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FreeMarkets (91.77)

Nothing Has Changed

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September 30, 2010 – Comments (14)

I was not planning on blogging today, until I read this comment to the post "The Greatest Lie Ever Told".

Devoish wrote: "it is almost like you believe things like the erie canal, the panama canal, and the transcontinental railroad did not contribute to lower costs in the 1800s. Or land grabs, and oil power. Or electricity.

Nope - prosperity (such as it was) was all about being on a gold standard."

What I find fascinating about the response is that the argument is trying to compare productivity with the type of currency in use.  The two have nothing in common, but it brings up a fascinating point.  How can we figure out if we're better off today if we still had a gold standard vs our fiat currency.

There is no simple formula because of our position in the world - where would we be if the dollar wasn't made the defacto currency after WWII (though if we didn't have a gold standard then, albeit only for foreign bankers, we wouldn't have been made the defacto currency).  What would the value of the dollar be today if we lost a major battle?  Sadly, few people realize that our currency today is tied to our military power (due a little history research on the city state Florence and you'll discover they had a paper currency that literally became worthless in a few months after losing a battle - admittedly that battle was most of their army).

So while we can argue that our position makes our fiat currency stronger than it otherwise would be, it's not possible to argue the opposite, that our position makes our fiat currency WEAKER than is otherwise would be.

It's very important not to use the gov'ts CPI number, since they switch out products.  Butter too expensive, than the CPI will replace it with margarine.  I don't believe they do this to keep the people from revolting since most people don't know what the CPI is, but rather to keep Social Security payments that are linked to the CPI from moving astronomically upward.

In a discussion with a friend he said (paraphrased) "Wages have gone up from $1,000 in 1913 to $25,000 today.  That's a 25x increase in purcharsing power, thus the FED is doing a good job.  Even Ron Paul says that the dollar has lost 93% of its value since 1913, but since wages are up about 25x, nothing has really changed."

Unfortunately he hung himself with this simple argument.  "Nothing has really changed."  EXACTLY RIGHT!  In the course of almost 100 years, the buying power of one's labor has not changed.  We have doubled household incomes by sending our wives to work and we may start sending our children to work or getting Grandma to end her retirement to earn a few bucks as a WalMart greeter to futher increase our household incomes, but NOTHING HAS REALLY CHANGED.

Think about what has changed since 1913:

1) Ford invents the assembly line
2) Electricity becomes available nationwide
3) The automobile is invented, and is actually VERY reliable
4) Air Conditioning
5) The computer age
I'm leaving a ton of stuff out, but the point is that prices dropped during the 1800's due to productivity increases, a nationwide train system (privately financed), and yet 100 years after the Federal Reserve, the average American worker is in roughtly the same place.  A century of technological innovation and increased productivity has gotten us NO WHERE! 

But wait - don't I have a flat panel TV, the guy in 1910 certainly did not.  Yes you do, just like the man in Italy in 1290 AD who wore glasses as he looked upon the crumbling old infrastructure of the Roman Empire.  Or the American in 1933 that bought an electric guitar - he obviously didn't have it easier than his parents, but he did have a new invention that no one else had just five years earlier.  Technology gives us things that previous generations didn't have, but you are working just as hard today for your food and housing as your great-great grandparents did.  They worked less hours for their food and housing then their parents and that's progress. 

But gold has increased in value by approximately 50x its 1913 value.  What this means is that under a gold standard your income would be DOUBLE what it is today.  And by working 1/2 as hard for your basic necessities, it would FREE every American to use that additional time for what they want.  You could work 20 hrs/week, instead of 40.  You could spend your leisure time on vacation or inventing something new or to write a book.  Think about it, Thomas Edison doesn't exist in 1654 - all his time is spent in the fields.

One could argue we've already lost a lot more than 2x our earning power in 100 years, we may have forced thousands of Americans to keep their nose to the grindstone who may have invented time saving devices.  There's no way of knowing.

Fiat currency's have taken away more than our earning power, they are reducing the speed of innovation and entrepeneurship.

 

 

14 Comments – Post Your Own

#1) On September 30, 2010 at 11:57 AM, chk999 (99.97) wrote:

If you don't believe the average american blue collar worker is better off now than in 1913 you really have to read some history.

(Hint: What was the infant death rate in 1913?) 

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#2) On September 30, 2010 at 12:01 PM, FreeMarkets (91.77) wrote:

You're missing the point.  Technology has made cars reliable, health care better, but the average American has to work just as hard to obtain food and housing.  Therefore, all the productivity increases over the past 100 years have been inflated away by our fiat currency.

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#3) On September 30, 2010 at 12:02 PM, FreeMarkets (91.77) wrote:

You could also argue it's not just the fiat currency, but also the many regulations that hinder rather than help.

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#4) On September 30, 2010 at 12:27 PM, whereaminow (20.93) wrote:

FM,

When you start down this road, where people ask you to "prove it", you find out eventually that there is a difference between proving and approving.  No matter what evidence, reasoning, or theory you provide in an attempt to meet the challenge presented, it is only necessary for you to be satisfied.  In the end, you will never prove anything to devoish.  You will only give him opportunities to show his disapproval. 

Here is an example: prove that society can order itself without government coercion.  I marshal evidence of American society that did this very thing, with less violence and more freedom than any time in history.  Response, well it's not here now so it must have failed.  Counter response, but you wanted proof that a society can order itself without coercion and I gave an example.  Counter counter, well it's not here so it must have failed.

But, that being said, there a couple of problem's here. First, wages most definitely do not rise with inflation.  Wages rise from increased productivity.  Wages are pushed up by inflation, and by coercion.  One of the reasons that Austrian School economists despise the Cantillon effects of inflation is that wage earners see their wages pushed up after the money has worked through the economy.  So wage earners are in perpetual catch-up mode in a world of purposeful inflation.

So wage "increases" (and it is appropriate to put that in quotes, since they aren't really increases) are always behind price increases and the spread - the difference - rises over time.

With this in mind, consider that argument presented to me many months ago by JakilaTheHun.  Wages, he said, haven't risen by more than 2-3% annually since the early 1980's.  Therefore, there is no way that the general price level could have risen by 6%, or 9%,. or whatever a free market economist pundit attempted to pin it.

Now, what is that?  Wages behaved like I said they would, so I'm wrong?  Sometimes you just have to shake your head and wonder how corrupted their minds must be by the nonsense they were taught at universities.

Thanks for your compliments of my post. I greatly appreciate it!

David in Qatar

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#5) On September 30, 2010 at 1:11 PM, SkepticalOx (99.43) wrote:

But gold has increased in value by approximately 50x its 1913 value.  What this means is that under a gold standard your income would be DOUBLE what it is today.  And by working 1/2 as hard for your basic necessities, it would FREE every American to use that additional time for what they want.  You could work 20 hrs/week, instead of 40.  You could spend your leisure time on vacation or inventing something new or to write a book.

This is a slightly faulty assumption no? Most of gold's run-up has been in recent years, and how much of that is associated with speculation or fundamentals is different (also, the fact that the world's currencies are fiat have an effect on why people would buy gold thereby effecting it's price). So to automatically say your income would be twice as much is flawed. Am I wrong?

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#6) On September 30, 2010 at 1:21 PM, FreeMarkets (91.77) wrote:

I would argue that gold is 1/2 the value it will be in the next two or three years, so that I'm doing a disservice to my argument.  But if you think its better to use prices from the past what year is best?  1981, or would you choose a year when gold was at its low point because the Volcker understood the value of a strong currency?

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#7) On September 30, 2010 at 1:43 PM, SkepticalOx (99.43) wrote:

My point is that you can't say because the price of gold is A, that your income would be B instead of what it is now with any level of precision that you're using now. It's way too simplistic. If the price of gold spiked to $5000 in a year (due to a whole variety of factors), would our hypothetical incomes be 10x of what it is today if we were on the gold standard?

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#8) On September 30, 2010 at 2:09 PM, FreeMarkets (91.77) wrote:

Absolutely.  Why wouldn't your gold be worth 10x more if the price of gold went up 10x?

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#9) On September 30, 2010 at 2:15 PM, SkepticalOx (99.43) wrote:

Because your gold should technically not spike up that much if you were on the gold standard no? Apples and Oranges.

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#10) On September 30, 2010 at 2:17 PM, FracturedVision (< 20) wrote:

#5 -

 Most of our nominal public debt has been run up in recent years too. I think its safe to say that gold's value in dollars is proportional to the level of our deficit spending.

Also, I remember lately that the latest estimate of gold physical reserves is far lower than previously thought, meaning if people were buying for pure speculation that prices would be much higher.  This in turn means that the current price level is not an anomaly or a bubble.

I'd argue that the ratio of the price of gold to buying power would remain constant whether it was 2x or 10x the price.  Inflation would easily account for the difference in nominal values. So even if the hypothetical income was 10x of what it was today, buying power under a gold standard still would have been double given the new set of prices.

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#11) On October 01, 2010 at 7:53 AM, FreeMarkets (91.77) wrote:

#9 (Because your gold should technically not spike up that much if you were on the gold standard no?)

Considering we're on a fiat currency, it will spike up that much - and maybe a lot more.  Gold isn't worth ANYTHING more than it was 100 years ago.  The fiat dollar is worth less.

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#12) On October 03, 2010 at 12:53 AM, FleaBagger (29.27) wrote:

Increases in the price of gold reflect the extent of the populace's rejection of the fiat currency and preference of the gold standard - a de facto gold standard, if you will.

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#13) On October 05, 2010 at 10:37 AM, mtf00l (45.04) wrote:

Consider this...the "spread" in Gold Wages versus Fiat Wages has gone to the top 2 percenters as profits.

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#14) On October 07, 2010 at 10:52 PM, devoish (98.67) wrote:

Freemarkets.

If the following paragraph by hopelesslylost isn't trying to link being on the gold standard to lower prices while ignoring the contributions of things like the erie canal, the panama canal, and the transcontinental railroad did not contribute to lower costs in the 1800s. Or land grabs, and oil power, or the discovery of gold in nearly every state - effectively findingh money on the ground as fast as Bernanke can print it. then I believe you are missing an education in propaganda.

The Classical Gold Standard

In 1896, prices were lower in American than they had been in 1834, when the United States went back on a 100% gold standard.  The Civil War caused some price distortions through inflation (wars and inflation are inseparable.)  But from 1879, when the U.S. returned to a full gold standard, until 1896, prices fell at 3% annually. Wages, on the other hand, remained flat and in certain cases, even roses.  In fact, wages rose steadily throughout the 1800's.  Imagine the impact this had on the standard of living of poor Americans.  For 18 years, assuming their salaries remained constant, their standard of living rose by 3% annually.  That means that in 1896, the average American worker's standard of living rose by roughly 70% over what he enjoyed in 1879.

If Hopelesslylost is not trying to lead us to believe that being on the gold standard was the cause of the rise in the average American worker's standard of living then one should also ask why he placed all those wonderful thoughts in the same paragraph.

If a person does not think for themselves, and place all the events of that time period into the picture when they consider that paragraph then I believe they do themselves a disservice and are as easily led as sheep.

Thank you for the careful consideration of my reply.

 

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