“This means business activity starts with a loan based what’s known at the time”
I understand that, but so long as steady deflation is ‘expected’ under a gold standard, I don’t understand the big deal. It merely changes the terms of what constitutes a sensible loan in light of these expectations. It’s much more of a big deal if the central bank intervenes to create unexpected inflation or otherwise screw up economic fundamentals in a way no rational businessman could have predicted.
Put another way, deflation has been an enduring feature of markets for computers and other electronic gadgetry, yet I haven’t seen any evidence that these industries lack for borrowed capital.
What am I missing?
Say you've got an idea for a new car company. You need to borrow $1 billion for your factory. Every year you have to cut your prices by 3%. Can you get your employees to agree to a 3% cut in salary every year? Will it be easier or harder for your employees to pay their mortgage when their income drops 3% each year? Will it be easier or harder for you to pay back the factory loan with your revenue per car dropping 3% each year?
Could people delay their new car purchase because they know it will be 3% cheaper next year? 6% cheaper the year after that?
That's just it, gold is excessively volatile and back when we had the gold standard we'd go from double digit inflation one year to double digit deflation the next --totally random with no way of predicting.
Not only does the record of past performance speak for itself, gold's current price swings are just as bad as ever. Right now gold can be bartered for twice as much crude oil as it could two years ago. That's deflation at a forty percent annual rate for two years.