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I agree gold would temporarily lower interest rates as equilibrium was restored after the introduction of new money. Why would this cause unsustainable capital investment?
what interest rates?
Why would new gold cause people to no longer be able to complete their investments
What books could you recommend to me that discuss your theory of banking and deposits etc.?
Then business cycles are in fact inherent in a free market.
Not according to Rothbard, Hayek, and Mises they aren’t. In fact the Austrian Business Cycle Theory clearly says how business cylces are direct results of a central banks expansion of money and manipulation of interest rates.
Wow. I was wondering…shouldn’t people who are unable to understand what saving is and why frb is flawed, be called morons ? I’m not sure but I think at least two posters on this thread fully deserve the adjective..
A mildly interesting fact about Max and scineram is that they constantly illustrate how their ‘free-market’ system would work by referencing how the current fascist system works. And lo and behold, there’s no substantial difference…
And besides, it’s been ‘historically proved’ that scottish fractional banking operated at 2% reserves and paper traded at par with gold. Oh, the miracles of free scamming. (Also, the idea that 1800 Scotland was a ‘free-society’ is a joke, but never mind.)
As to how well banking worked in Scotland there are different ‘opinions’…
The Myth of Free Banking in Scotland
Here’s an interesting note from Mises as well.
It should be obvious that critics of fractional reserve scams are older than the austrian school.
Austrian Business Cycle Theory.
capital investments must be funded in real terms. the only way to do this is for people to save.
take a baker in a barter economy. let’s say he produces 10 loaves of bread, eats 1 and sells 7 of them for immediate consumer goods he wants. If he wants to expand his bakery without sacrificing quality of life, he must have savings. Thus, even while he no longer bakes but works on his bakery itself, he has a stockpile of already baked bread that he can eat and sell while he does his work.
in a money-based economy, this functions a little different, but the same thing generally occurs. The baker saves and spends money instead of bread (obviously money has a longer “shelf-life” than bread, making this already more economical). The money he saves he can now afford weekly payments to a builder, who will build him a completely new bakery over a few months. The builder uses the money to purchase bread among other currently available goods.
Now, imagine this on a macro-scale. Everyone produces a little more than they consume. They don’t see the leftover goods, though - only the leftover money. They don’t manage our own investments, either. When they loan the money out, the money is used to pay workers who don’t necessarily contribute to immediately consumable goods, but to more efficient production equipment - capital goods. These workers use their pay to purchase the currently available goods on the store shelf.
Now imagine if the money entering the loan market was not derived from savings, but from new money. The workers paid to build capital goods would seek to spend their money on current goods. This would cause price inflation, which would lower real interest rates. People would be inclined to save less, because the price of credit is driven lower and lower in terms of real goods currently available. It would also drive up labor costs and other factors of production…in addition to the various investors bidding up these costs through their credit-fueled capital investments.
Many investors will realize they don’t have enough credit to finish their projects, as the prices of their factors of production have risen. They must borrow more. But if interest rates rise, they will be unable to borrow profitably for the expected returns from their investment. They will have to liquidate their investments. If such is difficult, they may default their loans as well.
Interest rates must eventually rise, causing this situation. If the interest rate continues to be pushed down by new money, inflation will become so great that there is no longer any saving occurring. This can cause hyperinflation and abandonment of the currency, because it will take greater and greater infusions of new money to suppress the rate. Then investors are cut off from the economy of real goods and must abandon their investments. Otherwise, the interest rate must rise to balance the supply and demand for credit. No savings = no supply. Low interest rates = high demand.
A lowering of the interest rate generally encourages more indirect investment, or investment furthest away from effecting current stocks of consumer goods. These investments are the most time-consuming, and generally the most capital-intensive, such as mining, refining, etc. Incidentally, these are also most likely to require additional credit due to price inflation before being completed.
Does that suffice?
generally, all interest rates. People may have different time preferences for different lengths. For instance, I may be willing to loan money for 6 months at 1%, but not 1 year. Of course, if interest yeilds go inverted, meaning short-term credit is more expensive than long-term, this can only be the work of government manipulation.
Rothbard in America’s Great Depression noted that Mises claimed business cycle theory was applicable to economic theory in a free market; however, he also noted that additions to the stock of money being introduced through the credit market in a free market would be so small that they would be relatively insignificant - unable to create massive clusters of bankruptcies.
Mises definitely argued they could occur in a free market. This means simply that they are not strictly caused by violating the free market. Of course, government interventions are the most common means of bringing about the situation where they occur - the introduction of new units of money through the credit market. All 3 would agree that business cycles would be much more common and severe with government control over money and banking.
This must be true saving. If they only hoard the funds do not go into capital investment.
You probably meant “by inflation I mean an increase in the money supply”. Now, assuming that’s what you meant…
Increasing the total amount of available gold (mining) would at best make gold a bit cheaper. It’s highly unlike or even impossible that a mine can produce enough gold to make any difference in the global price of gold though.
Increasing the amount of coins by melting jewelry is irrelevant from a money-supply point of view. Jewelry is real savings so converting it into coin is not inflationary.
Bottom line is, commodity money does not behave like fiat money. Comparing the two is misleading (of course, some ppl confuse things on purpose to perpetuate scams like “paper is as good as gold”)
ps: I didn’t mean to suggest your post as answer , I just hit the wrong button.
Jewelry is not used as money. After converting it does become exchange medium. This means bigger money supply and higher prices. How can you say it is not inflation?
The ‘price’ of gold ‘money’ takes into account the gold that is in coins and jewelry.. The gold jewelry is already part of the money supply. Converting gold from jewelry into coins has no effect on the money supply. Read what Juan posted again, very s l o w l y (better yet, start from page 1)
[+o(] .
Exactly !
Isn’t the demand for the two different? I want to be paid in coins not necklace when I sell something.
yes, i did. sorry.
correct - that’s why it makes good money. and that’s why strict gold standards would prevent any sizeable business cycle. but they are theoretically still possible. that was my only point.
Bonds, Stocks, Mutual Funds are all savings. Monetizing them is inflationary if it is not met by a decrease in other money. However, you are correct that gold is mostly used monetarily, not in jewelry and even less in industry. If it were truly able to compete as a currency, it would be much more so. More points for gold.
I am sorry if I confused anyone. I was merely saying that business cycles are theoretically possible in a free market; not that they would be as frequent, far-reaching, or painful as our current ones.
The ratio of exchange of gold against all other goods (its price…) is set by the demand/supply of gold, regardless of its shape…
Again, converting jewelry into coin, or vice versa, doesn’t create (or mine) new gold. So, there’s no increase in the supply of gold, so there’s no change in the price of gold. ‘Gold-money’ doesn’t lose value when new coins are minted.
The problem is, you seem to believe that ‘money’ has value just because it’s money, when in reality things work backwards. Gold coius are valuable money because they are made of valuable gold, not because they are coins.
Coins would actually be slightly more valuable than raw gold because work has gone into them to make them coined.
I havn’t been reading this thread for the past several pages, and actually only read that last sentence of your post, haha. I can’t believe how explosive this thread became! Is it often that threads get this long?
Not unless Austrians have eschewed this whole “subjectivism” business lately.
They are valuable precisely because they are money. They can be exchanged. Turning them into jewelry is costly and they lose exchange value. And vice versa.
This sounds like a labor theory of value. I think it’d be safer to say coins have a higher market price than jewelry or dust, etc, because they have greater demand.