(MIG Tournament) Conservative Showdown #2: Gold Standard

C1: The Austrian Business Cycle, Depressions, and the Gold Standard (TGS) [1] Rothbard writes, Without bank credit expansion, supply and demand tend to be equilibrated through the free price system, and no cumulative booms or busts can then develop. But then government through its central bank stimulates bank credit expansion by expanding central bank liabilities and therefore the cash reserves of all the nation's commercial banks…Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest in the economy below its free-market level. But what happens when the rate of interest falls, not because of lower time preferences and higher savings, but from government interference that promotes the expansion of bank credit? …For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: they invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased… So the workers set about to consume most of their new income, in short to reestablish the old consumer/saving proportions. This means that they redirect the spending back to the consumer goods industries, and they don't save and invest enough to buy the newly-produced machines, capital equipment, industrial raw materials, etc. This all reveals itself as a sudden sharp and continuing depression in the producers' goods industries. Once the consumers reestablished their desired consumption/investment proportions, it is thus revealed that business had invested too much in capital goods and had underinvested in consumer goods. The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers. And, TGS reduces the harm of the B&B cycle. [2] Since TGS restricts the fiat creation of money and credit, the possibility of the Fed printing money to try and stall the effects of a depression or recession. Intervention from the Fed only masks the symptoms without actually solving the underlying problems, and exacerbates the problems for the future. Empirically this is correct when analyzing the periods of Hoover’s and Bush’s intervention in the market – the following depressions were far worse due to prolonged government intervention. Moreover, the empirics show that even though fractional reserve banking is the main culprit in these cycles, periods of the gold standard have lessened and blunted recessions than those without the gold standard. Thorton writes, The only necessary requirement is that the interventions help to forestall the correction process and that the interventions collectively undermine the ability of the price system and the system of profit and loss to properly reallocate resources. Among all business cycles, few have degenerated into prolonged depressions or recessions. Most business cycles come and go so quickly… What makes the difference between the ordinary business cycle and an extraordinary depression? The one factor that is consistent in all four of the major crises is massive government intervention to address the initial economic crisis. In all four cases, the government responded not in the traditional laissez-faire manner of leaving things alone but instead with policies that attempted to reverse the economic crisis. In the first three major depressions, governments consistently intervened in the economy and made long-term institutional changes in the economy. In the case of the stagflation of the 1970s, the government met the initial crisis with comprehensive wage and price controls and the closing of the gold window, along with a loose monetary policy, deficit spending, and bailouts. C2: TGS, Deflation and Inflation [3] [4] Deflation Good Kaza writes, If deflation is truly synonymous with contraction, as Keynesians maintain, one would not find periods of negative CPI in expansions. Yet this has occurred at least six times since the Civil War (1879, 1895, 1922, 1928, 1939, and 1955). According to the National Bureau of Economic Research’s business cycle chronology, which dates to 1854, expansions occurred in the U.S. all six years. The Bureau of Labor Statistics (2004) published estimates that show CPI was negative for 11 years in the late nineteeth century, including 1879 and1895. The NBER chronology shows the economy was in expansion for nine months in 1879 and 11 months in 1895 despite a negative CPI both years. Federal Reserve Bank of Minneapolis data show CPI was negative for 13 years in the twentieth century, including 1922, 1928, 1939, and 1955. The NBER chronology shows the economy was in expansion for 12 months in each of these years. Inflation Bad TGS prevents inflation, and inflation is bad. Shostak writes, Increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price rises as such. Moreover, the beneficiaries of the newly created money--i.e., money "out of thin air"--are always the first recipients of money, for they can divert a greater portion of wealth to themselves. Obviously, those who either don't receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the real pool of funding. Furthermore, real incomes fall, not because of general rises in prices, but because of increases in money supply; in other words, inflation depletes the real pool of funding, thereby undermining the production of real wealth-- i.e., lowering real incomes. General increases in prices, which follow increases in money supply, only point to the erosion of money's purchasing power--although general rises in prices by themselves do not undermine the formation of real wealth as such. C3: TGS reduces the chance of war [5] The great wars of the 20th Century were made possible by the quick halt of TGS during that time period which made financing the wars indefinite. However, comparatively the wars during TGS were small and rare: Lips writes, “The era of the gold standard during the 19th century was the golden age of the white man. During this period, after Napoleon, there were only seven wars of any importance…. Theoretically, the U.S. cannot be warring at all, i.e., under the strict discipline of the gold standard it would not be possible. Because of the nation’s deficit, there would not be any money left to spend on an unproductive and destructive war. The U.S.’s foreign debt is enormous…. And still the U.S. is conducting wars, which it is paying for with paper-ticket-token money…So we may note that if the world were on a gold standard, the U.S. could not be conducting any wars. Why? Because then they would have to pay for them in gold. Gold, therefore, acts as a braking mechanism. Putting on the brakes has a disciplining effect. [1] http://mises.org... [2] http://mises.org... [3] Kaza. Deflation and Economic Growth [4] http://mises.org... [5] http://tinyurl.com...