I have to take this one. Paul Ryan asks
Name me a nation in history that has prospered by devaluing its currency.
How about the United States
See that turning point in 1933. There is a lot of dispute about what caused it but some people with a long interest in Monetary Policy have argued that it was Executive Order 6102. Drafted as follows.
And announced to the public as follows
Those of us who think recessions are caused by the hoarding of money would expect this type of thing to have extreme effects. Hard money folks would suspect that this would result in a debasement of the currency. Indeed, unlike the modern metaphorical use of the word debasement this was literal debasement. The base of the currency was confiscated at gun point, melted down and reissued in a less valuable form.
The transferability of dollars into gold shifted from $20 an ounce to $35 an ounce. This was again a literal debasement done by threat of imprisonment. I wish I had ready access to pictures of private safety deposit boxes being torn open and the gold taken out. Nonetheless, there are numerous reports of this happening.
Not exactly a free market move and vastly more extreme than anything I contemplate tolerating. However, what was the economic effect?
From April to July on 1933 Industrial Production in the United States surged 57%. Here year-over-year growth in Industrial production from the year before debasement until the year after
We move immediately from shrinking Industrial production to surging production. With year-over-year growth rates reaching 60% in July of 1933.
I don’t want to pick a fight with my more liberal friends but I would argue that it was this move that made it seem as if Roosevelt had magical economic powers and gave cover to what were on the whole probably ineffectual at best industrial policies.
However, even if there are those who are afraid that a more smooth and free market debasement will likewise cover over what they regard as the poor policies of the Obama administration, I ask you to take another look at that chart above. 60% growth from 30% collapse just a year earlier. You really want to throw that away because you are worried that it might possibly help in a fight over a health care policy less extensive than the one that is “crippling” the budget of our whacky neighbors to the North?
There are a lot of issues here but if what you are concerned about is piling up government debt than growth is your friend and debasement is the way to get there.
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Wednesday ~ November 24th, 2010 at 3:28 pm
sardonic_sob
I am a hard-currency fan and I really want to believe in the concept that Ryan is espousing here. And we do have lots of examples of societies which experienced all kinds of economic problems from debasing currency/printing money/various kinds of inflation.
However, as I get older and even MORE cynical, I start to think that debasing the currency/etc is just something you get as a society ages, loses vitality, and gains complexity and non-productive obligations, and while it doesn’t help, it doesn’t really hurt, either. It’s just a thing. If you didn’t do it, it wouldn’t necessarily mean your society wasn’t in decline anyway. And, as you point out, debasing the currency CAN be actively beneficial in the right circumstances. The fact that these are rare doesn’t mean they don’t happen.
The problem is that the phenomenon is usually *associated,* whether it’s causal, consequential, or co-symptomatic, with societies in decline. But declines can take a long, long time to build, so both sides are convinced they’re right. Advocates of debasement can show a period of decades where it didn’t utterly destroy the Republic and in fact generally speaking it worked pretty well, so they pooh-pooh the hard-currency advocates as primitive scaremongers. Hard-currency types know that generally and historically speaking debasement is a very, very bad sign so they are not inclined to consider special circumstances or the fact that modern monetary systems may actually *be* qualitatively different from historical norms. And ne’er the twain shall meet.