Under the Gold standard, the Formation of the Value of the Monetary Unit Is Not Directly Subject to the Action of the Government

Under the gold standard, the formation of the value of the monetary unit is not directly subject to the action of the government. The production of gold is free and responds only to the opportunity for profit. All gold not introduced into trade for consumption or for some other purpose flows into the economy as money, either as coins in circulation or as bars or coins in bank reserves. Should the increase in the quantity of money exceed the increase in the demand for money, then the purchasing power of the monetary unit must fall. Likewise, if the increase in the quantity of money lags behind the increase in the demand for money, the purchasing power of the monetary unit will rise.

There is no doubt about the fact that, in the last generation, the purchasing power of gold has declined. Yet earlier, during the two decades following the German monetary reform and the great economic crisis of 1873, there was widespread complaint over the decline of commodity prices. Governments consulted experts for advice on how to eliminate this generally prevailing “evil.” Powerful political parties recommended measures for pushing prices up by increasing the quantity of money. In place of the gold standard, they advocated the silver standard, the double standard [bimetallism] or even a paper standard, for they considered the annual production of gold too small to meet the growing demand for money without increasing the purchasing power of the monetary unit. However, these complaints died out in the last five years of the nineteenth century, and soon men everywhere began to grumble about the opposite situation, i.e., the increasing cost of living. Just as they had proposed monetary reforms in the 1880s and 1890s to counteract the drop in prices, they now suggested measures to stop prices from rising.

—Ludwig von Mises, “Monetary Stabilization and Cyclical Policy (1928),” in The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 60-61.