That quote I provided above about reform is clearly a proposal for the abolition of central banking.
I’m not going to argue with you anymore about context. The context is there for all to judge for themselves.
I don’t agree:
Thus (when you consider the three conditions required to end the trade cycle) the logical conclusion is that the (immediate) cause of all cyclical activity and inter-temporal disequilibrium is this divergence between the two rates of interest (one controlled by banking system, and other controlled by real forces–both of them are variables, controlling one does not control the other). Fractional reserve banking may or may not cause inter-temporal disequilibrium.
I don’t understand what you’re trying to say here. An influx of labor will indeed cause the natural rate to rise, and if the banking system doesn’t respond by increasing the money rate of interest (keep reserves at the established rate), a trade cycle will surely follow.
(emphasis is mine). This is what I’m talking about and advocating. A money supply which responds to the demand for cash holdings does not affect the ratio between the demand for present and future goods, and therefore does not cause a divergence between the two rates of interest, and is ultimately not responsible for economic downturns. Also, the credit-induced boom followed by a bust is only one kind of downturn. You can go straight to a bust (MR>NR), or have Cantillon affects due to price rigidities and a variable money supply (gold standard with 100% reserves still has a variable money supply).
The main theoretical issue, in my opinion, is the fact that Rothbardian’s (for lack of a better term) don’t consider (or take into account) price rigidities. If this was eliminated, then the problem would be that much simpler.
Wait, I thought they weren’t proposals?
The contraction is not the problem. The expansion (inter-temporal disequilibrium) is the problem.
DD5:
And government induces this expansion by means of Fractional Reserve banking.
Why are all the banks insolvent when the bust is revealed? Why does the moneys supply contract? Just because it expands, doesn’t mean it has to contract. Why?
- Because they have increased the supply of money beyond the demand for cash holdings, altering the demand for consumer and producer goods, distorting the structure of production. The tension between actual time preference and the market rate of interest forces the structure to its natural state; the money rate will rise towards the natural rate, extinguishing excess fiduciary media, leading to a liquidation of malinvestments. The demand for money will (may) rise sharply, elevating the market rate above the natural rate (over-compensating), leading to “secondary shocks.” My argument (which you entirely ignore, once again) is that the boom is not caused by fractional reserve banking. No boom, no bust.
You are talking about banks issuing fiduciary media to meed this alleged demand. Your above assertion is not necessarily true at all.
I think Jonathan may be able to make the case as why this is not true, so I will not respond to this at this moment.
And the minute the market discovers what they had done, the banks’ true assets are revealed to be only a fraction of its total liabilities. You say that I am avoiding your argument, but I am not.
The above is currently only possible with with Fractional Reserve banking. What is not clear about this point?
You keep resorting to the theoretical explanation of what actually occurs to the structure of production. I know this! But the theoretical explanation does in no way refute the causal institution for the distortions - Fractional Reserve Banking. And I don’t deny that the institution is so effective in its ability to distort the economy by government exempting it from the free market.
DD5:
And the minute the market discovers what they had done, the banks’ true assets are revealed to be only a fraction of its total liabilities. You say that I am avoiding your argument, but I am not.
The above is currently only possible with with Fractional Reserve banking. What is not clear about this point?
You keep resorting to the theoretical explanation of what actually occurs to the structure of production. I know this! But the theoretical explanation does in no way refute the causal institution for the distortions - Fractional Reserve Banking. And I don’t deny that the institution is so effective in its ability to distort the economy by government exempting it from the free market.
You’re throwing the baby out with the bath water. Eating food can clog your arteries, but the solution isn’t to ban food (bad analogy, I know). Fractional reserve banking can lead to inflationary induced booms, but the solution isn’t to ban/eliminate modern banking. FRB is only an indirect cause. The remedy is to free the banking system so that it can accommodate the demand for money, and prevent the elevation and depression of the market rate with respect to the natural rate. Is this possible? Theory says yes. The banking system has always been the most regulated sector, but I believe that voluntary exchange and free market activity yields the optimal result (it may lead to 100% reserves–but you can’t reach this conclusion a priori, and you have no historical support).
This is a rather ironic statement. All of the “elevation and depression” that you are talking about have all been themselves caused by the very system you are proposing as a remedy. And your system cannot respond to a demand for money, but a demand for fiduciary media - They are not the same. You are wrongly assuming that demand for fiduciary media always constitutes a demand to forgo consumption. You don’t realize it [yet], but this is false.
And Mises was suppose to have cleared up this confusion about the demand for money and the need for tampering with the money supply. People demand purchasing power and not money.
It’s not? I thought we agreed on that. Modern banking is not free by any means.
I don’t want to ban anything of this kind. When are you going to quit with the straw man. I personally think Ponzi-schemes should be legal as long as long as participant are not deceived into thinking it is a just another mutual fund.
Are you conflating our current system with a free market in banking and money, once again?
Fiduciary media satiates the demand for money. You don’t want the supply of money in the broader sense to expand beyond, or fall below, the demand for money.
I never made this claim. Forgoing consumption is called saving, which is the demand for future goods. I’m saying that satiating the demand for money as money does not affect the demand for current and/or present goods. (Go back two pages and re-read my initial defense of free-banking).
He created a taxonomy of money. Fiduciary media is money in the broader sense (called “M1” today).
Define modern banking. There have been relatively free periods of modern banking (Scotland), and extremely regulated periods of modern banking (today). The former worked pretty well, relatively speaking (until a government intervention, Peel’s act, brought it to an end). When I say “modern banking” I’m talking about banking after the “dark ages” (in Europe and Middle East).
I said it was a bad analogy, and then I tried to clarify the point. Also, your personal ethical beliefs mean nothing to me. I personally believe that government intervention and extreme regulations are bad.
Look, I’ve said a million times that the market would keep such distortions to a minimum. If you want a clairification, then ask one. Don’t resort to straw man attacks.
You keep making claims about hypothetical scenarios that are practically impossible without fractional reserve banking in order to support fractional reserve banking. So perhaps, you are conflating the two systems.
Because people are fooled into thinking that they are backed by 100% or they don’t care because the government guarantees. And regardless of this, not all people want fiduciary media. Many will want to hold gold that is out of reach from banks precisely for the extreme “natural disaster” type scerios that you like so much. The bank cannot respond to anything but fiduciary media.
Is holding money saving or not?
demand for money means holding it. Is it saving or not? What does it mean to say that a bank responds to this demand if not by making loans on the basis of the money held in the bank. I think you are all over the place.
And he also discriminated between them in his analysis. There is a reason.
DD5:
Is holding money saving or not?
demand for money means holding it. Is it saving or not? What does it mean to say that a bank responds to this demand if not by making loans on the basis of the money held in the bank. I think you are all over the place.
Do you expect me to answer the same questions, over and over again, forever?
Can you give some concrete examples for situations when a free market agent (yourself, person, corporation, depositor?) “demands” more cash holdings than they already have? What would cause this “demand” to appear and what would these “extra” cash holdings be used for? I assume that you are not referring to a scenario where you spend your bank account down to $0 whereupon you express your “demand for cash holdings” which the bank’s “money supply” is supposed to meet, but I could be wrong.
Z.
The claim isn’t that fractional reserve banking is the cause, it is that it is a cause, and so the phrase, “Fractional reserve banking causes the business cycle” is accurate.
Whether this is true or not has nothing to do with what you quoted.
Ever tried to sell anything?
There were 3 quotes.
z1235:
Can you give some concrete examples for situations when a free market agent (yourself, person, corporation, depositor?) “demands” more cash holdings than they already have? What would cause this “demand” to appear and what would these “extra” cash holdings be used for? I assume that you are not referring to a scenario where you spend your bank account down to $0 whereupon you express your “demand for cash holdings” which the bank’s “money supply” is supposed to meet, but I could be wrong.
Z.
This is basically where I’m at right now. I mentioned on a previous post that the demand for money is closely tied to routinized transactions, and for periodic payments which fall during specific dates (first and last of every month–certain expenses). You can facilitate the demand for money as money during such periods in order to prevent unnecessary deflation (demand pushes money rate above natural rate in MM, and people begin to sell and restrict purchases for increased liquidity). The demand for money also rises during periods of uncertainty. As I understand it, this will constitute a real move towards savings, but banks may overcompensate by contracting the money supply too quickly, also elevating the market rate above the natural rate. Then there are also exogenous changes: for example, the government may increase wage rates by decree, which would lead to an increased business demand for cash holdings, which, if satiated, would undo the government policy (this reeks of Monetarism and rational expectations–so I have a problem with this). Hayek says that satiating the demand for money as money is legitimate (expecially during down turns), but he doesn’t really go into this too much. I’m sure the modern day free bankers clarify, but they sound like confused monetarists to me, so i haven’t read their stuff.
But the overall argument is logically sound, though the specifics (for me at least) are vague. The implication is that during downturns (which are inevitable, according to Hayek) you increase the money supply, and during booms you limit the expansion of fiduciary media. The goal is to keep the interest rates equal (even during periods of relative stability). Mises doesn’t explicitly make these arguments (Hayek does), but he does so implicitly, in my opinion. He says eliminating fiduciary media leads to “undesirable consequences” (more than one), but only mentions one undesirable consequence in TMC. (The elimination of fiduciary media would cause a rapid appreciation in the value of gold (money proper), leading to an allocation of resources towards the production of precious metals, which would increase the supply and satiate the demand for money. This would divert economic resources towards unfruitful economic activities (production and discovery of precious metals).
Jrgen replied on 02-20-2010 6:18 PM
I have never understood why many Austrians are so hostile towards FRB. Government involvement in the banking industry is bad, yes. Fraud is bad, yes. Is FRB always fraud? Definitely not. Is FRB always bad? No. For supposed free market thinkers, a lot of people seem very keen on imposing ideas on others."
this is the source of the quote
now if you can quote me happy with Mises referring to ‘unfruitful economic activities’ vis entrepreneurs led by price signals to mine precious metals in an unhampered market you will have taught me something today.
“In fact, the development of the clearing system and fiduciary media has at least kept pace with the potential increase of the demand for money brought about by the extension of the money economy, so that the tremendous increase in the exchange value of money, which otherwise would have occurred as a consequence of the extension of the use of money, had been completely avoided, together with its undesirable consequences. If it had not been for this the increase in the exchange value of money, and so also of the monetary metal, would have given an increased impetus to the production of the metal. This would undoubtedly have meant increased returns to certain individual undertakings; but the welfare of the community would have suffered. The increase in the stock of precious metals which serve monetary purposes would not have improved the position of the individual members of the community, would not have increased the satisfaction of their wants; for the monetary function could also have been fulfilled by a smaller stock… This all becomes particularly clear if we think of an economic community which does not itself produce the precious metals, but imports them. Here the amount of their cost is expressed by the quantity of commodities that must be surrendered to foreign countries in order to obtain the supplementary quantity of monetary metal in exchange." -Theory of Money and Credit, pp. 338
There’s more, but I’m too lazy to quote the entire passage (about 3 pages long).
has at least kept pace with the potential increase of the demand …
at least is the key word here, because the overall view of Mises, in the broader sense, is that fiduciary media is bad.
If not, how do you reconcile your interpretations with the quotes I provided here:
https://forum.freecapitalists.org/t/fractional-reserve-banking/4329/531
By the way, Money and Credit is Mises’ first work on this matter. He refines his argument in later works. Read Human Action. His position on these matters becomes much more concise and clear.
What is the idea of interpreting a theory solely based on the first “draft” written by Mises in his early 20’s, as oppose to the more refined theory written in his 60’s, such as Human Action. I don’t get it. Don’t you figure that his theoretical thoughts would have evolved?