| | Andy: The reason that "hard money deflations" do not impoverish is simple: there are no hard money deflations. The supply of gold does not contract, because people safeguard it for its value. Deflations occur only as a result of coercive money and banking regulations that attempt to protect banks from runs that arise when bankers attempt to issue more bank notes, or loans of bank notes, than they have gold on deposit. In the absence of banking regulations, any surplus issuance of bank notes by a particular institution would almost immediately force the withdrawal of gold from that institution in favor of other banks that refrained from the fraud of fractional reserve banking. The regulations permit banks in concert to expand money and credit well beyond their gold despoits. When bank loans go bad during the inevitable downturn of the business cycle generated by fractional reserve bank inflating, some banks are threatened. Depositors rush to retrieve their gold, which ushers in a spontaneous monetary contraction and deflation. The inflation that inspired the artificial boom, and the deflation that follows, are features of a state regulated banking system, not of a free market gold standard. In American history, the banking regulations to which I refer were imposed by state legislatures throughout the nineteenth century, and the panics and crashes that erupted during that century, such as the Panic of 1837, were the direct consequence of those regulations.
To the extent that prices fall under an authentic gold standard (or whatever commodity the market selects as money), that process is beneficial to everyone: debtors, creditors, workers, and business people. For the decline in prices reflects a rise in the value of money; the rise in the value of money reflects an increase in the demand to hold money. The increase in the demand for money occurs because greater production of physical wealth requires more expenditure of money to facilitate trade. This gradual decline in prices happens only because production has been rising. And since production can increase only as the result of capital accumulation, and since capital accumulation increases the productivity of workers, real wage rates rise. Debtors do just fine because economic progress conveys to nearly everyone the benefits of rising real wages and real profits. In other words, each player is likely to enjoy higher real income with which to pay debts.
The idea that money exists to measure wealth is, with due respect, confused. In a free market, traders use money prices to calculate, but no one needs to "measure wealth". When one exchanges a gold piece, or a fiduciary receipt for some quntity of gold, for a good, one is not seeking to measure wealth, but simply to buy some good. Economic calculation requires money prices, but such calculation does not measure wealth; it only informs the trader whether he is gaining or losing market exchange value by doing a deal. The only types who preoccupy themselves with measuring wealth are politicans who pretend to be "economic planners".
Finally, the deflation in the money supply in the early 1930's happened as a response to central bank inflating throughout the Roaring Twenties. The primary cause of the monetary deflation was the outflow of gold from the United States, which had inflated enthusiastically; to Europe, which had inflated at a slower rate. The outflow contracted bank reserves in spite of "heroic" measures by the Fed to ramp up reserves and the money supply. With loans rapidly going bad as a consequence of the reversal of the Fed's artifical boom, a monetary contraction was unavoidable. The fault for the Depression lay with the Fed, but not because it didn't succeed in inflating in the early Thirties, but rather because it succeeded in inflating throughout the Twenties. Two great sources concerning this period in history include Rothbard's America's Great Derpression, and Benjamin Anderson's A Financial History of the United States from1900 through 1945. Anderson was a veteran Wall Street banker who for years was the chairman of Chase Bank; in his history he writes of the Fed's frantic efforts to pump up the money supply. As I recall, Anderson documented that the Fed actually increased bank reserves despite the gold outflow, following a brief dip in late '29 and early '30. Still, the money supply later contracted in response to the liquidation of malinvestments inspired by the inflationary boom, as banks failed, depositors withdrew cash, and borrowers and lenders avoided new loans.
Although the Depression was a major tragedy, its duration and intensity were due to the misguided attempts by both Hoover and FDR to coercively prop up wages and prices in the face of a declining money supply. The deflation that accompanied the Depression was not its cause, but its consequence.
Further, that deflation was beneficial, not wealth destroying. Busines cycles occur when producers respond to central-bank-manipulated, artifically low interest rates. As rates decline, producers react as though more capital were available for new capital intensive ventures than has actually been saved. The resulting expansion in business loans and projects ushers in an artifical wealth-destroying boom that wastes scarce and precious capital in unsustainable investment white elephants. The recession is the curative that corrects the errors of the boom and reconnects economic decisions with the reality of scarcity. The deflation is beneficial because it accelerates the cure of recession, by reducing white elephant investment prices, contracting spending, and thereby more rapidly liquidating wealth-consuming malinvestments. To the extent that the deflation encourages saving over consumption, it actually serves to partly rationalize the malinvestments that suffer from a dearth of savings.
One last note which I should have addressed earlier: an authentic free market commodity standard does not entail price fixing. People may trade gold coins or receipts for those coins for goods; such voluntary exchange does not require fixing the price of gold against any other good or money. In foreign trade, the price of gold would fluctuate against the value of foreign fiat currencies, which usually lose value as central bankers "manage" their captive money. The price fixing of gold that you refer to arises after banking regulations prop up fractional reserve bank inflating. When central bankers then attempt to coercively repress the market's repricing of their depreciating bank notes against gold, they resort to price fixing.
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