Re: measurement of abstract labor

From: Rakesh Bhandari (rakeshb@STANFORD.EDU)
Date: Wed Jul 14 2004 - 12:29:20 EDT

Hi Claus,
Will have to reply in a few days. I am interested in how a Marxist
explains the deflationary consequences of the gold standard without
reference to the quantity theory of money. Here are some helpful
notes, based on the research of Barry Eichengreen.
YOurs, Rakesh

Why Not the Gold Standard?

Talking Points on the Likely Consequences of Re-Establishment of a
Gold Standard:

Brad DeLong

U.C. Berkeley


Consequences for the Magnitude of Business Cycles:

Loss of control over economic policy. If the U.S. and a substantial
number of other industrial economies adopted a gold standard, the
U.S. would lose the ability to tune its economic policies to fit
domestic conditions.

*       For example, in the spring of 1995 the dollar weakened
against the yen. Under a gold standard, such a decline in the dollar
would not have been allowed: instead the Federal Reserve would have
raised interest rates considerably in order to keep the value of the
dollar fixed at its gold parity, and a recession would probably have

Recessionary bias. Under a gold standard, the burden of adjustment is
always placed on the "weak currency" country.

*       Countries seeing downward market pressure on the values of
their currencies are forced to contract their economies and raise
*       The gold standard imposes no equivalent adjustment burden on
countries seeing upward market pressure on currency values.
*       Hence a deflationary bias which makes it likely that a gold
standard regime will see a higher average unemployment rate than an
alternative managed regime.

The gold standard and the Great Depression. The current judgment of
economic historians (see, for example, Barry J. Eichengreen, Golden
Fetters) is that attachment to the gold standard played a major part
in keeping governments from fighting the Great Depression, and was a
major factor turning the recession of 1929-1931 into the Great
Depression of 1931-1941.

*       Countries that were not on the gold standard in 1929--or that
quickly abandoned the gold standard--by and large escaped the Great
*       Countries that abandoned the gold standard in 1930 and 1931
suffered from the Great Depression, but escaped its worst ravages.
*       Countries that held to the gold standard through 1933 (like
the United States) or 1936 (like France) suffered the worst from the
Great Depression
*       Commitment to the gold standard prevented Federal Reserve
action to expand the money supply in 1930 and 1931--and forced
President Hoover into destructive attempts at budget-balancing in
order to avoid a gold standard-generated run on the dollar.
*       Commitment to the gold standard left countries vulnerable to
"runs" on their currencies--Mexico in January of 1995 writ very, very
large. Such a run, and even the fear that there might be a future
run, boosted unemployment and amplified business cycles during the
gold standard era.
*       The standard interpretation of the Depression, dating back to
Milton Friedman and Anna Schwartz's Monetary History of the United
States, is that the Federal Reserve could have but for some
mysterious reason did not boost the money supply to cure the
Depression; but Friedman and Schwartz do not stress the role played
by the gold standard in tieing the Federal Reserve's hands--the
"golden fetters" of Eichengreen.
*       Friedman was and is aware of the role played by the gold
standard--hence his long time advocacy of floating exchange rates,
the antithesis of the gold standard.


Consequences for the Long-Run Average Rate of Inflation:

Average inflation determined by gold mining. Under a gold standard,
the long-run trajectory of the price level is determined by the pace
at which gold is mined in South Africa and Russia.

*       For example, the discovery and exploitation of large gold
reserves near present-day Johannesburg at the end of the nineteenth
century was responsible for a four percentage point per year shift in
the worldwide rate of inflation--from a deflation of roughly two
percent per year before 1896 to an inflation of roughly two percent
per year after 1896.
*       In the election of 1896, William Jennings Bryan's Democrats
called for free coinage of silver as a way to end the then-current
deflation and stop the transfer of wealth away from indebted farmers.
The concurrent gold discoveries in South Africa changed the rate of
drift of the price level, and accomplished more than the writers of
the Democratic platform could have dreamed, without any change in the
U.S. coinage.
*       Thus any political factors that interrupted the pace of gold
mining would have major effects on the long-run trend of the price
level--send us into an era of slow deflation, with high unemployment.
Conversely, significant advances in gold mining technology could
provide a significant boost to the average rate of inflation over
*       Under the gold standard, the average rate of inflation or
deflation over decades ceases to be under the control of the
government or the central bank, and becomes the result of the balance
between growing world production and the pace of gold mining.


Why Do Some Still Advocate a Gold Standard?

*       A belief that governments and central banks should not
control the average rate of inflation over decades, and that the
world will be better off if the long-run drift of the price level is
determined "automatically."
*       A belief that bondholders and investors will be reassured by
a government committed to a gold standard, will be confident that
inflation rates will be low, and so will bid down nominal interest
*       Of course, if you do not trust a central bank to keep
inflation low, why should you trust it to remain on the gold standard
for generations? This large hole in the supposed case for a gold
standard is not addressed.
*       Failure to recognize the role played by the gold standard in
amplifying and propagating the Great Depression.
*       Failure to recognize that the international monetary system
functions best when the burden-of-adjustment is spread between
balance-of-payments "surplus" and "deficit" countries, rather than
being loaded exclusively onto "deficit" countries.
*       Failure to recognize how gold convertibility increases the
likelihood of a run on the currency, and thus amplifies recessions.


This archive was generated by hypermail 2.1.5 : Thu Jul 15 2004 - 00:00:01 EDT