Gold vs Fiat

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    Professor Herbener,
    My Econ professor, a self- proclaimed Keynesian, insists that central bank- controlled fiat currency is more stable than specie/commodity, including gold. As evidence, he points to inflation in Spain when massive amounts of gold were shipped in from the New World.
    What is an Austrian, sound- money response to this? Did inflation of gold in Spain really happen? If so, was it as devastating as he claims?

    Also, I’m excited to announce that the curriculum committee at my college has just approved my application to use your Austrian Econ course here at Liberty Classroom for three hours of credit! I wasn’t sure they’d go for it, but it’s now an official class just for me.

    Morgan Aldous


    Estimates vary, but the rate of price inflation in Western Europe during the period of the so-called Price Revolution (from the early 16th century to the middle of the 17th century) was maybe as high as 2 percent per year. The Spanish production of money from the New World was mainly silver, not gold. The production of silver and gold coins by the Spanish was a state-run enterprise that involved enslavement of the natives of the New World. These circumstances are hardly normal, even by government standards, and certainly are not relevant to judging the results of a free-market monetary system in which money, like all other goods, would be produced by private enterprise and therefore, its production would be consistent with private property and regulated by profit and loss.

    In the hundred years before the establishment of our central bank, the Federal Reserve System in 1913, with the U.S. under a commodity money standard the dollar had roughly the same purchasing power in 1813 that it had in 1913. In the hundred years since the establishment of the Federal Reserve System, with its progressive movement toward fiat paper money, the dollar has lost over 95 percent of its purchasing power from 1913 to 2013.

    The episodes of hyper-inflation of the 20th century were all driven by excess fiat paper money issue. Here’s the sad story:

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