Right, and if this money taken out of circulation starts to park as deposits in banks, banks actually see their reserves rise and can and will, according “free” bankers, use those reserves to issue fiduciary media via loans. I think that’s the point Edward was making about why an increase in demand for money would lead to the creation of fiduciary media.
Yeah insofar as checks aren’t cashed, which would slow down the money multiplication process, i.e., the creation of additional demand deposits (from essentially nothing).
Hulsmann on the interest rate in a commodity-money system. This article really opened my mind and gave me a whole new perspective on money, savings, interest rate, etc. Once you’ve seen the world through Hulsmann’s eyes, you’ll never be confused by the disjointed ramblings of monetarists and Keynesians again.
Clayton -
I agree with Rothbard’s argument, namely that money which acts solely as money (as opposed to commodity money that serves two functions, both as a medium of exchange and for industrial purposes) can exert no influence whatsoever on the natural rate of interest. To imply otherwise would mean to incorporate liquidity preference into the Austrian PTP theory of interest. But the article does not address the fact that market interest rates are indeed partially determined by both the demand for money and the supply of money. That is, there is a direct relationship between the demand for money and market interest rates, which implies that alterations in the demand/supply for money must necessarily yield temporary disequilibrium in the loan market (until prices adjust).
The free banking argument, as I understand it (if I understand it at all) is that an elevated demand cash holdings will elevate the market rate of interest above the natural rate, which, again, is independent of all monetary factors. In such a condition, you will have unnatural deflation and depressed economic activity. Rather than allowing prices to adjust, which could take a while, and which would be rather painful, we could elevate the supply of money in order to satiate the demand for money as money.
This argument makes sense to me, but I don’t see how such a proposal is at all possible. Here are my problems:
- The supply of money contracts precisely when the demand for money rises.
- How would the market distinguish between those who (a) merely wish to increase their cash balances, (b) those who have a lower time preference, and (c) those who demand money (credit) for investment?
I would add:
- Granted [hypothetically] for the sake of argument that the market could distinguish between (a), (b), and (c), the banks would still face the impossible problem of not being able to supply the newly created money precisely to those hands that wish to hold it.