vaniver:

voxette-vk:

femmenietzsche:

tanadrin:

uncrediblehallq:

Learning more about American history has given me two related beliefs that I’m not sure I’ve seen anyone lay out quite explicitly:

1) Gold buggery is not a random delusion, like the belief that disease could be cure by bleeding, but something that came into existence because it served very particular class interests.
2) Keynes and other 20th-century macroeconomists weren’t original, they just put a respectable face on ideas that had been around a long time.

First, gold buggery: historically, mostly normal people have not thought the gold standard is a good idea. In addition to all the reasons Vox.com would tell you the gold standard is a bad idea, gold money has a serious problem that is extremely obvious even if you know nothing about economics. The problem is just that gold is too valuable to be useful for everyday financial transactions. Even a tiny one-gram coin would be worth $40 today. You can’t pay in gold for a loaf of bread or pint of ale.

So why adopt the gold standard? Well, if you’re a creditor, you might lobby for your country to adopt a gold standard because this will make you richer than if your country adopted paper money like every sensible economist today thinks it should. This rationale for the gold standard is, if anything, even more evil than it sounds. Historically creditors have a tendency to believe that they’re entitled to risk-free return on their capital, when the cold hard reality is that there is no such thing as a risk-free investment. But creditors believe they’re entitled to one anyway, and have at times destroyed entire economies rather than accepting losses.

Another reason to adopt a gold standard is that next time you get into a war, you want to be able to buy weapons and food and other war materials and hire mercenaries from abroad. They might not want to be paid in a paper currency that could cease to exist once the war is over. So you fix your currency to gold so foreigners will take it during a war.

But that’s also kind of crazy. Why reorient your entire economy around gold when you could just stockpile gold in a vault, to be used in case of emergency? This is a normal thing for countries to do today, it’s called having foreign exchange reserves, and it doesn’t require a gold standard. That sort of thinking mostly only makes sense from the point of view of political elites who are very invested in their country’s war-fighting ability, and rich enough to weather any economic problems caused by the gold standard.

Now about Keynes. It turns out during America’s Long Depression of 1873-1879, a lot of farmers were convinced that their problem was simple: they didn’t have enough money. Literally. They thought the problem was not having enough of the medium of exchange. So Congress passed a bill that would have printed more money called the Inflation Bill, which was unfortunately vetoed by President Grant.

If you know macroeconomics, you’ll realize that the proponents of the Inflation Bill were correct and that recessions can literally be caused by a lack of money. But wait a second, this was decades before Keynes! Why don’t we hear about the important contributions to economics made by proponents of the Inflation Bill? Why does Keynes get all the credit? Because the proponents of the Inflation Bill were poor farmers and their populist representatives in Congress. The rabble, in other words.

What Keynes did was give these ideas respectability. If a second-generation Cambridge professor was saying that depressions could be fixed by pumping money into the economy, he couldn’t be dismissed as “the rabble”. But that was about social class, not intellectual rigor. Populists had gotten it right decades before. So when you hear that people supported the gold standard before Keynes because they didn’t know any better, don’t believe it. Goldbuggery only existed in the first place because it served the interests of the rich and powerful, and entirely correct objections were dismissed only because those making them were poor.

This explains the whole fight over bimetallism and the Cross of Gold speech, which I never really understood before.

And of course listeners of @earlyandoftenpodcast​ will know that this pattern dates back to the early 1700s, when indebted New England farmers perennially short on cash faced off against their merchant creditors. History rhymes, etc.

First, a gold standard, even a 100% reserve gold standard, does not require that the medium of exchange be physical gold coins. That is nonsense. A gold standard simply means that any banknotes are “backed” by gold, i.e. it can be exchanged for gold at a fixed face value. For instance, a “dollar” used to be defined as 1/20th of an ounce of gold. A 100% reserve gold standard requires that banks keep enough gold in reserve to fully redeem all notes if called upon to do so. For instance, if they have issued $20,000, they must keep 1000 ounces of gold.

Second, when the gold standard was operative, there were always subsidiary token currencies such as coins made or copper or nickel. These could be used for daily transactions in a time before banknotes were cheap enough to be feasible. What made them tokens is that the face value was greater than their intrinsic metallic value. People accepted them as a matter of convenience, but they were not legal tender for large sums. Therefore, a mint could not produce millions of pennies and buy whatever they wanted with coins that were worth more than they cost to produce.

Third, the purpose of the gold standard is simple. It is not that gold has some mystical quality. It is to remove the discretion of the government over the supply of money. The operation of the gold mining industry, etc. doesn’t really manage the supply of money in anyone’s ideal way. But the opinion of supporters is that it is preferable to government mismanagement.

Fourth, price “deflation” that is produced by an economy growing faster than the supply of money grows does not alter the aggregate relative balance between creditors and debtors. (For that matter, neither does price “inflation” caused by economic destruction.) That is, a stable currency does not benefit creditors unfairly. What alters the balance between debtors and creditors is a change in the quantity of money. When the government prints more money, it benefits debtors at the expense of creditors (and the economy as a whole) by lowering the value of a dollar-denominated debt. The opposite, monetary deflation, is caused by the destruction of money. But the destruction of money is not caused by the gold standard; it is what the gold standard is designed to prevent. It happens when banks that have issued currency become insolvent and don’t have the reserves to redeem their currency. That currency becomes worthless, the value of a dollar-denominated debt rises, and creditors “benefit” in theory but not really because their debtors go bankrupt. The idea that creditors have historically been in some conspiracy to bring this about makes no sense.

Fifth, the only situation in which there can possibly be a “shortage” of currency is under the absurdly foolish policy of bimetallism. Bimetallism is a system that sets up a fixed exchange rate between gold and silver (and paper money). Like any price control, it creates shortages. When the actual supply of silver falls below the 16:1 ratio (the usual bimetallist ratio), it all leaves the country, because people are forced to sell it for less than it is worth. Then there is only gold and no silver. When the supply of silver exceeds the fixed ratio, it floods the country and pushes out all the gold. It’s Gresham’s law: “if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.”

Sixth, there is otherwise no sensible meaning in talking about farmers “not having enough currency”. You can only mean two things by that: either they were poor, i.e. they didn’t have enough wealth in general to exchange for currency. Or they lacked access to credit, i.e. even though they had substantial wealth in the form of land, they had trouble liquidating it when they needed money in the short term. Neither of these problems is solved by printing more money.

Seventh, there is a thoroughly confused version of Keynesianism here. The basis of the Keynesian theory of unemployment is that because of nominal wage rigidity (i.e. people don’t want a pay cut), wages refuse to fall in the face of economic shocks, which leads to a surplus of labor and involuntary unemployment. Inflation is one way (not necessary a good way) of getting wages back in balance: firms can keep nominal wages the same, but now they’re worth less in real terms. But there is nothing in this view saying that the problem is some kind of absolute shortage of money. The problem is the failure of the economy to come back into equilibrium after a shock, which is often a deflationary shock caused precisely by the destruction of money mentioned above.

Overall agreed with voxette-vk, but I think points 5 and 6 are confused.

Sixth, there is otherwise no sensible meaning in talking about farmers “not having enough currency”. You can only mean two things by that: either they were poor, i.e. they didn’t have enough wealth in general to exchange for currency. Or they lacked access to credit, i.e. even though they had substantial wealth in the form of land, they had trouble liquidating it when they needed money in the short term. Neither of these problems is solved by printing more money.

There is actually a third option here: there wasn’t enough currency in existence of the right size to facilitate the volume of trade at harvest time.

This is a distinct issue that is just hard for us to imagine, given how much transactions have been abstracted away by centralized systems (“Couldn’t they just, you know, PayPal them?”). But basically all farmers wanted to sell their grain and pay their farmhands all at once, and if your town is trying to do $1,000 worth of trades (that are mostly sized around $5) and you only have 20 $5 bills and 100 $1 bills, you’re going to have a bad time. In real life, the main times I’ve seen this have been board games (”hey, can people cash in their $1s for $5s?”) or vending (”ack everyone is paying me in $20s and expecting change back”). A farmer can’t split a $20 bill between four farmhands who each want $5.

This is also easy to confuse with lobbying for inflation (”the government should print more money, because then it’ll be easier to pay back my mortgage”) which was also a common policy platform for farmers. But a non-inflationary way to do this is to destroy a $20 bill whenever you make 20 $1 bills, and often people would find themselves in the situation of wanting to do that but not being able to, because only the government could create more money, and the government didn’t understand or didn’t care about people not having enough of the right size of bill.

Which is, of course, the root of the problem; the right solution to it is to allow the banks to issue their own coinage, so that if they need more pennies they can just make more pennies.

There’s something to all of this, also at the time of the Cross of Gold speech US gold supply held fairly steady since the California gold rush ended but the Nevada silver rush meant silver was the main vector of pressure

And that silver had been devalued and then abandoned in 1873 and this decision to keep money tight rather than allow inflation, legislative force preventing the actual discovery of lodes of wealth buried in the ground from affecting the economy to benefit borrowers as it naturally would, was understood (correctly) as a political decision to benefit existing capitalholders

Then like immediately after the speech the Yukon Gold Rush took some of the pressure off