Austrian Economics shows that only paper money i.e. money not backed by anything like all currencies today can cause the business cycle.
No it doesn't. Not Rothbard, not Hayek, not Mises - no Austrian I have ever heard has claimed this.
You also need to understand that most Austrians don't consider the 19th century a perfect "sound money" paradise, and there were several mistakes made during the period
Depends on what country You look at and which Austrians You consider. The free-banking Austrians have considered several 19th cent. economies, like Scotland and Canada, which had banking systems approximating free-banking in several respects and they worked like a charm. No panics in Canada, few in Scotland. And considering how closely tied those two economies were to the relatively volatile US and England, that's quite a feat. (see eg. Selgin,
The Theory of Free Banking, pp. 5-12). Though I suppose it's true that those systems were not ideal free markets, either.
Not really, the American economy has become more stable since government began intervening more. I don't pretend to know the direction of the causation, but the correlation is the opposite of what you say it is.
No, it hasn't. The NBER statistics have been under attack from economists for years. Newer time series suggest the volatility of the pre-Fed era is less than the post-Fed era and not much different from the post-WWII era. See Selgin, Lastrapes, White (2010)
Has the Fed Been a Failure, or if You consider a Cato paper biased, Christina Romer (1986)
Is the Stabilization of the Postwar Economy a Figment of the Data?.
Like You, I don't pretend to know why that is. You may argue that without the Fed things would be worse because of stickier prices or unmoored inflation expectations, but on the face of it, Your claim is not obviously correct I'm afraid.
Also, consider, US governments had been active in the economy prior to the establishment of the Fed. The banking system was heavily regulated on the state level and there was a lot of going back-and-forth with national banks, suspentions of specie payments and Gresham's-law switches in the effective standard because of the rigid statutory bimetallism. As far as I know, Canada's system on the other hand, which was less regulated for the most part, was generally more responsive to seasonal, and even secular, money demand changes.
Actually, V2 can have boom and bust cycles, based on capital concentrations rather than consumer confidence. If too much money gets pulled out of the real economy and dumped into national banks or the government purse, then demand will fall and produce a recession.
I'm curious as to how this works in economic terms. Is this because prices for goods are sticky? Or is it just a simple case of RBC with a supply shock? Are wages sticky in Vicky? I really don't know much the inner workings of its economic system.
I don't get why people always say paper(or electornic) money is the problem, and that having a Gold standard will somehow fix everything.
One major argument is that one of the most important things in considering the macroeconomic stability of a country are inflation expectations. They, or, more accurately, NGDP expectations pretty much make or break an economic system in the short run, because, with sticky prices, they determine future demand. If they become low enough to make the expected real interest rate negative, they can also cause liquidity traps. The problem with paper money is that inflation expectations depend entirely on the credibility of the central bank; if it doesn't credibly signal a consistent policy, it's not able reliably to manage the situation. And since central banks do a lot of pretty crazy stuff nowadays (a lot of it good, mind You), it's not entirely given what one can expect. However, a gold standard anchors long-term inflation expectations - bar discoveries of new continents, one is pretty certain how much money will be able to buy in 20 years, beyond the scope of any short-term recession.
This doesn't mean that a gold standard doesn't have important flaws, but there You have it.
The only option you have then is to devalue the currency, so it's worth less gold than before. Thus removing the reason to have a gold standard in the first place.
Or You can just have deflation. Which, by the way, works just fine outside a liquidity trap - there is little correlation between deflation and recession outside those few traumatic experiences everybody knows. It might make a liquidity trap more likely, tho. Also, You can always have fractional-reserve expansions, as interbank clearing becomes less aggressive in response to money demand changes, whilst still having a gold standard. That's how free-banking usually works.
But yes, it's von Hayek voodoo nonsense to claim there's any relation between paper money and business cycles, relying mostly on some pitifully obvious logical flaws.
Hayek was in favour of paper (fiat) money. Depending on what You mean by paper money, so was von Mises and pretty much most Austrians until Rothbard came along. And no Austrian to my knowledge claims paper money in and of itself causes business cycles.
People really should understand that there's a big difference between Austrian economics and herpy-derpy internet Austrianism.
But this is the man who brought us the idea that anything other than a completely free market is automatically a totalitarian dictatorship.
Hayek himself was in favour of an economic system quite removed from a completely free market. What he did claim is that any system which is not a free market is vulnerable to political and economic pressure and can thus give in to a process leading towards authoritarianism. I find much to disagree with in Hayek, but this argument I consider extremely persuasive, personally.
