1) The rationale is that silver is significantly harder to create, while paper notes are easy. If the paper notes must be redeemable for silver, it is some level of control on the creation of paper notes, in that a rational economic actor is unlikely to create significantly more notes than they can redeem. Austrian Business Cycle Theory places the blame for the business cycles firmly on the creation of unbacked paper currencies and the resulting inflation. Most people calling for sliver (or gold for that matter) backing of the US dollar subscribe to ABCT, and believe that such backing would reduce or eliminate the damage done by business cycles.
Thanks, I think I follow this explanation to some degree.
Here is what I still don’t get: What is special about the silver? Instead of limiting the money supply by linking it to silver, why not just choose an arbitrary number of dollars and say, “that’s the limit?” It seems to me that the quantity of silver is limited and arbitrary, so I still don’t understand what the advantage would be for using silver backing.
The second-last icon on the bottom right of a corner is a permalink; right-click on it and select “Copy Link Location” or whatever your browser’s equivalent is, then paste it where needed.
Can’t we look into precommitment mechanisms (I am skeptical of the current batch of crypto$, but crypto seems like a good field to look into for precommitments).
Yes, it’s arbitrary. On the other hand, governments historically have a mixed track record at keeping their word when they promise not to wreck the currency. It’s easy and tempting to cheat if there isn’t some physical limit to expanding the money supply.
I understand and agree with what you and Lumifer (below) say about how it’s easy to “cheat” if you don’t have a physical limitation on the money supply.
However, wouldn’t it be just as easy to change your mind with the physical backing: “Now you pay two dollars to get an ounce of gold, whereas in the past you paid one dollar per ounce of gold.”?
I guess to get to the crux of the matter—does the fact that there is a physical/concrete/non-abstract component involved sufficiently blind people to the fact that inflation could still happen under this system that it once proved effective for preventing mass loss of confidence?
However, wouldn’t it be just as easy to change your mind with the physical backing: “Now you pay two dollars to get an ounce of gold, whereas in the past you paid one dollar per ounce of gold.”?
Governments can indeed do this—the usual term is “devaluing.” But a devaluation is a blatant obvious politically costly thing, in a way that letting inflation gradually creep up from 2% to 4% to 8% isn’t. So it’s not “just as easy.”
1) The rationale is that silver is significantly harder to create, while paper notes are easy. If the paper notes must be redeemable for silver, it is some level of control on the creation of paper notes, in that a rational economic actor is unlikely to create significantly more notes than they can redeem. Austrian Business Cycle Theory places the blame for the business cycles firmly on the creation of unbacked paper currencies and the resulting inflation. Most people calling for sliver (or gold for that matter) backing of the US dollar subscribe to ABCT, and believe that such backing would reduce or eliminate the damage done by business cycles.
Thanks, I think I follow this explanation to some degree.
Here is what I still don’t get: What is special about the silver? Instead of limiting the money supply by linking it to silver, why not just choose an arbitrary number of dollars and say, “that’s the limit?” It seems to me that the quantity of silver is limited and arbitrary, so I still don’t understand what the advantage would be for using silver backing.
Because it’s easy to change your mind.
Don’t know how to link to comments; could you read my comment above to asr?
The second-last icon on the bottom right of a corner is a permalink; right-click on it and select “Copy Link Location” or whatever your browser’s equivalent is, then paste it where needed.
Can’t we look into precommitment mechanisms (I am skeptical of the current batch of crypto$, but crypto seems like a good field to look into for precommitments).
Yes, it’s arbitrary. On the other hand, governments historically have a mixed track record at keeping their word when they promise not to wreck the currency. It’s easy and tempting to cheat if there isn’t some physical limit to expanding the money supply.
I understand and agree with what you and Lumifer (below) say about how it’s easy to “cheat” if you don’t have a physical limitation on the money supply.
However, wouldn’t it be just as easy to change your mind with the physical backing: “Now you pay two dollars to get an ounce of gold, whereas in the past you paid one dollar per ounce of gold.”?
I guess to get to the crux of the matter—does the fact that there is a physical/concrete/non-abstract component involved sufficiently blind people to the fact that inflation could still happen under this system that it once proved effective for preventing mass loss of confidence?
Governments can indeed do this—the usual term is “devaluing.” But a devaluation is a blatant obvious politically costly thing, in a way that letting inflation gradually creep up from 2% to 4% to 8% isn’t. So it’s not “just as easy.”
Actually, the usual term is debasement of currency :-) Devaluing refers to changing the foreign exchange rate.