Boom-Bust Cycles And Easy Money

In the case of the increase in the supply of gold, no fraud is committed. The supplier of gold — the gold mine — has increased the production of a useful commodity. Therefore, in this sense we do not have here an exchange of nothing for something. Consequently, we also do not have an emergence of bubble activities. A wealth producer (because of the fact that he has produced something useful) can exchange it for other goods. He does not require money out of “thin air” to divert real wealth to him.

On the gold standard an increase in the growth rate of money, which is gold, will not set in motion the emergence of bubble or false activities i.e. an economic boom. Hence, a fall in the growth rate of money supply is not going to create an economic bust — no bubble or false activities were created that are going to be destroyed by a slower money supply growth rate.

We hold that the disappearance of money out of “thin air” is the major cause of economic downturns. (The injection of money out of “thin air” generates bubble activities while the disappearance of money out of “thin air” destroys these bubble activities). On the gold standard, this cannot occur. On a pure gold standard, without the central bank, money is gold. Consequently on the gold standard money cannot disappear since gold cannot disappear unless it is physically destroyed, which is an unlikely proposition. We can thus conclude that the gold standard, if not abused, is not conducive of boom-bust cycles.

  • 1.Milton Friedman – Dollars And Deficits – Prentice Hall Inc 1968 p 193.
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