I came across Milton Friedman’s view on the gold standard very recently…
“The fundamental defect of a commodity standard, from the point of view of the society as a whole, is that it requires the use of real resources to add to the stock of money.” Milton Friedman
As far as I can see the Chicago school rejects the gold standard because they say it will take up to 4% of the annual GDP to produce the gold money. I think that will not be the case with the suggested model of using electronic money measured in gold. Would it be a problem with a traditional gold standard?
“My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.” Milton Friedman
How did an alleged free-market economist come to such a conclusion?
I came across Milton Friedman’s view on the gold standard very recently…
“The fundamental defect of a commodity standard, from the point of view of the society as a whole, is that it requires the use of real resources to add to the stock of money.” Milton Friedman
As far as I can see the Chicago school rejects the gold standard because they say it will take up to 4% of the annual GDP to produce the gold money. I think that will not be the case with the suggested model of using electronic money measured in gold. Would it be a problem with a traditional gold standard?
“My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.” Milton Friedman
How did an alleged free-market economist come to such a conclusion?
You can be a free market economist and advocate against the use of gold as money, or any other choice the free market may make. (as long as you don’t advocate that the government use force to mold the market according to your opinion)
If we were to have a free market, reality would quickly decide whether the use of gold is good or bad, and the market would act accordingly.
Objectivism certainly doesn’t advocate in favor or against gold, but rather for individual rights. As long as Milton Friedman is on board with that, let’s not take his opinion as a political statement, but rather judge it as economic advice. Who knows, maybe he’s right, I’m certainly not equipped to decide, and unfortunately without the freedom to test it, I’d have to become an economic scholar before I can decide.
Friedman was not an advocate of freedom as a fundamental ethical issue. In the vein of Adam Smith and the “invisible hand”, he thought freedom was efficient as wealth-creation. The neo-Cons have a similar philosophy. He was quite comfortable with the Fed, and with the notion that the Fed should use a fiat currency and inflate that currency at a low, fixed rate.
The monetarist school did act as a bridge to advocate Classical economics to the world of 1970/1980. However, their own unique contributions are questionable. In many ways, they’re just reformed Keynesians.
Friedman was not an advocate of freedom as a fundamental ethical issue. In the vein of Adam Smith and the “invisible hand”, he thought freedom was efficient as wealth-creation. The neo-Cons have a similar philosophy. He was quite comfortable with the Fed, and with the notion that the Fed should use a fiat currency and inflate that currency at a low, fixed rate.
The monetarist school did act as a bridge to advocate Classical economics to the world of 1970/1980. However, their own unique contributions are questionable. In many ways, they’re just reformed Keynesians.
That seems to be a very accurate description.
Do you have something to answer them on the 4% argument? Or is there a place where we discussed that argument?
Do you have something to answer them on the 4% argument? Or is there a place where we discussed that argument?
I don’t know where he comes up with the 4% figure. It is not merely the number; I’m not clear what assumption he is making. For instance, why would any % of GDP need to be spent each and every year? I just don’t understand his argument well enough to comment.
I suspect that the fundamental mistake the monetarists make is to think that money is something completely separate from other values. So, for instance, they would think of the Quantity Theory of Money as describing two major components: money and other values. So, they see money “chasing” values. This works to some extent, but only as long as one thinks of this as merely a rough approximation of the real picture. A more accurate picture is that values chase values. Money is closer to being more a characteristic of certain values, with some being more money-like and others being less money-like. [“Money-like” would means that it has the attributes like fungiblity, high value-per-unit, etc. that a typical Economic text might list.]
So, when Friedman says that a commodity standard “requires the use of real resources to add to the stock of money” he is right, but that is only because money ought to represent some real value. [“Real” does not mean physical or even currently in existence; a real promise to perform can also be a value if made by someone reliable (i.e. someone of good credit).]
Do you have something to answer them on the 4% argument? Or is there a place where we discussed that argument?
Thanks!
I think the assumption here is that people are going to be handling the gold during common transactions, i.e., paying in gold coins; although, I have no idea how much GDP it would take to make the gold coins. It very well could be the case that minting gold money would cost 4% of GDP per year, but if that’s the case it would never happen in a free market. That would give a whole new meaning to “It takes money to make money,” wouldn’t it? :lol: There is, however, no reason to necessarily mint gold, or any metal, for use as money, and yet still have a commodity standard.
That 4% figure strikes me as absurd. Unless it includes the cost of the gold, but that shouldn’t count; the people that own the gold will pay to have it minted so they can spend it. Physically striking coins is not terribly expensive; we are willing to pay the cost to strike quarters and dimes after all. (Nickels and cents cost more to make than they are worth but part of that is materials.)
That’s the number that Bastian Hayek, in a post above, quoted coming from the Chicago School of Economics, when writing about Milton Freedman’s complaints concerning a commodity standard for currency.
Just a wild guess, but currency in circulation hovered around 4% of GDP from the late 60’s to the early 90’s. (It fell from over 10% in the late 40’s, and has recently topped 6%, and rising fast)
If that’s where Friedman got his number, it’s only a one-time 4% “investment” of resources to establish a standard, plus an annual increase of apx 4% of GDP growth. In a robust economy (5% growth), that’s 0.2% of GDP every year, or about $28B in today’s equivalent.
Hey, that’s less than 1% of our federal budget!!! <_<