Is it true that the quantity of money doesn’t matter as Jörg Guido Hülsmann states in Deflation and Liberty? Or should the quantity of money increase with increased production, thus making the gold standard untenable?
Could you also explain why?
Well, first off, even under a “gold standard” (which is really just a case of the government trying to fix the price of gold in terms of some arbitrary unit… allowing them to change that fixed price when they find it convenient), the quantity of money does expand. People are always mining for gold, which means there is a steady stream of material entering the system. Anybody who argues in favor of a fixed supply of money doesn’t know what they’re talking about: there’s no such thing. The key question is not IF the money supply expands, but HOW.
If a people is using gold as their only medium of exchange (which has never been the case; gold and silver have always served this role in parallel, competing only at the margins between small and large transactions), the only way to expand the money supply is to go into the earth and get it. This requires time and effort, which people can only afford to do if production of other things is high enough to compensate that time and effort. If society needs food, building materials, and such more than it needs more money, that is what people will do. As productivity rises, the value of the gold in the mines rises, meaning the rate of monetary expansion will always be tied to actual productivity.
In addition, this situation means that the ONLY way to acquire wealth (short of stealing it outright) is through investment and labor–productive activity–even when that effort is engaged in expanding the money supply. This rewards a work ethic. (And if we were ever to reach a “peak gold” type situation, something else would likely arise and take gold’s place in the range of transactions increasing scarcity rendered it less useful for.)
The alternative is to have a central authority issue currency (a position they can only achieve by first tying it to the naturally arising money). Now the money supply can increase regardless of productivity. Furthermore, there’s also a new way to acquire wealth: play the monetary authority’s game. This undermines productivity in favor of servility. You can be very good friends with the king (or with his friends, or his friends’ friends, etc.) You can lobby the legislature. You can beg for loans from the central bank. All of these things involve bowing and scraping before authority to get them to take from others (via currency expansion) and give to you. In other words, it undermines productivity for the sake of servility.
It’s not IF the money supply expands. The money supply will always expand, one way or another. It’s HOW it expands, and what sort of behavior that expansion rewards.
Are you reading him right? How can it not matter?
And the quantity of money should increase or decrease to match supply and demand.
Once a sufficient quantity of money has been established to enable indirect exchange of goods in the economy, the quantity of money never has to increase beyond that amount. If the population grows or productivity increases the quantity of money does not have to increase. Money is only the medium of exchange. Unless money is consumed for jewlery or some other industrial means, then that would create monetary deflation and should be prevented. But the quantity of currency, the medium of exchange, never has to be increased.
You may find the following link useful to better your understanding
and the full book:
When has a sufficient quantity been established?
With deflation comes wealth. This isn’t reffering to a monetary shock where a debt default causes money supply to contract. What he’s referring to is that with a fixed money supply, as the productivity economy grows and produces increasing number of goods then more goods being chased by fewer dollars means prices fall. This is not bad. It is true wealth creation. The working class become wealther because their dollars can buy more of the surplus they have produced. Prices fall. The input cost to business falls. It’s cheaper to run companies.
If hourly wage is a high expense for businesses then wages will have to fall commensurate with the falling of other prices. Otherwise there will be increased unemployment. But falling wages are okay considering the cost of living is falling as well. As long as wages don’t fall faster than falling prices then the working class are still getting wealthier. But this isn’t allowed to happen today because the gov’t interferes in the economy and mandates a minimum wage by law. Therefore we have unemployment in the economy because of this law.
Then comes the question of - what about debts. It would be harder to pay back debt if your wages are falling. But the debt repayment could have a negative interest rate, indexed to deflation. Just as interest rates today are indexed to expected long term inflation.
Also, the rate of this deflation and wealth creation is not rapid. It’s not like the falling prices we are seeing today due to deleveraging & paying off debts at liquidating prices. In a true free market the falling prices (which are prices in terms of dollars) would be gradual and dependent on the rate of increased productivity. Probably a couple percent per year? Maybe less? Depending on how wealthy the economy is growing. The more prosperous and wealthy we become by increased quantity of real goods in the economy, the more our hourly wages can fall.
Things priced in dollars would have their prices fall. But thinking of trade between one commodity for another, the exchange rate of one good for another good may not change. It’s only its price tag in dollars would be changing. Today a dozen eggs can buy bread. Maybe eggs cost 2 dollars and so does bread. But in 5 years now eggs cost 1.5 dollars and so does bread. The exchange between goods are the same. It’s the price in dollars that changes.
You did not answer.
Anyway, production of money, gold coinage for example, is also creation of true wealth.
How is production of money true wealth? If I’m on a desert island and starving and someone gives me a pile of gold or US dollars … what good is it. I will still starve to death. Money is only good for the things that it can secure that is produced by the economy.
You can then buy food from that someone so you will not starve.
I don’t know when a true sufficient quantity of money exists. But I’m sure we had a sufficient quantity a long time ago. The USA has had an economy for a long time now. During the greater part of the industrial revolution we had a gold standard and the quantity of money did not expand much, beyond that of regular gold mining, while we had an explosion of increased number of goods produced in the economy. Same goes for the industrial boom of the early 1920’s, we were on the classical gold standard then too. Fixed money supply and increased productivity supports fixed unit of account for trade. This supports efficient international trade and dividsion of labor in the economy. Increased prosperity results.
This is evasion and question begging. You have not even provided a plausible definition of sufficient or optimal money supply. The very fact that on a free market money production intensifies as its purchasing power increases shows the actual quantity is suboptimal.
Coinage is not production of money. If gold is used as money, then production of gold (mining) is the only way to produce more money. That or alchemy.
You just keep on confusing money with coins. Amazing.
Money (gold, silver) does not need to increase in quantity. Money can increase in value. An increase in production is balanced, if no more money quantitatively is pumped or mined into circulation, by an increase in value of money.
Which in turn creates incentive to increase the quantity which then decreases the purchasing power.
What is the incentive to decrease the purchasing power of money? The push for the Federal Reserve as the perpetual money creating machine was in order to create inflation. Stable prices was the propaganda used to convince people needed it. But the truth is that when the central bank counterfits money, it is the organizations who first receive this money to expand their businesses and bid up the price and secure goods away from other producers in the economy - are who steal the wealth from the working class. Rather than have the purchasing power of money rise and have the working class become wealthier the Rockerfellers and Morgans in 1907 agitated for a central bank to funnel the wealth creation due to increased productivity back into the pockets of politically connected enterprises.
Look at AIG and all these companies who fund all the political campaigns. All these guys are now getting bailed out because they’re well connected. They will also be alive to help contribute towards the next political campaign.
What the hell? If something gets more expensive relative to other things there is an incentive to increase its production. This is econ 101.
So money gets more ‘expensive’ and goods get cheaper. No need for your inflationist nonsense. Of course, you can also point out that if something is ‘expensive’ then there are incentives to counterfeit it, and that’s what you advocate : the creation of paper money/credit money out of thin air.
Why should I stfu ? You don’t understand the basics. Your remarks about coinage clearly show it.
yes. Is that bothersome?