The French Crime of 1873: An Essay on the Emergence of the International Gold Standard, 1870–1880

[Ad Orientem]

This article attempts to provide a new view of how the bimetallic standard was maintained before 1873 and how it came to change into a monometallic gold standard between 1870 and 1880. The conventional view that the gold standard emerged out of the contradictions of bimetallism is not persuasive. Instead, this article claims that bimetallism might have survived and provides an alternative explanation of the emergence of the gold standard. Political and historical factors proved essential in precipitating the uncoordinated emergence of the international gold standard.

Available as a PDF here...

https://www.researchgate.net/publicatio ... _1870-1880

[ochotona]

If you own gold and silver, are you Bi?

[boglerdude]

eli5

Im still struggling to understand when economists say "there wasnt enough money during the depression." Rockefeller had "enough money"

[pmward]

eli5

Im still struggling to understand when economists say "there wasnt enough money during the depression." Rockefeller had "enough money"

I highly recommend reading Dalio's Navigating Big Debt Crisis, especially the really in depth case study he does on the Great Depression if you want to understand. You can download the PDF free here: https://www.bridgewater.com/big-debt-crises/

TLDR is that money is debt. When debt defaults money has to be written off the balance sheet of the banks which means money literally vanishes into thin air. Shrinking supply of money causes liquidity issues which increases demand, which increases the value of money drastically. This also becomes a self perpetuating cycle that continues to get worse and worse until more money is finally supplied to the system. Good luck to Rockefeller if he actually wanted to get his cash out of the banks at that time, haha. This is in essence what happens during any mass deleveraging / deflation / depression / financial crisis, or whatever other term you want to use for it. The same exact thing happened in 2008. The difference in why we recovered so much quicker in 2008 is that in the Great Depression they procrastinated printing money and tried to go for austerity first. The day they removed the gold peg was the very day that the statistics show the recovery started. In 2008 they immediately eased and that made all the difference in ending the crisis soon after.

[boglerdude]

Hopefully the book will be turned into a podcast.

> TLDR is that money is debt.

Japan gov prints a billion yen bond, 0%, due in 500 years. BOJ prints Yen and the gov spends the billion into the economy. That money isnt "debt" its never going to be repaid. The bonds are an antiquated system, says MMT

> When debt defaults money has to be written off the balance sheet of the banks which means money literally vanishes into thin air.

The money the bank didnt get back is still out there.

> This is in essence what happens during any mass deleveraging / deflation / depression / financial crisis, or whatever other term you want to use for it.

The Fed can step in as a lender of last resort and lend to credit worthy borrowers. But should they continue to print after the panic? Which is the FRED chart that shows how much new money they make every month

[pmward]

He can't really turn that into a podcast and do it justice, there's too much data and charts, and it would be way too long. He does have a YouTube video doing a TLDR version of his principles of how the economic system works, but it doesn't go into the case studies. It's a book that is really worth reading.

> TLDR is that money is debt.

Japan gov prints a billion yen bond, 0%, due in 500 years. BOJ prints Yen and the gov spends the billion into the economy. That money isnt "debt" its never going to be repaid. The bonds are an antiquated system, says MMT

MMT does not say that at all. MMT doesn't state to do away with bonds or debt, MMT can be done with bonds, and is how it is actually being implemented in Japan and China, and also how it would end up being implemented here. Also, just because the money won't be repaid in this lifetime does not mean it is not "debt" and is not an owed liability on the BOJ's balance sheet. It is still debt. Without debt there is no money in a fiat currency. In a fiat currency debt is an absolute necessity.

> When debt defaults money has to be written off the balance sheet of the banks which means money literally vanishes into thin air.

The money the bank didnt get back is still out there.

No it is not, because when someone takes out debt they don't have the cash to back the debt. Debt is future spending brought forward. The money did not exist until it was borrowed, and when it was defaulted that money was destroyed. You really should read into how the banking system actually works, it's really quite complex and fascinating. Trillions of dollars are created and destroyed every single day.

> This is in essence what happens during any mass deleveraging / deflation / depression / financial crisis, or whatever other term you want to use for it.

The Fed can step in as a lender of last resort and lend to credit worthy borrowers. But should they continue to print after the panic? Which is the FRED chart that shows how much new money they make every month

That is the question now isn't it. We will find the answer to that one first hand shortly.

[boglerdude]

If I borrow 100k from a bank, and spend it on cars, then default on the loan, that cash is still out circulating

Why call something a "debt" if its never going to be paid back

MMT wants to stop issuing bonds and do overt money printing
http://bilbo.economicoutlook.net/blog/?p=31715
http://mikenormaneconomics.blogspot.com ... -rich.html

[drumminj]

If I borrow 100k from a bank, and spend it on cars, then default on the loan, that cash is still out circulating

Why call something a "debt" if its never going to be paid back

Because in most cases the loan gets paid back/the money gets destroyed, so it's only temporarily inflationary to make the loan in our fractional reserve system, vs just printing and handing out the money, which is 100% and permanently inflationary?

[pmward]

If I borrow 100k from a bank, and spend it on cars, then default on the loan, that cash is still out circulating

Why call something a "debt" if its never going to be paid back

MMT wants to stop issuing bonds and do overt money printing
http://bilbo.economicoutlook.net/blog/?p=31715
http://mikenormaneconomics.blogspot.com ... -rich.html

Yes, but the cash is then destroyed at the bank during default cancelling out what is circulating through the economy. That's the whole point I'm getting at. The money supply in the country is less immediately following a default than it was just before. Then when you get epidemic level defaulting like 2008 or 1929 you get a deflation, why? Because the mass defaults lead to a very quickly contracting money supply. Then the scarcity of money leads to people panicking and trying to pull money out of the bank, leading to runs, which exacerbates the problem. Increasing demand and ever reducing supply leads to liquidity drying up. But the first domino that falls in a deflation is *always* a contracting money supply through mass defaulting on debt.

Debt is a liability on a balance sheet somewhere. Whether or not it is paid back is another story. But if you're referring to government debt it will be paid back in nominal terms, so your thinking is not very logical to me on this point.

And some MMT advocates are saying to stop issue bonds, but not every one. And it's currently not legal here in the U.S. so we would likely go the Japan and China route, of continuing to issue bonds against the Feds balance sheet. We are already long on the road to MMT, and Trump is already our most MMT president ever. The only thing that needs to change is using QE to directly promote fiscal stimulus, and boom we have pure MMT. All the other pieces are in place already, even with the bonds. Now, at some point congress could allow the Fed to forgive their balance sheet and clear the liabilities (this is very likely to happen at some point, imo), but either way it's still printing money and still has the same end result. I mean, what's the difference between the Fed having a balance sheet that is never intended to be unwound and them outright printing? They are both the same, it's merely technicality that separates them. The Fed using their balance sheet is simply a loop hole around the current legal limitations.

[boglerdude]

What about not being allowed to take your money from the bank. eg they offer 0% for liquidity, and 4% for a yearly CD. 250,000 FDIC guaranteed instant liquidity seems like way too much. And margin loans seem like a product that should not exist. They make a "deflationary spiral/panic" worse.

Maybe these ideas are better than printing money/always reflating "bubbles"

> Because in most cases the loan gets paid back/the money gets destroyed, so it's only temporarily inflationary to make the loan in our fractional reserve system, vs just printing and handing out the money, which is 100% and permanently inflationary?

yeh, "natural" inflation is driven by new household formation (population growth). Someone turns 25, takes out a car loan, student loan, and mortgage. They pay them off by 40 (for example). So if your avg population is 40 and increasing, you get deflation. So the BOJ is buying up Japanese companies. Imagine Trump (ie the government) buying your local Taco Bell. Im not sure this is ideal, but its the plan for next time US stocks drop ~50%.

[pmward]

What about not being allowed to take your money from the bank. eg they offer 0% for liquidity, and 4% for a yearly CD. 250,000 FDIC guaranteed instant liquidity seems like way too much. And margin loans seem like a product that should not exist. They make a "deflationary spiral/panic" worse.

Maybe these ideas are better than printing money/always reflating "bubbles"

> Because in most cases the loan gets paid back/the money gets destroyed, so it's only temporarily inflationary to make the loan in our fractional reserve system, vs just printing and handing out the money, which is 100% and permanently inflationary?

yeh, "natural" inflation is driven by new household formation (population growth). Someone turns 25, takes out a car loan, student loan, and mortgage. They pay them off by 40 (for example). So if your avg population is 40 and increasing, you get deflation. So the BOJ is buying up Japanese companies. Imagine Trump (ie the government) buying your local Taco Bell. Im not sure this is ideal, but its the plan for next time US stocks drop ~50%.

When the loan gets paid back the money does not get destroyed, it is used as capital to finance other loans.

There are also other factors to inflation than just the amount of money in circulation. Case in point, look at the last 10 years. We've printed more money than we ever have post industrial revolution, yet inflation has been anemic. The next greatest period of time for money printing was WWII and inflation was not super high then either. If money supply and inflation were truly correlated this would not be possible. Inflation is driven mostly by a mix of confidence and population demographics. As long as the population demographics are not improving, and the majority fully trust the currency, inflation will stay tame. Now look at the 70s on the other hand. What did they have? A very inflationary demographic of baby boomers coming of age, a generation of baby boomers that had lost all trust in the government because of Vietnam, as well as some supply shortages and drama in the currency and politics that caused the general public to lose even more trust in the government and the currency.

For whatever reason, millennials currently are very trusting in the government, matter of fact they want the governments power to grow to levels never seen in this country before because they trust it so much. Combine that with an aging baby boomer generation, and the fact that most millennials are getting a later start in life than past generations, as well as the student loan crisis... and that is the real reason inflation has been so tame. I see a lot of these inflationary headwinds turning into tailwinds in the next decade though, as the bulk of the boomer retirement bandaid gets ripped off, the large population of millennials come of age, finally join the workforce, and start advancing in their careers / earning more money. I also think that the current populist movements on both the left and the right are eventually going to break the millennials trust in the government and that will effect the currency.

Japan is a scary example that I hope doesn't happen here. They are literally choosing the haves and have nots. This is a very dangerous road to go down, and I have a feeling this will come back to bite them at some point. Well, it already is, the reason why they have such anemic growth is because they don't allow the unproductive branches to be pruned to make way for more productive ones. But it's going to get much worse before it gets better.

[jhogue]

I still don't understand why we have not had massive inflation. My inability to explain the effect of multiple rounds of QE and enormous deficits has a lot to do with why I embraced Harry Browne's market agnosticism.

[pmward]

I still don't understand why we have not had massive inflation. My inability to explain the effect of multiple rounds of QE and enormous deficits has a lot to do with why I embraced Harry Browne's market agnosticism.

Well there's a few pieces at play.

1) deflationary population trends (baby boomers retiring and millennials taking forever to join the workforce)

2) global deflationary trends provide inflationary headwinds locally

3) QE went to banks not people

3a) We swapped from a corridor system to a floor system, which means that the reserves provide by QE now pay banks interest so it lowers the banks desire to put that money at risk by lending it out when they can get a risk free return for just sitting on it.

3b) since all the QE went to banks when it did find its way out of the banks reserves it wound up in assets as opposed to in productive economic spending. It inflated asset prices but provided no real growth.

4) The general population is overly trusting of the U.S. government and the Fed, they believe that after the Fed rescued us in 2008 that they have more power than they really do.

5) Reserve status on currency means a consistently large foreign investment surplus, which means we *have* to have an equally large trade deficit, which is an inflationary headwind.

I'm sure there are others I'm missing. Needless to say inflation is only loosely correlated to money supply. Now if the money we printed made its way into the hands of the general public as opposed to just into bank reserves and assets then I believe it would have been hugely inflationary. If we continue our flirtation with MMT we will be able to see if this hypothesis holds true. I still think Browne's agnosticism still holds though, as it was essentially the first real implementation of MPT (and to this day the most pure popularized form of MPT). The underlying fact that money always *has* to find a home somewhere, means that even if the correlations are not perfect, one of the assets will always be in a bull market. Money has to go somewhere, so something is always going to be bought. If not stocks and bonds, then real assets. There is benefit in taking highly volatile uncorrelated assets and placing them against each other in a portfolio that is regularly rebalanced.

[Kbg]

Here ya go in two simple charts:

https://fred.stlouisfed.org/series/M2

https://fred.stlouisfed.org/series/M2V

Just cuz you create money does not mean it will get used and clearly it has not been...batta bing, no inflation. We've become so financial instrument oriented that we forget the real physical economy has always been and will always be the actual driver of these things. We will have inflation again when wage growth takes us there and it just hasn't. My leading guess (though I have no idea), technology has made for a ton of efficiency which requires a very small work force to create it as compared to the industrial world.

[pmward]

Here ya go in two simple charts:

https://fred.stlouisfed.org/series/M2

https://fred.stlouisfed.org/series/M2V

Just cuz you create money does not mean it will get used and clearly it has not been...batta bing, no inflation. We've become so financial instrument oriented that we forget the real physical economy has always been and will always be the actual driver of these things. We will have inflation again when wage growth takes us there and it just hasn't. My leading guess (though I have no idea), technology has made for a ton of efficiency which requires a very small work force to create it as compared to the industrial world.

Technology definitely plays a part in weak wage growth. As does globalization and the reduction in unions. However, most of those factors have kind of run their course; the bulk of the damage has been done. The trends in globalization and unions especially have been tapering off and even starting to reverse in some industries. All of these things have added to the wealth divide, where since the early 80s non C-suite workers have received a trend of a consistently lower and lower share of the profits. Seeing the political landscape right now it makes me feel even more sure that over the next decade we are likely to see wage growth start to play out again. Not to mention the possibility of helicopter money via MMT. If the money actually finds its way to the people as opposed to banks, companies, and assets we will definitely see inflation start to pick up. I think the next decade will be interesting, as I think we may see both negative interest rates and the return of inflation in the same decade. This is a big part of why I'm so bullish gold in the 2020's, as negative interest rates and/or increasing inflation would be very good for gold.

[boglerdude]

Defining inflation as CPI is misleading, why not make CPI 50% weighted to the price of smartphones

Whats the inflation rate of assets that are fixed in supply, over the last decade. Gold, tuition, urban rents.

Its funny how people complaining about high rent, turn around and block legislation to increase housing.
https://la.curbed.com/2019/5/16/1862821 ... -postponed

[pmward]

Defining inflation as CPI is misleading, why not make CPI 50% weighted to the price of smartphones

Smartphones are a good example of why CPI is BS. Because when Apple releases a new phone they see it as an upgrade and something worth more money. So a price increase in the phone if released in line with an "upgrade" doesn't effect the CPI because they count that you paid more but received more. It definitely adds a degree of negative skew to tech, services, or any other kind of product that sees regular upgrades.

[pmward]

Timely article that came in one of my newsletters today about how our current definition of inflation in a fiat currency is flawed: https://integratinginvestor.com/the-opp ... inflation/

[Libertarian666]

I still don't understand why we have not had massive inflation. My inability to explain the effect of multiple rounds of QE and enormous deficits has a lot to do with why I embraced Harry Browne's market agnosticism.

We have had massive inflation, but it was in the prices of housing, medical care, and tuition.

[boglerdude]

When I asked The Braintrust (https://old.reddit.com/r/badeconomics/) why inflation is necessary, they said:

https://slate.com/business/1998/08/baby ... onomy.html

[jhogue]

I still don't understand why we have not had massive inflation. My inability to explain the effect of multiple rounds of QE and enormous deficits has a lot to do with why I embraced Harry Browne's market agnosticism.

We have had massive inflation, but it was in the prices of housing, medical care, and tuition.

I would certainly agree that there has been above-CPI increases in the cost of medical care and higher education, as well as post-Great Recession housing. But when I said "massive inflation," I meant inflation of the run-a-way, Weimar Republic sort. Gold went up after 2009, but then went back down. There was a flight to safety in US Treasurys, but the interest rate on LTTs seems pretty tame. As Medium Tex used to say, it is just as easy to write a deflationary narrative for the next decade as it is to write an inflationary narrative. In the meantime, I find market agnosticism to be the most logical and profitable "non-narrative."