Peter Schiff
Since early last year, when the financial crisis began to bloom in earnest around the world, one refrain that we have heard repeated often is: "history has consistently shown that stoking aggregate demand through robust monetary expansion is the only proven means to quell a slowing economy." Informed by this central precept of Keynesian economics (first described less than 100 years ago), governments from Washington to Tokyo are now relying on deficit spending, credit expansion, and monetary stimulus to prevent their economies from falling into what they argue would otherwise be an inescapable downward spiral of demand destruction, falling prices, economic contraction, and corporate and personal bankruptcies.
Since early last year, when the financial crisis began to bloom in earnest around the world, one refrain that we have heard repeated often is: "history has consistently shown that stoking aggregate demand through robust monetary expansion is the only proven means to quell a slowing economy." Informed by this central precept of Keynesian economics (first described less than 100 years ago), governments from Washington to Tokyo are now relying on deficit spending, credit expansion, and monetary stimulus to prevent their economies from falling into what they argue would otherwise be an inescapable downward spiral of demand destruction, falling prices, economic contraction, and corporate and personal bankruptcies.
The miracle tool that permits all of these aggressive government responses, and which many consider to be the crucial advancement in modern economics, is known in academic circles as an "elastic money supply." The expansion of the money supply (through money printing, debt monetization, or increased lending) is credited with limiting the severity of the free market boom and bust cycle and keeping the global economy on an even keel since the Second World War. Advocates of the tool argue that it has ended the economic miseries supposedly common in unchecked free market capitalism (think Dickens).
However, in order to provide this apparent benefit, governments had to discard what they perceived as a burdensome relic of the past: inelastic gold-based money. When civilization first began 5,000 or so years ago, societies almost universally developed mediums of exchange to replace the gross inefficiencies of barter-based economies. Many things were tried (shells, beads, cooking oil, salt, etc.), but eventually nearly all civilizations settled on precious metals -gold, in particular - as the best form of money based on its durability, uniformity, scarcity, and divisibility.
For 99% of recorded history, emperors, kings, and parliaments "struggled" with the limitations of gold. If Henry VIII, for instance, wanted to spend money to stimulate the English economy, he had a few choices as to where to get the gold: tax his citizenry, borrow from the bankers in Holland, dig for gold in his own realm, or seek to plunder gold from foreign sources through war or blackmail. All of these options involved significant costs and pitfalls. Henry's easiest means to expand his money supply was to debase his gold by secretly mixing in base-metal alloys. However, such a ruse was easily detected by sophisticated market participants, who would subsequently shun Henry's coinage. The result was that the governments of the world could only spend what they had.
