This may be subjective. Probably, thinkers in the great empires in the past could have viewed their era as exceptional that needed new paradigms to run their countries. The mind seems to think that fractional reserve banking, with its ability to create (credit-based) capital, naturally suits modern capitalism. But the ultimate test is still whether an alternative monetary system is better overall for economics, not just about whether how much financing is available for certain purposes. Scholarship very often fails because it is bounded by limits. Take the current talk about a US Senate committee to examine the cause of the current global financial crisis. Assume, hypothetically, that the reason is the world not on a fixed money supply pure Gold Standard. Then the committee that precluded questioning the global monetary system and precluded examining the Gold Standard will never arrive at the truth. That "purchasing power should remain constant" may be the result of habit of the linear nature of the common human mind and not backed by any serious scholarship. The major economics of the last century is largely founded on fiat credit-based fractional reserve monetary system. Most policy makers were schooled in such economics and their mindset have a natural bias imbibed with such economics. Stability is usually desirable in economics and matching growth rate with inflation could have been perceived as the "natural" golden mean for "stability", but it entails "meddling" with the money supply. The end result of "modulating" the money supply to achieve stability could end up as pouring oil onto fire to control its spread.
Pigou effect describes the positives of deflation, only caveat being that Pigou did not factor in the devastating effects on highly levered economies. In a world with no credit, and zero debt, Pigou effect sounds awesome, everything gets cheaper, and people buy more. In a world with credit, everyone with loans tethered to flexible-priced assets goes underwater and experiences the negative wealth effect from owing more on the asset than what it's worth. End result in the levered environment is less consumption, less output, higher unemployment, etc. So yes, bad for debtor not so bad for creditor, as long as asset repo doesn't occur; because asset will be put back on creditor's book at the new, lower fair value + past payments received from debtors. This can be far less than what the new fair value is. This is the story of the housing market.
I don't have the knowledge to refute you, but only have some questions. This seems too strong and deterministic a statement. Once manipulation of the money supply and interest rates are eliminated, things may become "stable and predictable" and such deflationary environment may not cause businesses that own assets on credit to be pulled down by such assets. To invest or not to invest would have to be done on a usual rational best decision basis. There are different classes of debtors and creditors. Ordinary saving depositors are creditors that never ever need to do "asset repo" and a deflationary environment always encourages savings which is almost certainly the only way towards future higher growth. The paradox of thrifts will only need be invoked after we have messed things up. I don't know if you mean the US subprime crisis which I don't fully understanding. Classical extending of credits to people to buy houses must be done with prudence, ie in markets that have stability and predictability and loans need to be supported by collateral. All loans for US housing markets in the past decades are all property speculations and may not be much about "providing a roof over the head". For both the borrowers and lenders, it is more about timing the market or even about exiting the market.
Not my thought. Seems to me that credit should be created only by saving-based instruments (like CD, bonds, ...) to avoid people think their liquidity is in danger when a crisis arise. Long term credit should be backed by long term saving, so anyone is forced to stick to their plan and not start a vicious circle. Who want to exit should accept market value, and speculation could be possibile only on this part of the market. I strongly believe fractional system is a scam, and a danger to dinamic stability of any economic system (engineers say that it is a "postive feedback" http://en.wikipedia.org/wiki/Positive_feedback_loop and http://en.wikipedia.org/wiki/System_dynamics). Interesting. I agree that could be a problem, but history teach us than only crisis can push big paradigma changes. Maybe they need a bigger crisis. WE pay the price of vested interest, as usual. Seems to me that economics as we know it is useless, but maybe I'm only not knowledgeable enough. Anyway, "matching growth rate with inflation" is a non sense to me. Other variables should be taken in account. First we should call growth rate only a per capita real grow, not gross variations. And the only grow we have is due to productivity enhancement or more labour (more man-hours, thus more people working or more hard working). Moreover, changing demographics and employment rate are very important, so resources limits (and the loop price-substitutes/efficiency). But no macro-economic studies on this matters are readily available, AFAIK. If you know any, please give a link... Seems to me that macro-economic theory do not make a good work to explain this to decision makers. I agree we have to distinguish between different class of debtors. But savings it isn't a certain way to future high grow. You can "create" money from nothing if that money create a bigger productivity/employment enhancement that counterbalance it (that is one reason to assign to Congress the power to issue money, IMHO, be aware that working people consume, unemployed don't). Moreover, you can save for future consumption, if noone is using that savings to improve the system, you will not have any real grow at all (and maybe a shrink). Financing innovations and entrepeneurship is always a good thing (with its failure rate, of course, so had a internal efficency who drive interest rate and limits money creation) because create grow. Financing consumption is only a shift in time (shifting today a consumption of tomorrow) and when demographics do not support it with growing population, it will drive to a industrial over-capacity. There are more variables involved than we normally study in macro-economics, and I haven't found an economist who starts from productive capacity of human life and found his theory on it, taking in account it can change in time due to innovations.
Most people would likely believe savings to be good for future growth, but it assumes savings being always properly mobilized so as not to bring about a deflating GDP. In open and non-corrupt economies, I think the problem is rarely about more supply of savings to people willing to borrow to invest, but rather traditionally, in many cultures, funds are never loaned out frivolously. So the economy should have the "mysterious unseen hand" that balances things out - proper free markets may be able to do this. Of course my answer is just an attempt at guessing but serious scholarship in this direction may help.
Things only become "stable and predictable" in long-run, static economic models. You're just "assuming" your way back to equilibrium. I've just skimmed alot of what you've written, and I think you're saying that money supply needs to static and fixed to gold. If this is your thesis, then you're wrong. The problem with that argument for a fixed money supply (to gold) is that the world population is increasing at an exponential rate, whereas the supply of gold is not. Population will eventually outgrow money supply at an increasing rate, and prices will be in a perpetual state of deflation, savvy? There's the long-run flaw with that issue. I too assumed away a bunch of crap, just for the sake of brevity. Our new, global economy needs fresh ideas, not beaten, dead horses from antiquity.
Gold standards only benefits people already owns gold. It should be replace with silver standards or even copper.
The same apply even if the population is stable and productivity (output-per-hour) is growing, and even with shrinking population, if productivity grows more than population shrink. But deflation is always bad? Don't you need a bit of "deflation" to allow all working people to partecipate to gains due to innovations? Hi-tech sector is in deflation by its birth. Should we pay a Quad core PC 1,000 times than we do, only because it is 1,000 times more powerful than a 8086 PC, and do a lot more? Should we pay a 1 GigaBytes memory 1,000 times more than we used to pay a 1 MegaBytes memory, just to avoid "deflation"?
No, deflation is not always bad, but in an economy loaded with debt, it's positives just aren't all that....well, positive. Your computer analogy is due to economies of scale, not deflation. You can thank the rapidly-improving technologies for cheap computers, not a "positive, deflationary spiral isolated only to the computer sector," you just made that up.