Keith: > Those who oppose currencies being exchangeable into gold fall into two > fallacies. Firstly, they assume that the supply of gold, being fixed, must > also necessarily fix its value. Secondly, they don't appreciate that > currency started out as a consumer good -- that is, it had intrinsic value > -- and that until currency is restored to this role then we will have > continuing currency problems. We will either have rampant inflation for a > decade or two, or periods of prolonged deflation. In between, there are > periods when the value of the government currencies is approximately right, > but this is more by good luck than judgement, and they don't last long > before we plunge one way or the other again.
I'd have to reread sources like Polyani to understand why countries abandoned to gold standard, but I guess a general enough answer is that it simply proved unworkable. W.J. Bryant's cross of gold argument suggested that some people already instinctively understood this back in the 19th Century, but still felt that the currency had to be tied to something, if not gold alone, then gold plus silver. What I've never understood is why the prices of all goods and services, and indeed the economy as a whole, had to be tied to a single commodity. Why tie production, consumption and exchange to a single commodity? Why make that commodity the measure of national well being and wealth? Modern societies have become enormously complex. They cannot be expected to function automatically, depending on constraints like the gold standard. They need to be managed. A tremendous variety of endowments and services that make societies function internally and internationally need to be managed. And so the money supply, the grease that makes the whole thing work, also needs to be managed. No government in its right mind could abdicate the responsibility to do so. One could write a play about the re-establishment of the gold standard in a modern nation, say Canada. In a stagnating economy, one could visualize our Minister of Finance turning to his friend the prospector and saying "Hey, Bud, we need more gold. Git up north and find some." A couple of months later the prospector would return and say "Nope, couldn't find any." The economy still stagnant, the people would be marching and storming the barricades, calling for the head of the Minister of Finance. Appearing on a balcony in his toga, the Minister, royally pointing downward at the vaults of the Bank of Canada, would say "Hey, it's not my fault. It's down there! There's not enough gold!" (End of Act One.) Ed Weick ----- Original Message ----- From: "Keith Hudson" <[EMAIL PROTECTED]> To: <[EMAIL PROTECTED]> Sent: Tuesday, August 05, 2003 10:50 PM Subject: [Futurework] The Wizard of Oz problem > The article below is interesting on two counts. For one thing, it explains > the real reason why "The Wizard of Oz" was written and then filmed. (I > don't know whether this film is re-shown these days, or what today's > children might think of it, but it certainly enchanted me when I was a > child.) For another, it was a plea to extend the money supply in the 1880s > to lift the deep depression of those days. > > Those who oppose currencies being exchangeable into gold fall into two > fallacies. Firstly, they assume that the supply of gold, being fixed, must > also necessarily fix its value. Secondly, they don't appreciate that > currency started out as a consumer good -- that is, it had intrinsic value > -- and that until currency is restored to this role then we will have > continuing currency problems. We will either have rampant inflation for a > decade or two, or periods of prolonged deflation. In between, there are > periods when the value of the government currencies is approximately right, > but this is more by good luck than judgement, and they don't last long > before we plunge one way or the other again. > > The writer, Bill O'Rahilly, has touching faith in the ability of > governments to engineer themselves out of economic difficulties and quotes > Franklin Roosevelt's 40 per cent reduction of the dollar against gold in > 1933-34 with approval. Yes, asO'Rahilly says, it certainly stimulated a > stock market rally and, of course, being an investment banker, that's what > he would like to happen right now. Unfortunately, though, Franklin > Roosevelt's decision in the 30s did nothing at all in making enough money > available for consumer demand, and unemployment continued much as before > and was only relieved by the outbreak of WWII and the huge take-up of > workers in the armaments and allied industries. I hope we don't have to > wait for WWIII to lift America out of gradually worsening unemployment > which is bound to affect all of us before too long. > > KH > > <<<< > GOODBYE, YELLOW BRICK ROAD > > Bill O'Rahilly > > Seldom can we draw upon fiction and witchcraft to direct us through > economic history. But in 1964, Henry Littlefield, a school teacher, > published a study entitled "The Wizard of Oz: A Parable on Populism". In > this essay he presented L. Frank Baum's, The Wizard of Oz, as an allegory > for late 19th century America. His descrikption of this popular novel has > echoes in today's US economy. > > The story covers the1890s, during which the US endured grinding deflation. > Farming communities in the west, represented by the Scarecrow, saw their > incomes and asset values collapse and the real cost of debts rise. This > benefited the bankers in the east -- in the guise of the Wicked Witch of > the East. Throughout the period the gold standard was in operation, > represented by the Yellow Brick Road. The supply of money was confined by > the fixed availability of gold. According to Littlefield, Baum supported > the Democratic pro-silver candidacy of the time and wove this theme into > his tale. Dorothy was the US, Oz was gold, the Tin Man was industry and the > Emerald City was Washington. Perhaps teh allegory was lost on Metro Goldwyn > and Mayer -- or maybe they employed artistic licence for visual effect. But > in Baums' original story, Dorothy did not have ruby shoes but silver ones, > representing the silver campaign. > > In a National Democratic Convention debate on monetary policy at the time, > William .Jennings Bryan, a little-known Democrat, called for a move towards a > silver standard. Silver would, he said, provide a more abundant reserve > against which banks could produce money and ultimately reflate the economy. > Drastic times called for dramatic rhetoric. Bryan's manifesto earned him > the Democratic presidential nomination that year as he electioneered: "You > shall not press down upon the brow of labour this crown of thorns, you > shall not crucify mankind upon a > cross of gold". > > Victory eluded Bryan in the 1897 election and the gold standard remained. > Not long after, discoveries of gold in the Klondike and the Yukon led to an > increase in gold reserves, which had the same net effect on liquidity as > moving to a silver standard -- the US economy eventually reflated. > > The big mistake of policymakers in the 1890s was slavish adherence to the > gold standard. Bryan's call for a break from the prevailing economic > convention was too revolutionary to countenance. Indeed the gold standard > remained for another 40 years. It again acted as a policy restraint after > the 1927 crash, with more disastrous > consequences. This time here were no serendipitous discoveries of gold. The > consequence of policy inflexibility was the Depression of the 1930s. > > Learning from the past, the Federal Reserve has already gone some way to > embracing Bryan's school of thought by breaking with policy norms and > deploying "pre-emptive and forceful" measures. The Fed maintains that it is > easier to preventt deflation than cure it. If we consider International > Monetary Fund studies of Japan in the early 1990s, it is clear that the > onset of deflation can be insidious and can lead to unsuitable policies > that at the time appear appropriate. This is why, despite signs of > recovery, the Fed has continuously cut interest rates. Although current > policies may stoke inflation in the future, the Fed would rather face > inflation than deflation down the track. > > In the deflationary arena, traditional relationships and systems become > distorted. We can no longer rely on conventional policy responses to buoy > economic growth. Hence interest rates have been reduced to their lowest > levels in 50 years, the dollar has declined by 30 per cent against the euro > and federal taxes have been cut by $350 billion. Though such measures are > not unusual per se, the combination, speed and degree to which they have > been invoked recently marks them as dramatic and unforeseen. > > Exchange rate policy alone can be highly potent. Consider the effect that > Franklin Roosevelt's 40 per cent reduction of the dollar against gold had > in 1933-34. This depreciation led to a surge in money supply that > precipitated an end to deflation in 1934 and sparked one of the most > vigorous stock-market rallies in a century. > > Some recent economic data indicate that the threat deflation is beginning > to wane. But the Fed will probably maintain an accommodative stance until > it is certain of that. During this transition period, we could see an > outcome that echoes 1999, when the Fed told markets it would provide > liquidity to protect financial systems against a possible slowdown induced > by the "millennium bug" (Y2K). Ultimately, when it became evident that the > advent of Y2K would pass without a ripple, this excess liquidity was sucked > into markets and fuelled a bull run in equities. If observers today view > the Fed as over-compensating against deflation, we could see a shift in > liquidity from bonds and property to equities, prompting another Y2K-style > bull run. > > For the time being the Fed's goal is to ward off deflation if that means > straying from the Yellow Brick Road of policy orthodoxy,so be it. Any > unwelcome rise in the longer end of the yield curve will more than likely > be countered by rhetoric to that effect from Fed members. > > Much has changed since Baum wrote his tale. The Scarecrow's fields are full > of genetically modified soya and the Tin Man has silicon components. Yet as > before, the Good Witch in the Fed will endeavour to bring Dorothy safely > back home to Aunt Em. > > The writer is a Dublin-based investment banker > > Financial Times 5 August 2003 > >>>> > > > Keith Hudson, 6 Upper Camden Place, Bath, England > > _______________________________________________ > Futurework mailing list > [EMAIL PROTECTED] > http://scribe.uwaterloo.ca/mailman/listinfo/futurework _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
