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

800 Money, Bank Credit, and Economic CyclesMurray N. Rothbard has devoted considerable thought tothe process of exchanging for gold all bills already issued bythe Federal Reserve, a step which would follow the establishmentof a 100-percent reserve requirement on all bankdeposits. Based on data from 1981, Rothbard reaches the conclusionthat this exchange would be contingent on a gold priceof $1,696 per ounce. Over the past fifteen years the price of theexchange has risen noticeably. Therefore, if we take intoaccount that the current [1997] price of gold is around $350 anounce, it is clear that in a country with an economy as large asthat of the United States, the complete privatization of fiduciarymoney and its replacement with gold would require anearly twenty-fold increase in the present market value ofgold. 105 This sharp rise in the price of gold would initiallydrive up its supply and perhaps cause an inflationary shockwhich we could hardly quantify, but which would be felt onlyonce and would not exert any acute distorting effects on thereal productive structure. 106out, Timberlake resolutely claims that money has a direct, subjectiveutility, just like any other good, yet he fails to realize that money onlygenerates utility as a medium of exchange, unlike consumer and intermediategoods, and thus the absolute volume of it is irrelevant withrespect to the fulfillment of its function. Therefore one must turn to the“monetary regression theorem” (which is simply a retrospective versionof Menger’s theory on the evolutionary emergence of money) to explainhow economic agents estimate money’s purchasing power today basedon that which it had in the past. This is the key to avoiding the vices ofcircular reasoning in this matter.105 Rothbard, “The Case for a Genuine Gold Dollar,” chapter 1 of TheGold Standard: An Austrian Perspective, p. 14; see also “The Solution,” p.700.106 Thus it would be unnecessary and damaging to implement the proposalF.A. Hayek made in 1937, when, in reference to the establishmentof a 100-percent reserve requirement for banking in a context of a puregold standard, he concluded:[I]t would clearly require as an essential complement an internationalcontrol of the production of gold, since the increasein the value of gold would otherwise bring about an enormousincrease in the supply of gold. But this would only providea safety valve probably necessary in any case to prevent