Murray Rothbard on Money Part Two

"The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium. As the philosopher and economist David Hume pointed out in the mid-eighteenth century, if one nation, say France, inflates its supply of paper francs, its prices rise; the increasing incomes in paper francs stimulate imports from abroad, which are also spurred by the fact that prices of imports are now relatively cheaper than prices at home. At the same time, the higher prices at home discourage exports abroad; the result is a deficit in the balance of payments, which must be paid for by foreign countries cashing in francs for gold. The gold outflow means that France must eventually contract its inflated paper francs in order to prevent a loss of all of its gold. If the inflation has taken the form of bank deposits, then the French banks have to contract their loans and deposits in order to avoid bankruptcy as foreigners call upon the French banks to redeem their deposits in gold. The contraction lowers prices at home, and generates an export surplus, thereby reversing the gold outflow, until the prices levels are equalized in France and in other countries."

This was written by Murray Rothbard in 1963 in his book What Has Government Done To Our Money? We don't use gold anymore, so how does the given situation apply to us? As we inflate our currency, instead of seeing and outflow of gold to countries who import to us, we've simply lost jobs, productivity, and capital to these countries, such as China. This affect has been amplified because the Chinese keep their currency artificially pegged at an undervalued rate to the US dollar. If they allowed their currency to freely float against foreign currencies, the purchasing power of the Chinese would increase, the price of their imports would increase, and we wouldn't see the same loss of jobs, productivity, and capital in the West.

Not that I am in favour of ordering the Chinese on how to manage their currency. This situation could simply be resolved if the Bank of Canada and the Fed kept a tighter monetary policy, or even better, allowed the free market to determine our currency.