As previously posted, the monetary crisis of 1619-23 was caused by the debasement, by the authorities, of the coin.
"A German mint hard at work producing debased coinage designed to be palmed off on the nearest neighboring state, c.1620"
Courtesy of the Smithsonian Institution
The blog of the Smithsonian Magazine provides an even more vivid look into this event, “Kipper und Wipper”: Rogue Traders, Rogue Princes, Rogue Bishops and the German Financial Meltdown of 1621-23:
What made the kipper- und wipperzeit so incredible was that it was the product not only of slipshod economic management, but also of deliberate attempts by a large number of German states to systematically defraud their neighbors. This monetary terrorism had its roots in the economic problems of the late 16th century and lasted long enough to merge into the general crisis of the 1620s caused by the outbreak of the Thirty Years’ War, which killed roughly 20 percent of the population of Germany. While it lasted, the madness infected large swaths of German-speaking Europe, from the Swiss Alps to the Baltic coast, and it resulted in some surreal scenes: Bishops took over nunneries and turned them into makeshift mints, the better to pump out debased coinage; princes indulged in the tit-for-tat unleashing of hordes of crooked money-changers, who crossed into neighboring territories equipped with mobile bureaux de change, bags full of dodgy money, and a roving commission to seek out gullible peasants who would swap their good money for bad. By the time it stuttered to a halt, the kipper- und wipperzeit had undermined economies as far apart as Britain and Muscovy, and—just as in 1923—it was possible to tell how badly things were going from the sight of children playing in the streets with piles of worthless currency.
The evidence is persuasive that things today, notwithstanding recurring anxiety in the maverick financial press, are a long way from again going so seriously wrong. And yet, in these days of high political angst, it is well to bear in mind the concluding observation by The Smithsonian:
Kindleberger concludes his study (upon which the author of the blog draws) with a quotation from Macaulay’s History of England that may be allowed to stand for the Kipper- und Wipperzeit—and indeed for all hyperinflations. Writing of a similar English wave of coin-clipping that occurred in 1696, the great historian observed:
As recently noted here, Slate's business and economics correspondent, Matthew Yglesias, recently published an interesting critique of Cato's upcoming monetary conference which Yglesias refers to as Cato Institute Staging Gold Standard Love-In. This drew an immediate, and intelligent, response by Reason Magazine's senior editor Brian Doherty.
Brian Doherty courtesy of Wikipedia
Matthew Yglesias yesterday filled some space on Slate with something that pretended to be a critique of the Cato Institute for throwing a conference that considers the possibility that gold might make better money than government/central bank paper.
He doesn't do anything as gauche as, say, report on what people said there regarding gold, even to critique it.
One of the most interesting points that Doherty makes -- a point too seldom made -- was that of the softening of the opposition by the great Milton Friedman (whose opposition Yglesias references in passing) to the gold standard:
Friedman, as lots of people don't know or don't remember, despite his reputation as the "libertarian who hated gold" got far more mellow about the possible merits of gold-as-money in his later, more libertarian years. See his book Money Mischief, where he wrote that "it does not follow [from the fact that there are costs associated with mining the gold, etc.] that the existence of a gold standard...is a mistake and harmful to society...the verdict is far from in on whether fiat money will involve a lower cost than commodity money," pointing out that relying on the probity of government managers to guarantee a safe and sane money might have its own risks.
... given the laughability of his "gold is no better than fiat to curb inflation" argument above, I guess he can't imagine any real reason one might value gold as money.
His argument seems inexplicable, pointless; on the surface it has nothing to do with any actual argument for or against gold as money, says nothing worth saying and is confusing in doing so. It is, I should say, perhaps the very definition of that horrible little twitter-esque mockery term "derp" which appears in its URL, as if Cato is guilty of it rather than the Yg.
The exchange between Doherty and Yglesias is by no means an esoteric or unimportant one. The issue of monetary policy comes more to the fore in the national discourse -- including the conversation surrounding President Obama's nomination of the Honorable Janet Yellen to chair the Federal Reserve Board.
The potential value of the gold standard as an important asset in creating a climate of equitable prosperity has achieved new respectability. Those who wish to follow the core policy conversation would be greatly benefited by studying The True Gold Standard and Money, Gold, and History by Lehrman Institute founder and chairman, Lewis E. Lehrman, Reagan Gold Commissioner... the eminence grise of the classical gold standard and a leading figure in the ongoing debate.
"I met a traveler from an antique land...."
Statue of Ramses II, courtesy of TourEgypt.net
Two prior blogs, here, referenced the demolition, by Niall Ferguson, of any vestiges of credibility that Paul Krugman might still have possessed in polite society. Ferguson spreads many of Krugman's errors and omissions upon the record ... for all to marvel upon.
In this, Ferguson casts Krugman in the role of Shelley's Ozymandias:
I met a traveller from an antique land
Some selections from Ferguson's Part 3, the (currently) final episode:
In my previous two articles, I have shown that Paul Krugman - revered by his acolytes as the Invincible Krugtron - failed to anticipate the financial crisis and wrongly predicted that the single European currency would fall victim to it. I have exploded his claim to intellectual invincibility. Very clearly, he has made at least twice as many major mistakes in his career as the mere two he has previously admitted to.
You may ask: Why have I taken the trouble to do this? I have three motives. The first is to illuminate the way the world really works, as opposed to the way Krugman and his beloved New Keynesian macroeconomic models say it works. The second is to assert the importance of humility and civility in public as well as academic discourse. And the third, frankly, is to teach him the meaning of the old Scottish regimental motto: nemo me impune lacessit ("No one attacks me with impunity").
I am not an economist. I am an economic historian. The economist seeks to simplify the world into mathematical models - in Krugman's case models erected upon the intellectual foundations laid by John Maynard Keynes. But to the historian, who is trained to study the world "as it actually is", the economist's model, with its smooth curves on two axes, looks like an oversimplification. The historian's world is a complex system, full of non-linear relationships, feedback loops and tipping points. There is more chaos than simple causation. There is more uncertainty than calculable risk.
So we public intellectuals should not brag too loudly when we get things right. Nor should we condemn too harshly the predictions of others that are subsequently falsified by events. The most that we can do in this unpredictable world is read as widely and deeply as we can, think seriously, and then exchange ideas in a humble and respectful manner. Nobody ever seems to have explained this to Paul Krugman. There is a reason that his hero John Maynard Keynes did not go around calling his great rival Friedrich Hayek a "mendacious idiot" or a "dope".
For too long, Paul Krugman has exploited his authority as an award-winning economist and his power as a New York Times columnist to heap opprobrium on anyone who ventures to disagree with him. Along the way, he has acquired a claque of like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O'Brien, Noah Smith, Matthew Yglesias and Justin Wolfers. Krugman and his acolytes evidently relish the viciousness of their attacks, priding themselves on the crassness of their language. But I should like to know what qualifies a figure like Matt O'Brien to call anyone a "disingenuous idiot"? What exactly are his credentials? 35,550 tweets? How does he essentially differ from the cranks who, before the Internet, had to vent their spleen by writing letters in green ink?
Where I come from, however, we do not fear bullies. We despise them. And we do so because we understand that what motivates their bullying is a deep sense of insecurity. Unfortunately for Krugtron the Invincible, his ultimate nightmare has just become a reality. By applying the methods of the historian - by quoting and contextualizing his own published words - I believe I have now made him what he richly deserves to be: a figure of fun, whose predictions (and proscriptions) no one should ever again take seriously.
Once again, note the emphasis on the value of history over deracinated intellect.
Indeed, history, as getting to the root, is (both literally and figuratively) the more radical approach.
Prof. Ferguson has called out Prof. Krugman and "named and shamed" his acolytes, as blackguards, hooligans, and thugs but one step (if that) removed from cranks, albeit cranks who have been provided -- to their editors' shame -- distinguished venues.
A distinguished venue does not give one liberty to behave like a thug.
High praise to Niall Ferguson for playing Joseph Welch to Paul Krugman, who has made himself the economics profession's Joe McCarthy, for stating as plainly as did the heroic Welch:
"Have you no sense of decency sir, at long last? Have you left no sense of decency?"
Paul Krugman is discredited.
Slate, the online magazine, recently published a more than ordinarily thoughtful piece by gold standard skeptic Matthew Yglesias entitled Cato Institute Staging Gold Standard Love-In.
Matthew Yglesias courtesy of Wikipedia
Given the past five years of unusually low inflation and unusually low employment relative to the size of the population, the only sensible question to ask about monetary policy is whether the Federal Reserve has done enough to support aggregate demand and economic growth. Instead, the libertarian Cato Institute is sending out invitations to a November conference dedicated to talking about the gold standard:
CATO’S 31ST ANNUAL MONETARY CONFERENCE — WAS THE FED A GOOD IDEA? — will bring together some of the world’s leading scholars and policymakers to consider the record of the Federal Reserve since its establishment in December 1913. The Great Depression left a black mark on the nation’s central bank and the Great Recession has vastly expanded the bank’s powers. In 1913, the dollar was defined in terms of gold. Today we have a pure fiat money and the Fed is the largest buyer of U.S. public debt, enabling the federal government to live beyond its means. Would we have been better off adhering to the rules of a gold standard? This conference will address that issue by examining the regulatory record of the Fed, discussing the constitutional basis for adhering to a convertibility principle, and by making the case for a National Monetary Commission to consider alternatives to the current regime.
Yglesias concludes that there is:
"a deep yearning to give the case for free markets a profound moral reading rather than a pragmatic one, and that reading is hard to maintain in the face of a modern monetary system. Hence the hankering for gold."
This, by dismissing the pragmatic arguments for the gold standard -- which Yglesias does not, in fact, grapple with -- is a too-facile critique. Yet there are signs that Yglesias, one of the smarter (magna cum laude, Harvard University, 2003), and more decent, cats in the Neo-Keynesian alley, has, perhaps for the first time, begun engaging thoughtfully with the proponents of gold. [One hopes that the unfortunate inclusion of the neologism "derp" in the article's URL was interposed by an editor; use of the term "derp" would be the mark of an infantile twerp.]
Two years ago, Yglesias indulged in an much more facile dismissal of gold. At ThinkProgress.org, the propaganda arm of the Vast Left Wing Conspiracy, he wrote The Trouble With Gold:
Interestingly, what won’t give you the security you crave is the adoption of a gold standard. If a federal law mandates that $1,000 be worth a certain amount of gold, there’s nothing stopping congress from changing the law later. If you want the alleged security of gold, there’s no substitute for gold. A gold standard is neither necessary nor sufficient.
Nor does gold ensure stable prices. What it ensures is that inflation trends are driven by the supply of gold. Find a new gold mine somewhere: inflation. Aliens come to steal gold: deflation. All you’re doing is randomizing the extent and timing of inflation.
"Aliens come to steal gold?" This clearly was not grappling with the data (or real world).
Now, as Slate's business and economics correspondent, Yglesias presents a somewhat more mature perspective, one in which he presents as groping to understand the grounding of the libertarian (although not the classical liberal conservative) narrative in support of the gold standard. Yglesias's future critiques will be far more interesting, and useful, once he moves beyond a superficial reading of the arguments of the gold standard's proponents. These are not, predominantly, rooted in inflationphobia, here imputed, groundlessly, to Cato's scholars.
The gold standard is not solely based in a "profound moral reading" to the exclusion of a pragmatic one. Moreover, the classical gold standard leans neither right nor left, not authoritarian nor libertarian. Left wing icons -- Karl Marx, for one, and George Bernard Shaw, for another -- were gold standard proponents. Keynes, for another (although soon thereafter abjuring the gold standard -- or at least its "evil twin" the gold-exchange standard) wrote, in 1922:
"If gold standards could be introduced throughout Europe, we all agree that this would promote, as nothing else can, the revival not only of trade and production, but of international credit and the movement of capital to where it is needed most. One of the greatest elements of uncertainty would be lifted…and one of the most subtle temptations to improvident national finance would be removed; for if a national currency had once been stabilized on gold basis, it would be harder (because so much more openly disgraceful) for a Finance Minister so to act as to destroy this gold basis."
The left potentially has a very constructive, potentially crucial, role in the coming debate about the restoration of the classical gold standard. The restoration must set a conversion parity at which the value of the dollar is defined. This is an important matter.
As indicated in The True Gold Standard by Lehrman Institute founder and chairman, Lewis E. Lehrman -- who will be presenting the Closing Address at the very Cato monetary conference skeptically, and unduly superficially, questioned by Yglesias -- this will be determined, initially, by a price discovery period. But Lehrman also has called for a step to ensure that labor and debtors cannot be prejudiced in the process.
The higher the parity, the more it privileges capital and creditors. The lower the parity, the more it privileges labor and debtors. Lehrman has been virtually alone in calling for a mechanism as added insurance that labor and debtors are not prejudiced in the process of setting the new price parity (as happened, for example, in 1925).
Yglesias -- if he begins to focus on the actual, rather than posited, propositions of the key classical liberal gold standard proponents, like Lehrman -- would add a most welcome contribution to the discourse. The major classical liberal proponents propose the gold standard -- with much empirical data to support the argument -- as a mechanism to restore a climate of equitable prosperity for labor and the middle class.
This very much includes reducing the income inequality that began to become pandemic when President Nixon, on August 15, 1971, repudiated the last vestiges of the gold standard. The perspective of the left on the real presenting issues of restoration would be welcome.
The perspective of honest liberals, in fact, would be invaluable.
Two erudite scholars, James Narron and David Skeie, publishing at the Federal Reserve Bank of New York's Liberty Street Economics are treating their history-minded readers to "new series chronicles mostly forgotten financial crises over the 300 years—from 1620 to 1920—just prior to the Great Depression."
Flugschrift aus der Kipper- und Wipperzeit gegen die Geldverschlechterung durch diePrägung minderwertiger Münzen: An die Gotts- und Gwissenlose Geltwucherer, 1622, Holzschnitt (ÖNB)
As they observe, "As momentous as financial crises have been in the past century, we sometimes forget that major financial crises have occurred for centuries—and often." Their June 24, 2103 publication takes us back to the early 17th century:
The Kipper und Wipperzeit is the common name for the economic crisis caused by the rapid debasement of subsidiary, or small-denomination, coin by Holy Roman Empire states in their efforts to finance the Thirty Years’ War (1618–48). In a 1991 article, Charles Kindleberger—author of the earlier work Manias, Panics and Crashes and originally a Fed economist—offered a fascinating account of the causes and consequences of the 1619–23 crisis. Kipper refers to coin clipping and Wipperzeit refers to a see-saw (an allusion to the counterbalance scales used to weigh species coin). Despite the clever name, two forms of debasement actually fueled the crisis.
"The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors."
It is from the laboratory of history, as Lehrman Institute founder and chairman Lewis E. Lehrman observes, from which we can derive the lessons to guide our steps today. And one invariable lesson of history is that the debasement of money inevitably fuels crisis.
Whether resolved by crying up or crying down,degrading the unit of account inevitably ends in tears.