Skip to comments.The History of Money
Posted on 11/18/2005 6:43:11 PM PST by hubbubhubbub
Before Alan Greenspan retires I thought it might be worthwhile hearing what he thinks of money. Three years ago he gave a speech at the opening of an American Numismatic Society exhibition that I found on the Federal Reserve Bank website(1).
Greenspan reminds us, in no uncertain terms, that a monetary system based on fiat money amounts to no more than a confidence game. The value of fiat money is determined solely by our confidence in the issuers of that money or, more specifically, on how well the supply of fiat money is managed. If too much money is created the public will lose confidence in its purchasing power and the perceived value of the money can collapse. Remember, fiat money has no intrinsic value; it only has perceived value.
After you have read Greenspans speech, read the excerpts from a speech that Ben Bernanke made later that same year, and remember, he is going to be the next Federal Reserve Chairman.
The History of Money (1) by Alan Greenspan The other day I told a spendthrift friend that I had to deliver a short address on the history of money. He responded, "I understand the history of money. When I get some, it's soon history." Fortunately, not all market participants are as spendthrift as my friend. Savers have been in sufficient abundance since the beginning of the Industrial Revolution to enable investment to further material well-being. Money, as a store of value, was an early facilitator of savings and one of the great inventions of mankind. Saving and investment is very difficult in a barter economy.
The history of money is the history of civilization or, more exactly, of some important civilizing values. Its form at any particular period of history reflects the degree of confidence, or the degree of trust, that market participants have in the institutions that govern every market system, whether centrally planned or free.
To accept money in exchange for goods and services requires a trust that the money will be accepted by another purveyor of goods and services. In earlier generations that trust adhered to the intrinsic value of gold, silver, or any other commodity that had general acceptability. Historians, digging deep into the earliest evidence of human practice, link such commodities' broad acceptability to peoples' desire for ostentatious gold and silver ornaments.
Many millennia later, in one of the remarkable advances in financial history, the bank note emerged as a medium of exchange. It had no intrinsic value. It was rather a promise to pay, on demand, a certain quantity of gold or other valued commodity. The bank note's value rested on trust in the willingness and ability of the bank note issuer to meet that promise. Reputation for trustworthiness, accordingly, became an economic value to banks--the early issuers of private paper currency. They competed for reputation by advertising the amount of capital they had to back up their promises to pay in gold. Those banks that proved trustworthy were able to broadly issue bank notes, along with demand deposits, that is, zero interest rate liabilities. The profit that accrued from investing the proceeds at interest was capitalized in the banks' market value. In the mid-nineteenth century, equity capital/asset ratios were often several multiples of today's ratios.
In the twentieth century, bank reputation receded in importance and capital ratios decreased as government programs, especially the discount window and deposit insurance, provided support for bank promises to pay. And, at the base of the financial system, with the abandonment of gold convertibility in the 1930s, legal tender became backed--if that is the proper term--by the fiat of the state.
The value of fiat money can be inferred only from the values of the present and future goods and services it can command. And that, in turn, has largely rested on the quantity of fiat money created relative to demand. The early history of the post-Bretton Woods system of generalized fiat money was plagued, as we all remember, by excess money issuance and the resultant inflationary instability.
Central bankers' success, however, in containing inflation during the past two decades raises hopes that fiat money can be managed in a responsible way. This has been the case in the United States, and the dollar, despite many challenges to its status, remains the principal international currency.
If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen.
I suspect that Alan Greenspan deliberately used oxen, and not gold, in the above paragraph so as not to cause panic buying of the yellow metal.
Now read Ben Bernankes comments and then decide for yourself whether you should own some gold, or not. Bernanke was talking about combating deflation, and we should not take his remarks out of context, but they are still instructive of the way our new Federal Reserve Board Chairman thinks. The full text of his talk is also available on the Federal Reserve Bank website(2).
under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Of course, the U.S. government is not going to print money and distribute it willy-nilly. Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.
As I mentioned, we should not take Ben Bernankes comments out of context. At the time there was a real threat that the US could collapse into a deflationary depression following the bursting of the tech bubble. A deflationary depression is the last thing anyone wants and so, to prevent it, the Fed was dropping interest rates as fast as possible. The Federal Funds Rate (the rate at which banks lend federal funds to each other on an over-night basis) fell from 6.5% in 2000 to 1% in 2003. It was during this time that Bernanke made the speech I quoted above, in part to alleviate fears of a deflationary collapse.
The reason I think his speech is important is that the Federal Reserve had to take extreme measures in the aftermath of the tech bubble which, in the big scheme of things, was not all that big. To prevent a slowdown the Fed dropped the Federal Funds Rate from 6.5% to 1% in just three years and in doing so created a real estate bubble that dwarfs the tech bubble in every imaginable way.
As I mentioned last week, I think the US real estate market is ready to roll over and if it does the Federal Reserve will not have 5.5 percentage points by which to lower the Federal Funds Rate. The Effective Federal Funds rate is currently at 4%, and that brings us to Ben Bernankes speech. What will Ben Bernanke do to prevent a slowdown in the US economy when the real estate market finally cools down?
Paul van Eeden
Last week the Fed announced they will no longer provide M-3 stats.
Helicopter Ben Bernake's printing presses are being fired up.
It's almost as if they know something bad is going to happen and want to cover their tracks in advance.
This is what Greenspan wrote about fiat money and gold in 1866, before he was seduced by the power of the central banks.
Gold and Economic Freedom
By ALAN GREENSPAN 1966
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire-that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.
In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.
Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.
The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.
What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible.
More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.
In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.
Whether the single medium is gold, silver, sea shells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has always been considered a luxury good. It is durable, portable, homogeneous, divisible, and, therefore, has significant advantages over all other media of exchange. Since the beginning of Would War I, it has been virtually the sole international standard of exchange.
If all goods and services were to be paid for in gold, large payments would be difficult to execute, and this would tend to limit the extent of a society's division of labor and specialization. Thus a logical extension of the creation of a medium of exchange, is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.
A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security for his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth.
When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one--so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.
A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold, and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post- World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.
But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline- argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely--it was claimed--there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (paper reserves) could serve as legal tender to pay depositors.
When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates.
The "Fed" succeeded: it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.
With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.)
But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited.
The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets.
The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.
Amen. Helicopter Ben is going to try to inflate our way out of our looming credit crisis.
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
A thought to ponder.
" Normally, money is injected into the economy through asset purchases by the Federal Reserve"
Can anyone explain what that statement means?
Let me see. With gold as our standard, we use a refined metal equal in volume to, oh, .00000000001% of the entire wealth of the nation as the basis of our money. A supply that increases, oh, 1/10 of 1% a year. In an economy that, all going well, increases 4% a year. When a growing economy is tied to a static measure of exchange, eventually growth breaks down the same way the body breaks down if there is not enough blood to feed all its parts oxygen.
While "fiat" money can grow at a rate equal to (or, yes, more than) the value of the entire economy. Yes it can deflate, but then it can grow and keep pace with the growth of the economy.
value of economy value of gold difference
100 100 0
104 101 3%
108.16 102.01 6.15%
112.864 103.0301 9.8339%
116.9896 104.60401 12.38559%
As you can see, if gold increases at rate "a" and the economy increases at rate "b", the growing gap will mean that there is not enough cash money in circulation to maintain growth. Eventual result: recession and "crash" and depression.
Oh, you can fudge it a bit. You can create what amounts to a fiat secondary currency by using silver at a fixed ratio--16-1 was the traditional ratio at the Founding and kept as long as possible. But silver currency, not being gold, it as mentioned itself "fiat" currency. One could ignore the 16 to 1 ratio if one wanted, but eventually the silver currency would drive out the gold and you'd be back where you started.
Upshot: tying an economy that has a far greater potential for growth than the potential for growth of the gold supply is unutterably stupid as it would choke economic growth in the end.
My solution? Deal with it goldbugs, but the gold standard is gone to *stay.* Short of nuclear war or plague, gold will not make a comeback. Of course, if nuclear war or plague come, gold may indeed make a comeback, as will monarchy, mob rule, and other primitive social practices. Nota bene.
Wrong. The price of gold simply rises or falls to reflect supply and demand of contracts. Standard fiat money silliness, which we shall see as Helicopter Ben fires up the printing presses next year.
I suggest you read what Greenspan wrote in 1966, when his head was screwed on correctly.
Or what economist Walter Williams wrote this very week.
Last month, President Bush nominated Dr. Ben S. Bernanke, currently chairman of the President's Council of Economic Advisors, as chairman of Federal Reserve Board to replace the retiring Alan Greenspan. Alan Greenspan's replacement comes at a time of heightened fears of inflation resulting from the recent spike in oil prices.
First, let's decide what is and what is not inflation. One price or several prices rising is not inflation. When there's a general increase in prices, or alternatively, a reduction in the purchasing power of money, there's inflation. But just as in the case of diseases, describing a symptom doesn't necessarily give us a clue to a cause. Nobel Laureate and professor Milton Friedman says, "[I]nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Increases in money supply are what constitute inflation, and a general rise in prices is the symptom.
Let's look at that with a simple example. Pretend several of us gather to play a standard Monopoly game that contains $15,140 worth of money. The player who owns Boardwalk or any other property is free to sell it for any price he wishes. Given the money supply in the game, a general price level will emerge for all trades. If some property prices rise, others will fall, thereby maintaining that level.
Suppose unbeknownst to other players, I counterfeit $5,000 and introduce it into the game. Initially, that gives me tremendous purchasing power, whereby I can bid up property prices. After my $5,000 has circulated through the game, there will be a general rise in the prices -- something that would have been impossible before I slipped money into the game. My example is a highly simplistic example of a real economy, but it permits us to make some basic assessments of inflation.
First, let's not let politicians deceive us, and escape culpability, by defining inflation as rising prices, which would allow them to make the pretense that inflation is caused by greedy businessmen, rapacious unions or Arab sheiks. Increases in money supply are what constitute inflation, and the general rise in the price level is the result. Who's in charge of the money supply? It's the government operating through the Federal Reserve.
There's another inflation result that bears acknowledgment. Printing new money to introduce into the game makes me a thief. I've obtained objects of value for nothing in return. My actions also lower the purchasing power of every dollar in the game. I've often suggested that if a person is ever charged with counterfeiting, he should tell the judge he was engaging in monetary policy.
When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I pay you back with dollars with reduced purchasing power. Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation's primary beneficiary. That identification is easy if you ask: Who is the nation's largest debtor? If you said, "It's the U.S. government," go to the head of the class.
So what about the president's nomination of Ben S. Bernanke as Alan Greenspan's replacement? I know little or nothing about the man. What I do know is that it's not wise for one person, or group of persons, to have so much power over our economy.
Dr. Williams has served on the faculty of George Mason University in Fairfax, VA, as John M. Olin Distinguished Professor of Economics, since 1980.
You will forgive my skepticism but he did not address a single one of my points.
M3 is obsolete. "M5" is closer to the truth today. But the Fed will not provide statistics. Instead of providing open access to information Greenspan now creates a brick wall. Only the elite will be allowed access to this information. Watch what happens, people. It's going to be one wild ride.
Do you consider Walter illiams a crackpot?
Or a man who said that deflation can always be kept at bay, because "of that invention called the printing press," and that if there was a liquidity crisis and deflation, he would "drop bales of money on every lawn in America?"
That's our new fed chairman, Helicopter Ben.
"Icebergs ahead, captain."
"Turn off the M-3 transponder monitor in the steerage lounge. Mustn't cause a panic among the sheeple."
But fiat money is a "confidence game" that enables rapid creation of wealth by radically reducing the price of capital and optimizing it to economic conditions. The antithesis, defining a finite supply of rare metal to be of equal value to the world, is also a confidence game, and more absurd in my opinion.
The Fed purchases US government securities from the public (banks and others). In the process, money is injected into the economy.
Youre right in that the supply of gold would rise with the value of the economy. But Appalled but Not Surprised is touching on a problem that Greenspan presumably recognizes now and is not addressed.
Pegging the price of gold to a growing economy would raise the price of capital. For instance if the value the economy grew at 5% percent annually, the value of my gold in my safe grows at the same rate. I then require a premium on top of the rate of economic growth to put it at risk, perhaps another 5 percent. So the price of capital is always above the economic growth rate, restricting investment, growth and risk taking.
Make that price of gold.
Read "The Case Against the Fed" by Murray Rothbard. The upshot of it is that there is no reason that the money supply must grow for productivity to increase. With a completely static money supply you can still have growth, but you will have deflation. In fact this is what happened in both England and the US when we were on the classic gold standard. If you think about it, other than computers, we gain nothing from the ongoing productivity gains in our economy. Without inflation we would, productivity gains would mean that a lot more things would be like computers, cheaper and more powerful over time. The obvious deflation in the computer industry (brought on by the massive technology improvements in the industry) have not prevented companies in that industry from continuing to grow. (Intel, Dell, HP, Microsoft, etc.)
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