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CAPITALISM: |
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The Clearest and
Most Comprehensive Contemporary Defense of the Capitalist
Economic System Available |
Literature and Lectures by Edith Packer, George Reisman, and Others |
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From Chapter 19: Falling Prices Under the 100-Percent-Reserve Gold Standard Would Not Be Deflationary (pp. 954-955)This excerpt is taken from George Reisman, Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books, 1996. Copyright © 1996 by George Reisman. All rights reserved. May not be reproduced in any form without written permission of the author. The following limited exception is granted: Namely, provided they are reproduced in full and include this copyright notice and are made for noncommercial use, i.e., for use other than for sale, including use as part of any publication that is sold, copies of this excerpt may be downloaded into personal computers and distributed electronically or on paper printouts from a personal computer; reproduction on the internet is permitted provided the copy of the excerpt is accompanied by the following link to the Jefferson School's home page (which may, and hopefully will, be displayed elsewhere and more prominently): The Jefferson School of Philosophy, Economics, and Psychology. This limited right of reproduction expires on December 31, 1999. This page has been visited Paradoxically, it is precisely the gold standard's success in preventing inflationary increases in the money supply that is the source of much of the opposition to it. People believe that the fall in prices that would occur under the gold standard would represent deflation. And, as a result, they believe that the economic system would languish in a state of more or less permanent depression. Amazingly, even most of the supporters of the gold standard appear to believe this in some form. They advocate a fractional-reserve gold standard in the belief that it is necessary to make the money supply grow more rapidly than the increase in gold taken by itself. In effect, they want each additional ounce of gold to make possible the creation of money substitutes representing claims to two, five, ten, or more ounces of gold. They apparently do not realize that if they were right, the implication of their position would ultimately be no gold standard at all. For if it in fact were necessary for the quantity of money to grow more rapidly than the supply of gold, then each year the supply of gold would represent an ever smaller fraction of the supply of money. Eventually the fraction would approach zero. If, on the other hand, gold is always to constitute the same fraction of the money supply, then it is impossible for the money supply to grow more rapidly than gold, and one may as well have a 100-percent-gold reserve. Indeed, the rate of increase in the supply of gold itself is likely to be greater under a 100-percent-reserve system than under any fractional-reserve system in which the fraction of gold is fixed. This is because the real value of gold is greatest under a 100-percent-reserve system and therefore the inducement to the increase in its supply the strongest. Of course, it should be obvious on the basis of previous discussion, that the fall in prices that would occur under the 100-percent-reserve gold standard would not at all represent deflation.111 In the nature of the case, such a fall in prices would be the result of an increase in production, not a decrease in spending. Because of this, it would not be accompanied by any of the essential symptoms of deflation: namely, a greater difficulty of repaying debts and a wiping out of the rate of profit on capital invested. Under the 100-percent-reserve gold standard, total sales revenues in the economic system would in fact modestly increase from year to year, in accordance with the modest increase in the gold money supply and the volume of spending in terms of gold. The average business firm would thus find that its sales revenues modestly increased from year to year. The fact that the average business firm might have to sell at somewhat lower prices from year to year would not in any way imply a reduction in its sales revenues. On the contrary, it would have a supply of goods to sell that was larger by more than corresponded to the fall in prices, and was so to a significant degree. The fall in prices, it cannot be stressed too strongly, would be the result not of a fall in spending, not even of an increase in supply in the face of a given volume of spending, but of an increase in supply which outstripped an increase in spending. In such circumstances, a greater increase in the supply of goods than corresponds to the fall in prices exists to precisely the same extent as the increase in the volume of spending in terms of gold. The context of why prices fall under the 100-percent-reserve gold standard must be kept in mind: it is because while spending rises 2 or 3 percent a year, in accordance with the increase in the gold supply, production rises 4, 5, or 6 percent a year. This kind of drop in prices is not accompanied by declining sales revenues, but by modestly rising sales revenues. The rise in sales revenues is the corollary of the rise in spending. Any business firm that increases its production in accordance with the economy-wide average increase has no greater difficulty in earning a dollar of sales revenue at the lower prices that prevail later on than it had at the higher prices that prevailed earlier. In fact, it necessarily has a somewhat easier time earning a dollar of sales revenues, for the supply of goods it is able to produce and sell goes up by more than the price of its goods must fall. Because it is no harder to earn a dollar later on than it was earlier, but easier, there is not only no greater difficulty of repaying debts, as there is under deflation, but a lesser difficulty. Thus, this symptom of deflation is most decidedly not present. Nor is the fall in prices under the 100-percent-reserve gold standard accompanied by any wiping out of the average rate of profit in the economic system, which is the other leading symptom of deflation. On the contrary, the increase in the quantity of money and volume of spending that takes place under the 100-percent-reserve gold standard represents a corresponding addition to the nominal rate of profit. To whatever extent the increase in production and supply outstrips the increase in the quantity of money and volume of spending, the resulting fall in prices is merely the measure by which the addition to the real rate of profit exceeds the addition to the nominal rate of profit.112 Thus, falling prices under a 100-percent-reserve gold standard simply do not represent deflation. They do not make it more difficult for the average debtor to repay his debts and they do not reduce the average rate of profit. It is a very different story, however, when prices fall not as they do under the 100-percent-reserve gold standard, because of more production, but because of less spending in the economy. Then the fall in prices is accompanied by a decline in the sales revenues of the average seller. Then it is more difficult for the average debtor to repay his debts, because whether he has more goods to sell or less goods to sell, there simply isn't as much money to be taken in by him. And because sales revenues fall, the average rate of profit falls, corresponding to the lag between a fall in productive expenditure and a fall in depreciation cost and cost of goods sold.113 The fact is that deflation is not a matter of falling prices, but of a contraction in
the volume of spending in the economy. This is what produces the essential symptoms of
deflation: the general inability to repay debts and the wiping out of business
profitability. If this point is kept in mind, then it becomes clear that a
100-percent-reserve gold standard not only would not cause deflation, but would actually
be the best possible protection against deflation. Notes 111. See above, pp. 573580 and 817818. 112. See above, pp. 762767, 774775, 807818, and 825826. 113. See above, p. 574 and pp. 744750, 762771, and 882883. |
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