Why does Milton Friedman prefers Fiat currency instead of Gold standard?

Discussion in 'Metal Futures' started by Daal, Jul 7, 2006.

  1. Daal


    I havent read his books yet but I'm familiar with this ideology. Yet I dont understand what are the reasons he doesnt think a gold standard would work in today's economy
  2. 20 years ago he was on Wall Street Week and told Ruky, "... The Fed should be abolished and replaced with a computer that increased the money supply according to the growth in population.... about 2% per year..."

    About 8 years ago, I heard him comment, "... I think the Fed has done a fine job..."

    About 5 years ago, "... I'm not sure I'd support the Fed's policies of recent years..."

    Basically, he changes his views like he changes his underwear.
  3. Daal


    I guess your point is that inflexibility is a sign of wisdom. Btw, I dont think he changed his mind about the fed being switched by a computer. And fed policies changed so did his opinion on it
  4. From what I read, it looks like he supports a fiat currency because his studies have led him to beileve that the management of gold reserves through interest rate changes are often the opposite of what they would be if only the optimal monetary supply for the countries economy was taken into account.

    I can't speak about his views on other economic topics, but he has remained pretty consistent on this from what I've read.
  5. Better start reading what his role model Hayek & von Mises had to say about this.
  6. The biggest reason anyone would not support a gold standard is because of the limitations it imposes on growth in the money supply and balance of payments. Simply put the gold standard broke down. As far as Friedmans monetarist views, they are simplistic at best and do not account for many economic variables that WILL assert themselves despite a well managed growth of the money supply. Right now, despite certain built in systems, we have probably the best test yet of his theories. Greenspan did his monetarist duties well and it looks like Bernanke is a team player. The Bush Administration ( like most conservatives) doesn't have a clue about how to effectively manage Fiscal Policy. So, will an effectively managed growth rate in the money supply overcome all economic ills? I happen to believe that it is a good start, but unlike Friedman, I feel that as the system acclimates itself around an economy that is dependant on monetary policy it will develop new ways to force the hands of monetary policymakers and force them to abandon the flat line policies. My thoughts right now are that inflationary fears will wind up (if they havent already) forcing them to take measures which will restrict monetary growth and that the ways the economy has adapted itself will implode. The result being a deflationary cycle of epic proportions. I also believe this could be ( could have been) avoided by some reasonable countercyclical Fiscal management( too late now). We need a Friedman student at the Fed and Keynes students in the White House and Congress and we might actually find a great balanced economy.
  7. Mr B

    Mr B

    if production goes up.

    but the price of gold remains constant (therefore money supply remains constant)

    = deflation (same money chasing more goods).

    = the depression of the 30s.

    it's all documented in political allegory "The Wizard of Oz".

    also: in 1968, the British ambassador turned up in Washington and demanded that the UK be given the gold it was owed by the USA. And the US deficit was so big back then that they didn't have enough gold to pay everybody, so Nixon closed the gold window in 1971.

    with the deficit being what it is now, the USA could never pay it's creditors and there would be a run on the Fed if anybody with a trade surplus demanded gold. So a gold price on the dollar is out of the question regardless of your economic beliefs.

    and finally:

    Friedman specifically, hated the command economies of the 50s and 60s was probably a fan of Hayek. He believed that liberalising the capital markets and floating the currencies (ie not linking to gold) would transfer volatility out of western economies and into the capital markets. this has 2 advantages: 1. smoother economy - compare GDP growth and inflation volatility in the Greenspan era with earlier pre liberalisation times such as Volcker era. 2. the volatility transferred into capital markets benefits traders.
  8. Daal


    But whats his take on the belief the austrian school has stating that kind of deflation is benign?
  9. The method that should be utilized is that method that produces the most benefits ...namely the enhancement of growth and productivity...

    The Gold Standard would be more restrictive with respect to growth and productivity...

    Fiat currencies are like competitors at a football game...The team with the people in the best physical shape are the most valuable players with regards to putting points on the board...

    If the players had to conform to rules that negated their performance then there would be fewer points on the board...albeit under the more restrictive rules they would still play the game...

    Currencies simply reflect the relative performance of that country...and have nothing to do with a pile of scarce gold metal that you cannot eat or use for productive gains...

    It is the relativeness of the currency teams that matter most....
  10. Cesko


    Mr B and Libertad

    I think you really hit the nail on the head regarding the problem. Talking of relativity of currency, late Walter Wriston said basically that Forex is much more draconian system check than gold ever was. How do you think politicians all over the world like FOREX?
    #10     Jul 8, 2006