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To: DallasMike
"No one here has yet even offered to explain why, if the gold standard is such a cure-all, gold standard countries have been just as subject to inflation and deflation and other financial problems as non-gold standard countries."

OK let's try.

In the first place, inflation and deflation are determined by this simple formula: MV = PT in which M= the money supply; V = the number of transactions each unit of money supports at the relevant point in time (T); P is the price of all goods and services at the time point of measurement (T). Inflation occurs when MV exceeds the goods and services for which it is expended; deflation occurs when MV is less than the goods and services. Inflation and deflation are monetary events--they are only about the purchaseing power value of money.

Even in a specie money system, you can have inflation and deflation. If more gold is dug up than goods and services are produced to support the value of the gold, there will be inflation (loss of purchasing power of the money--ie gold will go down in value). That happened during the 18th century in Europe when silver which was the primary monetary base increased in supply as a result of the New World discoveries. Not a common event in a specie money system but it can happen.

Can also have deflation. The argument for fiat money was that a specie money system would have built in deflation--we would not have enough money supply to support the economic system. We can't dig the gold fast enough.

The answer is both cases is "so what". The inflation event was tiny (comparable to our stated inflation now) and of very short term impact. I don't think anyone can point to an example where the kind of deflation that is built in to the gold monetary system was a problem. Interest rates would be low or non existent because the gold the creditor gets paid back is likely to be worth more than the gold he lent.

But the manufacturer is hurt by having to sell his goods for less than the cost of production? No. He may get less gold for his goods but it is worth more--he still gets market value for his production.

Now none of this has much to do with any of your examples of inflation-deflation in what you call a gold standard economy because none of those examples come from a real gold standard money system.

Those systems were all systems where the government got to fix the value of the trading paper. They were gold reserve systems--we have 200 tons of gold; we will have a 25% reserve system and print paper for 800 tons of gold value. Then the government tweaks the reserve system to permit it to create more paper--that gets you inflation.

Or the government has to fix inflation it caused so it devalues the paper gold against the real gold and presto you get deflation.

The government calls the money system a gold standard because it has to have that lable to create confidence but it then keeps the legal power to put in the fix to keep control of what the real spendable value is. Like Governor Davis of California labled his power system a free marketplace but fixed prices, all these prior "gold standards" were gold standards in lable only but not reality.

None of these historical problems happens in a real gold money system--the gold is the money--it works for everybody and everybody is better off. The fiat money system is an absolute fraud on the citizens of America which works only because the people are incapable of understanding how and why they are getting screwed.

37 posted on 02/06/2002 7:27:11 PM PST by David
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To: David
>>I don't think anyone can point to an example where the kind of deflation that is built in to the gold monetary system was a problem.<<

Two right off the top of my head - the Great Deflation that lead to the Great Depression of the 1890s, and the Great Deflation that lead to the Great Depression of the 1930's.

The problem that you are not addressing is that on the gold standard, and on the gold exchange standard, the exchange rate and the money supply are not set by market forces, but by governments. Do a google search on "gold standard" and "rules of the game" and you should turn up some good articles on it.

In Sayer's history of the Bank of England, he details how Montagu Norman deliberately kept millions of pounds of gold off the books to continue deflating the money supply because Britain decided to return to the pre-war exchange rate despite the fact that the money supply had increased during the war. This lead to massive unemployment and a moribund economy. Similar actions were taken by the US Fed - using open market actions to "mop up" "excess liquidity."

Unfortunately, when you have fractional reserve banking and central banks you have economists and politicians making these decision. But who wants to carry around nothing but gold for transactions? Not to mention the fact that the current amount of gold available for use as money is such that even if we went back to using gold to back US currency, we would still need fractional reserve, as there isn't enough gold.

Which, by the way, was one of the causes of the Great Deflation of the 1920s-1930s -- not enough gold being produced to go 'round.
92 posted on 02/07/2002 2:19:04 PM PST by CobaltBlue
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