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• W3121911227 abstract "I do not know of any attempt to measure the real resource costs of an irredeemable paper currency and to compare such costs with the real resource costs of a commodity currency. That is clearly a needed research --Milton Friedman In 1986, Milton Friedman published a brief article in the Journal of Political Economy suggesting the possibility that real resource costs associated with the production and use of money could be greater under the current fiat money regime than under the commodity money regimes that preceded it. His article, and the broader implication about the resource costs of paper money, however, received scant attention. For by 1986, the Fed's disinflationary policies had come to full fruition, inaugurating the Great Moderation that ushered in two decades of low inflation, low unemployment, and strong real growth in the U.S. economy. Private accumulation of coins and bullion as an inflation hedge, safe-haven asset (hereafter demand for gold, following the terminology of the World Gold Council) had ballooned in the 1970s along with the price of gold, but the Voleker disinflation brought the price back down to earth, undermining of the rationale for ongoing monetary accumulation. (1) More recently, the world has experienced severe financial crises, recession, and massive central bank interventions aimed at preventing a recurrence of the Great Depression. Unconventional monetary policies--in the form of ultra-low interest rates, quantitative easing, and macro-prudential regulation--by the Federal Reserve and other major central banks have contributed to asset price booms in commodities. In particular, in 2012, gold--the traditional safe haven asset still widely perceived as a hedge against inflation and economic uncertainty--saw both its average annual nominal and real price soar to new heights, as shown in Figure 1. boom is not just a price boom, but a production boom. high price of is largely a result of the extra safe-haven investment funds being diverted into holdings during times of fiscal and monetary uncertainty, and this high price in turn induces mining entrepreneurs to direct additional resources into production. Although many researchers and commentators argue that the world is near gold production--that is, world output must at some point peak and then decline due to the finite amount of extant in the earth's crust--it appears that output has indeed responded to real price changes over the past several decades, albeit with a significant lag. Gold, like all fixed mineral resources, exhibits rising marginal costs of production in the short run with fixed production technology. Hence, the lagged output response to higher real prices represents a clear increase in real resource use in the mining industry. As Butterman (1980: 377) explained in the U.S. Geological Survey annual Minerals Yearbook for 1978-79, The increasingly strong price provided the incentive for extensive exploration for deposits and the development of new mines. Retreatment of old tailings dumps, and the heap leaching of low-grade ores, became economically feasible. Figure 2 confirms that higher real prices of gold--driven largely by bouts of increased investment demand--do indeed elicit an increased supply effort, and hence a greater resource cost of production. [FIGURE 1 OMITTED] [FIGURE 2 OMITTED] In light of these rising resource costs of investment production, Friedman's unanswered question acquires renewed relevance. By comparing the net annual real value of investment in the fiat money era against the classical standard era, we seek to begin the undertaking of Friedman's much needed research project. remainder of this article proceeds as follows. First, we present some estimates of the resource costs of the classical standard. …" @default.
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• W3121911227 date "2015-03-22" @default.
• W3121911227 modified "2023-09-29" @default.
• W3121911227 title "Current Evidence on the Resource Costs of Irredeemable Paper Money" @default.
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