Gold Standard

BOHtox

I recently read in to Gold Standard.

Are there any arguments as to why we should go back?
It seems that we only left it so the banks could create more money, cause inflation, debt and have more money.

Would the Gold Standard bring price stability? thus stopping/ reducing drastically inflation? and also would it mean that bubbles would not be made?

Victor

BOHtox wrote: »

Are there any arguments as to why we should go back?

There are arguments, but whether they are sustainable is another matter. I imagine most of the noise supporting such a move is coming from people who currently hold gold and want a safety blanket for when that bubble bursts. You are being shilled.

It seems that we

We?

It seems that we only left it so the banks could create more money, cause inflation, debt and have more money.

Even when gold standards were in place, inflation was at time rampant.

Would the Gold Standard bring price stability?

Only in the price of gold. given that gold is a small part of the world economy, there is no particular need to tie money and gold. And if all currencies were tied to gold, there would be no ability for currencies to fluctuate over time and ease some of the worst excesses that happen.

thus stopping/ reducing drastically inflation?

No. Imagine if there was a major war in the Middle East and all the oil was cut off. Do you not think there would be inflation in the price of oil that would follow through to inflation in other prices?
Note: Some inflation is useful - hence ECB and BoE targets of about 2% - as it means that gradual adjustments in prices can occur between commodities.

and also would it mean that bubbles would not be made?

Why do you say this? The only bubble it would prevent would be a gold bubble. Hoarding or instability or other factors could create bubbles in other commodities.

BOHtox

Victor wrote: »

There are arguments, but whether they are sustainable is another matter. I imagine most of the noise supporting such a move is coming from people who currently hold gold and want a safety blanket for when that bubble bursts. You are being shilled.

Well I'm not gold holder...

Victor wrote: »

We?

Humanity, banks etc

Victor wrote: »

Even when gold standards were in place, inflation was at time rampant.

Well there's hyperinflation in the world now. There's inflation in the world now. Was it worse now or then?

Victor wrote: »

Only in the price of gold. given that gold is a small part of the world economy, there is no particular need to tie money and gold. And if all currencies were tied to gold, there would be no ability for currencies to fluctuate over time and ease some of the worst excesses that happen.

Is that not the point of it? Maybe I'm wrong but because of it being fixed that means that there is no flucuation.

Victor wrote: »

No. Imagine if there was a major war in the Middle East and all the oil was cut off. Do you not think there would be inflation in the price of oil that would follow through to inflation in other prices?
Note: Some inflation is useful - hence ECB and BoE targets of about 2% - as it means that gradual adjustments in prices can occur between commodities.

That's demand pull inflation. Obviously there's demand pull inflation. Banks also create inflation. To me, this is bad inflation. It can cause booms, and thus huge busts.

Victor wrote: »

Why do you say this? The only bubble it would prevent would be a gold bubble. Hoarding or instability or other factors could create bubbles in other commodities.

Would it not stop it due to banks not being able to create vasts amount of credit that creates inflation.

It's hard to argue when I'm not knowlegable in the area. I'm not really debating just trying to learn more...

happyman81

BOHtox wrote: »

Victor wrote: »

There are arguments, but whether they are sustainable is another matter. I imagine most of the noise supporting such a move is coming from people who currently hold gold and want a safety blanket for when that bubble bursts. You are being shilled.

Well I'm not gold holder...

Victor wrote: »

We?

Humanity, banks etc

Victor wrote: »

Even when gold standards were in place, inflation was at time rampant.

Well there's hyperinflation in the world now. There's inflation in the world now. Was it worse now or then?

Victor wrote: »

Only in the price of gold. given that gold is a small part of the world economy, there is no particular need to tie money and gold. And if all currencies were tied to gold, there would be no ability for currencies to fluctuate over time and ease some of the worst excesses that happen.

Is that not the point of it? Maybe I'm wrong but because of it being fixed that means that there is no flucuation.

Victor wrote: »

No. Imagine if there was a major war in the Middle East and all the oil was cut off. Do you not think there would be inflation in the price of oil that would follow through to inflation in other prices?
Note: Some inflation is useful - hence ECB and BoE targets of about 2% - as it means that gradual adjustments in prices can occur between commodities.

That's demand pull inflation. Obviously there's demand pull inflation. Banks also create inflation. To me, this is bad inflation. It can cause booms, and thus huge busts.

Victor wrote: »

Why do you say this? The only bubble it would prevent would be a gold bubble. Hoarding or instability or other factors could create bubbles in other commodities.

Would it not stop it due to banks not being able to create vasts amount of credit that creates inflation.

It's hard to argue when I'm not knowlegable in the area. I'm not really debating just trying to learn more...

Where, apart from under loony regimes, does hyperinflation exist today?

BOHtox

happyman81 wrote: »

Where, apart from under loony regimes, does hyperinflation exist today?

So what you're asking is apart from where there's hyperinflation, where is there hyperinflation?

http://en.wikipedia.org/wiki/Hyperinflation#Worst_hyperinflations_in_world_history

Never actually knew it happened so much. There's still high inflation in other areas that create bubbles.

happyman81

BOHtox wrote: »

So what you're asking is apart from where there's hyperinflation, where is there hyperinflation?

http://en.wikipedia.org/wiki/Hyperinflation#Worst_hyperinflations_in_world_history

Never actually knew it happened so much. There's still high inflation in other areas that create bubbles.

Happened so much? It happened in six countries, do you even know the circumstances of any of those countries when this occurred, or do you automatically blame the fiat system? Let's take a look at the context:

Taiwan 1949 - In the midst of civil war
Greece 1944 - World War II ring a bell?
Germany 1923 - Crippled by war reparations, Treaty of Versailles ring a bell?
Yugoslavia 1994 - Yeah, very peaceful and stable place then...
Zimbabwe - Really? Mugabe? Look him up.
Hungary 1946 - Yup, a real quiet time in Hungary's history.


So, do you have any non-war/dictator/siege/reparations example of hyperinflation today, like you said above? (excuse my sarcasm)

BOHtox

happyman81 wrote: »

Happened so much? It happened in six countries, do you even know the circumstances of any of those countries when this occurred, or do you automatically blame the fiat system? Let's take a look at the context:

Taiwan 1949 - In the midst of civil war
Greece 1944 - World War II ring a bell?
Germany 1923 - Crippled by war reparations, Treaty of Versailles ring a bell?
Yugoslavia 1994 - Yeah, very peaceful and stable place then...
Zimbabwe - Really? Mugabe? Look him up.
Hungary 1946 - Yup, a real quiet time in Hungary's history.


So, do you have any non-war/dictator/siege/reparations example of hyperinflation today, like you said above? (excuse my sarcasm)

Firstly I was initially using hyperbole when refering to high inflation as hyperinflation.

Secondly, I only really thought of Zimbabwe.

Thirdly, no. But see my first point.

happyman81

BOHtox wrote: »

Firstly I was initially using hyperbole when refering to high inflation as hyperinflation.

Secondly, I only really thought of Zimbabwe.

Thirdly, no. But see my first point.

Ok, in fairness though when you say hyperinflation in this forum people will treat it as literal.

BOHtox

happyman81 wrote: »

Ok, in fairness though when you say hyperinflation in this forum people will treat it as literal.

Fair enough.


[To clarify my inkling:] Banks/ Governments create credit. This can be to devalue debt etc. Regardless, it causes inflation. In my opinion this is very very bad inflation. Demand-Pull inflation is not bad inflation as it just simply shows there is more demand for a good and therefore production should be increase, eventually reducing inflation.

This bad inflation causes bubbles as people having credit. They spend this, as you would, like there's no tomorrow. The bubble then crashes, people are left with a mountain of debt and this cycle will eventually happen again.

Gold Standard fixes this. There is a price of gold and currency which would be linked. The only inflation would be on the gold reserves, which would be nominal if not prices would stay stagnent. Banks can still create credit, but with gold reserves, meaning they have to do it slower. The growth is therefore not a bubble and can be controlled by raising interest rates and reducing demand for credit, yeah I'm kind of anti-European in this sense.

[/clarification]

Basically, am I right or is it too simplistic of an approach?

I'd like to study economics in college (not going to happen in the next few years though. I'll start a thread on this later in time), would we touch on this?

andrew

As a small mod note: These threads often turn into pseudo-economics messes. I hope this doesn't happen, but just so you're all aware, any un-soundness or devolution into conspiracy theories about banks will result in this thread being closed.

Anyways:

I'd like to study economics in college (not going to happen in the next few years thought. I'll start a thread on this later in time), would we touch on this?

Almost definitely.

The gold standard does indeed offer price stability. However, it has several disadvantages, which led to it's abandonment by the seventies.

A principal disadvantage is that under a gold standard the authorities can't use monetary policy. Say a country is hit by some sort of negative shock, such that it enters a recession. When a country can use monetary policy, it can make it so that the price of that country's exports becomes cheaper for everyone else; overnight it can render that country more competative on the world markets. Similarly, if a country is hit by a positive shock such that there's bubble, monetary policy can be used like a fire hose in order to dampen down the bubble before it gets too big and bursts.

This is really useful to have, especially in the case of recessions. Prices tend to adjust only very slowly, and so being able to use monetary policy to cause them to fall in real terms is really useful. Absent such policy, you have a situation in which prices must naturally fall, which takes ages, and leads to higher and more persistant unemployment.

As you've said though, credit bubbles can be caused by central banks in the absence of a gold standard. But this isn't an inevitable consequence of central banks, so long as monetary policy is adequate. In contrast, deeper recessions are an inevitable consequence of a gold standard.

Also, if you've been reading the kind of stuff i think you've been reading about the gold standard, remember that there's a huge bias against inflation there. For some people, it's the worst thing possible in the world. But arguably it's not. A little bit of inflation can be a good thing; it encourages people to make purchases now rather than later. It mitigates against the possibility of there being massive deflation, by giving the central bank room to maneouver with regards to the real inflation rate which they target. Finally, it's only a problem so long as people keep all their assets in cash, which most people don't do. Anyone who has any savings can put money into, for example, solidarity bonds, which provide a return which is easily above inflation (assuming the target rate of 2% per year is met). I got a call from BoI recently offering me a rate of 3% in a savings account, again above the target rate of inflation. So really, unless your entire stock of wealth is under your bed, inflation need not make you poorer. In short, inflation is only bad if it's very high. Low rates of inflation aren't bad, and certainly aren't worse than the kind of economic situation created by a gold standard.

Black Swan

BOHtox wrote: »

I recently read in to Gold Standard...

Would the Gold Standard bring price stability? thus stopping/ reducing drastically inflation? and also would it mean that bubbles would not be made?

Comparing price stability with bubbles was problematic; i.e., price stability and bubbles were not always directly associated, and can arise from a series of complex factors where the relationships were questionable, if any existed. Tulips anyone?

In addition to the Gold Standard (1992) published by the Auburn Ludwig von Mises Institute, you may wish to compare and contrast it with The Gold Standard in Theory and History (1997) edited by Barry Eichengreen and Marc Flundrean, 2nd edition, New York: Routledge. In the latter work, it has been concluded that a gold standard would not necessarily ensure a self-equilibrating system for international monetary policy, and more research was needed; i.e., LOOK a bit more before leaping.

If I interpret Ludwig von Mises correctly, he was for a hundred percent gold reserve standard; i.e., no more issuing of demand liabilities by banks (central or branches) greater than reserves. Furthermore, governments could not print currency unless backed one hundred percent by gold reserves.

Unfortunately, calls for a "return" to the gold standard (in Mises terms) have been misleading historically. Was there ever a paper currency monetary system that was based upon a one hundred percent gold reserve standard?

SupaNova

happyman81 wrote: »

Happened so much? It happened in six countries, do you even know the circumstances of any of those countries when this occurred, or do you automatically blame the fiat system? Let's take a look at the context:

Taiwan 1949 - In the midst of civil war
Greece 1944 - World War II ring a bell?
Germany 1923 - Crippled by war reparations, Treaty of Versailles ring a bell?
Yugoslavia 1994 - Yeah, very peaceful and stable place then...
Zimbabwe - Really? Mugabe? Look him up.
Hungary 1946 - Yup, a real quiet time in Hungary's history.

So, do you have any non-war/dictator/siege/reparations example of hyperinflation today, like you said above? (excuse my sarcasm)

A lot more than 6 times:
http://dollardaze.org/blog/?p=107

This is an interesting one, with a helping hand from an Irishman. Clink on the link to see the giant Yapese stone money.

Yap (late 1800's)
The island of Yap in the Pacific Ocean used varying sized stones as money, of which the largest weighing several tons were the most valuable. The stones had been brought by sea from the Island of Palau 210 km away. The journey was very perilous given the length of the voyage and the rough seas between the islands of Palau and Yap. Many of the stones were lost at sea. The risk associated with procurement of the "money stones" initially made them highly valuable. The Yapese valued them because large stones were quite difficult to steal and were in relatively short supply. However, in 1874, an enterprising Irishman named David O'Keefe hit upon the idea of employing the Yapese to import more "money" in the form of shiploads of large stones, also from Palau. O'Keefe then traded these stones with the Yapese for other commodities such as sea cucumbers and copra. Over time, the Yapese brought thousands of new stones to the island, debasing the value of the old ones. Today they are almost worthless, except as a tourist curiosity.

happyman81

SupaNova wrote: »

happyman81 wrote: »

Happened so much? It happened in six countries, do you even know the circumstances of any of those countries when this occurred, or do you automatically blame the fiat system? Let's take a look at the context:

Taiwan 1949 - In the midst of civil war
Greece 1944 - World War II ring a bell?
Germany 1923 - Crippled by war reparations, Treaty of Versailles ring a bell?
Yugoslavia 1994 - Yeah, very peaceful and stable place then...
Zimbabwe - Really? Mugabe? Look him up.
Hungary 1946 - Yup, a real quiet time in Hungary's history.

So, do you have any non-war/dictator/siege/reparations example of hyperinflation today, like you said above? (excuse my sarcasm)

A lot more than 6 times:
http://dollardaze.org/blog/?p=107

This is an interesting one, with a helping hand from an Irishman. Clink on the link to see the giant Yapanese stone money.

Yap (late 1800's)
The island of Yap in the Pacific Ocean used varying sized stones as money, of which the largest weighing several tons were the most valuable. The stones had been brought by sea from the Island of Palau 210 km away. The journey was very perilous given the length of the voyage and the rough seas between the islands of Palau and Yap. Many of the stones were lost at sea. The risk associated with procurement of the "money stones" initially made them highly valuable. The Yapese valued them because large stones were quite difficult to steal and were in relatively short supply. However, in 1874, an enterprising Irishman named David O'Keefe hit upon the idea of employing the Yapese to import more "money" in the form of shiploads of large stones, also from Palau. O'Keefe then traded these stones with the Yapese for other commodities such as sea cucumbers and copra. Over time, the Yapese brought thousands of new stones to the island, debasing the value of the old ones. Today they are almost worthless, except as a tourist curiosity.

Yes, I know that I was referring to his link, in particular.

SupaNova

andrew wrote: »

The gold standard does indeed offer price stability. However, it has several disadvantages, which led to it's abandonment by the seventies.

A principal disadvantage is that under a gold standard the authorities can't use monetary policy. Say a country is hit by some sort of negative shock, such that it enters a recession. When a country can use monetary policy, it can make it so that the price of that country's exports becomes cheaper for everyone else; overnight it can render that country more competative on the world markets. Similarly, if a country is hit by a positive shock such that there's bubble, monetary policy can be used like a fire hose in order to dampen down the bubble before it gets too big and bursts.

This is really useful to have, especially in the case of recessions. Prices tend to adjust only very slowly, and so being able to use monetary policy to cause them to fall in real terms is really useful. Absent such policy, you have a situation in which prices must naturally fall, which takes ages, and leads to higher and more persistant unemployment.

As you've said though, credit bubbles can be caused by central banks in the absence of a gold standard. But this isn't an inevitable consequence of central banks, so long as monetary policy is adequate. In contrast, deeper recessions are an inevitable consequence of a gold standard.

After centuries of practice monetary policy hasn't been a very successful tool. And to say that a gold standard absent central bank interference would result in deeper recessions isn't accurate.

Christina Romer, hardly a Misesian did some research and compared the pre-World War I period with the post-World War II period where she found that:
"Recessions have not become noticeably shorter over time The average length of recessions is actually one month longer in the post-World War II era than in the pre World War I era. There is also no obvious change in the distribution of the length of recessions between the prewar and postwar eras."
http://elsa.berkeley.edu/~cromer/JEP_Spring99.pdf

I really wonder why the standard mainstream line that the gold standard was terrible, and that central banks control of monetary policy is a useful tool in combating recessions, flies so easily given the dismal failure of central banks according to their own stated aims.

andrew

SupaNova wrote: »

After centuries of practice monetary policy hasn't been a very successful tool. And to say that a gold standard absent central bank interference would result in deeper recessions isn't accurate.

Christina Romer, hardly a Misesian did some research and compared the pre-World War I period with the post-World War II period where she found that:
"Recessions have not become noticeably shorter over time The average length of recessions is actually one month longer in the post-World War II era than in the pre World War I era. There is also no obvious change in the distribution of the length of recessions between the prewar and postwar eras."
http://elsa.berkeley.edu/~cromer/JEP_Spring99.pdf

.

From the Romer paper:

"Our key finding was that monetary actions taken after the peak in activity—that is, after the economy had turned down—accounted for a substantial fraction of the output growth that occurred in the year following troughs. For example, using policy multipliers from the Data Resources Incorporated (DRI) forecasting model, we calculated that monetary policy contributed 1.5 percentage points to the growth rate of real output in the year following a trough, while discretionary fiscal policy contributed 0.5 percentage points. This is compared with an average actual growth rate in the year following troughs of 4.6 percent. These findings suggest that stabilization policy, especially monetary policy, has played an important role in controlling the size of postwar recessions."

Also:

" Furthermore, there are some periods of robust expansion, such as the early 1960s and the early to mid-1990s, which in the absence of policy would have been episodes of very low growth. This suggests that policy may have prevented some recessions or near-recessions in the postwar era."

So as I said, monetary policy makes recessions less deep; something Romer herself agrees with (though I havn't read the entire paper). And then you have Friedman and Schwartzs' analysis on the great depression, and how a large part of the blame can be put on an an inability to expand the money supply. And the fact that countries who left the gold standard recovered from the depression sooner. And the ability of monetary policy to mitigate the 'great recession' (though it's difficult to prove that this has been the case of course). The evidence that monetary policy is an effective policy tool is pretty strong.

Also, it's not correct to say that monetary policy has been ineffective after centuries of use, give centralised control over monetary policy as a tool for Macroeconomic management hasn't been around for centuries.

I really wonder why the standard mainstream line that the gold standard was terrible, and that central banks control of monetary policy is a useful tool in combating recessions, flies so easily given the dismal failure of central banks according to their own stated aims

What failures, according to which stated aims, are you talking about?

SupaNova

andrew wrote: »

From the Romer paper:

"Our key finding was that monetary actions taken after the peak in activity—that is, after the economy had turned down—accounted for a substantial fraction of the output growth that occurred in the year following troughs. For example, using policy multipliers from the Data Resources Incorporated (DRI) forecasting model, we calculated that monetary policy contributed 1.5 percentage points to the growth rate of real output in the year following a trough, while discretionary fiscal policy contributed 0.5 percentage points. This is compared with an average actual growth rate in the year following troughs of 4.6 percent. These findings suggest that stabilization policy, especially monetary policy, has played an important role in controlling the size of postwar recessions."

Also:

" Furthermore, there are some periods of robust expansion, such as the early 1960s and the early to mid-1990s, which in the absence of policy would have been episodes of very low growth. This suggests that policy may have prevented some recessions or near-recessions in the postwar era."

So as I said, monetary policy makes recessions less deep; something Romer herself agrees with (though I havn't read the entire paper). And then you have Friedman and Schwartzs' analysis on the great depression, and how a large part of the blame can be put on an an inability to expand the money supply. And the fact that countries who left the gold standard recovered from the depression sooner. And the ability of monetary policy to mitigate the 'great recession' (though it's difficult to prove that this has been the case of course). The evidence that monetary policy is an effective policy tool is pretty strong.

My point was that before monetary policy was used as a tool to speed up or slow down the economy, the recessions were not deeper than they are now. The quote above from Romer here doesn't contradict the fact. Also with Friedman's view of the Great Depression it doesn't account for monetary policy being the cause of it in the first place, likewise with the most recent recession. It was monetary policy that blew things up in the first place. The mainstream view is that boom bust is part and part of the market economy and it needs to be tamed, where as the free market view is that monetary expansion and interference with interest rates are the biggest culprits. One says monetary policy is the solution the other says it is often the problem.

What failures, according to which stated aims, are you talking about?

Price stability and full employment. George Selgin gives a specific lecture on the subject:
http://www.youtube.com/watch?v=yLynuQebyUM

andrew

SupaNova wrote: »

My point was that before monetary policy was used as a tool to speed up or slow down the economy, the recessions were not deeper than they are now. The quote above from Romer here doesn't contradict the fact.

And my point was that without monetary policy, recessions would be deeper, because monetary policy can be used to control the size of recessions. This is something unambigouosly confirmed by Romer, and economics in general.

Also with Friedman's view of the Great Depression it doesn't account for monetary policy being the cause of it in the first place, likewise with the most recent recession. It was monetary policy that blew things up in the first place. The mainstream view is that boom bust is part and part of the market economy and it needs to be tamed, where as the free market view is that monetary expansion and interference with interest rates are the biggest culprits. One says monetary policy is the solution the other says it is often the problem.

That monetary policy has (arguably) been the cause of some recessions, and also been the solution to those same recessions, doesn't negate the fact that monetary policy can be and is used as an effective stabilization policy tool. Not all recessions have, or can be claimed to have, a monetary origin.

Price stability and full employment. George Selgin gives a specific lecture on the subject:
http://www.youtube.com/watch?v=yLynuQebyUM

The Federal Reserve isn't the only central bank in the world. The Fed wasn't even the first central bank in the world. You can't say 'monetary policy has failed' and point to just the Fed, which has different policy goals to other central banks.

And even in terms of their objectives, that prices have risen and recessions still happen doesn't mean the Fed has failed. Was the Fed's reduction of inflation in the 70's a failure? Is the fact that the US economy has grown constantly since the 1900's a failure? Is relatively constant price growth a failure? The fact that it has full employment as it's goal doesn't mean that a situation of less than full employment is the Fed's fault, as that video implies.

And the stuff on price stability is just plain stupid. Inflation is higher now than during the gold standard, yet people are materially better off, and there continues to be real growth in the economy, and people can still save. Unless you've a moral problem with inflation, it hasn't been really that much of a problem post gold standard (except in the 70's).

(I didn't watch all of the video; it's long and it's late)

SupaNova

andrew wrote: »

And my point was that without monetary policy, recessions would be deeper, because monetary policy can be used to control the size of recessions. This is something unambigouosly confirmed by Romer, and economics in general.

That monetary policy has (arguably) been the cause of some recessions, and also been the solution to those same recessions, doesn't negate the fact that monetary policy can be and is used as an effective stabilization policy tool. Not all recessions have, or can be claimed to have, a monetary origin.

I don't disagree with you that much here.

The Federal Reserve isn't the only central bank in the world. The Fed wasn't even the first central bank in the world. You can't say 'monetary policy has failed' and point to just the Fed, which has different policy goals to other central banks.

Yes, the BoE in its long history hasn't done much better, and a young ECB hasn't been stellar either.

And even in terms of their objectives, that prices have risen and recessions still happen doesn't mean the Fed has failed. Was the Fed's reduction of inflation in the 70's a failure? Is the fact that the US economy has grown constantly since the 1900's a failure? Is relatively constant price growth a failure? The fact that it has full employment as it's goal doesn't mean that a situation of less than full employment is the Fed's fault, as that video implies.

Actually the video doesn't imply a situation of full employment is solely due to the FED and acknowledges that there are many other factors. The fact that we have had growth is great, but attributing it to the FED or central banking is an illogical leap to make, if only for central banking there would be no growth. Mankind has been hurtling forward despite central banking not because of it.

And the stuff on price stability is just plain stupid. Inflation is higher now than during the gold standard, yet people are materially better off, and there continues to be real growth in the economy, and people can still save. Unless you've a moral problem with inflation, it hasn't been really that much of a problem post gold standard (except in the 70's).

(I didn't watch all of the video; it's long and it's late)

Yeah of course people are better off now than 100 years ago, your reasoning here is what is plain stupid:

We were on a gold standard 100 years ago, we are not now, we have a better standard of living now than we did 100 years ago, therefore people are not materially better off under a gold standard.

andrew

SupaNova wrote: »

Actually the video doesn't imply a situation of full employment is solely due to the FED and acknowledges that there are many other factors. The fact that we have had growth is great, but attributing it to the FED or central banking is an illogical leap to make, if only for central banking there would be no growth. Mankind has been hurtling forward despite central banking not because of it.

I wasn't saying that there'd be no growth without a central bank. You were saying that central banks have been a failure in terms of price stability and growth, and bad in general. I was making the point that, if central banks have been such a bad force within the economy, then there's very little evidence for this in terms of rates of economic growth seen since central banking became the norm, not to mention Romer's analysis of recessions.

Yeah of course people are better off now than 100 years ago, your reasoning here is what is plain stupid:

We were on a gold standard 100 years ago, we are not now, we have a better standard of living now than we did 100 years ago, therefore people are not materially better off under a gold standard.

That's not what my logic was. I was arguing that characterising central banking as a failure because there has been price growth is silly, because this price growth (as long as it's not too large and is relatively constant) has very few harms.

My general point is that if you're going to say central banks have failed and are bad, and that monetary policy has failed, then you need to show some harms above and beyond the benefits of having discretionary monetary policy. Monetary policy is unambiguously beneficial when it comes to managing booms and busts (even the booms and busts which it doesn't cause). What are the harms which negate this benefit, and how would a return to a gold standard be beneficial? Is the fact that (arguably) sometimes monetary policy can create a recession enough to say monetary policy always and everwhere is a bad thing and a negative force?

SupaNova

andrew wrote: »

I wasn't saying that there'd be no growth without a central bank. You were saying that central banks have been a failure in terms of price stability and growth, and bad in general. I was making the point that, if central banks have been such a bad force within the economy, then there's very little evidence for this in terms of rates of economic growth seen since central banking became the norm, not to mention Romer's analysis of recessions.


That's not what my logic was. I was arguing that characterising central banking as a failure because there has been price growth is silly, because this price growth (as long as it's not too large and is relatively constant) has very few harms.

My general point is that if you're going to say central banks have failed and are bad, and that monetary policy has failed, then you need to show some harms above and beyond the benefits of having discretionary monetary policy. Monetary policy is unambiguously beneficial when it comes to managing booms and busts (even the booms and busts which it doesn't cause). What are the harms which negate this benefit, and how would a return to a gold standard be beneficial? Is the fact that (arguably) sometimes monetary policy can create a recession enough to say monetary policy always and everwhere is a bad thing and a negative force?

I'm not arguing for a return to a gold standard, but arguing against the claim that central banks have been a stabilizing force smoothing out booms and busts that they don't create, and arguing against the claim that what we have is an improvement.

The harms are the very booms and busts it creates. It would be great if you could give examples of booms and busts that haven't been brought about through monetary expansion that can compare to say the current boom and bust we are experiencing. If you could do that I might start to swallow some of the benevolent central bank line.

SupaNova

andrew wrote: »

So as I said, monetary policy makes recessions less deep; something Romer herself agrees with (though I havn't read the entire paper). And then you have Friedman and Schwartzs' analysis on the great depression, and how a large part of the blame can be put on an an inability to expand the money supply. And the fact that countries who left the gold standard recovered from the depression sooner. And the ability of monetary policy to mitigate the 'great recession' (though it's difficult to prove that this has been the case of course). The evidence that monetary policy is an effective policy tool is pretty strong.

I missed this, people are quick to find correlations that back up their theory and assume that because countries left the gold standard recovered from the depression sooner, leaving the gold standard and embarking on expansionary monetary policy was the reason, there are many other factors that can lengthen or shorten length and severity of recessions, but such is the sad state of Economics. Then you have the forgotten Depression of 1920, where there was no loosening and the depression was over in far less time than the Great Depression. Woods also has a lecture on the same topic, where he highlights how economic historians neatly brush it aside as it might disagree with their beliefs:

"The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent. No wonder, then, that Secretary of Commerce Herbert Hoover — falsely characterized as a supporter of laissez-faire economics — urged President Harding to consider an array of interventions to turn the economy around. Hoover was ignored.


Instead of "fiscal stimulus," Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third.


The Federal Reserve's activity, moreover, was hardly noticeable. As one economic historian puts it, "Despite the severity of the contraction, the Fed did not move to use its powers to turn the money supply around and fight the contraction."[2] By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923."

bushi

Victor wrote: »

Even when gold standards were in place, inflation was at time rampant.
Only in the price of gold.

...well this is a bit of a nonsense, isn't it. Inflation can only occurs, when the money supply is extended. I.e. money is printed, Quantitively Eased, LTROed etc, etc.... You cannot print gold, you have to mine it. Thus governments could not overspend like crazy (like it is today), they could not wage wars like crazy (like it happens today), and central banks could not print on a whim, to enable governments to do all that crap - in the process, destroying the currency's buying power.

Yes, there were inflations in gold-based monetary systems in the history, when the large quantities of gold were all of a sudden supplied to local economies (ie gold rush in California, or the age of Spanish conquest of South America), and these were quite serious for their respective economies. But first, there is a very little chance now to discover a gold fields comparable to California's, or to find another unconquered continent to exploit and extract the wealth from, is it. Under the Classic Gold Standard (pre- WW1), in general, there was a stable, small deflation - which one should intuitively expect in the capitalist economy - steadily increasing industry effectiveness, causes the prices to be lower.

Victor wrote: »

And if all currencies were tied to gold, there would be no ability for currencies to fluctuate over time and ease some of the worst excesses that happen.

The "worst excesses that happen", are the result of unchecked cheap money, being printed out of nothing by Central Banks. And when the money is cheap (or effectively free, like in today's near-zero interest rates environment), it prompts risky investments, by those, who can tap to the source of that free/easy money, ie big investment banks. That is a definition of what an economic "bubble" is. But not your mom and pop investors, they are at the end of the money chain, so they cannot reap the fruits, but are getting it hard, right up their... -by the value of their savings being greatly reduced (), and inflation, that props their daily expenses up.

In short, "borrow more & spend it right now" is a more rational approach, than "save it today, amass your wealth, and consume it later", in such perversely designed system, as we all are "enjoying" today.

Victor wrote: »

No. Imagine if there was a major war in the Middle East and all the oil was cut off. Do you not think there would be inflation in the price of oil that would follow through to inflation in other prices?

It would not be an inflation! If the price of oil would rise, than the prices of other goods (in less demand) would HAVE to get lower - otherwise there would not be enough money in the economy, to buy them! The manufacturers of these goods could (and probably would try to) command higher prices for their stuff, to compensate for their increased costs, but it doesn't mean, that they would be able to get them - because there is no more money in the economy, actually there is LESS money, because MORE was spend on the first-need good (the oil). Of course, if these goods are necessities (like food, clothing, etc.) - people would NEED to buy them whatever the price, but then, they will stop spending on OTHER things - thus lowering their respective prices, eventually. In highly "overheated" economy, it might mean that the whole sectors would collapse, because people cannot afford their products (anything rings the bell, regarding Irish holiday industry/hotels/Spas/numerous franchises going out of business?)

Remember, inflation ONLY happens, when the Central Banks print more money. Where do you think the extra money would come from, in your Middle East war scenario?
It is an oxymoron, to say that inflation can happen because of price rises. It cannot. If you do not increase the money supply, inlation CANNOT happened (constant size of the money pool, means that AVERAGE PRICE OF ALL GOODS, cannot change = thus no inflation, by definition). Your are confusing the causes (money printing) with effects (AVERAGE price rises = inflation).

Victor wrote: »

Note: Some inflation is useful - hence ECB and BoE targets of about 2% - as it means that gradual adjustments in prices can occur between commodities.

...well that a "some inflation is usefull" is a mantra, without any real backing. Like I said, under the Classical Gold Standard period, there was long-term, constant DEFLATION, and the standards of living for the people increased immensely. INflation is ONLY required, to cheapen the currencies, and to pay the interest on all the money in the economy, that is currently created as a DEBT. Remember, in today's Keynesian/Central Banks cartel system, no debt=no money in the economy. Quite a funny concept, isn't it? But here we are.

Victor wrote: »

Why do you say this? The only bubble it would prevent would be a gold bubble. Hoarding or instability or other factors could create bubbles in other commodities.

It would most probably prevent majority of the bubbles, and the misallocations of the capital wouldn't be even nearly as severe, as it happens under our current fiat money systems. Cheap/free money, accessible for institutional speculators, is what creates the bubbles. Later on, the fact, that people realize, that holding on to their MONEY, actually destroys their saving's purchasing power in the long run, is what further fuels the bubbles (people are pushed into risky investments, instead of just holding on to their hard-earned MONEY, that SHOULD have earn them stable and decent INCREASE in purchasing power, over the years - which obviously isn't happening with all the Central Banks of this world printing all the time like crazy, and thus destroying the purchasing power of their respective currencies).

That would not happened, if money was:
a) scarce, and not nearly-free for institutional investors,
b) slightly deflationary - indeed people would "hoard" much more of it (there was a time in the history, when such a "hoarding" was called "saving"). More savings is a GOOD thing to economy! More DEBT, is not! Ask ze Germans, and the Greeks, if you want to argue that!

..Because first, banks would first need to convince people to get their savings (today, instead, they just prop the Central Banks to lend them some more billions, thank you very much), and secondly - if your money is already appreciating over time, instead of depreciating - why would anyone invest in some risky monkey-business schemes? The business would have to be solid and well thought out, to attract investors - where today, anything goes - a family house in a middle of nowhere, that has to be sold for a € half a million, to make a profit??? Hell, why not, here's your loan, Mr. Developer!


FACTS and REASONING versus BELIEFS. Thank you very much.

I would suggest to read "The Alpha Strategy", By John A. Pugsley, to get the real understanding how inflation works, in layman terms, what a price is, how the real economy works, what causes inflation/price rises, and to "unconfuse" yourself from all the technical economic blabber. Which really is quite simple, if you have a good eamples at hand, and open mind to question th popular beliefs (which obviously, as we can see around us, are not well-informed).

SupaNova

bushi wrote: »

You cannot print gold, you have to mine it. Thus governments could not overspend like crazy (like it is today), they could not wage wars like crazy (like it happens today), and central banks could not print on a whim, to enable governments to do all that crap - in the process, destroying the currency's buying power.

Unfortunately the gold standard is not a mystical super shackle that will prevent wars and governments from overspending, history is testament to the fact.

happyman81

SupaNova wrote: »

bushi wrote: »

You cannot print gold, you have to mine it. Thus governments could not overspend like crazy (like it is today), they could not wage wars like crazy (like it happens today), and central banks could not print on a whim, to enable governments to do all that crap - in the process, destroying the currency's buying power.

Unfortunately the gold standard is not a mystical super shackle that will prevent wars and governments from overspending, history is testament to the fact.

Off the top of my head, during the Gold Standard era the Franco-Prussian war occured, as did the Crimean War, I believe. There was also a war between Russia and Japan, and the US and Mexico.

From memory, but could be wrong on some. Can anyone think of more?

.

bushi

SupaNova wrote: »

Unfortunately the gold standard is not a mystical super shackle that will prevent wars and governments from overspending, history is testament to the fact.

Theoretically - yes, it WOULD BE, if enforced - but in the wartime, gold standards were SUSPENDED, time and again, and temporarily replaced by paper-money ones, that governments COULD print out of nothing, to finance their war efforts. Usually, that paper money was universally hated by the people, because under paper's rule, they were experiencing and suffering - yes, you got it right - an INFLATION, and their costs of living were soaring.

So whomever could, did hoard their Gold/Silver money (or rather, preserving his saving's purchasing power), and avoiding government-issued paper as a cholera. This of course was causing "gold price to rise" (which is of course a nonsense - in fact what was happening, was that paper money was depreciating as fast as they were printing it). That "price rise", as we would say today, or "paper money worthlessness", as it was seen by most of the people back then, was also serving as an easy and quite "in your face" check on government going broke - and usually prompt some corrective actions.

So it wasn't gold PREVENTING governments from ill-doing, but the example demonstrates, that war efforts are IMPOSSIBLE to finance, under a strict regime of available physical gold, that's quantity is out of control of governments. And indeed, overspending (ie operating budgetary deficits, year after a year, after a year...), is extremely difficult under Gold Standard, and again, corrections are much quicker and much less violent - it is much more difficult, to "kick the can down the road", if there's no printing press to the (temporary) "rescue".

History indeed holds all the facts, it is just that we are not quite used to draw our own conclusions from it.

SupaNova

As you know, if funding a war is not possible under a gold standard it is simply abandoned, it would not be any different today. If people want a gold standard today, they first need to change the course of political will so that it is strongly anti-war and anti-overspending otherwise it's a futile exercise. But then if you can do that, you don't need the attribute of being the disciplinarian you assigned the gold standard.

bushi

happyman81 wrote: »

Off the top of my head, during the Gold Standard era the Franco-Prussian war occured

...off the top of my head, both sides sponsored by...?? Rotschilds, and their fractional-reserve, paper-money issuing banks, no?

I don't know about all the wars, and obviously, gold standard preventing them all from happening is an utopia - but definitely, it would make PEOPLE much more in check of what are actual government spendings, and it would be much more difficult to massage the statistics, as it is done now, to excuse some more money printing.

bushi

andrew wrote: »

That's not what my logic was. I was arguing that characterising central banking as a failure because there has been price growth is silly, because this price growth (as long as it's not too large and is relatively constant) has very few harms.

...what about the fact that the REAL purchasing power of families, and REAL expendable income is constantly shrinking, since the introduction of CBs? Standards of living are up, yes, but it is to be attributed to the immense increase in productivity, and NOT monetary policies! What about the immoral fact, that the private banks were given the monopoly to create nations' money out of nothing, and charge interest on it? What about the fact that ALL money in the circulation (bar coins), need to be paid back to them at some stage, WITH interest, and that there is no way to escape that debt slavery, other than by somoeone, somewhere, borrowing EVEN MORE? What about the fact, that since Fed took the steering wheel, Dollar's purchasing power has been reduced by about 95%?
What about the "ratio of foreclosures", that is expected to happened, BY DESIGN, DESPITE all the efforts of the productive economy???

...
I personally believe that our current banking/monetary system is nothing short of a sophisticated scam and ponzi scheme, and we would be all IMMENSELY better off without it, and on the gold standard, for example (or any other standard, that would PREVENT central entities from controlling the supply of money in the economy. This is the ULTIMATE power, not the supposedly democratic governments. And if there is a power above a democratic government, well, that is bad, isn't it)

andrew

SupaNova wrote: »

I'm not arguing for a return to a gold standard, but arguing against the claim that central banks have been a stabilizing force smoothing out booms and busts that they don't create, and arguing against the claim that what we have is an improvement.

The harms are the very booms and busts it creates. It would be great if you could give examples of booms and busts that haven't been brought about through monetary expansion that can compare to say the current boom and bust we are experiencing. If you could do that I might start to swallow some of the benevolent central bank line.

In terms of busts and booms not brought about by monetary shocks: they're called exogenous shocks. A (literally) textbook example of an exogenous shock which was mitigated by monetary policy, is the example of Australian and New Zealand monetary policy in response to the Asian Crisis in 1997. Demand for Auz and NZ exports fell dramatically during the crisis; a large exogenous reduction in demand. You'd expect both Auz and NZ to have entered a recession, but both their central banks embarked on an expansionary policy, lowering interest rates drastically. Their currencies depreciated, and declines in exports were minimised and quickly reversed, stemming the fall in aggregate demand. This has been the reason for many recessions in the past, especially smaller exporting nations suffering the effects of recessions in other countries.

There are a few reasons why examples of effective monetary policy like this are hard to come by. Firstly is that monetary policy is constantly used to manage the economy, and obviously it's next to impossible to point to all the recessions which didn't exist (except maybe in a case like above) due to the use of monetary policy. This has another effect too, because if monetary policy is effective as smoothing out demand shocks, then the only thing left to create recessions...is monetary shocks. And so of course recessions will be attributed to monetary policy if monetary policy is the only thing left to lead to booms and busts.

Another factor is that, while central banks have been around for about a century, autonomous monetary policy hasn't. A gold standard was in effect until the 70's and there were subsequently 30 years of exchange rate agreements (the ERM) in Europe up until the Euro. This kept exchange rates within narrow bands, ruling out autonomous monetary policy for european community countries unless they were willing to painfully leave the mechanism, as some did. Certainly, the Aus NZ policies explained above wouldn't have been possible under the ERM, not without a lot of pain; and the ERM contributed to economic difficulties by preventing european economies from having their own exchange rates.

My point is that monetary policy is a handy tool for combating exogenous demand shocks, whatever their origin, positive or negative. Even if it can be used poorly, and even if it causes some recessions (though I'd disagree that it's as important as you think it is; maybe a topic for another thread), it's still a useful policy option to have lying around. Absent such a tool it's very difficult to cope with demand shocks.

SupaNova

andrew wrote: »

In terms of busts and booms not brought about by monetary shocks: they're called exogenous shocks. A (literally) textbook example of an exogenous shock which was mitigated by monetary policy, is the example of Australian and New Zealand monetary policy in response to the Asian Crisis in 1997. Demand for Auz and NZ exports fell dramatically during the crisis; a large exogenous reduction in demand. You'd expect both Auz and NZ to have entered a recession, but both their central banks embarked on an expansionary policy, lowering interest rates drastically. Their currencies depreciated, and declines in exports were minimised and quickly reversed, stemming the fall in aggregate demand. This has been the reason for many recessions in the past, especially smaller exporting nations suffering the effects of recessions in other countries.

But again the Asian crises was a clear case of monetary mismanagement, starting with Thailand's overvalued exchange rate peg. And if there are examples of responses that were not expansionary to similar drops in demands for exports, you certainly can't conclude that expansionary policy is the right response. Even if there are not examples where non expansionary policy was tried you still cant conclude that expansionary policy is the right response just because the patient got better. The patient may have gotten better all by himself or with another prescription.

andrew

SupaNova wrote: »

But again the Asian crises was a clear case of monetary mismanagement, starting with Thailand's overvalued exchange rate peg. And if there are examples of responses that were not expansionary to similar drops in demands for exports, you certainly can't conclude that expansionary policy is the right response. Even if there are not examples where non expansionary policy was tried you still cant conclude that expansionary policy is the right response just because the patient got better. The patient may have gotten better all by himself or with another prescription.

It doesn't matter what caused the Asian crisis; we're talking about whether monetary policy is an effective policy response to a shock or not, whatever the underlying source of that shock.

Obviously it's impossible to nail causation 100% in a social science, but there are solid theoretical reasons underpinning Auz and NZ's monetary policy success, and so you can't really dismiss that result just because there's no control for the Auz and NZ example.