Last Friday’s Financial Times contained an article which suggested that the Republican Party is seriously thinking of returning the US to the gold standard, and that it will discuss this idea at the annual party convention in Tampa this week.
Many people will react to this radical idea by asking if the Republicans have learned anything at all from history. But do they actually have a point?
Surely anyone with a grasp of economic history knows that strict adherence to the gold standard, with the balanced budget mantra, at a time of asset price deflation in the early 1930s exacerbated the recession, which morphed into the Great Depression. But is the case as open and shut as that?
While the lessons of that era are reasonably well accepted, there are also those who will rightly point out that, whatever about the 1930s, anyone with a grasp of recent economic history can see that the massive quantitative easing of the past five years has had little or no effect, other than facilitating a massive increase in the US’s national debt.
This is the heart of the matter, and there are two legitimate sides to the argument.
On one side, you have Barack Obama and most moderate to slightly left-of-centre economists, led by Paul Krugman, who believe that the way to jolt the US economy back to life is with as much credit as possible. They contend that the economy is suffering from a liquidity trap, because the banks are not lending money.
Therefore, orthodox monetary policy, where you cut interest rates and the economy recovers on its own, can’t work.
This school of economics – to which I subscribe – sees the recession in the US as a balance-sheet recession, and believe those broken balance sheets are forcing the central banks into more unorthodox policies.
On the other side, you have those who believe that all this printing of money will lead to massive inflation in the US; that the bond market will collapse; and that the US will descend into hyper-inflation, driven by far too much paper money sloshing around the economy, which is the direct result of too much of it being printed in the first place.
By picking Paul Ryan (a budget hawk and admirer of Ayn Rand) as his running mate and paying homage to Ron Paul (an interesting thinker and a man who believes that the Federal Reserve is destroying the US by printing too much cash), Mitt Romney hopes to define the central debate of the US presidential election.
This debate will be over big government versus small government, and the gold standard is emerging as a central plank for the small government side.
The advocates of this side believe that linking the dollar in this way would prevent the government and the central bank from printing money to finance deficits.
This would stop the US budget deficit in its tracks and – they claim – put the US economy back on a solid footing.
How would it work? And what is meant by “returning to the gold standard”?
The gold standard was an exchange rate system that worked very well from 1860 to 1914. It tied all major currencies to gold. If gold reserves began to fall, the country would have to raise interest rates and deflate, with wages and prices falling in order to get gold flowing back into the country, attracted by the high real interest rates.
The currency parity was maintained, but the entire adjustment fell on workers’ wages. As long as workers’ wages were flexible downwards, a country that was experiencing an outflow of gold could rectify itself.
So if a country was experiencing a boom, and its people were buying imports, the amount of gold in the country’s reserves would fall. This would have to be replaced quickly by offering investors a higher interest rate. The higher interest rate would grind down wages, and the economy would deflate.
As long as inflation wasn’t too different between the countries, and workers had few rights, this all worked. But when the big powers went to war with each other, the central banks (to varying degrees) started printing money to pay for guns, and all countries came off the gold standard.
Then, after the First World War, inflation rates were massively different in many countries, so going back to old exchange rates meant huge deflation in countries. This obviously drove up unemployment.
After the crash of 1929 – triggered by an increase in US interest rates – all countries that wanted to stay on the gold standard had to deflate their own economies in the face of collapsing demand. Obviously, wages would only fall if trade unions (which had largely been absent in the period 1860-1914) allowed this to happen. However, they wouldn’t, as they wanted to maintain the wages of their members. The result was that unemployment rose rapidly.
As it went on, deflation fed on itself, while the policy of letting the banks go to the wall caused the amount of credit to fall further, reinforcing this.
Without the government stepping in and boosting demand, the countries of first Europe, then Latin America and then ultimately the US, contracted further. The gold standard, because it implied that you could only increase the money supply if you increased actual gold in the vaults, prevented any reflation.
Ultimately, all countries, when faced with deep recessions, abandoned the gold standard. The US, the last to ditch it, came off gold in 1933. Now Mitt Romney’s team want it to go back to gold, to force the Fed to stop printing money without a corresponding infusion of gold.
The implications of this would, I believe, be a massive recession in the US and massive deflation with it. The gold standard advocates dispute this, though. They say there is no bond crisis on the horizon, and point to the fact that bond yields have never been lower – indicative of a demand for US government paper.
In fact, with yields so low, the gold standards advocates claim that there is no value in US bonds, particularly if the Federal Reserve keeps printing more and more money to finance more and more government programmes.
This is not an academic debate, and it is not going away. For now, the ones in power are those who believe that reflation – via the government and the central bank, using fiat money or created money – is the logical way to go (because there is a balance sheet recession, a liquidity trap and the economy is still very weak). But that might not last.
The US presidential election looks set to pit two big ideologies against each other, and there can only be one winner.
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Hegemonic Ideologies…Yaaaawn! Just a quick note, the past six years can be described as a period of bad government and central bank policies that allowed the financial capitalist industry to continue their global heist. You all heard the term, “Kicking the can down the road”, while at the same time the slogan “Too big to fail shall never happen again!” echoed around the world but as we all know today, they got even bigger, much bigger. Imperial dominance is established by means of force. Political and military, cultural and economical imperialism dictates internal politics and the overall societal character of… Read more »
Georg comment along with David’s article are 2 of the best I have read in months and months. Together they describe the social pressures are work in a evolving world.
Just as we are now witnessing the limits of what the earth’s biosphere can withstand by way of mindless resource use, we are also starting to see the limits of how far you can “economically advance” civilization while mindlessly consuming the labors of those less fortunate.
The fight is between those who know those limits and those who do not want us to know.
Romney and the list of endorsing economists http://economistsforromney.com/ In context: Myron Scholes (along with his collaborator Robert Merton) shared the Nobel for “developing a new method for valuing derivatives”. This method gave birth to the trading model used by Long Term Capital Management in the 90s. Remember LTCM? The hedge fund that almost brought the financial system to its knees in 1998 were it not for the Fed-orchestrated bailout. 10 years later derivatives trading managed to finish the job and produce a far bigger crisis. Scholes himself was accused by LTCH vs. US of using illegal tax shelters to hide… Read more »
David,
Straight of the bat the QE in USA was a means through which private interests (who run US) funneled public monies into their pockets.
Which one are you?
Marbles (Golliers & Steelies) or Football Cards?
My feeling with economists is that they’re just out of ammunition, and the image of alchemy is starting to loom too large for comfort. Every sector of the economy has borrowed itself almost out of existence, over the past 20 -40 years. The state, the corporate sector, and the consumer. Each in turn has been through at least one bubble, and has wallowed in unlimited borrowing. In the USA it was known as the ‘Greenspan Put’, and when ever anything looked less than rosy in the US economy, there’d be decisive Fed action, resulting in another bubble. None of it… Read more »
Hi, First of all David I am going to thank you for never censoring any posts because this one is going to be one of my most robust. When I read this article in the SBB I found myself intensly irritated at how juvenile the post is so let me explain. The full title in the SBB is ‘The perils of going for gold’. It’s very misleading because gold is a very important store of value in times of inflationary expectations. The article quite rightly points out that deflation is the big threat however. Since the article offers analysis on… Read more »
An interesting article David exploring the nature of our monetary systems. I think there is another important distinction between the pre WW1 gold standard and what replaced it after the war. Before 1913 an ordinary citizen of any country could walk into a bank and exchange his paper notes for gold or silver. This was known as the classical gold standard and is the only one that is of any use to ordinary people. During the war this right was denied as part of the “war effort” where the governments deemed it to be selfish and anti nationalistic to look… Read more »
Four months until budget 2013, articles are leaking into the press and the softening up has begun. This is The Showing Of The Instruments
When the hammer falls you can’t complain. You did nothing
This might waken you up
Kirwan and Jeff Rense discuss the final nail in the coffin of free speech (mp3)
http://rense.gsradio.net:8080/rense/special/rense_Kirwan_122611.mp3
The way to solv the problem in the us regarding thd currency issue is to restore to the American government the right to print it’s own currency which was given to the FED in 1913. Bill still agrees with you that returning the us to the gold standard would not work only restoring the control of the quantiy of the money supply to the US government will allow the us economy to expand because the currency in circulation would not be borrowed into existince as is currently the case with FED issued currency. The people would not be paying interest… Read more »
Iceland is the best example to follow if Ireland wants to pull out of this debt crisis. In Iceland, Banks had to accept debt reduction to businesses and home mortgages, up to 110%. And here our Government is hiding behind the Constitution, and doing next to nothing of significance, for small and medium size businesses and homes, that are on the brink of bankruptcy. It should be Iceland way, not Frankfurt way. And Professor Robert H Wade is adamant it’s the only way, as shown by Argentina and most recently by Iceland, where they were able to protect on of… Read more »
FIAT currency pays for wars and Eugenics. The globalist central bankers print money out of thin air and bribe sociopath politicians to implement their evil agenda. I hope someday soon you will address these issues, but I won’t hold my breath waiting for it. Thrash precious metals all you like. But at least physical gold and silver cannot be as easily manipulated by the evil global elite. They are real tangible assets, that store wealth of hard working individuals The global elites have engineered a nightmare, the media continue to facilitate them. The communist future you lot (Central banking and… Read more »
It was only a matter of time until Gold was discussed. I’d like to know David’s opinion on the possible use of Special Drawing Rights (SDR”S) which are issued by the IMF and its possible role as a future global currency.
Hocus Pocus!
‘The Wonderful Wizard of Oz’ by L. Frank Baum is his parable on this very topic and his two primers are as valid today as when it was published in 1900.
WHO creates credit and how is its QUANTITY determined?
Discussing economics without regard to these two primers is a redundant discussion.
(Yes, there is wall-to-wall redundant discussions on our airways. Perhaps ‘expert commentators’, excl DMC, should read ‘The Wonderful Wizard of Oz’ before airing their blissful ignorances)
Throughout history there has always been this divide between workers and gentlemen, peasants and landowners, blue and white collars, unions of artisans and members of the court. As soon as there is change which is militarily/ financially important, like ships, aircraft etc, there has been a disruption created by a newly empowered social class (call them pilots or scientists or professionals of any sort) which becomes subsumed under a new hierarchy – Doctors and Nurses, Bank Managers and Tellers, Captains and Privates. The elites merely morph and re-create closed shops for the upper echoleons. These closed shops or institutions are… Read more »
David, Keynesianism only works when you have a surplus from the good times “saving for a rainy day”. Virtually all the governments of the world (esp the US) are running huge defecits. “Stimulating demand” or as you have put it solving the problem of too much debt by adding more debt won’t work because the debts are impossible to pay back — you simply consign future generations to debt serfdom.
Krugman is a coward and a moron.
The Euro is to be Circumcised
Germany to issue circumcision stamp
[…] full article at source: http://www.davidmcwilliams.ie/2012/08/27/going-for-gold […]
DMcW, I think you hit the Klondike! Real gold is not metal, rather ideas, economics. And exactly, it is not an academic debate. It is more like having a future or not for our expanding population.
The debate will not be shoved under the carpet! And it is monumental.
(Phew, for a moment there exhaustion was winning).
And the last line :
“The US presidential election looks set to pit two big ideologies against each other, and there can only be one winner”.
It would be real if indeed just one candidate actually represented the American System of Political Economy, as detailed by Alexander Hamilton and our own Arthus Griffith.
What is actually happening is the scissors attack of Romney, and Obama, and (I presume unwittingly) Ron Paul is an assault on the very foundations of both the USA and Eire.
This must be taken personally Americans!!!
. This school of economics — to which I subscribe — sees the recession in the US as a balance-sheet recession, and believe those broken balance sheets are forcing the central banks into more unorthodox policies. Non so blind as those who refuse to see, David. The central bankers are the problem not the solution as expressed and explained, without rebuttal, many times. David, you are the blind leading the blind into economic serfdom and poverty. interference in the economy by bankers on behest of poiticians to the profit of the banker is all we have seen this last hundred… Read more »
Bernanke’s playbook is entitled;
“A Monetary History of the United States, 1867-1960”
http://www.amazon.com/Monetary-History-United-States-1867-1960/dp/0691003548
Mr. Bernanke acknowledged as much when he spoke at a 90th birthday celebration for Mr. Friedman in 2002. “I would like to say to Milton and Anna: Regarding the Great Depression, you’re right, we did it,” he said. “We’re very sorry, but thanks to you we won’t do it again.”
http://www.nytimes.com/2012/06/22/business/anna-schwartz-economist-who-worked-with-friedman-dies-at-96.html?pagewanted=all
In Plain English that’s more bubbles than a bubble bath.
Bernanke is a politicans wet dream – always be seen to be doing something at any cost.
I am scratching my head here trying to understand why this is about the only Irish media coverage that is given to Ron Paul. Paul’s main tendency is to do the completely obvious. In political establishments in the West this is a real shocker, and the media has a tendency to ignore this as much as possible, because of the need to serve corporate interests. The same applies here. No political option is allowed exist which serves the interest of the ordinary individuals in society, to the cost of negating the influence of vested interests. The only conclusion that I… Read more »
{ They say there is no bond crisis on the horizon, and point to the fact that bond yields have never been lower — indicative of a demand for US government paper. } I disagree. The bond market in several Eurozone countries is highly dependent on ECB intervention. It is also dependent on state backed private banks buying government bonds. [which I suspect is going on here….]. If the Chinese, the Russians, and the Indians have stopped buying US Treasuries, then who is buying the record levels of bond issuance ? Basel II also classifies state bonds as Tier 1… Read more »
I am tired – jet lag- from a creche in Dublin to a crossroads in china – we then slipped into the Greece -went back in time to USSR – defaulted on the creche payments in Dublin – now we digging for gold in USA….. Anyone fancy a trip to Iceland for relaxing spa next….
Hi David’ Sorry to detract from your current story. I was looking back at your story about TEACHERS NEED TO LEARN HARD LESSONS ABOUT PAY April 11, 2012 “There is no way in the world that anyone is going to lend to Ireland, unless we offer a realistic way out of this and stop pretending that national wage deals signed in 2010 have any realistic hope of being paid.” Did we not go back to the bond markets recently? I’d also like to add that I did hear that INTO radio broadcast….and for a moment, stopped and thought about just… Read more »
Padser, I came across Teachers yesterday pulling the all day (3:30pm) Martyr face and then they said the children hadn’t comeback yet!
Just be glad these cosseted peeps are running the country – making sure the country gets what it deserves.
“Surely anyone with a grasp of economic history knows that strict adherence to the gold standard, with the balanced budget mantra, at a time of asset price deflation in the early 1930s exacerbated the recession, which morphed into the Great Depression.” You are not going back far enough in history for an explanation of the 30’s depression. The later 1800’s and the period before the 1st world war were a period of dymanic growth and the classic gold standard. Money supply is tied to the amount of gold . There is no increase in the money supply that is not… Read more »
Therefore, orthodox monetary policy, where you cut interest rates and the economy recovers on its own, can’t work. This school of economics — to which I subscribe — sees the recession in the US as a balance-sheet recession, and believe those broken balance sheets are forcing the central banks into more unorthodox policies. Why not call it buy its real name Major depression II Or the Greatest Depression. If you take the level of economic actity and measure in terms of supply and demand the economies around the world are in contraction. Because the measurement use it GDP and that… Read more »
Ron Paul is a nut. He is a interesting nut but at the end of the day he is still a nut . I went to see him speak at UC Berkeley ( of all places ) a few months back . He excites young people with his talk of the US ending wars and leaving the world to it’s own devices and fixing the economy with a return to the gold standard . Reduce government and introduce tiny taxes . However his social policies are absolutely brutal . End social welfare , end Medicare . Let people make their… Read more »
“Surely anyone with a grasp of economic history knows that strict adherence to the gold standard, with the balanced budget mantra, at a time of asset price deflation in the early 1930s exacerbated the recession, which morphed into the Great Depression. But is the case as open and shut as that?” NO From Wikipedea Milton Friedman stated that “the severity of each of the major contractions – 1920-1, 1929-33 and 1937-8 is directly attributable to acts of commission and omission by the Reserve authorities”[27] He further believes that the US got out of the Great Depression because of the “natural… Read more »
We could do witha Taxed Enough Already movement in this country.
Now we have Noonan saying that he wants to levy a property tax directly from peopl’s pay packets.
In addition to 23% VAT, expensive fuel, and all the other levies extracted from working people to get the proceeds of their sweat from them.
And the we have market interference mechanism like NAMA to prevent working people from being able to get any vale in the property market.
BTW David
I appreciate the chance for a discussion. Please take nothing personally. You are a grand fellow to give us this forum.
Thanks.
I have done some research on this gold standard issue and it seems none other than helicopter man Ben Bernanke has a clear grasp of the difference between the classical gold standard up to 1914 and the flawed version which took it’s place after the war. In 2004 at Washington and Lee University Bernanke noted that ” The gold standard appeared to be highly successful from 1870 to the beginning of WW1 in 1914. During the so-called classical gold standard period international trade and capital flows expanded markedly and central banks experienced relatively few problems ensuring that their currencies retained… Read more »
Portugese Gold Standard:
http://www.handelsblatt.com/finanzen/rohstoffe-devisen/rohstoffe/euro-krise-der-portugiesische-goldstandard-/7040854.html
So cash-for-gold outfits in Portugal increase by 30% this year; wedding rings sold to pay the rent; while the Germans apparently are the biggest hoarders of gold.
Scarcity principle…Gold
Just a funny thought… as Gold and Silver are limited and speculated with, hence using the economic principle of scarcity and demand… I present you the future…
THE WATER STANDARD
I’d just like to point out that when discussing who creates money you have to distinguish between cash, central bank reserves and the main type of money, bank-account money. 1. Cash is printed by the central banks but the amounts are trivial in today’s digital world. 2. Central banks reserves are the type of money that banks use to pay each other and this is the main type of money which central banks create. 3. The main type of money, bank-account money, is created by the commercial banks and forms over 97% of the Eurozone money supply. It’s normally created… Read more »
13
Economic lessons on this site should now evolve to include the word ‘ Attachment’. Many of us send missives with attachments and likewise we receive them too . However in the legal economic sense the word has now morphed in the public eye to mean something else . How to explain ‘that something else’ is a daunting task and will remain a passive nimph to most or wake up call to a few .Somehow that few will be you and I soon. So who is attaching what and to whom ? Is it a picture we are all hanging (… Read more »
The subjects all different in there own wright all end up in the same way of making me realise how power and greed all go hand in hand . Also the game and it’s all one big game who gets caught in the cross fire does not seam to matter. Ireland is no different to any other country in so much as the holders of power,big company’s the government and there cronies ,who controll and want more and more power. Crime does pay and it’s got to the stage where it dies not matter who we elect is such a… Read more »
Well, this article is about the US. And here is some American humor concerning the way that lobbyists have destroyed the system on the people. http://www.youtube.com/watch?v=2aO9tA5DWJM&feature=player_embedded Now young kids can aspire to be a crony. Because it seems that cronies are highly successful. I think we could operate a world excellence centre for developing cronies here in this country. In fact, I reckon we are already leading in the field. The Americans had a spell with meritocracy, but in Ireland we never let such detestable concepts interfere with developing cronyism. Leave that sort of thing to Israel, Singapore and the… Read more »
Has anyone noticed a Moon WOBBLE ?
One question that has always bothered me down through the years was; why is it that a large percentage of the populations of both Australia, Canada and New Zealand are made up of Irish and English decent who are capable of creating a quality of life in eight of the top ten cities in the World as outlined below, and yet back on their native soils the cities they have left behind are no better that 43rd place in the rankings. What is holding these people back? Is it the politics of these places? Is it the unequal distribution of… Read more »
Euro Break-Up: Getting Closer to D-Day! August 28, 2012 (EIRNS)–“The Secret Plans for the Euro-Crash” is the title of a detailed article in the Aug. 25 {Frankfurter Allgemeine Zeitung} on an exit scenario for life after the euro. Advisors from the business consultancy Capco have already written a 300 page study detailing every step of a euro exit, and lawyers are going from door to door of companies, to explain how subsidiary companies could go bankrupt without affecting the proprietary company, should Greece, for example, leave the euro. But since Spain is in need of the bailout fund, the teams… Read more »
Draghi’s Witches’ Brew Tries To Combine Hyperinflation, Austerity, Lax Bank Standards Aug. 28, 2012 (LPAC) — European Central Bank chairman Mario Draghi will make a surprise non-appearance at the Jackson Hole bankers’ conclave starting Friday, CNBC reports. The reason given by Draghi’s office is that he will have too much work to do between now and Sept. 6, when he will announce his much-ballyhooed plan for hyperinflationary money-printing and Eurozone sovereign bond-buying. But one clear reason is that the market “shock and awe” from three weeks’ worth of Draghi trial balloons, has worn off, and anything further “Hyper Mario” might… Read more »
Morning from the Stena ferry, can just make out Howth. This boat journey always makes me feel nostaligic for my student years of working in bars ec in London before Ryanair made air travel affordable. Thanks for all the comments on this piece. We are obviously an eclectic bunch…no uniformity of opinion here!
Best
David
I was chatting to a farmer friend of mine – looking at his field of turnips. He said maybe I should buy them all and same for next 2-3 years and while I’m at it, buy all the turnips in the country on the same basis . He said, that’s what investment banks do and have been doing for a while now. And then since they have the muscle, they become a monopoly supplier of turnips and you and I, the customer, take the hit and the Investment bank pockets the profit. Value added by this bank? ZERO. I suppose… Read more »
Was asked earlier did the Gold Standard cause the great depression or not. I do not know. But I am learn a lot from the comments and I am trying to de-muddle. Basically the argument goes like this: Look at famine in Ireland. There was plenty of food, but the higher price available elsewhere priced people out of survival. The same goes on today except the highest bidder comprises groups who can command a monopoly control of a scarce resource – be it food, oil or whatever. When we look at global imbalances in trade and in human rights, I… Read more »