Re: Hume & the Postmodern Grin without a Cat (was Re: pomoistas)

[Yoshie Furuhashi <furuhashi.1@xxxxxxx>]

> Last time I checked, Hume's price-specie flow model is still taught in
> university economics classes to measure price and money supply dynamics
> under a gold standard. Not a bad concoction for someone whose "universe"
> implies that "identities in general are fiction, subject only to customs."
> Do we really need to abstract economic implications from the /philosophy/
> of one of the most influential political economists of the 18th century?
>
> ----Ben Day

Apparently, Hume has exercised a worse influence on economists than
on postmodernists (who tend to be sentimentally Keynesian & social
democratic, even though their epistemology does not accord well with
their sentiment).

*****   What Has Government Done to Our Money?

Murray N. Rothbard

IV. The Monetary Breakdown of the West

1. Phase I: The Classical Gold Standard, 1815-1914

We can look back upon the "classical" gold standard, the Western
world of the nineteenth and early twentieth centuries, as the literal
and metaphorical Golden Age. With the exception of the troublesome
problem of silver, the world was on a gold standard, which meant that
each national currency (the dollar, pound, franc, etc.) was merely a
name for a certain definite weight of gold. The "dollar," for
example, was defined as 1/20 of a gold ounce, the pound sterling as
slightly less than 1/4 of a gold ounce, and so on. This meant that
the "exchange rates" between the various national currencies were
fixed, not because they were arbitrarily controlled by government,
but in the same way that one pound of weight is defined as being
equal to sixteen ounces.

The international gold standard meant that the benefits of having one
money medium were extended throughout the world. One of the reasons
for the growth and prosperity of the United States has been the fact
that we have enjoyed one money throughout the large area of the
country. We have had a gold or at least a single dollar standard with
the entire country, and did not have to suffer the chaos of each city
and county issuing its own money which would then fluctuate with
respect to the moneys of all the other cities and counties. The
nineteenth century saw the benefits of one money throughout the
civilized world. One money facilitated freedom of trade, investment,
and travel throughout that trading and monetary area, with the
consequent growth of specialization and the international division of
labor.

It must be emphasized that gold was not selected arbitrarily by
governments to be the monetary standard. Gold had developed for many
centuries on the free market as the best money; as the commodity
providing the most stable and desirable monetary medium. Above all,
the supply and provision of gold was subject only to market forces,
and not to the arbitrary printing press of the government.

The international gold standard provided an automatic market
mechanism for checking the inflationary potential of government. It
also provide an automatic mechanism for keeping the balance of
payments of each country in equilibrium. As the philosopher and
economist David Hume pointed out in the mid-eighteenth century, if
one nation, say France, inflates its supply of paper francs, its
prices rise; the increasing incomes in paper francs stimulates
imports from abroad, which are also spurred by the fact that prices
of imports are now relatively cheaper than prices at home. At the
same time, the higher prices at home discourage exports abroad; the
result is a deficit in the balance of payments, which must be paid
for by foreign countries cashing in francs for gold. The gold outflow
means that France must eventually contract its inflated paper francs
in order to prevent a loss of all of its gold. If the inflation has
taken the form of bank deposits, then the French banks have to
contract their loans and deposits in order to avoid bankruptcy as
foreigners call upon the French banks to redeem their deposits in
gold. The contraction lowers prices at home, and generates an export
surplus, thereby reversing the gold outflow, until the price levels
are equalized in France and in other countries as well.

It is true that the interventions of governments previous to the
nineteenth century weakened the speed of this market mechanism, and
allowed for a business cycle of inflation and recession within this
gold standard framework. These interventions were particularly: the
governments' monopolizing of the mint, legal tender laws, the
creation of paper money, and the development of inflationary banking
propelled by each of the governments. But while these interventions
slowed the adjustments of the market, these adjustments were still in
ultimate control of the situation. So while the classical gold
standard of the nineteenth century was not perfect, and allowed for
relatively minor booms and busts, it still provided us with by far
the best monetary order the world has ever known, an order which
worked, which kept business cycles from getting out of hand, and
which enabled the development of free international trade, exchange,
and investment. [1]

[1] For a recent study of the classical gold standard, and a history
of the early phases of its breakdown in the twentieth century, see
Melchior Palyi, The Twilight of Gold, 1914-1936 (Chicago: Henry
Regnery, 1972).

<http://www.mises.org/money/4s1.asp>   *****

Yoshie