Wednesday, August 11, 2010

Set the Wayback Machine to 1840

In Henry James's The Bostonians, the young, ambitious, and reactionary Mississippi lawyer who is the antagonist of the novel submits some of his essays on race relations and similar topics to several weekly and monthly journals. The editor of one returns them with a note stating: "Doubtless some magazine of the sixteenth century would have been very happy to print them."

I suppose the present-day Republican Party's predilection for enthusiastically reinventing ideas that died a century or two ago from sheer intellectual bankruptcy—or the sheer moral repugnance they finally aroused—should not be too much of a surprise. Along with Confederate nostalgia, literacy tests for voting, opposition to public education, belief in "creationism," support for a return to laissez-faire financial regulation, and abolition of Social Security, we have recently been treated to proposals from the thinkers of the Republican Party to repeal the 14th Amendment's guarantee of citizenship for all persons born in the United States (but also to extend the 14th Amendment's protections to "the unborn"—that's presumably the native-born unborn, not the illegal-immigrant unborn).

Most of these fresh ideas, including that bit about the unborn, are incorporated in the recently adopted platform of the Republican Party of Iowa (Plank No. 2: "America is good.")

Still, some ideas are so utterly inane, so thoroughly discredited, so manifestly ridiculous, that it is almost impossible to believe that grownups can still believe them. Such is the case with the increasingly popular call on the right for the abolition of the Federal Reserve and a return to the gold standard. The Iowa GOP duly included this in their platform; ex-DJ/ex-drug addict/current Fox News blowhard Glenn Beck, when he is not reading from his diary or producing crocodile tears, is warning of the impending collapse of the non-gold-standard dollar—and then shilling for a scam that offers to take those (presumably worthless?) paper dollars in exchange for gold coins sold for as much as 200% over their actual value (the company is now under investigation for fraud); and libertarian GOP congressman Ron Paul wants not only a return to a gold standard but a drastic contraction of the money supply through an end to fractional reserve banking—meaning that banks would have to maintain reserves equal on average to the full amount that they have out on loan at any given time.

The crippling depression of the 1890s taught every sentient economist that when the money supply fails to keep pace with growth of the economy, the result is deflation (fewer dollars are chasing more goods, so the value of the dollar rises), which sets off a paralyzing cycle: wages fall, borrowing becomes prohibitive, purchases are put off on the expectation of future price drops, and the economy goes into a tailspin. The Federal Reserve was created as a direct consequence of that lesson. What would have happened had we remained on the gold standard? Here's a graph I made of the world's cumulative supply of gold, versus the size of the U.S. economy (as measured by real GDP), each plotted with an index of 1929=100:

So—we can adopt the brilliant strategy of allowing the growth of our money supply to be determined by the amount of a metal dug up out of the ground each year in China, Russia, Uzbekistan, South Africa, Ghana, Indonesia, and other wonderful places; or we can use the tools proven by every central bank over the last century of adjusting interest rates and other interventions so that the money supply keeps pace with the economy.