Could an Increase in Gold Supply Trigger a Boom-Bust Cycle?

The Austrian Business Cycle Theory (ABCT) postulates that artificially increasing the money supply through expansionary monetary policy significantly alters market interest rates, creating a misalignment with the natural interest rate formed by market dynamics. This dissonance is a catalyst for the boom-bust cycle, a phenomenon characterized by unsustainable economic booms followed by inevitable busts. In a gold standard scenario, where gold serves as the currency and no central bank intervene, a rise in the gold supply can similarly lead to lowered market interest rates, initiating a cycle akin to that seen under fiat money systems. The dependence of interest rates on the money supply highlights that even in a commodity standard like gold, the potential for boom-bust cycles persists if the money supply, though inherently “real”, is manipulated.

Theoretical discussions reveal differing opinions among economists regarding the role of gold supply increases in initiating economic cycles. According to Robert Murphy, a surplus of gold can indeed trigger a boom due to the distortion of interest rates, even in an environment of 100% reserve banking. However, Ludwig von Mises argued that the practical influence of this mechanism would be minimal. Contrarily, Murray Rothbard contended that the essential cause of boom-bust cycles stemmed from central banks’ expansionary policies, which create money out of thin air and initiate processes that disrupt the normal functioning of the economy. Rothbard emphasized that increases in gold supply should not be equated with monetary inflation, as they do not disrupt market functions or redistribute wealth in the distortive manner that fiat currency can.

Rothbard delineated inflation as a result of central bank policies, asserting that the arbitrary creation of money leads to an exchange of nothing for something, consequently eroding wealth from productive sectors and favoring those who receive the newly minted money first. In his view, the true cause of economic misalignment and the resultant cycles of boom and bust is central banks’ inflationary monetary policies and the fake prosperity they generate. These conditions prime the economy for corrections, as banks facing unsustainable credit expansions must eventually tighten monetary policies amidst inflationary pressures, resulting in economic downturns when unsound investments fail.

The relationship between gold mining and economic well-being illustrates the complexities of supply adjustments in a market. Producers mine gold based on demand, with this activity historically linking gold’s utility as jewelry and currency. If gold becomes more valued in the market, an increase in its supply is akin to producing a needed commodity; it essentially reflects a true wealth addition, contrasting the phenomena associated with fiat money. Unlike unbacked financial instruments that inflate the money supply without corresponding production, an increase in mined gold engages in genuine wealth exchange without questionable practices, thereby not contributing to the type of economic disruptions seen with artificially created money.

In contrast, unbacked monetary receipts, which are devoid of the necessary gold backing, operate similarly to counterfeit money on a large scale. These do not correspond to an increase in real wealth but facilitate consumption that exceeds productive capabilities, engendering many of the same adverse economic consequences typical of inflationary practices. When these receipts flood the market, they misallocate resources, inflate the economic environment, and foster an unsustainable boom that leads to eventual busts once the deceptive prosperity is unveiled. Such practices typify the embezzlement and deceit that lie at the heart of inflationary monetary policies, showcasing the disparity between a genuine increase in wealth via gold production versus the fictitious wealth represented by fiat currency.

The differentiation between increases in the money supply and gold supply crystallizes a core tenet of ABCT. True economic cycles, particularly boom-bust cycles, result from upon manipulation of money systems rather than natural market fluctuations stemming from wealth generation. An increase in gold supply, if properly managed and devoid of inflationary intentions characteristic of fiat systems, does not disrupt market order or precipitate economic turmoil. Continuous changes in a free market denote healthy economic transitions rather than the chaotic cycles prompted by monetary intervention. This brings forth the conclusion that artificial increases in the money supply—and not genuine increases in real wealth—induce the detrimental cycles identified by Austrian economists.

In summary, understanding the nuanced distinctions between gold supply increases versus inflationary monetary policies provides a clearer view of economic cycles. The very essence of boom-bust cycles is tied to the misguided creation of money—what Rothbard and others consider acts of embezzlement. As this discourse illustrates, true economic vitality relies on sustainable practices and the preservation of wealth-generating activities free from the distortive influences of central bank policies, thereby safeguarding against the cyclical instabilities that have plagued both historical and contemporary economic systems.