John Maynard Keynes

[August1991]

I'm willing to argue that Keynes was important in the development of economic theory and some of his ideas are still relevant today.

May I suggest a Paul Krugman article? (Some may not like Krugman but in fact in this article, he was plagiarizing others. His article is a vulgarization.)

Krugman and Baby Sitting

[August1991]

More importantly in the long run (which was always Keynes concern) it taught the federal government the use of the Spending Power.

On the contrary, Keynes is famous for saying that "in the long run, we are all dead." Keynesian economics is always short run.

Do you know what Friedman replied when asked whether he thought Keynes or Von Mises was the greater economist. He said, without hesitation; "Keynes."

Provide a quote or source, please.

It is the binding force today and is the reason that al those who are crying "Fiscal Imbalance" should be hanged for treason.

The term fiscal imbalance refers to federal government revenues and provincial government spending. I don't see how Keynes is relevant.

That saved Canada which, by the late 30's was on the brin if disintergretation as the powers of the Federal Government dissipated and the Provinces acted more and more like autonomous regions.

Huh?

We can look at the 1930s, if you want, but what happened was a little more complex than your simplistic description.

For that, Keynes was often referred to as a "Father of Confederation." You still see the term used by some who are not ignorant of our real past.

I note that you put the title in the past tense. It was a common idea in the 1960s. Well, in the 1960s, many people thought that smoking was not harmful and that a women's place was in the home.

[Hugo]

(Moved from the other thread)

Hugo, you mentioned "Mises" (in fact, it is von Mises) and W. F. Hutt. Neither of these two can be considered to be mainstream.

I know it's "von Mises", I'm just shortening it. It does not matter that neither is mainstream (von Mises might be considered to be mainstream, or at least those he influenced were - Ayn Rand, for instance), their criticisms are correct.

Keynes was an important economist and important contributer to economic theory. To suggest otherwise is simply false.

I agree that he was important economist. Hitler was an important politician. I believe that Keynes was important for all the wrong reasons, and that his ideas, like those of Marx, have been very destructive.

Whether or not he is an important contributor to economic theory is another matter. As I said, he has been accused by many of plagiarism. The general consensus amongst capitalist economists is that he was a popularizer of other theories rather than a thinker. Not only that, but these theories are usually just plain wrong.

You mentioned liquidity preference. The state of the Japanese economy today destroys this myth. According to Keynes, Japan was caught in a liquidity trap in the early 90s, and the Japanese government should have cut interest rates to recover. They cut them to nothing, and failed to recover. Thus, there isn't a liquidity trap, even though according to Keynes, there must be. I found a good column on this example for you here.

"Excess" supply of money is not a fraud, it is a tax.

A fraud can be regarded as a tax. If a con-man persuades you to hand over $100 for a good he does not have and has absolutely no intention of giving you, he has defrauded you - and taxed you $100.

The notion that there is a one-for-one equivalency between "real assets" and "paper assets" is simplistic to be laughable. What valuation do you give either asset?

Value is in the eye of the beholder. The only value that exists in anything is what people give it.

That being said, money is a good. It can be bartered for other goods. If the quantity of other goods increases (physical capital growth) but the quantity of money does not, it follows that money will become worth more in exchange, as long as demand is roughly constant. This talk of "paper assets" is misleading, since paper money is generally an inflationary tool rather than a sound currency.

You trot out a couple of sentences purporting to explain highly complex theories

This is a couple of sentences more than you have trotted out.

Keynes was a capotalist and his use of that particular model was in his attempts to save Capitalism.

Keynes was a socialist, and anyone who purports to "save capitalism" is generally a socialist too. If you want to save capitalism, the best thing you can do is leave it well alone. Those who advocate state interference in the economy are shilling for Marx.

Have you read Keynes "How to Pay for the War?" That just about explodes your juvenile criticisms.

It's wrong, quite simply. It advocates inflationary defecit spending to pay for war, which as has been shown, is a very stupid economic policy. Keynes also believed that war can be good for an economy, which means he basically doesn't understand Bastiat's broken-window fallacy. This is shameful, since it was written almost a century before the book in question.

Keynesianism taught Canada how to get out of the Depression as it did everyone who would listen.

Keynesianism actually got the world into the Depression in the first place, thanks to US and European policies of deficit spending and loose monetary policy which were advocated by Keynes. It's a mistake to believe that FDR had any radically different policies than Herbert Hoover. Hoover's Keynesian policies helped cause the Depression, and FDR's continuation of them helped prolong it, and nothing more.

[Hugo]

Regarding the Paul Krugman article:

I think this guy has misidentified the cause of his co-op recession. The initial problem was that the currency was not correctly matched to the true value of capital. The recession was inevitable.

In economic history, this is exactly the same thing as when the US, British and French governments went back on the gold standard in the 1920s. The dollar was undervalued, the pound and franc overvalued, which was a primary cause of the Great Depression. The problem was not a lack of inflation to stimulate the economy, but a failure to properly link the value of a currency to the goods it was to be bartered for.

The inflationary measures he mentioned fixed the problem not because inflation can prime an economic pump (it can't), but because it corrected the earlier mistake of currency parity.

[The Terrible Sweal]

I agree that he was important economist. Hitler was an important politician.

I'm shocked to hear you compare Keynes to Hitler! You are devaluing the lives off all of Hitlers victims in a most shameful fashion.

I believe that Keynes was important for all the wrong reasons, and that his ideas, like those of Marx, have been very destructive.

Keynes' ideas are essential building blocks of modern economics. They are not beyond criticism, but it sounds to me like you really want to criticize the use/mis-use of the ideas rather than the ideas themselves.

It advocates inflationary defecit spending to pay for war, which as has been shown, is a very stupid economic policy.

Shown? Where? When?

Keynesianism actually got the world into the Depression in the first place...

I find that hard to believe since his seminal work The General Theory of Employment, Interest and Money, was published in 1935, six years after the depression began.

This kind of basic error greatly undermines the general credibility of you position.

[Guest eureka]

Keynes advocated the use of savings to pay for the war' He opposed the idea of taxes. Savings that would be repayed.

That is not inflationary deficit spending.

I could find a link for you, August. I might even be able to post it if it is not a long one. However, it was an American economist who asked the question expecting a different answer.

[Hugo]

I'm shocked to hear you compare Keynes to Hitler!  You are devaluing the lives off all of Hitlers victims in a most shameful fashion.

Guilty as charged, and I apologise. I was just trying to illustrate that "important" does not equate to "beneficial." I admit that my example was extremist.

Keynes' ideas are essential building blocks of modern economics. They are not beyond criticism, but it sounds to me like you really want to criticize the use/mis-use of the ideas rather than the ideas themselves.

I believe his ideas were wrong, fundamentally flawed. It follows that the application of a wrong idea will almost certainly fail to produce beneficial results. I can criticise his ideas as theories, and then bring out examples of their application as further illustrations of their flaws.

Shown? Where? When?

In the other thread. To summarise briefly, funding from inflated currency is bad because it either has to be deflated again (leading to recession), or can continue to be inflated (leading to abandonment of the currency and economic crash). Nor can one remain stationary, i.e. to inflate "just a little" and stop there, because the artificial boom created by currency expansion can only avoid being turned into a bust as long as the currency expansion continues. If it stops, all the investment created with inflated currency collapses.

I find that hard to believe since his seminal work The General Theory of Employment, Interest and Money, was published in 1935, six years after the depression began.

Like I said, most of his ideas weren't original. Therefore I said "Keynesianism", by which I meant the theories that Keynes popularised rather than those which he actually came up with.

Keynes advocated the use of savings to pay for the war' He opposed the idea of taxes. Savings that would be repayed.

Actually, that's wrong. He did advocate the raising of taxes to pay for war. I was wrong when I claimed that he advocated deficit spending in this particular work, I was confusing it with his earlier pieces - but thank you for pointing out another Keynesian self-contradiction!

[Guest eureka]

http://www.mskousen.com/Books/Articles/guess.html

Try this, August. Why is the request for authorities not limited to where they matter. This kind of request is a time waster.

[Guest eureka]

Read it, Hugo. He advocated savings use.

Frankly, I don't know where to go with all this for you. You post simplistic ideas as the end of criticism. You seem to be unaware of the thousands of pages devoted to the working out of the theories and their practise.

Here is a link to most of his important writings. With a bio style explanation of

Keynes.http://cepa.newschool.edu/het/profiles/keynes.htm

[Hugo]

I have already seen that link. What does "compulsory saving" actually mean? Taxation! It's a word game. A lot of Keynesian theories like this depend on deception in order to work, like the full employment policy, which hopes that nobody would notice the rising prices consequent to inflation. Keynes hopes to deceive workers into accepting lower wages without their realising that he has hoodwinked them. His downfall is that people simply aren't that stupid.

You seem to be unaware of the thousands of pages devoted to the working out of the theories and their practise.

As do you! What tracts of Keynesian analysis have you posted so far, exactly? This argument about war funding is the first indication that you know of a single Keynesian theorem - and alarmingly, it seems that you are completely mistaken about its nature!

[The Terrible Sweal]

To summarise briefly, funding from inflated currency is bad because it either has to be deflated again (leading to recession), or can continue to be inflated (leading to abandonment of the currency and economic crash). Nor can one remain stationary, i.e. to inflate "just a little" and stop there, because the artificial boom created by currency expansion can only avoid being turned into a bust as long as the currency expansion continues.

All you seem to be saying there is that inflation stops when there is an economic downturn. Two thoughts: First, this supports my contention that inflation is a product of growth. Second, it does not substantiate the causal relationship you posit between inflation and downturns.

If [inflation] stops, all the investment created with inflated currency collapses.

I don't know what you mean by 'the investment' collapsing. The value of the currency may collapse, but real capital accumulated during the period of growth would remain (though perhaps 'stranded').

[The Terrible Sweal]

I have already seen that link. What does "compulsory saving" actually mean? Taxation! It's a word game.

The difference is the promise to repay. You can't ignore that.

... the full employment policy, which hopes that nobody would notice the rising prices ...

Correct me if I'm wrong, but I seem to recall there being a net increase in welfare posited which made the trade-off worthwhile.

[Hugo]

, this supports my contention that inflation is a product of growth.

You have your cause and effect mixed up. Inflation produces growth, albeit only temporarily, not the other way around, and an economic downturn occurs when inflation stops or slows, not the other way around. Inflation produces an influx of money from nowhere, which will be spent, producing growth. In time, prices will adjust upward to reflect the new influx of money (money is now worth less compared to other commodities).

This can be seen in the history of the pound sterling. For centuries, when the pound sterling remained a gold-coin backed currency, it retained its value despite roaring economic growth in the 18th and 19th centuries.

On the other hand, the pace of economic growth has been slowing since the turn of the 20th century, and yet since that time the pound sterling has lost 80% of its value.

This refutes your argument. For it to be true, the reverse would have had to have happened - the growth in the 18th and 19th centuries would have had to produce a massive devaluation of the pound, and the relative stagnation of the 20th century would have had to keep it relatively stable.

Second, it does not substantiate the causal relationship you posit between inflation and downturns.

Inflation causes temporary economic growth, but because the inflated currency is not backed by capital, the growth is only temporary. When the inflation stops, all that was put into the economy will be destroyed, since that which went in came from nowhere, so that which goes out will go nowhere.

I don't know what you mean by 'the investment' collapsing. The value of the currency may collapse, but real capital accumulated during the period of growth would remain (though perhaps 'stranded').

Basically, inflation tends to destroy profit margins because, as the inflatory mindset begins, debtors and workers start demanding more money that is progressively larger than the inflation rate. This destroys real profit margins and eventually renders whole sectors of industry unprofitable, thus causing companies to fold, unemployment rates to multiply and so forth. The capital used in their construction and growth is essentially lost because nobody else, in the inflatory climate, will be able or willing to purchase it.

The lines of business that collapse under inflatory policy aren't necessarily the ones that were generated under it. For instance, inflation vastly favours debtors at the expense of creditors. But taking the economy as a whole, inflation produces a temporary growth spurt that will quickly collapse unless the currency is further inflated.

The difference is the promise to repay. You can't ignore that.

A-ha! But what if the government repays in inflated currency?

Correct me if I'm wrong, but I seem to recall there being a net increase in welfare posited which made the trade-off worthwhile.

Explain how, or link to someone who does.

[Guest eureka]

You seem very fond, Hugo, of accusing others of not having read things to cover up your inability to grasp what you are supposed to have read.

You are right inthat I do not read Keynes economic treatises or major works. I don't because I have no desire to be an economist. I have, however, probably read a great deal more about him than you. I did it long ago.

The reason I did was that I had a maths teacher in school who was at Cambridge with Keynes and was also a double first who, for reasons I never heard, had no ambition to go further. I was a child at the time, and it meant nothing to me. However, it did stimulate me to, a few years later, read about Keynes.

That was enough for me to realize what utter nonsense you are posting in your blind adherence to an ideology.

Keynes also wrote about not having full employment. He wrote about how to deal with a real world in order to get the best that there could be. He most certainly never advocated the lowering of workers wages as an economic necessity.

And, he did it in a way that no economist before or since has or could.

[The Terrible Sweal]

This can be seen in the history of the pound sterling. For centuries, when the pound sterling remained a gold-coin backed currency, it retained its value despite roaring economic growth in the 18th and 19th centuries.

This tells you something about the gold standard, but not about the mechanics of growth and inflation without the gold standard.

On the other hand, the pace of economic growth has been slowing since the turn of the 20th century, and yet since that time the pound sterling has lost 80% of its value.  ... This refutes your argument.

Except, growth has actually accelerated! See...

Inflation causes temporary economic growth, but because the inflated currency is not backed by capital, the growth is only temporary.

But if it caused growth, then it IS backed by capital, i.e. that growth.

I don't know what you mean by 'the investment' collapsing. The value of the currency may collapse, but real capital accumulated during the period of growth would remain (though perhaps 'stranded').

Basically, inflation tends to destroy profit margins because, as the inflatory mindset begins, debtors and workers start demanding more money that is progressively larger than the inflation rate.

The inflationary mindset? Anyway, that doesn't follow. Increased demand for money should make its value higher, not lower.

The capital used in their construction and growth is essentially lost because nobody else, in the inflatory climate, will be able or willing to purchase it.

Again, that doesn't make sense. If prices are rising, money is worth less tomorrow than goods are. Inflation is incentive the buy the factory and not hold onto cash.

The difference is the promise to repay. You can't ignore that.

A-ha! But what if the government repays in inflated currency?

If the government manipulates the currency to that effect, it's a swindle. If it happens by market forces, it was a poor investment. Accordingly, if it was compulsory, it amounts to a tax. Which was your point there -- Okay.

Correct me if I'm wrong, but I seem to recall there being a net increase in welfare posited which made the trade-off worthwhile.

Explain how, or link to someone who does.

The shift in the price function causing higher output, i.e. growth.

[Hugo]

You are right inthat I do not read Keynes economic treatises or major works. I don't because I have no desire to be an economist. I have, however, probably read a great deal more about him than you. I did it long ago.

As I said before, to another poster, it's pointless trying to argue that you have some kind of authority here because you cannot prove it. All you can prove is what you know in the course of debate, and so far you have demonstrated that you had heard of one written work by Keynes, and that you didn't understand it.

This tells you something about the gold standard, but not about the mechanics of growth and inflation without the gold standard.

Yes, it does. You see, the primary difference between the stable-money period before 1913 and the unstable period thereafter was the abandonment of the gold standard. Inflation is far easier off the gold standard, while on it, it's only possible with coin debasement which is a primitive method with obvious limits. The mechanics of growth off the gold standard are theoretically the same as they are on it, however, inflation when not on gold becomes far easier.

Except, growth has actually accelerated! See...

These figures don't support your hypothesis. Between 1700 and 1913 (Britain went onto gold in 1717), we have over 2100% GDP growth in Britain and virtually no inflation (relative price stability). Between 1913 and 1998, we have 394% GDP growth (a slowdown, not an acceleration), and 400% inflation.

But if it caused growth, then it IS backed by capital, i.e. that growth.

If a currency inflation causes growth, and the inflation is "backed" by that growth, then we are saying that the inflation caused itself, which is not possible.

Monetary expansion must be backed by capital expansion beforehand, not afterwards.

The inflationary mindset?

Yes. You have heard of index-linking? Basically, if the economy has a habitual 5% inflation rate, then people will demand a 5% yearly salary increase, suppliers will insist on 5% annual price increases and so forth. When this happens, the inflation has become self-defeating, because it no longer produces growth. The only way to produce further growth is to increase the rate of inflation, so if you have the aforementioned scenario, and you want 5% growth, that means you have to increase the rate of inflation to 10%.

Increased demand for money should make its value higher, not lower.

There is not an increased demand for money, there is an increased supply of money. Because demand has remained a relative constant, this devalues the money. People don't demand more money, they demand the same money, but because the money has been inflated, they must demand more units of currency to get the same money. This is what I meant.

Again, that doesn't make sense. If prices are rising, money is worth less tomorrow than goods are.

This only happens when inflation enters its final phase and people abandon the currency. Until that point, prices increase first in line with inflation and then faster than inflation, which discourages saving and investment, since saved and invested money will be worth less at maturity than it was when initially invested.

If the government manipulates the currency to that effect, it's a swindle... Accordingly, if it was compulsory, it amounts to a tax. Which was your point there -- Okay.

You are to be commended on your intellectual honesty. I mean that in all seriousness. This is shaping up to be a good thread.

The shift in the price function causing higher output, i.e. growth.

The growth is only temporary. The prices and wages adjust to the inflation rate, which makes it self-defeating. See above.

[The Terrible Sweal]

This tells you something about the gold standard, but not about the mechanics of growth and inflation without the gold standard.

Yes, it does. You see, the primary difference between the stable-money period before 1913 and the unstable period thereafter was the abandonment of the gold standard. Inflation is far easier off the gold standard, while on it, it's only possible with coin debasement which is a primitive method with obvious limits. The mechanics of growth off the gold standard are theoretically the same as they are on it, however, inflation when not on gold becomes far easier.

That's exactly my point. Inflation is a different beast depending whether you use a gold standard or not. Thus, your attempt to discuss post-gold standard inflation in the same terms as pre-gold standard is undermined.

Except, growth has actually accelerated! See...

These figures don't support your hypothesis. Between 1700 and 1913 (Britain went onto gold in 1717), we have over 2100% GDP growth in Britain and virtually no inflation (relative price stability). Between 1913 and 1998, we have 394% GDP growth (a slowdown, not an acceleration), and 400% inflation.

1. Britain went onto the gold standard in 1821.

2. The figures I gave indicated a growth of a bit over 200% for the UK between 1700 and 1820, and 600% for the period 1820-1913. I don't know how you come up with your 2100% figure.

3. Growth for the UK between 1913 and 1998 is in fact closer to 5% (4.94) and the period is eight years shorter.

4. Taking British figures in isolation has a distorting effect due to the rise and fall of the B.Empire. World figures bear out my point.

5. Where are your inflation figures from?

6. I believe the table I offered uses real (inflation adjusted money).

If a currency inflation causes growth, and the inflation is "backed" by that growth, then we are saying that the inflation caused itself, which is not possible.

Well, I'm actually saying the growth causes the inflation. Or that all demand is real.

Monetary expansion must be backed by capital expansion beforehand, not afterwards.

Why not? That's what investment is all about.

Increased demand for money should make its value higher, not lower.

There is not an increased demand for money, there is an increased supply of money.

But you just said that workers demand MORE money. I think you have fallen into a contradiction.

Again, that doesn't make sense. If prices are rising, money is worth less tomorrow than goods are.

This only happens when inflation enters its final phase and people abandon the currency. Until that point, prices increase first in line with inflation and then faster than inflation,

Final phase? No. That's what inflation IS. The decrease in the value of money vs. goods. It is coequal with inflation, not part of any 'phase'.

which discourages saving and investment, since saved and invested money will be worth less at maturity than it was when initially invested.

In other words, it re-prices investment risk. (In yet other words, shifts the price equilibrium in the labor/capital market.) And it encourages consumption spending. Increased consumption produces increased aggregate demand. Unmet demand in turn induces increased investment, i.e. repricing investment risk in favor of investment. This is the aggregate demand curve/supply equilibrium moving up and to the right: more goods at higher prices (growth).

The growth is only temporary. The prices and wages adjust to the inflation rate, which makes it self-defeating. See above.

But they adjust at a higher quantity equilibrium, do they not?

[Hugo]

Inflation is a different beast depending whether you use a gold standard or not. Thus, your attempt to discuss post-gold standard inflation in the same terms as pre-gold standard is undermined.

I'm not sure where I was saying differently. Gold-standard inflation is different, being artifically created only by coinage debasement and occasionally naturally created by large inflows of precious metal, as when Europeans started plundering the precious metals of the New World. But this is rare and its effects are comparatively moderate.

Britain went onto the gold standard in 1821.

1717. Sir Isaac Newton, who was Master of the Mint at the time, fixed the pound to gold at £3.17.10½d per 22 carat troy ounce. This arrangement was formalized in 1821 (although silver was not officially demonetized in 1717, it virtually died out as a currency thereafter) and I think this is where the confusion arises.

The figures I gave indicated a growth of a bit over 200% for the UK between 1700 and 1820, and 600% for the period 1820-1913. I don't know how you come up with your 2100% figure.

Between 1700 and 1913, GDP increased from $10,709 to to $224,618. That is an increase of 1997%. I was off somewhat (I forgot to deduct the initial 100% - silly error, my apologies).

Growth for the UK between 1913 and 1998 is in fact closer to 5% (4.94) and the period is eight years shorter.

For the period 1913-1998, GDP increases from $224,618 to $1,108,568, an increase of 394%.

Averaged out, this means in the 85 years between 1913-1998 the growth was 394%. In a given 85 year period between 1700 and 1913, growth would have been (on average) about 796%. That's double the rate of growth between 1700 and 1913 as compared to 1913-1998. Per annum, we're looking at about 4.5% growth after 1913 as compared to 9.3% for the two centuries beforehand.

Taking British figures in isolation has a distorting effect due to the rise and fall of the B.Empire. World figures bear out my point.

No, they don't, because you don't know the inflation rates for those countries. Unless you can find enough examples where inflation is greatest at the fastest period of growth and least at the slowest to outnumber the examples where the opposite is the case, your hypothesis is not borne out by the facts. I'm taking British figures because I know the British rates of inflation.

Furthermore, if you allege that these effects were caused by the British Empire, you must tell me what effect you think these events had on the British economy and explain them in such a way as to tie them in to the economic figures.

Where are your inflation figures from?

Dr. Hans F. Sennholz, head of the Department of Economics at Grove City College, states that the pound sterling has lost 90% of its value (I remembered it slightly wrong) since 1931 and has suffered four major devaluations.

Also see Jacques Rueff, The Age of Inflation (Gateway Editions, Henry Regnery Company, Chicago, Ill., 1964).

I believe the table I offered uses real (inflation adjusted money).

I know. Thus it is a useful way of comparing economic growth to inflatory rates because the growth can be seen without inflatory effects.

Well, I'm actually saying the growth causes the inflation.

But it doesn't. Economic growth always (initially) follows inflation, it never precedes it. Think about this: do central banks cut the interest rates to stimulate the economy, or do they cut them because the economy was stimulated?

The figures that we're examining above also bear out this point. The fastest growth accompanied and was followed by no inflation. After Britain went off gold and began to inflate the currency, growth slowed.

Why not? That's what investment is all about.

No, investment is taking existing capital and investing it for future capital. Inflation is about taking nothing and investing it for future capital.

But you just said that workers demand MORE money. I think you have fallen into a contradiction.

No, the workers demand more units of currency, but the same amount of money. I'm sorry I didn't make the distinction more clearly.

Here's an analogy. Say I sell only oranges in sacks of 10. You want 20 oranges, so you buy two sacks. Then I start only selling oranges in sacks of 5. You still want 20 oranges, so you buy four sacks. Your demand for "units of oranges" (as we measure them in sacks) has doubled, but you are still getting the same amount of oranges.

Final phase? No. That's what inflation IS. The decrease in the value of money vs. goods. It is coequal with inflation, not part of any 'phase'.

No, there are phases of inflation, or at least of an inflatory economy. Initially, the supply of money increases faster than prices. Then prices keep pace, then increase of prices outpace the increase of money, then the currency collapses.

This is obviously going to cause confusion, though, since there are about 6 accepted definitions of inflation. The one that I use and the one I believe is most correct is the artificial expansion of the money supply (people also use it to mean rising prices, which is an effect of inflation, and they can even use it to mean economic growth, amongst other things).

In other words, it re-prices investment risk. (In yet other words, shifts the price equilibrium in the labor/capital market.) And it encourages consumption spending. Increased consumption produces increased aggregate demand. Unmet demand in turn induces increased investment, i.e. repricing investment risk in favor of investment.

No, this isn't the case. Inflation disrupts the normal relationship between consumption and saving/investment. In an inflatory environment, people will consume and spend far more than they invest. Initially, this produces increased demand and an apparent quickening of the economy, but because no new investment is happening to meet this demand (investment is discouraged outside market means) you then run into problems. These disruptions get bigger and bigger until the scheme collapses and the market tacks back to where it would have been, in a recession.

But they adjust at a higher quantity equilibrium, do they not?

No, they don't reach an equilibrium. The problem with this type of thinking, as von Mises and Rothbard took pains to point out, is that economics involves humans. It's not a physical science. Humans are smart and they figure out inflation, and they attempt to compensate for it, which means that the inflatory measures become a race against time. Human action negates inflatory gains unless the inflation is quickened, and eventually humans realise what is going on and desert the currency entirely, since they realise that money is always going to be worth less tomorrow and the inflation won't stop.

[August1991]

Inflation is far easier off the gold standard, while on it, it's only possible with coin debasement which is a primitive method with obvious limits. The mechanics of growth off the gold standard are theoretically the same as they are on it, however, inflation when not on gold becomes far easier.

Hugo, this means in effect that if we adopted a gold standard, our monetary policy would be determined by the random findings of gold around the world. Furthermore, the mere suggestion of using a gold standard would set off a search for new gold sources. All that wasted efforts chasing an otherwise useless metal. Considered objectively, the idea is hilarious if it weren't so absurd and even dangerous.

The only people I know in favour of the Gold Standard are people connected to the gold industry.

Between 1700 and 1913, GDP increased from $10,709 to to $224,618. That is an increase of 1997%.  For the period 1913-1998, GDP increases from $224,618 to $1,108,568, an increase of 394%.

I'll assume these are stats in real terms for the UK. Are the per capita? (I suspect not.)

I'll accept that the 19th century was a period of general growth whereas the 20th century experienced growth primarily in the second half. But to draw from this the conclusion that we should adopt the gold standard is ridiculous? Do you suggest we return to sailing ships because that was the main method of transport in the 19th century?

----

Hugo, you seem insistent that "money" be backed by "real capital". Then, you seem under the illusion that gold is "real capital". Have I got you right?

There many types of financial instruments of which base money is only one version. These financial instruments represent various claims on real assets in the present or the future. Indeed, these instruments are used to place a value on these assets.

I will use one example. The price of a Microsoft share (a financial instrument) is based on the current valuation of all future Microsoft real profits. One could argue that Microsoft shares are "backed" by these future profits except the valuation of those profits will change as Microsoft's prospects change.

The traditional definition of money is correct: store of value, unit of account and a facilitator of trade.

----

Hugo, I have no argument with your dislike of inflation but I would argue that the problem is more complex. It pertains specifically to how people respond to the dilemma of knowing whether changing prices reflect real changes in relative scarcities or merely nominal changes (inflation). In simple terms, if coffee becomes more expensive, Tim Horton's doesn't know if it should raise prices or use coffee more carefully.

[Hugo]

Hugo, this means in effect that if we adopted a gold standard, our monetary policy would be determined by the random findings of gold around the world.

This doesn't cause a problem. Firstly, gold is lost to wear and tear (although durable when stored, it isn't when handled daily). The most important consideration in the free market, though, is gold mining. Gold is mined because it costs less than 1oz of gold to mine 1oz of gold. If gold falls in value due to new reserves, once the price of mining 1oz of gold for a given mine rises above 1oz of gold it ceases to be profitable and closes. Thus, the gold supply tends towards equilibrium. However, with fiat money the cost of introducing new money is merely the cost of printing it!

Furthermore, the mere suggestion of using a gold standard would set off a search for new gold sources. All that wasted efforts chasing an otherwise useless metal. Considered objectively, the idea is hilarious if it weren't so absurd and even dangerous.

Money needs to be a commodity that is universally valued in order to be useful. Market forces have established that gold is generally the best commodity for this purpose. Through history, practically every and any commodity has been tried as money, but through the ages gold has won through as the best. It is easily marketable, relatively valuable per given unit of volume and thus easily transportable, durable and in relatively stable supply. It doesn't evaporate and can be transformed from coin to bullion and back again as many times as you like. It can't be counterfeited since the test to establish the purity of gold is pretty simple and impossible to defeat. Neither wealth nor gold can come from nothing.

Modern gold-standard theorists don't even insist that the commodity be gold, it can be silver or, in theory, anything, nor do they insist that gold be money. It's merely the case that gold (and possibly silver, although its current value at 1/80 that of gold makes it less portable and valuable, and there's no reason you couldn't have both) happens to be the best commodity. The gold standard is the case for market-originated commodity money, and nothing more.

The Bank of Nova Scotia offers a gold-warehousing service. They keep your gold for you, for a fee (3 cents per 100oz. per day), and issue you a certificate. The warehouse does nothing but store your gold, and the certificate is as good as gold for payment. Just an interesting snippet!

The only people I know in favour of the Gold Standard are people connected to the gold industry.

Ludwig von Mises. Now you know another.

But to draw from this the conclusion that we should adopt the gold standard is ridiculous? Do you suggest we return to sailing ships because that was the main method of transport in the 19th century?

That was not why I trotted out these figures. Sweal theorised that growth is accompanied by inflation because growth causes inflation. These figures prove him wrong. That is all I seek to say with them. Don't read too much into it or try to put words into my mouth.

Hugo, you seem insistent that "money" be backed by "real capital". Then, you seem under the illusion that gold is "real capital". Have I got you right?

"Real capital" is whatever people say it is, August. Gold is valuable because people universally think it has value. If people universally rejected gold as having value it would be useless as a commodity, and when that happens, let me know! So far in history, though, people of all times and cultures have valued gold in a relatively consistent fashion.

Hugo, I have no argument with your dislike of inflation but I would argue that the problem is more complex. It pertains specifically to how people respond to the dilemma of knowing whether changing prices reflect real changes in relative scarcities or merely nominal changes (inflation). In simple terms, if coffee becomes more expensive, Tim Horton's doesn't know if it should raise prices or use coffee more carefully.

Exactly, economics is a science of human behviour. However, when inflation happens we know what the situation is: money is decreasing in value compared to all other commodities.

[August1991]

The only people I know in favour of the Gold Standard are people connected to the gold industry.

Ludwig von Mises. Now you know another.

von Mises died in 1973. About the same time anyone last suggested seriously a gold standard.

Incidentally, IMV, von Mises wrote very good critiques of communism and central planning. And that's about all he did.

[Hugo]

That was a terrible excuse for a reply, August. You started off with a confession of ignorance disguised as an ad-populum fallacy, and followed it with a dismissive comment on an economist you apparently don't know or understand very much to begin with. These comments hinder, rather than help, your viewpoint by demonstrating your lack of qualification to have one. I suggest you try again, properly this time!

[The Terrible Sweal]

Inflation is a different beast depending whether you use a gold standard or not. Thus, your attempt to discuss post-gold standard inflation in the same terms as pre-gold standard is undermined.

I'm not sure where I was saying differently. Gold-standard inflation is different, being artifically created only by coinage debasement ...

In other words, comparison of inflation between gold standard money and our modern money is like comparing apples and oranges.

Well, I'm actually saying the growth causes the inflation.

But it doesn't. Economic growth always (initially) follows inflation, it never precedes it. Think about this: do central banks cut the interest rates to stimulate the economy, or do they cut them because the economy was stimulated?

As I understand it, when growth is too rapid it can create a destabilizing level of inflation. Central banks act on a continous basis to maintain a balance.

Why not? That's what investment is all about.

No, investment is taking existing capital and investing it for future capital. Inflation is about taking nothing and investing it for future capital.

No, that's deficit spending.

But you just said that workers demand MORE money. I think you have fallen into a contradiction.

No, the workers demand more units of currency, but the same amount of money. I'm sorry I didn't make the distinction more clearly.

No. Workers demand more value. They know inflation affects their money like everyone else.

This is obviously going to cause confusion, though, since there are about 6 accepted definitions of inflation. The one that I use and the one I believe is most correct is the artificial expansion of the money supply (people also use it to mean rising prices, which is an effect of inflation, and they can even use it to mean economic growth, amongst other things).

Well, I guess that concludes our discussion for today ... we're using much different definitions.

[Hugo]

In other words, comparison of inflation between gold standard money and our modern money is like comparing apples and oranges.

Quite aptly, yes. Apples and oranges are different, but they are both eaten for nutrition.

As I understand it, when growth is too rapid it can create a destabilizing level of inflation. Central banks act on a continous basis to maintain a balance.

Explain how, or at least provide an example.

No, that's deficit spending.

No, it is not. Deficit spending is when you borrow money and spend it. A government could spend from a deficit without inflating, for instance, by selling bonds. In this case, the expenditure is from a budget deficit but is from real capital.

Inflation is creating new money from nothing and then spending it. That's an entirely different beast.

No. Workers demand more value. They know inflation affects their money like everyone else.

My point exactly.

Well, I guess that concludes our discussion for today ... we're using much different definitions.

Why did you not tell me how you define inflation?

[August1991]

In other words, comparison of inflation between gold standard money and our modern money is like comparing apples and oranges.

Quite aptly, yes. Apples and oranges are different, but they are both eaten for nutrition.

Friedman rightly said that sustained inflation is at all times a monetary phenomenon. Who cares whether it's "gold money" or "modern money"?

The far more significant facts are that, first, most transactions around the world are now contracted using private financial instruments and second, those transactions can be denominated in the currency of convenience.

For all intents, "modern money" has been privatized.