“You ain’t going to walk around the mall with a bag full of nuggets.”
you might need 1 gold coin. but mostly you would be walking around with many silver coins.
each silver coin is roughly 30 dollars…so you wouldn’t need alot. each gold coin is roughly 2000 dollars…so you definetely don’t need to walk around with one unless you are going to purchase a massive amount of stuff.
1 oz coins would be pretty hefty, if coins were going to be actually used in daily transactions, I would expect them to more like the size of say dimes.
You cannot truly understand the business cycle without understanding markets, which is what I recommended you do, mustang19.
Again, monetary expansion causes artificially low interest rates which causes malinvestments that collapse when interest rates rise/the monetary supply contracts.
And major difference between the FED printing money/creating digital money is that is costs (next to) nothing and is on a whim of interventionists. If interest rates are high, gold (and all other commodities) become more valuable. So people build more mining machines and such an do work to produce more value (in some cases, gold and silver). But more machines are built to harvest grains, or process grains or metal, or all sorts of valuable things are made. When the gold is deposited, and not under fractional reserve banking, that “new money” doesn’t go to anyone that didn’t earn it. If it is dumped into investment banks, it’s no different than people saving money and doing so. It’s not printed out of thin air with no work or value behind it. What’s more, without fractional reserve banking or a lender of last resort like the FED, there are no bailouts. This makes malinvestments less likely.
Of course, once interests rates go down, new production of gold (and other commodities) decreases and all that follows. Do you not see the difference? It’s huge. In the free society, no interventionists get to decree when interest rates go up (or down) on a whim. This allows entrepreneurs to do what they do properly, which is predict where the market is going and take risks.
Again, impala, learn how markets work. Then try to understand the business cycle. You have failed at both so far.
I don’t think this statement explains the effect clearly.
Lower interest rates on their own do not cause widespread malinvestments. The malinvestments appear because lower interest rates naturally occur when individuals save more, demonstrating their preference for future goods over current goods. However, in the case of a lowering of rates due to credit expansion there is no corresponding action by individuals and so what investors think people are doing and what people are actually doing is much different.. It is this desync that causes the malinvestments and the eventual bust.
As a quick aside before I begin, the supply of gold isn’t that important. Just the supply of gold used as money.
I believe the reasoning behind your original statements are more or less correct, even if your conclusion (recession) is exceedingly unlikely. The brief thought I’ve given the subject* leads me to believe that addition of gold-as-money to the economy would result in the same alterations to the economy that occur with the addition of dollars-as-money. Namely, if spent on consumption goods then there would be a net transfer of wealth from everyone else to the money producer and if loaned then there would be some level of malinvestment.
The advantage of gold is, therefore, one of degree not one of kind. You simply can’t generate gold at the rate you can paper money. The economy should be more than capable of handling the delta in money supply without significant disruption (ie recession). It would act more as a friction instead. It is also important to note that Austrian Economics does not advocate forcing people to use gold, instead leaving it up to the market to decide the preferred monetary medium. If gold’s supply fluctuated enough to be a problem I believe it would be replaced in the market by something without these issues.
Absolutely. I should have mentioned that specifically, but I thought it was implied when I talked of the difference between money printed out of thin air v. people depositing gold as savings. My bad.
This is the essential point that rebuts this particular troll-argument. However, I will note that the difference in degree is so large as to be - for all practical intents - a difference in kind. Annual production of gold adds around 1% to the overall gold supply, and that’s using all the latest technological means for extracting gold. As the supply of above-ground gold grows, the harder it becomes to maintain even this 1% rate of expansion. By comparison, the Fed has maintained around 10% annual increase in the money supply for close to four years straight now (not as measured by the absurd CPI, of course, but shadowstats has shown that annual inflation is pretty close to 10%). Unlike the case with gold, inflation does not become increasingly difficult over time. It costs no more to add another 10% to the money supply next year than it did to add it this year. And there is nothing preventing the Fed or any central bank from increasing the money supply at ratest well above 100% per year (cf Zimbabwe), a situation that is simply inconceivable in the case of gold.
Clayton -
“It costs no more to add another 10% to the money supply next year than it did to add it this year.”
I see the grain of truth to that, but it will cost more and more. The only way to make it cost less is to print proportionally more high numbered currencies or increase the cap on the currency value.
What??
@eliot: What Phi said… Wha??
Clayton -
You know, I think I know what he means (correct me of I’m wrong eliotn).
IF they literally printed all the new money, I suppose you would be right (that to continually increase the monetary supply by 10% every year, more and more bills would need to be printed, thus more cost, unless they printed larger and larger denominations). However, most of the new money is in a digital form. Most is never physically printed. Hence, there is no cost (besides a few clicks and taps on a mouse and keyboard).
Many financial derivatives are a form of digitally created private money which cost next to nothing to produce (and were produced in much greater numbers than federal reserve notes during the lead up to, for example, the GFC). Gold does cost more to produce than dollars, but as the next guy brings up, gold production will increase if anything under low interest rates.
Actually, I’m pretty sure gold production increases when interest rates fall or interest rates become negative as commodities become more attractive stores of value.
Innacurate. That may be the rate of growth this year, but there are large decadal and yearly variations.
Not only that, but Austrians have to explain the 19th century business cycle under “free banking”, too, as this was largely a deflationary period. It’s incorrect to say that state chartered banks and so forth increased the money supply during these booms (such as the leadup to the Long Depression), as these booms were deflationary; one can only argue that the rate of decrease slowed due to these charters.
When you speak of gold as money, and money becomes less valuable in relation to other things (decrease in interest rates), there is less incentive to produce gold than when gold as money increases in value in relation to other things (increase in interest rates). What you point out is under current monetary policy where the only safe way to store value during major inflation is in commodities.
And I disagree with your agrument concerning the 19th century. Read A History of Money and Banking in the United States. And learn how markets work, mustang/impala.
The past several years of monetary expansion/low interest rate conditions, for example, have caused gold production to skyrocket. It’s because gold is a relatively steady store of value despite changes in the value of those “other things”.
Gold production as a whole is also procyclical, which doesn’t fit your low-interest-rate-booms-reduce-gold-production theory.
Unless you’re willing to explain your disagreement, that’s all there is. The gold exchange standard had an immediate contractionary effect when introduced.
He said “gold as money” which you clearly missed because your example is irrelevant. Which pretty much makes it irrelevant.
What exactly is the problem?
Phi claims that lower interest rates reduce the value of commodities. The problem is that the gold supply is determined by mine production and circulation, not lending rates like “paper” money is. Lower rates on (non-commodity) money reduce the attractiveness of that particular class of money, but not commodities, as they do not originate from lending.
The major issue with you is you don’t understand money as a medium of exchange. This and this alone explains why the business cycle occurs when money supply increases under fiat or even debased dollars occurs and while it is unlikely (if even possible) under a strict gold standard (without fractional reserve banking or treatin FRB as fraud). You still haven’t understood the first few responses you got on this topic, mustang, which tried to explain this to you. There is a difference between using a commodity as money and using fiat as money.
As for the 19th century conundrum you are unwilling to educate yourself of (even though the book is free in PDF or audiobook format from the LvMI, oh well. I guess I will just add that FRB was widespread in America, even in the colonial/revolutionary days. Again, this is different from someone mining more gold, which could then be used for coins, jewelry, electronics, etc. And I’m not so sure what is the problem with deflation anyway. What do you mean when you say a period was “deflationary,” impala?
Yes, one originates from lending at interest and reduces in value when interest rates fall, and one originates from mining and does not reduce in value as interest rates fall. This is my point.
As for the comment about nonmonetary uses of gold: that graph tracks the amount of gold in circulation. If you were to include all the gold used in electronics and so forth over the years, the increase in that “gold supply” would be even greater.
Fall in prices. Incidentally, there was a monetary contraction at the same time.
Let’s get something straight Mustang19: that during a period of time the price level lowered steadily is not any proof that credit-based business cycles were not under progress. Absolute measurements such as these prove nothing. What would prove something is if one could measure the historically existing price level movements from the 19th century and compare them with those movements that would have existed sans pre-existing bank regulations/licensing/price-fixes, which were not alien to the American federal government in the 19th century.
Do not make the egregious error of conflating a falling price level with a shrinking money supply: when the production of goods generally outpaces the production of money, the price level falls. This is simple enough and clearly what occurred in postbellum America.
The National Banking Acts of the civil war enabled a system of credit wherein a select few Wall Street banks could expand their credit without fear of market reaction: local banks were made to pyramid notes on state banks who were made to pyramid notes on top of Wall Street Banks’ notes, meaning that those wall street banks had legally become an integral fundament to the US banking system and consequently its economy. Meaning when wall street banks issued more notes, the reaction from competitor banks was not to redeem said notes but instead use those notes as their own collateral. Wall Street banks were insulated from market action in this way and were stimulated by the enjoyment of the privilege of the cantillon effect. Under previous arrangements, banks issued their own currencies, and when they overexpanded credit competitors redeemed said notes, thus dwindling the reserves; this system functioned in a system similar to the international gold standard pre-WWI. This is not “free banking”.
Then there were the first two charters of the National Bank which enabled a coordinated expansion of credit, who do not need to be explained as their structures were nakedly designed for coordinating a national credit policy and are thus vulnerable to over or under-guessing the appropriate rate of invesment in relation to available savings.
Secondly, the ABCT does not purport to explain all economic fluctuations. The point of the ABCT is to describe the effects of coordinated credit expansion so that investment exceeds available savings. Nothing else. One does not ‘work back’ from certain business cycles to the ABCT if, indeed, the ABCT is not the appropriate explanation. That said there are many cases in which the ABCT is applicable due to the apparently irresistable obvious benefit of credit expansion to the powerful parties of society.
If National Banking Acts and National Banks are not enough for whatever suspicions you may still harbor, please miseswiki: L.M. Shaw and Silver Sherman Purchase Act as answers to your inevitable questions on the Panics of 1907 and 1893 respectively.
EDIT: Important error in first paragraph.
_
It does kind of make you think, though. But for lack of data on that period I’ll move on.
I don’t question that. It was a bad system, and the Second National Bank era was not ideal, but better. However, I think there are some other cases (like Sweden and Australia) which had something that might resemble true free banking in your book.
ed: What about the period between the Second National Bank and the Civil War?
Nice to see you again, Jargon.
I will have to inform myself of those. That said, permanent features of a political economy (I call them “passive” or “lengthy” measures, such national banking act or national banks) are not the only sources of business cycles. “Active” measures too are sources (such as devaluations of currency initiated by the treasury or new legislation fixing metals’ prices).
Unfortunately there really isn’t much material on this era (that I know of, at least).
I was getting bored without you :P. But seriously, why keep making all these accounts?