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Saturday, August 23, 2008

"The real William Jennings Bryan"

Ewegen praises William Jennings Bryan, three-time loser as a candidate for president.

Ewegen is one of those guys that knows just enough 'bout economics to be dangerous. He wrote:

The current Federal Reserve System wasn't created until 1913. Before then, America didn't have a mechanism to grow our money supply in tandem with the expanding output from farms and factories. A rigid reliance on a gold standard triggered repeated depressions and bouts of deflation. A farmer who borrowed $1,000 to buy land when wheat was selling for $1 a bushel would find his debt effectively quintupled if the price of wheat dropped to 20 cents. The happy banker, meanwhile, would be enriched fivefold through no effort on his part.

I asked Justin Longo of the Independence Institute (and renowned economist from the Austrian School) to reply to Ewegen's assertions in that paragraph. Longo wrote:

The article is almost half right. When you do not grow the money supply, there is a predictable, extremely mild deflation of the currency because of the growing output. This is by far the most stable monetary system one could conceive of, as the deflation that takes place is completely, 100% predictable. You measure output each year and that in turn gives you the amount of deflation. Since everyone knows the amount of deflation and will be expecting it, there is NO business cycle whatsoever. People know the economy grows at what, 3 to 5% a year? Well, it figures into the calculations just like inflation predictions do nowadays. However, unlike inflation prediction, which is an educated guess at best, due to the Fed printing whatever amount of money they desire at any point in time, deflation prediction is damn near a science because everyone knows how much the economy grows each year. In sum, the article is completely wrong about "repeated depressions and bouts of deflation." You cannot have any depression unless you continue to fool the entire market with deflation. And there is no way in hell that could happen with a fixed money supply. Remember, inflation only works if it is increasing AT AN INCREASING rate. People get used to it and the effect wears off. Same rule applies to the fixed money supply's mild deflation.

That means that an economy with a fixed money supply is far easier to predict and far more stable -and therefore to plan accordingly - than an economy with a money supply tweaked by a politically appointed bureaucrat at The Fed.

1 comment:

  1. Well done bringing in Mr. Longo for a well stated and clearly educated, reasonable response.