Thread: LIGHTWEIGHT'S SCHOOL OF ECONOMICS VOLUME 1

LIGHTWEIGHTS SCHOOL OF ECONOMICS VOLUME 1.

I was cleaning out my email and found a paper I wrote for college. I vividly remember it being 5am and I was just shot with a bb gun(don't ask) when I was writing this out for my class at 9am.

It is boring as shit to most people, but if you are into Economics it could be interesting. I ended up finding about 30 papers in this email so if you guys want more, I can post more up. I wrote on everything from the Mafia's influence on the Economy to the subprime mortgage crash, to tons of other stuff

It is probably riddled with typos and I'm sure I wrote this with a few beers in me , but if you can get past that you might learn a thing or two.


This paper is about the history of gold as well as what some schools of thought thought about it





Throughout history, different camps of economic thinkers have had their ideas of specie. Although specie is not talked about as widely now, during the time of the mercantilists, it was a widely discussed topic.
One of the mercantilists’ thoughts about specie was that gold accumulation meant wealth and national power. They believed very highly to have a trade surplus. They even implemented policies to prevent specie outflow. They also believed that money supply (in the form of specie) was key to national growth and power.
The physiocrats had a different view about specie than the mercantilists. The physiocrats were considered the first school of thought as a reaction to the French mercantalists. Contrary to the mercantalists, the physiocrats thought that wealth is not the measure of gold, but instead it is measured by the total stock of consumable goods produced by labor.
Petty, a pre-Smithian thinker believed that specie was only a very small percentage of wealth. It was so small that he considered it to be less than 1%.
Richard Cantillion, was a successful banker and speculator in commodities while living in France. Cantillion has been praised as being one of the first economists and his views are considered to be a building block for classical and neoclassical thoughts. Cantillion, probably one of the most cited economists when talking about specie was the one that first coined an early version of the specie flow mechanism. Cantillon wrote his Essai, during the 1730s in which there was a setup for the thoughts that Hume later elaborated on when talking about specie flow mechanism. In his book, Cantillion wrote: The goods and manufactures will in the long run cost so much that Foreigner will gradually cease to buy them, and will accustom himself to get them cheaper elsewhere, and this will by imperceptible degrees ruin the work and manufactures of the State. The same cause which will raise the rents of Landlords (which is the abundance of money) will draw them into the habit of importing many articles from foreign countries where they can be had cheap"(The Labour theory of value, Peter C. Dooey p.69). Cantillon's piece was published three years before Hume's essay came out talking about the specie flow mechanism. Although Hume's essay came out first, it was said that Cantillon started writing his Essai before Hume started writing. Thus there is some speculation that Hume had stolen some of Cantillon's thoughts. Even with this speculation Cantillon and Hume are not completely similar. "Hume demonstrated that policies which produce a favorable balance of trade and increase the stock of gold in which a country would be self-defeating, because the resulting inflation would generate an unfavourable balance of trade and gold outflow; whereas Cantillon advocated restriction on trade to build up the monetary gold stock, because 'it is always true that when the State is in actual possession of a Balance of Trade and abundant money seems powerful, and it is so in reality so long as this abundance continues'"(The labor value theory of money p.70).
To perhaps fully comprehend the idea of specie, the Gold Standard must first be understood. "The Gold Standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money were freely converted into gold at the fixed price"( Gold Standard: The Concise Encyclopedia of Economics | Library of Economics and Liberty). This regulation of the money supply worked because for a time, it was stable. When new production of gold started, it would only add a fraction to the accumulated stock, and because of the free convertibility, there was not much variance. However, this soon proved to be wrong once surges of gold discoveries happened. Most notably, the discovery of gold in Australia and in California during the gold rush. This caused price levels to be unpredictable during the short term. One of the most interesting aspects of using the gold standard, was that exchange rates were fixed. Since each county put a fixed price on the price of gold, and because convertibility was free, the exchange rates in between the different countries were fixed. This is the reason why the specie flow mechanism worked. With the prices being fixed, it would seem believable that the world experiences many shocks. The most famous example comes from the discovery of gold in California. "The newly produced gold increased the U.S. money supply, which then raised domestic expenditures, nominal income, and, ultimately, the price level. The rise the domestic price level made U.S. exports more expensive, causing a deficit in the U.S."(Gold Standard: The Concise Encyclopedia of Economics | Library of Economics and Liberty).
The Gold Standard had to work by the help of the central banks. "...they were supposed to raise their discount rates-the interest rate at which the central bank lends money to member banks- to speed a gold inflow, and to lower their discount rates to facilitate a gold outflow" Gold Standard: The Concise Encyclopedia of Economics | Library of Economics and Liberty.
The Gold Standard performed exceedingly well in some areas, while was extremely vulnerable in other areas. Between 1880 and 1914, the aforementioned average annual inflation rate was 0.1 percent which is then compared to 1946-2003, where the average in 4.1 percent. However, the Gold Standard turned out to be unstable in the short run even though it was predicted that it was be stable. The reason why this was true was because the Gold Standard was so vulnerable to monetary shocks. Not only is it highly unpredictable in the short run, but it gives the government little room to implement monetary policy.
The Gold Standard, being widely used internationally deteriorated during World War I. The major why this happened was
What Cantillon also touched on in relation to specie was the build up of specie for certain necessities. What Cantillon talked about was the have a favorable balance of trade for the purpose to obtain a large sum of gold and silver for emergencies, which included war funds. This seemingly rational thought was widely accepted, and Smith touched upon this as well. Smith justified the Navigation Act on the grounds of national defense.
Hume discussed in detail his views on the specie flow mechanism as also the price-specie flow model. The definition of the price-specie flow according to Hume had to do with the positive and negative balances of trade.
"When there was more god circulating abroad, prices rose in the surplus country. The specie flow thereby produced a change in relative prices"(Globalizing Capital).
David Hume, a classical economist, was another famous economist when there was a dealing with specie, and more importantly the specie flow mechanism. It is said that Hume might have stolen some ideas from Cantillon in dealing with the specie flow mechanism. In basic terms, Hume argued that there needs to be a positive balance of trade. This argument was based on the gold standard, which equates to the fact that all currency has a relation to gold value, and that gold is pretty much the universal currency. By having a positive balance of trade, what the means is that exports will be greater than imports. When this happens, there will be a surplus of gold coming into the country that has the positive balance of payments. Although this seems logical, there were some critics which asked if there was no regulation on gold, wouldn’t there be inflation and wouldn’t the price of gold drop in that country? Hume refuted this comment by talking about the quantity theory of money. What Hume argued was that when there is a rise of the money supply in a certain country, the prices of goods will increase accordingly and consequently, the opposite will happen for countries with a negative balance of trades. When there are higher prices in a certain country with a positive balance of trade, the exports will decrease and the imports will increase. When countries are experiences a negative balance of trade, and their money supply is decreasing ,their imports will decrease and their exports will increase. This heightening of balance of trade will continue until the balance of trade will be equal.

One of David Hume's most remarkable features when explaining the specie flow mechanism was that his model was extremely durable. Although the Gold Standard is not implemented in modern day use, Hume's thoughts are still the dominant thoughts of today's approach(Globalizing Capital, Barry J Eichengreen). The simplicity of Humes's thinking is what is key. "Hume considered a world in which only gold coin circulated and the role of banks was negligible. Each time merchandise was exported, the exporter received payment in gold, which he took to the mint to have coined. Each time an importer purchased merchandise abroad, he made payment by exporting gold"(Globalizing Capital 25).
David Hume, who is considered by some by belonging to the Currency School had views and ideas of banks which helped his argument for specie. "According to the Currency School, the only legitimate reason for the quality of paper money ever to increase was an inflow of gold. It never occurred to these theorists that b increasing the amount of paper money, a competitive banking system might be satisfying a demand to hold additional money that otherwise would have induced an inflow of gold"(Free banking and monetary reform David Glasner81).
What some arguments are against the Currency School is the treatment of deposits. "Deposits are conceptually the same as notes, as Pennington and a few other in the Currency School tradition recognized. But almost no one recommended controlling the quantity of deposits. To rationalize this inconsistency, members of the Currency School tried unsuccessfully to find persuasive distinction between banknotes and deposits. Yet that failure never undermined their position"(Glasner)
Another example of the disruption of short term equilibrium was the discovery of gold in Australia. In the late 1850's, gold was discovered in Australia and just like the discovery on gold in California, there was a massive disruption in the "stable" monetary supply. When gold was found, the prices first started to increase in Australia. Once the gold was exported it then sent the increase to other places, and since the banking systems in certain areas allowed money stocks to increase without a holding on an equivalent amount of gold, the gold was re-exported. Glasner talks about the re-exportation of specie: "...was re-exported to the Orient, where it was added to the existing hoards."(Glasner 87). Glasner then goes onto explain how prices would have risen a fraction more in the United States and Britain than in the Orient. This assumption was based on the assumption that the gold was held in the Orient.
Hume's thoughts of the specie flow mechanism was revolutionary during his time. Because his beliefs were during the time of the Gold Standard, many of his thoughts were easily applied. Because the Gold Standard is not applicable at this time, there is only speculation on how revolutionary his beliefs and thoughts were. Cantillon, however does not get the respect that he deserves as being the originator of the mechanism. Although there are high doubts that Hume deliberately plagiarized from Cantillon, it is still prevalent that they share similar views. Cantillon started his writing two decades before Hume came out with this essay. Regardless of who was the original thinker, the specie-flow- mechanism explains a lot of about the Gold Standard and how exports and imports interact with each other.

you need to format those paragraphs better for people to actually read this yo! i think there might have been some content left out of the first post near the end as well.

that is a rather brief account for the history of gold and i'd rather see a deeper examination over a more narrow period of time. one part i saw that seemed a little confusing was the note about the gold rush (1848) followed by a sentence about the gold standard working with central banks - but the US didn't have a central bank from 1841 until 1913.

i believe we'll be moving towards some kind of bretton woods system again. unlikely that any countries use gold domestically but i expect it to be used to settle accounts between countries in some fashion.

personally i really like the idea of competing currencies. i think this is how ron paul wants to kill the fed; introduce a competing currency and let the market choose. i don't think one based on a commodity is necessary, but think it's a reasonable way to prevent abuse... i like the idea of a currency based on gold with a currency board, which simply acts to keep the price of gold in that currency constant. i think greenspan is fond of this idea. i think the barest miminum change to the fed today should be what the republicans have recently pushed for, ending the dual mandate on inflation targeting and full employment and just going for inflation. (is this the case with all other CBs?)

i'm not very impressed by the fed's track record; i think technology should have smoothed out the business cycle considerably. since the inception of the fed though we've had less panics, although they have been greater in severity. since we've gone to a purely fiat standard worldwide i think the system has been going downhill and i think the fed has actually now replaced the business cycle with a bubble cycle.

Thats alot to read but looks extremely interesting, gonna read later. But can you post the mafia paper as well. Thanks for showing this to us.

Originally Posted by sickmint79

you need to format those paragraphs better for people to actually read this yo! i think there might have been some content left out of the first post near the end as well.

that is a rather brief account for the history of gold and i'd rather see a deeper examination over a more narrow period of time. one part i saw that seemed a little confusing was the note about the gold rush (1848) followed by a sentence about the gold standard working with central banks - but the US didn't have a central bank from 1841 until 1913.

i believe we'll be moving towards some kind of bretton woods system again. unlikely that any countries use gold domestically but i expect it to be used to settle accounts between countries in some fashion.

personally i really like the idea of competing currencies. i think this is how ron paul wants to kill the fed; introduce a competing currency and let the market choose. i don't think one based on a commodity is necessary, but think it's a reasonable way to prevent abuse... i like the idea of a currency based on gold with a currency board, which simply acts to keep the price of gold in that currency constant. i think greenspan is fond of this idea. i think the barest miminum change to the fed today should be what the republicans have recently pushed for, ending the dual mandate on inflation targeting and full employment and just going for inflation. (is this the case with all other CBs?)

i'm not very impressed by the fed's track record; i think technology should have smoothed out the business cycle considerably. since the inception of the fed though we've had less panics, although they have been greater in severity. since we've gone to a purely fiat standard worldwide i think the system has been going downhill and i think the fed has actually now replaced the business cycle with a bubble cycle.

You might be right, I think this was not the final paper that I turned in. I found this in an email to myself but thought some people would like it baahahaha, my bad