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Source link: http://archive.mises.org/11313/the-non-mystery-of-inflation/

The Non-Mystery of Inflation

December 24, 2009 by

Nothing at all is mysterious about inflation; it is government intervention pure and simple. Why, then, do government leaders continue to inflate? And why do the printing presses go undetected by the general public? FULL ARTICLE by Mark Spangler

{ 181 comments }

Mike Sproul January 1, 2010 at 10:29 pm

Gerry Flaychy:

When a call option specifies that the bearer is entitled to buy 1 share of IBM stock from the writer for $50, it is actually fairly uncommon for that call to be redeemed for IBM stock, since it is easier for the writer to simply buy it back from the bearer for its market price. Similarly, it is often easier for for a bank to redeem its dollars by buying them back with a dollar’s worth of goods or securities, rather than paying out actual green paper dollars.

Peter Surda January 2, 2010 at 3:59 am

@T. Ralph Kays:
I agree with you in that RBD (which I’m not familiar with so I’m taking your definition) is incorrect. I am not a RBD proponent.

Thanks for clarifying that the backing issue is not about value. That however only eliminates part of my objection. However, even if you have asset-backed IOUs, there is still no 100% guarantee you’ll be able to redeem them, if the assets are damaged or stolen. It is also not a problem that revenue-backing means a less specific identity of the collateral. This is a quantitative, not a qualitative issue. Even with gold-backed notes, you can’t redeem them for specific gold, just “a” gold.

@Mike Sproul:
> Quantity theorists (including Austrians) claim
> that fiat money can have value in spite of having
> NO backing at all.
I am not sure your interpretation of the Austrian money theory is correct, it only explains part of the theory (as I understand it).

> They claim that it is only
> necessary to limit the supply of pieces of paper,
> and that limited supply, coupled with peoples’
> demand for a medium of exchange, will give
> them value.
Again, I think this is only a partial interpretation.

> The flaw in this argument is that the issuer gets
> a free lunch, which attracts rival issuers.
Bala already answered: this doesn’t happen because of legal tender laws. Absent these, truly fiat money (neither asset- nor revenue-backed) would indeed have zero market value.

T. Ralph Kays January 2, 2010 at 5:47 am

Peter

Your responses to Mike Sproul are correct, he seriously misrepresents austrian theory.
I don’t think you and I really have much of a disagreement at this point, just some different definitions possibly. Mike Sproul trots out various financial instruments and claims that they are money, when they clearly aren’t. IOUs are not money, they are loan documents. That a market arises where they can be traded easily is no different than any other specialized market for trading specific types of goods. Collateral is not what you seem to be claiming it is. Collateral provides security for a loan, nothing more, it is not in any sense backing.
When you say: “It is also not a problem that revenue-backing means a less specific identity of the collateral.” I really don’t understand what you mean, and I am pretty sure that is not my point.
Backing a currency means nothing more than promising to exchange it for a specific amount of something else. When credit expansion results in the creation of money, or money substitutes, the collateral behind the loans is not backing, it is only security for the loan. The banks do not own the collateral and cannot give it to the holders of the money, or money substitutes, at will. This is where Mike Sproul gets tricky though, he says it doesn’t matter because the collateral will make the loan an attractive asset that can be used to raise the money necessary to honor the claim. As far as that goes and within limits it is true. It is his claim that this is not fractional reserve banking with all its flaws, and specifically his claim that this type of credit expansion does not affect the value of the money, or in other words cause inflation, nor lead to the business cycle that is wrong.
He claims that having more money chasing the same amount of goods will have no affect on the value of the money, in other words, prices won’t change; AS LONG AS the extra money was created by someone who already has enough assets. He is saying that the supply of money relative to the goods available will have no relationship to prices if the money is issued by someone who has enough assets.

Gerry Flaychy January 2, 2010 at 9:27 am

Mike Sproul wrote: ” Similarly, it is often easier for a bank to redeem its dollars by buying them back with a dollar’s worth of goods or securities, rather than paying out actual green paper dollars.”

Nowadays, what individual commercial banks are issuing is account-money, not bank notes, or dollars, or green paper dollars, still less fed notes. Even the central bank issued account-money.

Thus a commercial bank cannot buy back its dollars for the simple reason that they don’t have dollars !

Concerning the account-money, it is redeemed in base money ” i.e.” fed notes, and also coins, when the depositors ask for it ” i.e.” when they redeem their account-money.

Banks don’t rather give back goods or securities to those depositors !

So what are you talking about in the above quotation ?

Bala January 2, 2010 at 10:35 am

Gerry Flaychy,

” So what are you talking about in the above quotation ? ”

You still think he knows what he is talking of? You should click on the links he has provided. You will really split your sides laughing at the kind of rubbish he has put up. What’s even funnier is that he really believes in it.

Mike Sproul January 2, 2010 at 11:43 am

Peter Surda:
“I am not sure your interpretation of the Austrian money theory is correct, it only explains part of the theory (as I understand it).”

Mises did say that credit money has always originated in a suspension of convertibility, so he gave backing that much credit, but he makes it clear that once convertibility is suspended, money gets its value from supply and demand, not backing. For example:

(From Mises, Theory of Money and Credit, part II, ch. 8)
“How could it come about that the government bonds, bearing interest at five percent, could be valued less highly than the non-interest-bearing currency notes? This could not possibly be attributed, say, to the fact that people hoped that the currency notes would be converted into gold before the bonds were redeemed. There was no suggestion of such an expectation. Quite another circumstance decided the matter.

The currency notes were common media of exchange—they were money—and consequently, besides the value that they possessed as claims against the state, they also had a value as money.”

You’ll find the same idea in Hayek, Rothbard, etc.

As for mainstream textbooks, they say without exception that paper dollars get their value solely from supply and demand (e.g., Mankiw, 3/e, p. 353). I don’t know of a textbook that even mentions backing, except occasionally to explode the “myth” that backing can give value to pieces of paper money. This goes back to Ricardo, Thornton, Hume, Locke, and earlier.

As for legal tender laws, I’ll mention three problems:
1) Money crosses borders easily.
2) The Assignats, Continentals, etc, lost all their value, in spite of legal tender laws that were enforced by every means including mass murder.
3) Private issue of checking account dollars, credit card dollars, etc. would reduce the demand for the legal tender dollars, and reduce their value, with no stable solution short of zero value

Gerry Flaychy:

Modern private banks issue checking account dollars. A bank can buy back one of its checking account dollars with a green paper dollar, with a bond, or even by selling some of its furniture for some of its checking account dollars.

scott t January 2, 2010 at 12:50 pm

” he makes it clear that once convertibility is suspended, money gets its value from supply and demand, not backing.”

is this process different than when 1oz if gold/silver is less expensive to get out of the ground than 1oz in your hand?

Bala January 2, 2010 at 2:44 pm

Mike Sproul,

” Private issue of checking account dollars, credit card dollars, etc. would reduce the demand for the legal tender dollars, and reduce their value, with no stable solution short of zero value ”

They do! Ha Ha Ha!!! Why do you think $1 today is worth less than 5% of what $1 was worth in 1913? You prove everything we say and then claim to have disproved it. Your argumentation is really interesting. Thanks for the laughs.

Peter Surda January 3, 2010 at 4:58 am

This is kind of odd, because I partially agree with Mike Sproul and partially with the Austrians.

Mike’s objection is precisely why I have reservations with some aspects of Austrian theory. On one hand, I don’t see a difference between money and IOUs. I also don’t see a financial difference between asset-backed and revenue-backed IOUs. On the other hand, I agree that if an IOU is only revenue-backed, that creates inflation (ABCT). Does that make any sense?

Regarding legal tender laws:
> Money crosses borders easily.
I am not sure I understand this. Legal tender laws require people to accept the currency as debt settlement (there are other requirements, e.g. using it in accounting but they have smaller effect now in the time of computers). It does not mean that you can’t use other currencies. However, due to a similar effect as in Gresham’s law, they are crowded out of circulation (as debtors prefer it). You can see a similar effect in reverse in countries that have high inflation: foreign currency pushes the local one out of circulation (as creditors refuse to accept it).

> The Assignats, Continentals, etc, lost all their
> value, in spite of legal tender laws that were
> enforced by every means including mass murder.
This does not negate my claim. See previous paragraph. If the negative effects of the inflation rate of the local currency outweigh the threat of retribution, the local currency will stop circulating.

> Private issue of checking account dollars, credit
> card dollars, etc. would reduce the demand for
> the legal tender dollars, and reduce their value,
> with no stable solution short of zero value
I believe this is actually correct. They reduce demand and lead to inflation.

Gerry Flaychy January 3, 2010 at 9:48 am

Mike Sproul wrote: ” Modern private banks issue checking account dollars. A bank can buy back one of its checking account dollars with a green paper dollar, with a bond, or even by selling some of its furniture for some of its checking account dollars. “

I have never heard of a modern bank buying back one of its checking account money.
I have a checking account and I don’t understand why ‘my’ bank would want to buy back my checking account money.
On the contrary, banks do all they can to make us deposit as much money as possible into checking accounts, and to make us use account-money instead of base money.

And even if for a mysterious reason the bank would want to buy back my checking account money, the bank cannot buy it if I don’t want to sell it, still less for furniture !

So what are you talking about ? What do you mean exactly ?

Mike Sproul January 3, 2010 at 11:21 am

Peter Surda:

“I also don’t see a financial difference between asset-backed and revenue-backed IOUs. On the other hand, I agree that if an IOU is only revenue-backed, that creates inflation (ABCT). Does that make any sense?”

Nope. No sense at all. Think of IBM stock. Even the most die-hard quantity theorists agree that if IBM shares initially sell for $60, then IBM can issue 1 more share, sell it for $60 of new assets, and the share price will not change because IBM’s assets would have risen in step with it’s issue of shares. IBM might have previously had 100 shares laying claim to assets worth $6000 (hence share price=6000/100=60). Now they have 101 shares laying claim to assets worth $6060, so share price is 6060/101=$60.

Now suppose that $60 ‘asset’ was a bond that will yield revenue of $3/year forever. At a market rate of interest of 5%, the present value of this perpetual revenue stream is $60. We’ve just gone from saying that the extra share of IBM was ‘asset-backed’ to saying it is ‘revenue backed’, but it makes no difference to the share price. The issue of the extra share does not reduce IBM’s share price in either case. The same is true of money.

“> Money crosses borders easily.”

Countries can be small, weak, and close together. Currencies compete. If the supply/demand view of money were correct, then as one currency loses value, people will demand it less, and it will lose more value, which reduces demand more, etc. On this view the dollar should have driven the peso out of circulation long ago. But the backing view says this won’t happen, because the peso is valued according to its backing.

If modern paper money has value because of supply and demand, and not because of backing, then why do central banks always hold assets? There should be some bank somewhere that holds no assets against the money it issues. There never has been such a bank.

“> Private issue of checking account dollars”

If you say it causes inflation, then banking is equivalent to counterfeiting, and widespread banking should have reduced the value of the dollar to zero long ago. But if the green paper dollar is backed by stuff worth 1 oz. of silver, then no amount of checking account dollars will affect the value of the green paper dollar. You don’t get the absurd result that banks are like counterfeiters.

Gerry Flaychy:

Change the words “buy back” to “redeem” and you might see it more clearly.

Peter Surda January 3, 2010 at 12:18 pm

Mike:
In your example of IBM shares, the nominal value of the share is unchanged by the switch, but the total amount of money (and derivatives) issued by both companies is different (ceteris paribus). Same amount of assets in economy but more money in circulation equals inflation.

T. Ralph Kays January 3, 2010 at 1:37 pm

Peter

One of the problems with Mike Sprouls argument is his use of words like ‘value’ and ‘worth’. For example he says: “But if the green paper dollar is backed by stuff worth 1 oz. of silver,…”. What does he mean by this? The dollar he refers to is not backed by the 1 ounce of silver, he says so, it is backed by the “stuff”, which he claims is “worth” 1 ounce of silver. One confusion here is that the dollar really would be “worth” 1 ounce of silver if it were reliably redeemable directly for 1 ounce of silver. In that case its actual value could change just as the value of 1 ounce of silver can change. But what does he mean when he says the “stuff” is worth 1 ounce of silver? He doesn’t mean that someone is guaranteeing to always exchange the “stuff” for 1 ounce of silver either. He means the current silver price of the “stuff” is 1 ounce. The point he wants you to ignore is that the silver price of the stuff is based on the supply and demand for silver and “stuff”. But somehow he insists that this does not result in the dollars based on this system being subject to supply and demand. At this point he is actually postulating that a subjective value system of supply and demand can establish an objective value for dollars. Everything on the market is subject to the effects of supply and demand, there is no such thing as an objectively determined value, not even for dollars.

Mike Sproul January 3, 2010 at 3:24 pm

Peter:

Start by comparing two views of IBM’s issue of 1 new share.
(a) The backing view says that it doesn’t affect the share price, since IBM’s assets move in step with the quantity of shares.
(b) The quantity view ignores the new assets and says that the quantity of shares has increased by 1%, therefore the share price will fall by 1%.

View (b) is indefensible. View (a) is subject to minor qualifications, like questions about whether IBM is able to utilize the new $60 effectively. But any finance professor will tell you that view (a) is pretty much correct, while (b) is plain wrong.

The quantity theory applies view (b) to money and says that it does not matter that the assets of a money-issuer normally move in step with the issue of money. The simple fact that the quantity of money increases by 1% will cause about 1% inflation regardless of issuers’ assets. That’s a view that I find indefensible, and yet it is, regrettably, the mainstream view. It is advocated by everyone from Austrians to Keynesians and worse.

Now, about your ‘ceteris paribus’: You always have to ask why new shares of IBM are issued, and you always have to ask why new money is issued. The new share of IBM is only issued because IBM and its investors “want” the share. That is, because IBM believes it can put the extra $60 to good use, and the investors believe it too. Now this doesn’t rule out bad behavior. IBM might just want the $60 so its managers can blow it on candy. The backing view just says that this will make IBM shares fall in value by 1%.

So now ask why a new dollar gets issued. A common reason would be that it’s the Christmas shopping season, and people have use for more money. So a shopper goes to his bank and borrows 100 checking account dollars. The only way that bank would issue those dollars is that they believe that the shopper will repay the $100 plus interest, and one way for the shopper to reassure the bank is to offer a $100 lien on his house.

So the new dollars get issued, and not only do the bank’s assets rise in step, but the new dollars are only issued to satisfy an increase in money demand, so even a quantity theorist would say that no inflation will result.

Peter Surda January 4, 2010 at 6:32 am

@Mike Sproul
Both a and b in your examples are incorrect. Austrian theory (as I understand it) doesn’t say that the market price of a share as expressed in dollars falls (eventually it probably would, but that’s irrelevant). That would be what other economists call “price inflation” as opposed to “monetary inflation”.

I made a couple of tables to demonstrate the financial situation of the IBM share example: http://shurdeek.shurdix.org/tmp/money.pdf

There are 4 entities in the economy: some manufacturer, IBM, bond issuer and IBM shareholders, and 3 situations (before the issue of extra share, after issuing it as an asset-backed IOU, and after issuing it as revenue-backed IOU). On the very right side you see the sums for the whole economy. I put zero into most cells, it might not actually be zero in reality, but putting there some other number might be confusing.

You see that in all three cases the amount of assets in the whole economy is the same. In the first two, all IOUs are asset-backed. In the last one, some are only revenue-backed. Now, you will observe that the sum of the nominal values of all circulating IOUs is higher in the last one than in the second one. The bond issuer has introduced debt, or leverage, into circulation. This is per definition monetary inflation.

Now I need to turn again, agree with Mike and disagree with the Austrians. Monetary inflation does not necessarily mean anything bad or fraudulent or lead to price inflation, as long as the actual revenue backing the IOUs is sufficient. Now, back to ABCT. On a free market, this is kept in check by the free choice of currency, risk of going bankrupt, and the interest rate reflecting the intersection of supply and demand. Legal tender laws as market regulation, central bank as the lender of last resort and the determinant of the interest rate all disrupt this process and lead to bubbles and busts.

Peter Surda January 4, 2010 at 6:41 am

@T. Ralph Kays:
I am afraid on this one I have to agree with Mike. From the point of view of the creditor, there is no qualitative difference between asset-backed and revenue-backed IOU or even if the legitimacy of the revenue. You might prefer asset-backed IOUs and that’s fine. But that does not completely eliminate the risk of non-refundability or give the IOU an objective value.

T. Ralph Kays January 4, 2010 at 10:44 am

Peter

So what? I never argued that point. His economics is wrong because he thinks there is a way to create money that is not subject to the effects of supply and demand, in other words an objectively determined value.

T. Ralph Kays January 4, 2010 at 10:59 am

Peter

“Monetary inflation does not necessarily mean anything bad or fraudulent or lead to price inflation, as long as the actual revenue backing the IOUs is sufficient.”
This is a completely false statement. Smart banking practises in the form of having good security for loans made has nothing to do with the fact that the money supply has changed by these processes. You and Mike are both postulating a form of money that is somehow outside the effects of supply and demand. Gold coins cannot avoid the effects of supply and demand, how does this magical money you and Mike are talking about do it? If the money you and Mike are talking about exists outside of the effects of supply and demand then you should be able to explain its value WITHOUT reference to things that are subject to supply and demand.

Carlos Novais January 4, 2010 at 12:30 pm

As I stated before:

Notes and demand deposits are contractual labels that can only be assumed by 100% Reserve Banks. Fractional Reserve Banks issuing fractional “notes and demand deposits” should label them as “promises of payment with at least x% of reserves.”

Promises of payment would carry a discount to true Notes and Demand Deposits (100% Reserve) = they would not be fungible.

Why I would accept a “promise” of a thing instead of the actual thing? Why would I deposit my physical coins in a fractional reserve bank receiving fractional reserve notes instead of receiving true 100% notes or deposits?

So, in a complete honest Free Banking, good money would drive bad money.

Of course people could be accepting “promises” (fractional reserve notes or demand deposits) instead of true notes or demand deposits, but not at same face value.

scott t January 4, 2010 at 1:56 pm

“His economics is wrong because he thinks there is a way to create money that is not subject to the effects of supply and demand, …..”

i guess. i understand the sproul to say in a basic way

1. print money — 2. print money claiming a ‘worth’ of a previously money-purchased asset, it can be anything — 3. if the printed ‘worth’ was wrong, so be it…the notes lose value.

if this is incorrect let me know.

i guess you mean by objective value a note that says redeeem for 1oz. of silver will always be for 1oz of silver …even though the 1oz.of silver possibly can decline in value as well.

i am not sure however if what the sproul describes, carried out on a large economy wide basis is harmful or the disease and ill that i have seen inflation described as on mises sites.

T. Ralph Kays January 4, 2010 at 2:06 pm

RBD explained!
It seems that Oberon, the king of the fairies, is so impressed with good banking practises that he rewards those who protect their credit expansion by obtaining adequate collateral. This reward consists of sending forth hordes of little fairies who sprinkle magic dust on all of the new money created this way, which protects this money (but not other money created in evil ways) from the influence of the law of supply and demand!

Gerry Flaychy January 4, 2010 at 6:38 pm

Mike Sproul wrote: ” Change the words “buy back” to “redeem” and you might see it more clearly.”

Account-money is redeemable in fed notes not in bond nor in furniture, and it is on the depositor demand, and also it is obligatory for the bank to redeem in fed notes and for the same amount: the bank doesn’t have the choice.

To buy back something means that it is the seller of this thing who wants to have it back. He cannot simply demand it, like in the depositor case above, to get it back.
The buyer is not obliged to sell the thing back, and if he accepts, he can ask the price he wants: he is not obliged to sell it back for the same amount paid. He has the choice.

And, as the ‘buyer’ that we are speaking of here is a depositor, it doesn’t makes much sense, if any. A depositor doesn’t buy back the fed notes he has deposited some time before, he doesn’t have to, he just redeem them.

Thus, contrary to what you said, modern private banks don’t redeem checking account dollars: depositors do; banks don’t even buy them back.

Mike Sproul January 4, 2010 at 10:05 pm

Peter:

The issue of more shares, or more money, is what Austrians call monetary inflation. But as long as those shares, or those money units, have adequate backing we do not see what Austrians call price inflation.

Start by thinking of a pure barter economy where all goods have a market price at which they trade against other goods. Now if, instead of trading with salt, cows, etc., people start trading with IOU’s that reliably promise to deliver salt or cows, then relative prices don’t change. The number of IOU’s rises (monetary inflation) but there is no price inflation.

A farmer who owns cows can easily issue IOU’s promising a cow, but people will also trust him to issue an IOU promising salt. He might not have any salt, but as long as he has enough cows, people will accept his salt IOU’s. There is still more monetary inflation, but no price inflation. All goods still have the same relative prices, and an IOU that reliably promises 1 pound of salt will still be worth 1 pound of salt, even if it’s backed by cows. Note that the total value of all the IOU’s issued is limited by the total value of goods that exist. The IOU’s don’t just multiply without limit.

T. Ralph Kays January 4, 2010 at 10:31 pm

Peter
When the fellow who has no salt to back his salt IOU goes into the market to buy the salt he needs won’t that be an increased demand for salt? Won’t that change the price of salt? How can relative prices stay the same if this guy is out in the marketplace trying to cover his IOUs by buying things he didn’t have when he issued the IOUs? In this barter society does this guy withdraw from circulation enough cows to buy salt to cover his salt IOUs? If he doesn’t then aren’t the cows still trading on the market in which case the IOUs do increase the money supply and cause inflation. What gets really confusing is when Mike Sproul stops misrepresenting RBD and admits that the property he proposes backs the money doesn’t even belong to the issuer of the money, it is collateral only, not backing.

T. Ralph Kays January 5, 2010 at 12:23 am

Peter

Look carefully at Mike Sprouls pure barter economy and his introduction of IOUs to this economy. As I pointed out earlier, if all of the goods that previously were trading in this market are still trading and a new item, the 1 pound salt IOU, is added it will clearly affect a change in relative prices, inflation if you will. But what if the guy who issues the salt IOU, lets call him Mike, withdraws enough cow from the market to trade for sufficient salt to redeem the IOU at current prices. It doesn’t matter if he directly sets aside cow, or if the cow is off the market because it was pledged as collateral to Mike. The IOU trades as if it were salt because Mike is widely seen as being honest. The effect of the IOU is to temporarily depress the value of salt, after all there is now more ‘salt’ on the market. Withdrawing the cow from the market will increase the value of cow, after all supply has decreased. Now prices of cow in terms of salt has increased, and conversely the cow price of salt has decreased. Now lets assume someone redeems the IOU, so Mike goes to the salt dealer, lets call him Peter, with the amount of cow that was set aside at the OLD prices to buy salt. But now the value of salt has been depressed and the value of cow has risen. Mike recieves far more salt for his set aside cow than he needs to retire the IOU. Now the IOU is gone, we are back to the original trading situation and the original ‘prices’ will re-establish themselves. Now when Peter goes to buy salt to replace what he sold to Mike he will find that the cow he got from Mike will buy only part of what he sold to Mike. Mike has whatever he traded for the IOU and the person who redeemed it has the promised salt, but also Mike has the extra salt and Peter has less salt, and this has resulted from nothing but Mikes creation, out of thin air, of an IOU.
This process if continued will continue to enrich Mike and impoverish Peter, giving Mike more and more assets on which to base more IOUs, accelerating the process.
Of course that is Mikes true purpose in pushing RBD, he likes the idea of stealing from people.

Peter Surda January 5, 2010 at 5:01 am

As I stated far above, I’m not an expert in banking, I am merely trying to understand and to clarify (to myself) the Austrian approach. I have been trying to comprehend the Austrian approach for a while and have trouble following the conclusions of parts of the Austrian monetary theory.

@Mike Sproul:
> The issue of more shares, or more money, is what
> Austrians call monetary inflation. But as long as
> those shares, or those money units, have adequate
> backing we do not see what Austrians call price
> inflation.
Surprisingly, I have no issue with this argument. I agree with you. Maybe we might disagree on what “adequate backing” means.

@Austrians:
Neither money nor gold have “objective value”, and indeed the value is determined by supply and demand.
I agree that it should be clear to the creditor whether the IOU he obtains is asset-backed or revenue-backed and if they claim something that is contrary to the financial situation (e.g. 100% immediate redeemability while the reserves are below 100%), this means fraud. But apart from that, there is no issue. Notes with fractional redeemability wouldn’t have a market price directly proportionate to the reserve ratio, rather also to the estimated risk of default.

Even if you have asset-backed IOUs (e.g. gold deposits), there is still no guarantee for redeemability. The gold could get stolen and then the notes would be worthless. Also, the market value of gold could decline, which also decreases the market price of the notes. Just like if you have a revenue-backed IOU and the debtor fails to get sufficient revenue, the market value of that IOU falls. It is also normal for a business to have a negative equity. There is a non-zero risk in all cases, and in all cases the market price can fluctuate.

Imagine the extreme case, if replicators were invented (like in Star Trek). That would make all the matter equivalent. A ton of gold would have the same market price as a ton of sand. The market for gold and gold-backed IOUs would collapse and from this perspective there would be a massive price inflation.

In my opinion, the “asset-backed IOU theorists” insist that the expected future revenues should only be reflected in the interest rate and not in the money base.
I don’t see a reason for this strict separation. Of course, if there is mismatch, it means trouble. But asset-based IOUs are also affected by this phenomenon, as demonstrated above. Furthermore, free market would keep this in check and allow you to refuse IOUs which carry higher risk than you prefer.

scott t January 5, 2010 at 10:57 am

“But apart from that, there is no issue. Notes with fractional redeemability wouldn’t have a market price directly proportionate to the reserve ratio, rather also to the estimated risk of default.

Even if you have asset-backed IOUs (e.g. gold deposits), there is still no guarantee for redeemability.”

unless the issue is one of forcibly mandating the fractional-backed note – also even if no force is used does the mechanism lend itself to greater economic miscalculation than the previoulsy referred to objective-value note.

for insntance, unless gold theft really took place on a regular basis from depositors (unlikely) they would at least know that the note did definitly have a corresponding amount of gold sitting somewhere – and would this operate better for long term economic calculation thaen fractional-note soup.

has that ever shown itself to be the case historically?

Gerry Flaychy January 5, 2010 at 3:27 pm

Mike Sproul wrote: ” The issue of more shares, or more money, is what Austrians call monetary inflation. “

Shares? Shares of what?

I would be very curious to see a quotation confirming that.

Gerry Flaychy January 6, 2010 at 1:05 pm

Mises and the meaning of inflation.

Mises wrote: “In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation:

an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well),

that is not offset by a corresponding increase in the need for money (again in the broader sense of the term),

so that a fall in the objective exchange value of money must occur.”

http://mises.org/books/Theory_Money_Credit/Part2_Ch13.aspx#_ednref11 (7 Excursus)

scott t January 6, 2010 at 3:15 pm

“…that is not offset by a corresponding increase in the need for money…”

isnt a need for money met by exchangeing a good for it?
is a need for money different than a need for any other good?

“…so that a fall in the objective exchange value of money must occur.”
does this really matter?

i have seen inflation called a disease and ill at mises and lrc.

if there are more weaker moneys around instead of fewer moneys that are stronger…is there much of a difference?

scott t January 6, 2010 at 3:22 pm

if there are more weaker moneys around instead of fewer moneys that are stronger…is there much of a difference?

now that i review this…historically has this just not happend all at once? benefitting a few and harming many?

until….

“when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s.”
http://blog.mises.org/archives/010741.asp

or do the first receivers still remain better off?

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