Photo by Michael Steinberg on Pexels.com

Even most fiat currency advocates understand this point and attempt to utilize various monetary rules to create some sense of expected steady depreciation of the dollar. The pretense of “stability” is merely an illusion engendered by the rigidity of a rule that limited the amount of inflation allotted per year. The rules-bound approach in the United States permits 2% inflation per year to allow for economic growth. In an attempt to achieve the aims of “full employment” and monetary stability. Few question the fidelity to which the Federal Reserve has adhered to this 2 % annual inflation target. For instance, in 2007 during the nascent period of the economic crisis, the inflation rate was a staggering 4.08%.More than double what is conventionally allotted by the Federal Reserve. Demonstrating that these monetary rules that are meant to maintain the integrity of our money supply are sensitive to exigencies of purported economic calamity. It is well documented that the subprime housing crisis that emerged in 2007 was caused by our governing institutions using the money supply to manipulate interest rates. The prospect of the U.S central bank maintaining the value of our money is marred by the fact they do not consistently abide by these rules. Unfortunately, when it is politically convenient to loosen these parameters of these rules, the Fed does so. Generally, they could not anticipate the emergence of an emergency requiring accommodations in their money management constraints. If the Federal Reserve did unwaveringly adhere to the 2% rule this still is not necessarily the type of stability that should be welcomed. Irrespective of the annual rate of economic growth, this is still at the expense of the purchasing power of the dollar. While the rate of inflation may be predictable, it is a signal that the value of our money will only continue to decrease. The goal of holding any commodity is for the value to increase or remain constant not to wither away to oblivion. 

The instability caused by the Federal Reserve failing to rigidity follow its own monetary rules has consequences that reverberate throughout the economy. Prices function as a source of information to consumers and producers, that even includes those that produce and hold various forms of money. If the Federal Reserve has been augmenting the money supply to lower interest rates this distorts the loans markets for lenders and borrowers. The argument that the short-run instability of gold makes it necessary for state intervention in the money markets, does not hold water. As lenders and borrows can enter into contractual agreements setting interest requirements; even adjust for immediate price-level variances (p.32). Any attempt to manipulate the money supply to encourage consumption does nothing more than to manipulate the integrity of the money supply Only serving to encourage economic actors to engage in malinvestment, arguably creating moral hazard. Not only does lowering interest rates alter the money supply, but it also encourages the individual who could not otherwise afford to borrow money to do so. Despite the fact, the natural interest rate of the loan is unproportionate to their income and necessary expenses. Unfortunately leading may make borrowers inclined to take uncalculated risks created by an illusory interest rate. That invariably is unsustainable and eventually will be forced back to natural rates, regardless of any distortions the market will self-correct.

If the Federal Reserve’s management rules are effective at warding off volatility, we would expect there to be wild variances in the value of gold-backed money in the pre-central banking era. After being confronted with the number it becomes quite evident that the facts do not comport with popular opinion. One only needs to review the dramatic increase in the rate of inflation in the post-gold economy to see the full effect. From the period of the period between 1790 and 1913 a $100 basket of consumer goods only experienced an $8 variance ($108 in 1913) (p.5-6). However, that same basket of goods had reached the cost of $2,422 by 2008(p5-6), demonstrating the hasten pace of dollar depreciation. It is calculated that the overall rate of inflation between 1879 and 1913 was a meager 0.01 % on a classical gold standard. It should be noted that similar numbers are reflected in the 93 years Great Britain retained a freely fluctuating gold standard (p.3). How skeptics can deride the notion of gold-backed money without address the long-run stability is perplexing. The political and economic establishment has effectively become short-sighted through praising immediate stability over enduring integrity. There is a deeper underlying question regarding this disjointed preference, what does it say about our society? Has our propensity for instant gratification become so entrenched in our culture that it has bled into our governing institutions? If our purported “experts” exalt the virtues of instantaneous band-aid measures over long-run functionality, then the answer to this question is self-evident.

5 thoughts on “Time to Restore the Gold Standard- Part V(b): Stability

    1. I hope I didn’t veer too close to plagiarism on that one. When wrote it I wasn’t even considering the specific insight.

      However, I did consider his work in the Denationalization of Money (1974) throughout writing this series. Even though his insights in that pamphlet are only appurtenant to the issue of a gold standard.

      Liked by 1 person

      1. Plagiarism? Hardly!!

        I would argue that the aforementioned insight is a vital and established part of the liberal tradition. For example, Benjamin Constant described liberalism in 1874 as “the system of principles.” Besides adding a few points and forwarding it in a more explicit form, Hayek merely restated what was already understood.

        I find that Hayek, unlike his contemporary exponent Dr. Sowell, often introduced ideas in their abstract formats (I.e, dissociated from particular instances).

        Liked by 1 person

        1. That’s one think that many modern thinkers are lacking a systematic approach. After all abstract isolations of an idea are necessary for thorough analysis. Then again, it could be the fact that he was an Austrian Economist.

          I find that Austrian economics operates as a cohesive system of logic. Taking more of holistic approach to analysis, starts right at the taproot of reasoning. Hayek to his credit was a very versatile and flexible thinker. Mises was brilliant, however, at time too uncompromising. However, in many ways Mises was the first gatekeeper of Austrian methodology.

          Liked by 1 person

        2. Great point!

          I think that in not having principles, many modern thinkers content themselves with causal axioms. The chief difference apparently being that principles are generally demonstrably validatable (e.g, the law of scarcity) while axioms need not be (e.g, prices increase because of “greedy” people).

          From my readings, I think that Mises was a genius. He had tremendous economic insight, however, much of his sociological work that I have read is too rationalistic for my taste.

          Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.