Assuming Money

[LargoWinch]

Decent article explaining the failling of the Gold Standard and Austrian Economic theory:

By Derryl Hermanutz

In a Sept.24 OpEdNews article by Robert Reich titled, "When Will Wall Street Call for More Federal Spending?" http://www.opednews.com/articles/When-Will-Wall-Street-Call-by-Robert-Reich-110924-414.html , Robert wrote,
"If this keeps up, we'll have a showdown between establishment Republicans who understand what must be done -- and who will support substantially more federal spending in the short term in order to goose the economy -- and Tea Party zealots who refuse to face reality."


Some of the "Tea Party zealots" actually do see reality, but they evaluate it differently due to their Austrian School monetary perspective. Austrians believe gold is the only "real" money, the only "natural" (and thus inevitable) form of money. They think the creation of credit money based on a "fractional reserve" of gold bullion is scandalous, and the pure fiat dollar that we've had since 1971 is an unmitigated abomination.


In the Austrian worldview the money supply should be a fixed sum, growing only as fast as miners can dig up new gold. If the real economy also grows about as fast as the increase of gold/money, then overall there should be price stability. Money would retain its purchasing power over time rather than being diluted by money supply "inflation".


Austrians want to hold the value of money fixed, and the real economy must revolve doggedly around this moneycentric system for the benefit of the 5% of the population who have lots of money. Proponents of modern money theory (MMT), on the other hand, see the real economy as central, with an adjustable supply "fiat" money system being used to keep the economy functioning for the benefit of all of us 95% who do not already have a lifetime supply of money and who depend on working in a functioning economy to earn ongoing incomes.


In a zero sum money system like the Austrians' idealized gold bullion money, one person's monetary "profit" can only come at the expense of another person's monetary "loss". There is by definition a "fixed supply" of bullion, and for one person to get more of it somebody else has to have less. Yet everyone agrees that we all need to "profit" from our work. If a caveman "spends" 3000 calories per day hunting food, and only "earns" 2500 calories for his work, that "unprofitable" entrepreneur/worker is going to starve to death. We "need" to profit from our work.

...

Continued here.

[thriftyandboringinohio]

Re: Assuming Money

Thanks, Largo. It is a most entertaining summary.

[shiny!]

Re: Assuming Money

In a zero sum money system like the Austrians' idealized gold bullion money, one person's monetary "profit" can only come at the expense of another person's monetary "loss". There is by definition a "fixed supply" of bullion, and for one person to get more of it somebody else has to have less.

I don't necessarily agree with this. Under a fixed money supply like gold, prosperity can be generated when increasing manufacturing efficiency causes a reduction in the cost of goods to consumers.

A good example of this is the Ford Model T.

When cars were invented they cost more than the average worker could afford. Henry Ford developed a cheaper way to manufacture them using mass assembly.

From Wikipedia: http://en.wikipedia.org/wiki/Henry_Ford#Model_T

The Model T was introduced on October 1, 1908. It had the steering wheel on the left, which every other company soon copied. The entire engine and transmission were enclosed; the four cylinders were cast in a solid block; the suspension used two semi-elliptic springs. The car was very simple to drive, and easy and cheap to repair. It was so cheap at $825 in 1908 ($20,100 today) (the price fell every year) that by the 1920s, a majority of American drivers had learned to drive on the Model T.

Ford created a massive publicity machine in Detroit to ensure every newspaper carried stories and ads about the new product. Ford's network of local dealers made the car ubiquitous in virtually every city in North America. As independent dealers, the franchises grew rich and publicized not just the Ford but the very concept of automobiling; local motor clubs sprang up to help new drivers and to encourage exploring the countryside. Ford was always eager to sell to farmers, who looked on the vehicle as a commercial device to help their business. Sales skyrocketed—several years posted 100% gains on the previous year. Always on the hunt for more efficiency and lower costs, in 1913 Ford introduced the moving assembly belts into his plants, which enabled an enormous increase in production. Although Ford is often credited with the idea, contemporary sources indicate that the concept and its development came from employees Clarence Avery, Peter E. Martin, Charles E. Sorensen, and C. Harold Wills. (See Piquette Plant)

Sales passed 250,000 in 1914. By 1916, as the price dropped to $360 for the basic touring car, sales reached 472,000 (Using the consumer price index, this price was equivalent to $7,020 in 2008 dollars.)

By 1918, half of all cars in America were Model T's. However, it was a monolithic black; as Ford wrote in his autobiography, "Any customer can have a car painted any colour that he wants so long as it is black". Until the development of the assembly line, which mandated black because of its quicker drying time, Model T's were available in other colors, including red. The design was fervently promoted and defended by Ford, and production continued as late as 1927; the final total production was 15,007,034. This record stood for the next 45 years. This record was achieved in just 19 years from the introduction of the first Model T (1908).

Ford cut costs by radically improved manufacturing techniques, all the while paying his workers extremely well. He also radically changed the way his products were promoted and sold. He made his cars so inexpensive that practically everyone could afford them. He did this all while the country was on a gold standard.

Our modern technological civilization was built upon cheap oil, which is now gone. But imagine what can happen if there are similar "Ford-like" breakthroughs in solar and wind generation, electric batteries, nanotechnology, etc. If energy is cheap enough- perhaps even free at some point, costs for food, transportation and housing would all drop. That would once again allow people's money to go further and fuel a growth in prosperity for all.

I think you can have a healthy economy using a fixed monetary system rather than fiat money and inflation. But to do so, workers have to have wages sufficient to be able to afford the things they manufacture. We need to reduce regulatory capture and restore our manufacturing base. We also need to stop subsidizing gargantuan, obsolete businesses that have failed, and instead create a business environment that encourages small, nimble and innovative start-up companies.

Under thirty years of FIRE, workers in the US have been reduced to burger flippers, paper pushers and government employees. Forty years of pure fiat currencies and a credit-based economy has caused the majority of us to become poorer. We're now broke, the laborers in the sweatshops exist in slavelike conditions, while the people at the top pay themselves obscene bonuses.

It's true that under this kind of imbalance the vast majority of people who don't own gold would suffer horribly under a gold standard. But I think we can do much, much better than this.

[tombat1913]

Re: Assuming Money

Even if you don't agree with a gold standard, this is a fat headed explanation of it. "The real economy must revolve doggedly around this money centric system for the benefit of the 5% of the population who have lots of money." This statement alone is enough meat to chew on because I have little taste for dumb.

First, at least the 5% who have all the money would have earned it by virtue of wealth production, not by being first at the feeding trough of the FED.
Second, It's a fiat system that is money centric, not a gold system. This massive money manipulating FIRE economy wouldn't have existed in a gold system because there would be no fractional reserve system and there would have been no massive inflation directed at the housing market. Fiat creates an entire genre of 'business' based upon watching what the FED is going to do with the money supply instead of actually producing something of value. Gold is value centric, not currency centric.
Third, what the hell is so wrong with the value of ones saving increasing?

And the statement about fiat keeping the economy functioning, how pompous! As if central planners are somehow greasing the gears and pulling the levers of the economy to "keep it functioning for the benefit of the 95%". Blah!

[c1ue]

Re: Assuming Money

First, at least the 5% who have all the money would have earned it by virtue of wealth production, not by being first at the feeding trough of the FED.

I'd say that this assertion is highly suspect.

Are you really trying to tell me the banksters - who have most of the money these days - earned it?

Switching to a gold standard now enshrines that economic theft into perpetuity.

Second, It's a fiat system that is money centric, not a gold system. This massive money manipulating FIRE economy wouldn't have existed in a gold system because there would be no fractional reserve system and there would have been no massive inflation directed at the housing market. Fiat creates an entire genre of 'business' based upon watching what the FED is going to do with the money supply instead of actually producing something of value. Gold is value centric, not currency centric.

While many of these statements are true, the fact is in a system where there is no credit creation - i.e. a 'hard' gold standard - those who hold the what money exists own a monopoly on the ability to float merchandise, to build new industrial capacity, to perform research and development, and so forth.

It is because none of these activities generate income immediately; if you don't have the cash then you simply cannot undertake them and this in turn gives disproportionate power to those who do have the cash.

Third, what the hell is so wrong with the value of ones saving increasing?

There's nothing wrong with this, so long as it doesn't screw everyone else including the overall economy.

A hard gold standard was fine in 1900 when 90% plus of people were subsistence farmers, with the remainder mostly servicing these farmers. Most people didn't have cash and didn't need it.

The same is not true today.

[SlopeOak]

Re: Assuming Money

those who hold the what money exists own a monopoly on the ability to float merchandise, to build new industrial capacity, to perform research and development, and so forth.

Trying to understand what you mean, here. Can you explain how this is different in a fiat system vs gold standard?

If I want to build new industrial capacity under our current fiat system, I cannot generate the necessary money out of thin air any more easily than I could under a gold standard.

[DSpencer]

Re: Assuming Money

Even if you don't agree with a gold standard, this is a fat headed explanation of it.

Very true. It's really just an awful article.

When the entire system contains a total fixed sum of 100 golden marbles, then you can redistribute possession of marbles so some get more while others have less, but "the economy" can never get "richer" in money, because by definition you have fixed the total supply of money at 100 golden marbles. The economy could get richer "in economic goods" if people convert resources to economically useful goods and services. But the economy cannot get richer "in money". That critical point is lost on the entire Austrian and neoclassical Schools of economics in their assumptions about money.

Getting richer "in economic goods" is the point!

Does this guy think that the goal is to just get richer and richer in worthless money?

The government could issue a $2 trillion coin (for example), deposit that coin in its account at the Federal Reserve, and the Fed would credit the government's account with a $2 trillion deposit of "money".
...
So the government already has a legal mechanism in place to create all the money it needs debt free.

Oh, I guess so.

[LorenS]

Re: Assuming Money

Most real Austrians don't have a fixation on a "gold standard" - which is an artificial government fiat arrangement as well.

Most Austrians want to let money preferences be settled by the market.

I tend to prefer the constitutional definition. Congress gets to set the weight and fineness of a given coin, the mint will, as a service, convert your bulk metal into said weights and measures, and then we get to trade them as we see fit. Taxation is then accomplished by using the Congressional money units. The rest of us are free to engage in commerce as we see fit.

[Ghent12]

Re: Assuming Money

I'd say that this assertion is highly suspect.

Are you really trying to tell me the banksters - who have most of the money these days - earned it?

Switching to a gold standard now enshrines that economic theft into perpetuity.

Obviously he's not saying that the banksters earned it from a value-creation perspective. Reading the rest of his post will tell you that. They are in the business of currency manipulation and profiting from arbitrary and completely artificial Byzantine political arrangements that ultimately originate at the FED.

No, switching really doesn't enshrine theft into perpetuity. In this hypothetical scenario where we switch to a gold standard now, there are really two directions that the current wealthy can take. They can either tend to spend their wealth, thereby exchanging it to others for goods and services; or they can just keep their wealth and do nothing with it, which would have essentially no impact on the "outside" economy the same way gold still in the Earth does not really influence the economy. Indeed the rich could potentially be disruptive by adjusting the rates at which they spend wealth from high to low/stop, but market price systems are about as fast at communicating signals as Internet connections nowadays.

[Starving Steve]

Re: Assuming Money

The central banks do not need to goose the money supply. What we need is to increase the supply of tangible products and including the energy supply. Then, if the money supply would be held constant, prices would fall, and the standard of living of the people would rise.....Simply, it's the tinkering and goosing of the world's money supply by central banks that has gotten the world into this morass that we now call, "The Great Recession". To emerge from this morass, Keynesian economics will have to be discarded. Economic policies and economic thinking will have to be re-set.

[c1ue]

Re: Assuming Money

Trying to understand what you mean, here. Can you explain how this is different in a fiat system vs gold standard?

If I want to build new industrial capacity under our current fiat system, I cannot generate the necessary money out of thin air any more easily than I could under a gold standard.

Very simple example:

You have an existing system where $100 in gold is being used to transact all the various economic business that exists.

You seek to add new economic business. If the business succeeds, suddenly we have more economic activity. Yet there is still only the $100 in gold.

Each bit of economic activity is now devalued to match the 'hard' $100 in gold.

The person loaning or spending that bit of 'hard' money is thus faced with the fact that creating new economic activity literally reduces the value of the new activity while making what was spent more valuable.

On the other hand, having this bit of 'hard' money means you can squeeze value out of any and every person needing liquidity.

Which is preferable? Creating a new business - inherently risky and somewhat counterproductive - or just taking your taxes from everyone who needs liquidity?

No, switching really doesn't enshrine theft into perpetuity. In this hypothetical scenario where we switch to a gold standard now, there are really two directions that the current wealthy can take. They can either tend to spend their wealth, thereby exchanging it to others for goods and services; or they can just keep their wealth and do nothing with it, which would have essentially no impact on the "outside" economy the same way gold still in the Earth does not really influence the economy. Indeed the rich could potentially be disruptive by adjusting the rates at which they spend wealth from high to low/stop, but market price systems are about as fast at communicating signals as Internet connections nowadays.

I don't understand why in your above scenarios, you didn't include the actual option employed during hard money eras: Loan sharking

Think of borrowing money in a 'hard money' era as trying to get VC funding for an internet startup today: unless you have connections or a pedigree, it ain't happening.

[SlopeOak]

Re: Assuming Money

Very simple example:

You have an existing system where $100 in gold is being used to transact all the various economic business that exists.

You seek to add new economic business. If the business succeeds, suddenly we have more economic activity. Yet there is still only the $100 in gold.

Each bit of economic activity is now devalued to match the 'hard' $100 in gold.

The person loaning or spending that bit of 'hard' money is thus faced with the fact that creating new economic activity literally reduces the value of the new activity while making what was spent more valuable.

On the other hand, having this bit of 'hard' money means you can squeeze value out of any and every person needing liquidity.

Which is preferable? Creating a new business - inherently risky and somewhat counterproductive - or just taking your taxes from everyone who needs liquidity?

I appreciate the response, but I still don't understand. You've explained the gold standard side; could you explain the equivalent on the fiat side?

A private citizen still cannot create money out of thin air in either system. But in the fiat system, banks and governments can. That's the main difference I see between the two systems (banks and gov'ts can make money out of thin air). Why is this supposed to be better?

[c1ue]

Re: Assuming Money

I appreciate the response, but I still don't understand. You've explained the gold standard side; could you explain the equivalent on the fiat side?

A private citizen still cannot create money out of thin air in either system. But in the fiat system, banks and governments can. That's the main difference I see between the two systems (banks and gov'ts can make money out of thin air). Why is this supposed to be better?

A fiat system isn't necessarily better; it can be much worse when the fiat is abused. This is the greatest criticism of fiat: that those who have the ability to print - governments and/or banks - have a built-in incentive to overprint.

However, the theory behind fiat is that the amount of printing is to be adjusted to the amount of growth.

Thus in the example above, while the private citizen cannot himself print money (though the difference between a private citizen and a bankster is somewhat debatable), the ability to obtain loans from banks is far easier than in a 'hard' money scenario.

Those who have money also theoretically should deploy their money to work - because the growth in overall money supply via fiat is an inherently depreciating effect.

This in turn is true because interest rates lag inflation.

Note that the above criticism of fiat has its counterpart to 'hard' money: the inability to print forces the government out of any immediate impact on the overall economy. If you look at the US economy prior to the creation of the Federal Reserve, there was almost a clockwork cycle of booms and busts punctuated by the really big 1873 bust.

Please note that I'm not saying that fiat somehow removes the inherently anti-competitive impact of huge sums of money in a small number of hands.

[tombat1913]

Re: Assuming Money

I'd say that this assertion is highly suspect.

Are you really trying to tell me the banksters - who have most of the money these days - earned it?

Switching to a gold standard now enshrines that economic theft into perpetuity.

Quite the opposite, I'm saying that the money isn't earned, it's manipulated out of the system as described in the fiat video posted on the main page. The economic theft in perpetuity is a system that allows irresponsible banks to receive money printed out of thin air, and the bailout when their balance sheets are crushed by poor management the resulting devaluation of savings of responsible people.

While many of these statements are true, the fact is in a system where there is no credit creation - i.e. a 'hard' gold standard - those who hold the what money exists own a monopoly on the ability to float merchandise, to build new industrial capacity, to perform research and development, and so forth. It is because none of these activities generate income immediately; if you don't have the cash then you simply cannot undertake them and this in turn gives disproportionate power to those who do have the cash.

Those who hold the money will always decide where it is going to be spent, whether through investment or loan. How many people do you know who can just go out and build new industrial capacity or take on major R&D without asking somebody with lots of money to front the cash? Of course they need a loan. But when the money just shows up as zeros and ones it will be misallocated because there is always more to come.

More to the point though, I think there is a gross conceptual error here about what a gold standard actually is. What it is is nothing more than restriction on creation of currency. The credit system existed long before fiat currency. It's not as though economics simply didn't exist when there were limitations on currency creation. Why would we assume that placing limitations on currency creation is suddenly going to halt creditors from loaning money?

Gold would represent the underlying value of assets just the same as dollars do now, and as true wealth (technology, food, homes, etc.) are created, the value of a kilo of gold would rise because the wealth that it represents has increased. Now, because the value of that kilo has increased, a few grams of that can be invested or loaned to entrepreneurs to create more wealth without jeopardizing the net value of the original savings. However, it's going to be loaned wisely because it's a finite and appreciating asset. Of course people and institutions are going to want to invest their wealth in hopes of return, of course they would invest in R&D and infrastructure, those things are much more valuable than a piece of yellow metal. Holding a chunk of mineral should never get a greater ROI than creating something truly valuable, and in a gold standard it wouldn't, there would be plenty of credit to worthy beneficiaries. It's the fiat system that has made me wealthier by holding on to these stupid little coins instead of investing in solid well run companies as I would like to do. It's the fiat system that has banks to afraid to loan money to small businesses and has the credit system freezing up.

Contrarily fiat credit comes from nothing, it has no intrinsic value as we found out with these derivatives that are eating the economy like cancer. They print it like monopoly money or don't bother to print it at all and dish it out to poorly run solar panel companies that go bankrupt within a year, and mismanaged banks, and programs to send contraceptives to prostitutes in China, and subsidies to militarize small town police with armored vehicles that look like they belong on the streets of Tikrit, and vanishing pallets (literally pallets) of fiat to third world countries. This is what happens when currency has no intrinsic value.

There's nothing wrong with this, so long as it doesn't screw everyone else including the overall economy.

How could one's savings increasing in value possibly screw anybody?

A hard gold standard was fine in 1900 when 90% plus of people were subsistence farmers, with the remainder mostly servicing these farmers. Most people didn't have cash and didn't need it.

The same is not true today.

Assuming that you're correct and farmers grew everything they needed on their own farms and didn't need cash for seed, feed, dishes, linens, tables, chairs, hairbrushes, tools, shoes, rope, playing cards, alcohol, lantern oil, soap, etc. (and I expressly do not share that assumption). What relevance does this have? A currency standard is nothing more than a limitation on the creation of currency. Not a limitation on credit or wealth or the amount of cash that people can carry. Something was needed to represent wealth for the sake of trade. Gold was chosen because it's durable, divisible, consistent, convenient, and has value due to it's limited quantity; it was a practical choice. It's still a practical choice.

[Ghent12]

Re: Assuming Money

Very simple example:

You have an existing system where $100 in gold is being used to transact all the various economic business that exists.

You seek to add new economic business. If the business succeeds, suddenly we have more economic activity. Yet there is still only the $100 in gold.

Each bit of economic activity is now devalued to match the 'hard' $100 in gold.

The person loaning or spending that bit of 'hard' money is thus faced with the fact that creating new economic activity literally reduces the value of the new activity while making what was spent more valuable.

On the other hand, having this bit of 'hard' money means you can squeeze value out of any and every person needing liquidity.

Which is preferable? Creating a new business - inherently risky and somewhat counterproductive - or just taking your taxes from everyone who needs liquidity?

Currency and money are relative, and they have relative values. There shouldn't be much a problem addressing the added economic activity on a "hard" money standard, since that is essentially what occurred for all of history prior to 1971. The "efficient market" theory says that the trend for all goods and services is that they become cheaper and/or better over time, hence the added economic value of any given activity in a "hard" money system will mean that all related economic activity will command a lower share of per unit monetary value. That means more goods/services and at a lower price.

I don't understand why in your above scenarios, you didn't include the actual option employed during hard money eras: Loan sharking

Think of borrowing money in a 'hard money' era as trying to get VC funding for an internet startup today: unless you have connections or a pedigree, it ain't happening.

Ooooh, big bad lenders not willing to lend enough money to someone to create Pets.com? One man's "loan shark" is another man's savior, and I think that, given the nature of the Bubble Economy we live in, a tightening of credit standards right now would not be a bad thing. Loose credit leads to squandering of resources far more than a lack of credit leads to non-productivity.

Absurdly low credit standards create bubbles, and Greenspan/Bernanke FED chairmanships create absurdly low credit standards. It's like the people who hated President Bush's "abuses of power" and then call for more executive power to be in the hands of President Obama. Try to think at least one step ahead--power that can be used responsibly can also (and as a rule it will also) be used irresponsibly. The value of money should belong to the economy, just as the value of credit should. At least then "systemic mistakes" don't grow into "too big to fail" entities.