Angruse or whatever claims that the gold standard is unlibertarian and inefficient; this is what I was referring to. He’s also unfamiliar with the regression theorem, and believes that people will accept his bank notes which aren’t backed by anything of value (to them).
The text I’m referring to is Macroeconomics sixth edition, by N. Gregory Mankiw. You’ll find a brief explanation of monetary history on pages 78-80 in the chapter titled, “Money and Inflation” (chapter 4).He makes it clear that fiat money comes from commodity money, and cannot come into existence on it’s own.
A part of my notes from Prices and Production lecture 4:
On page 289 Hayek says that any increase in money in the broader sense acts the same way as an increase in money proper. Lengthening the structure of production can be easily demonstrated as one firm becoming two. Hayek begins to lose his mind and differentiates between a “legitimate” increase in the supply of money which should occur when there is an increase in demand for money (which would act as money), as opposed to the situation when there is an illegitimate demand for money as capital.
That quote from TMC which was used about 100 times on this thread also supports this position. (But Hayek said it shouldn’t be attempted, ever).
Fractional Reserve Banking and all related financial instruments outlawed
The only loans are made between individuals to other individuals
(and I think we’re now analyzing the same hypothetical)
Some people would not loan their money out at all for the very purpose of making the price level drop.
Now as I understand Free Banking (and excuse me because my understanding really is quite rudimentary) when money is hoarded the banks would increase the amount of liabilities which in turn accommodates investment spending at the current “price level” (used in shorthand, I’m aware of some of the technicalities against using this term in this way) as signalled by the change in time preferences and lower consumption.
In this situation an FRB system assumes that hoarded money, at least in the short run, is meant to have been loaned out by the savers in a Zero-Transaction-Cost-Draconian-One-Hundred-Percent-Reserve world.
If the money hoarded is base money and it is hoarded for a longer period of time the price level will of course fall with a FRB system.
Therefore, in my understanding at least, in this short run there would be a discrepancy between a Fractional Reserve Banking system and a Zero-Transaction-Cost-Draconian-One-Hundred-Percent-Reserve world.
In a sense you can call the FRB system inefficient in this regard because those holding onto the money are stifled by that particular institution
FRB will create multiple claims to the same amount of Gold or cash reserves that are all in circulation simultaneously. So long of course that the deposit owners don’t redeem their claims for real Gold (or cash). Time deposits only maintain one tittle owner at any given time. There is no increase in the money supply.
I think we need to distinguish between the demand for money and the demand for saving by individuals. If both of these manifest themselves as attempted increases in checking account balances under FRB then there might be a discrepancy. FRB might increase the amount of liabilities by too much if it mistakes increases in the demand for money (hoarding) for increases in the demand for saving. I guess it all depends on expectations, as most things do.
And what do they do when too many people turn up trying to get on the overbooked flight? They offer payment to people until a sufficient number prefer the payment to the seat. They don’t just say “oh, well, no more seats available; tough luck you!” (which is banks do when they run out of money). A big difference is that in the airline example, all claims to the seats come due at the same time (when the flight is about to leave), so they can buy off the least-interested players at that time. When it comes to banknotes, people turn up at random times, so they can’t identify the level of “desperation” for the value, even if they were able to buy their way out of the situation (which they obviously can’t, else they wouldn’t have a problem!)
I know what the paper was about, the point is that given the small difference between 100% reserve and FRB concerns the formal nature of time deposits against the informal nature of demand deposits, the only consistent position of that of Block. If you want to support 100% reserves, go ahead, but the point is that to be consistent you’re also going to want to rule out any mismatching of loans and financial instruments such as loans with call and put options. Do you want to do that?
Why the uncharitable assumption that he simply doesn’t know the regression theorem? It just seems a bit odd when you’re the one confusion how a base money is likely to arise with the way the inside money is likely to be provided by the banking system. I don’t know any free banker in the Austrian tradition who would deny the validity of the regression theorem, but you’re missing the point with your criticism.
Quite simply, you’re confusing inside and outside money. And I don’t know how many times this has to be repeated, clearly, the money is not made out of “thin air” since if a fractional reserve bank has $0 worth of assets, it can loan out exacly $0 worth to potential customers.
See, you started off by saying that if you pick up any macro textbook you’ll see that it mentions Mises and the regression theorem. Since then you’ve moved to saying that one picks up this particular textbook there will be something of an allusion to the regression theorem without any explicit mention of it or Mises.
Yet, Dr Block is an economist who refuses to study an area of economics because it goes against his philosophical convictions. I don’t know about you, but that just seems odd to me.
Why don’t you read up on the history of fractional reserve banking and see that problems such as the ones you’ve mentioned have been dealt with throughout history. Scottish free banks had clauses on their notes stipulating that the bank could refuse payment to the holder for a certain period of time (six months, I believe) but the bank had to pay interest over this time. During this time the bank would call in existing loans when possible and refuse to make new ones in order to satisfy the demands of depositors.
He said gold isn’t market money, that people will accept his bank notes not backed by anything (but a balance sheet), and claimed that money “is a good just like any other good;” what am I supposed to think? He made it blatantly obvious.
Go back and read what I said. You guys are getting desperate. Any textbook/history book will tell you that gold is the monetary unit chosen by free societies, throughout time.
When are you going to stop commiting this fallacy? It’s just not true that notes aren’t backed by anything in a fractional reserve system. Look, if money was “created out of thin air” then a bank with no money in reserves could expand any way, but that just isn’t the case. A bank with zero dollars in reserves can’t expand any credit at all. Now, in Hayek’s fiat type money, then I’d agree that there isn’t anything, sort of by definition, backing the reserves. But nobody is talking about that.
In any case, money doesn’t have to be fully backed to be accepted. The big factor in determining whether or not the public will hold the notes of a particular bank is its credibility, even if the public knows the bank notes aren’t fully backed if they believe they can their specie upon redemption or the notes will be accepted, they’ll use them. Even then, there are other factors such as asthetics and durability that determine the public’s willingness to hold a particular form of bank note.
That’s not at all what you said, your claim was that most mainstream macro textbooks will mention Mises and the regression theorem. Now all they’re alleged to mention is that money began as gold but was replaced because fiat money is more efficient. I wouldn’t disagree with the latter, but the former just isn’t true.
As for your charges of desperation, this point is tangential so stop appealing to the crowd.
Yeah, if it is forced on you at gun point. ###############
The free market disagrees with you and for a reason. What you are describing cannot function as money. Such un-backed pieces of paper never has evolved into money for the obvious economic reasons. Just tempering with it by FRB causes price distortions and boom/busts. FRB exists and always has existed due to special exemptions from the free market. The fact that you don’t want to understnd the difference between time deposits and FRB demand deposits shows you have a serious problem of understanding the function of money.
Why do people accept money as payment? Because they expect others will take it is payment in the future. There is no reason why fiat money could not evolve on the market and in fact, it has. In Somalia, people still accept the old government money even though it is “unbacked” and there are no legal tender laws.