Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

A Proposal for Banking Reform:The Theory of a 100-Percent Reserve Requirement 779it would be equal to about 1 percent of the gross domesticproduct of each nation. 83 It is obviously much “cheaper” toissue paper money than to mine the earth for gold at a cost ofaround 1 percent of the gross domestic product of all countriesthroughout the world.Nevertheless to reject this monetary system based on thesupposed cost of the gold standard, as Keynes and Samuelsondo, is to be deceived. It is not correct to merely compare thecosts of gold production with those of issuing paper money;instead, it is necessary to compare the overall (direct and indirect)costs involved in both monetary systems. In doing so, wemust weigh not only the serious harm cyclical economic recessionsinflict on the economy and society, but also the range ofcosts associated with a monetary standard that is elastic,entirely fiduciary, and controlled by the state. Required readingon this topic includes Roger W. Garrison’s “The Costs of aGold Standard.” 84 In this article, Professor Garrison estimatesthe opportunity costs of a purely fiduciary monetary standardand compares them with those of a pure gold standard and a100-percent reserve requirement. Garrison states:The true costs of the paper standard would have to take intoaccount (1) the costs imposed on society by different politicalfactions in their attempts to gain control of the printing press,(2) the costs imposed by special-interest groups in theirattempts to persuade the controller of the printing press tomisuse its authority (print more money) for the benefit ofspecial interests, (3) the costs in the form of inflation-inducedmisallocation of resources that occur throughout the economyas a result of the monetary authority succumbing to thepolitical pressures of the special interests, and (4) the costsincurred by businesses in their attempts to predict what themonetary authority will do in the future and to hedgeagainst likely, but uncertain, consequences of monetaryirresponsibility. With these considerations in mind, it is not83 Leland B. Yeager, “Introduction,” The Gold Standard: An Austrian Perspective,p. x.84 Roger W. Garrison, “The Costs of a Gold Standard,” chapter 4 of thebook, The Gold Standard: An Austrian Perspective, pp. 61–79.