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Source link: http://archive.mises.org/11208/the-power-of-the-theory-of-money-and-credit/

The Power of The Theory of Money and Credit

December 10, 2009 by

“Yet the future of the dollar is precarious,” Mises presciently penned in The Theory of Money and Credit, “dependent on the vicissitudes of the continuing struggle between a small minority of economists on the one hand and hosts of ignorant demagogues and their ‘unorthodox’ allies on the other hand.” FULL ARTICLE by Doug French

{ 7 comments }

Stephen Grossman December 10, 2009 at 10:46 am

I recently read _Human Action_, Rothbard’s, _America’s Great Depression, and am finishing his _History of Money and Banking in the US_. I was going to read _Theory of Money and Credit but Ive started de Soto’s _Money, Bank Credit and Economic Cycles because I wanted another perspective on Austrian economics and because de Soto was more focused on cycles and because he could be expected to discuss _TMC_. And now I can say mutuum and tantundem.

greg December 10, 2009 at 12:36 pm

Bubbles are caused by money in the markets shifting from one area to the next chasing after better than average returns. You had a bubble in oil which had nothing to do about money supply, it was pure and simple people shifting to oil in search of greater returns. The media picked up on it and fueled the fire. The same is happening with gold today.

And if you are reducing the real estate bubble to an event caused solely by an increase in money supply, you really don’t understand the real estate business. For me, I can sum up the problem in real estate, it is a terrible investment! The cost of buying and selling real estate is so high, it is not liquid and has the lowest margins of any business.

Basically, if you are making investment decisions on movements in the money supply, you will get burned. Follow the money movement in the markets and you will understand the true cause of bubbles.

Bob December 10, 2009 at 3:04 pm

Greg, the money supply was still greatly expanding in 2007 and early 2008. This was likely driven not by the FED but by the securitization process, which was driven by several different government policies which understated and backstopped downside risks. Look at MZM.

The oil bubble busted in mid 2008. So…there’s almost a perfect correlation.

On the other hand, gold prices have not correlated well to money supply. Maybe it’s NOT a bubble.

Are you really saying that bubbles are caused by people bidding up prices for a particular asset class? That sounds like a description of the bubble itself, not the cause.

Bubbles are caused by a huge bout of cheap credit, which eventually causes lenders to abandon cautious risk assessment to retain positive real interest rates. Also contributing is that most of the managers making such decisions do not own the companies and could care less about their long-term health.

Stephen Grossman December 10, 2009 at 4:20 pm

>[greg]Bubbles are caused by money in the markets shifting from one area to the next chasing after better than average returns. You had a bubble in oil which had nothing to do about money supply, it was pure and simple people shifting to oil in search of greater returns.

“It is not enough just to stand back and look at points on a chart going up and down, smiling when things go up and frowning when things go down. That is the nihilism of an economic statistician who employs no theory, no notion of cause and effect, no understanding of the dynamics of human history.” [Mises, _Human Action_]

Economic law applies to money as well as apples. Govt inflation has to go somewhere, if not here, then there, until the crackup boom. Gold/oil has been stable for 50 yrs but money/oil has skyrocketed.

Troy December 10, 2009 at 4:50 pm

Good artilcle, Mr French, and well done for the Mises Institute to republich Mises’s TMC.

Hayek writes, in Hayek on Hayek (1994/6), of an apocraphyl story, concerning the hyper-inflation at the time, in which Mises arranged to meet someone at 12 midnight. Mises and the other person turn up. In the background the sound of the printing presses are chug-a-lugging away, churning out heaps of banknotes for the central bank.

Mises asks: “What’s that noise?” then: “Switch it off!”

That’s Mises’s at least immediate solution for hyperinflation!

David Hillary December 10, 2009 at 5:32 pm

‘with the idea that more regulation of the fractionalized banking system cartelized by a central bank will create such stability.’
I wonder why French has to label the present banking system as ‘fractionalised’ and writing of ‘severing’ ties to gold’.

The present banking is characterised by:
1. Fiat currency
2. No direct redemption or conversion rights of fiat currency holders
3. Central banking, with effective monopolisation of bank note issue
4. Prudential regulation of banks
5. Deposit insurance for depositors
6. Mostly privately owned banks
7. fractional reserve banking
8. Financial assistance to some banks

French seizes on 3. and 7. at the expense of the others.

The loss of value of USD compared to gold primarily results from legalised default of the US government and/or the federal reserve to honour its obligations to pay or redeem its obligations in gold, rather than policies concerning interest rates and fed balance sheet issues.

Gerry Flaychy December 10, 2009 at 7:39 pm
greg wrote: “Bubbles are caused by money in the markets shifting from one area to the next chasing after better than average returns.”

If hat money is always shifting, how this money then can create an increase in price in some sector, stay there to sustain the prices at the level attained, and after that, succeed to inflate more and more the prices, which is that that is called a bubble, with more or less the same amount of money ?

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