At the time of the Roman Empire, they were not under a gold standard. What you are saying doesn't make any sense. Furthermore, one of the causes for the fall of the Roman Empire was precisely the fact that they reduced the value of the coins to support military and public spending, which was extremely high, one of the causes that many historians believe was fundamental to the fall of Rome. .
Well no. The point isn't that they were specifically on the "gold standard" or not. The point is that basing your monetary systems around a metal,
as the romans did, does not prevent inflation or currency manipulation.
But inflation isn't the reason the Roman Empire failed anyway, and monetary mismanagement contributed to, but was not the primary cause of the collapse.
Your initial mistake is to start calling the phenomenon of deflation a bad thing. You are missing the point.
Calling the phenomenon of price reduction "deflation" is one of the most serious mistakes a person can make in economic science. It is the equivalent of confusing getting rich with getting poor. This error leads people to believe that an increase in the production of goods and services -- something that, in itself, is the basis of enrichment, but which also causes a fall in prices -- is at the same time the cause of a economic contraction and the impoverishment it generates.
To correctly understand the point, it is necessary to clarify a few things.
Okay, I'm gonna stop you right here. I am not missing the point. You are.
I've already stated that deflation can be a good thing if it is achieved using advances in TFP. What we've been discussing is monetary deflation, which is most definitively a bad thing, and something you keep avoiding talking about.
This would be exactly the scenario under a gold standard, as the supply of gold grows modestly from one year to the next as a result of continued and expanded mining, and the volume of spending in terms of gold grows proportionately. Under these circumstances, an ordinary seller would be in a position to sell his goods at lower prices and, at the same time, at a higher volume.
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Furthermore, notwithstanding the corresponding fall in prices caused by the more rapid increase in the production and supply of goods and services, the increase in the quantity of gold and the volume of expenditure in terms of gold makes debt repayment somewhat more difficult. easy. For example, suppose that sales revenues in the economic system are increasing at a rate of 2% -- because of increases in the supply of gold and the volume of spending -- but that prices are falling at a rate of 3%. , because the supply of goods and services increased by 5% in the year.
This is incredibly economically illiterate. What
actually happens and what
has happened is an accelerated cycle of "creative destruction" that caused frequent boom/bust cycles due to the inability of the gold standard to adequately respond to fluctuations in money demand and lack of banking regulations.
The principal issue is the inadequacy of the Gold Standard to maintain price stability. That's what happens when you fix the price of gold. Volatility and fluctuations don't go away when you "fix" the price of the currency, it merely moves those fluctuations to the prices of goods instead.
Finally, in relation to mass unemployment: if there is deflation -- in the correct sense of the term, that is, a reduction in the amount of money and the volume of spending -- then a fall in prices, far from being the cause of deflation/depression, will be the solution. In such circumstances, a reduction in wages and prices is exactly what is needed to allow a reduced amount of money and spending to buy everything that a previously larger amount of money and spending could buy. If, for example, as occurred in the United States in 1929, there was originally $50 billion in wage spending employing 50 million workers at an average annual wage of $1,000, and now, because of deflation, there is only $40 billion in spending on 40 million workers, full employment could be restored if the average wage fell from $1,000 to $800 per year. In that case, $40 billion could employ as many workers as $50 billion did.
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Thus, precisely because of the impossibility of creating gold in abundance -- as today the central bank can do with banknotes --, banks were much more cautious in their loans. Consequently, the expansion of the money supply through fractional reserves was much more contained.
Uh no, and again, a Gold Standard doesn't prevent an expansion of the money supply. Regulations and control does, but even if we assume that the money supply stays fixed,
that's a bad thing. Supply and demand are never stable 24/7. They are dynamic day to day and will be impacted by events and factors outside of related economic activity.
Second, you criticize fractional banking and centralized banking,
when it is precisely those two things that allow for creation of credit, and prevention of economic catastrophy.
Third, there was both a drop in wages and a drop in employment. You're also not differentiating between nominal wages and real wages. In a recession, real wages rise even as nominal wages drop. Not that this is relevant to your argument anyway.
And the result was that, from 1815 to 1913, there was price deflation in the USA. In other words, prices fell year after year -- something unimaginable nowadays. Something that cost US$100 in 1815 only cost US$65 in 1913. Average price inflation during this period was -0.43%. That is, every year, things became 0.43% cheaper. When you look at the post-Civil War period -- from 1865 to 1914 --, the values become even more extraordinary. Something that cost $100 in 1865 only cost $60 in 1913, which means there was an average annual deflation of 1% -- every year, things got 1% cheaper.
Between 1815 and 1913 there were over 20 economic cycles with wild fluctuations in prices. So no, things didn't get "1% cheaper". They got 50% cheapr and then 30% more expensive and then 40% cheaper and then 20% more expensive. It was actually a horrible time.
The only "good" deflation was the deflationary period of 1870-1890,
due to the Second Industrial revolution. Hardly some side effect of the gold standard.
What was the result of the creation of the American central bank? What happened to the American economy after the government took control of the currency? Did the dollar remain with the same purchasing power?
In 1920, there was the first post-Fed crisis, generated by the acceleration of monetary expansion. This was the last crisis in which a government did almost nothing to try to mitigate it -- which is exactly why its duration was short.
During the remainder of the 1920s, the money supply grew more rapidly again, culminating in the 1929 crisis.
In 1933, Roosevelt prohibited American citizens from redeeming their dollars in gold. Americans were even prohibited from owning any amount of gold at home or abroad. The dollar was devalued and became redeemable in gold only for foreign governments and central banks. Still, a small connection with gold was maintained.
In 1945, with the Bretton Woods agreement, the dollar became the standard world currency, although still linked to gold. With one detail: the dollar could not be redeemed in gold by American citizens; it could be redeemed in gold only to foreign governments and their central banks. No American individual could exchange dollars for gold. Only governments had this privilege. This arrangement, albeit tortuously, restricted the Fed somewhat, because if it inflated the dollar, foreign governments could exercise their right to exchange dollars for gold, causing a huge flight of gold from the US.
In 1971, however, precisely as a result of a large volume of gold outflow from the USA, Richard Nixon put an end to everything and definitively removed the USA from what was still left of the gold standard, defaulting on foreign governments and creating the paper system. -floating currencies that we currently know.
The result of the Federal Reserve was a stable money supply, fewer economic cycles, and stable prices. And this can be empirically seen by just looking at the price of bread...
