On investments, it’s a question of factoring in the change in the supply of money to get the real interest rate. Something like modern adjustments for inflation.
Also, an increase in mining isn’t the only way money supply changes. If money demand changes or if velocity of exchange changes, then it has comparable consequences.
no, we are not only talking about increases in money… but rather about the effect of creation of fiduciary media which is introduced into the economic system through the extension of loans.
Why would the creation of dollars be any different than the increase of gold? Either way, money in the economy is increasing and, according to the theory, the interest rate is changing. Why is gold special?
Also, why shouldn’t similar consequences occur when anyother variable in the exchange equation changes? Say there’s no increase in the money supply at all, but velocity increases ten fold. What’s the difference?
I’m still not sure how an entrepreneur would factor these changes in the supply of money in. It’s easy to present it as a solution, but the fallacy is uncovered when you find out there is no appreciable way for entrepreneurs to really know (besides the fact that entrepreneurs are not economists). If an entrepreneur wants to invest he will base his decision on what seems to him a juxtaposition between benefits and costs. Low interest rates make higher order production seem more beneficial. What is the entrepreneur to do in the case of artificial interest rates? Cease investment for the length of the boom? That can be many, many years. I think the lack of sensibility in this objection to the Austrian Business Cycle Theory is quite obvious.
What does velocity of money have to do with the supply of money? Money, or tangible assets used as a common good for trade, can only increase if the volume of these “tangible assets” increases. If the velocity of a particular piece of money increases it does not multiply into more money, it remains the same. Besides, the concept of velocity of money has already been refuted:
According to popular thinking, the idea of velocity is straightforward. It is held that over any interval of time, such as a year, a given amount of money can be used again and again to finance people’s purchases of goods and services. The money one person spends for goods and services at any given moment can be used later by the recipient of that money to purchase yet other goods and services.
From the equation of exchange, it seems that money together with velocity is the source of funding for economic activities. Furthermore, from the equation of exchange, it would appear that for a given stock of money, an increase in velocity helps finance a greater value of transactions than money could have done by itself.
As logical as it sounds, neither money nor velocity has anything to do with financing transactions. Here is why.
Consider the following: baker John sold ten loaves of bread to tomato farmer George for $10. Now, John exchanges the $10 to buy 5kg of potatoes from Bob the potato farmer. How did John pay for potatoes? He paid with the bread he produced.
Observe that John the baker had financed the purchase of potatoes, not with money, but with bread. He paid for potatoes with his bread, using money to facilitate the exchange. In other words, money fulfills here the role of the medium of exchange and not the means of payment.
The number of times money changed hands has no relevance whatsoever on the baker’s capability to fund the purchase of potatoes. What matters here is that he possesses bread that can be exchanged by means of money for potatoes.
How is it that the fact that the same $10 bill used in several transactions can add anything to the means of funding? By what means does the speed of money circulation add to the real pool of funding? Imagine that money and velocity would have indeed been means of funding or means of payments. If this was so, then poverty worldwide could have been erased a long time ago. Moreover, since rising velocity is supposed to boost effective funding, then it would have been to everyone’s benefit to make sure that money circulates as fast as possible. This implies that anyone who holds on to money should be classified as a menace to society, for he slows down the velocity of money and hence the creation of real wealth.
Austrian arguments against the mechanistic equation for velocity of money have been provided as early as Ludwig von Mises and Benjamin Anderson (who published his refutation as early as 1917).
the expansion of gold where the money first enters the economic system as new loans (rather than being spent to make purchase) would have the perverse effect on the market rate of interest as the extension of fiduciary media.
Gold is introduced when the demand for gold specie in circulation (" in pockets") increases. This is demand for money. Fiduciary media is not a response to a demand for money, but a response to demand for capital. While a demand for money will be used to fund lower order goods, capital is used to fund higher order goods.
I am not sure how entrepreneurs can factor these changes in, but I know they are able to do so today to an extent. If this is a financial innovation that needs to occur, I think it could without a central bank that has an interest in being particularly opaque.
A change in the demand for money, or for how often money will be used, would have a lot to do with interest rates, wouldn’t it? I thought that’s what we were still talking about and that not only an increase in dollars would have an “unnatural” influence on interest rates. Again, if the increase in the supply for money is correlated to equal the demand for money, this is a natural price system. If people use money more or have more of a demand to use and exchange it, then I would expect an increase in money supply at the same pace to be good for economic stability and smooth adjustment of prices to the change in the monetary factor. Why should this increase in money supply be unnatural? Why should it cause a boom?
As far as velocity being refuted, I’m just going to trust Milton Friedman got it right. I’m not saying you’re wrong for disagreeing, but I’m fairly confident that velocity of money exists.
So an increase in the supply of money is only perverse when it comes in dollar form? I’m sorry, maybe I misunderstood.
Or are you saying that an increase in the supply of money is only perverse when it starts off as a loan? So when a banker mines a bunch of gold and loans it out, does that have a perverse effect on the economy?
The only thing that would occur in a free banking environment is that given that there is no monopoly on money, entrepreneurs and consumers alike would simply change to more stable currencies and banking systems.
Yes, maybe in a system in which credit reserves were not inflated with fiduciary media. An increase in the demand for money would show a time preference leaning towards current goods, as opposed to future goods, so interest rates would probably be higher when demand for money increases. But, under fractional reserve banking the problem is that the increase in the money supply is not synonymous with an increase in the demand for money. What is increasing is the money substitute representing capital, which is why the interest rates for borrowing capital decrease.
This is why I stress the difference between money (a tangible asset, like gold) and capital (something that is used to produce more capital during the stages of production).
An increase in the demand for money is not the same thing as an increase in the amount of dollars. I’m not sure where you are making this fallacious connection.
This makes absolutely no sense. I feel as if you’re not really reading the posts you are replying to. If you were, we would already be past this stage.
That’s a fairly strange opinion to hold. If you unwilling to change your perception of concepts, then what is the point of debating with you? Had you read Shostak’s article, you would have easily seen that was it being disputed is not the fact that " velocity of money exists", but the fact that velocity of money has anything to do with money supply and the ability to fund investment projects, because what really funds investment projects is the capital which the money represents.
Yes, because that increase in the supply of gold did not come with a corresponding increase in the accumulation of capital. Money is not capital.
The exchange equation describes a macro effect, but the boom is the result of a micro effect. Milton Friedman ignored all aspects of micro analysis when he treated the money supply, as if the money was received by everybody all at once in exact proportion to his prior income and without any change in their spending and saving habbits. But this ignores the reality that the new money is injected into a particular point in the economy and only gradually cripples (in unexpected and unpredictible ways) throught the entire economy. This process takes time. So if the new money is spent on cars first, it may cause a temporary boom for the car dealers causing an increase in prices in the car industry. This boom is only temporary for as soon as the moeny cripples to the rest of the economy and all other prices adjust, the boom will be end.
Since when do bankers mine? New gold will enter in a more disperse manner, mostly by wage earners of the mint industry.
And that is a debate amongst free bankers.
You are right, but those are just terms. There isn’t any reason why “demand deposit” must mean bailment. As long as the terms and conditions are spelled out in the contract. Scineram basically said it already:
Fine, I disagree. I’ll only make a few brief comments on this. Banks that practice FRB will have a huge advantage over full reserve banks in that they will pay interest instead of charging storage fees. That fact alone makes me doubt them falling into disfavour. Nor, do I think the banks will constantly be at the brink of having to invoke the clause, obviously they are going to only lend at “safe” rates and there are other means to protect their stability and image.
And I misread you how? I clearly said “I’m not sure how you could” not “I’m not sure how you are.”
Bad metaphor or not, that is whats being said. (See above)
That beautifully sums up my point. Yes, credit expansion is still at the heart of “crises and depressions” nobody is denying that. That’s exactly why the banking system must be left free. Notice, he doesn’t utter one sentence about how reserves have to be kept at 100%, and nothing about fractional reserves at all. If he meant to he easily could have said so. And my use of the word “slow” was meant to mean more cautiously, at a market rate. I disagree with you interpretation as he uses both the terms “slow” and “limited” within the same sentence, but I’m not going to divulge this tangent much further.
Wonderful. You are for free banking (although differ on the expected outcome).
If you read, I never called Murray Rothbard a crank, I called him a "crank. " I even went on to make it clear that I didn’t think he was a crank:
And you are correct for White and Sechrest, other free bankers disagree with them as well, that doesn’t change the point though.
No problem.
I really don’t know how any self-respecting libertarian could pull that argument. Search the site, its been done here before (I think with myself and DD5 actually)
Yes, it’s a tough sell for anyone who doesn’t understand the role of price mechanisms. If you reduce the market rate of interest below the natural rate for an extended period of time, the structure of production will be pulled in all directions, eventually causing a crises. Also, if you push the market rate of interest above the natural rate, you will get artificially depressed prices. It’s called economics.
It may not.
I don’t understand this question. Why is it that arbitrarily altering the supply of money in the loanable funds market unnaturally changes the course of interest rates? The answer is in the question.
Fluctuations in money demand naturally change the the interest rate… When you artificially suppress the market rate of interest by altering the money supply, you distort this price mechanism–you tell producer’s that there’s more available resources for their production methods when there isn’t.
How does an increase in paper make anyone wealthier? Do you believe increasing the supply of money creates any real wealth for the economy? Why do you just naturally assume this?
It doesn’t, money is never exchanged for money, ever.
Yes, it’s a tough sell for anyone who doesn’t understand the role of price mechanisms. If you reduce the market rate of interest below the natural rate for an extended period of time, the structure of production will be pulled in all directions, eventually causing a crises. Also, if you push the market rate of interest above the natural rate, you will get artificially depressed prices. It’s called economics.
I’m not for a 100% reserve rate, but there are some very serious problems here.
Additional fiduciary media in the form of banknotes or deposit accounts is issued by a bank in response to a decrease in its clearings. Less clearings means there is an increased demand for its liabilities, banknotes or deposit accounts.
Which free-bankers?
I agree, but the terms of current contracts are actually very clear. I feel that you do not have accurate knowledge on the existing deman deposit contracts. What you are basically saying is that if the contract is spelled out, then the bank’s actions are justified. But, you ignore that the contract is spelled out, and that based on the terms of said contract the bank’s actions are not justified.
Up until they fail, of course. A recurring issue in this free banking argument is the attempt to make one point, without considering the effects of another.
No, it’s not. I’m not sure why you make these assertions, and then fail at backing them up. I will simply restate what you quoted, since it was not even addressed. " 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."
I’m not sure you have an accurate interpretation of the free-banking school’s argument.
Of course. You are mistaking theoretical disagreement for a debate on free banking versus 100-reserves.
Then perhaps you should clarify your " free banking" solution, since it does not seem to coincide with the free banking arguments put forth by the most prominent members of this school (e.g. White, Selgin, Dowd, Sechrest, etc.).
Most obviously those who agree with Mises and those who do not.
I haven’t seen every single contract currently in existence so how could I? You are confusing my (brief) theoretical defense of fractional-reserve banking and the current monstrosity. I haven’t defended the current system whatsoever.
Assuming they will fail.
I’ve addressed that multiple times now. I think you are confusing my own brief defense of FRB (which only came forth do to your missing my original point) with my argument that Mises was for free banking (my original intention). I haven’t argued that Mises was a proponent of FRB, just that he thought it would be safest within free banking. (Which directly contrasts the full-reservists).
I really don’t know what else you want. How many times need I say, “I’m not arguing that Mises was for FRB, just that he wasn’t a full reservist” before you realise that I’m not arguing that Mises was for FRB, just that he wasn’t a full reservist?
More or less, “a system free banking can render the market economy secure against crises and depressions.” The school itself varies, but that seems to be the underlying theme.
You mistook my only point (directed toward DD5) on Mises being a free banker and not a 100% reservist as being something more, like a theoretical debate. I don’t think making the error here.
I haven’t put forth a free banking solution at all. That isn’t my intention. All I did was make a point about Mises that you seem to repeatedly overlook.
If it has come down to simply “free banking should be free banking, not regulated banking under the veneer of freedom (100-percent reserves)”, then point conceded. That said, you didn’t read the contract that you signed when you opened a demand deposit with your bank?
Even if I had or hadn’t, I don’t see the relevance.