|Author(s):||Hammes, David L.|
Published by EH.Net (October 2012)
David L. Hammes, Harvesting Gold: Thomas Edison?s Experiment to Re-Invent American Money. Silver City, NM: Richard Mahler Publications, 2012. vi +154 pp. $13 (paperback), ISBN: 978-0-9850667-03.
Reviewed for EH.Net by Eric Tymoigne, Department of Economics, Lewis and Clark College.
Thomas Edison is celebrated for his entrepreneurial creativity and business skills. He is far less known for his contribution to solve monetary problems and this book presents that aspect of Edison?s endeavors. The book is written for readers who have a very limited knowledge of money and banking matters and the style is informal at times. Readers well versed in money matters can skip the first half of the book ? that deals mostly with the money multiplier and some financial history up to the establishment of the Federal Reserve ? and go directly to chapter 7 that begins to deal with Edison?s ?experiment.?
The main goal of Edison?s was to solve an old problem of monetary systems ? price stability. Edison was deeply dissatisfied with the gold standard because it subjects the economy to strong deflationary forces and it can be manipulated by money profiteers. Edison was also dissatisfied with unbacked currency because past experiences (from the Assignats in France to the Greenback in the U.S.) show that it is inflationary.
While he disliked the gold standard he was not willing to give it up in order to limit disruptions and to make his plan more acceptable. The goal was to circumvent its deflationary tendencies, while also preventing inflation and the boom and bust cycles that prevailed until the early part of the twentieth century. At the same time, Edison was also worried about farmers who were heavily indebted but saw the price of their crops decline dramatically. This led him to develop a monetary framework in which gold and agricultural commodities play the role of anchor for the monetary system.
In his system, government would create numerous warehouses for commodities that would buy commodities through a one-year repurchase agreement and the issuance of a warehouse certificate. The inflow of cash to farmers via the repurchase agreement would cover 50 percent of the value of the commodities. Commodities ought to be valued at a price based on a 25-year average instead of current market price. The repurchase agreement must be repaid in 12 monthly installments (i.e. farmers are required to repurchase some of their commodities every month over a twelve-month period at the warehouse price). The certificates would be tradable or could be pledged for a loan, and anybody with a certificate could go to the warehouse and claim ownership of some commodities that would be purchased with 50 percent cash and the handing of the certificate.
According to Edison this would help to promote price stability by limiting deflationary and inflationary pressure. Indeed, there would be a price floor on commodities ? the price set by the warehouse ? and there would be twice as many commodities as money created so there could not be too much money chasing too few goods. It would also help farmers by providing a loan at a zero interest rate.
Reactions to Edison?s monetary framework were mixed, to say the least, and most of reviewers understood that it would not solve price instability while creating massive economic problems. The supply of currency would fluctuate widely with agricultural output and would be inelastic, and the scheme would promote speculation in commodities. In addition, a Gresham?s law for commodities would emerge with low quality commodities backing the currency. Edison?s framework also did not deal with other forms of monetary instrument than currency.
Overall, the second half of the book presents well, the scheme and the context in which it was created, as well as the reaction to it. In the final chapter, the author argues that the Fed failed to promote price stability since 1970 and suggests that this may have of something to do with the fact that the U.S. dollar is no longer backed by gold. He also notes that setting the growth rate of the money supply to the long-run growth rate of output may help to promote price stability but at the price of giving up fine tuning. I would disagree with both claims. On the first claim, the goal of the Fed never has been to reach price stability in the sense of no inflation or deflation. Price stability is defined as stable and low inflation. So a decline in the purchasing power of the dollar is actually a policy goal, as long as it does not occur too fast and erratically. The Fed, if one assumes that the Fed can take most of the credit for the control of inflation, has been highly successful at that. On the second claim, it assumes that inflation has monetary origins and that the Fed can control the money supply and so prices. The Volcker experiment showed that controlling of monetary growth was not possible, and the long-term correlation between price- and money- growth rates can be read from price to money if one takes an endogenous view of money supply.
Eric Tymoigne is Assistant Professor, Department of Economics, Lewis and Clark College, and the author (with L. Randall Wray) of The Rise and Fall of Money Manager Capitalism: Minsky?s Half Century, Routledge (forthcoming).
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|Subject(s):||Financial Markets, Financial Institutions, and Monetary History|
|Geographic Area(s):||North America|
|Time Period(s):||20th Century: Pre WWII|