Agreed, but the more important objection is that the gold standard simply does not provide a stable value to currency in an economy with variable production levels, even assuming a constant gold supply. To see this more easily, consider a simplified economy that produces only one good, widgets. Assume that the dollar is pegged at some level to a constant gold supply. That would imply a constant supply of dollars in the economy. For the sake of ease of math, let the constant dollar supply be $1,000. Now consider what happens in our simplified economy. Suppose in year one, 500 widgets are produced. That implies that the value of a widget is $2. Conversely, that implies that the real value of a dollar is 0.5 widgets. Next year, however, the widget factories only make 250 widgets. The cost of those widgets would be $4. The value of the dollar has plunged to 0.25 widgets!
The gold standard has NOT eliminated inflation, which is the primary reason that its proponents give in its favor. The solution is obviously to allow the supply of dollars to change. With $500 in the economy we retain the $2 widget price, and therefore the 0.5 widget dollar value. That’s why a variable money supply actually works better than a fixed money supply. Of course, that’s in theory; I would agree that in practice the Fed typically does not maintain dollar values well, but that’s also not its only policy goal. Rigid maintenance of dollar value also has negative effects on economic growth.
That very much depends on the definition you're using of stability -- having a store of value in gold [or silver] has traditionally been considered very good despite variances in the supply precisely because the metals themselves have intrinsic worth, which means that there is a baseline "bottom" to their value. (Fiat money systems have no such bottom: they can print money all they want to flood the market or, more easily, just add a few zeroes on in their electronic ledger.)
In this sense gold [and silver] really are stable. And, if you look toward antiquity, you'll see that metal coinage only really got screwed up when the purity standards were loosened.
To see this more easily, consider a simplified economy that produces only one good, widgets. Assume that the dollar is pegged at some level to a constant gold supply. That would imply a constant supply of dollars in the economy. For the sake of ease of math, let the constant dollar supply be $1,000. Now consider what happens in our simplified economy. Suppose in year one, 500 widgets are produced. That implies that the value of a widget is $2. Conversely, that implies that the real value of a dollar is 0.5 widgets. Next year, however, the widget factories only make 250 widgets. The cost of those widgets would be $4. The value of the dollar has plunged to 0.25 widgets!
And?
No, seriously, this isn't a bad model at all, nor is it a bad phenomenon — let real market forces work.
Let the producers compete to produce their widget cheaper.
The gold standard has NOT eliminated inflation, which is the primary reason that its proponents give in its favor.
Actually it does — What you illustrated was not inflation, but supply and demand.
The big difference between inflation and supply/demand is that inflation is essentially solely the money-supply — that good X might be made for much cheaper in the future [aluminum, as a historical example], or might go up in the future [gasoline, as a historical example]
The solution is obviously to allow the supply of dollars to change.
Why?
No, seriously — why should we allow the supply to be easily changeable?
We could just let it alone (or a slow increase, as forcing minting of purity-ensured coinage would be) and let the pressures act on the market.
With $500 in the economy we retain the $2 widget price, and therefore the 0.5 widget dollar value. That’s why a variable money supply actually works better than a fixed money supply. Of course, that’s in theory; I would agree that in practice the Fed typically does not maintain dollar values well, but that’s also not its only policy goal. Rigid maintenance of dollar value also has negative effects on economic growth.
It sounds to me like this is the solving of what is essentially a non-problem. (That is I reject the assertion that a Rigid maintenance of dollar value also has negative effects on economic growth.
)
I quite agree.
For most of the 19th century the Gold Standard did prevent inflation. In fact, there was considerable deflation over the century, as the rapidly expanding economies of the world intermittently outran the supply of gold.
The ideal is to have the money supply expand at the same rate, or perhaps very slightly faster, than the amount of stuff it can be used to buy. The problem is that whoever is put in charge of deciding how much and when to expand the money supply is thereby given enormous power.