100% gold standard vs fractional gold standard

An old piece written by Henry Hazlitt in 1979 who wrote the famous book: Economics in One Lesson.

He says we moved from a pure gold standard where money would be created backed by 100% gold reserves to a fractional one where only 50% or lower gold reserve was needed. This move to full backing to fractional backing sowed seeds for multiple monetary and financial crises:

My chief concern in this article has been to show that in addition to being the principal institution responsible for bringing about the cycle of boom and bust that has plagued the civilized world since the early nineteenth century, the fractional-reserve standard, once its principle of “economizing the use of gold” has been fully accepted, itself encourages an inflation that has no logical stopping place until gold has been “phased out” altogether, and the world is adrift in the turbulent seas of paper money.

In emphasizing this weakness of a fractional-reserve standard, I do not intend to imply that I have solved the baffling problem of creating an ideal money — assuming that that problem is even soluble. An opportunity now exists — for the first time in a couple of centuries — to introduce a 100 percent gold reserve standard. But if sufficient new gold supplies were not regularly available, such a standard could conceivably result, over time, in a troublesome fall in commodity prices. Moreover, unless there were rigid prohibitions against it, a private no less than a government money would soon tend to become a fractional-reserve standard. And if we allowed this, would we not soon be on the road once more to a constantly diminishing fraction, and at least a constant mild inflation?

I confess I do not have confident answers to these questions. But that does not invalidate my criticisms of a fractional-reserve standard. I should like to point out, incidentally, that expanding the money supply through a fractional-reserve standard — mainly for the purpose of holding down the exchange value of the individual currency unit and thereby preventing a fall in prices — could also be accomplished under a full gold standard by constantly or periodically reducing the weight of gold into which the dollar (or other unit) was convertible. Such a proposal was once actually made by the economist Irving Fisher. I am unaware of any economist who accepts such a proposal today. But it is no different in principle from steadily expanding the money supply — under either a paper or a fractional-reserve gold standard — for the purpose of holding down the purchasing power of the monetary unit. Is this a power we would want to trust to the politicians?

It is so much valuable to read these pieces on monetary economics than the algebraic pieces one has to read today. There is much clarity..

2 Responses to “100% gold standard vs fractional gold standard”

  1. 100% gold standard vs fractional gold standard | Me Stock Broker Says:

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