Crucify Them on a Cross of Gold

This article is a shining exemplar of what's wrong with Austrian economics, and has actually irritated me to the point of blogging.  These people (especially the disciples of Rothbard, whose name has also come up recently in connection with his Dixiecrat alliances) do not know anything about history, and when they try to study it, they fail.  They're not too good at math, either.  I'll put the worst parts in an appropriate red color:

Let’s see, Tall Paul left the Fed in 1987. Using even the establishment’s numbers via “The Inflation Calculator” what cost a $1.00 in 1987 cost $1.89 in 2010. So the value of the dollar has been cut in half just since 1987 using the most conservative numbers. What’s stable and predictable about cutting the value of the dollar in half?

The rule of 72 tells us that cutting the value of the dollar in half over a period of 25 years is an inflation rate of less than 3 percent.  I'll leave it as an exercise for the reader as to whether that's stable and predictable, or not. Employers seem to think it is, which is why they often plan raises of 3-4 percent a year.

And what’s so bad about falling prices for a long period of time. That’s how we all become better off is when goods and services become more affordable through technological improvements.

This assumes two unlike things are the same.  Deflation, like inflation, is always and everywhere a monetary phenomenon.  If prices fall because technology is improving, that's not deflation.  If prices fall because the economy is growing faster than the money supply, which is what happens on the gold standard, that *is* deflation.  One of these things is not like the other.


You may ask what's the difference?  Prices falling must be good, right?  The difference is whether value is actually being created.  If wages fall as fast as prices, all that happens is that we've changed the measuring unit.  For falls in prices to be valuable, things actually have to be less rare in terms of what it takes to buy them.  Austrians should get this, but if they did, they wouldn't write crap like this.


If prices are falling due to technological improvement, workers may be temporarily displaced, and these effects may even be severe.  In the long run, however, the new technology will create new opportunities and the long-term result will be that the value of goods will fall relative to the value of labor, that is, your wages will buy more stuff.  This is why most of us don't have servants; compared to the early 20th century, say, the value of labor has skyrocketed.  A superbly trained butler now makes as much as a good lawyer.  In a technological innovation, employers don't need to cut wages or fire people because they're making more money; they need to hire more people, and each of those people's salaries can buy more stuff. 


Altering the value of things by jacking around with the currency supply, however, does not create value.  How could it?  That would be magic.  What happens is the price of goods falls, putting pressure on producers to cut costs, including labor costs.   People don't typically respond well to wages being cut (although that has happened some in this recession).  So employers just fire people instead.  In the long term as employees are shuffled around, wages do effectively fall, as fired people get hired at lower wages.  Since prices are lower too, the purchasing power of the workers remains the same, and the only cost here would normally be the shoeleather expense of the fired workers shuffling around... except for two factors.  One is debt.  When workers' salaries drop, the value of their debts does not.  And the other is time preference: money getting less valuable (inflation) causes people to spend it.  Money getting more valuable (deflation) causes people to save it for the future when it is expected to be worth more.  Therefore both inflation and deflation are self-reinforcing.

The long depression Parker talks about (1870s to 1900) was actually a period of great prosperity. This period of the classical gold standard was marked by gently falling prices leading to increased productivity, raised living standards, and the first glimpses of globalization.

The period in question was and is known as the Great Deflation.  A comparison of the Panic of 1873, which occurred at the beginning of it and was considered by some who lived through both to be worse than the Great Depression, with our current mess is eerily exact.


The title of this post is taken from a famous speech by William Jennings Bryan, in which he accused the federal government of crucifying farmers with the gold standard.  The amount of currency available per capita fell by 7/8 during this period as Lincoln's dollars not backed by gold from the Civil War era were retired.  Prices fell by 1.7% per year, which over thirty years nearly doubled the value of the dollar.  We are evidently meant to believe that halving the value of the dollar is unstable and unpredictable, but doubling it is not.

While prices fell, the US economy prospered. Industry expanded; the railroads expanded; physical output, net national product, and real per capita income all roared ahead. For the decade from 1869 to 1879, the real national product grew 6.8% per year and real-product-per-capita growth was described by Murray Rothbard, in his History of Money and Banking in the United States: The Colonial Era to World War II as “phenomenal” at 4.5% per year.

In the Western farm areas Bryan referred to, money became intermittently unobtainable and the economy was reduced to barter.  Due to debt, the price of grain actually fell below its production cost for most farmers, leaving large areas of the countryside barren.  At the same time, a massive real estate and lending bubble in the cities popped.  Banks foreclosed and then collapsed under bank runs, jobless people rioted, socialism rose and tension increased between labor and big business.  18,000 businesses failed.  The official unemployment rate soared to 14%.  To quote the article I linked above:

The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.

As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.    

This is just, you know, some stuff that happened.  History, as it was.  The upshot of this post is: If they can't tell you the truth about history, it's because they're not able to tell you the truth about economics.  Von Mises was smarter than this, and there are real insights to be had from Human Action.  Disciples like this do him no credit.