I just had this thought about the nature of market currency, price inflation, and economic growth. It came about last night when I was thinking about Friedman’s k-percent rule. My dilemma was this: is Friedman’s k-percent rule really better than normal central banking, considering that during periods of economic slowdown and recession we’d have quicker rates of inflation (due to monetary growth being relatively higher than economic growth)? Of course, I was thinking about this because I was assuming that the market would follow something similar to Friedman’s k-percent rule (e.g. 5% monetary growth yearly).
But then this thought hit me: I’m a moron! (lol) Presumably, market currency would consist of some hard assets, i.e. gold, silver, copper, platinum, rhodium, etc., so if economic growth does slow down in a free market, there could be price-inflationary pressures, but that would mean a falling price of money - which in turn means lower profits for those who mine hard currency out of the earth.
As we all know, lower profits means that there’d be less supply supplied to the market - which means lower monetary growth during times of economic slowdown - which in turn means that price expectations would be relatively intact.
So, if the economy grows quickly, there will be a higher demand for currency and therefore a higher profit, which will stimulate more mining and create an incentive for currency speculators to release their reserves - which would ease the price-deflationary pressures. On the other hand, during periods of economic slowdown, the demand for currency would fall, which would lead to mining companies mining less due to the lower price (and therefore profit) of money while currency speculators would perhaps purchase more currency and wait for an economic uptick when the currency is needed more. This would do a lot to prevent price instability, which is presumably what a lot of monetarists and new classicists want.
This, and the fact that hard currencies are a natural regulator of balance of payments between regions and countries should be a reason why someone who isn’t even versed at all in the evils of fiat currency should accept hard, market based currencies.
I know this entire post is, well, obvious, but I haven’t seen anyone really talk about it, so I decided to throw it out here, perhaps it’ll help some noobs.
