The gold standard, printing money and getting the right amount

A return to the gold standard and the printing of money to provide a social dividend have recently been suggested on LinkedIn and Reddit as ways to deal with the economic crisis.  The gold standard and the printing of money have been both tried with disastrous results.  To the best of my knowledge the social dividend has not been tried but I see it as a guaranteed annual income and I believe it has a lot of potential – subject to paying attention to the amount of money in the economy.

The problem  with the gold standard is that it can cause recession because it limits the amount of money to facilitate the exchange of goods and services.  The problem with printing money is that it can lead to inflation which wipes out people’s savings.

The key to financial economic nirvana is to have just the right amount of money for the quantity of goods and services a society wants to exchange.  Too much money leads to inflation and too little money leads to deflation and a curtailment of economic activity.   The amount of money needs to be flexible to follow the ups and downs of economic activity.

At several times during their history Americans have tried to follow a gold standard.  Generally the result was depression.  In the 1930s the monetary authorities tried to restrict the amount of money in circulation and the result was depression.  The exception was during the gold rushes of the late 19th century when the newly discovered gold allowed the money supply to increase along with economic growth.

Following the first world war the German Weimar republic had lots of financial obligations.  As the external obligations were requiring gold the government met its internal obligations by printing money.  As the money was printed faster than economic activity increased that country experienced inflation which became hyperinflation.  The result was that the savings of most people became worthless.

The social dividend proposal was a feature of Social Credit which had its origins in England in the 1920s and prospered in Alberta and British Columbia.  At least in British Columbia the social dividend was forgotten and the party became a right of centre business coalition.

To the best of my knowledge the social dividend has not been tried.  I think it should be so long as the amount of money in the economy is close to the amount needed.

Money is something we all use and we teach our children at an early age how to manage their money.  However,  very few people understand the economics of money and especially how money is created. I believe that if we are to resolve economic problems we have to understand the economics of money and banking.  The essay “LETS go to market: Dealing with the economic crisis”  talks about how money is created, some of the problems with fractional reserve money which we currently use and proposes an alternative way of creating money based on Local Exchange Trading Systems.  Also a number of posts on this weblog have dealt with money.  Here they are.

Money is a highly emotional issue in part because our culture has raised us to believe that our future depends upon our having adequate savings.  As it is so important one would think people would be wanting to understand it and be prepared to consider reforms as there are such emotional costs to losing it.

I believe the fractional reserve way of creating money is a Ponzi scheme and has built into it a mechanism for forcing a continuous increase in the money supply regardless of increases or decreases in economic activity.  As a part of money creation reform we should look at incorporating a social dividend or universal income scheme.

However the money process is reformed an essential feature is that the money supply should be flexible up and down according to changes in the level of economic growth or degrowth.

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