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Frank Shostak

Frank Shostak

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor's degree from Hebrew University, master's degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

Articles by Frank Shostak

Defining “Inflation” Correctly

4 days ago

Inflation is typically defined as a general increase in the prices of goods and services—described by changes in the Consumer Price Index (CPI) or other price indexes.
If inflation is a general rise in measured prices, then why is it regarded as bad news? What kind of damage can it inflict? Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources.
Despite all of these assertions regarding inflation’s side effects, mainstream economics doesn’t tell us how all of these bad effects are caused. Why should a general rise in prices hurt some groups of people and not others? Why should a general rise

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Let’s Hope Deflation Is Headed Our Way

13 days ago

The yearly growth rate of the US consumer price index (CPI) fell to 0.4 percent in April from 2 percent in April last year while the annual growth of the producer price index (PPI) plunged to –1.2 percent last month against 2.4 percent in April 2019.
Furthermore, the yearly growth rate of the import price index fell to –6.8 percent in April from –0.2 percent in April last year.
A general decline in the prices of goods and services is regarded as bad news since it is associated with major economic slumps such as the Great Depression of the 1930s.
In July 1932, during the Great Depression, the yearly growth rate of industrial production stood at –31 percent whilst the yearly growth rate of the CPI bottomed out at –10.7 percent in September 1932.
According to

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How Central Banks and Lockdowns Are Making the Crisis Worse

18 days ago

What typifies the phenomenon of the boom-bust cycle is that it is recurrent. What is the reason for this?
Loose monetary policies set the platform for various activities that would not emerge without the easy monetary stance. What loose monetary policy does here is to engineer the transfer of real savings from wealth generating activities to artificially stimulated activities, which we can label as bubble activities.
Over time, these loose monetary policies begin to manifest as increases in price inflation (consumer prices, producer prices, and/or asset prices) and various forms of distortions that economists call overheating.
To counter these side effects the central bank may reverse its earlier loose stance, as happened in 2018 when the Fed allowed interest

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Government Regulation against “Monopolies” Only Lowers Our Standard of Living

May 1, 2020

According to a popular way of thinking, monopolies undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products. Consequently, this undermines the well-being of individuals in the economy. By this way of thinking, the inefficiency emerges because of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.
The “Perfect Competition” Framework
In the world of perfect competition, a market is characterized by the following features:
There are many buyers and sellers in the market.
Homogeneous products are traded.
Buyers and sellers are perfectly informed.
There are no obstacles or barriers to entering the market.
In the world of perfect competition, buyers and

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Creating More Money Won’t Revive the Economy

April 8, 2020

In response to the coronavirus, central banks worldwide are currently pumping massive amounts of money. This pumping, it is held, is going to arrest the negative economic side effects that the virus-related panic inflicts on economies. As appealing as it sounds we suggest that this view is erroneous.
The view that more money can revive an economy is based on the belief that money transmits its effect through aggregate expenditure. With more money in their pockets, people will be able to spend more and the rest will follow suit. Money then, as one can see in this way of thinking, is a means of payments and a means of funding.
Money, however, is not the means of payments but the medium of exchange. It does not have a life of its own; it only enables one producer to

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The Bureaucrats Can’t Fix This

April 5, 2020

In the midst of the emerging economic chaos triggered by the COVID-19 coronavirus, individuals are seeking answers from governments as to how to prevent the emerging economic disaster.
Most economic experts are sympathetic to this and are urging the authorities to push massive injections of money. Thus in the US the central bank has embarked on a $2 trillion stimulus. At the same time government officials are imposing draconian measures to keep the population in isolation. The isolation is expected to arrest the spread of the coronavirus.
Even if one were to accept that the total lockdown of the population will slow the spread of the virus, this will inevitably reduce the production of goods and services needed in the economy—needed to support individuals’ lives

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Diversification versus Risk

March 28, 2020

It is widely held that financial asset prices fully reflect all available and relevant information, and that adjustments to new information is virtually instantaneous. This way of thinking which is known as the Efficient Market Hypothesis (EMH) is closely linked with the modern portfolio theory (MPT), which postulates that market participants are at least as good at price forecasting as any model that a financial market scholar can come up with, given the available information.1
It is held that asset prices respond only to the unexpected part of any information, since the expected part is already embedded in prices. According to MPT, the individual investor cannot outsmart the market by trading based on the available information since the available information is

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No, Technology Shocks Aren’t Behind Recurring Business Cycles

March 22, 2020

Economic fluctuations, also known as business cycles, are seen as being driven by mysterious forces that are difficult to identify. Finn Kydland and Edward C. Prescott (KP), the 2004 Nobel laureates in economics, decided to attempt to find out what these forces were.1 They hypothesized that technology shocks are a major factor behind economic fluctuations and demonstrated that a technology-induced shock can explain 70 percent of the fluctuations in the postwar US data.
Kydland and Prescott’s Methodology: Calibrated Fixed Parameters (with a Layman’s Primer)
To do this, KP employed the Solow growth model (named after the 1987 Nobel laureate), which is based on the Cobb-Douglas production function of the following type:
Here Y is real output, A is a

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Why Sweden’s Negative Interest Rate Experiment Is a Failure

March 9, 2020

According to the Financial Times’s February 20 article “Why Sweden Ditched Its Negative Rate Experiment,” economists are pondering whether Sweden’s central bank experiment with negative interest rate was a success.
Sweden’s Riksbank, the world’s oldest central bank, introduced negative interest rates in early 2015. The reason given by central bank policymakers for the introduction of the negative interest was to counter deflation. Note that for the period November 2012 to December 2014 the average yearly growth rate of the consumer price index stood at –0.1 percent.
According to the Financial Times analysts, it is still too early to judge whether negative rates have worked or have caused lasting damage to the economy and finance sector.
From the perspective of

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Some Problems with Worker Productivity Stats

February 19, 2020

According to the US Labor Department, worker productivity in the non-farm sector increased at an annual rate of 1.4 percent in the fourth quarter of 2019 after declining by 0.2 percent in the previous quarter. For the year, productivity increased 1.7 percent, up from 1.3 percent in both 2017 and 2018. It was the best annual showing since the 3.4 percent increase in 2010. For most commentators, an increase in productivity is considered an indication that the US economy is becoming healthier and wealthier.
After all, the increase in productivity means that workers are now generating a greater amount of goods per hour. Notwithstanding, there are serious doubts as to whether productivity figures here actually describe the facts of reality.
To calculate productivity,

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Government “Fixes” for the Trade Balance Are Far Worse Than Any Trade Deficit

February 16, 2020

In December 2019, the US trade account balance stood at a deficit of $48.9 billion, against a deficit of $43.7 billion in November and $60.8 billion in December 2018.
Most commentators consider the trade account balance the single most important piece of information about the health of the economy. According to the widely accepted view, a surplus on the trade account is considered a positive development while a deficit is perceived negatively. What is the reason for this?

US Trade Balance, 2000-2019(see more posts on U.S. Trade Balance, ) – Click to enlarge
Popular thinking holds that the key to economic growth is demand for goods and services. Increases and decreases in demand are behind the rises and declines in the economy’s production of goods. Hence, in

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How Keynesian Ideas Weaken Economic Fundamentals

February 3, 2020

Whenever there are signs that the economy is likely to fall into an economic slump most experts advise that the central bank and the government should embark on loose monetary and fiscal policies to counter the possible economic recession. In this sense, most experts are following the ideas of the English economist John Maynard Keynes.
Briefly, John Maynard Keynes held that one could not have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy.
Successful management in the Keynesian framework is achieved by influencing overall spending in an economy. It is spending that generates income. Spending by one

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Economic Stats Won’t Tell Us What Really Causes Recessions

January 1, 2020

Most economists are of the view that by means of economic indicators it is possible to identify early signs of an upcoming recession or prosperity. What is the rationale behind this opinion?
The National Bureau of Economic Research (NBER) introduced the economic indicators approach in the 1930s. A research team led by W. C. Mitchell and Arthur F. Burns studied about 487 economic data to ascertain the mystery of the business cycle. According to Mitchell and Burns,
Business cycles are a type of fluctuation found in the aggregate economic activity of nations. … a cycle consists of expansion occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next

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To Be Useful, Data Needs Theory

December 29, 2019

For most so-called practical economists, information regarding the state of an economy is derived from data. Thus, if an economic statistic such as real gross domestic product or industrial production shows a visible increase, it is considered indicative of a strengthening of the economy. Conversely, a decline in the growth rate is regarded as weakening. It seems that by looking at the data one can ascertain economic conditions. Is this the case, though? The so-called data that analysts are looking at is a display of historical information.
But according to Ludwig von Mises in Human Action,
History cannot teach us any general rule, principle, or law. There is no means to abstract from a historical experience a posteriori any theories or theorems concerning human

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Good Economic Theory Focuses on Explanation, Not Prediction

December 22, 2019

In order to establish the state of the economy, economists employ various theories. Yet what are the criteria for how they decide whether the theory employed is helpful in ascertaining the facts of reality?
According to the popular way of thinking, our knowledge of the world of economics is elusive — it is not possible to ascertain how the world of economics really works. Hence, it is held the criterion for the selection of a theory should be its predictive power.
So long as the theory “works,” it is regarded as a valid framework as far as the assessment of an economy is concerned. Once the theory breaks down, the search for a new theory begins.
For instance, an economist forms the view that consumer outlays on goods and services are determined by disposable

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Why Central Banks Aren’t Really Setting Interest Rates

December 12, 2019

Mainstream thinking considers the central bank a key factor in the determination of interest rates. By setting short-term interest rates, the central bank, it is argued, can influence the entire interest rate structure by creating expectations about the future course of its interest rate policy.
In this way of thinking, the long-term rate is an average of current and expected short-term interest rates. If today’s one-year rate is 4 percent and the next year’s one-year rate is expected to be 5 percent, then the two-year rate today should be 4.5 percent ((4%+5%)/2=4.5%).
Conversely, if today’s one-year rate is 4 percent and the next year’s one-year rate expected to be 3 percent, then the two-year rate today should be 3.5 percent ((4%+3%)/2=3.5%).
By this popular

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Exports: Currency Devaluation Won’t Grow the Economy

December 3, 2019

A visible weakness in economic activity in major world economies raises concern among various commentators that world economies have difficulties recovering despite very aggressive loose monetary policies. The yearly growth rate of US industrial production stood at minus 1.1 % in October, against minus 0.1% in September, and 4.1% in October last year. In the euro zone, the yearly growth rate of production stood at minus 1.7% in September versus minus 2.8% in the month before and 0.6% in September 2018. In addition, in China the growth momentum of industrial production remains under downward pressure with the annual growth rate declining to 4.7% in October from 5.8% in September and 5.9% in September the year before.

Industrial Production, 2000-2019 – Click to

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Capital Accumulation, Not Government, Is the Key To Technological Innovation

November 27, 2019

According to Mariana Mazzucato, the RM Phillips Professor in the Economics of Innovation at the University of Sussex, government is an important factor in the promotion of innovation and thus economic growth. In particular, she challenges the popular view that innovation happens in the private sector, with governments playing a limited role. Many commentators regard her as a revolutionary thinker that challenges the accepted dogma regarding the role of government in promoting innovations and economic growth.
In her 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths, Marianna Mazzucato argues that the United States’ economic success is a result of public- and state-funded investment in innovation and technology. In his critique of the

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Don’t Want a Liquidity Trap? More Saving Is the Answer

November 19, 2019

With interest rates in many countries close to zero or even negative, some commentators are of the view that monetary policy of the central banks are likely to become less effective in navigating the economy. In fact it is held that we have most likely reached a situation that the economy is approaching a liquidity trap. But what does this mean?
In the popular framework of thinking that originates from the writings of John Maynard Keynes, economic activity is presented in terms of a circular flow of money. Spending by one individual becomes part of the earnings of another individual, and spending by yet another individual becomes part of the first individual’s earnings.
Recessions, according to Keynes, are a response to the fact that consumers — for some

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Why Friedman Is Wrong on the Business Cycle

November 14, 2019

According to an article in Bloomberg on November 5, 2019, Milton Friedman’s business cycle theory seems to be vindicated.
According to Milton Friedman, strong recoveries are just natural after particularly deep recessions. Like a guitar string, the harder the string is plucked down, the faster it should come back up.
Bigger recessions should lead to faster growth rates during the recoveries, to get the economy back to the pre-recession level of activity. In Friedman’s model, the size of the recession predicts the growth rate in the recovery.1
The Bloomberg article refers to a study by Tara Sinclair that employs advance mathematical techniques that supposedly confirmed Friedman’s hypothesis that in the US bigger recessions are followed by faster recoveries — but

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Why Government Should not Fight Deflation

November 10, 2019

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.
This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators hold that policies that counter deflation will also counter the slump.
Will Reversing Deflation Prevent a Slump?
If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy. Or so it is held.
Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking

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Rising Oil Prices Don’t Cause Inflation

May 17, 2017

Correlation vs. Causation
A very good visual correlation between the yearly percentage change in the consumer price index (CPI) and the yearly percentage change in the price of oil seems to provide support to the popular thinking that future changes in price inflation in the US are likely to be set by the yearly growth rate in the price of oil (see first chart below).

Gushing forth… a Union Oil Co. oil well sometime early in the 20th century – Click to enlarge
But is it valid to suggest that a price of an important input such as oil is a key determinant of the prices of goods and services? It is true that producers of goods and services set asking prices. It is also true that producers, while setting prices, take into account various production costs including the cost of energy.
Whether the asking price set by producers is going to be realized in the market place, however, hinges on whether or not consumers will accept those prices. Consumers dictate whether the price set by producers is “right.” On this Mises wrote:
“The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run the plants and the farms.

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Central Banks’ Obsession with Price Stability Leads to Economic Instability

May 5, 2017

Fixation on the Consumer Price Index
For most economists the key factor that sets the foundation for healthy economic fundamentals is a stable price level as depicted by the consumer price index.
According to this way of thinking, a stable price level doesn’t obscure the visibility of the relative changes in the prices of goods and services, and enables businesses to see clearly market signals that are conveyed by the relative changes in the prices of goods and services.
Consequently, it is held, this leads to the efficient use of the economy’s scarce resources and hence results in better economic fundamentals.

Central planners at work. It looks stable, doesn’t it? – Click to enlarge

The Rationale for Price-Stabilization Policies
For instance, let us say that demand increases for potatoes versus tomatoes. This relative strengthening, it is held, is going to be depicted by a greater increase in the price of potatoes than for tomatoes.
Now in an unhampered market, businesses pay attention to consumer wishes as manifested by changes in the relative prices of goods and services. Failing to abide by consumer wishes will result in the wrong production mix of goods and services and therefore lead to losses.

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Money Creation and the Boom-Bust Cycle

January 12, 2017

A Difference of Opinions
In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:
I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud from any source a 100 percent gold standard. This is the only system compatible with the fullest preservation of the rights of property. It is the only system that assures the end of inflation and, with it, of the business cycle. (1)
Some economists such as George Selgin and Lawrence White have contested this view. In his article in The Independent Review George Selgin argued that it is not true that fractional-reserve banking must always set in motion the menace of the boom-bust cycle. According to Selgin:
In truth, whether an addition to the money stock will aggravate the business cycle depends entirely on whether or not the addition is warranted by a pre-existing increase in the public’s demand for money balances. If an expansion of the supply of bank money creates an overall excess of money, people will spend the excess.

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Two Types of Credit — One Leads to Booms and Busts

November 19, 2016

Stumped by the Bust
In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.
Businessmen themselves are confused as to why. They cannot make sense of why certain business practices that were profitable yesterday are losing money today. Bad business conditions emerge when least expected — just when all businesses are holding the view that a new age of steady and rapid progress has emerged.
In his writings, Ludwig von Mises argued against the prevailing explanation of the business cycle consisting of over-production and under-consumption theories, and critically addressed various theories that depended on vague notions of mass psychology and irregular shocks.
In the psychological explanation, an increase in people’s confidence regarding future business conditions gives rise to an economic boom. Conversely, a sudden fall in confidence sets in motion business stagnation.

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Is there a Savings Glut?

November 6, 2016

Can Saving Possibly “Undermine Economic Growth”?
In his speech at the New York Federal Reserve of New York on October 5, 2016, the Federal Reserve Vice Chairman Stanley Fischer has suggested  that a visible decline in the natural interest rate in the US could be on account of the world glut of saving.
According to Fischer, both increased saving and reduced investments have potentially significantly lowered the natural rate of interest. For Fisher and other commentators this could signify that the economy might have fallen into a situation where increased saving undermines the economic growth
Most economists are in agreement that in order to grow an economy, saving is a must. It is saving that funds investment in capital goods like computers, tools, and machinery, which in turn, make the economy more productive. It is argued that, while saving plays an important role in growing an economy, sometimes too much saving can actually be a bad thing.

Stanley Fischer points out where the imaginary savings glut he believes to have spotted is hiding. Photo credit: – Click to enlarge
For instance, it is held that if consumer demand is weak, then more savings will only undermine consumer expenditure and weaken economic growth.

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Should we Be Concerned About the Fall in Money Velocity?

August 22, 2016

Alarmed Experts
A fall in the US velocity of money M2 to 1.44 in June from 1.51 in June last year and 2.2 in May 1997 has alarmed many experts. Note that the June figure is the lowest since January 1959.
Some commentators are of the view that this points to a severe liquidity crunch, which could culminate in a massive stock market collapse and an economic disaster in the months ahead.

Money velocity is widely considered “too slow”. But what does the formula really tell us?

According to a popular thinking the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services.
The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.

M2 velocity has declined to a new multi-decade low. This chart is basically saying: “A lot of money printing has failed to produce a lot of economic output”. Big surprise… ? – click to enlarge.

A Famous Equation
For example, during a year a particular ten-dollar bill might have been used as following: a baker John pays the ten-dollars to a tomato farmer George.

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Does the UK Need Even More Stimulus?

August 22, 2016

AEP Speaks for Himself
“We are all Keynesians now, so let’s get fiscal.” This is one view according to Ambrose Evans-Pritchard from The Telegraph who believes the time is right for the UK government to loosen its fiscal stance.
He suggests that the “Bank of England has done everything possible under the constraints of monetary orthodoxy to cushion the Brexit shock. It is now up to the British government to save the economy, and the sooner the better,” — argues the economics editor of The Telegraph.
According to Ambrose Evans-Pritchard, monetary policy is close to its limits. The Bank of England’s preemptive £170 billion stimulus package is brave — and unquestionably the right thing to do in these dramatic circumstances — however, given the present limitations of monetary policy he is of the view that only loose fiscal policy can address the shocks of Brexit.
Now even if one were to accept that Brexit has caused a shock, is loose monetary policy the necessary remedy? What is needed to offset a shock is to boost the pool of real wealth. Printing more money never does it. A looser monetary stance only dilutes the pool of real wealth and weakens the process of wealth generation.

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Deflation Is Always Good for the Economy

August 5, 2016

“Experts” Assert that Inflation is an Agent of Economic Growth
For most experts, deflation, which they define as a general decline in prices of goods and services, is bad news since it generates expectations for a further decline in prices.
As a result, they hold, consumers postpone their buying of goods at present since they expect to buy these goods at lower prices in the future. This weakens the overall flow of spending and in turn weakens the economy.
Hence, such commentators hold that policies that counter deflation will also counter the slump. If deflation leads to an economic slump then policies that reverse deflation should be good for the economy.

Illustration via – click to enlarge.
Reversing deflation would imply introducing policies that support general increases in the prices of goods, i.e., inflation. This means that inflation could actually be an agent of economic growth.
According to most experts, a little bit of inflation can actually be a good thing. Mainstream thinkers are of the view that inflation of 2% is not harmful to economic growth, but that inflation of 10% could be bad news (indeed the Fed’s inflation target is 2%).
Thus, we can conclude that at a rate of inflation of 10%, it is likely that consumers are going to form rising inflation expectations.

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Why a “Dollar” Should Only Be a Name for a Unit of Gold

July 27, 2016

Once Upon a Time…
Prior to 1933, the name “dollar” was used to refer to a unit of gold that had a weight of 23.22 grains. Since there are 480 grains in one ounce, this means that the name dollar also stood for 0.048 ounce of gold. This in turn, means that one ounce of gold referred to $20.67.
Now, $20.67 is not the price of one ounce of gold in terms of dollars as popular thinking has it, for there is no such entity as a dollar. Dollar is just a name for 0.048 ounce of gold. On this Rothbard wrote:
No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars, and gold.
Likewise, the names of other currencies stood for a fixed amount of gold. The habit of regarding these names as a separate entity from gold emerged with the enforcement of the paper standard.
Over time, as paper money assumed a life of its own, it became acceptable to set the price of gold in terms of dollars, francs, pounds, etc. (the absurdity of all this reached new heights with the introduction of the floating currency system). In a free market, currencies do not float against each other. They are exchanged in accordance with a fixed definition.
If the British pound stands for 0.25 of an ounce of gold and the dollar stands for 0.

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