Economic Theory of Fixed Money: Better/Worse Off

[Addell]

Hey, can someone please explain how this idea works out, because if at any point in time the amount of money is fixed then the theory of "better of worse of" actually works. This theory is based upon the fact that when one country becomes better of (i.e through trade) another country must become worse of.

 

[Aquamarine]

During the gold standard the quantity of money was almost fixed since little gold is destroyed and the total amount increases only slowly through mining. Since gold flowed to countries with higher economic growth prices adjusted automatically so price levels were balanced all over the world. No losers.

Suppose a technological innovation brought about faster real economic growth in the United States. With the supply of money (gold) essentially fixed in the short run, this caused U.S. prices to fall. Prices of U.S. exports then fell relative to the prices of imports. This caused the British to demand more U.S. exports and Americans to demand fewer imports. A U.S. balance-of-payments surplus was created, causing gold (specie) to flow from the United Kingdom to the United States. The gold inflow increased the U.S. money supply, reversing the initial fall in prices. In the United Kingdom the gold outflow reduced the money supply and, hence, lowered the price level. The net result was balanced prices among countries.

http://www.econlib.org/library/Enc/GoldStandard.html

 

[russ_watters]

Welcome aboard to both of you.

Addell, the theory works exactly as you explained it: If the amount of money is fixed, then if one person gains, someone must lose. That's simply a matter of arithmetic. So if the premise is true, the theory will work.

The reality of world economics, though, is that the amount of money is not fixed. Even artificial attempts to fix it by tieing it to a comodity like gold don't work because the quantity of gold in the world isn't fixed and the amount of other available resources is also not fixed. Both are constantly increasing and, for all intents and purposes, the total amount of wealth available is limitless over time. The reason the gold standard was discarded is because physical money is just a vehicle for transporting wealth and artificially restricting it limits how much wealth can flow around the economy, limiting how big the economy can get.

Aquamarine - good link. I learned a few things I didn't know about the gold standard (namely, the relationship with unemployment).

 

[Aquamarine]

It is certainly possible to create an exactly fixed quantity of money. Since money is now mostly created electronically the central banks could simply decide to freeze the quantity. Bills and coins could be replaced with paycards.

This still wouldn't mean that some countries could exploit other countries through free trade. Yes, countries with faster growth would get more of the worlds money. No, this is not exploitation, this simply reflects that they produce more.

The reason the gold standard was discarded is because physical money is just a vehicle for transporting wealth and artificially restricting it limits how much wealth can flow around the economy, limiting how big the economy can get.

The amount of gold could have been divided into arbitrarily small parts if bills were used to represent a certain amount of gold. The reason that the gold standard was discarded was the same reason as countless time before in history: The government wanted more money than it had available. Some of the consequences:
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=27975

The true inflation, unemployment and deficit numbers:
http://www.gillespieresearch.com/cgi-bin/s/article/id=264
http://www.gillespieresearch.com/cgi-bin/s/article/id=278
http://www.gillespieresearch.com/cgi-bin/s/article/id=300

 

[Burnsys]

It is certainly possible to create an exactly fixed quantity of money. Since money is now mostly created electronically the central banks could simply decide to freeze the quantity. Bills and coins could be replaced with paycards.

This still wouldn't mean that some countries could exploit other countries through free trade. Yes, countries with faster growth would get more of the worlds money. No, this is not exploitation, this simply reflects that they produce more.

The amount of gold could have been divided into arbitrarily small parts if bills were used to represent a certain amount of gold. The reason that the gold standard was discarded was the same reason as countless time before in history: The government wanted more money than it had available. Some of the consequences:
http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=27975

The true inflation, unemployment and deficit numbers:
http://www.gillespieresearch.com/cgi-bin/s/article/id=264
http://www.gillespieresearch.com/cgi-bin/s/article/id=278
http://www.gillespieresearch.com/cgi-bin/s/article/id=300

and the debt of course:

Us National Debt: $ 7,431,586,182,424.77
http://www.brillig.com/debt_clock/