Yea Hayek also believed that a gold standard was impossible. Not a terribly consistent fellow.
EDIT: This is a split thread from Hayek and Minimum Income. - krazy kaju
'It is difficult to imagine any normal person wishing to meet Marx for a third time.' - Alexander Gray, The Socialist Tradition
Laughing Man: Yea Hayek also believed that a gold standard was impossible. Not a terribly consistent fellow.
How is that inconsistent? Hayek supported a completely free market monetary system, which would inevitably result in a system that provides as stable a price level as possible. Gold cannot achieve this goal.
Mises Community Natural Rights Discussion Group
krazy kaju:Gold cannot achieve this goal.
Please explain.
Laughing Man:Please explain.
I'll let Hayek do the heavy lifting:
I do believe that if today all the legalobstacles were removed which prevent suchan issue of private money under distinctnames, in the first instance indeed, as all ofyou would expect, people would from theirown experience be led to rush for the onlything they know and understand, and startusing gold. But this very fact would after awhile make it very doubtful whether goldwas for the purpose of money really a goodstandard. It would turn out to be a verygood investment, for the reason that becauseof the increased demand for gold the valueof gold would go up; but that very factwould make it very unsuitable as money.You do not want to incur debts in terms ofa unit which constantly goes up in value asit would in this case, so people would beginto look for another kind of money: if theywere free to choose the money, in terms ofwhich they kept their books, made their cal-culations, incurred debts or lent money, theywould prefer a standard which remains sta-ble in purchasing power.
But the price of gold is always fluctuating so it is unreasonable to assume that the price of gold will constantly rise therefore causing a reluctance in debt.
First, I think it is important to realize that gold prices would not be nearly as volatile if the currency was on the metal, but really that is aside the point. In fact, volatile gold prices would be one more reason to move away from a gold standard, not towards it.
The really important thing is what the median price of gold is. Around what point does the price fluctuate? The price of oil has ups and downs, but that doesn't change the fact that, on the whole, if there is an increase in demand for oil but no increase in supply, the median price will go up. Similarly, if there is an increase in demand for gold, but no increase in the gold supply, then all else being equal there will be an increase in the value of gold.
Laughing Man:But the price of gold is always fluctuating so it is unreasonable to assume that the price of gold will constantly rise therefore causing a reluctance in debt.
If gold were currency, then we should experience price deflation for the simple fact that the supply of gold would expand slower than the economy. In other terms, the demand for gold currency would rise at a quicker pace than the supply of gold currency.
Of course, from a strict subjectivist point of view, this isn't necessarily a bad thing, though I would argue that it would prevent the credit markets from clearing as completely as they can (since real interest rates would essentially have a price floor). The more important point here is that debtors and employers would not want an appreciating currency, whereas lenders and workers would not want a depreciating currency. In general, all employers would want stable purchasing power in order to accurately deal with unions, whereas all entrepreneurs in general would want stable purchasing power to be able to calculate accurately.
krazy kaju:If gold were currency, then we should experience price deflation for the simple fact that the supply of gold would expand slower than the economy. In other terms, the demand for gold currency would rise at a quicker pace than the supply of gold currency.
So that would increase the purchasing power of gold meaning you can get more for less. Why would demand rise if you can buy more of something with less gold ounces?
Laughing Man:Why would demand rise if you can buy more of something with less gold ounces?
Other way around, buddy. Demand would rise, which would push up prices (of gold currency). Demand wouldn't rise because prices rose.
krazy kaju: Demand would rise, which would push up prices (of gold currency). Demand wouldn't rise because prices rose.
If demand rose for cash then that would cause prices to fall. So if prices go up then demand would go up to counteract the rising prices.
I'm talking about the price of currency, not the price of goods in the economy. Of course the price of goods in the economy would fall. The key here is that the amount of goods in the economy would expand quicker than the amount of gold currency. This would force the price of goods down, as supply would increase at a quicker rate than demand. In other words, there would be general price deflation, or a falling price level.
krazy kaju:In other words, there would be general price deflation, or a falling price level.
Which would infer that gold ounce has a greater purchasing power. Therefore why demand more gold if you can get more goods with less gold?
That's equivalent to asking "why want $1,000,000 when you can have $1,000?"
krazy kaju:That's equivalent to asking "why want $1,000,000 when you can have $1,000?"
No it isn't. It is more like why would you have a cash demand of 1,000,000 when the good or service you want is far less then that? I mean many people have a flat cash balance demand for unforeseen events but it seems like you are implying that cash demands will always rise under a gold standard. I just don't see that happening, theoretically or in the past. And I have another question, what is stopping this from happening to any other commodity based currency? I'm guessing Hayek propounds a commodity based currency due to Mises' regression theorem, it seems as though Hayek is implying that we must inflate the currency in order to maintain a cash demand level.
krazy kaju: I do believe that if today all the legalobstacles were removed which prevent suchan issue of private money under distinctnames, in the first instance indeed, as all ofyou would expect, people would from theirown experience be led to rush for the onlything they know and understand, and startusing gold. But this very fact would after awhile make it very doubtful whether goldwas for the purpose of money really a goodstandard. It would turn out to be a verygood investment, for the reason that becauseof the increased demand for gold the valueof gold would go up; but that very factwould make it very unsuitable as money.You do not want to incur debts in terms ofa unit which constantly goes up in value asit would in this case, so people would beginto look for another kind of money: if theywere free to choose the money, in terms ofwhich they kept their books, made their cal-culations, incurred debts or lent money, theywould prefer a standard which remains sta-ble in purchasing power.
All he's saying here is that the monetary unit should be taken away from government control and replaced by something chosen by the market. Hayek understands history, and as such, knows that the move will ultimately be towards gold. Going back to the gold standard, at least at first, would be extremely volatile. He's not objecting to the gold standard, he's just talking about the obvious difficulties associated with the transition.
Yes, price deflation should be expected, and in fact, is welcomed. Gold is not perfect, but at least it allows for a functioning price mechanism. The fact that gold is not easily inflated is why it's so valued by Austrians; essentially, the interest rate, and therefore the structure of production, is not at the mercy of political ambitions.
krazy kaju: In general, all employers would want stable purchasing power in order to accurately deal with unions, whereas all entrepreneurs in general would want stable purchasing power to be able to calculate accurately.
This stable prices bullshit is what caused the great depression under Fisher and Strong. We want accurate prices, not stable prices.
krazy kaju:Other way around, buddy. Demand would rise, which would push up prices (of gold currency). Demand wouldn't rise because prices rose.
There's no reason to assume this. You're ignoring human action and time preference.
"The banks can either keep the demand for real capital set by the supply of savings, or keep the price level steady; but they cannot preform both functions at once." -Hayek, Prices and production
No, Hayek actually doesn't believe that a gold standard is possible.
Walter Block's Critique
Laughing Man: No, Hayek actually doesn't believe that a gold standard is possible. Walter Block's Critique
Even if Hayek is wrong about the possibility of a Gold Standard, the point is moot because his free banking Commodity Reserve Currency would be superior anyway. Why do Austrians insist on making claims about what the market would choose? Why not simply argue for free banking and stop worrying about it?
"I cannot prove, but am prepared to affirm, that if you take care of clarity in reasoning, most good causes will take care of themselves, while some bad ones are taken care of as a matter of course." -Anthony de Jasay
Solid_Choke:Even if Hayek is wrong about the possibility of a Gold Standard, the point is moot because his free banking Commodity Reserve Currency would be superior anyway. Why do Austrians insist on making claims about what the market would choose? Why not simply argue for free banking and stop worrying about it?
Well there is the regression theorem which states that only commodities can be utilized as currencies. Gold is merely the best commodity which thrives at having 'moneyish' qualities. It has been tested by time and is consistent.
Because free banking is inherently flawed and must inevitably lead to monetary intervention by the state. Fractional reserves cause a reduction in the market rate of interest relative to the natural rate (cause of business cycle), and inevitably a panic, which is quite problematic with 3-4% reserves. That's why people worry about it. Solvency and liquidity is pretty important.
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