Saving does not cause an increase in the money supply, it only causes an increase in the supply of capital (capital accumulation). The money supply remains constant, unless more money or money substitutes are physically created. There is an explicite difference between a redistribution of money under a change in time preference, and an increase in the amount of money in circulation.
Higher order produce the inputs required for the intel chip fabrication plant. The intel chip fabrication plant is merely one phase in the production process.
No, the saved resources is what allows the investment projects to come into fruition. The problem is that the artificially reduced interest rate tells market actors that time preference is low, and that there’s plentiful resources for more roundabout methods of production (savings–subsistence fund). You’re confusing causality–the reduced interest rate causes the malinvestment, and the forced savings attempts to correct the distorted structure of production.
No. Pure confusion.
Increasing the money supply does not increase the amount of resources in the economy, but only prolongs the malinvestment and leads to increasing prices, both in the higher and lower orders.
The production methods are determined by the supply of subsistence funds less consumption after each production period. The higher the supply of subsistence funds (savings), the longer the production method may be (more productive). This subsistence fund is expressed in the lonable funds market through the interest rate. If consumption diminishes the subsistence fund to a point where previous methods of production are too long, that is, where there’s not enough goods to sustain the economy for the production process, then the price of current goods will rise to a point where the extended production process is no longer profitable. Thus, if the interest rate is arbitrarily reduced, as if the supply of savings had actually increased, and producers begin to extend the production process, they will be met with increasing costs and scarcity.
How did I do with this new children’s book draft? Thanks.
https://docs.google.com/present/edit?id=0AcRoi3t5YXTeZGZ0ZnF6bmdfMTM4ZnFqdGZjZHQ&hl=en
I don’t see that says FRB is bad at all. As the banknote can be returned for redemption, he never says returned at all times any times. He even says in HA, “What is needed to prevent any further credit expansion is to place the banking business under the general rules of commercial and civil laws compelling every individual and firm to fulfill all obligation in full compliance with the terms of the contract.” And his concern over banknotes, is just that. It says nothing about deposits.
Okay, but you can’t return fiduciary media for redemption at any time (which is probably why fiduciary media’s modern value is just the promise that it is worth a certain amount). If you are loaning out from checking deposits, at any time when there is a superfluous note circulating for that deposit then there are two claims. The bank cannot fulfill both claims, because it would be physically impossible.
Re-read your quote:
Therefore the dangers of credit expansion were not very great as long as the credit expansion was the business of private banks and private businesses subject to commercial laws.
When he is referring to “credit expansion” he is referring to fractional-reserve banking. Even in this nebulous quote, it’s clear that he is attributing the adjective “dangerous” to the concept of credit expansion. Not only that, but he doesn’t say that the dangers of credit expansion are non-existant, he says, "are not very great".
He continues:
As long as the surplus banknote could be returned to the bank of issue for redemption, there was a check on credit expansion, and there couldn’t be credit expansion of any considerable extent
Ludwig von Mises is right. That quote, in fact, can be attributed to fractional reserve banking (like I did), because you cannot redeem a superfluous note if there are multiple claims on the same deposit. That is the “check” he is referring to. The quote in Human Action supports this position:
…compelling every individual and firm to fulfill all obligation in full compliance with the terms of the contract.
Sure. But nowhere does Mises say at “any time though” the passage from HA made it even more clear.
And thats a positive, not a negative. Contrast that with the idea that FRB (credit expansion) inherently causes bubbles (as has been espoused), FRB constitutes fraud, or “the benefits are not very great.” Accepting that there are dangers within banking hardly makes one a full-reservist.
Yes, the last sentence especially makes it completely in compliance with free banking theory.
I’m not sure you are interpreting my use of that word correctly. There is no time at which that banknote can be redeemed, if there are multiple claims on it.
I’m not sure how you can interpret that “credit expansion” is “dangerous” as being “positive”. What all the quotes you have provided do suggest is that Mises did not believe that banks should give banknotes which have to be redeemed by defrauding another client (i.e. fractional reserves on demand deposits).
You cay say that by ignoring the rest of my post, and ignoring the fact that two claims on one asset cannot be fulfilled (because it is physically impossible). But, it does not make you right, it just makes you delusional.
Then you have stepped out of the realm of FRB all together. As all notes can be redeemed within the contractual time period expressed with each client. Mises’ quotes show that free banking is the way to avoid the over-issue of fiduciary media.
He didn’t simply say “credit expansion is dangerous,” as in something to be avoided. Hes saying that “credit expansion,” while dangerous, isn’t necessarily bad. Fractional reserves hardly defraud another client, especially given the contract entered into by all parties involved. (Which Mises has shown support for). If you continue reading, Mises goes on to explains how the situation could be bad. (Government interference)
You are either 1) confused about FRB, 2) confused about Mises, 3) confused about FRB and Mises.
What you are referring to is the product of fractional-reserve banking. You continue to treat the two separately, but you haven’t really made a case for it (I mean, if you actually made an argument I might eventually agree with you). In fractional-reserve banking, when you are loaning out of demand deposits, you create multiple claims for the same assets. The demand deposit’s contract states that the depositor has the explicit right to demand the assets deposited at any time. When you loan money, the debtor has rights to those assets within the time of the contract. But, the contract with the debtor and the contract with the depositor are running simultaneously, and therefore one of the two cannot redeem their banknotes.
As a result, one of the two clients are being defrauded. I have not seen any “free banker” reconcile this fact. Even Lawrence White ignored it when responding to a blog post of mine.
Not to cut you off, but he did not say that at all. You are interpreting that, and adding words to the quote. I’m not sure how you can so badly misinterpret Mises:
Therefore the dangers of credit expansion were not very great as long as the credit expansion was the business of private banks and private businesses subject to commercial laws.
Nowhere there does is say that credit expansion is not necessarily bad. He explicitly cites that there are dangers. I have not read Marxism Unmasked, and so I am guessing that he is building on opinions established prior to this publication (such as in Human Action or The Theory of Money and Credit). The quotes clearest interpretation is that private banking has natural checks to credit expansion, and so credit expansion is not as bad as it would be in a regulated or monopolized market.
He continues:
But very soon governments invaded this field of action.They invaded it under the erroneous idea that by issuing circulation credit, additional credit, fiduciary media, by issuing more money than they had received from the public, the banks were in a position, precisely on account of this credit expansion, to reduce the height of the rate of interest. (Bolding mine.)
Mises never showed support for fractional reserve banking (the only “free banking” case that I is commonly stated is Mises’ definition of inflation, which has little to do with fractional reserve banking—it is not inflation is the money supply is being expanded to meet demand for money [Mises states this in The Theory of Credit and Money; I don’t want to go into this, since it is off-topic, but I am just stating for clarity). None of the passages you have quoted show this—it seems to me that you are making inquitous misinterpretations.
Given that it seems that the argument has devolved into interpretation versus interpretation, I’m not sure it is worth continuing. Whether your interpretation is correct or not, it becomes irrelevant when it is clear that one of our interpretations is wrong and we are obviously unwilling to budge on the issue. So, in regards to Mises I can agree to disagree.
You did a great job of avoiding what I actually said. Like I have said above, you have failed to make a concrete case that fractional reserve banking does not defraud at least one contract.
Interesting collection of quotes from Marxism Unmasked:
The situation that came about in the nineteenth century with the development of modern methods of banking, with the issue of banknotes and of deposits subject to check, led to two serious problems: fiduciary media and credit expansion. (p. 78 [all pages refer to PDF]; all bolding mine)
The following quote provides the context over the passage we are currently debating:
The second very questionable business consists of the institution of credit expansion, which may be called the most important economic problem of our age. This means that the banker lends more money to people than he receives from his depositors. This surplus of banknotes issued by the banker, or of deposits subject to check which he opens for his customers, is credit expansion. The question is, “What are the consequences of such operations?” At the beginning, credit expansion of this type was not very critical, not very dangerous, because it was done by individual bankers who had a good standing in the city and their notes could be taken by people, or they could be refused.You could go to the banker and receive from him a loan made up completely of additional banknotes, fiduciary media, made up completely of credit expansion. But then the question was, would your customers and your creditors really be ready to accept as payment the banknotes issued by this banker? We may assume that a creditor who has a questionable deal would answer, “It is better to take these notes than to wait any longer for payment.” But then, he would have gone immediately to the banker who issued the notes and would have redeemed them, thus reducing the number of surplus banknotes outstanding.
What it seems that he is saying is that superfluous bank notes would be immediately redeemed, and so in relatively small quantities banks could deal with this. If you do a search for the words “credit expansion” and read the passages, it becomes clearer that what Mises is arguing is that government allowed for credit expansion to take place on a much grander scale. He clearly argues that while credit expansion is necessarily bad, in small quantities it can be dealt with.
I’m not making an argument for FRB, I merely arguing that Mises wasn’t a 100% reservist. You seem to be assuming that I’m arguing that he thought FRB would succeed in a free market, even if that wasn’t true that still isn’t the point. However…
“In fractional-reserve banking, when you are loaning out of demand deposits, you create multiple claims for the same assets. The demand deposit’s contract states that the depositor has the explicit right to demand the assets deposited at any time.”
…This isn’t necessarily true at all. You are stating what the contract must say, while apparently ignoring what it can say. The demand deposit’s contract can state that the depositor has the explicit right to demand the assets deposited at any time unless… in which case his demand will be redeemed by date X… if needed the form of Y… etc.
Thats the beauty of the option clause.
My point exactly. “He didn’t simply say” means he did not say, I’m not attributing the quote to him as he didn’t say anything like that.
I’m not sure how you could assume that he’s building off of TMC as his opinion of free banking seems to change by HA (but I’m not convinced). I didn’t think that there was any doubt that there are dangers in credit expansion, just as there are dangers in driving, thats why its crucial it only be in good hands (private). He makes this point clear in HA:
Free banking is the only method available for the prevention of the dangers inherent in credit expansion. It would, it is true, not hinder slow credit expansion, kept within very narrow limits, on the part of cautious banks which provide the public with all information required about their financial status.
It seems pretty clear that he found “slow” credit expansion to be safe. And as already shown he clearly defined “credit expansion” as the banker lending more money than deposited.
And that is the same basic argument that all free bankers use. Regardless, he makes my point about him not being a “crank” a la Rothbard, as he clearly isn’t demanding 100% reserves, hes advocating Free Banking.
Thats the free banking argument in a nutshell, minus the “bad” part. What he seems to be saying is that only in a free market can credit expansion be correctly maintained, thus not starting a business cycle (a danger). I don’t see any calls for 100% reserves.
No, but he is at least extremely close to one. He admits that the circulation of fiduciary media would be kept to a bare minimum in a free market for banking.
If the contract is any different, then it is not a demand deposit. Demand deposit contracts are the way they are for a reason; they make warehousing and usage of money much easier than just holding on to your cash and doing the accounting yourself.
I have already made the argument that banks that require the use of option clauses would most likely fall into disfavor with their clients. Obviously, a client who deposited his money in a bank to warehouse it while he thinks on what to spend it on and then suddenly is cut off from his money, because the bank cannot meet his demand (too much fiduciary media being returned for redemption) will probably move to another bank. So, while the option clause may exist as a caveat in a contract, I think that it becomes pretty clear that banks who have to make use of it will not survive for long periods of time.
You should re-read what I wrote. I didn’t say that he’s building off The Theory of Money and Credit; I explicitly said that he is probably building off of prior arguments. I will quote myself just so that we’re clear:
I have not read Marxism Unmasked, and so I am guessing that he is building on opinions established prior to this publication (such as in Human Action or The Theory of Money and Credit).
It seems as if your ability to misinterpret extends beyond Ludwig von Mises.
That is a bad metaphor. That is like saying that credit expansion can be good if it’s done by the right people. That is not what Ludwig von Mises is claiming at all. It is clear that what he is saying is that credit expansion would be kept to a bare minimum.
You should continue the quote:
But under free banking it would have been impossible for credit expansion with all its inevitable consequences to have developed into a regular—one is tempted to say normal—feature of the economic system. Only free banking would have rendered the market economy secure against crises and depressions.
Just so that it’s clear, credit expansion is still at the heart of “crises and depressions”, and Mises still supports the notion that in a free banking environment credit expansion would not just be “slow”, but would be extremely limited (admittedly, in this case I might be misinterpreting the use of the word “slow”—I’m not sure if you are meaning to use it in the sense of velocity or using it as a synonymous of “limited”. The way it is used seems to imply that credit expansion would continue, just at a slower pace. I don’t think that is accurate; Mises is stating that while there may be cases in which superfluous notes are distributed, they would be quickly returned and the supply of money substitutes returned to its previous volume).
I agree with you that economists such as Murray Rothbard and (please forgive me) Jesús Huerta de Soto (one of my favorite economists, though) are incorrect in supporting forced 100% reserves. In my “article” I concluded with:
Admittedly, there should be no legal bar against fractional-reserve banking. The legal question is easily avoidable. Larry Sechrest has a valid point when he states that fractional-reserve banking may arise as a result of offering a better deal to the customer. In other words, the fact that banks issue interest on checking deposits may lure depositors to trust these banks over simple warehouse banks, because the promise of interest in enticing. Is this type of banking tenable over the long-run?
There is more, but it simply restates the case I’ve been making in this thread insofar, so I will skip some parts:
Despite these theoretical disagreements between various economists who support free-banking, they can all agree on the fact that the current cartelized banking system must be dismantled and exchanged with one that is free. This includes the freedom to mint coins, or print money, and the freedom from a central bank’s sway. This also includes the freedom to fail. Only by eliminating this bank of last resort can a truly stable banking system evolve and only by these means can society finally enjoy stable economic growth and prosperity. In a free market, poor banking systems would quickly fall out of place and stable accounting measurements come to the forefront. Certainly, on this all free-banking economists can agree.
I would not, however, call Murray Rothbard a crank. His theoretical insights are valuable. This must be admitted, even if you disagree with him (I disagree with Larry Sechrest and Lawrence White, but that does not make them cranks). Speaking of Larry Sechrest and Lawrence White, their arguments are not that fractional-reserve banking would be kept at a bare minimum. Their argument is explicitely that it would be an acceptable and healthy form of banking, which I disagree with. It is true that they admit that perpetual credit expansion would be impossible, and that it could only occur as long as the issues can be redeemed without conflict of interest, but the major theoretical disagremeents are mainly on the extent of possible credit expansion (this is, at least, what I have read through out White’s articles and Sechrest’s book Free Banking). Furthermore, the free banking school does not believe that fractional reserve banking is necessarily inflationary, while Mises obviously does. The latter simply believes that the inflation is self-regulating, so that generally if it occurs there are natural checks which cause the money supply to return to its previous volume.
Finally, if the first quote was initially included in the thread as a means of proving that Ludwig von Mises was not a supporter of forced 100% reserves then I can admit to not necessarily misinterpreting your posts, but at least driving it off through an off-topic tangent.
I am surprised that DD5 has not made his case in regards to defrauding the “third party”. This was the one criticism of my above stated position on free banking (in the paragraphs quoted), and I was interested in hearing more (this is not a challenge, just a genuine inquiry of interest).
So whenever money demand or supply changes a business cycle occurs?
That’s a tough sell.
I don’t see why that is the case. Why would an increase in the supply of money necessitate first order goods to look more profitable? Is it because an increase in money supply brings a decrease in the interest rate?
If this is true, couldn’t that simply be thwarted if the increase or decrease of money supply was known and accounted for? Even so, I don’t see how this problem is at all solved with full fractional reserve banking. Money supply and demand can still fluctuate, so if this is the of the business cycle, it seems like the business cycle is just a natural part of the economy that can only be tamed and not conquered.
I personally am unsure as to whether or not an increase in the supply of money needs to increase or decrease interest rates, as long as demand for money increases at the same pace.
How would it? If a bank has a surplus of credit it lowers interest rates. It’s not as if an entrepreneur has a choice; or, do you suggest that all investment come to a halt?
I’m not sure how you come to such a conclusion. In a 100-percent reserve system there is no monetary expansion, apart from the physical mining of actual money (not money substitute). It is true that a large amount of incoming specie can set off a cycle (see: Tulipmania and the Crisis of 1937), but these are less recurring.
Credit expansion does not respond to an increase in the demand for money. Judging from your response to NirgrahamUK, you equate “demand for money” with “demand for capital”. They are not the same.
explain in greater detail (than none at all) how your question relates to the sentence of mine that you quoted?
Why is it that only an increase in money unnaturally changes the course of interest rates? If the supply of money increases, does it necessitatate that a “boom” is occurring?
Consider as an example a modern day seller of gold bullion who offers to sell gold stored in his own vaults in order to save the buyer the hassle of storing the gold himself and to offer him other services of transaction for convenience. The seller issues a paper claim ticket or perhaps opens a digital account for the buyer. If the seller notices that most customers do not ever redeem their physical gold, he may be tempted to commit fraud and issue multiple tickets for the same amount of gold. At this point, the “free banker” will immediately object and claim that no fraud necessarily needs to take place if the buyer is aware of the practice. However, all other owners of gold are still clearly defrauded by having multiple gold accounts being created out of nothing. The buyer agreeing to the seller’s terms hardly eliminates the fraud, but only makes him a collaborator in the fraud along with the seller against all other owners of gold. Now of course, if these new gold accounts are NOT introduced into the market as real gold substitutes backed up by 100% the face amount and safely secured in some vault, then no fraud takes place at all, but then we are no longer talking about anything even remotely related to fractional reserve banking.
All those holding the money commodity are being defrauded by having its value debased as a result of the multiple new demand deposits created out of nothing. They are the 3rd party. Thus, Rothbard was correct when he pointed out here (pp. 98):
"Where did the money come from? It came—and this is the most important single thing to know about modern banking—it came out of thin air. Commercial banks—that is, fractional reserve banks—create money out of thin air. Essentially they do it in the same way as counterfeiters. Counterfeiters, too, create money out of thin air by printing something masquerading as money or as a warehouse receipt for money. In this way, they fraudulently extract resources from the public, from the people who have genuinely earned their money. In the same way, fractional reserve banks counterfeit warehouse receipts for money, which then circulate as equivalent to money among the public. There is one exception to the equivalence: The law fails to treat the receipts as counterfeit."
The “public” in this case is the third party.