Fixed Money Supply Full Gold Standards

Discussion in 'Economics' started by Onlygold, Apr 22, 2009.

  1. Onlygold


    I have posted this elsewhere earlier, but this forum is still the most active with some very knowledgeable posters.

    Paradox of Money
    More money means a higher standard of living for an individual, for a partnership of 2, 3, 4, ... persons, for a family, for a business corporation, an organization, a municipality, a constituency, but it stops with the country where more money lowers the optimal possibility for economic production and harms the economy.

    At the country level, more money would first unleash a destabilizing competition for ownership of the newly created money. The new money will then further cause a forced redistribution of the country's product disrupting the normal working of the free markets which causes a further fall in the optimal possibility of the economy.

    This paradox suggests that a fixed money supply (Gold Standard) monetary system better serves the economy than one based on the current US Fiat Money Fractional Reserve Banking system. Most of all aspect of modern free market capitalism should still be available except commercial banking as we now know it.

    Outline of a Fixed Money Supply Full Gold Standards
    A closed economy is assumed - i.e. a one country world.
    There is no commercial banking - no more banking as we know it, the banks that can create money.
    The Government Central Bank - this is the only bank in the country. It holds the fixed total money supply in the country which is also now the total of all "bank deposits". All money transactions only move money between these accounts.
    fixed total money supply - it means the total "registered" quantity of Gold the central bank decides on using as money. A simple model can ignore new discoveries of gold, etc. This is also the figure when an accompanying theory refers to the "money supply". It is also unchanging. It is also completely divisible in whatever granularity we wish to have and no one ever need to "carry" the physical metal.
    all of this money have an owner - should be self-evident.
    Lending - this is simple unqualified "money lending". It is in all ways identical to personal loans between two persons, from A to B. A cannot lend more than what he has in the "central bank". What A loan out is no more available for him to spend, but B now has more money to spend.
    coins and currency in circulation - this is a trivial issue. Assumption of a cashless society should not make any difference to the development of a consistent theory.

    The above may be all that is required as an outline.

    The details as to how to ensure the money supply is maintained as a fixed quantity of Gold is not examined.

    A simplified Fixed Money Quantity Theory
    The Exchange Equation is :
    P x Q = M x V
    P = price level of final goods
    Q = real Total Final Goods or GDP
    M = fixed money supply
    V = money velocity

    Postulate : The money velocity is stable or constant in the proposed fixed money supply system.

    In other words, the Nominal GDP (M x V) is constant as a postulate.

    As the other side of a transaction of goods is payment from wages -
    Price x Real GDP = Wage Level x Total Man Hours.

    We have as a corollary of the postulate:
    With a constant work force, the Wage level is a constant.

    We have a clean simple proof why our fixed money supply Simple Quantity Theory can accommodate changes in economic growth:

    Proof by Refutation
    Assume it cannot. This means the real GDP must be a constant. But this is clearly illogical. Assume a bumper harvest in the agricultural sector. This must mean a real GDP growth or changes in real GDP changes. Thus the theory must be able to accommodate changes in real GDP.

    A fixed money supply economy within our theory does not in any way disallow changes in growth. It can accommodate growth expansion as well as contraction.

    Fractional Reserve Banking is flawed. A monetary system unlimited on the supply side for money serving to match the real product of a country limited on the supply side is fraught with unpredictable, and likely detrimental, consequences.

    The argument for this new monetary system is that it optimizes the working of the free market mechanism by allowing it to work in a most stable economic environment. In a normal stable economy with a real growth rate of 3% per annum due to productivity increase from better technology or returns from prior real capital investments, an increased standard of living would be realized in an environment with stable wages and natural price deflation of about 3% per annum

    This simplified Quantity Theory can be invalidated only in two ways:
    1) that the the money velocity cannot be assumed stable in the real world.
    2) The model with Price x Real GDP = constant is not workable in a real economy and it causes the collapse of the economy under all reasonable conditions.
  2. sjfan


    Your proof is wrong and shows misunderstanding of basic economics.

    Total man hour is not a constant. Rather, the total man hour you put there should really be total man hour productivity, which is certainly not the case. So, in order for your equation to balance out, it has to be the case that V is growing, or price is deflating... which isn't exactly a good thing

  3. Onlygold


    A constant work force is assumed in order to illustrate the case with stable (constant) wage level.

    There may be errors in rigor with equations.
  4. It is just ridiculous to see people thinking about these stuff.

    Fixed money supply and gold standard are both the perfect marriage to slavery.

    Why is it so hard to learn that money can be anything people use to trade.

    Another thing..........the best thing that can be done for monetary policy is to keep the purchasing power constant. To achieve this the money supply must grow at the same % level GDP grows. If we fall short, we have deflation (NOT A GOOD THING) if we go over we have inflation (NOT A GOOD THING).

    For health purposes it is the same if you weight 80 pounds or 300 pounds.
  5. Onlygold


    I have thought of this before. It probably is current conventional wisdom and may even be "the economically correct answer". Somehow, somewhere, within my mind, there lurks some thoughts that what is conventionally accepted could still be wrong, but I don't know economics nor have I the answer.

    What if conventional wisdom completely underestimated how intrinsically adaptable "truely free" market prices are to production supply and demand that it should be the sole mechanism that should be relied on to determine resources allocation and no modulation of the money supply is needed to help out with the price mechanism ? That all manner of money supply modulation only reduces the optimal working of economic resources allocation.

    I may be wrong.
  6. Onlygold


    The reason may be that people should not be entrusted with deciding what should or should not be money - that the right must be completely taken away from man (Yes, the logic here seems contradictory !).
  7. That's nonsense.
  8. sjfan


    So why are you trying to pass off your ideas as an "economic" theory by using words like velocity of money and, constant labor force, axiomatic, etc?

    Anyone with a bit of formal economics training can tell pretty fast that you are just putting jargon together without really understanding any of it.

  9. piezoe


    curiously, in centuries prior to the twentieth, deflation was common as were monetary systems based on gold. The banks even allowed for deflation. Goods often got cheaper and money went further, and no one minded. It seems deflation is only bad when you are the debtor and the other guy is the creditor.
  10. Although I somewhat agree with you, we should take in account that our economy is very different from past.

    Innovation is capital intensive. So any environment unfriendly for borrowing capital IMHO is unfriendly for innovations.
    And only innovations can give us real grow. This is IMO the reason because deflation can be bad: more fear to take risk, less innovation. BTW, thinking of credit card or other form of personal debt linked to consumption instead, I believe anyone should take deflation risk at his own risk.
    But investment is predominant in chosing if it is bad or not, IMHO.

    Jueco, Could you elaborate a little on it?
    I don't understand why purchasing power should remain costant. With innovation, productivity improvement should raise purchasing power (and in my opinion even that of people not directly affected by that improvement, because if relative desiderability of different jobs change too much, they at the end should balance again, or people will fight fiercely for best jobs).
    Moreover, I don't understand why you believe that fixed money supply is equivalent to slavery (distribution of money not related to wealth creation (parasitism) could not be the real problem?)
    #10     Apr 24, 2009