Guest Author Derryl Hermanutz has contributed to GEI previously on topics related to theory of money and relationships between current events and economic history and philosophy.
Even in the pre-1913 era before the Fed, America never had a truly fixed supply money system. American money was often (supposedly) linked to a gold base, but bankers have been creating fractional reserve “bank deposit money”, and issuing their own banknotes, since long before America’s Continental government issued their own scrip.
In his 1920s and 1930s books and pamphlets, Irving Fisher describes the various monetary cycles the US has endured throughout its history. It is always monetary expansion that enables economic expansion, and monetary contraction that causes depressions.
After the bankster “gold boys” destroyed Lincoln’s Greenbacks the US went into deep recession, leading to the whole “bimetalism” debate where William Jennings Bryan and others demanded the remonetization of silver, the poor man’s money. Those people knew very well that constriction of the money supply meant constriction of their economy, and they knew the solution was to loosen up the money supply. If all US money had to be backed up by the bankers’ gold there was not enough money to sustain the economic level and prosperous people became poor.
I agree that technology lowers costs and makes goods cheaper in the long term. This is one of the arguments Murray Rothbard uses to support his gold-money ideas. But you have to see that there are two sides to CPI deflation. Rothbard is only looking at the demand side. Anybody who is holding gold during an era of declining prices will see the value of his money rise.
In fact most people don’t have any money, only “rich” people do. Most people depend on a prosperous economy to earn their daily living. Deflating prices are a boon to rich people and consumers and a bane to producers and workers.
How can you make any profit and sustain your productive business when the prices for your finished goods keep going down? You invested in your capital costs and your production costs at higher price levels, and when you’re finally ready to start selling goods the price of the goods has declined to the point that you can never recover your capital investment and you’re lucky if the lower prices will cover your operating costs.
Downward final demand prices will drive down labor wages, or it will bankrupt producers and labor will be unemployed and have no incomes at all. How can the productive sector “enjoy” low prices when they are bankrupt or unemployed and have no income to buy anything?
The issue is: Do we want to maximize the stability of the value of money? Or do we want to maximize the stability of the real productive economy? These are opposites.
Money cannot simultaneously serve as the medium of exchange in a growing capitalist profit-seeking economy, and serve as a store of value. Either money supply inflates (and the buying power of money decreases) to support ongoing money profits and wages in a prosperous economy; or money supply stays flat or declines in a deflationary depression economy (and the buying power of money is stable or rising).
Gold-money advocates want to maximize the value of money and are happy to accept periodic deflationary depressions to “squeeze out the malinvestments”. But producing valuable goods and services that people want is not “malinvestment” in economic terms. It is only malinvestment in money terms, if the money supply stops growing to support ongoing profits and wages at ever higher prices.
People are employed and prosperous in an inflationary boom, and unemployed and bankrupt in a deflationary bust. As America is seeing, the existence of a “middle class” of income earners depends on a continually rising economy. These people have net debt, not net savings, so they cannot buy cheap during depressions because they have no money, or they only have enough to live on.
Very few people are rich in money, and very many people depend on a prosperous economy for ongoing employment income and small business profits and large business profits (stock dividends) to earn their daily bread. Stabilizing and increasing the value of money serves the few at the direct expense of the many. A democratic people should not stand for this monetarist assault on their ability to earn a living.
The New Feudalism by Derryl Hermanutz
This is Not a Credit Crisis by Dirk J. Bezemer
Did France Cause the Great Depression? by Douglas Irwin
The Deficit Commission and America’s Neo-feudal Economy by Michael Hudson (at Credit Writedowns)