These notes are from the lecture Economics of the Gold Standard, given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them. This lecture was given by Prof. Block.
- Prior to indirect exchange, there was direct exchange. To acquire X, you needed to find someone who was willing to sell X for something you had, Y.
- Then, some genius decided to use a very widely accepted good as a method of indirect exchange: purchased a more marketable good with a less marketable good.
- Then, this genius would use the more marketable good to purchase other goods, which he desired.
- The idea caught on, demand for the commodity increased, and it quickly became the monetary standard.
Gold ahs been chosen as the monetary standard everywhere when people ahve been free to choose it.
Why Gold as the Monetary Standard?
- High unit/weight value.
- Many industrial uses.
- Easily identified and characterized.
Advantages of the Gold Standard
- Can’t print up more gold. It needs to be mined, a very expensive process.
- The State can’t print up fiat money.
- The cause of inflation is the printing of money.
- The effect of inflation (an increase in the money-supply):
- If you expect inflation, you buy more today.
- If you expect deflation, you buy less today.
- Because expectations are for prices to fall (deflation), individuals buy less, not more, when prices go up.
- So, the State keeps increasing the money supply, and prices remain the same; but as they do this, eventually so much money is
chasing the same goods that prices go up more than proportionately. Thus:
- An increase the money-supply can leave prices unchanged.
- An increase in the money-supply can cause prices to go up.
- An increase in the money-supply can cause prices to go up more than proportionately.
This shows that monetarism is flatly wrong.
- People get bank notes for claims to bank-reserves.
- Pretty soon, people start trading in bank-note claims on gold, not gold.
- A bank merchant has the idea to issue more notes for gold than he has.
- Fractional reserves.
- He hass 10kg of gold and loans out bank-notes for 10.2kg of gold.
- Competitition prevents this from perpetuation.
- Complete separation of money and state.
- Private money.
- No legal tender.
- Fractional reserve banking would be criminal
- No Austrian Business Cycle.
- No wealth redistribution (from inflation).
Contrasting the Austrian View to Others’ Views
- American Economic Review Q&A had no questions on gold.
- Milton Friedman:
- Distrustful of State being trusted with money.
- Problem with commodity standard is that it is costing resources that would otherwise have been used for other things.
- So, he thinks we should just accept paper money (fiat-money).
- So, “freedom is great, but it costs something, so to hell with freedom.” Atrocious.
- Just because something costs real resources doen’t mean we shouldn’t use it — the free market decides how best to allocate it.
Even Friedman thinks gold is insurance.
- Allan Greenspan:
- Gold and economic freedom are inseparable.
- Statists are all united in their hatred, terror, and rants against gold.
- Gold acts to protect property rights, which is something that the State hates.
- So, how do we account for Greenspan now? Rothbard answers:
- Favors the gold standard, but only at a high philosophical level.
- Never has he ever done anything to promote the gold standard.
- Austrian against the gold standard.
- Proposes that we repeal the legal tender laws.
- “Ducat” — basket of a whole bunch of stuff, like a dollar, yen, etc. Non-sense. Repealing legal tender is necessary, but not
- Against Mises’ insights on money and the regression theorum.
- As if there is infinite regression, which is circular.
- But, if you really go back and back and back, the first money must be a commodity.
- If you just get rid of legal tender, people will still use dollars.
- This would be a disaster, because anyone else could print money as well. This would create hyper-inflation and a crack-up
boom. Money would lose all value.
- All Hayek’s ducat is, is a competitition between fiat currency, which would be competition in the production of bads — inflation.
- Want competititon between real property rights owners, not between crooks.
- Sort of a free market economist, but Keynesian.
- “Optimal currency area” — much less than the entire world.
- Need many currencies, each one supreme in its particular area.
- If each region has its own currency, then this would solve unemployment.
- How define “region”?
- Area, where there is factor mobility, outside of which there is no factor mobility.
- But, regions are constantly changing, so do we constantly change the money? Disaster.
- On one hand, the entire world is ar egion under the free market, because there is world-wide factor mobility.
- On the other hand, everyone is a region, because there are transaction costs.