Home › Forums › Discuss Austrian Economics, Step by Step › Newbie sound money question
- This topic has 4 replies, 5 voices, and was last updated 10 years, 7 months ago by woods.
October 18, 2012 at 5:55 pm #17253Babysan12Member
You guys will probably laugh at this one, so Ill apologize up front. Someone sent me a video of Ron Paul at one of the debates, stating that if we had sound money, gasoline would cost about a dime. I thought that made sense when you look at the price of silver vs. a gallon of gas. Shared that with a friend, who immediately said, “so what, your wages would be less too. A family income of 60,000, would only be about 1800.”. So my question is, do you really come out ahead? Would it all be relevant? Thanks!October 19, 2012 at 6:06 pm #17254maester_millerParticipant
I would say that your friend is maybe half right, but missing the greater point.
He’s right in the sense that to the extent that the rise of gas prices is attributable to inflation, that same inflation also causes wages to rise. The problem is that gasoline has risen in price for a number of reasons besides simple price inflation, and that wages have also risen for many reasons besides inflation (namely, gains in productivity as a result of technological improvement).
If we maintained sound money, the illusory price increases from inflation would be stripped away, since government would not have the ability to magically conjure new gold or silver coins out of thin air. That does not guarantee that gasoline would stay at such and such a price as compared to the annual wage. If the supply of gasoline falls and workers do not gain in productivity, the price of gasoline per unit of labor would in fact rise, but that is due to simple economic laws, and not because we have sound money.
To truly answer his question, you can probably find graphs and figures relating the price of gasoline (or various other commodities) as measured against median income, or other commodities (such as gold and silver).October 19, 2012 at 8:47 pm #17255tang20Member
If we had sound money the government would not be able to embark on extremely costly wars in the Middle East, thus wasting tremendous amounts of fuel and resources to begin with. This is again not a definite proof that gas prices would still be low relative to wages, but it is a strong suggestion.October 20, 2012 at 11:13 am #17256jmherbenerParticipant
It’s hard to fit the two main economic arguments about the effects of monetary inflation into pithy political statements. But, to say, as your friend implies, that monetary inflation doesn’t matter because all prices and wages go up together is mistaken.
Monetary inflation will push the prices of some goods up further than the prices of other goods and it will push the prices of some goods up sooner than the prices of other goods. Because of this, income is redistributed away from those who are selling goods whose prices go up later and not so much and buying goods whose prices go up sooner and further. Income is redistributed toward those who are selling goods whose prices go up sooner and further and buy goods whose prices are going up later and not so much. These changes in the structure of prices change the profitability of lines of production and therefore, entrepreneurs shift resources toward the more profitable and away from the less profitable lines.
Monetary inflation, therefore, retards the efficiency with which entrepreneurs arrange production to satisfy people’s consumption demands. Instead, resources are forced into production to serve the interests of the state.
Take a look at the lectures on money and monetary policy for more details.October 21, 2012 at 5:16 pm #17257woodsParticipant
I would add to this that while your income would indeed go up under inflation, the value of your savings would not. Whereas under the gold standard, the real value of both your income and your savings increased.
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