The gist seems to be that if people are really concerned about money holding it’s value then they can take out futures contracts or whatever (hedge themselves). This has a cost associated with it that people rarely decide is worth it, so it clearly doesn’t make sense to thrust this benefit on them by force of law. Seems like a rational argument to me.
Seemingly I have a lot of reading, listening and viewing to do…
Hi Jimmy - I’d recommend de Soto’s book on Money, Bank Credit, and Economic Cycles, translated in 2006 - it is the clearest in regards to the three topics in its name of any book I’ve ever seen. Just do a Google search for desoto.pdf and you’ll find the document from this site. However, that is theory (and doesn’t do a great job describing how actions from the federal reserve influence money creation - but it does do a good job of describing how the money is really created - via loans against deposits.
For a detailed description of events up to the beginning stages of the great depression, search for Rothbard’s book on the great depression, also available somewhere on this site as a free pdf. However, I believe that he is not careful enough in his arguments - while most of his ideas are, in my opinion, correct, he takes some of them too far, ascribing consequences to certain actions that were not necessarily caused by the actions. It’s hard for me to remember what seemed wrong when reading it, but if you read de Soto’s book, you’ll get a much clearer picture (plus I think the entire book is amazing, with the exception of how he recommends making a transition to a 100% gold backed reserve based money - the last chapter is the one that is the weakest in this masterpiece - and I mean masterpiece b/c the book changed the way I see the world)
OK I’m sold - sounds like exaclty what I’m after. Looking through the table of Contents it looks kind of… long, but then I’m finding this little mystery is hidden by many layers of complexity so I guess that’s no surprise.
I started reading through Rothbard’s stuff at http://mises.org/money.asp and, like you say, he often asserts stuff which may well be correct but makes no effort to justify these assertions - making it a little bit hard to read for my liking.
Hi goodAsGold - that’s exactly my point - money backed 100% by gold is much harder to manipulate by the government, legally impossible if it’s a legal requirement.
OK I’m sold - sounds like exaclty what I’m after. Looking through the table of Contents it looks kind of… long, but then I’m finding this little mystery is hidden by many layers of complexity so I guess that’s no surprise. I started reading through Rothbard’s stuff at http://mises.org/money.asp and, like you say, he often asserts stuff which may well be correct but makes no effort to justify these assertions - making it a little bit hard to read for my liking. Thanks again!
Hi Jimmy- just to forewarn you, de Soto also makes lots of assumptions, and many questions /challenges popped into my head while reading it, but every single one of them was addressed by the end of the book. It’s long, and the description of the productive structure of the economy is difficult at times, but stick with it and you won’t be disappointed (except perhaps with the last chapter on how to actually implement the system).
Hi there! Let me begin where you left off in your story … with your question:
So my question is, how can the “villagers” in this system create the money that they need to pay back the interest on the loans that they HAD to take out in order for there to be any money in the system at all?
The answer is very simple. With only $900 in the system (remember $100 is in reserve), some of the widgets will simply remain as unsold inventory. Keep in mind that at this point, the bank has loaned out everything it can within the fractional reserve banking rules. However, there are a few things that can and will eventually happen:
The price of widgets will drop. This means that all the widgets might sell but the most they will sell for is exactly $900 since that is all the money there is in the system. Sellers will either make less profits or show a loss, after paying bank interest.
Widget prices will rise even as new widget production drops. Villagers will pay more money for less widgets.
Villagers will create “non-bank” credit, i.e. sellers will allow buyers to defer payment … not sustainable.
Villagers will sell their widgets to people outside of their village … exports - but this is another fairy tale
Eventually, the Central Bank will lower its Fractional Reserve Rate in order to increase the money supply.
By the way, the only instance I can think of where “villagers” will simultaneously repay their loans is if our little fairy tale comes to an end - when everyone decides to call it quits, go to bed and not wake up the next morning. Come to think of it … if this were the case, why would any “villager” even bother to repay the bank?
