The claim of the Austrian business cycle theory is that cheap credit pushes the money interest rate below the natural rate and creates a boom which has to cause a bust. Thus, it would be desirable if the actual rate of interest prevailing in the economy was equal to the natural rate.
At the same time, Austrians advocate the gold standard, so it seems as if Austrians would claim that the answer to the topic question is yes. However, I cannot see how this can be, since the natural rate of interest is determined by many factors (productivity and depreciation of capital, population growth, thriftiness) while the money supply on a gold standard would depend on the amount of gold production.
Am I missing something here? Could someone explain or point me to where it is explained why a gold standard monetary regime is desirable if one aims at making the natural rate of interest prevail in the economy?
I believe the answer is no, since the quantity of gold available can still increase, due to the discovery of new mines. So the purchasing power fluctuations of money, in this case gold, would still blur the natural rate of interest. The natural rate of interest, at least as far as I understand it, is purely determined by time preferences. That is, the difference in the “value” of the production good, relative to the potential value of the commodities it can produce. The main reason why the Austrians prefer the gold standard is because it is the money chosen by the market, that is, freely by society; and it cannot be arbitrarily inflated by the government/central banks for purely political reasons. I guess the best form of money would be fiat money which can’t be inflated; but that’s impossible. The natural rate will be unknown until someone completes Hayek/Bohm-Bawerk’s work. There are some who say that Austrians should give up on capital theory, but it’s the single greatest plague which infects mainstream economists. It’s the reason why Friedman, Keynes, and Marx were wrong.
As long as there is fractional reserve banking there will be money in the system that has no backing in specie. This new money will will produce the same thing to a much lesser degree as the central bank printing money, that is it produces booms and busts.
Yeah, I assumed when he said gold-standard he meant a 100% reserve system. My mistake. But even with a 100% reserve system under a gold standard, there would still be inflation and a distortion of the natural rate.
So this means that, according to Austrians, there is no monetary system that can ensure that the market rate is equal to the natural rate. I guess this makes sense since the natural rate comes about in a very hypothetical barter economy.
Does anyone know where the relation between the 100% reserve gold standard and the natural rate is discussed in detail?
Its not; the natural rate of interest is determined when the supply of savings meets the demand for investment without purchasing power fluctuations in money. A 100% gold reserve rate would assure that the market rate is equal to the natural rate only if the supply of gold never increased/decreased, world wide.