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On the Resource Cost of Fiat Money

February 13, 2013

Tags Monetary Theory

Milton Friedman and all monetarists after him claimed that the Gold Standard had a fatal flow. The Gold Standard required that gold be dug up, refined and then made into coins or stored away in vaults to back paper money in circulation. Therefore this gold was expensive and could not be used in jewelry, artwork, industry, etc.

The fiat money system does away with most of this cost. In a recent working paper Tyler Watts and Lukas Snyder show that the cost of the fiat money system can be just as high as the gold standard. Their rational and evidence suggests that during the inflationary 1970s and during the current economic crisis that just as much gold is being purchased for investment purposes and therefore there is no resource cost advantage of fiat money.

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