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  1. #1

    Default Question about commodity standards...

    I was debating my economics teacher in class the other day (he actually asked me to stop asking questions in class because I try to counter his "matter of fact" teaching style!). We were talking about the quantity theory of money and how under the gold standard the money supply wasn't increasing as fast as GDP. He claimed that this led to farmers who took out loans to go settle out west not being able to pay back their loans because the real amount owed was increasing and their incomes were falling. I countered with saying the farmers should not have taken out the loans in the first place, and the fact that food prices continued dropping and thus their incomes with it essentially proves that there were too many farmers. These people should have been employed elsewhere as they would have had they not taken out these loans. He essentially said that the loans were good loans when they were made, and had the real value not increased because of deflation then the farmers would have been able to repay them. He argued that for this reason we should have a growing money supply as long as GDP is growing.

    I know in economics there is often not a definitive "he's right, you're wrong", but who is more right in this case?

    In the likely case that my argument was weak, what is the better argument for commodity money against a fiat money?

    I understand that Ron Paul is not necessarily for a gold standard, but I would like to argue mainly against monetary inflation, not for a gold standard.

    Thank you for your responses!



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  3. #2

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    If the value of the money is increasing, savers benefit and borrowers lose. This is true. However, GDP is not a good substitute measure for the demand for money.

    Does he have historical evidence for a monetary deflation? Falling prices does not necessarily mean deflation. Prices fall when supply increases versus a stagnant demand or when demand falls against a stable supply. Either of these could have caused a drop in food prices. And, as you suggest, the proper course would be to stop borrowing money to invest in farming.

    If the market picks the currency - as is Ron Paul's plan - the market will reject a currency if it is too unstable. So deflation serious enough to disrupt markets would probably be rejected by the market.
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  4. #3

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    An increase in the value of money makes borrowing money expensive. Why is that a problem? Don't borrow money if you can't afford to pay it back.

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    Quote Originally Posted by chronicaust View Post
    He claimed that this led to farmers who took out loans to go settle out west not being able to pay back their loans because the real amount owed was increasing and their incomes were falling. I countered with saying the farmers should not have taken out the loans in the first place, and the fact that food prices continued dropping and thus their incomes with it essentially proves that there were too many farmers. These people should have been employed elsewhere as they would have had they not taken out these loans.
    As further evidence for your argument, you could point out that the percentage of the workforce employed in farming declined sharply from 72% in 1820 to 64% in 1850 to 41% in 1900 to 21% in 1930. And even with that decline, FDR resorted to buying and destroying food during the Great Depression.
    Last edited by enoch150; 05-01-2012 at 08:03 PM.

  6. #5

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    Quote Originally Posted by enoch150 View Post
    As further evidence for your argument, you could point out that the percentage of the workforce employed in farming declined sharply from 72% in 1820 to 64% in 1850 to 41% in 1900 to 21% in 1930. And even with that decline, FDR resorted to buying and destroying food during the Great Depression.
    They were so good at what they did more and more people were allowed to create other things and engage in other occupations.

    chronicaust,

    It sounds like your teacher has led you into the woods and is showing you a single tree. Maybe try to lead him back out and give him a look at the overall forest and see what he thinks. I'm seeing it like this. This argument was from something else but I think it should paint a close enough picture.


    Maybe this will help make the danger of fiat money clear.

    Imagine you and me are setting across from each other. We create enough money to represent all of the world's wealth. Each one of us has one SUPER Dollar in front of him.

    You own half of everything and so do I.

    I'm the government though. I get bribed into creating a Central Bank.

    You're not doing what I want you to be doing so I print up myself eight more SUPER Dollars to manipulate you with.

    All of a sudden your SUPER Dollar only represents one tenth of the wealth of the world!

    That isn't the only thing though. You need to get busy and get to work because YOU'VE BEEN STIFFED with the bill for the money I PRINTED UP to get YOU TO DO what I WANTED.

    That to me represents what has been happening to the economy, and us, and why so many of our occupations just can't keep up with the fake money presses.



    Once you've got the basics some other things should start becoming clear.

    ~No matter where you aunt Martha hid the sugar jar with here savings in it others are able to slither in like vampires in the night and suck the strength out of it. (This is a severe understatement. They also suck the strength out of the sugar bowl itself, the shelf it is on, the house it is in, and everything else everywhere.)

    ~Sure if the double the money supply your Uncle Phil gets twice as much when he sells his stocks but he is getting twice as many of something worth half as much. Plus some of the very people that counterfeited the money supply have now cut themselves in on his stuff with capital gains taxes.

    ~ No matter how much hard earned money the "we the people" can come up with to build their world the way they want, others have the ability to fire up the fake money presses and dictate to them their will.



    See the little bumps of this chart put together by Robert Sahr. They show earlier times of war when fiat was introduced into the system to finance them. It now looks like they are at war with all of us.

    http://photos.imageevent.com/stokeyb...rencyvalue.jpg

    This is a chart of the Dow Jones Industrials. Notice the same percentage of increase as in Robert Sahr's chart? (Knock off a couple of zeros to simplify if your not seeing it.)

    http://photos.imageevent.com/stokeyb...ney/30DJIA.jpg

    Super Dollar

    http://photos.imageevent.com/stokeyb...gle640x537.jpg
    Last edited by Carson; 05-01-2012 at 08:56 PM.

  7. #6

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    Ask him how it is even possible for GDP to "outgrow" the currency in which it is measured. If there is only so much money in an economy, and money supply under a gold standard was "too slow", how then did GDP increase? Of course its a fairly simple answer but its a good question to ask to see what your teacher says in response.
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