Friday, December 30, 2011

The Gold Standard: An Austrian School Contradiction?

One of the chief arguments of the Austrian School of economic thought is that a free market should be allowed to determine prices of its own accord. Fixing of prices leads to adverse effects on other areas of an economy that are not immediately obvious. For a detailed description or if you are not familiar with the argument against price-fixing (a form of economic planning), please read pages 190 to 209 of the following PDF of Economics for Real People by Gene Callahan:

In the pages above, the author describes a scenario in which a person proposes fixing the floor price of a stock at $10 per share. A conversation about this topic ensues, outlining why this would be a bad idea. Accepting the premise that fixing prices is a bad idea, I'd like to explore if it's also a bad idea to fix the rate of change of prices. In the example above, this would be equivalent to limiting daily stock price movement to a range of, for example,  -5% to +5%. Suppose the opening stock price is $100. This would mean that a floor price for the stock during that day would be $95 and a ceiling price for the stock during that day would be $105. In other words, fixing the rate of change of a price is equivalent to fixing simultaneous price floors and ceilings.

In my previous blog post "Inflation and the Optimal Money Supply", I outline the case for attributing inflation to rapid changes in the size of the money supply, and how fixing interest rates (a form of price fixing) is equivalent to tinkering with market supply and demand for cash holdings. Many Austrian School economists advocate the return to a gold standard to resolve this problem. In other words, every dollar should be redeemable for the equivalent amount of gold. Since the amount of gold in the world is fixed and only so much gold can be mined per year, then the money supply won't be able to change size so quickly.

One Warren Buffett quote that got me thinking was the following: "[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

If we want the same effects of a gold standard without needing to mine the actual gold, we would simply need some sort of law or restriction that the money supply can only grow by a certain amount per year, similar to how only a certain amount of gold is mined every year. In essence, we would want to fix the rate of change of the size of the money supply, which is a form of economic planning. As I've outlined above, fixing a rate of change of a price is essentially fixing the price to a certain range. Upon realizing this, I noticed a contradiction: the Austrian School advocates against price fixing and economic planning, and the Austrian School advocates a gold standard, which can be seen as a way of fixing the rate of change of the size of the money supply through economic planning. This seems to be a contradiction.

I don't know the answer to this conundrum, nor am I entirely certain that I haven't misinterpreted or mis-stated the beliefs of the Austrian School of economic thought. Comments are welcome, as I would love to know more about this particular topic.

Edit: I've thought of some additional insights on this topic; see my other blog post.


  1. Answer here:


  3. Further on Buffetts quote on Gold, I ask, what is it that we do with Fiat Money? We print a small portion of it and take it from one vault of one bank and deposit them into another vault in another bank - perhaps Buffett is getting old and forgot that Gold "is" money?