Gibson’s Non-Paradox

Birmingham statistician and financial forecaster Arthur H. Gibson’s so-called ‘paradox’ came about from his detailed empirical findings that the level of bond yields (as measured by the price of British Consols) tended to follow – with a lag of around a year – the price of wholesale commodities (a measure he adopted, as he himself explained, as a proxy for what he thought was the real crux of the issue, the cost of consumable necessities for which no comparable data existed). Argument has abounded as to the phenomenon’s true explanation, ever since.

First published in 1923, his observation followed that, contrary to the ideas of some of the so-called ‘classicals’, a surfeit of money did not (long) seem to suppress nominal bond yields but, conversely, brought them up in the train of the rise in wholesale prices which that excess of money had first brought about.

Thus, high prices and high yields tended to go together as did low prices and low yields.

Tooke, champion of the early 19th Century Banking School, thought the former was due to a sort of cost-push as afflicted businessmen attempted to pass their heightened interest costs onto their customers: A.H. Gibson himself propounded the theory that low rates encouraged extra investment, which eventually led to an expanded supply of goods and hence to lower prices. We Austrians, with our jaundiced sensitivity to policy-induced ‘malinvestment’ would partially agree, especially if we recall that Gibson was tracking wholesale prices (which consist largely of inputs to other productive processes) and not those of the end-consumer goods whose eventual rise is the trigger for the crisis in our most iconic exposition of the cycle.

Keynes, ever with an eye to lampooning the ‘classicals’ and equally ever enamoured of the faintest appearance of ‘paradox’, gave the phenomenon its name even as his contemporary, Irving Fisher, was struggling to reconcile it with his own theories of interest by embarking on a complicated tale of ‘inside’ and ‘outside’ money creation under the operation of the classical gold standard.

Since then, all manner of luminaries have tackled the subject – notably that newly-evangelising monetary extremist, Larry Summers – each using ever more abstruse calculus to make their case and many examining the data for countries as disparate as the Netherlands, Turkey, Africa, and China in their quest for the Holy Grail of elucidation.

It strikes your author, however, that to a puzzle over which both pro-and anti-gold types have battled over the years, there may in fact be a very simple resolution. Here is how the story goes:

Back in the good, old, rip-roaring, rugged individual days of the 19th century, while freedom was spreading and industrialization deepening and widening – and, of course, while governments were small and money generally hard – brief episodes of inflation were typically soon overcome by a determined adherence (or, at least, a rueful renewed attachment) to the monetary standard, in conjunction with the ongoing supply-side revolution.

As a result, even where the sporadic, credit-fuelled attempts to throw off the constraints of both precious metal production and genuine capital provision did break out, these would ultimately fail – a failure which was NOT, as now, actively frustrated by the authorities.

Soon, in place of the canal crazes, emerging market mining manias, railway booms, cotton corners, and Gruenderzeiten, there would follow a welcome reversion to the golden (and silvered) mean.

Hence, prices showed NO sustained tendency to rise. To the contrary, given the vast, self-fuelling productive revolution which was underway in the 19th century and absent any unchecked monetary expansion, they tended – very benignly, you will note – to fall.

Thus, a bond investor, in seeking a yield which would secure him command over a sufficient quantity of real goods in future to overcome the urgings of his own, innate time preference for similar goods today, would therefore require a monetary inducement which varied only with a price LEVEL which did indeed show discrete changes (in both directions) but which did not undergo, as the default setting, long periods whose only variation was in the speed of its increase.

In such a world, Gibson’s observations would result. If I want the coupon on my Consols to afford me a bushel of wheat every quarter then, yields and prices on a perpetual instrument being inversely proportional, should wheat for any reason become more expensive, then I will only offer to buy the bonds at a commensurately lower price, one which yields me just that enlarged sum of money I require for my material provisions – and vice versa, too.

But, scroll forward to the 21st century and endure along the way two World Wars, multiple New Deals, ever more intrusive and deadweight government interventions, several hyper- and multiple chronic inflations (the latter recently enshrined as the ludicrous idea that halving the value of money once every generation represents ‘stability’ and is therefore a holy desideratum of policy).

Now, the same investor’s great-grandson feels the need to factor in an estimate of the PACE of rises in the price level if he is to assure himself of the same reward for thrift in terms of real goods and services in the future, so now Fisher’s outline holds sway, contrary to what used to be the case, back in the sun-kissed Victorian heyday of bourgeois civilisation.

Of course, nowadays, bond yields are not set by markets at all, but by MIT megalomaniacs-in-office and so WE have what is not simply a paradox, but more the suffering of a psychosis, viz., that interest rates are now supposed to set the inflation rate!

From gold standard to gold exchange standard, to Gold Pool standard, to naked greenback standard, to Goldman, Sachs standard, and now to a guaranteed-depreciation standard.

Not getting any better, is it?