… Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that’s just come to an end, sometimes the government will choose to put an asterix on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that’s a pretty misleading way to think about it.
The unprecedented success of Keynesianism is due to the fact that it provides an apparent justification for the “deficit spending” policies of contemporary governments. It is the pseudo-philosophy of those who can think of nothing else than to dissipate the capital accumulated by previous generations. Yet no effusions of authors however brilliant and sophisticated can alter the perennial economic laws. They… work and take care of themselves. Not-withstanding all the passionate fulminations of the spokesmen of governments, the inevitable consequences of inflationism and expansionism as depicted by the “orthodox” economists are coming to pass. And then, very late indeed, even simple people will discover that Keynes did not teach us how to perform the “miracle… of turning a stone into bread,” but the not at all miraculous procedure of eating the seed corn.
— Ludwig von Mises, Planning for Freedom, p.71
(via conza)
The Truth About Diocletian and Inflation →
Yeah, that is a pretty misleading way to think about it. So why suggest it as “going in the other direction”? Coming up with a “new” currency with new denominations is not necessarily any less inflationary if the effect is still the same. If the U.S. government prints brand new money out of thin air, it doesn’t matter if they print five Dollarinos worth $1,000 each or simply five thousand dollars.
I’m not sure I follow your objection. The French monetary exchange didn’t involve just printing new money per se. Under the traditional definition of inflation (an increase in the money supply), the French deflated their currency. The old centime pieces were never circulated widely, and fell out of use under the new system. So under the exchange that took place, the total amount of practically usable legal tender was reduced. …
But it is. They created new money. They didn’t first extract existing currency to then replace it with the new. At least, I don’t believe they did (please, correct me here if this is the case). As I said, creating a new currency isn’t necessarily any less inflationary, particularly if it’s additive. And of course the old centime pieces were increasingly less circulated because their value was exceedingly low in relation to the new money added to the economy, especially since they were no longer being minted to keep up with the volume demanded to keep up with inflating prices. When actual inflation becomes price inflation, there is a point in which the velocity of the lowest denominations, especially when said denominations become a smaller percentage of the overall currency, tends to slow down as such denominations become more cumbersome and less practical to use.
… I linked to Yglesias’s article because Ron Paul accused Krugman of supporting the economic policies of Emperor Diocletian. Krugman rejected that accusation, and I think the article demonstrates that Paul was being overwrought: I don’t believe I’ve ever heard Krugman calling for an overnight 100% doubling of the exchange value of the currency, which is what Diocletian did when he issued his final currency Edict. I think we can both agree that such a policy decision would be catastrophic and ruinous. …
This is only a matter of degrees. The point Ron Paul was making (and that I would agree with) is that Krugman’s preferred “tools” and “methods” are, essentially, the same as Diocletian - they only disagree in speed, as it were. One may advocate stabbing someone in the abdomen quickly, and the other may advocate a much more gentle stabbing. But the stabbee would rightly protest to both knives through his gut.
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[I had to redact much of letterstomycountry’s argument as I only had time for a quick rebuttal of his main points. Please click here if you wish to see his argument in full.]
Krugman and Money
“[D]o you really think people use dollar bills because the federal government isn’t allowing them to use other stuff? That seems like a very strange point of view…You can do barter with all kinds of stuff…”
- Paul Krugman, in his recent televised discussion (hardly a “debate”) with Ron Paul.
For starters, of course the government “isn’t allowing [people] to use other stuff,” if we understand “stuff” to be what Ron Paul was arguing (and Krugman was immediately responding to): money. We need only look at the recent Bernard von NotHaus conviction for minting “Liberty Dollars,” both coins and gold and silver certificates. Further, as Ron Paul stipulated, there are taxes on gold and silver that make using it as a medium of exchange artificially more prohibitive and costly.
But this isn’t quite what Krugman was getting at. He explicitly conflated money/currency, which is what Ron Paul was discussing, with barter. This is such a fundamentally flawed proposition that it almost shocks me how little push-back the media has given Krugman.
As Bob Murphy explains in his economics book for middle-schoolers, Lessons for the Young Economist, “direct exchange, or what is also called barter, [are] exchanges that do not involve money”:
We only leave a state of barter and enter the realm of indirect exchange when people receive an item during a trade that they don’t plan on using themselves, whether for consumption or production. What happens in this case is that they plan on trading the item away to somebody else in the future. This is actually what happens in every trade involving money. When you sell a few hours of your leisure cutting your neighbor’s lawn for $20, you are engaged in indirect exchange. You don’t plan on eating the $20 bill, and you don’t intend to combine it with other materials in order to build something. The reason you value it, is that you expect to be able to find somebody else (in the future) who will sell you something you do directly value, in exchange for the money.
It’s pretty basic stuff. But Krugman was probably hoping the unthinking masses wouldn’t notice his deflection.
The Truth About Diocletian and Inflation →
… Currency reforms of the sort Diocletian undertook still happen sometimes in the modern era, but they almost always go in the other direction. When a country has in the recent past suffered a bout of serious inflation that’s just come to an end, sometimes the government will choose to put an asterix on the new regime by basically striking a zero or two off the old currency. So in 1960, France introduced a New Franc and announced that one New Franc was worth 100 Old Francs, and that 1 Franc Coin of the old vintage could stay in circulation as one New Centime. You could describe the impact of that switch as a giant one-off deflation, but that’s a pretty misleading way to think about it.
Yeah, that is a pretty misleading way to think about it. So why suggest it as “going in the other direction”? Coming up with a “new” currency with new denominations is not necessarily any less inflationary if the effect is still the same. If the U.S. government prints brand new money out of thin air, it doesn’t matter if they print five Dollarinos worth $1,000 each or simply five thousand dollars.
And if I regularly took 2-3% of someone’s wealth - just took it of my own volition - would that person call such activity “normal” and “non-ruinous”? Would they consider themselves having achieved “prosperity” as a result? This is what the piece above suggests with regards to ostensibly mild inflation.
Further, the piece above mentions the Roman civil wars but shrugs aside as somehow less of an issue that the reason the wars were particularly adverse to the economy (aside from the fact that, contra to Keynesians, wars are eo ipso destruction of wealth - something the piece above at least seems to acknowledge) was because Rome funded the wars and empire through not only excessive taxation but the debasement of the currency leading to hyperinflation. Money itself was destroyed - and every non-barter transaction used money.
The contortions Keynesians must place themselves in just to defend their philosophy is amazing.
(Source: letterstomycountry)
We start the “Keynesian Revolution” today in econ.
Below is what I anticipate class will be like:
Bring in a children’s picture book and hand it to the professor. When he/she asks what it is for, say “We’re covering animal spirits, magical multipliers, growth through inflation and protectionism, and that employment and an economy can be engineered… I just figured I’d offer up my own favorite fairy tale to go along with yours.”
Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis
(Source: youtube.com)
Anti-Bernanke →
In [his] opening lecture [on “The Federal Reserve and the Financial Crisis,”] Bernanke offers a brief overview of the role of central banks, their general origins, the specific origins of the Federal Reserve System, and the Fed’s early performance. …
So like any central banker, and unlike better academic economists, Bernanke consistently portrays inflation, business cycles, financial crises, and asset price “bubbles” as things that happen because…well, the point is that there is generally no “because.” These things just happen; central banks, on the other hand, exist to prevent them from happening, or to “mitigate” them once they happen, or perhaps (as in the case of “bubbles”) to simply tolerate them, because they can’t do any better than that. That central banks’ own policies might actually cause inflation, or contribute to the business cycle, or trigger crises, or blow-up asset bubbles—these are possibilities to which every economist worth his or her salt attaches some importance, if not overwhelming importance. But they are also possibilities that every true-blue central banker avoids like so many landmines. …
In describing the historical origins of central banking, for instance, Bernanke makes no mention at all of the fiscal purpose of all of the earliest central banks—that is, of the fact that they were set up, not to combat inflation or crises or cycles but to provide financial relief to their sponsoring governments in return for monopoly privileges. …
By ignoring the true origins of early central banks, and of the Bank of England in particular, and simply asserting that the (immaculately conceived) Bank gradually figured-out its “true” purpose, especially by discovering that it could save the British economy now and then by serving as a Lender of Last Resort, Bernanke is able to overlook the important possibility that central banks’ monopoly privileges—and their monopoly of paper currency especially—may have been a contributing cause of 19th-century financial instability. …
Besides ignoring the destabilizing effects of central banking—or of any system based on a currency monopoly—Bernanke carefully avoids any mention of the destabilizing effects of other sorts of misguided financial regulation. He thus attributes the greater frequency of banking crises in the post-Civil War U.S. than in England solely to the lack of a central bank in the former country, making one wish that some clever GWU student had interrupted him to observe that Canada and Scotland, despite also lacking central banks, each had far fewer crises than either the U.S. or England. Hearing Bernanke you would never guess that U.S. banks were generally denied the ability to branch, or that state chartered banks were prevented by a prohibitive federal tax from issuing their own notes, or that National banks found it increasingly difficult to issue their own notes owing to the high cost of government securities required (originally for fiscal reasons) as backing for their notes. Certainly you would not realize that economic historians have long recognized (see, for starters, here and here) how these regulations played a crucial part in pre-Fed U.S. financial instability. No: you would be left to assume that U.S. crises just…happened, or rather, that they happened “because” there was no central bank around to put a stop to them.
To be fair, Bernanke does eventually get ‘round to offering a theory of crises. The theory is the one according to which a rumor spreads to the effect that some bank or banks may be in trouble, which is supposedly enough to trigger a “contagion” of fear that has everyone scrambling for their dough. Bernanke refers listeners to Frank Capra’s movie “It’s a Wonderful Life,” as though it offered some sort of ground for taking the theory seriously…
Bernanke’s discussion of the gold standard is perhaps the low point of a generally poor performance, consisting of little more than the usual catalog of anti-gold clichés…
It’s true that Bernanke’s whitewashing of the Fed isn’t quite complete: he devotes considerable time to explaining how it “blew it” during the Great Depression. But the admission is intended to be anything but fatal to the case for central banking. On the contrary: the depression was a crucial learning experience. Since then, the Fed, we are assured, has gotten its act together. Well, O.K.: there are still be a few bugs to be worked out. But never mind: some future Fed Chairman will manage to spin them away.
It was John Maynard Keynes, a man of great intellect but limited knowledge of economic theory, who ultimately succeeded in rehabilitating a view long the preserve of cranks with whom he openly sympathised. He had attempted by a succession of new theories to justify the same, superficially persuasive, intuitive belief that had been held by many practical men before, but that will not withstand rigorous analysis of the price mechanism: just as there cannot be a uniform price for all kinds of labour, an equality of demand and supply of labour in general cannot be secured by managing aggregate demand.
— F.A. Hayek
Keynesians Jump the Gun on Inflation →
Advocates of government stimulus are running victory laps on recent developments that appear to vindicate their strategy. In particular, Paul Krugman compares the sluggish growth in Europe to the somewhat-less-sluggish growth in the US to prove that stimulus was more effective than austerity. Other economists are using government inflation measures to defend Fed Chairman Bernanke’s easy-money policy. The only problem is, they’re calling the race before the finish line is even in sight.
As usual, Paul Krugman overlooks basic economics (which, despite his Nobel Prize, is a science about which Mr. Krugman really knows very little). The reason stimulus is so politically popular is that it appears to work in the short-term. However, appearances can often be deceiving, as they are right now in the US. Stimulus merely numbs the pain of economic contraction, as the underlying trauma gets worse. Austerity might slow an economy down, but at least the wounds are able to heal. America has chosen the former and Europe the latter, albeit not quite as large a dose as needed. The fact that in the short-run Europe is suffering more than the US does not vindicate Washington’s approach. On the contrary, this is exactly what is to be expected.
What we’re seeing is like a race where each runner has a broken ankle. One has a coach who tells him to pace himself and not worry so much about winning this one, while the other coach gives his runner a shot of painkillers and tells him to give it all he’s got. Of course, early in the race, the doped-up runner is going to be flying down the track like nothing’s wrong, while the other runner might be limping at half his normal speed. However, when the drugs wear off, the sprinter is liable to collapse from pain, leaving the better-coached runner to limp across the finish line.
The true test is not the immediate effects of stimulus or austerity, but the long-term results. For that reason, Krugman’s conclusions are meaningless. The apparent success of stimulus simply results from spending more borrowed money on government programs and consumption. But don’t we all agree now that this is exactly what caused the financial crisis in the first place?
As far as inflation is concerned, a vindication of Federal Reserve Chairman Ben Bernanke is equally premature. First of all, it’s not that Quantitative Easing will lead to inflation; it’s that QE is inflation. Secondly, there is a lag between QE and rising consumer prices, so the jury is still out as to how high consumer prices will ultimately rise as a result of current and past Fed policy mistakes.
But even more fundamentally, it is absurd to look solely at government price measures, which are built to understate inflation, and conclude that QE has not already produced an elevated cost-of-living. For example, the 2.4% rise in the Personal Consumption Expenditure (PCE) Index in 2011 is more of an indictment of the accuracy of the index than a vindication of Bernanke. In fact, of all the ways the government purports to measure inflation, the PCE is perhaps the most meaningless, as it relies on built-in mechanisms like goods substitution to hide a lower standard of living. As an example of how this works, imagine you are used to eating farm-fresh butter but have to switch to cheaper but also less-healthy margarine from a factory; the PCE would say you are no worse off. That’s exactly why the Fed chooses to use this uncommon metric.
Keynesianism
Inflation, instability, cronyism: hallmarks of central banking
laliberty: Hi. I hope you don’t take my response as an attack. If you want more information, I’d be happy to point you to some sources. I promise to not hold your being a Fighting Irish against you… (couldn’t help it, I’m a ‘Cane and remember the Catholics vs Convicts rivalry too well) :)
Absolutely not — I am all for reasoned debate and am more than happy to engage you on this.
I do disagree with you on a number of places, though, starting with the idea that the poll is a Keynesian one — the point of the IGM forum is to survey economists from schools as disparate as UChicago and Princeton (one neoclassical and one Keynesian). Furthermore, Monetarists and Keynesians rarely get along (see: Stephen Williamson and Paul Krugman).
My point was that they are all central banking apologists, all essentially monetarists of some sort - meaning all accept or advocate a governmental role in the supply of money. Being neo-classical, or Keynesian, or Chicago-Schooler, or Supply-sider, or even Socialist - like a Monetarist - is not mutually exclusive to being in favor of a centralized authority in monetary policy. That there are disagreements doesn’t negate this. Republicans and Democrats disagree vehemently on many things, but they are both, generally speaking, statists.
Basically, the question asked is a fairly defining one.
I’m an economics student myself, and I happen to take issue with some of your contentions. First, and this is a technical quibble, inflation isn’t an increase in the money supply, but rather an increase in price levels.
This is not, in fact, merely a quibble. This is actually a crucial point. I offered a link in my previous post that explained how inflation was always defined as an inflating of the currency or inflating of the money supply. Even Keynes himself defined the term this way. In fact, from 1864-2003, that’s exactly how Webster’s defined inflation: “undue expansion or increase, from over-issue; — said of currency.”
That this definition is less common today is a direct consequence of what can only be considered many years’ worth of Orwellian language restructuring. As I previously explained, “Inflation was and is definitionally printing money, or more specifically inflating the money supply. By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money.”
This is not unlike suddenly using the word dog to instead refer to dog piss.
Ask your economic professors why inflation had a set definition that has only recently changed. Why what once was inflation is now defined by its effects. I took a number of Keynesian courses in college and it was in challenging what seemed to be inconsistencies did I truly learn.
More to the point, your argument implicitly rests on the idea that the “falling value of the dollar,” as you term it, is intrinsically bad.
That is not necessarily what my argument rests on. I was countering the claim that monetary policy allows for more stability and less volatility than the value of gold. In fact, “stable prices” is one of the Fed’s primary purposes. I think I demonstrated the falsity of such a claim in my last post by showing how in 30+ years, “relative to the Federal Reserve’s “stable” dollar, the price of gasoline increased by 245%. Relative to “volatile” gold, on the other hand, the price of gasoline decreased by 0.5%..”
You neglect, of course, to realize that increases in price levels extend to the price of labor — that is, compensation (wages + benefits) increase with the price of goods. (Now, and this is something related to my biggest passion, healthcare policy, increases in compensation have gone almost entirely to insurance premiums — but I digress.)
If price levels eventually extend to wages, this merely means that wages are catching up to other price changes. The price changes that occur first are always in whichever preferred industry gets the new money, and thus benefits those favored cronies who are most connected. They get to circulate the new dollars before saturation and velocity cause prices to increase. In other words, they have more money before that money is less valued. Those lower on the economic ladder typically feel the price changing effects of inflation well before their wages catch up.
There, of course, are a number of other arguments against the gold standard. As a student of economics, it seems clear to me that monetary policy is, in fact, a useful tool for solving macroeconomic problems. My economics department is a neoclassical, free-market one, but it generally doesn’t deny the empirical evidence that monetary policy can and does have a moderating effect on the volatility of GDP.
There is a separate argument to be made for not intervening in the macroeconomy at all, and I’ll be happy to engage that one too. But as far as I see it, the gold standard is still a bad idea, and for far more reasons than the ones I have oh-so-briefly outlined here.
There’s an inherent problem in using GDP to measure the effectiveness of a central banks moderating effects, considering government spending is factored into “growth.” Even so, The Fed states 2% annual inflation as its goal, which means its ideal is a 2% drop in the purchasing power of the currency. And, I’d also counter that empirical evidence shows an overwhelming and consistent lack of success with regards to central banks’ abilities to mitigate recessions, avoid monetary volatility, and attenuate periods of high unemployment - the main reasons publicly offered for the existence of such central banks. And none of this even addresses the fundamental trouble with a monetary printing press: malinvestment.
But ultimately, this comes down to what my argument does rest on: the use of knowledge in society. I recommend my post on The Calculation Problem and Price Theory for the basics.
You may find this article from The Economist interesting, too.
To this, I’d simply say freedom ain’t easy. The question is whether or not a central bank is the most just, effective, moral, and productive answer for a wealthy, thriving economy and populace. Whatever logistical complications may exist to arrive at the ideal solution are, in my opinion, secondary to the long-term benefit. (Also, as a related side note: Democracy is illegitimate.)
And, yes: Go Irish!
Booo!
Re: Yes, the gold standard is a bad idea →
Take note, Ron Paul fans. It is a bad idea, and economists everywhere agree.
“economists everywhere”
The poll you link to surveys central banking apologists, mostly Monetarists and Keynesians. They are by definition in support of fiat currency. They view the economy as something to be engineered through the manipulation of the money supply - something impossible with a fixed gold standard. Consensus among them is meaningless.
That’s like asking your local butcher if eating meat should be outlawed.
Looking at their answers, it’s clear even the “experts” are anything but. Allow me to address a few:
Nancy Stokey: “There are much better ways to avoid excessive inflation, while maintaining the flexibility of a fiat currency.”
Inflation is an increase in the money supply. You cannot avoid excessive inflation by allowing for the mechanisms of excessive inflation to control inflation. This is like keeping a flame at bay with a firehose of gasoline.
The Fed’s only tool is to inflate - and it has persistently used this tool to the great detriment of the value of our currency. By no means has a central bank, much less leaving the gold standard, avoided excess inflation (as I will demonstrate later).
The law of supply is immutable: When dollars are abundant they are also cheap. A gold standard thus keeps dollars from being artificially abundant.
Richard Thaler: “Why tie to gold? why not 1982 Bordeaux?”
Because gold is a proven asset. It is the most successful medium of exchange in the history of mankind. People have used and still use gold as money. No one uses wine.
Though perhaps if wine (1) retained value over thousands of years without decay (imperishable), (2) were easily divisible without losing value, (3) were malleable and ductile, able to be shaped into more convenient and portable forms, (4) remained stable in a wide range of temperatures and climates, (5) has never been worth nothing, (6) was fungible (an ounce from one source would be equal and identical to an ounce from another source), (7) supply was finite without being so rare as to be difficult to use (relative scarcity), (8) new supply was relatively uncommon and difficult to acquire (certainly relative to the success of vineyards or activity of a printing press), (9) had a long-standing history of being used as currency, and above all else (10) free people were using it as a medium of exchange or intermediary of trade - then Thaler might have a point. Seeing as none of that applies to wine, Thaler’s comment exposes some serious economic shortcomings.
Kenneth Judd: “The relative price of gold can be very volatile.”
Yes - relative to the dollar because the dollar is volatile:
This chart clearly shows the effect of fiat currency that can be inflated at whim - such as the greenback during the “Civil War” or the Federal Reserve note when losing its silver/gold backing in the late 60’s.
Meanwhile, the value of gold is incredibly stable relative to other commodities.
Let’s look at gasoline back in 1980, which, like 2011, also had a spike in the price of gold and oil (these are my calculations, but feel free to look into it yourselves):
Price per gallon, 1980: $1.25
Federal taxes per gallon, 1980: $0.04
Price per gallon, 1980 (pre-tax, in inflation-adjusted dollars): $3.32
Ounce of gold, 1980 (average): $615
Gallons of gasoline per one ounce of gold (1980, pre-tax): 508.2
Price per gallon, 2011: $3.25
Federal taxes per gallon, 2011: $0.185
Price per gallon, 2011 (pre-tax): $3.06
Ounce of gold, 2011 (average): $1565
Gallons of gasoline per one ounce of gold (2011, pre-tax): 510.6
So, relative to the Federal Reserve’s “stable” dollar, the price of gasoline increased by 245%. Relative to “volatile” gold, on the other hand, the price of gasoline decreased by 0.5%.
Which one is the bad idea again?
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