One more point I should bring up is that the collapse will come about independent of any individuals actions. I might decline to take the loan, but that won’t stop everyone else, which will lead to the same collapse except that I never had the privilege of cheap credit. It’s similar to the communist problem of labor: if my wages are to be divided evenly with everyone based on total production, I can stop working and have hardly any effect on my wages, and if everyone else stops working, I can continue to do so and still get next to nothing for it. The same thing can be said of the entrepreneur when the Fed inflates: the collapse will come and no amount of restraint on an individual’s part will stop it. Given that, you might as well get some cheap loans.
I regards to Selgin’s comment on your post: So he is saying that you are basically buying the paper note when you trade your gold for it? Why would anyone do that? The assumed value of the note is that it is redeemable in gold, but not that is a receipt for a deposit of gold.
I don’t see why Rothbard has to be wrong in order for Selgin to be correct. It seems that Selgin is talking about loans, whereas Rothbard is talking about warehousing.
My guess is that Caplan didn’t consider the Carry Trade…
I’d be interested to see upon whom Caplan modeled his omniscient entrepreneur in his example, he’s certainly lucky to know him. The collapse of the MBS market proves him wrong anyway. Homeowners failed to consider how they would make payments when rates rose and investors failed to consider how the value of their MBS’s would be affected when this happened. Double-whammy.
Come to think of it, the Dubai situation makes a fool of Caplan.
Yea, I’m not sure either. I assume the reason is that money substitutes would be easier to carry and use.
Well, the free bankers believe that the bank now has ownership over the deposit of gold, so they could loan it out. The reserve ratio would be decided through price signals, and I’m guessing that the higher the demand for base money the higher the reserve ratio would be. I’d like to read the other books by Selgin before criticizing his views on fractional reserve banking and distortion of prices, because honestly I don’t know his view. But, if Rothbard - and I believe early Hayek, as well - was correct then while meeting the demand for bank-issued money would not be inflationary, the loaning of gold deposits would.
I don’t think there is an adequate distinction between deposits made to safeguard one’s gold, so that the depositor can instead use the bank notes, and true savings accounts, or time deposits.
To expand on your idea, building on the mechanics of Fed intervention: What about the temporal nature of debt and contract? The banks will create a contract and lend capital they have now at the current interest rate despite the fact that the project will be completed in the future, do they not? Any interest rate hikes don’t affect the ROI on that loan, just the bank’s ability to originate loans in the future.
To expand on your idea, building on the mechanics of Fed intervention: What about the temporal nature of debt and contract? The banks will create a contract and lend capital they have now at the current interest rate despite the fact that the project will be completed in the future, do they not? Any interest rate hikes don’t affect the ROI on that loan, just the bank’s ability to originate loans in the future.
Here’s m-w.com’s definition for “deposit”: [T]o place especially for safekeeping or as a pledge.
When I buy a pizza, I am not making a deposit at the pizzeria, that is, I am not giving my money to the pizzeria for safekeeping. Instead, I am exchange ownership titles.
Anyway, I’m going to end here, since I haven’t read Selgin’s complete argument. These were simply my initial thoughts after reading the comment Selgin left on you post.
No, there are endogenous and exogenous factors which can set off the ABC; today, there is a combination of the two. Recessions and the business cycle are not contingent upon exogenous monetary manipulation, by central banks or whatever. This over-simplification a very common misnomer (it’s a straw man). My professor actually echoed it today in class (“the Austrian’s blame everything on central banks”).
Unless it’s a variable rate loan, this is true. The interest paid goes according to the agreement when it was made.
Could you kindly elaborate on this?
I left a comment there.
Also, I am 99% sure you are already aware of this, but just in case (perhaps for others here), MES and Mystery of Banking are in no way substitutes. Not even for banking theory. MES is Austrian Economics from A to Z. As far as banking, there is very little in MES, but as far as Capital Theory / Structure of production, I still don’t know of any better text then MES. Mystery of Banking has almost no mention of capital theory, although the beginning offers a good intro to Mises’ theory on Money and Credit.
It is you who is denying the possibility of the common banking contracts. Whatever kind of deposit is used elsewhere is of little importance for money is different.
That Money deposited for safe keeping is different from wheat deposited for safekeeping is just a baseless assertion by you. What is the basis for this distinction other then “historical legal opinions”? They should be identical. For consistency, the argument must be valid for wheat as well.
There are rigidities and imperfections in the nature of banking itself which can cause relative divergences between the market and natural rates of interest. Banks, rather than elevating the market rate when there’s an increased demand for capital, will satiate that demand through the expansion of fiduciary media. So, for example: a new technological innovation emerges which increases the productivity of capital; the natural rate rises. But if the banks merely expand the supply of money, rather than elevating the market rate towards the natural rate, you set off an inflationary induced boom. Thus, the market rate can be suppressed below the natural rate, even if it remains constant, or “stable.” You can increase the supply of money as money, but not as capital (this causes the ABC).
Esuric, that one sailed right over my head. I see I need more background.
Do you know of some link that talks about this q in general? How about one that explains money as money and money as capital?
Well, It’s in Hayek’s Monetary Theory and the Trade Cycle.
Prices and Production (also by Hayek), lecture 4. Mises talks about it in the Theory of Money and Credit as well.
Essentially the banks, when confronted with an increased demand for investment, decide to lend more money (create additional credit) rather than elevating the market rate of interest towards the natural rate. The business cycle is not the result of fractional reserve banking; it’s the result of an arbitrarily reduced market of interest (relative to the natural rate, or equilibrium rate, if you like). Also, when the market rate is above the natural rate, you get economic stagnation.
It isn’t. In the real world, however, no one deposits money for safekeeping.
Really? I do. If I show up to my bank today and they tell me my money’s gone I’m going to be kind of mad. There are other reasons of course, but safekeeping certainly is one.
Your money isn’t gone, because your money is a bank liability, i.e. an account or note redeemable for some type of asset (probably gold, in a free market). The asset that you originally exhanged for that account balance or notes may be gone, but it stopped being your property when given to the bank. Why would you prefer an account balance or paper notes to the “deposited” asset, like gold? Elimination of storage fees, interest accrual, ease of transport, use of electronic transfers without additional fees, etc.
In a free banking system, in a sense, gold ceases to be the primary medium of exchange, and instead becomes a kind of collateral for money, i.e. bank liabilities. Are liabilities backed by gold a better type of money than gold coins? I think so, because changes in the demand for money can more easily be satisfied by the former than the latter, causing less economic disturbances like booms and busts.
The specific notes are gone, but our currency is fungible, therefore I can get essentially the same money back at a later time. I might forfeit the specific notes, but I still have the right to the amount I deposited.