In America's Great Depression Rothbard writes:
"can a boom–depression cycle of any degree be generated in a 100 percent gold economy? Can a purely free market suffer from business cycles, however limited in extent? One crucial distinction between a credit expansion and entry of new gold onto the loan market is that bank credit expansion distorts the market’s reflection of the pattern of voluntary time preferences; the gold inflow embodies changes in the structure of voluntary time preferences...Furthermore, entrepreneurs are trained to estimate changes and avoid error. They can handle irregular fluctuations, and certainly they should be able to cope with the results of an inflow of gold, results which are roughly predictable. They could not forecast the results of a credit expansion, because the credit expansion tampered with all their moorings, distorted interest rates and calculations of capital."
Let us assume that the government decides to adopt the old Friedmanite plan of 100% reserves combined with an annual 3% increase in the money supply.
1) Why would the results of this increase not be more predictable than irregular increases in the gold supply?
2) Furthermore, why does credit expansion tamper with moorings, interest rate and capital calculations while gold supply increases don't?
3) Lastly, how exactly does a gold inflow embody change?
rpj83:1) Why would the results of this increase not be more predictable than irregular increases in the gold supply?
The key takeaway here is that the 3% increase falsifies the price signal (interest rates) in terms of time preference, thereby distorting the structure of production.
rpj83:2) Furthermore, why does credit expansion tamper with moorings, interest rate and capital calculations while gold supply increases don't?
Because so long as gold remains universally desired, the production of gold is the production of wealth, and therefore any resources allocated towards its procurement are not malinvested.
rpj83:3) Lastly, how exactly does a gold inflow embody change?
An inflow of gold (i.e., the production of gold) is relatively predictable especially in the long-run. I think the 500-year average is something like 2% per year. Every augmentation of the gold supply is a smaller and smaller proportion of the total world stock of gold (which has never shrunk in any year in recorded history) and accordingly has a more-or-less stabilizing effect on value.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
rpj83: Let us assume that the government decides to adopt the old Friedmanite plan of 100% reserves combined with an annual 3% increase in the money supply. 1) Why would the results of this increase not be more predictable than irregular increases in the gold supply? The future is uncertain, and 3% may be enough, too much, or too little to support and or retard growth. The market should set the rate, because it will know how much to increase the money supply. Even with predicatble money supply increase there is far too much in a society to be calculated than just money supply. 2) Furthermore, why does credit expansion tamper with moorings, interest rate and capital calculations while gold supply increases don't? Credit expansion creates fiat money backed by nothing, in essense increasing the money supply. 3) Lastly, how exactly does a gold inflow embody change? Gold or any other type of free market money preserves value because it cannot be created out of thin air. It needs to be mined and refined. Prices would not be as volatile in a gold standard.
The future is uncertain, and 3% may be enough, too much, or too little to support and or retard growth. The market should set the rate, because it will know how much to increase the money supply. Even with predicatble money supply increase there is far too much in a society to be calculated than just money supply.
Credit expansion creates fiat money backed by nothing, in essense increasing the money supply.
Gold or any other type of free market money preserves value because it cannot be created out of thin air. It needs to be mined and refined. Prices would not be as volatile in a gold standard.
Compare a price control to mere increases in the supply of a good. In effect, credit expansion is the former, increases in the amount of gold the latter.
-Jon
To darkness I condemn you...
Thanks everyone, you have all made this a lot clearer. I have always considered this to be a key quote of Rothbard's that needs some elaboration.
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