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Now, that's not to say that it stabilizes prices. We don't want stable prices. We want prices changing, continual change in the economy. So the purchasing power of money, which is simply the other side of the whole structure of prices, it's the reverse of it or the reciprocal, that's also changing radically. Okay. We want to allow that to change.

Roger Garrison has used a good analogy, and that is from the perspective of we people on Earth, the sun is stationary. We're moving around the sun, but yet the sun is obviously moving through the galaxy. And so gold is like the sun in some sense. It's relatively much more stable than prices of other goods and services, of single goods and services.

Okay. So let's talk a little about the boom and bust. There could be temporary recessions and inflationary booms under the classical Gold Standard. It was possible, because there was fracturing reserves, for private commercial banks to reduce their reserve ratios or to multiply an inflow of gold by creating fiduciary media and to cause an inflation and to cause malinvestments, distortion of the interest rate, bad loans and so on, which then would have to be liquidated.

So there was some room for that to happen, and that did happen under the Gold Standard, but it would eventually end, and pretty quickly in a recession or a bust, and you'd have all the phenomena connected with booms and busts. But what would happen under a Gold Standard is that you would have a rapid decline in prices and wages. The government never tried to maintain prices and wages until the great depression. So they fell for the equilibrium levels. But these were minor compared to what occurred after the Gold Standard was destroyed by governments.

Well, let me say a few words about the balance of payments adjustment mechanism, which more or less ensured that, number one, inflations that did take place under the classical Gold Standard could not be too great. And number two, that as people increase the demand for money in one nation because they became more prosperous, money would automatically be redistributed away from nations that weren't growing as fast, to nations that were growing faster. It had a natural distribution mechanism built into it.

So let's talk about an increase in the money supply brought about by fractional reserve banks. So they drive the domestic money supply up. And of course, then the price level rises. The US price level rises above world prices because of the Kantian effects. The money tended back then to be injected into the domestic economy, the new money that the banks created.

And then the second fact was, look, if the US price level is above the world price level, people aren't going to buy as many exports from us or exports are going to fall. There'll be an increase in imports from abroad because it's now relatively cheaper to buy things from England and France and so on if they weren't inflating to the same extent as US banks were. Then you would have a balance of payments deficit. Your imports would suddenly exceed your exports. You'd have to ship gold abroad.

The price of the pound, for example, would rise to the export point, and so pounds would be very expensive and it'd be cheaper to ship some of the gold from the US to Great Britain, to Germany, to your other trade partners. So you'd have a deficit. And once you had a deficit, the gold would begin to flow out in payment of that deficit to the foreign countries. Gold banks, gold reserves will then fall.

Now at that point under the Gold Standard, gold reserves weren't centralized at the central bank. So they couldn't use reserves to move them around and bail out banks. There was no central bank that acted as a so-called lender of last resort, or as I like to call it, a bailer outer of last resort.

So this external drain of gold, the external drain was drain of gold out of bank reserves to, as people came in and turned their dollars in because they wanted to ship the gold abroad, to foreign countries. There would also be the threat of an internal drain. As people saw gold flowing out of their banks, and they had the money substitutes, which they knew were just money substitutes and would give them the ability to redeem for their gold, they rushed to the banks.