New Evidence on the Resource Costs of Irredeemable Paper Money

January, 2013

This paper compares estimates of the resource costs of monetary gold accumulation under the classical (1880-1914) gold standard with estimates of the resource costs associated with gold “investment” in the post-Bretton Woods era (1972-present) for the United States. While the costs associated with monetary or “investment” uses of precious metals — primarily gold coins and bullion — fell to historically low levels during the “great moderation” era (1982-2007), they rose sharply during both the “great inflation” era of the 1970s and the “great recession” era (2008-present), approaching levels consistent with the average for the classical gold standard in terms of real gold “investment” per capita. These results indicate that a transition to fiat money does not eliminate the resource costs of investment or “monetary” uses of gold. Indeed, fiat money volatility, whether realized as high and variable inflation rates, or the large monetary expansion undertaken since the 2008 financial crisis, can generate gold investment on par with the levels of monetary gold production of the classical gold standard.

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Current Evidence on the Resource Costs of Irredeemable Paper Money

May, 2015

In 1986, Milton Friedman published a brief article in the Journal of Political Economy suggesting the possibility that real resource costs associated with the production and use of money could be greater under the current fiat money regime than under the commodity money regimes that preceded it. His article, and the broader implication about the resource costs of paper money, however, received scant attention. For by 1986, the Fed’s disinflationary policies had come to full fruition, inaugurating the Great Moderation that ushered in two decades of low inflation, low unemployment, and strong real growth in the U.S. economy.

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