all problems deriving from being constrained in printing more, totally missing the fact that the problems arose by the relatively small movement away from a gold standard. The problem is not that the money printers were constrained, it is that they weren’t constrained enough.
It is like a person being constrained to hurting “only” 100 people a week, and then interprets the physical and psychological problems that arise from this behavior as deriving from an inability to hurt more people more often.
Monetarists are like knuckle dragging cavemen, who believe the solution to every problem requires an ax, simply because the ax is monopolized by a priest caveman.
When the world doesn’t behave after people, then hurt more people.
6. June 2012 at 08:53
To TallDave and JMann:
I think the first thing out of my mouth, and then repeated at the end of every sentence for effect, would be “Hayek was for it.” Friedman has some cache, but there’s no right wing credential like being an actual Austrian.
If the austerians were more entrenched and not taken by the name drop, I’d make the following argument. NGDPLT will replace the argument over stimulus/austerity. I know you like austerity, but not everyone does. You are not going to win every argument. If you insist on keeping on having them you’re going to end up with more cases like the debt deal disaster. If you really want to stop this mindless jerking around of the economy by the government, then let monetary policy take over the response to the depression and have the argument of slimming the state on the proper place, ideological grounds.
6. June 2012 at 09:23
dwb I did get some snark from an anonymous commentator-but nothing of substance. But I’ve had an anonymous comentator over at Diary of a Repupblican Hater too and he’s written me enough I’m now wondering if they’re the same guy…
You wouldn’t think so but who knows… LOL
6. June 2012 at 09:28
I think Major Freedom is in love-with Greg Ransom
They can continue to argue about the gold standard 40 years later.
Next they argue that the horse and buggy was far superior to today.
6. June 2012 at 09:38
Meanwhile in Frankfurt: http://www.ecb.int/press/pressconf/2012/html/is120606.en.html
The reading the speech left me speechless. Draghi basically announces everything that is bad with Eurozone: inflation being driven by commodity prices and indirect taxes and being at risk of going down sharply within months, negative real GDP growth, considerable slowdown of growth of monetary aggregates – just name it. And yet he and majority of the council decided to do nothing without even blinking. Just like that. Truly historical moment.
6. June 2012 at 10:20
this must be a misprint, or the editors are on vacation. from the WSJ:
“Across the pond, the European Central Bank is reluctant to help pull the euro zone out of its death spiral. It’s all about price stability for the ECB even as the bank acknowledges economic growth faces “downside risks.”
…
Yes, long-term reforms are desperately needed, but short-run austerity isn’t working in Greece (or in the nonmember U.K., for that matter).”
can you print this in the WSJ?? Someone’s been naughty! Not even ONE mention of the confidence fairy.
http://blogs.wsj.com/economics/2012/06/06/2012-feeling-like-2008-except-then-policy-makers-were-ready-to-act/
6. June 2012 at 10:26
dwb:
It must be a misprint, because who could ever believe that the UK was having “short-run austerity,” given its budget deficit? At least fiscal austerity, which is how I’ve always heard that phrased used.
If they mean that the BoE needs to increase the money supply, that’s a different matter.
6. June 2012 at 10:34
Scott, you have such faith that people are merely stupid. That if you could explain to them, they would act correctly.
Consider that distributional incentives are dominating the common good here – that it’s not just stupidity.
“It is difficult to get a man to understand something when his salary depends on his not understanding it.” – Upton Sinclair
6. June 2012 at 10:37
Major Freedom,
It’s a frustrating world we live in, right? If people could even understand that under a 100% reserve system, there would be no deflation (properly defined) and there would be no business cycle, they’d still bring up other B.S. arguments about how there isn’t enough gold to support the world economy or that a discretionary fiat standard has a better track record than the gold standard (lol on that one). Besides when you start talking about credit expansion being bad, people think you’re speaking in a foreign language.
6. June 2012 at 10:38
Good on Prof Irwin for sending that to you! I never took a class with him (I learned my macro from Jim Feyrer, he of the NBER working paper which concludes fiscal stimulus worked based on summing up regional output changes), but engaged with Irwin in various other contexts during my time at Dartmouth. He’s a fantastic teacher. The natural question seems to be…how did you get around to doing a post on this “a couple years” after he sent it to you?
6. June 2012 at 12:13
Mike Sax:
I think Major Freedom is in love-with Greg Ransom
You’re such a petulant drama queen. What are you, 12?
They can continue to argue about the gold standard 40 years later.
Yeah, like how Russians in October 1957 argued about non-communism 40 years later. Silly citizens. Communism had been a 40 year the status quo by then. They should have shut up and taken it as an improvement.
Next they argue that the horse and buggy was far superior to today.
Temporally more recent doesn’t necessarily mean it is better than temporally less recent, or vice versa. Good ideas ebb and flow, as do bad ideas. Speaking of bad ideas:
If you want to talk about ancient techniques, look no further than your own worldview. Monopolist money devaluation, which is what you believe “works”, dates back to at least the ancient Roman emperor Diocletian, over 1700 years ago. He too devalued the currency after he imposed his Edict on Coinage.
Oh look, there’s your advocacy. In ancient Rome.
Here I am as an advocate for monetary competition, not a mandatory gold standard, and there you are saying “Derp, gold is ancient”.
Next thing you’ll argue is that we should bring back Roman style slavery as well.
6. June 2012 at 12:13
Scott, technical MM question for you — I’ve been reading the FAQ, and I’m wondering what else the Fed could do after penalizing reserves and buying all the ~50% (iirc) or so of U.S. plus agency debt that it doesn’t already own (assuming further intervention was necessary, and that we don’t want more gov’t spending). Sorry if you’ve answered this before, a quick search didn’t turn up much. Buy private debt? Buy commodities (shades of FDR!)? Tax cuts to force the creation of more debt?
6. June 2012 at 12:15
@TallDave
I think the way to sell this to the Austrians on the right is to tell them that steady NGDP growth is what competing free Banks produced in Scotland and would be in their interest to produce now. If your currency’s value is rising you produce more of it to maximize profits, if it is falling in value you produce less of it to keep your reputation good. If the fed where a private for profit bank with meaningful competition that is what it would do.
6. June 2012 at 12:19
Floccina — Thanks, that’s interesting, I’ll have to learn more about that.
6. June 2012 at 12:20
John:
It’s a frustrating world we live in, right?
It depends on what frustrates you.
If people could even understand that under a 100% reserve system, there would be no deflation (properly defined) and there would be no business cycle, they’d still bring up other B.S. arguments about how there isn’t enough gold to support the world economy or that a discretionary fiat standard has a better track record than the gold standard (lol on that one). Besides when you start talking about credit expansion being bad, people think you’re speaking in a foreign language.
This is why the state should be as far away from economics as possible. Spontaneous knowledge and production in a division of labor is not only the best method at knowledge discovery, but the safest as well.
With money control under a monopolist, we get moron economic advisors telling statesmen that the supply of money MUST rise at a certain rate or else production will be choked off, as if prices can’t adjust downward the same way they adjust upward with inflation of money, by investors setting current prices for means of production in accordance with expected future prices. And who is to spend this newly created money? The state and their banking friends in the market of course, thus devaluing poor people’s money.
But we’re supposed to believe inflation benefits the poor, because the poor are the secret first receivers of the new money. Elves drop checks down their chimneys at night.
6. June 2012 at 12:22
TallDave,
If the Fed prints enough money to wipe out the US government’s debt and we’re not out of the crisis, then there’s probably not much of a demand crisis to deal with in the first place. You would probably have gotten hyperinflation long before the debt was wiped out.
6. June 2012 at 12:41
I’m confused by recent developments. US stocks have risen dramatically all of a sudden. Apparently they are suddenly more optimistic about Fed policy: http://uneasymoney.com/2012/06/06/do-i-see-a-patch-of-blue/
Apparently this was powerful enough to cause an upsurge in Europe too, even as the ECB left its policy rate unchanged
http://online.wsj.com/article/SB10001424052702303753904577449630854397816.html?mod=rss_world_markets
6. June 2012 at 12:47
Meanwhile Bob Murphy has a post on the foundations of monetary economics at EconLib. I’d be really interested to know what you think, Scott.
http://www.econlib.org/library/Columns/y2012/Murphymoney.html
6. June 2012 at 13:03
TallDave,
I’m with johnleemk on this one. The debt is so large compared to the Fed’s balance sheet that it’s not likely to be an issue for the foreseeable future. Last I checked the balance sheet is about $3 Trillion vs. over $10 Trillion in public debt. And the debt is growing, to the tune of over a trillion per year. Even if the Fed more than tripled its balance sheet, it would still have over a trillion in new bonds coming out each year to buy. So it could quadruple it within a year or two. If that’s not enough, it could buy up some of the $3 Trillion in state and local bonds. So you could quintuple it. And there are government backed loans it could buy too.
So your question is an interesting and important hypothetical, but let’s remember it is a long way off before we have to worry about it.
6. June 2012 at 13:10
Saturos,
Maybe the markets agree with Scott’s proclamation of victory, and are predicting that Bernanke will tell Congress he is adopting an NGDP futures targeting regime when he testifies.
In all seriousness, I’m not one to second-guess the market, but I’d guess they saw the jobs report and thought, “There’s no way the Fed can eff this up, we’ve got more QE coming. Whew…” But that’s just my wild-ass guess.
6. June 2012 at 13:51
Greg –
“The “gold standard” didn’t chose these arbitrary policies, nor did it dictate them.
Can anyone be honest about this?”
Can anyone be honest that the “gold standard” is just another government program? The free market didn’t decide the price of gold, the government did. The circular arguments are so frustrating. First we’re told that we need the gold standard because we can’t trust the government. And then we’re told that the government didn’t run the gold standard correctly. But if the gold standard requires the government that we can’t trust to act in a trustworthy manner than what did we gain by going to the gold standard?
Then the argument usually switches drastically to “We don’t want to force the gold standard on everyone, just allow the free market to choose!” Then when you point out that you can trade gold for whatever you want now, the argument switches again to “But the government doesn’t accept gold for taxes so most people don’t choose to use it as money.” So we’re back to the gold standard needing government support to work – the same government we supposedly can’t trust.
If the gold advocates just admitted they just think gold is wonderful and so great that the government needs to socialize it, then I would respect their honesty. Instead they play this game where they pretend to be free marketers to justify government support for their favorite special interest.
6. June 2012 at 13:56
TallDave,
As you and I have both said, if the worst case is that the Fed retires the entire debt by printing money without causing inflation, then let’s do it!
There are various possibilities after that, but my first thought would be a payroll tax holiday, with the fed issuing money to make up for the shortfall. The spending is immediate and temporary, and you don’t have the government deciding where the money goes.
Of course, if the Fed issues that much money without causing inflation, my first thought would be that something was so wrong with our assumptions that we should stop a minute and figure it out before taking further action, but if you needed a next step, I’d say tax holiday.
6. June 2012 at 13:59
TallDave,
The idea as I understand / conceptualize it has the Fed setting up a NGDP Futures market – I think they should do it under the guise of research.
Retail investors deposit their cash and make their bets on NGDP coming in 4.5% higher YOY each month… you lose or win a % of your money based on hypothetically the amount of $ the Fed needs to take out or push into the economy.
The idea being here, and I have no clue about this, but I assume under executive authority there is always some leeway to call it research.
THEN, the Fed should lobby to have the new legal mechanism be FIRST is uses the Futures Market to insert money and remove it from the supply every month, before it even buys or sells anything else.
—
To me this is a first key selling point to many Austrians, now the retail investor gets the newly printed money first.
6. June 2012 at 14:12
Everyone, I agree with most comments, so I’ll just address a few specific ones to save time:
Tall Dave, You said;
“Scott, technical MM question for you “” I’ve been reading the FAQ, and I’m wondering what else the Fed could do after penalizing reserves and buying all the ~50% (iirc) or so of U.S. plus agency debt that it doesn’t already own (assuming further intervention was necessary, and that we don’t want more gov’t spending). Sorry if you’ve answered this before, a quick search didn’t turn up much. Buy private debt? Buy commodities (shades of FDR!)? Tax cuts to force the creation of more debt?”
“What else” is the wrong question; those would be far down on my list. The Fed should set an explicit NGDP target–everything else in of minor importance.
Greg, Estonia’s GDP fell 18%. Does that answer your question?
Mike Sax, Don’t give me links, give me short quotes to respond to.
Everyone, Ask the question again if I missed something important.
6. June 2012 at 14:16
Jared,
“I think the first thing out of my mouth, and then repeated at the end of every sentence for effect, would be “Hayek was for it.” Friedman has some cache, but there’s no right wing credential like being an actual Austrian.”
To say that Hayek was “for it” is misleading at best. See http://www.themoneyillusion.com/?p=14468&cpage=1#comment-160739 and preceding discussion.
6. June 2012 at 14:50
Ah, expectations. Thanks for the response!
6. June 2012 at 15:12
John/NoI,
Yes, that looks about right, now that I find a more explicit source. Fed has $2.647T, that leaves ~75% of debt that could be targeted.
http://en.wikipedia.org/wiki/Fed#Balance_sheet
Hard to imagine we could get through all that, but otoh before QE began we were apparently at only ~750B. I do wonder if deflationary pressures will continue to surprise us, though Scott is probably right that setting the target will have a large effect.
I had forgotten the Fed actually already bought some MBS.
Interestingly, it appears the UK has actually set an upper limit of 70% of any debt issue.
6. June 2012 at 15:12
Sorry meant to add this link:
http://en.wikipedia.org/wiki/Quantitative_easing
6. June 2012 at 15:18
“Greg, Estonia’s GDP fell 18%. Does that answer your question?”
No.
But you knew that.
6. June 2012 at 15:27
NoI — Ron Paul actually seems to favor “free banking” though most consider it too pro-cyclical.
http://marginalrevolution.com/marginalrevolution/2012/05/the-paul-vs-paul-debate.html
http://en.wikipedia.org/wiki/Free_banking
6. June 2012 at 15:46
This is why the beatings will continue:
http://www.telegraph.co.uk/finance/financialcrisis/9314666/French-president-Francois-Hollande-cuts-retirement-age.html
6. June 2012 at 16:06
“Yeah, like how Russians in October 1957 argued about non-communism 40 years later. Silly citizens. Communism had been a 40 year the status quo by then. They should have shut up and taken it as an improvement”
Major you try to draw such overwrought analogies and you call me a drama queeen? By the way I got nothing agaainst 12 year olds-some of the greatest people I know are 12 years old. So you’re attempt to be consdescending fell flat as ususal.
Better to have the mentalitty of a 12 year old than your mentality of a man who is 12*12. Come to think of it that’s probably why you love the gold standard so much it reminds you of when you were 12.
I kind of see arguing the gold standard as productive as arguing the horse and buggy. If we have a debate between you who have thought up brilliant reasons to use the horse and buggy and your opponent argues that we;re better off with cars, who really cares about the debate?
suppose you’re a clever debater and your oppnonent is a dud-still nobody will care. At the end of the day we’re still going hom in our cars.
And so it is with gold. Some of you guys have to believe in it maybe it somehow gives you hope that 19th century isn’t over. But really why even bother to debate it?
You don’t argue the gold standard as it’s historically existed anyway but some idealized gold standard that could exist in some perfectly libertarian world that has also never existed.
You try to deny that the gold standard was given up beased on it’s failure in practice. Fine carry on your mental masturabation still we all go home in cars.
6. June 2012 at 16:19
Scott I have quotes. I asked him what he new about NGDP targeting. I quoted a little what you said about him the other day but here’s what you said:
1. If Williamson believes in liquidity traps, why in the world does he call himself a “monetarist?” Not believing in liquidity traps is pretty much the definition of monetarism.
2. If he thinks QE doesn’t work, how does he explain the huge impact of rumors of QE on the asset markets?
http://newmonetarism.blogspot.com/2012/06/more-on-unconventional-open-market.html#comment-form
He didn’t answer directly but referred me to a post he had written about it in the past. The punch line of this piece:
“In sum, the NGDP rule fits well within the set of Taylor rules that people have considered, which deviate in various ways from the basic rule that Taylor wrote down in 1993. So what’s new? Could it be that there is something different about what happens at the zero lower bound, which I have not accounted for thus far? Suppose we are at the zero lower bound, which is essentially the case currently, and the Fed announces, say, a target path for NGDP of 5% per year indefinitely. Could the Fed actually achieve such a target, even if it wanted to? No. Under current circumstances, there are no actions the Fed can take that could necessarily achieve such an outcome. Indeed, it is possible that the Fed could promise to keep the policy rate at 0.25% for five years in the future, and NGDP growth could fall below the target.”
“There is no magic in a NGDP target. I know people look at the state of the economy, and think that the Fed should keep trying things. Maybe something will work? Well, I’m afraid not. Even the FOMC dissenters, and their supporters are not quite ready to say that there is nothing the Fed can do under the current circumstances that could increase employment. But they should.”
http://newmonetarism.blogspot.fr/2011/10/nominal-gdp-targeting.html
6. June 2012 at 16:31
Dumb question alert…
Professor Sumner or anyone else who has the time to help a poor novice Keynesian get his head around Market Monetarism, (MM)… ( honest I am trying )…So Market Monetarism does not directly create demand, as Keynesianism does, it creates conditions to create demand…right ?
So specifically how does MM help the 1%.. (I hope that language does not offend)… who are sitting on 2 trillion in idle funds because there is no demand ?
6. June 2012 at 17:21
Bill,
MM’ers advocate for additional demand stimulus just like keynesians. The difference is that MM prefers additional monetary stimulus via a nominal GDP target as opposed to the keynesian preference of stimulus through fiscal policy which is largely inept because most fiscal stimulus would be offset by a central bank in an inflation targeting regime.
Also, I think one of the problems with your question is at the end where you use the words ‘idle’ and ‘funds’ in the same sentence. If funds are being saved/invested it’s not idle, is it? Sure, real resources like factories, machinery, workers, etc are idle right now but that’s a lot different from what you seem to be alluding to with financial capital.
6. June 2012 at 17:37
However according to some Williamson has now mellowed out so I don’t know. But that’s the link he provided.
He is connected with the Minneapolis Fed
6. June 2012 at 18:19
TylerG,
A lot of the opposition (or should I say skepticism lest I ruffle more feathers from the likes of Kevin Drum?) from fiscal stimulus proponents to monetary policy stems from some sort of misplaced belief that no matter how much money the Fed prints, banks will sit on them and not lend them, leaving them on reserve in the Fed’s vaults.
I point out to them that all the Fed needs to do is charge interest on reserves, rather than pay interest on reserves, and banks will figure out a way to get that money off their hands and into the economy — and that in any case, banks have no reason to touch those reserves when they have no reason to believe that the Fed won’t destroy money the moment the economy shows signs of inching above that lofty, aggressive inflation target of 2%.
Yet people believe that because money has to be distributed through banks, when interest rates are at zero, banks will stop lending and therefore the Fed’s money printing will be of no avail. It boggles the mind. Who ever said no to free money? People will refinance their mortgages, companies will bring forward their plans for maintaining/refurbishing their capital stock, the moment the bank says “Here, have some money. I don’t want anything except you to give me back exactly the same amount of money in 5/10/20/30 years, because the Fed is charging me to hold this money in reserve.”
How anyone can believe that the Fed could monetise the entirety of the US government’s debt and the price level would still not budge is just beyond me.
6. June 2012 at 18:39
Actually, Kevin Drum, Daniel Kuehn, and whoever else criticised me for bucketing the policy and political world into two camps (vulgar Austrians and vulgar Keynesians) can shove it, because here it is from the horse’s mouth, former Fed official Joe Gagnon: http://www.nextnewdeal.net/rortybomb/what-constrains-federal-reserve-interview-joseph-gagnon
“FOMC members all read the papers. They see the virulent opposition to their policies on the right and the silence on the left. (Paul Krugman is a big exception, but he is not a politician.)
…
“I think it would help if politicians on the left criticized the Fed more strongly for failing to achieve its employment mandate.”
6. June 2012 at 18:40
Check out the comments at Gawker:
http://gawker.com/5916267
This is LIBERALS talking back to the writer.
Here comes November.
6. June 2012 at 20:02
Couldn’t agree with your characterization anymore, johnleemk.
6. June 2012 at 20:10
@johnleemk
I believe this well describes PK´s unwavering contra MP position. And it was written as a response to a post by David Beckworth, a bona fide MM:
“The bottom line is that when you’re in a liquidity trap, focusing on nominal magnitudes doesn’t clarify matters; it obscures them.”
http://krugman.blogs.nytimes.com/2009/11/06/nominally-misguided-wonkish/
6. June 2012 at 20:49
Australia also cut government spending, and also has a growing economy.
6. June 2012 at 20:56
Australia is at full employment Greg, or at least very close. Any resources freed up when government spending is cut are rapidly moved to the mining sector. Full employment is the time to cut government spending (as long as the central bank is willing to accomodate).
6. June 2012 at 22:40
“….neglecting the essential question….”
The perfect title for the next Sumner e-book?
6. June 2012 at 23:21
Scott, it is incredible how our policy makers – particularly in Europe – continue to repeat the mistakes of 1931-33. Apparently none of them studied any economic and monetary history…
I by the way found Bank of International Settlements’ third annual report from 1933. In it said that “the Gold Standard remains the best available monetary mechanism”. Incredible – Hitler had just become chancellor in Germany. See here: http://marketmonetarist.com/2012/05/31/the-gold-standard-remains-the-best-available-monetary-mechanism/
PS listening to Draghi yesterday did not exactly make me think that he knew anything about monetary history…
7. June 2012 at 02:10
Marcus it just seems there’s this unwavering desire to beat up on Krugman.
In fact you can’t say he’s been unwavering. The fact is he did come out for it
http://krugman.blogs.nytimes.com/2011/10/30/a-volcker-moment-indeed-slightly-wonkish/
It seems that MMers always want to see him as the bad guy. Once he did come out for it, then you hear “Sure he says go for it but for the wrong reasons”
7. June 2012 at 05:27
Test
7. June 2012 at 05:29
Bill Ellis: I have attempted a lay friendly Easy Guide to Monetary Policy (click on my name and it is the latest post). Hopefully, that would be helpful. It also has lots of links, which may also be helpful.
7. June 2012 at 05:32
I find the gold standard arguments tedious.
(1) We are not going to get a gold standard.
(2) It would be a bad idea, and the more sections of the developing world get integrated into the global economy, the worse idea it would be.
(3) If we did get a gold standard, it would be like the interwar one–run by central banks. So the interwar experience is highly relevant.
(4) Even if we take the C19th experience, during the long deflationary period exactly the same countries as are having problems with the euro had problems with the gold standard.
So, let’s concentrate on getting some accountability and better performance out of the central banks we actually have.
7. June 2012 at 05:55
Actually, as an open request. If folk could have a look at my posted Easy Guide to Monetary Policy and make comments or suggestions, that would be good.
http://skepticlawyer.com.au/2012/06/06/easy-guide-to-monetary-policy/
Lars Christensen has already Facebooked that he like it.
7. June 2012 at 09:58
Propagation of Ideology:
“Can anyone be honest that the “gold standard” is just another government program? The free market didn’t decide the price of gold, the government did.”
There is no “price” of gold in a gold standard (other than the goods gold can buy of course). You’re still thinking in terms of fiat money.
In a gold standard, GOLD is money. It is as “significant” to talk about the price of gold in a gold standard, as it is to talk about the price of a $1 bill in a fiat dollar standard.
In a gold standard, gold would be money, which means the amount of gold, i.e. the weight, becomes the unit of exchange ratios. How many ounces is that computer? One? OK, here’s a claim to one ounce of gold.
The “price” the government sets that you’re talking about is actually the government setting the price of the dollar in relation to gold. For example, setting a dollar price of gold of $35 an ounce, is the government actually setting the amount of DOLLARS they are willing to give to people who give them one ounce of gold. That isn’t the “price of gold”, that’s the gold price of the dollar. The government is setting the price on the side of the dollar, not gold. Gold they cannot control. Gold is mined. They can control paper dollars.
7. June 2012 at 10:12
Mike Sax:
“Yeah, like how Russians in October 1957 argued about non-communism 40 years later. Silly citizens. Communism had been a 40 year the status quo by then. They should have shut up and taken it as an improvement”
Major you try to draw such overwrought analogies and you call me a drama queeen?
Yes. They are intellectual arguments. I am taking your arguments, and making analogies for them to show how ridiculous your arguments really are, to show you that the logic you are using, is something you won’t accept when it is used identically in another example, which of course means your argument is logically flawed.
Talking about who “loves” who here, THAT’S drama queen fluff. Why are you such a drama queen? You bored?
By the way I got nothing agaainst 12 year olds-some of the greatest people I know are 12 years old. So you’re attempt to be consdescending fell flat as ususal.
I have nothing against 12 year olds either. I wasn’t presuming you did. I said 12 years old because you appear to have the emotional and intellectual maturity of a 12 year old. Take that for what you want. Compliment, pejorative, I don’t really care.
Better to have the mentalitty of a 12 year old than your mentality of a man who is 12*12.
You mean wise? If you believe it’s better to have the mentality of a 12 year old than the mentality of a 144 year old, then by all means, value less knowledge over more! You’d only not surprise me in the slightest.
Come to think of it that’s probably why you love the gold standard so much it reminds you of when you were 12.
You probably love systematic money devaluation so much because it reminds you of ancient times 1500 years ago with emperor Diocletian.
And I don’t love the gold standard. I love monetary competition subject to profit and loss, built on private property rights. You know, exactly how most cultured people don’t initiate threats against their economic competitors, but applied to money production as well.
I kind of see arguing the gold standard as productive as arguing the horse and buggy.
I kind of see arguing money devaluation as productive as arguing horse and chariots.
If we have a debate between you who have thought up brilliant reasons to use the horse and buggy and your opponent argues that we;re better off with cars, who really cares about the debate?
If we have a debate between you who have thought up brilliant reasons to use horse and chariots and your opponent argues that we’re better off with economic competition in transportation, who really cares about your silly misguided analogies?
suppose you’re a clever debater and your oppnonent is a dud-still nobody will care. At the end of the day we’re still going hom in our cars.
Instead of flying cars that could have been produced in economic competition, but weren’t because the state protects the road car industry from competition.
And so it is with gold. Some of you guys have to believe in it maybe it somehow gives you hope that 19th century isn’t over. But really why even bother to debate it?
And so it is with money devaluation. Some of you guys have to believe in it maybe it somehow gives you hope that the 3rd century AD isn’t over. But really why even bother to debate it?
You don’t argue the gold standard as it’s historically existed anyway but some idealized gold standard that could exist in some perfectly libertarian world that has also never existed.
You don’t argue fiat money as it’s historically existed anyway but some idealized fiat standard that could exist in some perfectly welfare/warfare world that has also never existed.
You try to deny that the gold standard was given up beased on it’s failure in practice. Fine carry on your mental masturabation still we all go home in cars.
You try to deny that money devaluation was given up based on its failure in practice. Fine carry on your mental masturbation still we all go home in vehicles produced in competition, not chariots.
7. June 2012 at 10:13
Lorenzo,
“Since””for a given level of prices””the level of transactions determines the level of spending, and thus income (everyone’s money income is someone else’s spending), the latter matters; serious transaction “crashes” are known as recessions and depressions.
Shouldn’t that be the other way around? the level of spending (in dollars) determines the level of transactions (quantity of output transacted) when prices are fixed? And maybe just briefly mention that economists have good reason to believe it is always hard to cut nominal wages, making it reasonable to assume the price level won’t adjust well to a drop in spending. Remember we’re monetarists, everything we say should be logically complete.
7. June 2012 at 10:17
And maybe emphasize that private actors contract under the expectation that nominal income grows at a steady trend, wages adjusting accordingly – so providing enough money to keep spending stable, or even stably rising, is insufficient to keep income maximized if you’re below the trend level path of spending.
7. June 2012 at 10:25
What you’re calling “expectations coverage” is clever but needlessly confusing to me. I would rather say that the central bank’s job is to guarantee the appropriate total dollar-volume of spending in each period, supplying as much base as the economy demands in order to maintain that level. And this can only be done precisely by targeting the market forecast.
7. June 2012 at 10:27
Major –
“In a gold standard, gold would be money, which means the amount of gold, i.e. the weight, becomes the unit of exchange ratios.”
And who decides that gold is money? The government.
“The “price” the government sets that you’re talking about is actually the government setting the price of the dollar in relation to gold.”
Same thing. And the government can change that price any time.
Suppose the government called a national health care plan a “health care standard” and said they weren’t setting the price of health insurance, they were setting the price of dollars in terms of health insurance. The government would sell health insurance to anyone in exchange for dollars at a price set by the government. And they would buy health care from providers at a price determined by the government. Now health care is money. And when anyone questioned this people screamed at them “You can’t just print money! Health care is money!” Exact same thing.
7. June 2012 at 10:28
Once the level is guaranteed, then you can say that “expectations coverage” ensures that velocity rises to offset any fall in the money supply – when NGDP is expected to certainly be at a particular level, then velocity adjusts until that level is acheived, regardless of the quantity of money.
7. June 2012 at 10:36
I see you reasoning from a price change here “lowering the price of credit is usually stimulative for activity”. Instead the Fed generally signals ease by lowering rates beneath what it regards as the natural rate, which is itself achieved by stepping up the rate of purchase of securities. The increased monetary inflow pushes down the interest rate – relative to what it would have been otherwise. But a low rate of itself signals nothing – it could mean high supply of (monetary flows of) credit, or it could mean a low demand for them.
7. June 2012 at 10:38
Strictly speaking interest rates are the price of borrowing anything, not just money.
7. June 2012 at 10:39
“In Japan and the US, there is lots of money available for safe assets, so of course their price is low (remembering that bonds are a form of credit).”
Surely you mean that bond prices are high, and interest rates are low!
7. June 2012 at 10:51
A lot of what you say towards the end is just a more convoluted way of saying that interest rates are driven by nominal income and Fisher effects as well as the liquidity effect. I don’t see your discussion of risk as being particularly relevant or helpful
Above all, I think you’re being far too optimistic about what you regard as the RBA’s implicit “transactions level” target. I think we have an explicit 2% “medium-term” floor on inflation, and that’s great – but I have no doubt that it would let us down if spending ever really fell of a cliff. Make no mistake, high trend NGDP growth and the resulting high nominal rates, leaving us room to cut, are what saved us. Also Glenn Stevens is very proactive. I didn’t see you praising the way in which Glenn Stevens and Lars Svensson are forward looking central bankers (the latter obviously far more than the former).
But overall, great post.
7. June 2012 at 11:04
Paul, You said;
“I think the first thing out of my mouth, and then repeated at the end of every sentence for effect, would be “Hayek was for it.” Friedman has some cache, but there’s no right wing credential like being an actual Austrian.”
That pretty much summarizes why the right has become brain dead. Hayek was a great economist, but Friedman was so far ahead in macro it’s ridiculous.
Mike Sax, Thanks, but of course that doesn’t even address either of my comments.
Bill, I have some links in the right column for people new to the blog.
Johnleemk, Yes, that was a great comment by Gagnon.
Greg, Australia did a pretty big fiscal stimulus.
anon/portly, Not bad.
Lars, I agree.
Lorenzo, Thanks for providing that.
MF, You said;
“There is no “price” of gold in a gold standard”
If you are going to push the idea, don’t you think you ought to understand how it works? there is a price of gold, and that price is fixed. It was $20.67 an ounce under the US standard. Without a price of gold there is no gold standard.
7. June 2012 at 11:16
Propagation of Ideology:
“In a gold standard, gold would be money, which means the amount of gold, i.e. the weight, becomes the unit of exchange ratios.”
And who decides that gold is money? The government.
The government CAN decide that gold is money, but it is not NECESSARY that they do. For example, gold and silver were used as money in the US before the US government was even established.
In a free market, one that money production is competitive the way shoes and shirts and computers are, then I can assure you that paper would be at the bottom of the list of candidates for medium of exchange. It is just too plentiful and too lowly valued.
The only reason paper is money today is because of government.
But if the government got out of money production altogether, and left money production to free market forces, then I hope you are intellectually honest enough to accept that precious metals will almost certainly be the dominant medium of exchange of choice in the market.
So in this way, my advocacy for full unbridled monetary competition is essentially the same thing as saying a precious metals standard. The standards will be set by private minters.
“The “price” the government sets that you’re talking about is actually the government setting the price of the dollar in relation to gold.”
Same thing. And the government can change that price any time.
No, it’s quite different. There is a difference between there being a total supply of private gold bank paper claims to gold totaling $500 billion, say, and the government printing claims to gold and then promising to redeem those claims for a fixed ratio, and then reneging on their promise by setting a new redemption price, and then abolishing all redemptions like they did in 1971 because they wanted to print more dollars than they had in gold.
Suppose the government called a national health care plan a “health care standard” and said they weren’t setting the price of health insurance, they were setting the price of dollars in terms of health insurance. The government would sell health insurance to anyone in exchange for dollars at a price set by the government. And they would buy health care from providers at a price determined by the government. Now health care is money. And when anyone questioned this people screamed at them “You can’t just print money! Health care is money!” Exact same thing.
Yes, the exact same thing that you still aren’t thinking outside the fiat money box.
The “price” of health insurance in your example would not make healthcare the money. The paper claims would still be the money because they are still the universal medium of exchange.
In a gold standard, again, GOLD would be the money, not the paper claims. The paper notes would be transferable claims to gold money.
Your analogy doesn’t work because paper is still the money, and not only that, it isn’t market driven. I am advocating a market monetarism, a REAL market monetarism. One where the government doesn’t take possession of the nation’s gold and then renege on their promises to redeem dollars into gold upon request.
7. June 2012 at 11:54
I do not think that precious metals really would be the medium of exchange in a free market monetary system. After all, people in most modern countries already have the option to use paper money or metal coins as their media of exchange, and paper wins that competition hands down. Metal is too bulky and inconvenient to carry.
I think it would be very likely that pieces of paper representing claims to precious metals (probably gold) would become popular mediums of exchange, as they have been in the past. I would make two observations about this arrangement, however.
(1) This would not be a monetary system in which government is totally out of the picture. There would be a strong temptation in such a world for an enterprising con artist to print pieces of paper supposedly representing claims to gold, for which there was no actual gold to back them up. Government would still be necessary to enforce claims for fraud against such counterfeiters to prevent this sort of thing. It will be hard to prevent the government from using a discretionary power to enforce or not enforce fraud claims as an indirect means of creating or restricting inflation.
2) I think that the equilibrium of a world with metal money (so to speak) would be fairly unstable. The progression of the world from a system in which metals were almost universally used as media of exchange into one in which fiat currency predominates was probably not a mere accident of history. My guess is that if you succeeded in getting the federal reserve and other such institutions abolished and restored a free market in money, that it would take no more than about 20 years before democratic forces would push for the re-establishment of central banks and fiat money. For better or worse, freedom is only popular up to a point, and I would be willing to wager that the vast mass of humanity will be unable to resist the call to “do something” about the sorts of monetary panics that will result from the inevitable development of counterfeit gold notes.
7. June 2012 at 12:13
gdelassu:
I do not think that precious metals really would be the medium of exchange in a free market monetary system. After all, people in most modern countries already have the option to use paper money or metal coins as their media of exchange, and paper wins that competition hands down. Metal is too bulky and inconvenient to carry.
Legal tender laws, and taxation in US dollars only, refutes that conjecture. No, people are not “free” to use gold as money. Paper didn’t win the competition. It was the state’s guns that won the competition.
Moreover, a precious metals standard doesn’t mean people actually carry precious metals on them all the time. Paper claims to precious metals can suffice.
I think it would be very likely that pieces of paper representing claims to precious metals (probably gold) would become popular mediums of exchange, as they have been in the past. I would make two observations about this arrangement, however.
If the government legalized currency competition, by removing all taxes on gold transactions, and all capital gains taxes on gold, it is almost a guarantee that precious metals will eventually win and US dollars will no longer be money.
(1) This would not be a monetary system in which government is totally out of the picture. There would be a strong temptation in such a world for an enterprising con artist to print pieces of paper supposedly representing claims to gold, for which there was no actual gold to back them up. Government would still be necessary to enforce claims for fraud against such counterfeiters to prevent this sort of thing. It will be hard to prevent the government from using a discretionary power to enforce or not enforce fraud claims as an indirect means of creating or restricting inflation.
Yes, there is always the potential for government to use coercion to affect the monetary order. But that’s true for all monetary orders.
2) I think that the equilibrium of a world with metal money (so to speak) would be fairly unstable.
Why?
The progression of the world from a system in which metals were almost universally used as media of exchange into one in which fiat currency predominates was probably not a mere accident of history.
You’re right. It was the result of coercion and deceit.
My guess is that if you succeeded in getting the federal reserve and other such institutions abolished and restored a free market in money, that it would take no more than about 20 years before democratic forces would push for the re-establishment of central banks and fiat money.
I disagree. It depends on people’s ideas. Central banking is not an inevitable institution for humanity, despite what Marx wrote.
For better or worse, freedom is only popular up to a point, and I would be willing to wager that the vast mass of humanity will be unable to resist the call to “do something” about the sorts of monetary panics that will result from the inevitable development of counterfeit gold notes.
Counterfeit gold notes? You mean like there are panics with counterfeit US dollars all the time?
Counterfeiting is relatively easily handled by innovative and prudential entrepreneurs, the same way paper money can be made difficult to counterfeit in our monetary regime.
You’re worrying over a pretty minor problem. Most money is digital today anyway. Encryption is getting better and better all the time. Soon we’ll have quantum computers, which will have encryption so strong than a hacker even LOOKING at code will set off the trigger.
7. June 2012 at 12:43
“Legal tender laws, and taxation in US dollars only, refutes that conjecture. No, people are not “free” to use gold as money.”
Yes, they are free to use gold as money, and everyone else, including the government is free to accept or reject it.
That was a really quick progression to what I just described:
“Then when you point out that you can trade gold for whatever you want now, the argument switches again to “But the government doesn’t accept gold for taxes so most people don’t choose to use it as money.” So we’re back to the gold standard needing government support to work – the same government we supposedly can’t trust.”
“If the government legalized currency competition, by removing all taxes on gold transactions, and all capital gains taxes on gold, it is almost a guarantee that precious metals will eventually win and US dollars will no longer be money.”
I agree with you that if the government subsidizes gold by creating a tax loophole for gold then some people will be encouraged to use gold. It proves my point precisely. Your “free market” gold standard requires government subsidies.
But I disagree with you that it would be a large number of people. We can test this very easily in the real world. In the underground economy, which is by definition tax free, do most people use US dollars or gold? I’ve heard of people getting paid under the table in cash, but not in gold. In Hong Kong, where there is no capital gains tax on gold or anything else, what do most people use?
Look, I know it angers you that human beings don’t act the way you want them to, but that’s your problem, not theirs. The people have overwhelmingly chosen to use paper or electronic claims to tax tokens over paper or electronic claims to gold.
7. June 2012 at 13:06
1) Scott, I only know so many right wingers, but in their defense, I think that the majority of right wingers who can name any economists would prefer Friedman to Hayek. I might be committing the Pauline Kael fallacy, however.
IMHO, the big problem with non-economist right wingers is that they are fighting the last war. For the last 30 years, high school economic history for the post-WWII has basically been “Inflation is very bad, and governments have a natural tendency to inflate debt. Because inflation is very bad, this is disastrous. Paul Volker saved the country and ended the malaise by taming inflation.”
Convince the conservative economists, and they’ll pull the policy people along. But for now, fearing inflation isn’t brain dead, it’s just wrong.
2) Now I want to hear more about Estonia too. I presume the answer is that austerity is a rounding error, particularly in a country as small as Estonia that doesn’t have its own currency?
7. June 2012 at 13:25
Er, o.k., then why do you think that a gold standard would be an improvement over the current fiat regime? I think that there is more than a “potential” for the government to manipulate a gold-backed currency along the lines described above. I think that it is a dead certainty.
Fine, but that rather proves my point about the equilibrium being unstable. Remember, it is not just the U.S. that moved from a gold-standard to fiat currency. It was every other country in the world. In other words that coercion-&-deceit dynamic had to play itself out (successfully) many times over. That indicates to me that the market equilibrium favors the sort of coercion and deceit that result in the overthrow of a gold standard.
I would wager more than a small sum that if you somehow reinstated a gold-standard money system, the same coercion and deceit that served to undermine it before would undermine it again, and bring us back to the more stable equilibrium of fiat currencies. Modern market forces simply do not favor a metals-based monetary system, no matter how much your Austrian instincts crave it.
7. June 2012 at 18:56
Daniel Kuehn writes,
“We have the confidence fairy. We need to start talking more about the “expectations fairy” in reference to market monetarists like Scott Sumner.”
DeLong re-posted his comment.
http://delong.typepad.com/sdj/2012/06/hoisted-from-comments-daniel-kuehn-on-credible-federal-reserve-commitment-to-incredible-responsible-future-irresponsibility.html
7. June 2012 at 19:17
Notice how MF quietly slunk away from being called out on not knowing what a gold standard was… I guess he’ll now claim that’s not what he meant, when obviously he did.
7. June 2012 at 21:48
Scott,
I didn’t say: “I think the first thing out of my mouth, and then repeated at the end of every sentence for effect, would be “Hayek was for it.” Friedman has some cache, but there’s no right wing credential like being an actual Austrian.”
– Jared did.
I was responding that this is misleading at best, for the reasons outlined on the other thread I linked to.
8. June 2012 at 00:42
“Hayek was a great economist, but Friedman was so far ahead in macro it’s ridiculous.”
Interesting that you say that, Scott, seeing as …
http://uneasymoney.com/2011/12/03/john-taylors-obsession-with-rules/
http://uneasymoney.com/2012/06/03/omg-john-taylor-really-misunderstands-hayek/
And of course Hawtrey was even further ahead: http://uneasymoney.com/2012/02/23/hawtrey-on-the-short-but-sweet-1933-recovery/
8. June 2012 at 04:56
[…] Scott Sumner quoted Viscount d’Abernon who in 1931 said: “This depression is the stupidest and most gratuitous […]
8. June 2012 at 06:23
Propagation of Ideology:
“Legal tender laws, and taxation in US dollars only, refutes that conjecture. No, people are not “free” to use gold as money.”
Yes, they are free to use gold as money, and everyone else, including the government is free to accept or reject it.
Hahaha, that’s funny. Really.
The government has guns and they threaten people with using them if they disobey. If the state only accepts US dollars, and they back that demand for US dollars with guns, then sorry, we’re NOT free to use any money we want. We are coerced into using US dollars, because we have to accept US dollars in trade or else we’ll go to jail for tax evasion. Even if I used gold in my transactions, I will be taxed in “equivalent” US dollars, and that means I have to go out and acquire US dollars in trade, so that I can pay the taxes in US dollars. If I just go along my merry way and deal only in gold, I’ll end up in jail for tax evasion.
That is enough to refute your claim that we are “free” to use gold as money. But it gets better. For there are legal tender laws as well, and the government’s courts, which is a service they also monopolize by the way, only enforce contracts in US dollars. If you are sued, you have to pay in US dollars. If you sue somebody else, the courts will tell the defendant to pay up in US dollars. You can’t ask the courts to enforce the defendant to return gold. They’ll allow the defendant to return the “equivalent” US dollars.
And it gets even better than that! Even if people did try to “subvert the system”, and use gold coins as money, then those people will get charged as domestic terrorists, for “seeking to undermine the US financial system.” The Liberty Dollar Raid. Google it. The FBI stole the entire vault’s worth of Liberty Dollars, because the state does not want competition in money, and they’ll use force to backstop their monopoly.
So with taxation in US dollars, backed by force, and legal tender laws in US dollars, backed by force, “making an example of” gold coin users, it is clear that only a lunatic, or somebody INCREDIBLY ignorant, would believe “we are free to use any money we want.” No, we are most certainly not. You’re a slave to money monopolists. Deal with it. Accept it. Stop trying to believe it isn’t real, and that I’m wrong. YOU’RE WRONG.
“If the government legalized currency competition, by removing all taxes on gold transactions, and all capital gains taxes on gold, it is almost a guarantee that precious metals will eventually win and US dollars will no longer be money.”
I agree with you that if the government subsidizes gold by creating a tax loophole for gold then some people will be encouraged to use gold. It proves my point precisely. Your “free market” gold standard requires government subsidies.
[Facepalm]. It’s not a subsidy!! The state isn’t giving gold owners taxpayer money, nor printing press money. It’s allowing gold to compete with the US dollar by removing all taxes and regulations on the mere trading of it. Let private gold clearing houses charge a “fee” on gold transactions the way the state charges taxes on US dollar transactions, and we’ll see which currency wins.
In order to allow gold to compete with the dollar, the state cannot tax gold transactions in US dollars. If they must tax these transactions, then they can tax in gold. If you earn 100 units of gold, then you can be taxed 35% of it.
But I disagree with you that it would be a large number of people. We can test this very easily in the real world.
No, we can’t “test” it NOW. Not with the current laws in place. Not with the threats of force.
In the underground economy, which is by definition tax free, do most people use US dollars or gold?
You mean central banks? They operate outside the market process. They are immune from market forces. They are institutions protected by government force, and their currency is enforced by government force. Central banks own LOTS of gold. Central banks are tax free institutions.
At any rate, your “test” isn’t even a good one. Trading in gold secretly and not paying taxes on it is a criminal offence. Of COURSE you will see few people doing this, the same way you see few people stockpiling cocaine.
I’ve heard of people getting paid under the table in cash, but not in gold. In Hong Kong, where there is no capital gains tax on gold or anything else, what do most people use?
They use what they are forced to pay in taxes. Don’t you get it yet? Even if they trade in gold, they have to pay taxes in HKD.
Look, I know it angers you that human beings don’t act the way you want them to, but that’s your problem, not theirs.
I am not talking about other human beings not using gold. I don’t care if others use or don’t use it. I am talking about the state allowing ME to use gold without threatening me with force, without demanding that I pay taxes in US dollars, without demanding that I settle contracts in US dollars if I agree with someone else NOT to trade in US dollars.
You can dispense with the silly patronizing already, it’s getting boring already.
The people have overwhelmingly chosen to use paper or electronic claims to tax tokens over paper or electronic claims to gold.
False. “The people” is not some monolithic organic blob that says yay or nay. There are INDIVIDUALS, and the individuals in the state are using force to impose a US dollar monopoly.
8. June 2012 at 06:40
gdelassu:
Er, o.k., then why do you think that a gold standard would be an improvement over the current fiat regime?
The state would not be able to inflate. The power of money would go back into the hands of individuals. The business cycle would be eliminated/reduced. Prosperity would increase. Wars would be harder to finance, since the consent of the people is REALLY needed, as wars could not be financed via the printing press, such as the Iraq war, when the NY Fed secretly (at the time) sent over $40 billion to Iraq 2003-2008 to finance the war. Who knows how much more they sent to Afghanistan, or Iraq 2008-2012.
I think that there is more than a “potential” for the government to manipulate a gold-backed currency along the lines described above. I think that it is a dead certainty.
I think the potential for manipulation is the least it can possibly get with gold. Paper is easily manipulated.
“You’re right. It was the result of coercion and deceit.”
Fine, but that rather proves my point about the equilibrium being unstable.
There is no such thing as equilibriums in human society.
It doesn’t prove your point about “instability”. Humans make their own destinies. They aren’t subject to historical materialism.
And it is fiat money that is “unstable.” Gold is far MORE stable. Money devaluation is a very old tactic. Emperor Dioceltian did it in 300 AD in Rome. Inflation played a major part in the collapse of the Roman Empire. It destroyed economic coordination. Even Keynes himself believed that the surest way to collapse capitalism is monetary manipulation, and he supported money manipulation!
Remember, it is not just the U.S. that moved from a gold-standard to fiat currency. It was every other country in the world. In other words that coercion-&-deceit dynamic had to play itself out (successfully) many times over. That indicates to me that the market equilibrium favors the sort of coercion and deceit that result in the overthrow of a gold standard.
You can’t call state coercion a function of market forces. That’s just retarded, I’m sorry. You’re trying to sound grandiose, almost neoMarxian, as if humans have a historical role to play in the cosmos, where the spread of certain actions and ideas are somehow “necessary” in the process of history. No, they’re not. It is no less “equilibrium” than the spread of communism throughout half the globe during the 20th century, or the spread of Kingly monarchies throughout the 15th and 16th centuries.
If you want to go down the historicism route, history has “proven” that status quo, even global status quo, “equilibria”, are not improvements, let alone necessary innovations, in human society. What spreads over the world comes with great fanfare, celebrated as a progression and so on, only to be abolished once more, replaced with some other “equilibria.”
So you cannot possibly say, given your own epistemology, that the spread of central banking around the world represents some sort of historical progression to Utopia. The communists thought in that way, but they denied human reason.
I would wager more than a small sum that if you somehow reinstated a gold-standard money system, the same coercion and deceit that served to undermine it before would undermine it again, and bring us back to the more stable equilibrium of fiat currencies.
Then there is no reason not to allow people to do it, by removing the guns preventing them from doing it and remaining out of prison.
Modern market forces simply do not favor a metals-based monetary system, no matter how much your Austrian instincts crave it.
False. Market forces theoretically and historically have shown that precious metals is the money of choice. Market forces did not abolish gold. NON-market forces of statist coercion abolished it.
When property rights are respected, when individuals have economic freedom, when they can trade whatever they want, and use whatever money they want, without fear or threats from the state, it is almost a certainty that people will choose precious metals over paper. It’s more valuable!
You seem to have no idea what market forces even means. Market forces are not “social forces.” They are not “history.” Market forces are specific. They are the forces that result from private property rights and voluntary exchanges.
THIS was overruled by the state’s guns. They overruled the market, used violence, and abolished the market’s money of choice. Yes, the state is composed of people FROM the market, but this is when the market stops and statism begins. The state and the market are inimical. If the state introduces coercion, like it has in money, then that’s an ipso facto reduction in the market process.
Saturos:
Notice how MF quietly slunk away from being called out on not knowing what a gold standard was… I guess he’ll now claim that’s not what he meant, when obviously he did.
Wow Saturos, I go away for a little while and you miss me that quickly?
I haven’t “slunk away”, so don’t worry, everything will be alright. There is life beyond this blog you know. And nobody called me out on not knowing what a gold standard is. It is in fact I who called out gdelassu for not knowing what a gold standard is.
I meant what I said.
The fact that you have not made a single attempt to show exactly what I allegedly did get wrong about the gold standard, is strong evidence that you just wanted to antagonize, because you don’t understand the gold standard either.
8. June 2012 at 07:13
MF, and you still haven’t replied to what Scott said to you above, instead attacking me for pointing out that you hadn’t replied to Scott.
8. June 2012 at 08:13
J. Mann, Glad to hear most conservatives still like Friedman. My short answer on Estonia is that austerity didn’t hurt but the euro peg did hurt.
CA, That’s originally from Krugman, and it’s a horrible idea. Central banks will never commit to being irresponsible.
Saturos, I’ve done that to him 100 times, and he always just keeps plugging along, despite the fact that people repeatedly show he’s clueless on macro.
Keep in mind this is a guy who takes seriously theories that 9/11 was a US government plot.
Paul, Sorry for confusing you with Jared.
Saturos, Interesting links about Hayek, but they don’t change my mind.
11. June 2012 at 04:56
Saturos (1) On transactions, it is an identity really, so which way you put it is less important than to lead people into it step by step. Since I started off with “people have money to transact”, it was just easier to do it that way around. Besides, people do not transact in order to spend, they spend in order to transact. The constraints on their spending will affect whether they transact, but that is not quite the same.
And I did not want to get too far into sticky prices, though I did raise the point about it matters what constraints are operating.
(2) Trend levels: far too complicated. It is supposed to be an easy guide for lay folk.
(3) On expectations coverage; again, trying to use lay-friendly language.
(4) Velocity adjusts: nicely put.
(5) I am not sure I get your point here. There is a difference between lowering (direction change) and low (level). But I am talking of the former and not the latter and, more to point, why lowering interest rates are taken as a signal of monetary easing, even when all the central bank does is announce the lower rate.
(6) Yes, I get to the interconnectedness of interest rates later, but again, trying to lead the lay person in gently.
(7) bond prices: oops, that should be bond rents (i.e. interest rates), will fix that.
(8) The asset prices bit was largely me working through the logic for myself and deciding that asset prices were not driven by monetary policy as such (a certain former Deputy Governor made that argument in a recent book, and I had never been able to work out what I thought about it until then). But since folk do blame the Fed, for example, for asset price surges, it seemed to be a relevant thing to discuss in a lay guide.
On the RBA possibly, but I still think its behaviour is driven by a concern to keep income levels up.
So, thanks for the comments, and sorry it took so long to see them.
11. June 2012 at 05:09
Saturos: It is a subtle point, that interest rates are the price of credit, not money, bonds are a form of credit, but interest rates are not the price of bonds. I suppose that feeds back into the error of interest rates as the price of money.
11. June 2012 at 05:13
J. Mann. Estonia has very low public debt and, as far as I can tell, a highly flexible economy. Keynes himself would say that the more flexible your prices, the less any Keynesian implications apply.
11. June 2012 at 12:11
Saturos:
MF, and you still haven’t replied to what Scott said to you above, instead attacking me for pointing out that you hadn’t replied to Scott.
Sorry, I honestly did not see it.
ssumner wrote:
MF, you said: “There is no “price” of gold in a gold standard”
If you are going to push the idea, don’t you think you ought to understand how it works? there is a price of gold, and that price is fixed. It was $20.67 an ounce under the US standard. Without a price of gold there is no gold standard.
First, I am not “pushing” for a gold standard. I am pushing for a free market in money production, which will almost certainly be precious metals based.
Two, that was not a price of gold. The “price of gold” in a gold standard are the exchange ratios between gold and other commodities. For example, one ounce of gold for a nice suit (which by the way was the same price for a nice toga and pair of sandles in ancient Greece).
The fixed “price” of gold, of $20.67 an ounce, is not a price of gold. It was the price of US dollars that gold can buy. In a gold standard, GOLD is the reference measure of pricing, not US dollars. US dollars could be exchanged for gold money at the ratio of 20.67 to 1.
You too are thinking in terms of fiat.
I guess it’s an intellectual barrier derived from years and years of fiat money analysis. You’re stuck in a fiat box, and you can’t even grasp a gold standard in terms other than fiat money.
The “fixed” exchange rate of $20.67 to 1 ounce of gold was later raised by FDR, according to what he believed were lucky numbers (I kid you not).
This was a setting of the price of US dollars, not a setting of the price of gold. It would have been like a private tailor “setting a price” of one suit for every one ounce of gold a buyer offers him. By setting that many suits as the “price” of one ounce of gold, the tailor isn’t actually setting the price of gold. He is setting the price of his suits IN gold. The government did the same thing with $20.67 of their paper notes.
WHY OH WHY DO MONETARY ECONOMISTS NOT EVEN UNDERSTAND MONEY???
It would be a cosmic tragedy, if it weren’t such a farce.
11. June 2012 at 12:36
“MF, and you still haven’t replied to what Scott said to you above, instead attacking me for pointing out that you hadn’t replied to Scott.”
“Sorry, I honestly did not see it”
Is that becaue you mostly just take shots and actually read properly later?
11. June 2012 at 13:11
Is that becaue you mostly just take shots and actually read properly later?
No, it’s why I don’t take shots against posts I have not read. I didn’t take shots at Sumner’s comment until after I properly read it. Did you not properly read my responses? Haha
I think what you’re describing is your own habit, indeed, without the reading properly later part. You take shots at me prior to you properly reading what I have written. You do that with Austrian economics too.
Your hypocrisy knows no bounds.