As I believe Will Rogers once said, it ain't what we don't know that kills us; it's what we do know that ain't so. One of the reasons behind affection for the gold standard is the erroneous belief that during the era of the gold standard, the economy grew much faster than it does now.
Well, sometimes it did. It also shrank much faster than it does now. Under private or semi-private money, the economy tends to be much more volatile.
But on average, if you compare the two centuries, as I did using what primitive growth data we have for the 19th century, you'll see that there were spectacular years of China-style growth, but even more spectacular years of contraction. Recessions tended to be much longer, deeper, and more frequent than they are now.
But on average, the 20th century, with its Federal reserve and its fiat currency, grew not only more smoothly, but on average faster than the 19th. In 1800, real per-capita GDP was $1200 or thereabouts; at the turn of the 20th century, it was a little less than $5,000, a roughly fourfold increase. By comparison, between 1900 and 2000 real per-capita GDP went from $4,921 to $34,775, a sevenfold increase. Even if we chop off the first half of the 19th century, to put us squarely in the industrial revolution, 20th century growth still looks better. If fiat money is killing us economically, it's sure a slow-acting poison.
"But on average, the 20th century, with its Federal reserve and its fiat currency, grew not only more smoothly, but on average faster than the 19th.-MM
Well... maybe. Are you familiar, Megan, with Christina Romer's work?
Romer, a very good economist, argues that the apparent volatility is spurious--that it derives from flaws in the data.
That said, I certainly agree that the gold standard is a bad idea, and that it would not contribute to stability. Romer's work is prinicpally interesting becuase it undermines the claims of Keynesians that discretionary fiscal and monetary as contributed to stability.
To follow up, Romer (whose husband wrote a superb textbook, incidentally) summarized her own work thusly and :
Look here as well if you are interested.
Romer is arguable, but doesn't really go to the main point, which is that we grew faster in teh 20th c. than the 19th.
Agreed, Megan... In general, I think your criticisms of Ron Paul and the gold standard have been sound.
Well, I don't know. The gold standard is something that every single country in the world has moved away from, considering it an archaism, and that every introductory economics course teaches is a clumsy and outdated system. On the other hand, a crusty old curmudgeon with an honest face thinks it's a great idea. I think America should try it.
Megan,
This sounds a lot like a post hoc ergo propter hoc argument.
Ummm.....aren't you making an unfair comparison?
Comparing gold-standard dollars and post-gold-standard dollars, and then arguing that growth was faster, in dollars, without the gold standard, seems wrong. After all, the dollar can be depreciated any amount, but gold always has an intrinsic value.
Try comparing the price of gold (or any other commodity) against the dollar, and then tell us if the economy grew faster before or after the gold standard.
The figures are all in real (inflation adjusted) dollars. Obviously, nominal dollars would give skewed results.
"Ummm.....aren't you making an unfair comparison? Comparing gold-standard dollars and post-gold-standard dollars, and then arguing that growth was faster, in dollars, without the gold standard, seems wrong."
I checked also, using the link MM provided. Even using Real GDP per capita, growth was higher in the 20th century than in the 19th. Interestingly, though, growth was higher in the second half of the 19th century than in the first half of the 20th century, and faster still in the second half of the twentieth.
Anyway, I think this has to do with technological changes, not the gold standard. As every decent economics text teaches, money has a powerful influence in the short run, but little or no influence in the long run.
cf, I went and looked at historical gold tables and historical dollar deflators, but what you've suggested is close to impossible because when currency was redeemable in gold the price of gold stayed almost completely constant. Since we've gone off the gold standard, the price of gold has fluctuated wildly. So you'd have to do a pretty arbitrary job of picking a gold "price" for any particular range of time and comparing it to economic growth. What this does show, though, is that the idea that "the dollar can be depreciated any amount, but gold always has an intrinsic value" is quite wrong. Gold had a steady value only when the government legislated that it was currency. On its own, gold has bounced around crazily from $230 an ounce in 2000 up to $730 in 2006 and back down. The dollar would cease to have any value if the United States collapsed, but at that point all kinds of things might become hard currency -- gasoline, cigarettes, corn meal, chickens, etc.
It's 2007 and the Republicans are debating the gold standard, the fact of evolution, and whether or not torture is acceptable. I'd say that's all the reason anyone needs to be a Democrat, as flawed and frustrating as they are.
"On its own, gold has bounced around crazily from $230 an ounce in 2000 up to $730 in 2006 and back down."
brooksfoe, if you Au you'd like to sell, at a price lower than U$D 730, let our hostess know, if she doesn't pocket the opportunity, I'd b more than happy to buy as much as your selling..
http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
http://www.kitco.com/
rwe, I'll ask you since MM never does answer the Q when it comes up...MM states that 'growth' was higher in the 20th C. than the 19th C., but how does one square that against the fact that we left the 20th C. 10's of trillions(U$D) in Debt v. single-digit billions in 1900?
here's one source:
http://www.the-privateer.com/usdebt/budget.html
Hoffer, gold fell from $730 in May 2006 to under $600 in June 2006. Your point is?
Mark,
What matters is the debt to GDP ratio, but I'm sure that was much higher by the end of the 20th century than it had been at the beginning. The reason is because government spending grew at such a prodigious rate.
That's unfortunate (as Ron Paul and I would agree). Franklin Roosevelt and then Lyndon Johnson created huge entitlements that put tremendous strains on the budget. And there were large military expenditures as well, from two World Wars to the Cold War.
I wish government spending had been more restrained. But I don't see what that has to do with the gold standard or fiat money.
By the way, I'll send my regards to my pal hdt for you.
Franklin Roosevelt and then Lyndon Johnson created huge entitlements that put tremendous strains on the budget.
The ratio of federal debt to GDP fell under LBJ, as it has during the presidencies of every Democratic president since 1945. It rose dramatically under Ronald Reagan and under George W. Bush. The main reason is tax cuts unaccompanied by cuts in spending.
Meanwhile, US defense spending today is 33% higher than during the Vietnam War.
The overwhelming source of the federal debt created under FDR was not "entitlements". It was World War II.
brooksfoe,
Your comments are often good, but not his time. LBJ and FDR created huge long-term entitlements and that's what's threatening our fiscal health in the future. Not Iraq. Not tax cuts. You can't just look at short-run deficit figures.
As for Reagan (and for the others, for that matter) I suggest you read Laurence Kotlikoff's work. He points out that, using generational accounting, Reagan's policies were fiscally prudent. He cut income taxes, yes, but he also made improvements in Social Security. As Kotlikoff put it here:
And as for this claim:
"Meanwhile, US defense spending today is 33% higher than during the Vietnam War.
You should be looking at defense spending as a percentage of GDP, not defense spending in nominal dollars. And, as a percentage of GDP, defense spending is pretty low now--less than half what it was under Eisenhower, in fact.
Just to give the numbers: defense spending was 11.5% of GDP in 1953, 8.9% of GDP in 1968 (during the Viet Nam War) and a mere 3.9% in 2005. So it's hard to make the claim that defense spending has exploded. If anything, it's too low. You can check the numbers here.
rwe,
"I wish government spending had been more restrained. But I don't see what that has to do with the gold standard or fiat money."
the ready elasticity of fiat currency allows for government spending, in excess of revenues, without necessarily having to coincidently raise taxes or other revenues/borrowings.
with this: "What matters is the debt to GDP ratio.." one needs to be careful that the debt incurred is for useful and productive purposes, those that have the ability to liquidate it. we are running on ever thinner ice when the debts we are accumulating are those for mere consumption.
"As a single footstep will not make a path on the earth, so a single thought will not make a pathway in the mind. To make a deep physical path, we walk again and again. To make a deep mental path, we must think over and over the kind of thoughts we wish to dominate our lives."
Henry David Thoreau
"If the machine of government is of such a nature that it requires you to be the agent of injustice to another, then, I say, break the law."
Henry David Thoreau
need friends like rwe, if only to bail us out ;)
you may care to search www.mises.org , they have alot of good background on this topic..
Your point is?
Posted by brooksfoe | December 19, 2007 11:46 PM
brooksfoe, the point, as one would see in the chart, linked, is that Au is now U$D800..
rwe, we probably shouldn't get into a you-say-tomato argument about defense and entitlement spending on a gold standard thread. I'd say that while it's true we can afford higher defense spending since our economy is vastly bigger, defense spending ought to be considered in proportion to the threats it's supposed to deal with, and is thus much more wasteful today than it was in 1968 (Vietnam plus USSR) or 1953 (Korea plus USSR). In any case, if you're arguing about LBJ being the author of US national debt, defense spending as a proportion of GDP fell under LBJ too, because the economy was growing so fast.
But you were talking about entitlements as the source of the debt. Again, all I can say there is that whatever entitlements LBJ or FDR created, debt as a percentage of GDP fell very consistently after FDR all the way through the Carter years. It took off under Reagan. The source of the debt clearly wasn't Social Security, which after the Greenspan fix in 1983 began taking in more than it was paying out, as you note. In fact, it was just as Kotlikoff says: "the Reagan tax cuts did increase the burden on future generations" -- i.e. the national debt. Debt fell again through the Clinton years with PAYGO, from about 70% to about 60% of GDP if I recall correctly. Under Bush, it has jumped back up to near 70%, mainly due to the tax cuts. And looking out to the future, the shortfall in revenues through 2017 from the Bush tax cuts, if they become permanent, will be much bigger than the shortfall due to rising Medicare expenses -- which are themselves huge.
Brooksfoe, that's in part because the Democrats had a high rate of inflation eating away the value of past debt . . .
The signature "affurism" of nineteenth-century humorist Josh Billings was "It iz better tew know nothing than two know what ain't so." A handbill for one of his lectures included the line, “It iz better to kno less than to kno so much that ain’t so.” Across this handbill Billings wrote longhand, “You’d better not kno so much than know so many things that ain’t so.”
Yes, thank you. The nostalgicons are fond of looking fondly aft, to those heady days before Alexander Hamilton managed to institute his pernicious national bank. Ah, those were the days.
But they weren't:
http://trueconservative.typepad.com/trueconservative/2007/12/government-ba-1.html
I typically am on board with your analysis, but have to push back a little on your analysis here. For example, lots of leftists make the claim that since economic growth has been faster in the 20th century (an era of bigger government) than in the 19th century (an era of smaller government), that is proof that classical liberals are idealistic neophytes.
I think of broken windows, but the bigger point, I believe, is that something needs to be adhered to as a guiding principle, no? That principle is that people should have the right to choose the medium of exchange they wish to conduct business in. If doing this also has the effect of reducing inflationary pressures, then so be it. But that is not why some "gold bugs" support commodity currencies, some of them support commodity backed currencies on principle.
An interesting set of data is the official contraction - expansion series calculated by the NBER, the official definers of recessions.
Their data show that from 1854 to 1919 their were
16 business cycles with an average contraction of
22 months and an expansion of 27 months. So the economy was in a recession some 45% of the time.
From WW II until 2001 there were 10 cycles with an average contraction of 10 months and an expansion of 57 months. So since the advent of big government and the modern Fed the US economy has been in recessions only 15% of the time.
Romer looked at the depth or severity of recessions, so his revisions do not impact the data on the frequency of cycles.
In 1971 I was a gold analyst and did a study of the long run non-monetary demand and supply for gold. I found that demand growth exceeded supply growth at the 1969 price of around $39 that seemed to be an equilibrium price because there were no significant central bank gold sales or purchases in 1969. Given the estimates of demand elasticity I concluded that the real price of gold would have to grow at about a 3% annual rate. Interestingly, that trend growth rate generates a gold price of around $800 currently.
But if you have a gold based monetary system and the real price of gold is falling it means that the rest of the economy should suffer long run deflation.
alwsdad wrote: It's 2007 and the Republicans are debating the gold standard, the fact of evolution, and whether or not torture is acceptable.
I've got a vision of you with all of your hot-button topics scrawled on bingo balls, and a hand-cranked lottery cage situated next to your keyboard.
Spencer, I assume the economy was in reasonable shape, not deep in debt and ready for the next run after the recession. Can you say the same about the result of the recessions of 20th century? If not, it seems to me that you are comparing incomparable. We could as well state that the good 'performance' was the result of getting indebted - and if you tried to account for this visible/hidden debt, you may as well end up with the same data.
The Great Depression took 15 years to be fixed. 70's stagflation took 10 years. Can you point me to 19th century recessions of such magnitude?
Alan Greenspan's 1967 essay in support of the gold standard, which echoes many of Ron Paul's points -
http://www.constitution.org/mon/greenspan_gold.htm
that's in part because the Democrats had a high rate of inflation eating away the value of past debt . . . Posted by Megan McArdle | December 20, 2007 6:10 AM
Inflation under Kennedy-LBJ averaged 2.1%. Inflation under Clinton averaged 2.6%. For reference, inflation under Nixon-Ford was much higher, at 6.4%; inflation under Reagan-Bush1 averaged 4.6%. Inflation under Bush2 has averaged 2.7% and is now ticking up.
You have a case for Truman, at 6.9%, and Carter, at 9.7%. But Carter cut the nominal budget deficit in half; he would have reduced the national debt relative to GDP with or without inflation. Truman, whose administration also saw GDP grow 25% in 7 years (like Clinton's), is really peripheral to this discussion. The question is which is responsible for the federal debt, Democratic spending or Reagan-Bush tax cuts. The answer is clear: Democrats have shrunk the national debt; the Reagan-Bush tax cuts have blown it up. Inflation doesn't factor in significantly.
Is it fair to use per capita GDP when the 19th century was a time of immense immigration? Per capita GDP rose 1.97% in the 20th century and 1.4% in the 19th. But the real GDP of the nation rose 4.15% in the 19th and 3.32% in the 20th.
Well, if you add an immigrant that is poorer than the average person, you instantly lower per capita GDP and raise GDP. I'm not sure how to reconcile this and make it make something useful, but century long growth rates don't strike me as a good reason to be for or against the gold standard.
Re: 70's stagflation took 10 years.
Huh? After a nasty double-dip recession in 80-81, the economy had pretty much fully rebounded by the "morning in America" election year of 1984. That is not ten years.
Well, I won't weigh in on the nuances of monetary policy (here), but I have to throw my support behind a propos uses of Billy Joel lyrics for titles...