Austrian Business Cycle and Gold Standard

Paper Summary:

This paper analyzes how Austrians are staunch believers in the gold standard, which puts them in conflict with economists all over the world that favor the current system of fiat money. It looks at how the Austrian theory of the business cycle is based on the idea of an economy-wide disturbance that happens to the market process, resulting in a downturn that is cyclical, how Austrians place a great emphasis on their business cycle, and how their theory has withstood significant criticism. It discusses how Austrians support this type of economic readjustment because they believe that it eliminates weak firms and poor investments that negatively impact the economy.

From the Paper:

"The Austrian's theory is intuitive but its simplification of the process makes further explanation necessary. In most economies, expansionary policies are undertaken more than once. This makes the situation more complex as individuals begin to expect inflation and act accordingly. When people begin to expect inflation, sometimes prices actually rise faster than new money is being created. The effect of this is to create a shortage of money in the economy. While policy makers may argue that this phenomenon is a sign that still more money should be put in circulation, Austrians strongly disagree. They maintain that increasing the money supply further will only worsen the problem (Rasho, 2003)."

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