My knowledge of economic theory is pretty poor but I still like to have discussions, however there is a learned Keynesian at my school who is intent on changing my mind and recently we got into it about the gold standard on Facebook. He uses a lot of terminology i don't quite understand or can't quite wrap my head around. I just want to post some of his points about flaws of the gold standard and get some opinions on it.
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"Under any regime with a fixed money supply,
fluctuations in the demand for money create inflationary and disinflationary pressures
It is reasonable to assume that prices and wages are inflexible
Downward nominal rigidity is a particular problem
So there are major, major costs to big swings in prices.
Which is why you might want to commit to stabilising prices, or nominal incomes, or whatever.
Volatility / uncertainty is a major cost of fixed money supply regimes
The question is whether or not you think that the costs of price volatility are greater than the costs from the Fed potentially overheating the economy to a catastrophic extent.
Which I would argue is very unlikely with an independent central bank adhering to a sensible policy rule like an NGDP path target.
The overall PRICE LEVEL
the supply of dollars is fixed, so if people want to hold more dollars the number of dollars in circulation is reduced
ie the 'price' of dollars is increased
and this causes the price level to change dramatically.
But is there really a big difference between a big rise in the price of dollars, measured in stuff, or a big rise in the price of stuff, measured in dollars."
I appreciate anyone who can help me with this to improve my understanding of banking and the gold standard.
1. Under a "Gold Standard" prices are extremely stable. The total inflation of the USA in the 19th century with their on again/off again Gold Standard was barely above zero. The greatest period of growth in the USA history was at the end of the 19th century where prices dropped. And using just about any measure of wealth: health/mortality rates, disposable income, home ownership, mobility, communication, etc all improved. So prices were volitile, prices dropped.
2. When prices drop/money increases in value the winners are savers and entrepreneurs and the losers are debtors: Governments and Over Leveraged Banking Institutions.
3. "But is there really a big difference between a big rise in the price of dollars, measured in stuff, or a big rise in the price of stuff, measured in dollars."
Absolutely, if the rise in the price of stuff measured in dollars comes from an artificial increase in the amount of money and/or credit. The Austrian Theory of the Business Cycle described by Mises describes this phenomina cleary where the increase in money, normally done by a central bank through the fractional reserve banking system, appears to entrepreneurs as excess savings. The entrepreneurs use this money to start projects. When the conditions in the economy change and the projects are found to be unprofitable then the entrepreneurs must modify their plans or in a lot of cases end the plans altogether causing a recession. The creators of the money then can respond (like they are doing at this moment) by artificially increasing the supply of money and credit above what it already is thus enticing entrepreneurs to take on more unsustainable projects, or they can abandon money creation and cause a Panic/Recession/Depression.
The total inflation of the USA in the 19th century with their on again/off again Gold Standard was barely above zero.
By inflation you mean the price level?
It would be easier to 'answer' if it were formatted better. One point worth mentioning is price stability or instability is largely irrelevant; what matters is that prices be an honest representation of people's judgements on the state of supply and demand at the time. And if that means unstable, then better that information get disseminated through the price system than people behave as if it's not happening. This is a point where I think one of the more pernicious effects of econometricians has made a big dent. The 'stability' you get from gold doesn't come in the form of stable prices, it comes in the form of better information that over time leads to stable prices because people are better informed and deal more effectively with uncertainty. However, the macromancer crowd sees the stable prices and assume that the result of market stability from good monetary policy is actually itself the cause of market stability. So they assume if they keep the metric stable, all is well and good when in fact what's happening in reality is anything but good. They lose sight of the fact that it's human action creates the metrics, not the metrics that guide human action. So, stable prices are the result of better information over time, not an end in and of themselves which if achieved through some other method would still mean the same healthy underlying economy.
Good point. I am normally more careful about the use of the term inflation.