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.

Economists forecasting

Likely government budget cuts and the prospect for messy political fights over fiscal policy will weigh on the U.S. economy this year and hold growth to a tepid 2.4 percent, according to a survey of forecasters published on Monday.

The National Association for Business Economics said that more than 95 percent of the 49 economists who participated in its latest quarterly survey believe fiscal policy actions or concerns would slice into gross domestic product.


These are the first two paragraphs of a news item on the Huffington Post last night.

I’m having some difficulty with this forecast for the following reasons.

Forty-nine people make a very small and insignificant sample.  Any economist should know that.

business_peopleJust because somebody thinks something will happen doesn’t mean it will happen.

Just because somebody wants something to happen doesn’t mean it will happen.

Just because somebody believes something will happen doesn’t mean it will happen.

If these guys don’t say what their employers want to hear they will probably become unemployed.

Economists in general have not recently had a good track record with their predictions.

In a previous reincarnation I was a charter member of the skeptics association.

In this case a poll of ordinary people who are experiencing the realities of the economic crisis might be more accurate.

Making wise those who need wisdom

Here are some words of wisdom from John Kenneth Galbraith from his book The Great Crash 1929  (A paperback, written in 1954 and reprinted in 1997) pages 24 and 25.

Galbraith was writing about 1929 and I believe our current situation is quite different and probably worse.  However, the following thoughts may also apply to us.

Purely in retrospect it is easy to see how 1919 was destined to be a year to remember. … No one, wise or unwise, knew or now knows when depressions are due or overdue.

… the position of the people who had at least nominal responsibility for what was going on was a complex one.  One of the oldest puzzles of politics is who is to regulate the regulators.  But an equally baffling problem, which has never received the attention it deserves, is who is to make wise those who are required to have wisdom.

Some of those in positions of authority wanted the boom to continue.  They were making money out of it, and they may have had an intimation of the personal disaster which awaited them when the boom came to an end.  But there were also some who saw, however dimly, that a wild speculation was in progress and that something should be done.  For these people, however, every proposal to act raised the same intractable problem.  The consequences of successful action seemed almost as terrible as the consequences of inaction , and they could be more horrible for those who took the action.

…. The eventual disaster also had the inestimable advantage of allowing a few more days, weeks, or months of life.

To this I would add the observation that most of us most of the time think and act in our own short -term interests as opposed to our own long-term interests or the interests of our community as a whole.

The recession scapegoat list

The economics editor of The Guardian has published a long list of the people he claimes are responsible for the recession.  The list includes many high and mighty  including for a former British prime minister, a former U.S. president,  and a couple of central bank bosses.

I don’t  like  the idea of defending these guys, nor do I like usuing people as scapegoats.  One should remember the Indian prayer that one should not criticize another until one has walked a mile in that person’s mocassins.

Most of the names on the list are those of people who are figureheads acting on behalf of the people below them, including most of us.  These people are subjected to lots of lobbying and don’t always have the ability to do what they want.

The recession has most likely been caused by resource depletion, or at least the depletion of those resources most easily accessible and for this most of us are to blame.  Most of us have wanted a good life with lots of things such as computers, nice homes and great holidays.  And we have demanded high returns on our investments and savings.

No doubt the people on the list have made mistakes and acted in the best interests of themselves and their friends.  But the rest of us should also carry some of the blame.

The Euro zone’s impossible dilemma

Some economist are worried that attempts to deal with the euro zone crisis are going to force Europe into a recession.  Here’s a link to one such forecast.

It’s a valid fear but one that applies to the whole planet rather than just Europe.  The probable cause of a world-wide recession is that we are using resources at a rate which is not sustainable.

If this is true then policy makers face an impossible dilemma.

Policies which lead to recession will hurt a lot of people and especially the poor.  In this case the line between rich and poor will likely be quite high.

The conventional wisdom is that to deal with a recession governments should spend to stimulate the economy even if they have to go massively into debt.

Stimulating the economy when there is resource depletion is going to deplete resources even faster and will bring forward a major crash.

A further complication is that the Euro zone financial crisis will likely lead to a sharp reduction in the money supply.  Without money the exchange of goods and services will be curtailed.

Resource depletion combined with a loss of money supply has the potential to be disastrous.  But it should leave a few resources for the survivors.

Credit crunch and the money supply

Mark Carney, the governor of the Bank of Canada, and recently appointed to the Financial Stability Board, to oversee international financial reform has made the news by pointing out there may be a new wave of credit tightening as a result of the European debt crisis.

When bankers and economist worry about a credit crisis they are talking about a decline in money supply.  This is because banks create money when they make loans.  If they don’t make loans there will be less money around.

In a declining economy there are two things to note.

First, as we feel the squeeze from an unsustainable use of resources, there will be need for less money in the economy. Otherwise there will be inflation.

Second, if the money supply declines more than is needed, then there will not be enough money for the exchange of the goods and services we are capable of producing.  This too could contribute to the recession.

System D, the underground economy and competition

Just read an article on the web about the underground economy, also known as system D, which is probably more the case in the developing world than it is in Canada.  This follows reading a book chapter about London when Karl Marx lived there.

It sounds as if both of these are closer to the perfect competition model than anything I have experienced.  The difference is that Marx lived at the beginning of an age unprecedented prosperity and we are probably going into an era of decline.

The author of the article appears optimistic about the potential for System D and I find it attractive.  It appears to have a lot of vitality.

However I see at least two problems.  One is that if you work outside the law then there is potential for exploitation and dishonesty.

Another problem with System D is that when it is hit with a recession a lot of people will be out of work.  There is no potential for economic safety  mechanisms such as unemployment insurance.

It could well be that System D is a way to get around excessive government regulation of the economy most of which works to restrict competition.

Therefore we should aim for the best of both worlds.  Keep legislation which tries to prevent exploitation and provide a safety net and get rid of legislation which restricts competition.

(The book is Grand Pursuit, the Story of Economic Genius by Sylvia Nasar and was published this year.)

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