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Comment by creshal | Hacker News Reader

The problem is that you cannot really control the gold/silver supply. If your gold mines suddenly run dry (which happened to the Romans), it immediately cripples your economy (debasing the currency will create a panic, not debasing the currency leads to runoff deflation). If someone suddenly finds a massive new gold source, it will… also cripple your economy, due to runoff inflation (happened in the Spanish Price Revolution after the discovery of the New World).

Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.

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That would still make currencies far more stable than modern currencies. It's very unlikely that a significant source of gold will be found and even if it will be, it won't be in owner's interest to mine it very quickly.

The price revolutions were literally a one off event and while it's usually described as "rampant", the inflation rate was at most in the range of a few percent and it would be seen as moderate to low today.

> That would still make currencies far more stable than modern currencies.

Stability is not inherently good. Stable currencies that suffocate the economy because they do not allow for rapid enough expansion or reduction of the money supply are a burden. Another example would be the interwar years and great depression, were virtually all countries suspended the gold standard because it was simply impossible to uphold, and the economy recovered from it.

When the economy expands, things get cheaper. Like with most electronics in the last five decades or so.

Deflation is a lot more complicated than that, unfortunately.

No, it isn't.

Okay, so you have products that get cheaper and cheaper. Is that good? No, the computer industry is in a deep crisis because of that – first PC sales tanked, then laptop sales, then netbook sales, then ultrabook sales, then tablet sales, soon smartphone sales… if products get cheaper and cheaper, you have no incentive to buy more than absolutely necessary, because not waiting with your purchase will always lose you money.

And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too? What happens if they aren't? Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too?

Etc. pp.

>No, the computer industry is in a deep crisis because of that – first PC sales tanked, then laptop sales, then netbook sales, then ultrabook sales, then tablet sales, soon smartphone sales… if products get cheaper and cheaper, you have no incentive to buy more than absolutely necessary, because not waiting with your purchase will always lose you money.

Yes, because that's absolutely what happened. What actually happened is that there is no longet any reason to buy the top end, because the low end is enough for most people.

>And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too?

Why should wages decrease?

>What happens if they aren't?

People have more money to spend and the additional demand further boosts the economy.

>Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too?

People would definitely go back to saving and away from making debts. That is not a problem, the need to invest money when there is no objective reason to do so is what leads to investment bubbles and excessive debts.

> Yes, because that's absolutely what happened.

Sales are down down. Total sales. Not "high end sales". All sales.

> Why should wages decrease?

The economy is growing. The population is growing. Everything is growing… except your money supply. You have to make products cheaper with fixed wages, your personnel costs will explode, until it's no longer affordable to pay the current rates.

Same with rents: Building housing will become progressively cheaper. Rents, land taxes, etc. will have to go down to match these prices, or nobody will be able to afford living in existing housing any more.

> People would definitely go back to saving and away from making debts.

You seem to conflate a lot of issues here. We had inflation with gold standards (because you can debase your currency anyway). We had crashes and bubbles with gold standards (and pre-gold-standard gold based currencies, which you conflate too…). The destruction of the middle class and impoverishment of the lower classes aren't a result of fiat currencies.

> That is not a problem, the need to invest money when there is no objective reason to do so is what leads to investment bubbles and excessive debts.

Except that deflation will result in a shortage of investment even where there is objective need.

>Sales are down down. Total sales. Not "high end sales". All sales.

For how long? A few years? Prices have been dropping rapidly for many decades. Yes all sales are down, because you don't need high end computers any more, which also means you don't need to replace old computers as often.

>The economy is growing. The population is growing. Everything is growing… except your money supply.

Yes, that's why prices get lower to compensate.

>You have to make products cheaper with fixed wages, your personnel costs will explode, until it's no longer affordable to pay the current rates.

That's illogical. If you need to cut wages in order to decrease prices, you aren't growing, you are cutting costs.

>Same with rents: Building housing will become progressively cheaper. Rents, land taxes, etc. will have to go down to match these prices, or nobody will be able to afford living in existing housing any more.

If they will have to drop so be it. But I doubt that the costs of building the house is what determines property prices, it's more about the location.

>We had inflation with gold standards (because you can debase your currency anyway).

No, inflation started after gold standards were abandoned. As you wrote previously, the 1-2% inflation caused by influx of gold from the new world was seen as catastrophic at the time.

>We had crashes and bubbles with gold standards (and pre-gold-standard gold based currencies, which you conflate too…).

Not nearly as often. Yes, bubbles did happen as rare occurences, today they are seen almost as an unavoidable part of the economy.

>The destruction of the middle class and impoverishment of the lower classes aren't a result of fiat currencies.

That's not what I said, but it could be so. Avoiding inflation is much easier for the wealthy after all.

>Except that deflation will result in a shortage of investment even where there is objective need.

There is no reason to believe it would.

https://en.wikipedia.org/wiki/List_of_banking_crises

Note all of the entries that start with "Panic of.." from well before the collapse of Bretton Woods.

Even the Great Recession wasn't that bad compared to what we had before.

It shows much fewer crises before and virtually zero during the Bretton woods. If you click to some of them, you will see that most of them happened when the exchange to gold/silver was limited and people believed there isn't enough precious metals to back all the money, or the gold or silver standard was actually abandoned by some country.

> That would still make currencies far more stable than modern currencies.

Not really. Let's say we're on the gold standard, and now the computer revolution happens, and the internet revolution, and so on. We've created a bunch of new businesses, which are worth a bunch of money, but the amount of gold didn't change. So the value of money had to change, because the size of the economy changed, and the amount of gold didn't.

For that matter: Which is growing faster, the population, or the amount of gold? That affects the value of money if we're on the gold standard.

I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. I'm not saying we should go back to the gold standard, but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.

> I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both.

The problem is that, in the example quoted, no one had that control. Gold mines run dry and you're fucked. Not because some incompetent banker is controlling the gold supply, but because there is no more damn gold. The most competent financial advisor of Rome -- a figure so gargantuan in the field of finance that, if transplanted to the modern world, would not only win that fake Nobel prize for economics, but would cause every other economist to retire out of shame -- would have been powerless. Because there was literally no more gold.

Obviously, it wasn't the end of all things -- new mining facilities would be open, sometimes processes would be optimized in older ones, wars would be waged, but these things took time and needed money.

No more gold? Wasn't there more gold in other places? Places the Romans didn't know about, but still places.

I'm not suggesting the Romans needed to venture westward and discover the Americas, but did they really have no other options?

Their trade balance was massively negative – it's called the "silk road" and not the "Roman wine and glass ware road" for a reason. Gold and silver left Europe and perishable goods were bought for it. It was initially offset by spoils of war and massive mining operations (some of the Roman mines in Spain are still visible today).

Apart from that, there was also normal economic and population growth – even without trade, if your population and economy grows, you'll need more money if you want to keep prices and wages stable.

So, they had several options:

• Conquer places that have gold! That went well for a few centuries, until it didn't any more.

• Debase the currency to make more of the money still here. That was, unsurprisingly, massively unpopular. And because monetary value was still tied to precious metals, people just started to hoard old money to melt it in later (something you still occasionally see with e.g. copper pennies), which led to all sorts of economic problems (occasionally crashing all the way down to barter trade).

> I'd say it's a matter of debate how good that control is

It's just that having this debate is pure luxury already. Otherwise it'd be "where the hell do we get the gold we need to fuel our economy?" or "what do we do with all the surplus gold that's ruining our economy?".

> but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.

Bitcoin, really? Private currencies where inflation is at the mercy of random developers who may or may not control significant currency reserves as well?

Using foreign currencies to supplant or replace a failed domestic currency isn't a new phenomenon, nor limited to "crypto""currencies" (the Balkans used the German Mark extensively in the late 90s, and US Dollars get you far in a lot of places).

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