I’m getting an argument from a self-professed Friedman devotee that a central bank is needed to constantly expand the money supply or the growth of demand will outpace the supply of money. That with a hard money, or gold standard, we would be in danger of consumer demand outrunning the supply of money.
Any good refutations or thoughts on this? I know this is pretty basic, but I’m still working on grasping the ABCt.
You lower prices and wages. Deflation is easily handled without a central bank.
Why exactly does the supply of money need to increase? I’ve never quite understood that argument.
We don’t have a demand for money, we have a demand for goods and services. The function of money is only to allow indirect exchange. So the supply of money doesn’t need to grow at all, and any growth of a paper currency would be nothing but theft, just like any other counterfeiter. The money that people choose in the market can be broken down in parts, and so what happens is simply that prices drop over time. Just like you see now in the computer industry. This would happen in many more industries in a free market.
To learn more, I would recommend these:
Money, What Is It?
http://www.youtube.com/watch?v=Gizetn5VuA0
Division of Labor and Money (the longer version of the first link)
http://www.youtube.com/watch?v=rIxd6ezDPOk
and
The Economics of Deflation
http://www.youtube.com/watch?v=LhKC6F_-uzk
I’m getting an argument from a self-professed Friedman devotee that a central bank is needed to constantly expand the money supply or the growth of demand will outpace the supply of money.
A much better alternative is allowing prices to fall as production increases, increasing the value of money.
EDIT: I think this is a good topic to bring up a problem with calling falling prices “deflation”. It’s more of a semantics argument, but I think people should be more careful with using deflation. Deflation refers to a decrease in the supply of money (just like inflation refers to an increase in the supply of money). If anything, falling prices should be called “price deflation”.
This is brought up by George Reisman in an older Mises Daily.
I’ve thought about this before, and the answer that makes the most sense is lower prices and an increase in the value of money, but what if the supply of money is limited enough to where it could actually cause economic problems? Is it possible to where the increase in the population outgrows the increase in production and price deflation?
Population can certainly outgrow the increase of production (this is not very likely in a free market though). But creating more money does absolutely nothing to help such a population (quite the opposite; Zimbabwe anyone??).
But creating more money does absolutely nothing to help such a population
Regardless of who coins it? In the example I would assume that there is also a free-market for currency and not a central bank.
Could the problem with this be that the monetarists look at money as a good that is provided by government and that one could change the rate of money in regards to population etc. to formulate good monetary policy. Granted it has been a few years since I read Capitalism and Freedom and I haven’t read much Friedman beyond that so I could be quite wrong. But I think this quote from Mises would be useful
“Its(money’s) amount is determined by a deliberate demand for cash. And as with all other goods it is the changes in the relation between demand for and supply of money that bring about changes in the exchange ration between money and vendible goods”
Basically I think a good response is that a monopoly on the money supply by which people use aid money to exchange goods hampers the capitalist system. Up till now when people are free to choose they choose to back up their media of exchange with a commodity to give it value, unlike fiat currency.
The issue is not even inflation or deflation, but rather how changes in the money supply come about. If new money is dumpted into credit markets or something, without increasing the supply of money in every other part of the economy, this is asymmetric inflation, and leads to all sorts of trouble as the injected sector is able to outbid the others.
I don’t quite know what the supply of money is supposed to be though. In fiat money, is it the total dollars floating around? If I drew a /2 under every number on every bill would the money supply cut in half? I think this demonstrates the folly of thinking there’s such a thing as a ‘supply’ of fiat money. So long as your denominations are infinitely divisible, and you’re not going to run out of physical bills (or computer memory), conceptualizing money as having limits seems useless.
You were talking about production. What does it matter how much money there is? You only need enough to physically do transactions. With the advent of checks and electronic banking you wouldn’t need an increase in actual gold for hundreds of years. The price of a bread would simply drop to 1 dollar, and then it would drop to 50 cents, and then it would drop to 25 cents, and what does it matter if it’s 1 micro-cents?
Secular deflation (normal increase in productivity and a rise in the value of money) is a boogieman scare tactic. Secular deflation means things are actually improving. What could be better for a growing population than a lowering in the cost of living?
Nielso - Isn’t there a demand to hold money? and its increase or decrease can cause fluxuations in prices, no?
JMFC - yes deflation should be considered a fall in the supply of money, but isn’t that theoretically possible in a gold standard
coins wither with use, shipwrecks, and gold standard doesn’t necessitate 100% reserves, so bank runs could cause deflation or possibly more accurately reverse inflation
Deflation is easily handled without a central bank
price deflation???
i dont know how one measures the growth of demand outpacing the growth of currency/money.
the only issue i can tell about population growth is having the hard currency/money in abundance that a person could tell what they had. but i beliove that technical issue has been solved in previous discussions on these forums. smaller coins, high tech assaying, etc.
i guess if you deamnd something you either figure out a way to mine hard currency to get it or exchange a damanded good or service for the currency/mone to get what you demand.
You lower prices and wages.
i have read that the metal moneys generated a decring price level over time according to rothbard.
i diont know if thats true or not. it seems many pricees have declined adjusted for inflation.
as to whether wages would decline i dont know. a thing cannot negotioate its price…a person can.
as a wageearner becomes more productive over time i doubt necessarikly that a wage would decrease to usher in a less productive wageearner.
Population growth indeed leads to increased demand. Luckily hard currency can partially be replaced by credit money which is more elastic and can keep up with changes in demand better.
“Population growth indeed leads to increased demand.”
You can always count on a " MET free banking" advocate to reiterate centuries old economic fallacies.
How is this an ye olde economic fallacy, when we clearly have yet to reach (if it is even attainable, let alone) a post-scarcity society?
How would not an increased population also yield increased demand in at least some things (such was water, energy, food, etc.)?
“How is this an ye olde economic fallacy,”
He’s talking about money. Not the goods you can buy with it.
“The growth of demand will outpace the supply of money”
What does this mean exactly? By the laws of supply and demand, when demand for something goes up, but the supply remains the same, the price of the thing goes up.
But what does it mean for the price of money itself to go up? It means it will be able to buy more of everything. Instead of a pound of apples for a dollar, you will get two pounds, because the farmer wnats money so badly. Instead of working for $10 an hour, the worker will work for $5 an hour, because he wants money so bad. And so on for every single item that is for sale. This is known as deflation.
Is this a bad thing? Well it’s bad for some people and good for others. For anyone who is a consumer [meaning everyone], it is good. He can get more for his money. For people who have lent others money, it is also good, for they are being pepaid in money that is worth more than they lent. For people who OWE money, however, this is bad. They have to repay their debts with money that is worth more than they borrowed.
Of course inflation benefits just exactly the opposite groups. It benefits those who owe money, and harms those who have money [or are on a fixed income].
Oddly enough, the party line is that inflation is good, and deflation is bad. For some mysterious reason, economists the world over have decided it is best to give the debtors a break, as opposed to the creditors. Why is that, one wonders. Does it have something to do with the fact that the largest debtor by far in any country is the govt of that country? Is it realted to the fact that banks will give their depositors lesser value dollars than they got, while being able to charge high interest to their debtors to cover inflation? Have economists decided to adopt a theory which benefits the govts and banks of countries, as opposed to the powerless citizens? Nah, must be a coincidence.