I have been reading Mises on Money, Rothbard's Mystery of Banking, and other similar works. And now I have a question that I have not been able to figure out an explanation for. Hence, this question, defined as carefully as I can:
Assume a 100% gold standard with no fractional-reserve banking. Also assume a government committed to no interference with a free-market.
Now. What would happen if there were suddenly discovered a "Comstock-Lode-type" mountain of gold (not silver!). What would happen when that huge amount of new gold were introduced into such a free-market economy? Would it not cause a kind of inflation in the money supply? What would be the result in terms of prices and productivity, both short term and long term?
I am having trouble explaining the difference between what I think the result would be in contrast to a paper-money inflation.
I'll appreciate any help any of you can give me.
Thank you.
What if a large hunk of gold fell from the sky into someone's large lot, unbeknownst to anyone else, and this person spent it? On a really basic level, it would have similar effects on prices to a lot of fiat currency being printed.
I guess that depends on what you mean by "similar effects." its hard for me to see what is similar about someone spending real money and the government inventing more fake money, when the two exchanges actually dont resemble each other in the least. its like comparing someone trading an apple for an orange to someone trading a threat for an assassination. on a really basic level theres a similarity in that exchange is occurring. but everything else is different.
There would be more gold, so it would end up having less value
refer to my earlier posts, this summation is inaccurate. value is subjective in any case. the inverse of supply is demand. supply/demand relations are dynamic, not static as you conceive them to be.
pushing prices up.
prices of what? injection of fiats does not push prices up across the board, why would injection of commodity money? the second part of your misapprehension rears its head: private spending is qualitatively different than "public" spending.
Are the objections to the implication that therefore gold is no better than fiat currencies?
the objections are to your insistence on oversimplifying the situation under discussion. your explications are false, no need to address their concomitant false implications.
History shows the inevitability of fiat inflation until destruction, and lack of gold falling from the sky or being transmuted from lead.
that is an empirical argument and has no place in this dicussion. people hold cash as a store of value precisely because the future is uncertain.
Sorry to have agitated you; I retract everything I said in this thread. Please carry on.
please dont concern yourself with my state of excitement or the like. the only thing that is relevant is your (and others) understanding of the effect of an increase in the commodity money suply vis a vis an increase in the fiat money supply. is there anything you are unclear on?
One can observe historically the impact of a large influx of gold on an economy, specifically with regards to Spain during their period of conquering south america etc. It created a false prosperity, high inflation and an eventual bust. Resources were malinvested near the coastal town where all this gold was coming in. Rothbard discusses this in austrian perspective of economic thought.
... just as the State has no money of its own, so it has no power of its own - Albert Jay Nock
"conquering" would suggest that the gold was stolen rather than earned or given. perhaps thats why the effects resemble other cases of massive involuntary wealth transfer.