Commodity Money is not the solution

Prof.  Paul Krugman (NYT) has a very nice take on Ron Paul’s new video.

Prof. Krugman argue against of coming back to the commodity money, an idea by late Nobel laureate Fredric Hayek. the main argument is the way silver has fluctuated.

One important characteristic of a medium of exchange is that its supply can be controlled in way that allows shocks to the supply and demand for the medium of exchange to be offset. Otherwise, the value will potentially vary quite a bit over time. (E.g. the price of silver went from around $10 near the end of 1972 to over $100 at the beginning of 1980, followed by a large fall back to around $10 at the beginning of 1990. In 2001 it fell to around $6, then spiked to around $50 by 2011, then fell again to around $15 today, and all indications are that it will fall further.) Such large variations in purchasing power of the medium of exchange are highly undesirable — this is what the gold and silver bugs object to, periods of rapid inflation and deflation (in addition to the variation in purchasing power, it creates considerably uncertainty about the future — what will be the value of the medium of exchange when loans are repaid? — and harms future investment).

So the choice is to have a medium of exchange whose value can vary significantly, suddenly and unexpectedly, or have a central authority intervene to stabilize the price (by stockpiling or selling the medium of exchange to offset shocks to the supply and demand for the commodity). The point is that if changes in the value of a medium of exchange is the concern, as it appears to be, then switching to a commodity money does not solve the problem of needing a central authority to keep the value stable.

Indeed

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