Can Increases in the Supply of Gold Lead to Boom-Bust Cycles?
According to the Austrian business cycle theory, the boom-bust cycle emerges in response to a deviation in the market interest rate from the natural interest rate, or the equilibrium interest rate. As a rule, it is held, the tampering with market interest rates by the central bank sets the boom-bust cycle in motion.
Given this viewpoint, one might suggest that even with a gold standard without a central bank, an increase in the supply of gold money will lead to the lowering of market interest rates. This in turn is likely to cause the deviation of the market interest rates from the natural or the equilibrium interest rate. Consequently, this could set in motion the boom-bust cycle.
Murray Rothbard, however, believed that increases in the supply of gold could not set in motion boom-bust cycle. For him, the key reason behind boom-bust cycles is loose monetary policy of the central bank, which expands the money supply out of “thin air.”
Inflation, in this work, is explicitly defined to exclude increases in the stock of specie. While these increases have such similar effects as raising the prices of goods, they also differ sharply in other effects: (a) simple increases in specie do not constitute an intervention in the free market, penalizing one group and subsidizing another; and (b) they do not lead to the processes of the business cycle.1
Following this reasoning, the boom-bust cycle is the increase is caused by expanding the money supply out of “thin air.” The increase in the money supply sets an exchange of nothing for something, diverting resources from wealth generators to non-wealth-generating activities. For Rothbard then, business cycles occur because of the inflationary policies of the central bank, which set an act of embezzlement into motion.
Why Don’t Gold Supply Increase Generate Boom-Bust Cycles?
Consider the case of John the miner producing ten ounces of gold. He min
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