![]() The additional benefit that gold now offers further lifts individuals' demand for gold. ![]() Individuals have also discovered that gold is also useful to serve as the medium of the exchange. As a result, John the miner could exchange his ten ounces of gold for more goods and services than before. They now begin to assign a much greater exchange value to gold than before. Over time, individuals have discovered that gold-being originally useful in making jewelry-is also useful for other applications. He then exchanges his ten ounces of gold for various goods and services. Gold contributes to the well-being of individuals. The reason why he mines gold is because there is a market for it. Let us start with a barter economy where John the miner produces ten ounces of gold. Why Increases in the Gold Supply Are Not Conducive to Boom-Bust Cycles 4įor Rothbard, then, the business cycle phenomena is on account of the inflationary policies of the central bank, which set in motion an act of embezzlement through the diversion of real wealth from wealth generators to non–wealth generators.Īn increase in the supply of gold, according to Rothbard, does not lead to an act of embezzlement, as the increase in money out of “thin air” does, and hence does not result in the boom-bust cycle. While these increases have such similar effects as raising the prices of goods, they also differ sharply in other effects: (a) simple increases in specie do not constitute an intervention in the free market, penalizing one group and subsidizing another and (b) they do not lead to the processes of the business cycle (bold added). Inflation, in this work, is explicitly defined to exclude increases in the stock of specie. He held that, the business cycle cannot emerge in a free market economy where money is gold and there is no central bank. Both monetary policy and fractional reserve lending set in motion an expansion in the money supply out of “thin air.”Īccording to Rothbard it is the increases in money out of “thin air” that are the key causes of boom-bust cycles. For him the key reason behind boom-bust cycles is the act of embezzlement brought about by central bank monetary policies and fractional reserve bank lending. 3Ĭontrary to Mises, Murray Rothbard held that increases in the supply of gold could not set in motion boom-bust cycles. In principle, this process could occur even in the case of commodity money with 100 percent reserve banking. The unsustainable boom occurs when a newly created (or mined) quantity of money enters the loan market and distorts interest rates, before other prices in the economy have had time to adjust. (bold added) 2Īccording to Murphy, Mises concluded that The greater part acted first upon commodity prices and wage rates and affected the loan market only at a later stage of the inflationary process. Moreover, only a part of the additional gold immediately increased the supply offered on the loan market. The gold standard’s own inflationary potentialities were kept within limits by the vicissitudes of gold mining. ![]() The gold standard was an efficacious check upon credit expansion, as it forced the banks not to exceed certain limits in their expansionist ventures. Murphy quotes Mises on this:Įven a rapid increase in the production of the precious metals can never have the range which credit expansion can attain. Mises regarded the gold standard as the best monetary system as far as keeping the expansion in credit under tight control. While suggesting that the gold standard could generate business cycles whenever an increase in the supply of gold causes the market interest rate to deviate from the natural interest rate, or the equilibrium rate, Mises, however, viewed this possibility as remote. Murphy, Ludwig von Mises held that an increase in the supply of gold could trigger the boom-bust cycle. Consequently, following the ABCT, an increase in the supply of gold is going to set in motion the boom-bust cycle.Īccording to Robert P. This in turn is likely to cause the market interest rates to deviate from the equilibrium interest rate. Based on this it would appear that on a gold standard without the central bank, an increase in the supply of gold will set in motion boom-bust cycle.Īn increase in the supply of gold is likely to result in the lowering of market interest rates. It is held that the major cause for this deviation is increases in the money supply. According to the Austrian business cycle theory (ABCT), the boom-bust cycle emerges in response to a deviation in the market interest rate from the natural interest rate, or the equilibrium interest rate.
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