High Americans own mines, power stations and transport lines in the lowlands and employ lowlanders to work in them. I am impressed. All this has happened in Dan Coffin's lifetime.
The currency is tied to gold whose supply grows slowly. Most transactions are in cash. Borrowing is rare. Fertile soil causes surpluses and falling prices whereas machinery and labor are in short supply, therefore expensive. Selling labor-saving machinery to the lowlanders is insufficiently profitable for High Americans. The lowlanders are not starving so there is no need for charity.
By "salting the mine," Coffin finds gold on de Smet's land. A gold rush would ruin the land and wreck the economy. However, in exchange for Coffin's silence, de Smet sells him machinery that will enable the lowlanders to develop their land for themselves.
Problem solved?
16 comments:
I doubt a gold-standard currency would be practical in those circumstances. With an entire planet and only a few thousand people, it would be too likely to fluctuate wildly in comparison to the overall size of the economy. Gold standards worked reasonably well when gold was inherently scarce.
Kaor, Mr. Stirling!
Yes, but the Rustum colony was founded by Constitutionalists with a philosophical belief in the necessity and desirability of a currency being "hard" and sound. If gold is relatively scarce on Rustum, then that would make a gold based currency more likely to work.
Sean
Supply and demand: if you get a sudden influx of gold that's massive in relation to the total money supply, you'll get inflation.
The world economy of the "long" 19th century had two periods of inflation in a relatively deflationary period: the 1850's and 60's (after massive gold discoveries in California and Australia) and in the late 1890's-1914 period, after the great African fields came into production.
This was containable because the discoveries, while large, were made in a context of large and rapidly growing populations and when physical production was increasing rapidly too -- a slowdown in agricultural growth pushed food prices rapidly up just before 1914, too.
But most of that century was deflationary, because the money supply was growing less rapidly than population and, especially, production, because of technological innovation and the opening-up of the vast prairie lands of North and South America and elsewhere.
Deflation can be just as nasty as inflation, or more so. In particular, it squeezes debtors relentlessly. That's why the Populist movements flared up in America and elsewhere during that period -- farmers were caught in a price scissors between falling prices and a rise in the real value of fixed interest securities like mortgages. They were on a treadmill to nowhere, with the price of their grain falling no matter how much they produced while the banks wanted their payments every month in loans taken out when prices were higher.
The ideal monetary situation is a mild, controlled, but steady inflation. This encourages investment and maximizes production; it also encourages innovation.because it incentivizes putting capital where it'll appreciate rather than just sitting on it or putting it into fixed-income assets like bonds.
I really lose track of economic arguments very quickly even though I subscribe to the view that economics is the material base of all other aspects of society.
Kaor, Mr. Stirling and Paul!
Mr. Stirling: I think I understand your argument. But the problem is I don't put much trust, if any, in governments managing a "mild" inflation. I keep remembering things like the Great German Inflation of the early 1920's, and the current hyper inflation in Zimbabwe and Venezuela.
And the US had similar episodes of inflation, beginning as long ago as the "not worth a Continental" of the early US, the collapse of the Confederate currency in the Civil War, and the high inflation of Carter's Presidency. All this would strengthen my preference for a stable, "hard" currency.
I grant there would be a very real problem and hardship to debtors in the case you mentioned. Instead of tinkering with the currency as you suggested, mightn't variable loans be possible? That is, in a deflationary period, the interest to be paid on loans would be low, perhaps close to zero. Just a thought!
Paul: somehow I kinda thought you made a detailed study of economics while at the university!
Sean
Sean,
Oh no! I was a philosopher.
Oxbridge has a PPE (Philosophy, Politics and Economics) course but surely some students specialize more in P or in E.
Paul.
Kaor, Paul!
Understood, what you mostly focused on at Oxford University. Altho I think Adam Smith would disagree with so strictly separating economics from philosophy.
Sean
Sean,
Sorry. I wasn't at Oxford. I was at Trinity College, Dublin. In those days, we had "Mental and Moral Science," which was Philosophy and Psychology. If I had been at Oxford or Cambridge, then I suppose I would have been somewhere on the PPE spectrum.
Every subject from physics to literature overlaps with philosophy. To think about concepts like "matter," "cause," "personality," "responsibility" etc is to philosophize.
Paul.
Kaor, Paul!
Oops! I misunderstood you again! Yes, I agree that every subject or topic can overlap with or into philosophy.
Sean
Paul: economics is complex, but based on simple observed facts.
Eg., to take one, human beings want to get the highest possible return on a minimum expenditure of energy, for the obvious reason that for uncounted generations those who didn't tended to die without issue. The "least effort" principle; you only have a limited fund of energy/work capacity, so use it sparingly. This drives a great deal of economic behavior.
NB; it's important to keep in mind that evolution is not purposeful -- it's very easy for human beings to confuse it with purpose, because our brains are wired to look at randomness and find intention.
Since evolution is not purposeful, it tends to produce "kludges", things that work well enough, but often in weird or potentially counterproductive ways.
For example, as social predators human beings are both territorial and altruistic; this helped particular genes become more common, because under the conditions under which we evolved they increased the chances of those genes multiplying through reproductive success.
But if the conditions change, the genes don't necessarily change with them, or at least not nearly as fast.
Nearly everyone a hunter-gatherer associated with would be a relation, usually a fairly close one, sharing many of their genes. Hence a capacity to "feel altruistic impulses towards those we identify with" also meant "feel altruism towards close relatives", or as the saying goes near enough for government work.
A kludge -- you didn't need to be able to tell if someone was related to you (by smelling them, for instance) because if they were part of your social reference group they were automatically -highly likely- to be a close relative.
Another example is the "dependent infant" trigger -- big eyes, etc. The "cute, must protect" impulse.
It's quite possible to trigger that without even being a human being; it's how cats and dogs colonized human living-space so effectively, becoming enormously more numerous than they could have been as wild animals. They're cuter than our own offspring.
Sean: nothing works perfectly, but it's observable that since central banks took over managing money supply, economic growth has on average been much higher than it was during the gold standard. The period since 1945 has been one of very rapid growth, and since 1989 more rapid still.
Also, under the gold standard the periodic crises which are a necessary part of a capitalist economy were much worse than they are now because basically people were spectators and couldn't do anything about them.(*)
If you look at the history of the US in the 19th century, depressions about as bad as the "Great Depression" of the 30's happened fairly often -- about once a generation, though they were usually not quite so prolonged (although that of 1837-44 came close) and the fact that a big though shrinking sector of the economy was quasi-subsistence moderated the effect on non-indebted farmers.
There were other aspects of this instability as well. For example, if a bank went broke, you could lose everything completely unexpectedly and without warning -- note that this is a staple of 19th century novels as a plot-driver.
The Euro has some of the same consequences as the gold standard for many of the countries on it. Compare and contrast the post-2008 trajectories of Ireland and Iceland, which were about equally exposed to the financial crisis of 2007-9.
Ireland was on the Euro, and hence essentially had to do a sector-by-sector cram-down of incomes in order to keep meeting its foreign debt obligations, and couldn't cut domestic debt by devaluing the currency; very painful, and very slow, if fortunate for German bankers.
Iceland had an independent central bank. What -Iceland- did after the crisis was essentially to repudiate its foreign debts and tell people holding those suddenly worthless instruments that they were SOL and could just go pound sand if they didn't like it, German bankers included.
And they cut the value of their currency by 50%, which imposed a sudden, fairly massive and across-the-board loss on the population in general; after that, liquidity returned and recovery could begin rapidly, and was complete within a few years.
Or take a look at Greece's crucifixion on the altar of fiscal orthodoxy because it was a member of the Eurozone.
The gold standard (which was actually more of a pound-sterling standard) worked about that way in the 19th century. If a country had a monetary crisis, it had to pay in full and in gold, regardless of consequences to the population.
(*) it didn't help that the aftermath of the 1837 panic in the US meant that America had a very, very bad, absolutely awful banking system, with thousands of poorly capitalized banks and no central direction.
Kaor, Mr. Stirling!
Many thanks for your patient explanation. I fear, despite my distrust of so much which is done by gov'ts, a national central bank of the kind the US, the UK, and Iceland have is not such a bad idea. But I would still advocate that people have a few hundred gold and silver coins, just in case!
Yes, I have read of how bad panics and depressions were in the 19th century US. And I think the Great Depression of the 1930's could have been drastically shortened if FDR had not meddled with the economy so much.
Sean
Kaor, Mr. Stirling!
But wasn't one of the consequences of Iceland basically repudiating its debts being given a very bad credit rating with foreign investors and banks? Didn't Iceland have to pay for whatever new loans were taken out by paying higher interest? The repudiation have worked and even been necessary, but didn't it come with a price?
Sean
Sean: everything comes at a price! 8-).
Remember the "sunk cost" fallacy, though.
Banks don't calculate interest on big international loans just on the past behavior of countries the way an individual might, they calculate it on a balance of that and their calculation of the country's -future- probable behavior.
They're remarkably unemotional about it.
This is why Iceland's credit rating has recovered fairly quickly, while Greece's is in the toilet and Italy's is shaky, even though both are part of the Eurozone and (in theory at least) can't repudiate.
The bankers are factoring in systemic risks, like a collapse of the Euro or the effective collapse of the European Union. Financial bets based on those possibilities have been becoming more and more common.
A lot of things have changed since the 19th or early 20th centuries. One of them is that information is much more abundant and moves much more quickly.
This improves the behavior of markets, because people are more aware of real costs and prices, and market economies depend on market pricing signals to move the factors of production.
It also makes it easier to detect cheating.
Eg., nobody trusts Chinese government economic statistics, including the government of China. They're transparently false because you can check them against things like power consumption, or imports and exports.
(This also applies to things like census data -- the Chinese government has probably been hiding the fact that its population is already declining, for example. The real facts got out because a couple of statisticians in China leaked stuff, which revealed that the population there dropped 1.8 million in 2017 and that the number of births was only about half the official projection.)
Kaor, Mr. Stirling!
I was fascinated by your comments here. Many thanks!
Yes, a good banker HAS to be pragmatic and not let emotions get the better of him if he is going to do his job right. So, I think I can grasp that if Iceland's behavior since the repudiation of its old debts has been basically sound and responsible, that will shape how foreign investors/banks treat her. And I am aware of how irresponsible Greece has been.
Yes, the EU and its precious Euro has been a crippling strait jacket for countries like Spain, Italy, and Greece. Trying to force them to behave like Germany, the UK, even France when their ecconomies are simply not like has been a disaster. The sooner the EU and the Euro are dumped, the better for them.
I'm not surprised by what you said about mainland China. Peking has reached the end of the road of what you can achieve by the crony capitalist policies it has been following. So lies are more and more resorted to, instead of facing up to hard facts.
I am not surprised as well by what you said about population figures. Things like the grotesque one child per couple policy and compulsory abortion for women who had more than one child has led to there being now way more males than women. Also, of course, insofar as crony capitalism has worked, people tend to have fewer children when real wealth and living standards improve.
Sean
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