This would be correct if the total goods and services available in the economy was static. You're forgetting to factor in productivity. The goods and services available today are exponentially more than 20, 30, 50, 1000 years ago. That productivity will far outrun any giant gold deposits that we happen to bump into.
You're absolutely right. I set the static condition as a starting point just to refute the nonsensical position that an increase in gold supply somehow translates into increased purchasing power in the long run. If that was grasped then I would have gone further, relaxing the static assumption, and talked about long- vs short-term effects and perhaps introduced international capital flows as those are certainly relevant but as you could see there was no point. As for productivity gains outstripping gold store increases I'd have to look at the historical record. I remember a number of years ago that I read that their long-term rates of change were similar but I don't have any direct evidence.
If the gold standard is such a great thing why isn't there a developed country in the world that uses it? I haven't really looked at the problem as closely as others here likely have but I would note that while fiat money may lose value more quickly and as a store of value may be inferior to gold, one can use it more easily and do things with it. In the other role of currency, as a medium of exchange, fiat currency seems to me to be vastly superior to gold. By circulating, it allows people to do things and that I would think is the most important point. Wealth does not come from the gold possessed by a country but by the goods and services it produces. Money that circulates allows people to be productive. Without money/capital for example one cannot start a business. Money is the grease that allows the wheel to turn. Sticking too rigidly to a gold standard I suspect would be an impediment to the dynamism of a capitalist economy.
In the context that the negative effects of inflation caused by the increase in new gold is reduced or even reversed by increases in efficiency of the economy and the overall tendency for prices to decline as supplies of goods grow, does increase purchasing power over time. An increase in the affordability of goods by a larger portion of the population equates to a decrease in prices. The numbers associated with the purchase of those goods really don't mean much, what does is the ability to afford them. As prices might rise due to inflation the beneficial effects of a stable banking system and a sound currency will outstrip the negative effects of inflation. No mining activity in the world could compete with the inflation coming from central banks around the world. The larger point is that even though a hard money system may have disadvantages, what ever they may actually be is vastly preferable to the debt based currency system in place at present, which is regularly manipulated by a central bank at the behest of whichever political clique happens to hold the reins of power, and the banking cartel that maintains the system. As far as the idea that other countries don't use a gold based system, this is a relatively new phenomenon. For centuries exchange was based largely in gold. The trend away from gold has come for the most part since the end of the second World War. Nixon's repudiation of the Bretton Woods agreement severed the last ties to a gold based currency, setting the stage for the massive increase in inflation we currently enjoy. Objections to gold as money because it is less easily portable or too cumbersome to deal with miss the point. A hard money system that uses paper as a medium of exchange is perfectly functional. The catch is that the bearer must be able to present that certificate to the issuer and be able to receive the commodity upon demand for faith in the bank to continue. Banks that lend in excess of deposited reserves would quickly be forced out of business as remaining deposits would vanish after the word got out, effectively enforcing fiscal responsibility upon bankers. The reason central banks and governments love fiat currencies is that it relieves them of the necessity of fiscal responsibility. If they need more they simply make it or borrow it and pay it back in the future with money of lower value. A system that functions at the expense of the rest of us.
THAT is the key question. The reason why is because gold does not benefit those who wish to intervene in the markets. ie. parasites. 99% of the planet doesn't understand and can be sold on simplistic associations such as: "gold is deflationary", "gold caused the depression", etc. etc. It takes a very educated and informed mind to understand and see through the BS. The marketing has been contra-gold. For a reason. And NO, there is NOTHING SPECIAL about gold. (other than the fact that it can't be printed)
To address the original premise of this thread, which is "what is the monetarists criticism of the Austrian theory of the business cycle?" The Austrian school holds that the booms and busts associated with the business cycle are caused by the implementation of monetarist policies. To agree with the Austrians they would therefore have to admit that they are wrong. So.......
For those truly interested in the economics of this: http://www.mises.org/store/Money-Bank-Credit-and-Economic-Cycles-P290C0.aspx The monetarist criticism? Simple: they can't intervene and contort the system for personal gain.
Hi Capablanca: You are making the assumption that fiat money is superior to a commodity money as a medium of exchange, but I don't see the evidence to support such a conclusion. In the late 1800's, the US economy was expanding and productivity was up yet prices were actually falling. That is because the prices of goods and services in the market place will adjust to whatever the supply of money is. The idea that a modern economy simply cannot function without a central bank controlling the money supply is false. How did the US economy function before 1913, the year the FED was created? The biggest problem in the banking system before the creation of the FED was the use of fractional reserve banking. But instead of fixing the problem, the government has exacerbated the problem by the creation of the FED. The government is borrowing money from the FED, wasting it on an endless war fighting a faceless enemy and deferring the debt to the future. The national debt is now over 8 trillion dollars and anybody who says that doesn't matter is a moron in my book. Who is going to pay that money back? We keep spending money in the present and deferring payment to the future. How much longer can we continue to do that? If we were to consume everything we produce we would all be living at a subsistence level. Saving and investing sets the process of civilization in motion. Continuing to borrow and spend in the present while deferring the debt to the future sets the process of decivilization in motion. Trade imbalances which must eventually unwind themselves and massive budget deficits are all a result of fiat money. Under a commodity money, these massive deficts would not be possible. My final point is that a global free market economy will never exist as long as we have fiat money because the central banks have a monopoly on the production of money. They have no competition. In a truly free market economy anybody would be able to go into the business of producing money since money would be another commodity.