I’m an econ major at a state university. I got into a verbal fight with another student over this statement. Of all the arugments and theories I’ve heard intended to shoot down Austrian Economics and the gold-standard, this one has to take the cake. I’ve never heard of it before, and he believed it so vehemently.
He basically said that any currency backed by a commodity is a deterrent to technological advancement, because there’s no point in producing more stuff when all it will do is deflate the value of your money.
It was such a stupid argument, I couldn’t even wrap my head around it. I assume that he’s trying to say that a gold-based currency has more purchasing power over time, therefore there’s no point in working, producing, or striving to create more. You could just stash your gold and eventually sit at home and not work.
Economics isn’t really my thing, but I think that the reason that prices fall (gently) under a gold standard is precisely because of technological advancement and general increases in well-being.
This guy is truly confused. If a technological advancement allows us to produce more stuff, then the general medium of exchange will purchase more, not less. The value of the money goes up; it is the prices that go down.
Explain it to him this way:
It is equally valid to say that I purchase a gold backed dollar with my twenty eggs as it is to say I purchase twenty eggs with my gold backed dollar. If, suddenly, my gold backed dollar only purchases ten eggs, then the price per egg has gone from five gold backed cents to ten gold backed sense. The price in dollars went up, which means that the value of the eggs rose in relation to gold. If I can suddenly purchase fifty eggs with my gold backed dollar, each egg costs two gold backed cents. The price has gone down in terms of gold, which means that eggs are less valuable with respect to gold. Now reverse it. If my twenty eggs suddenly purchase only fifty gold backed cents, the price of a gold backed dollar in terms of eggs has risen from twenty eggs to forty eggs. The price of gold, in terms of eggs, has risen, therefore its value, in relation to eggs, has risen.
This is what happened before we had a Fed. The price of goods, in terms of dollars, fell, meaning that the price of dollars, in terms of goods, rose. This means that the gold got more valuable over time, with respect to these goods.
Humans have to consume to live at the very least. No matter how fast prices are expected to drop, no one will wait more than… what?.. a day or two to eat food when it is readily available for the buying. This situation is nicely regulated by the market: if everyone stops working, goods are no longer produced and suddenly the prices of the few goods remaining skyrockets, which will induce people to spend before their gold loses all value (when there is nothing left to buy). This is not to say that a free market will go back and forth so much, just that there are natural limits from stopping the situation your friend is describing.
Humans need to consume to survive, but they also need to consume to enjoy life. Does this pal of yours really think that people will forego all consumption until they are eighty years old just because their dollars will buy more? Anyone who has ever purchased a Nintendo II, knowing that a Nintendo III will come out in a couple years, has revealed the absurdity of this thinking. Future goods are discounted, and the fact is that a new DVD, for instance, is discounted to such a small rate when it is fifty or sixty or even ten years in the future, that almost no amount of expected increase in purchasing power of money will make it worth waiting that long to buy and watch your movie. Ask yourself: let’s say that the purchasing power of the gold backed dollar, over the next forty years, will triple with respect to DVD’s. This means that you can buy a DVD today, or wait forty years and buy three DVD’s with the same dollars. In most cases, do you think you will wait the forty years to purchase three DVD’s, or will you buy your DVD today. To ask the question, as Walter Block is fond of saying, is to answer it. And the rate of price deflation in the century leading up to the creation of the Fed was nowhere near that intense.
Of course, some people will put off purchases. And what is defined as foregoing consumption/putting off purchases?
This is actually a very common criticism that I come across. It is feasible that prices will decline as the economy grows under a gold standard, and this they claim will incentivise stashing cash under the matress (where it will get a definite return) rather than risking it.
The key thing they don’t recognise is that entrepreneurs have a low time-preference. They forego present goods for future goods, ie. they don’t consume, they invest.
So a higher purchasing power of money tomorrow may intice them into investing money today.
Also, point out that “growth deflation” under a gold stsndard did not put an end to entrepreneurship in the US between 1870 and 1896. In fact, there was steady growth throughout the period.
Its bad logic. Its like saying that if everyone drives their car that traffic will become so bad that no one will drive. Its impossible for both occur. What is presented as a problem is actually a situation that fixes itself!
If everyone sits at home then purchasing power won’t raise and people will have to go to work!
Hilariously what this guy fears is that people will become satisfied and cease striving to improve their lot in life. 1, that will never happen. 2, there would be nothing wrong if it did.
The more the purchasing power increases the greater the incentive to spend it. Obviously they are holding in order to acquire future consumption.
If some people stash their earnings others gain. The savers are producing but not consuming in equal amount, this means that others can consume more then they produce themself. The trade off, of course, is that in the future when the savers begin to spend prices will begin to rise as demand increases while production does not. In the long run, the effect is nil.
Gold standard does not entail increasing purchasing power infinetly through time, a gold standard just means a more stable level of purchasing power through time. Having established that, technological development is pretty irrelevant to what kind of medium of exchange is used.