The interesting thing about the period immediately after the dissolution of the SNB is an influx of foreign metals that caused something like what was discussed in the OP. Say what you want about the SNB, but its ability to expand the money supply was actually quite limited and it mostly functioned to shut down expansionary state banks by calling in backed notes.
JJ’s banhammer swings rather unpredictably.
Ahh, I thought you implied a fall in prices, but I just wanted to make sure you were t using it in another sense first.
Besides all that Jargon just said, let’s reiterate that a fall in prices does not mean a decrease in the monetary supply. This being said, the deflationary periods then were quite beneficial to the population, as they could buy more with their money. In fact, recessions were nowhere nearly as harmful as they are today, not only because they generally did not last decades (like they tend to do with the FED directing the game), but while people had less work/less money, the money they DID have increased in value. Today, the opposite is generally true. While people have less work/less money, their money decreases in value over time because of inflation. Do you not see a major difference? In the former, people are encouraged to save, and these savings can ultimately lead to more lending/lower interest rates, and these low rates are proper market signals in that they signal to entrepreneurs that people do have money to spend in the future on new/more products. In the latter, that is, today, people are encouraged to spend and not save, and so the only way to get lending going/lower interest rates is to keep expanding the monetary supply. This is a false signal, since consumers do not have savings to spend in the future on new/more products. Thus, the business cycle, and cycle it is because at some point, the central bank must stop expanding the currency base which allows interest rates to rise, and soon enough the malinvestments fail. If it does not stop debasin the currency: hyperinflation.
Again, impala, please educate yourself on the 19th century, the law of supply and demand, how saving and investment works with spending, generally how markets operate, THEN try to understand the business cycle.
I agree, and I was being unclear. The introduction of the gold exchange standard was the main factor.
Anyway, it seems that you’ve dropped the point about increases in the gold supply being offset in any way by interest rates. Which means an increase in the gold supply would actually exacerbate the credit cycle.
If I may point something out about the influx of foreign metals: this was an unfortunate side effect of bi-metallism employed in America and the playing out of Gresham’s Law. Again, Rothbard discusses this, and this period in the FREE book (check it out).
Ignoring the concerns you have (because you don’t understand markets and money thoroughly) does not prove something. I cannot state it more clearly than I have, but I promise, when I do, I’ll let you know. (;
You ought to be interested in the Suffolk Banking System. Rothbard referred to it as the market’s response to central banking: a clearing house for notes without state power. Empirical proof that individualist (in regards to banks formally ) banking is fully capable of responding to ‘wildcat’ banking.
You can read about it here, or in more thoroughly in Rothbard’s History of Money and Banking:
You stated it perfectly clearly. You just haven’t given an explanation as to why lower interest devalue gold, when gold doesn’t originate from lending at interest- actually, the whole point of Peter Schiff’s gig is that low interest rates boost gold, even relative to other commodities.
The problem I could see there is the scale. What works on a local level may not necessarily allow financial globalization or wide scale transactions. Uncertainly goes up a lot when you’re evaluating the solvency of banks in a local area versus nationally or globally. But I don’t know; it hasn’t been tried.
I obviously didn’t state it clear enough if you skimmed right over the important words. I said when interest rates decrease under a good standard, the value of gold in relation to other goods goes down. That is, banks are trying even harder to lend the gold out. And the consumer has the savings to buy new goods in the future, as is evidenced by their preference to save instead of spend.
Well I can’t offer anything empirical past this point, but really all that is necessary for the spontaneous emergence of the kind of institutions you are worrying about, is the certain knowledge that states will not provide them. We have seen that people can create ‘central bank institutions’ without state action, in the midst of a period of state interference in banking.
One shouldn’t employ this anti-individualist cynicism in regards to large scale free ‘central banking’. Why? All the minds and resources in history that have been devoted to these things have done so under the precedent of State Action. Should that possibility effectively disappear from the minds of acting financiers and bankers, there is no doubt that such institutions would emerge, as they are necessary, desired, and thus profitable.
This is just like public education vs. private. We can’t know how good private schooling for poor would be in 1st world countries when literally all of the resources that could go to low-cost schooling are already tied up in the public sector. It’s actually the fundamental lesson that one should learn in regards to social sciences: the exposure of the fallacy of «X was, thus X».
Definetly. But would it work better?
I don’t question that the Suffolk Bank was better than absolutely nothing. But it got hit with the Panic of 1837 like everyone else. When it did, it actually acted in a very “bad”, un-liquidationist, central-bank-like manner, extending credit to the economy to cushion the impact of the crisis.
http://www.minneapolisfed.org/research/qr/qr2421.pdf
Literally all? I don’t know about that.
Phi:
Why would the relative value of the good increase as interest rates fell?
First I need to clarify what you mean. When you say “good standard” I assume you mean something like the gold standard, except replacing gold with some other good. In this case, interest rates only exist if there is a paper currency to be lent out, as the point of the gold standard was to tie the dollar to gold.
Lower interest rates on currency and other debt instruments would cause these instruments to increase in supply and fall in value, simultaneously boosting the relative value of both the good and commodities.
Alternatively, you might mean that the good itself is being lent out at an interest rate. In that case, a lower interest rate would mean a lower price of the good, less value gained from holding the good, and a higher relative value of gold.
The third possibility is that you’re saying that gold, the shiny metal, is being lent out at an interest rate. In this case, yes, lower gold interest rates would lower the price of gold being lent, but this would merely push the price of gold below equilibrium, causing a shortage which would be made up for by gold buyers purchasing gold directly from mines at the same market price as before rather than whatever unwise person was doing the lending. In this case gold mines would still be forced by competition to produce ever-more gold at ever-lower prices (and interest rates), continually increasing the gold supply and lowering its price (and the interest rate).
ed: I should also point out that Bohm-Bawerk (and other Austrians) say interest rates fall as roundaboutness of production advances, ie interest rates are supposed to fall… even when capital prices are falling at the same time so there’s nothing to constrain credit growth.
For the third possibility, if you need to purchase gold from a miner, what currency do you use? Gold? How does that cause a shortage?
Im not following what youre trying to say.
Gold for gold?
Its like if i gave u 1 dollar and u give me 1 dollar back.
Even if gold is not tied to paper money, it can still have interest. All the paper does when it is tied to gold is to make it easier to exchange the currency.
Am i misunderstanding you?
I don’t know; labor, or some other commodity. I’m just trying to understand Phi’s point.
Sure, and that was what-did-Phi-mean possibility #3.
I can name some superior attributes offhand: much less worthwhile to capture one of these institutions leading to an absence of economic privilege. Able to die, meaning that they can spring up afresh under different leadership. Can’t print money beyond gold supply, so won’t create business cycles.
Why is it so hard to believe that they will interact with clearing houses in different countries? What kind of economy of scale are large scale banking institutions supposed to enjoy that small scale ones cannot, after all they’re not producing physical goods but engaging in services.
Well hold on. First of all it acted out of its own pockets. The Fed acts out of its own pockets as well, except its pockets are all of our wealth. Secondly that’s during a business cycle, which don’t have to happen nearly to the frequency that they do today.
Honestly it’s fine with me if they want to try to ride out the storm and run counter to the fundamentals. What I am opposed to is the state propping up the banks at the expense of everyone else. Suffolk Bank can try their damnedest and its possible sufficient liquidation will have occurred to clear malinvestments enough to restore investor confidence. And it did survive, so there you go.
People can try to resist fundamentals, but prices will eventually force most of them to liquidate until demand for capital is more in line with supply.
How about this then: to the extent that whenever anyone suggests private schools as alternatives to public , one’s opponent says “Yeah! If you’re a spoiled rich kid maybe…”
Economies of scale are part of it- part of the reason banks are so huge is that they’re competing on an international market and need the same diversification and risk pooling as everyone else (although that doesn’t justify Goldman Sachs or anything). The main problem is whether the case of a small local bank built on trust and personal connections is really applicable to global finance. The obscene fixed costs involved in hiring good executive-level quants and managers are big part of it too.
There’s actually a great deal of privately created money in the system, the M4, and it runs into the same problems of scale. Where global financial transactions might be performed rapidly, maybe even by bots rather than humans themselves, things break down. Now if you were to just outlaw financial globalization and “financial innovation”, that might simplify things.
To be fair, five recessions occured between the one mentioned and 1861. Certainly they don’t have to happen, but the only industrial economies which totally did away with the business cycle were the communist ones.
So you don’t think Suffolk’s presence as a “lender of last resort” was what maintained that confidence? I think it was part of it.
Oh, you know that’s not my argument. Both public and private schools in these countries are badly underfunded. More money for vouchers or public education wouldn’t hurt.
No. You’re confusing different sense of interest rate.
Oh boy. That graph only serves to make my point. This source estimates the above-ground gold is around 5.8 billion ounces. Your graph merely shows fluctuations in the rate of new gold mining.
Clayton -
You are too stuck in your statist (command) mindset. In a free society which has converged to using gold as a medium of exchange, if someone invented a cheap process of transforming rock into gold, then gold would not be “good money” any more and the market would converge to some other medium of exchange. More realistically, if instances of “private agents increasing the money supply” started occuring more frequently and disruptively so, then free market agents would simply stop using said “money” as money going forward. What is your point?
“We” don’t need a gold standard. All “we” need is a separation of money and state, i.e. abolishment of legal tender laws and capital gains taxes – then allowing the market to converge to whichever medium (media) of exchange suit(s) its needs best. Stop using data/empirics to discover “good” laws/rules which you would then shove down people’s (markets’) throats, supposedly for their own good.
"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)."
Yes, thats what I meant. I was thinking of money printing and forgot about new digital currency.
Yes, a business cycle can occur when private agents systematically increase the money supply. This happened during the 19th century with essentially systematic fractional-reserve banking.
However, I think the comparisons that have been made in this thread between the amount of gold production and the amount of money creation have been underestimated, because they haven’t taken into account fractional-reserve banking. By my calculation, if 90% of all deposits is loaned out to the last cent, then there will be about $8.20 of money created for every $1 deposited. If the monetary base is inflated by, say, 3% per year, then this leads to an effective monetary inflation rate of almost 25% per year (3% * 8.2). That’s almost 25 times as much as the money supply would inflate with a 1% per year increase in the gold supply.
In fact, the monetary base for the US dollar inflated at a rate of about 7.2% per year between 1985 and 2005 (source). Assuming a legal reserve requirement of 10%, and assuming that all other reserves were loaned out to the last cent, that would lead to an effective inflation rate of 59% per year.