I understand the basic Austrian assumption that a fiat money system is unsustainable, I just don’t agree with it. The question I’m asking is, what would prove to Austrians that they’re wrong in that assumption?
Ok, for terminology's sake, lets at least call it a "theory" that fiat money is unsustainable, rather than an "assumption". Austrian economics doesn't make "assumptions" in developing theory, but only makes them to use the theory to analyze "assumed" scenarios.
Then we must ask: what is meant by "fiat money system". Does it mean a paper/token system generally, or does it mean such a system controlled by a central bank? If the latter, what are the properties of the central bank (what assumptions do we make about the funding system of the bank, about the political nature of the bank, or about the extent to which the central bank controls its monopoly on printing the fiat money)?
If we
assume that the fiat money system is implemented by a central bank that has legal tender laws, among other things, we can first apply Say's law to notice that any near-full-weight coins are horded and pulled out of the economy because people would rather keep those and use the legally-equivalent paper to satisfy their currency needs. This leads to the eventual complete adoption of token coins, paper bills, and digital account transfers. Where nothing but the accounting unit is transferred.
Once an economy is in this state the central bank stops worrying about the old measures of value (the weight of gold or silver in a coin, the quality of fur in the traded pelts, the freshness of the tobacco in the traded bushels), and worries only about the number of units of money circulating in the economy. To a central banker the
incentive is to appease those who are closest to you by always making sure that they have enough units of money to do what they think they should be able to do. What is the central banker's loss if he prints a couple of trillion dollars to lend away on short term notes? Or if he just gives it away?
When the money is divorced from real resources,
and there is only one issuer of the money, it is an inevitable consequence that the money will collapse or the system will collapse. It is not an "assumption" that this will happen - it is the conclusion derived from the assumption of a central planning scheme in money.
Ron Paul and others have been predicting an imminent monetary collapse for 30+ years and haven’t been swayed in their convictions one bit despite being wrong that entire time, isn’t there a point where they should give up?
Btw, I don’t attribute malicious motives to Ron Paul, I’m sure his beliefs are sincere and he’s the first one wishing that his predictions will be proven wrong. I also wasn’t trying to read his mind when I tried to put forth a likely timeline of his 1981 prediction, that was just my best interpretation of “in the near future”.
The collapse is an inevitable conclusion. They should not give up, ever, due to a delay in observation. They should only give up when someone successfully attacks the logical basis for the scholarly deductions in the works like "Theory of Money and Credit". In the grand scheme of history, 40 years is a fleeting moment, a single generation. Maybe if 200 years went by under a single system of central fiat banking, then we'd have reason to suppose that the logic is wrong.
Also, I don’t deny that the price of gold has gone up recently, but it’s rather silly to attribute it to an inflation of the dollar. If that were true, then the dollar must have deflated by ~50% between 1980 and 2000. The price of gold, like the price of all commodities fluctuates all the time due to a number of internal and external shocks; it’s why fiat money provides a more stable and predictable inflationary environment than hard money. If I borrow a large sum of money to expand my business, I want to make sure that the money I have to pay back is of stable value; I don't want to have to worry about going out of business because a mining accident on the other side of the globe drove up the price of gold by 15% the day I have to pay back my loan.
Can you point to a single mining disaster in history that caused anything near the volatile price swing you're talking about here? I'd feel much safer about the "stability of value" of my contracts as priced in gold, silver, or beanie babies than I would about it being priced in the dollar. The assertions that you make about the fiat dollar being more "predictable" have been demonstrated to be 100% wrong in recent years using an Austrian take on econometics. I forget which author I was listening to on a Mises audio, but they've empirically shown that the Federal Reserve system is deficient in providing the stability you desire by looking at the volume and price of long term notes (25, 50, and 100 year T-bills, I think).
Forget about gold as a unique indicator of the value of the dollar, and look to the costs of ALL consumer goods or capital goods. It's true that any ONE of these items may have had "price shocks" that distorted their dollar trading price, but when you're looking at the stability of the dollar, you must compare to
everything it was traded for, as it is a general medium of exchange. And, all else being equal, money printed by fiat and distributed to Federal Reserve favored entities like big banks and large firms will cause price inflation, and will do so before the common consumer sees any additional units of the money.
If I lent a large sum of money to someone to expand their business, I'd hate for the dollar to decline in purchasing power by 50% in 20 years, but lo and behold, under the Federal Reserve system it has done just that on average. This not only hurts me, the lender, but it also sets up by debtor for eventual failure. Because while he thought he was earning enough resources to cover his costs, his revenue was devalued and could buy less than the money units his costs were accounted in. It sets him up for a bust once the money stops being inflated, OR once the members of the economy compensate for an ever inflating unit of currency as compared to the real resources they deal in.
The Austrian Theory has more historical evidence backing its theory than any other comprehensive school of economics, and very very few "unexplainable events". Certainly Ron Paul knew this when he started predicting the collapse in the 1980s, and his prediction wasn't that "there will be a collapse", but it also ALWAYS contained a warning that the Federal Reserve could just keep inflating to "solve" the short term problem and make it's big customers happy, but that this would hurt the rest of America
and would just push the crisis back another 4, 8, or 12 years and compound the level of maladjustment and correction needed to reestablish a well functioning economy focused on real products and services tailored to consumer demands.
If you're getting on the Austrians for "not giving up" after a mere 40 year episode of a fiat money system (which now more than ever is showing its fragility), how many central banking failures do you need to see before you give up on central banking? What has been the most stable, most successful, most prosperous central bank, in your opinion? If there hasn't been one, why do you have faith that you could devise one?
