Gold’s fixed supply gave the gold standard a built-in contractionary bias toward deflation

Evidence

Making this worse apart from the effect of austerity policies, the global supply of gold puts a ceiling on growth. If trade demand increases faster than the money supply, and the money supply is limited by the gold supply, interest rates will rise and the economy will slump in response. The gold standard had, then, an inbuilt contractionary bias. It could solve the problem of inflation, but only at the price of creating deflation. Deflation is a particularly pernicious problem because in a deflation everyone’s first best guess about what to do to protect themselves—for example, workers taking a pay cut to price themselves into a job—has the aggregate effect of cutting consumption, which shrinks the economy and makes everyone’s unemployment all the more likely. States with large trade or budget deficits going into a recession fare especially badly in such situations because it becomes almost impossible to grow out of the problem as recession and deflation compound each other. Taking on more loans and more debt to gain temporary relief will not help in the long run because you cannot grow out of it. — Mark Blyth, Austerity, 493

Categorization

• XREF: The ‘fallacy of composition’ — individual pay cuts that collectively shrink demand — is the same logic as the paradox of thrift that dominates the austerity critique literature. — connects to: Leaving the gold standard and sharing adjustment costs ended Swedish austerity. — Mark Blyth, Austerity: The History of a Dangerous…, 524; Gold exchange standards reduce gold demand but deepen deflationary pressures. — Clara E. Mattei, The Capital Order: How Economists…, 1689; Gold standard currencies had fixed parities and central banks limited issuance to gold reserves — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 64 (+3 more)
• DEFINE: Cleanly defines the paradox-of-thrift mechanism at the core of why deflationary austerity self-defeats.

Broader Connections

• Gold exchange standards reduce gold demand but deepen deflationary pressures. #expands (0.82) — Clara E. Mattei, The Capital Order, 1689
• Returning to gold required deliberate deflation in post-WWI Europe. #exemplifies (0.82) — Mark Blyth, Austerity, 499
• Gold standard currencies had fixed parities and central banks limited issuance to gold reserves #expands (0.80) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 64
• Britain’s gold-standard return demanded prolonged deliberate deflation #exemplifies (0.78) — Clara E. Mattei, The Capital Order, 995