Booms and busts before the Fed era?

Miscellaneous History
81

Ensuric,

“Here are the difficulties I have with the Rothbardian analysis: 1) he views money as neutral, that is, that it exerts no effects over the real economy (neutrality of money).”

You just can’t be more wrong about what you just said. I don’t think anyone could have viewed money as NOT neutral as Rothbard did.

It is precisely because money is not neutral, that the demand for money cannot be met by any type of elastic currency. It must be met by the action of individuals buying and selling, reestablishing new prices until the demand is satisfied. Let us not forget that it is not demand for money per se but demand for the purchasing power it renders, which is why the following is correct:

“any supply of money is sufficient”

and this has nothing to do with “money neutrality”. Mises generally held this view also. It is not “Rothbardian”. It dates back to the Ricardians.

In fact, if anybody may be relying on “money neutrality” it is all those who advocate for elastic currency . You are reaching the same conclusion:

"Though, of course, there is one big problem here: the money may not flow directly towards those who wish to increase their cash holdings. It may, in fact, flow towards those who which to increase consumption and/or investment."

Correct! This makes the economic analysis of fractional reserve free banking extremly problematic, if not entirely false.

See also my example in the next post.

82

Selgin,

Your explanation about the validity of new spending on the account of an equivalent reduction in spending somewhere else seems plausible, at first, until one realizes that you are still not addressing two fundamental issues: 1. The time element , 2. the micro-effects of the new money injected into the system. Let me try to convey the problem by example.

Suppose the current time preference of society is such that the purchases of present goods is 100 dollars and the purchases of future goods is 300 dollars. The ratio is 1/3 between consumption and direct investment.

Now suppose that some people wish to increase their cash balances by a total of $20. Suppose all of them do so by cutting their consumption by $20. They don’t cut on any of their expenditures on future goods (investments). Those individuals now put that money under their mattresses or in full reserve bank deposits. The new proportion between spending on present goods and future goods is $80 and $300. If we assume that the money is going to be held indefinitely, the new ratio is 4/15, which clearly indicates a lower time preference and a more elongated structure of production.

Now suppose that some monetary institutions, as in your free banking example, attempted to extend loans to offset the $20 of increase in cash balances. We can justifiably assume that the new loans will be directed towards investments as most of them always are. The proportion between spending on present goods and future goods will now be $80 and $320 (instead of $80 and $300). A ratio of 1/4 (instead of 4/15). Clearly, 1/4 and 4/15 indicate a different time preference. A discrepancy is arising.

The deviation between the two cases in my example is subtle, but only because I’ve made the [unrealistic] assumption (for simplicity) that the cash balances is increased only by cutting consumption. If the cash balances were to increase by also cutting investments (spending on future goods), then the difference would have been much greater.

For the new ratio of 1/4, that resulted from the $20 of new loans, to be sustainable in the long run, all of the new $20 would have to be saved (or held) after they are received as wages, so that $320 is reinvested in the next round. But why should they be? For one thing, the desire is $300, in accordance with the new established time preference of 4/15, and there is no valid reason for it to change on the account of the creation of new loans, anymore then there is a reason today when the current system issues new loans.

Now even if you claim that the new $20 was issued to satisfy a growing continuous increase in demand (as in your “circular flow” example"), there is no way that this $20 will reach all those who will wish to hold it. At least some of it (if not most of it) will reach other wage earners who will take this new money and spend it on consumers goods, throwing the structure out of balance. This is the microeconmic analysis, which you and a few others have been accused of neglecting.

83

Explain. Also, what do you mean by elastic money?

Because the Ricardians believed in the neutrality of money (I believe).

Pointing out a theoretical problem does not automatically validate your position. The Rothbardian position is far more problematic (they entirely ignore deflation!).

No. you completely ignored my original comment. This is the problem with you, DD5, you don’t even consider the opposing argument. You dance around it. Money is a good and a class in itself. Money is neither a present good nor future good. When the demand for money rises, the time preference of society cannot change (since time preference is represented by the ratio of demand between current and future goods). This example perfectly supports the free banking position.

84

No DD5–nice try but it doesn’t work as you suggest. An increased demand for money balances doesn’t neatly transalate into an ultimate demand for “present” or “future” goods: because it is a demand for financial assets it translates simply into greater lending power for the banks whose assets are being held. Whether the banks take advantage of it to make consumer or producer loans is entirely a decision over which they may exercise complete entrepreneurial discrepency, just as they might freely determine wihether to, say, make a 3 month loan and then renew it for another three, or make a six-month loan instead.

85

Ensuric,

No, you’re mistaken.

First, money is a present good. Mises may have defined it as neither in Money and Credit, but he later retracted it.

Second, An increase and decrease in one’s money balance is perfectly compatible with different combinations of simultaneous increases and decreases in the proportions in which he consumes or invests.

For example, if cash balances are increased by cutting consumption and not investment, the structure will become more elongated and productive, indicating a higher time preference.

This is what Mises means by the following:

Whenever an individual devotes a sum of money to saving
instead of spending it for consumption, the process of saving
agrees perfectly with the process of capital accumulation and
investment. It does not matter whether the individual saver
does or does not increase his cash holding. The act of saving
always has its counterpart in a supply of goods produced and
not consumed, of goods available for further production
activities. A man’s savings are always embodied in concrete
capital goods. . . . The effect of our saver’s saving, i.e., the surplus
of goods produced over goods consumed, does not disappear
on account of his hoarding. The prices of capital goods
do not rise to the height they would have attained in the
absence of such hoarding. But the fact that more capital goods
are available is not affected by the striving of a number of
people to increase their cash holdings. . . . The two
processes—increased cash holding of some people and
increased capital accumulation—take place side by side.

(Mises, Human Action, pp. 521–22)

Whenever an individual devotes a sum of money to saving
instead of spending it for consumption, the process of saving
agrees perfectly with the process of capital accumulation and
investment. It does not matter whether the individual saver
does or does not increase his cash holding. The act of saving
always has its counterpart in a supply of goods produced and
not consumed, of goods available for further production
activities. A man’s savings are always embodied in concrete
capital goods. . . . The effect of our saver’s saving, i.e., the surplus
of goods produced over goods consumed, does not disappear
on account of his hoarding. The prices of capital goods
do not rise to the height they would have attained in the
absence of such hoarding. But the fact that more capital goods
are available is not affected by the striving of a number of
people to increase their cash holdings. . . . The two

(Mises, Human Action, pp. 521–22)

Now, how can you say that time preference cannot change when my example clearly shows how the proportion between present and future goods can and does change. What is not valid about my example? It’s not possible for $20 to be cut from consumption and transferred to cash balances, while not cutting any spending on investments? It’s a perfectly valid and realistic example.

If you want an example where time preference remains the same, while demand for money increases, go to pp 690 at http://mises.org/books/desoto.pdf , starts with "As a graphic illustration of our argument, let us suppose…"

As for the Ricardians, I was talking about the fact that “any supply of money is sufficient” and not “money neutrality”.

“Elastic money” as in a money that can quickly adjust in supply to meet allegedly changes in demand for it, unlike gold for example. Fiduciary media is one example of “Elastic money”. No?

that…

86

I still boggles my mind that a whole movement has been perpetuated TODAY around such an archaic, bizarre and completely unnecessary concept as Free Banking. If I ‘demand’ money, I can either (1) earn/make it, (2) sell something I own in return for it, or (3) borrow it from someone else who’s saved it and is willing to lend it to me at interest. With advancements in technology and finance, it is getting exponentially easier for market agents to manage their capital allocations between cash (immediate liquidity) and investments (loans, bonds, stocks, funds, etc.). As markets in an increasing number of such instruments become increasingly liquid and developed it is becoming ever easier to change the duration and nature of one’s investments (e.g. Sell a 10yr Greek bond to buy a 3month US bill, a 6 month Ford commercial paper, a share of IBM, and keep the rest in cash). If one’s too stupid to do this on their own, there are professionals that can do it for them, for a fee.

Why on Earth would anyone need a bank in this day and age, and a fractional reserve one, no less? Without central banks at the cartel’s core, banks would most likely go the way of the Dodo, as new entities appear to match the preferred duration, nature, and risk profile of REAL savings with the economy (business) that seeks them.

Z.

Questions regarding 100 percent reserve banking
87

Selgin,

" An increased demand for money balances doesn’t neatly transalate into an ultimate demand for “present” or “future” goods: "

I don’t know what you mean by “neatly” but some proportion between present and future goods must be reestablished as a result of an increase or decrease in cash holdings, and certainly the banks cannot possibly know what that proportion is by the mere increase or decrease in deposits. How will those banks make those loans in just the right proportion. Claiming that demand for money is equivalent to some demand for financial asset seems to only complicate your argument further.

First, how can “money” be equivalent to a financial asset? Money, by definition, is perfect liquidity, otherwise it isn’t money, and there is no longer any point of talking about a “demand for money” or “increase demand to hold money”, etc… if “money” is just another “financial asset”. If people are selling financial assets because they want to hold cash, then you are now saying that they really are just changing between types of assets. This argument doens’t make any sense.

Second, even if I accept, for the sake of argument , your “financial asset” definition for “money”, it is still the case that the new time preference cannot be established by the mere increase or decrease in bank notes or deposits. The banks will make loans without any regard to time preference. The system cannot maintain equilibrium and must eventually throw the structure out of balance. I don’t see how the following quote by you addresses the issue: "Whether the banks take advantage of it to make consumer or producer loans is entirely a decision over which they may exercise complete entrepreneurial discrepency," You can say the exact same thing in defense of our current system. This is starting to sound a lot like the “efficient markets” objection to Austrian Business cycle theory.

I have to say though, I think I understand your position a lot better then I did before.

88

DD5: the treatment of (non-commodity) mones as “financial assets” is perfect standard. Here, for example, is Investopedia’s definition of a financial asset: “An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits, and the like are all examples of financial assets.”

89

I don’t quite understand how Investopedia’s definition for “financial asset” proves that money is also a financial asset.

When people want to hold money, they want to hold money and not IOUs. If they want to hold some particular form of IOUs, then they have a demand for those IOUs, but not for money. Now it seems that you have to conflate money with IOUs to make your case, and I don’t see any valid justification for this sort of conflation. Interestingly enough, it is only the particular type of fractional reserve IOUs that you are equating to money.

90

Where does Mises say this, and explain. How can money be a present good?

91

Ensuric,

I don’t know if he actually classified it as a present good, but I don’t think there is any other place where Mises defines money as “neither” other then in Money and Credit. Certainly not in Human Action.

Money is a good, albeit the most marketable good, you will notice that

  1. It is certainly not a future good

  2. You will notice that It is perfectly compatible with all aspects of economic analysis to treat is a present good. It makes prefect sense to define it as such and it serves no purpose to classify it as something special.

From MES (Emphasis mine):

In the monetary economy, since money enters into all transactions,
the discount of a future good against a present good
can, in all cases, be expressed in terms of one good: money. This
is so because the money commodity is a present good and
because claims to future goods are almost always expressed in
terms of future money income.

What are the future goods that exchange for money? Future
goods are goods that are now expected to become present goods at some
future date. They therefore have a present value. Because of the
universal fact of time preference, a particular good is worth more

What are the future goods that exchange for money? Future
goods are goods that are now expected to become present goods at some
future date. They therefore have a present value. Because of the
universal fact of time preference, a particular good is worth more

at present than is the present prospect of its becoming available as
a present good at some time in the future. In other words, a good
at present is worth more now than its present value as a future
good. Because money is the general medium of exchange, for the
time market as well as for other markets, money is the present
good, and the future goods are present expectations of the future
acquisition of money. It follows from the law of time preference
that present money is worth more than present expectations of the same
amount of future money. In other words, future money (as we may
call present expectations of money in the future) will always
exchange at a discount compared to present money.

at present than is the present prospect of its becoming available as
a present good at some time in the future. In other words, a good
at present is worth more now than its present value as a future
good. Because money is the general medium of exchange, for the
time market as well as for other markets, money is the present
good, and the future goods are present expectations of the future
acquisition of money. It follows from the law of time preference
that present money is worth more than present expectations of the same
amount of future money. In other words, future money (as we may
call present expectations of money in the future) will always
exchange at a discount compared to present money.

universal fact of time preference, a particular good is worth moreIn the monetary economy, since money enters into all transactions,
the discount of a future good against a present good
can, in all cases, be expressed in terms of one good: money. This
is so because the money commodity is a present good and
because claims to future goods are almost always expressed in
terms of future money income.

92

He didn’t redefine it because his original classification/typology is perfect:

Money cannot be a consumer (present good) since money is never consumed, but merely exchanged. Consumer goods are those goods which are immediately ready for consumption: sugar used to produce candy is a producer good, but sugar used to sweeten tea, for example, is a consumer good. This is the source of your confusion.

Money is both a good and a class in itself (though there are many forms of money) which exerts an influence over the money rates of interest. Therefore, interest rates can rise, or fall, depending solely on monetary conditions, independent of time preferences. This position is irrefutable.

93

Esuric, I have been led by this reading http://mises.org/pdf//asc/2003/asc9barnett.pdf

to conclude that money is a capital good. and not a 3rd category.

There is also an interesting article here:

Extract:

Selgin and White (1996, pp. 91–92) offer, essentially, three arguments

against the problem of bank runs. First, “solvent banks are not inherently run prone.”
Second, the market would immediately eliminate banks thought to
be insolvent. And, third, banks could insert (temporary) “option clauses” in
their contracts with their customers. Let us consider these in turn.
http://mises.org/journals/qjae/pdf/qjae8_2_4.pdf

Selgin and White (1996, pp. 91–92) offer, essentially, three arguments
against the problem of bank runs. First, “solvent banks are not inherently runprone.”
6 Second, the market would immediately eliminate banks thought to
be insolvent.7 And, third, banks could insert (temporary) “option clauses” in
their contracts with their customers. Let us consider these in turn.Selgin and White (1996, pp. 91–92) offer, essentially, three arguments
against the problem of bank runs. First, “solvent banks are not inherently runprone.”
6 Second, the market would immediately eliminate banks thought to
be insolvent.7 And, third, banks could insert (temporary) “option clauses” in
their contracts with their customers. Let us consider these in turn.Selgin and White (1996, pp. 91–92) offer, essentially, three arguments
against the problem of bank runs. First, “solvent banks are not inherently runprone.”
6 Second, the market would immediately eliminate banks thought to
be insolvent.7 And, third, banks could insert (temporary) “option clauses” in
their contracts with their customers. Let us consider these in turn.

Selgin and White (1996, pp. 91–92) offer, essentially, three arguments
against the problem of bank runs. First, “solvent banks are not inherently runprone.”
6 Second, the market would immediately eliminate banks thought to
be insolvent.7 And, third, banks could insert (temporary) “option clauses” in
their contracts with their customers. Let us consider these in turn.

94

Ensuric: "Money is both a good and a class in itself (though there are many forms of money) which exerts an influence over the money rates of interest. "

So what exactly is the problem with the fact that increases or decreases in cash holdings can represent different changes in proportions between present goods and future goods. Are you still arguing over this or you’re in agreement?

95

" I have been led by this reading http://mises.org/pdf//asc/2003/asc9barnett.pdf

to conclude that money is a capital good. and not a 3rd category."

And I have been led by this to suspect that a compelling case can be made for all 3 possibilities and there may not be any objective method by which this can be resolved.

96

indeed. bread is a capital good to the baker and it becomes a consumer good when in the mouth of a consumer. the status of ‘capital/consumer’ is determined subjectively.

however whilst bread is not praxeologically a consumer or capital good (we need thymology/a scene with definite agents to settle that question), perhaps we can narrow the scope? when it comes to money, by considering how we have defined it… have we defined it as something which is marked out by its special ability to allow its spender to receive other goods in exchange for it it r? i.e. its utility is indirect, it owes its utility qua its moneyness to its status as a capital good; the gold money is desired for its ability to buy other things that may be consumed later.)

In other words, at first some gold is to some people a capital good and to others a consumer good based on their subjective evaluation of gold qua ‘resource’. gold qua money is to all people a capital good because that’s what we have ‘defined’ (this will get people to boo!) ‘money’ to mean. gold qua its industrial and aesthetic(directly servicing beauty) will still be capital good to some and consumer good to others. but not that same gold qua money.

Thoughts please? Its a difficult subject ripe for discussion. My mind is certainly not closed on the matter

97

What do savers and borrowers exchange? Present goods for future goods, obviously, right? But in the money economy, they exchange money for IOUs. IOUs are claims to future goods, so naturally, money should be considered a present good. No? Otherwise, they are exchanging future goods for future goods. I’m not saying the article doesn’t make a rather persuasive case, but I am still inclined towards the treatment of money as a present good.

98

What do savers and borrowers exchange? Present goods for future goods, obviously, right?

ok, a rich steel magnate, rather than turn all his iron into steel, decides to loan some iron out to a borrower who offers a favourable rate of exchange.

The rich steel magnate had indeed exchanged his present goods for future goods, that happened when he did the ‘saving up’ of accumulating the iron till he had a quantity which could be borrowed. It does not happen for him at the moment of lending.

if we take a global view, and merely look at what exists and what will exist (we aren’t looking at what is a producers good and what is consumers good) its easy to say that the lent iron exists, whilst the future mansion the magnate will later have built for himself entirely from the proceeds of his investment does not exist) and from such an analysis we might say that ‘present goods are converted into (exchanged) for future goods’. really the borrowing is just the peculiar way by which the production good (if it is one) is later turned into some combination of all or some or none production goods and all or some or none present goods at a future date.

These issues get so confused because of the subjectivity issue. let me ask you this. can you save a consumers good? (the act of saving is the act of not consuming it…)

99

“These issues get so confused because of the subjectivity issue. let me ask you this. can you save a consumers good? (the act of saving is the act of not consuming it…)”

You can only save a consumers goods. If saving is the process of forgoing consumption, then you must be saving the goods that you are not consuming. So the goods that you are not consuming are what if not consumers goods.

If you’re going to define a consumers good as such only in the process of its consumption, then I think you will run into such absurdities that at least for the sake of economic theory, you will have to abandon this definition. For example if you buy a bar of soap, does it make much practical sense to define it as a future good right until the point that you use it? What if I only use it for 7 seconds 3 times a day? Is it now alternating between present and future good? I think these distinctions become nonsensical.

You have to be saving consumers goods because you can’t save future goods. You buy your future good with your saved consumers goods. If you hoard your consumers goods then it seems to complicate things, however, I think you can simply treat the situation as if you were simply exchanging consumers goods with yourself for future goods. You are still saving consumers goods in order to consume them in the future.

Another way to show that you can’t save future goods is that saving means forgoing consumption. Since you don’t literally consume your future goods, you can’t possibly be saving them. For example, if you own a machine that produces some intermediate goods, then you didn’t save that machine but purchased it with your saved consumers goods. Consuming capital is just a figure of speech to imply not reinvesting in your machine, i.e., abandonment.

So according to the above reasoning, if it is correct, money fits in perfectly with the above as a present good.

100

I agree that a good which is ‘capable of being consumed’ and is thymologically often a consumer good, is in the act of abstaining from being consumed (i.e. its not providing direct utility) is acting as a producers good. it is useful for its indirect utility. a utility that stems from the the consumption of a consumable good ‘in the future’ .

you can only save consumption goods. much like you can only kill a living person. once they are killed, they are not a living person. so, yes you can save a consumption good, in so doing you come to have production goods. thankfully you have the power of resurrection, and the icecream you froze in the freezer (not because you received direct utility from it existing in a frozen state) can be unfrozen and consumed (giving you direct utility). frozen ice cream left in the freezer till later is a producers good.

One of the biggest confusions that we all have to deal with is that we reflexively and for thymological reasons refer to classes of objects that we routinely associate with ‘productive activities’ as producers goods, and ditto for the consumptive side.

look at the encyclopedia britannica’s explanation of what is a consumer good. (no reference to subjectivity):

## consumer goods

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Home > Library > Miscellaneous > Britannica Concise Encyclopedia

goods manufactured and used in further manufacturing, processing, or resale. Intermediate goods either become part of the final product or lose their distinct identity in the manufacturing stream, while capital goods are the plant, equipment, and inventories used to produce final products. The contribution of intermediate goods to a country’s gross domestic product may be determined through the value-added method, which calculates the amount of value added to the final consumer good at each stage of production. This series of values is summed to estimate the total value of the final product.

I ask how Misesian are such definitions?

If you’re going to define a consumers good as such only in the process of its consumption, then I think you will run into such absurdities that at least for the sake of economic theory, you will have to abandon this definition. >>

What I see is that it is in the Misesian tradition to be just so pedantic. what is relaxed to allow for extended theorising is that reference to consumer and producer good, is not ‘absolute’ but it is relative. You think of the good as belonging to either some higher or some ‘relatively’ lower stage of production than some other good. in other words. ask not whether your particular bar of soap is a consumer good or producer good. but whether it is a higher or lower order good than some other bar of soap. like a small bar of soap that is all used up in one sitting (like in a hotel), or soap used in a production process, like cleaning a restaurant. and yet further comparisons, whether your bar of soap is of a higher or lower stage than some particular steel rod, or some particular TV set. or more instructive of my point, whether it is higher or lower than that bar of soap, had you put it to a different use, if we imagine that you decide to open a restaurant, or get direct pleasure from the wonderful experience of lathering a pet elephant and consuming it all. the bar of soap doesn’t have its status in the continuum of production and consumption intrinsically, it is a subjective function.

I ask whether Rothbard goes into absurdities when he writes…
Let us trace the relations among these goods by considering a typical human end: the eating of a ham sandwich. Having a desire for a ham sandwich, a man decides that this is a want that should be satisfied and proceeds to act upon his judgment of the methods by which a ham sandwich can be assembled. The consumers’ good is the ham sandwich at the point of being eaten. It is obvious that there is a scarcity of this consumers’ good as there is for all direct means; otherwise it would always be available, like air, and would not be the object of action. But if the consumers’ good is scarce and not obviously available, how can it be made available? The answer is that man must rearrange various elements of his environment in order to produce the ham sandwich at the desired place—the consumers’ good. In other words, man must use various indirectmeans as co-operating factors of production to arrive at the direct means. This necessary process involved in all action is called production; it is the use by man of available elements of his environment as indirect means—as co-operating factors—to arrive eventually at a consumers’ good that he can use directly to arrive at his end.

…emphasis is mine…

finally, i need you to clarify your understanding of the ‘future goods’ ‘present goods’ terminology. do you have a clear text for me to refer to, which is indicitive of your use, or can you briefly explain yourself just how you are using it?