What? It's neither obvious nor true.

Yes, it's very obvious if you look at just how the United States and other countries have funded past wars:

US war on Independence: Continental dollars are created to fund war, vaule quicky eroded

US Civil war: Lincoln creates greenbacks to fund war

WWI: Gold standard suspended to fight war

While it is true that the government can tax its citizens to oblivion, this is politially difficult. People hate taxes. Inflation provides a seductive way for the government to fund it's operations - while the ill effects come around 12-18 months later, and can be blamed on speculators, the weather, etc.

I see you're just nitpicking now, nuj. You have made very little inroad into disproving my thesis that gold as money limits government war and leads to economic prosperity.

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Hold your horses, that's one giant leap there! That shows that you can have growth and deflation and gold standard. It certainly does not show that deflation and the gold standard causes growth! That is not a mistake I expected you to make.

They happened at the same time and you have shown no other connection. This is an example of what you just did:


Here's a quite viable alternative to why both deflation and growth happened at the same time, by me just now, using only what you said in your post. As you said "this was the era of huge advances in manufacturing, railroads and chemistry".
This naturally leads to increased productivity which translates to real growth in GDP. I can't see anyone denying that.

Now why deflation? Well we have huge advances in manufacturing that means manufactured goods can be supplied cheaper. We have huge advances in railroads which means everything can be transported and therefore everything can be supplied cheaper. The advances in chemicals mean agricultural yields go up which means agri-goods can be... you guessed it supplied cheaper. So huge deflationary pressures, the fact that some years there is inflation goes to show how much money must have been being invested.

But wait a minute you say, that means deflation isn't all bad and current economic policy is wrong. Nope still not true, well not completely anyway. Technological deflation like the decreasing price of computers has always been seen as positive! So between 1870 and 1900 they where very lucky to have technological advances causing a fall in prices in essential goods rather then just computers like today.

So why is technological deflation ok? Because it does not lead to the deflationary spiral, because technology had improved: more not less is produced at a lower cost and lower price so real wages don't fall. (in a deflationary spiral less is produced forcing lower wages which lowers demand which forces prices to fall which means less is produced... and it spirals like that). Another aspect of technological deflation is that the incentive to invest in the rapidly improving technology far outstrips the incentive to stash cash.
Technological deflation is an extremely positive exception to the rule of deflation being bad.

Again that was a horrible mistake to make confusing correlation with causation! The least you could have done was to take into account population and used GDP per capita then it would look like some effort was put in!

Greetings Seos, lol, yeah perhaps my phrasing was a bit out. I was after all trying to prove the bare minimum: that growth can occur in the prescence of falling prices. It was an error on my part to say "gold standard and deflation have led to prosperity". Clearly there is only one source of economic prosperity: an lenghtening of the structure of production and positive capital* accumulation.

As I said, I have attempted to show a period of time where the economy expanded faster than the money supply and this did not end in calamity.

Lol, I made those graphs myself. Give me some credit! And yes, GDP per capita also rose by the way.

The correct description of the phenomenon is growth deflation, where the real economy expands. I could link you to a good lecture pointing out why falling prices due to all causes, that is, economic growth, hoarding and monetary contraction are all self correcting.

I was wrong when I said "gold standard and deflation have led to prosperity", however this phrase was more of a semantic error. I still maintain that my answers to questions 3 and 4 are correct in response to the Friedmanite claim that we need the money supply to increase by the same amount as goods and services do.

After all, just imagine how cheap computers would be without central banks inflating the currency!

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Does economic growth not preclude an economic collapse? There may be a slowdown or stoppage in economic growth due to a gold standard, but it would stabilize an economy and prevent crashes.

Assume for a moment that I'm extremely stupid. What exactly is the point of the gold standard?

How would the gold standard prevent multiple leveraging of financial products? What difference would it have made to sub-prime lending practices, and the sale, resale, and leveraging of those bad mortgages?

It seems to me that the gold standard would certainly prevent governments from simply printing money...I don't have a difficulty with that claim. However, I don't see where that connects to the current crisis at all - which seems more to be a case of allowing banks to base debt to asset ratios on assets whose value is dependent in turn on the availability of credit.

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If a return to a gold standard were particularly suited to resolving the present difficulties, it wouldn't have been suggested, incessantly, for the past 35 years.

Why does the global economy have to run the way it does currently in any case? It seems to me that we are just enslaved to the monitary system... Surely it doesn't make sense that someone should have to spend their entire lives paying back morgages...

Hi Torque, no not really. Growth financed with real savings will lead to economic prosperity, while growth financed with freshly created money and credit end in a bust, as the Austrian Business Theory shows.

The part about restricing government spending is vitally important - the US hasn't had a single balanced budget in 40 years. That, and the fact all wars are financed by legal tender laws.

As to where crises fit into all this, it all comes back to fractional reserve banking (of which central banking is just another example). Recessions are a result of credit expansion. This most likely can take the form of bank credit. Under a gold standard, gold warehouses would be forbidden from issuing gold receipts in excess of their reserves of specie hence solving the problem.

So a gold standard must also be accompanied by banking reform, which ironically involves removing previous banking reforms.

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Many people just rent. Perhaps we should consider it.