Sorry for lateness of response. Schedule.
Commodity money has intrinsic value. Fiat money doesn’t. Doubling the supply of gold would of course cause shocks, but writing a /2 next to every number on a bill, or cutting every bill in half would simply change nominal price levels.
Nothing has. How would anyone know that the proper course of action is to halve all prices?
Im under the assumption that people would be a little concerned, and then communicate with one another and come to the obvious conclusion to halve all nominal prices.
Although even if people didn’t communicate, vendors would find that at the old prices they wouldn’t be able to move as many goods, and lower their prices/wages to the new equilibrium level.
Nothing has “intrinsic” value. Value is entirely subjective.
Intrinsic subjective value then. Consumers value the commodity-money as an end in itself as well as a means to other ends.
I’m confused.
That would mean the object would be subjectively valued even if humans weren’t around to value it.
Intrinsic =/= objective. If I intrinsically value something that means I value it in and of itself. Other people might not. Example, a painting.
There would be an unsustainable boom. Shock.
So what?
Here is what you mean. People value Commodity money due to certain intrinsic characteristics that make it useful as money.
I came into this topic fully agreeing with Snowflake since his argument is how I’ve always thought about it, but Esuric has made some good points.
I think the scenario proposed of simply doubling the money supply and prices following is too simplistic. It doesn’t take into account debts and obligations (unless I missed this part of your thought experiment). If my savings account doubles overnight along with everyone else, I may still have a proportionately identical share of the money supply, but if my mortgage principal didn’t double along with it, I now have an unfair advantage over the bank in paying down my debt in inflated dollars.
Of course. Those would all double too. In fact, most loans have inflation built in to them. We’re positing kind of a weird situation where gabriel is creating nominal money out of thin air.
But if entrepreneurs could predict this abrupt change in the money supply, all contracts could simply be written to double/halve their values after a certain holy date.
Esuric is totally right about commodity money. I’m saying that for nominal fiat money that has no intrinsic subjective value, the nominal supply doesn’t matter.
An across the board doubling of the money supply would have no effect if a) everyone had knowledge it happened and b) everyone raised prices accordingly.
If either a) people didn’t know that money had doubled or b) didn’t know they should raise prices, then a short term shortage would result, followed by a glut in the middle term, and correction in the long term. (ie a boom-bust)
Yes well fortunately nobody is going to double everybody’s account overnight in a free market. A market based money is not likely to be money that will double in quantity overnight. There is likely to be a very moderate and gradual steady inflow of new commodity money that will be highly predictable by creditors and debtors alike. By today’s standards of fiat money, any rate of inflow is likely to be negligible, and as for the possibility of contraction of the money supply, that will practicably be impossible.
Your consumption patterns may change altogether; in fact, they most likely will. You may move towards luxury goods, or you may increase the quantity of normal goods you consume (substitutions and income effect); it all depends. Suppose in period one (t1) you had $10 to spend of food, and you bought 5 cans of spam ($2 each). Now suppose in period two (t2) your nominal income doubled. Under these new circumstances, we cannot know, a priori, your new course of action. It would be absurd, for example, to say that you must now buy 10 cans of spam; you may in fact buy steak, or chicken, or whatever. This will have uneven effects on price changes, since every individual is different, and would react to a change in their money incomes in a different way. Again, money is a good in itself (this is not a Keynesian revelation), and is demanded as a good (subjectively valued)
This is one of the great Austrian insights, and why It’s abandoned by the Rothbardian’s when it comes to deflation I’ll never know.
Prices adjust because of human action. Changes in the supply of money affect purchasing behavior, which then exerts an influence over relative and objective prices. We shouldn’t expect costs and prices to double even if they knew that their cash holdings would double in the morning. In fact, we should expect a relative increase in the price of consumer goods, which would elevate the interest rate, causing a contraction in the structure of production (a recession).
Why?
Where has it been claimed that money is neutral?
If you did that “/2” trick, it would have more than a merely nominal impact on the economy; you wouldn’t just end up with the same economy expressed in different terms. Putting a “/2” next to everyone’s dollar bills would effect different cash holders differently, because of differences in the rate at which the marginal utility of dollars declines for each person. These varied impacts will lead to varied impacts on the markets in which all these dollar-holders are engaged. Therefore, cash-induced changes in the money relation always result in a price revolution.
The interest rate is determined by time preference; that is, by the ratio of demand between current goods and future goods. People tend to place a value premium on current goods (they like to consume). Increasing their purchasing power in the short run by expanding the money supply will increase the demand for current (consumer) goods, which elevates the rate of interest. In our current system, inflation enters the banking system and then takes the form of producer credits, which increases the demand of producer goods relative to consumer goods (causing the boom). An increase in consumption (relative to savings) means more direct methods of production, and an increase in saving (relative to consumption) leads to more roundabout methods of production.
Ah, but the marginal utility of the dollar is in its purchasing power not its nominal value. A price revolution would occur if people’s expectations of the purchasing power of their new dollars are not in line with the actual purchasing power, but the economy would return to its original state as expectations and reality realign.
The marginal utility determines its purchasing power.
Granted.
I still stand by my statement. Consumer demand would increase (shortage/Boom), emphasis on consumption vs savings (glut/Bust) and then a correction(return to people’s actual time preference)