Discussion in 'Economy' started by Kevin_Kennedy, Mar 16, 2009.
Defend the Gold Standard - Robert P. Murphy - Mises Institute
Good man Kevin! Good article and subject.
Good article, both the original the critique. I am not so sure about the gold standard. Having our monetary system based on the price of a precious metal scares me! If the price of gold was falling and hyper-inflation kicked in, we would be at the mercy of the price of gold and would have no method to turn it around. Yep the fiat system isn't perfect, just look at Zimbabwae or Mexico, but I prefer it over the gold standard!
The gold standard is a deterrent to hyper-inflation, it's fiat currency that leads to hyper-inflation.
How so? If the price of gold changes drastically, since the price is directly effected by the law of supply and demand, then inflation or deflation occurs. If the pace is rapid so is inflation/deflation.
Prices and wages were stable until fiat currency came along, inflation with the gold standard has never happened.
Murphy mentions the fixed dollar/gold exchange rate in the article, which means that you wouldn't print any money unless you have the proper amount of gold to back it up. Inflation would occur as you increase your gold reserve, but it certainly wouldn't be anywhere near as rapid as simply printing paper dollars with no limit other than your imagination.
I suppose it's theoretically possible to build a modern economy around the assumption that the value of money will have to fall while the value of gold (relative to money and what it will buy) is bound to rise.
But the transition from fiat money to gold-backed money might be rather shocking for those who are currently in debt though, don't you think?
After all the modern borrower assumed their debts (and the interest they are paying on those debts) based on assumptions regarding inflation.
And it's not just consumers who'd be screwed by this but most corporations, too since they actually borrow MORE money (at interest predicated on inflation) than consumers do.
What is the solution to that massive transition problem which would quite literally bankrupt MOST people and most corporations (as most people and most corporations have some debts even if it's ONLY mortgages and long term bonds)?
So somebody in, say a 30 year fixed mortgage, who is paying 6% interest could easily find themselves underwater on his mortgage when the prices of RE crashed in order to align with the gold standards, continuous DEflationary pressure on the specie.
Or some corporation, (say an electric company) issued bonds paying 3% only to suddenly discover that the rate is 11% higher than the rate of deflation.
Anyone have any solution to that kind of transitional problem?
That would be the inevitable outcome of returning to a gold standard, after all.
Or does none of that matter to those of you who believe that the gold standard is the only answer to fiat money's inflating effects?
Or am I the first person to point this out to youse guys?
In a deflationary environment the value of money goes up, not down.
One of the reasons our "libertarian and Austrian Economics world" will never happen< I don't think, people can't be patient enough to suffer the short term problems associated with such a drastic change, we could have a slower transformation though, starting with competing currencies.
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