The Liberty Brake
 --- pull in case of tyranny
 
This past Wednesday night on the O'Reilly Factor, Bill brought on Dick Morris, former political strategist to the Clinton Administration and frequent Fox News guest, for a discussion of Ron Paul and his bid for the presidency (video here).  Bill and Dick took turns dismissing the candidate, and Dick revealed his stunning ignorance of economics when the subject of the gold standard arises.

Morris: "He [Ron Paul] is for the gold standard... You can't print more currency unless more gold is mined, and ultimately it means that your whole economic expansion is hostage to how much a South African gold mine produces."

Now Dick, how exactly does economic expansion rely on printing more currency?  If economic expansion means the increased availability of products and services, how does the expansion of the money supply make products and services more available?  The answer is it doesn't, and Morris is spouting an economic fallacy that has persisted for far too long.

Morris' complaint against the gold standard is that gold has a limited supply, so as the economy expanded, there wouldn't be enough money to pay for all the new goods and services.  To examine this complaint, let's imagine a very simplified situation. 

Let's suppose we live on an island.  (Dick Morris can also live on the island with us, though many of the islanders wonder if there is any useful purpose for him).  On this island, the only product for sale is fish.  Every day, 100 fish are caught and put up for sale, and in order to trade for fish, we use gold for money.  Now let us suppose that there are 100 ounces of gold on the island.  Let us also suppose that all the gold on the island has been mined, and there is no possibility of importing gold from off the island.  Essentially, we have a completely fixed money supply of 100 gold ounces.  At the current levels of supply and demand for fish, 1 fish can be traded for 1 ounce of gold.  This system works for the time being, and times on our tropical island are good.

Suddenly, some clever fisherman has an idea to start using nets to catch fish, and the availability of fish doubles.  Economic expansion has occurred on our island, and we now have 200 fish coming in every day.  "Oh no!" Dick Morris yells, "We have all these new fish, but not enough money to buy them with.  Surely, as people continue to pay 1 ounce per fish, the remaining fish will have to sit and rot away."  This is of course ridiculous, but why?

The reason is that prices adjust.  Now that there are more fish available, there is no reason that 1 fish must continue to be traded for 1 ounce of gold.  With the increase in productivity, prices will naturally settle at a new equilibrium where 1 fish can be bought for 1/2 ounce of gold.  The increase of productivity was not a disaster, but a blessing.  Now there are more fish for everyone, and everyone's money has appreciated in purchasing power.  This principle holds true in more complex economies like ours.

The general price level in a free market economy is set by the balance between productivity and money supply.  The US Dollar is nothing but your claim to a percentage of the productive resources of society.  If productivity increases while the money supply remains fixed, the value of everyone's money increases.  Essentially, every Dollar retains the same percentage claim to the "productivity pie," but the size of the pie has increased, so each Dollar can be exchanged for a bigger slice.  When productivity increases under a fixed money supply, everyone's dollars become more valuable.  This is the primary value of a gold standard, which keeps money supply relatively stable.

As usual, Dick Morris has no idea what he's talking about.  Our economic growth does not depend on the availability of printing new money.  This is a five-year-old's understanding of economics.  We can have a gold standard and economic growth too.  So let's leave the monetary policy to the grown-ups, Dick.
 


08/26/2011 12:57

Eric,

Perfect example of a free market system with the means of exchange backed by an item that remains pretty constant.

Reply
Helene Jnane
08/26/2011 23:33

Eric: Tell Dick what the benefit is to the clever fisherman for being so clever.

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01/28/2012 18:56

will be restored quickly

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01/28/2012 19:27

will come back soon

Reply
03/22/2012 00:48

will return shortly

Reply
03/24/2012 00:02

Many thanks for info

Reply
09/24/2012 08:33

THX for info

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    Eric Brakey is an actor and political activist living in New York City.  He holds his B.F.A. in Theater Performance from Ohio University.

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