As GDP growth increases, gold producers will move shift gold production into the creation of more monetary units. However, if gold begins to devalue, production of gold will shift to non monetary uses of gold <jewelry, electronics>. Thus, gold as a monetary unit will be self regulating and the price level will remain stable. <This assumes that 100% reserve banking has been instituted>. If anything, there might be a very slow, long term price deflation. This is very desirable <as long as the deflation is at a very slow, steady rate>. Deflation will benefit lower income people and savers.
But wouldnt it be more favorable to have a currency that inflates at the rate of growth? Such as a free floating currency with free floating rates of interest?
For example, if the GDP increases by x% then the money supply is increased by that same x%.
The monetary supply WOULD increase, if gold producers thought it profitable to shift gold production to monetary usage. Also, it is possible to introduce other commodities to supplement gold as the primary commidity. For example platinum could be used. It is likely that monetary platinum would be used only for major exchanges, such as between banks, very large corporations or governments. Ordinary citizens and small retailers would likely never see the platinum currency. Platinum and gold would flucuate in value relative to each other. Also, silver could supplement gold for very small transactions. So as you can see, commodities can fill the bill, expanding as necessary.
As for the interest rate. It would NOT be set by any organization. Rather it would purely reflect the time preference of consumers. My belief is that in the free market, the interest rate would be likely in the 25% range.
This is more or less correct, but this is not inflation. Well, different people define inflation in different ways, but I define it as the value of the unit of account, and the best way to guage the value of the unit of account is to look at the price of gold. The supply of gold tends to track economic growth better than almost anything else there is, plus it has a number of other characteristics that make it monetarily effective. Anyway, if the money price of gold goes up, meaning the money unit is being devalued, then that is inflation, and the converse is true in that if the money price of gold goes down then you have deflation.
So far, so good–now for the tricky bit: If the need for money declines, then the supply of money must decline with it (and vice versa). If the demand for money declines, and the supply of money also declines–but not as much as demand–such that the gold price goes up–then you have inflation, even if the overall supply of money goes down. Similarly, you can have deflation with an increasing absolute quantity of money, if the supply is not growing as fast as demand.
In short, inflation or deflation is an intensive or specific property, having to do with the quality or value of money, rather than an extensive property having to do with the absolute amount of money. It might have a roughly 1 to 1 relationship with overall economic activity, but that is not a requirement, so the relationship is not directly predictable.
So say the monetarists. Within the Chicago School of Economics, the money supply growth should not surpass (not encompass) real GDP growth. Those who are not studied within the Chicago School yet espouse its monetarist position equate the monetary growth with inflation (rather than growth), and tell us that inflation is good for the economy. Milton Friedman would disagree with his uneducated pupils maintaining this position. I see it a lot in chat forums.
Of course this isn’t a problem within Austrian Economics because we are not monetarists
The idea is, money isn’t intrinsically wealth, it is a means of transfering wealth. Production is wealth, and consumption is how wealth is transferred via money (freely). So as production increases, so does wealth and you can rightly expand the money supply when your wealth (production) has expanded as well. Production could be savings, capital investments, or other services offered.
In theory this is a viable economic system if strictly adhered to but it ignores the human factor, which is humans can only be duped for so long and have confidence in a medium that has no intrinsic value. It has never lasted in the past, and it will never last in the future. Paper supplies are always manipulated at the whims of the central powers. With a 100% asset currency it is not possible. This is one of the reasons why Austrian Economics is superior, it does not ignore thousands of years of history, nor does it ignore human nature.
Friedman was a fairly sharp guy and it is often the case that the folks who really understand what is going on with a given line of thought understand it a lot better than many of the folks who come along and parrot the line later. That said, let’s look at another way to interpret how monetarist policy should work (as I understand it, and anyone should feel free to correct me).
The monetarist method of managing the money supply is to grow it at a fixed rate every year, for example at three percent per year. Where this fails, in my view, is that there is no explicit way of keeping the growth of the money supply in line with what is actually demanded. If the desired increase in the money supply is to be three percent and the economy grows at three percent then things are likely to be pretty much ok. If the economy grows faster than three percent while the money supply grows three percent than the economy would be modestly starved for money, and there would be a deflation. If the economy grows at less than three percent (as in the late 70s when burdened by horrible fiscal and regulatory policy) but the money supply is still goosed by three percent then you end up with a potentially huge inflation (which of course is what we had during the monetarist experiment during the late 70s).
As I understand it, Friedman also thought that growth could be stimulated through the addition of extra money into the economy, when in truth the addition of money above what is needed only leads, per Mises and Austrian Business Cycle Theory (ABCT), to business cycles which would otherwise not happen.
At various times later in his life Friedman allowed that perhaps his desired program did have the flaws noted but right at the end seemed to maintain that yes, his desired program was the right way to go. I give him credit for much, he was a leading advocate for liberty in many ways, and his observation that inflation (and deflation) is always and everywhere a monetary phenomenon (meaning that is has to do with the amount of money created and not anything else) is right on target, but his error in advocating a steady increase of the money supply was the wrong way to go.
Interesting discussion. I think it is important to take a look at the history of monay in order to put some light on it.
Gold had been chosen because it was a valuable good even before having been used as a means of exchange, and had some other characteristics: partitionable, durable, everybody found it valuable, its value was stable in the long run, etc. In a free-currency world, there was not a specific problem about the supply of gold. We can imagine what would have happenned if suddenly somebody had discovered such a huge quantity of gold in order to make it so cheap, almost free (remember things are valuable whenever they are both scarce and useful). People would have just switch to another means of exchange: silver, platinum, whatever. The problem arise when we are forced by the government to use certain currency. In that case, the government is tempted to cheat us. It has always happened and will continue happening because politicians are men, not angels, and power corrupts. Just that.
The only way out I can picture is a system where every person is free to choose the currency he/she prefers.
The Austrian viewpoint is that deflation not caused by a decrease in the money supply is not harmful, because it does not result in large transfers of wealth or any malinvestment or change in the structure of production.
Remember that the demand for money is not related to the amount of goods on the market; the demand for money is simply the demand to hold money, i.e., to have on hand for saving or spending. This might fluctuate somewhat with changing time preferences in the like, but not too much.
If the GDP increases and the money supply stays constant (as it should), then there would be deflation, but harmless deflation. People will be able to buy more and more goods from year to year. What could possibly be wrong with that?
The idea would be from a pragmatic standpoint outlawing expansion of the money supply may be easier to get across to the general populus because there is some (undeserved of course) bad stigma about the ‘gold standard’. For some reason it conjures up images of like 1890s hoarding in most people’s brain. Of course, private currencies would be optimal, but this might be a better path to take rather than the gold standard view, which gets a lot of laughs in uneducated people.
And therein is the quintessence of the problem. You have a powerful and well funded banking lobby that likes the current system. And the central government is not likely to give up the fountain of unlimited spending easily.
Today I think I finally convinced my boss (who majors in business) that the Federal Reserve is a bad idea. (One convert is no cause to celebrate, but it’s my first “kill” if you allow me that metaphor.) I actually wonder at the education he’s paying for, because up until two weeks ago he thought we were on the gold standard. So many of the people I meet seem to think that.
But yes, when I argue for something - anything - other than the Fed, I often get a scoff and the mind numbing, “But who would manage the economy?” line.
In a related matter, what are some good arguments and points to make when trying to get people into the Austrian school of thought, or at least away from government intervention? My boss is a self described welfare-state socialist, so with him it was just a matter of showing how government intervention, viz. inflation, hurt the poor and how the Fed exists seemingly above “oversight.” It’s hard for me to balance the technical details - which are obviously of great importance, though I barely understand any of them - with the local audience: trying to convert people who know more about livestock reproduction than high falutin’ economics.
You could, to your friends pretend your a bureaucrat, and they through taxes have to pay for you ballin’ with their affairs.
Maybe it would help to look into why perfect competition is kooked.
The best management of an ecomomy: let’s the market decide for itself. For almost all the ends they wish to acheive through intervention, can be best done through the means of liberty.
If your subjugator(boss), is welfare statist, ask him how good things will be in his nightmare utopia, which has no money and little creative inspiration.
Well at work I have to learn to keep my fat trap shut, or some misologist, will be whining to some authoritarian.
“the more rules you make the more theives you create”
