“‘This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.’
“But then, finally, the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

“It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

This is because there is only so much inflating a government can do until the money is abandoned. The necessity of useful money shows itself bare throughout a hyperinflation. During this process, which can be described as nothing less than awful, people gradually abandon a currency in order to find new ones; one that has not lost all essential qualities a money must possess.

The hard thing to explain to people who look at economics as a set of rules to be found not in nature but in a textbook is that the laws are incontrovertible and omnipresent. Money serves a real societal function only when it possesses certain qualities, one of them being to maintain a relatively stable purchase power, or value, over time. This is typically found in the most commonly exchanged commodity (along with other essential qualities). Cattle, tobacco, gold, wampum, tea, cigarettes – these have all been used as money. All of this figures in to rebutting your argument for continued credit expansion argument because credit is in practice loaned money.

You are correct that there were there were boom/bust cycles on the gold standard, but to suggest that this fact proves me wrong is to misunderstand the critique. I advocate adopting a gold standard (when amenable) and abolishing the Federal Reserve (and, to be complete, eliminating the banking industry’s legal monopoly on fraud – i.e., fractional reserve banking) because they all encourage destructive behavior. (Note: ending legal tender laws would accomplish much of this, as well.)

I’ve found in the past that I lose most people here. It’s because the suggestions are radial by today’s standard, although mainstream by historical standards, that most people cannot begin to conceive a more productive order. The stock argument of Bernanke is ultimately wrong, and potentially fatal. He’s thrown caution to the wind and is gambling with the relevance of the dollar.

Two very serious treatments of this topic are:
1) Theory of Money and Credit by Ludwig von Mises – pub. 1912
2) Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto – pub. 1997 (?)

I don’t claim to have read either cover to cover, but have read much Mises, Rothbard, monetary theory, and critiques, and I may say these two works are likely the best resources you’ll find.

Finally, please don’t lump me in with Ron Paul.

“ottovbvs, actually I am pretty sure the ECB lets the Euro float against all other currencies.”

……….It does……although they also execute some discreet open market management I believe

“actually, expansionary monetary policy caused the boom/bust cycle that triggered the 1929 crash. the gold standard provides for honest and stable money.”

……….There were many things that triggered the 1929 crash…..technically speaking you’re correct about a causal link in that credit is money by another name, but it was more complicated than that…..basically it was exactly the same problem as this time around…….namely too much credit and then not enough of it……..the US was on the gold standard and had plenty of leeway to expand money supply domestically at the fixed rate without going off gold, since at the time they had about 60% of world gold stocks…..the reason it turned into a debacle was that when the crash occurred and there was a crisis of confidence and credit froze up they didn’t expand the money supply (or “flood the market with liquidity” as Bernanke and the other central bankers did this time) and hence they embarked on a deflationary spiral etc etc…….If the Fed had applied Bernanke’s policies in 1929-32 the depression if not avoided completely would have been massively reduced in severity …….the rest of the world apart from France didn’t have sufficient gold to maintain their currencies at previously fixed too high rates and wasted vast amounts of money(much of it borrowed) defending their currencies against speculators while imposing demand reducing policies at home to satisfy creditors that in turn induced deflation …….this is all very well described in that book Lords of Finance that was actually written by my daughter’s former boss.

“Both opponents and proponent of the gold standard should not get too mystical about it. The gold standard is a system of fixed exchange rates, nothing more nothing less.”

……..No mysticism involved……….your definition is correct as far as it goes…….the problem is that it’s an overly rigid and not very efficient system of monetary management despite it’s claimed benefits (ie. the cure is worse than the disease)…….hence there is no chance whatever of it being re-adopted whatever fantasies may be nurtured in some bosoms.

Both opponents and proponent of the gold standard should not get too mystical about it. The gold standard is a system of fixed exchange rates, nothing more nothing less.

why?
entrenched interests. do you find that hard to believe?

” b) war is not caused by going off a g0ld standard, but that often governments will go off the gold standard to fund wars ????”

……..The economic collapse in the thirties which did huge damage to the world economic system and allowed fascism to emerge, and ultimately caused the greatest war in human history, was largely precipitated by a blind adherence to the gold standard……….today it would be a major brake on economic growth…..China has roughly the same amount of gold stocks as Switzerland to underpin economic activity in the world’s second largest economy

” It’s hard for me to understand how people who are genuinely uninformed on economic and monetary theory all of a sudden have opinions they’re so happy to defend………Or maybe it’s as Reagan said (I paraphrase) – It’s not that our liberal friends know so little, but that they know so much that isn’t true”

………Perhap with your expert status you could tell us why a majority of economists (not to mention the uninformed Mr Buffett) regard the idea of a return to the gold standard as off the wall…….lack of information?

“ottovbvs, the ECB does not directly control the exchange rate of the Euro, it would have to influence to price of the Euro by trading on the open market.”

……………The ECB manages Euro rates constantly in the open market…….So if a Euro devaluation was ever necessary whose decision would it be?

I bailed out of the U.S. stock market in 1998, two full years before the dot.com bubble burst. But I’m not sorry I didn’t hang in there longer. Too rich for my blood, as the gamblers say.

http://www.youtube.com/watch?v=kc0xQfi4vPA

These are elementary facts that must be grasped and understood before all sorts of vicious, slandering comments are thrown at people, Frum included. I don’t believe Frum is a warmonger anymore than Bush was. Some would say both are; I disagree.

It’s hard for me to understand how people who are genuinely uninformed on economic and monetary theory all of a sudden have opinions they’re so happy to defend. Personally, I wouldn’t start blogging on veterinary medicine because I have no understanding, yet many here seem to take that same swagger into every policy discussion, even if they know demonstrably nothing.

Or maybe it’s as Reagan said (I paraphrase) – It’s not that our liberal friends know so little, but that they know so much that isn’t true.