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“A random shock drives up money and prices.”
Random shock… and how did that happen ? What about the chain of causality ? Long term inflation (as opposed to a short-lived) does not occur without legal tender laws. Your text actually shows that you don’t understand the root causes of inflation. Read “The Ethics of Money Production” by Guido Hulsmann). Pages 126-127, 132-133, 138, 147-149. 116-119 is optional but also worth reading.
If you want to understand how free banks would respond to fluctuations in demand for (inside) money, and consequently how they finance production chains, see The Theory of Free Banking, chapter 5.
“There are reasons to think that a gold standard in particular is likely to introduce procyclicality.”
Gold standard with or without FRB ? FRB with or without banking regulations ? Historical episodes of Free banking (with FRB) have been spared from such business cycles. Anyway, see “Has the Fed Been a Failure?” by Selgin, Lastrapes and Whites.
As the first panel of Figure 1 shows, most of the decline in the dollar‘s purchasing power has taken place since 1970, when the gold standard no longer placed any limits on the Fed‘s powers of monetary control. – (pp. 3-4)
As Bernanke‘s remarks suggest, unpredictable changes in the price level have greater costs than predictable changes. Benjamin Klein (1975) observed that, although the standard deviation of the rate of inflation was only a third as large between 1956 and 1972 as it had been from 1880 to 1915, inflation had also become much more persistent. The price level had consequently become less rather than more predictable since the Fed‘s establishment. – (p. 5)
Whereas one might expect the Fed, in its role as output stabilizer, to tighten the money supply in the face of positive IS (spending) shocks and to expand it in response to positive shocks to money demand, the response functions we estimate indicate instead that the Fed has tended to expand the money stock in response to IS shocks, causing larger and more persistent deviations of output from its “natural” level than would have occurred in response to similar shocks during the pre-Fed period (Figure 7, left-hand-side panels). At the same time, the Fed was less effective than the classical gold standard had been in expanding the money supply in response to unpredictable reductions in money‘s velocity. – (p. 14)
A fiat standard can in principle replicate a gold standard‘s price-level stability without any such resource costs (Friedman 1953). In practice, however, fiat standards have not replicated gold‘s price-level stability (Kydland and Wynne 2002, p. 1). Nor, ironically, have they even lowered resource costs. The inflation rates of postwar fiat standards have by themselves imposed estimated deadweight costs greater than the reasonably estimated resource costs of a gold standard (White 1999, pp. 48-49). Meanwhile, the public has accumulated gold coins and bullion as inflation hedges, adding more gold to private reserves than central banks have sold from official reserves. The real price of gold is much higher today than it was under the classical gold standard, encouraging the expansion of gold mining (Figure 12). Thus the resource costs of gold extraction and storage for asset-holding purposes have risen since the world‘s departure from the gold standard. – (pp. 41-42)
“But as for whether deposit insurance increases the probability of bank runs, well, they seemed to have suddenly stopped happening about 80 years ago. … Insurance just prevents this process from triggering a systemwide run and bringing down the good banks along with it.”
See Kam Hon Chu 2011, Deposit Insurance and Banking Stability. And also The Theory of Free Banking (Selgin 1988), page 113.
“He just kind of like, made a mention of assuming it for the sake of argument and never really challenged it.”
Read “The Theory of Free Banking: Money Supply under Competitive Note Issue”, pages 81-90, 95-99, 100, 102-103.