idunno about the politicians, but the central banks and their proxies simply rule da freakin' markets.
the beauty of a flat currency is that you have a liquidity multiplier. It works like this, you divide the emision by the minimun monetary reserves that are asked to be put aside to banks and institutions. Why. Lets say the FED puts out $100 and that the minimun reserve is 10%. The 100$ goes to chase manhatann bank. They take 10$ and gives em back to the fed for safe keeping. and lend $90 to jhon doe. He takes his $90 and puts it into first national bank. They take the $9 put em aside and lend $81 to jane doe. By now there are $271 circulating in the economy. keep on doing that into infinity and you have that $100 turned into $1000. This of course isn´t as simple as the example. It depends largely on what percentage of all monetary transactions occur electronically... when there´s no paper currency this occurs perfectly. It also depends on the people´s perception of the value held by the currency, a currencie that´s least safe {like the nicaraguan cordoba} will require larger safety deposits from all banks, than a currencie that´s considered safer, such as the dollar or the pound. The thing with the liquidity multiplier is that liquidity evaporates when thigs heat up... and there´s panic. That´s what happens when everyone tries to withdraw all money from the bank the same day. The bank goes broke and you only get a small % of your money back. {if it happens at every bank in the above example, the same day, you get 10% of your money back... cause in the end, that´s all there really is} So having a small reserve means there´s going to be a lot of liquidity in the market... but it also means that if it evaporates people are left with much less... You cant do this with gold standard as all your money in circulation has to be backed by it´s whole value, not in money but in gold. So your monetary supply is fixed to the amount of gold that you have in available... Is much less risky, but it is also much less profitable.
Friedman is a classical Liberal in that he believed in a govenrment that only was involved in defense, law enforcement, setting a few basic roles and nothing else. Gold standard won't work for socialist countries because the government needs more and more money to employ more and more voters to keep the monster growing and the politicans in power. America is a socialist country now because about 65% of the economy is controled by the government either through direct employment, transfer payments, and regulations. http://en.wikipedia.org/wiki/Milton_Friedman John
That's a simpleton's explanation. In fact the Gold Standard didn't "break down" at all. It was wrecked by the stupidity of the US government in believing that the dollar was and would remain supreme. After having prohibited US citizens a few years before from owning and trading in gold, the US government stupidly kept on throwing out the gold, in truth belonging to their citizens at real bargain prices. In fact they gave away a considerable part of the US citizen's assets. If they would have kept gold as a freely marketable commodity, this never could have happened. Politicians always HATE THE GOLD STANDARD. Why? It's the only thing they can't print themselves to fool the people with. Forget those kiddy talks about lack of liquidity under the gold standard. These have long ago been definitely answered by the Vienna School of Economics: von Mises & Hayek. nononsense
Absolutely simpleton I admit. I have never focused alot of attention on the gold standard simply because it is a non-issue. If you were to re-establish a gold standard would the government be required to surrender gold on demand to note holders? Would international transfer payments require gold transfer from one country to another? If we did that with the limited amount of gold available how would we be able to maintain our current account deficit and buy all that cheap shit from other countries? Wouldnt that force us to play on a level playing field with other nations? I happen to mostly like the way it is with a system that makes the U.S. absolutely indispensable to the world economy. I like being a conspicuous consumer.
here's a rather balanced and thorough wiki link on the subject fyi http://www.elitetrader.com/vb/showthread.php?s=&threadid=72278 as for the so-called Austrian School of Economics, Mises, Rothbart & co, yeah the gold standard is about as much as they can comprehend... stone age economics...
The key problem with 'money supplyism' in setting interest rates (a la Freidman 1980's) is that it's hard to measure, and worse the effect on the economy depends on a nearly impossible to measure "money velocity". So the money velocity can change and thereby the effect of the same money supply can vary widely. So you end up setting monetary policy based on a poorly measurable device times an unmeasurable thing which is estimated by statistical mumbo-jumbo. Hence, today, economists and central believe in managing the price of money (interest rates) which is much more measurable---and most importantly it is the price of money which changes human psychology and plans, not some abstract global quantity of money. Think about gasoline, and pretend that the motion of the trucking companies and pipeline companies were unmeasurable. The effect on the economy of "gasoline supply" coudl vary widely depending on the velocity of gasoline. Money is harder still since it is recycled and not consumed. Planned Communist economies attempted to manage quantity, so they could avoid looking at price. But price is the most potent signal for conveying information that matters. Freidman thinks he's "more free market than thou" by regulating supply and not price, but he (was) wrong. Since money is an abstraction created by central bankers you have to do one or the other and price works better.