1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/12614/money-supply-metrics-the-austrian-take/

Money-Supply Metrics, the Austrian Take

May 3, 2010 by

What is money? And how does one properly measure its supply? A correct formulation of the money supply must be based on a deductively derived, theoretically sound definition of money. FULL ARTICLE by Michael Pollario

{ 115 comments }

Michael Pollaro May 3, 2010 at 10:07 am

I welcome critique from readers!

As noted in my essay, a money substitute is not easy to define, a real challenge at times. I am particularly interested in reader views on Savings Accounts and the Treasury’s Special Financing Facility (SFP) Account – in or out of TMS. And along the same lines, and not addressed in my essay, the inclusion/exclusion of U.S. Savings Bonds at current redemption value. I wonder if U.S. Saving Bonds really meet the money surrogate test; specifically around final payment issues.

As I ended my essay, a correct definition of the money supply is a valuable tool for an investor, especially when your competition is looking at the wrong money metric. Getting the definition right is something we Austrians can all benefit from.

Thanks

Matthew May 3, 2010 at 11:07 am

The Law of Supply and _________?

Michael, your discussion of the meaning of money was excellent, but I believe that a discussion of this topic is incomplete without addressing demand for money. Perhaps you’ll consider a follow-up article that incorporates demand within your framework?

I think that one has to recognize that a shift out of currency into, say, MMMFs would represent decreased demand for money. For the sake of illustration, if we assume that the Fed sold the MMMFs to these people and accepted currency in return (thereby removing the currency from the money supply), we would see that the money supply dropped concomitantly with demand, and there would not be an affect on the purchasing power of money.

If the money supply is the only thing that’s important to you, fine, but at least reocgnize that for every other commodity in existence, from automobiles to zambonis, economists address demand just as much as supply.

Also, as someone who has been convinced by the case on the legitimacy of fractional reserve banking made by Selgin and White (contra Rothbard and Salerno) I’m still agnostic on the issue of demand deposits, whether it’s preferable to count them as money or as a form of credit. I lean strongly toward considering it credit. And in fact, have tentatively theorized that the best approach to discussing the money supply is to consider a spectrum of “moneyness” rather than a binary categorization. That is, individuals develop preferences to hold some mix of assets with an approximate level of moneyness, not an approximate balance of money classified by the Austrian or whoever else’s definition. After all, would you not agree that MMMFs are a pretty darn good substitute for demand deposits in every respect?

Michael Pollaro May 3, 2010 at 12:05 pm

Tx Matt for these comments

Agree, a proper exposition of money most include the demand side. I may tackle in a future post. But many theorists/practioners fail to even get the supply side right, hence the impetus for my essay.

My take – most practioners, even those familiar with ABCP, are working with the wrong money supply metric, and because of that, end up making bad forecasts and investment decisions. Case in point, how many in the contrarian camp winced when the Fed discontinued M3? And now, how many are currently pointing to M2′s 2% YoY growth rate or M3′s negative rate and calling Fed monetary policy tight? TMS2 is growing at 10% plus YoY. That’s not tight, at least not yet. And that has a bearing in the financial markets.

I’m not a fan of the spectrum approach. Yes there is some gray, but there is also a lot of black and white. I want to get a money metric in my tool box, one that approximates the ebb and flow of the money supply. As an investor, for eg, that’s a pretty important, for its is the creation of money, that is, credit not backed by savings, and what that means to those who hold cash balances, that gives us the business cycle.

Yeah, TMS may not be perfect, but nothing is when one is trying to quantify the real world.

With this in mind…

Demand deposits to me are black and white. They are money.

MMMFs are black and white too. They are not money but what Mises called secondary media of exchange (for the reason Salerno and Shostak gave in their essays on this subject). Yes, they tend to reduce the demand for money, but that is a far cry from them being money

As to gray, that to me is something like small time deposits, for there we are getting inside the minds of people, a slippery slope indeed – is it credit in terms of a deferral of consumption or is it a cash holding?

cret May 6, 2010 at 12:56 pm

And in fact, have tentatively theorized that the best approach to discussing the money supply is to consider a spectrum of “moneyness” rather than a binary categorization. That is, individuals develop preferences to hold some mix of assets with an approximate level of moneyness, not an approximate balance of money classified by the Austrian or whoever else’s definition.

if some mode of fractional reserves takes place now, does the credit that arises from the banking sector when money is “loaned-and-credit is created” still operate much as money on the market and goods??? isnt money still money.

is there a fundamental difference on the goods that are purchased and their prices and on the economy as to how money enters the market and the credit exenteded in the expectation of money later???

with the paper dollar, bank credit counted in dollars and reserves that i have seen described ledger entries counted in dollars this may not make much of a difference though.

Current May 3, 2010 at 12:09 pm

Like Matthew, I don’t agree with the 100% reservists like Rothbard, I think Selgin and White are correct in supporting fractional reserves.

However, that has little to do with this topic. On this topic I think that the article is pretty much correct. There are only two things I’d point out.

Firstly, the problem with travellers cheques is that they aren’t money to those who recieve them. They may be a medium of exchange in the market for *consumer* goods, but they aren’t in the general market for goods including . The vendor who recieves travellers cheques converts them because his wholesalers, creditors and shareholders will not accept them as payment. They are a form of consumer bill.

Secondly, regarding savings accounts. What these are really depends on how quickly they can be accessed. If they can be used like normal checking accounts then they are certainly money, if they can’t then they’re not. In Britain I have a primitive savings account where I actually have to go to the bank or send a letter to do anything with it. That account isn’t a present good and isn’t money. However, other savings accounts are accessible on smartphones, as Michael says, those are money substitutes, or at least very close. As Matthew says above it’s probably best to have a “spectrum” of money rather than a fixed definition.

I think that the modern savings account is causing problems for banks in Britain. A few years ago savings accounts were just like chequeing accounts except without the chequebook. A few had chequebooks, but lower rates, and a few had 30 day notice periods and higher rates. Recently though banks have been offering very poor rates on savings accounts. Instead of advertising savings accounts they have been promoting one year bonds and two year bonds very heavily and paying high interest on them. This may be because of the global financial crisis. But, it may be because technology has made savings accounts money substitutes, so to cope with this banks have had to change their practices.

Oddly I think the market will solve the problem of the definition of savings accounts. If they really have become money subsitutes then the pattern of withdrawals will become similar to chequeing accounts and the problems that this causes for banks will cause rates to fall to those of chequeing accounts. Banks will encourage the use of notice accounts instead. But, if they aren’t used as money subsitutes then there will continue to be an interest rate differential between them and chequeing accounts.

If you think about it, nothing that pays the same interest as a treasury bond can be a money substitute. If it was then no-one would be treasury bonds. Money subsitutes, if they pay interest at all, must pay lower interest than bonds and must pay similar interest to each other.

Michael Pollaro May 3, 2010 at 3:04 pm

Current,

Tx for the thoughtful comments

Are you saying travelers checks should or should not be in the money supply? I have them as not

Regarding savings accounts, in his 1966 and I believe last edition of Human Action, Mises had savings accounts as secondary media of exchange of the highest order, as close as you can get to a money substitute. After reading Salerno here below , I suggest Mises might call them money substitutes if he we alive today.

http://mises.org/journals/rae/pdf/RAE8_1_4.pdf pages 74-80

In today’s world, on pure mechanics, savings account are instantly transferable to a checking account at par – so then what’s the difference between savings accounts and demand deposits.

More to the point though is what depositors think – cash or credit. Unless the 30 day rule is enforced, how can they not be thought of as cash.

If I have $1,000 in my dresser draw and $1,000 in my savings account, I am 10 miles from home and I need that $1,000 to make a purchase at a store directly across from my bank, how can you say the $1,000 in my savings account is any different than the $1,000 in the my dresser draw?

I see your point about interest rates, but not sure that is a primary factor

Current May 4, 2010 at 12:08 pm

> Are you saying travelers checks should or should not be in the money supply?
> I have them as not.

I’m agreeing with you and saying that they should not be in the money supply. But, I’m just trying to clear up the reason. That is that travelers checks are only substitutable for money by consumers, they aren’t by businesses. Businesses must redeem them.

> If I have $1,000 in my dresser draw and $1,000 in my savings account, I am 10
> miles from home and I need that $1,000 to make a purchase at a store directly
> across from my bank, how can you say the $1,000 in my savings account is any
> different than the $1,000 in the my dresser draw?

I see your point. But, I think it depends on the type of savings account. Maybe US savings accounts are more advanced to British ones, but there are many British savings account where transactions can only be done by mail or over the counter. The bank chooses how advanced the savings account is. It can offer instant phone and internet access if it wants, or it not, if it wants.

> I see your point about interest rates, but not sure that is a primary factor

Yes, interest is only one factor. There are lots of others like the services the various types of accounts and notes provide.

Mike Sproul May 3, 2010 at 12:20 pm

In 1710, people claimed that only coins should be counted as money, and that the newly popular paper money should not be called money, since most of it was lent into existence and had to be repaid, ultimately with a coin. In 1840, people claimed that only coins and paper money should be counted as money, since the newly popular checking account money was mostly lent into existence and ultimately had to be repaid with either paper money or coins. Since about 1950, people have claimed that only coins, paper, and checking accounts should be counted as money. Credit cards should not be counted as money since they are lent into existence, and must ultimately be repaid with a check, paper bill, or coin.

I predict that in 100 years, people will recognize credit cards as money, but there will be some new form of money that they will say is only a ‘money substitute’ or ‘economizing expedient’ for real money.

Matthew May 3, 2010 at 12:30 pm

Well put Mike. I’m inclined to agree with your prediction. I would attribute that trend to (1) increased availability of information that reduces uncertainty and therefore demand for money, and as a corollary, (2) improvements in technology that streamline payment systems and clearing/settlement processes, also reducing demand for money.

I of course was using today’s definitions of money supply and demand. In your example in 1710, people would have viewed subsequent increased use of paper money as decreased demand for coins (i.e. money).

Current May 3, 2010 at 1:04 pm

I don’t even pay for my credit card with a cheque. My bank deducts it from my current account every month.

I agree, there’s a good case for including credit cards. The issue is complicated though when you remember that credit cards are good for consumer transactions, but aren’t so common between businesses. And they are only one way from the consumers perspective I can take and recieve notes and chequeing deposits, but I can’t recieve credit card payments I can only make them.

I think the big problem in the future is the status of CASH! For many consumer transaction cash is a better money than a credit card or a cheque. However, for business to business transacation cash is often considered unacceptable.

In the future we may have to make a sectoral theory of money where “consumer money” is different to “business money.”

Michael Pollaro May 3, 2010 at 3:15 pm

The issue with credit cards,the reason why it is not a money substitute, is because it’s use at the point of purchase does not represent final payment, one that fully extinguishes the debt incurred in the transaction.

It doesn’t matter the form the final payment takes to qualify as a money/money substitute. What matters is that it is final

Mike Sproul May 3, 2010 at 4:11 pm

But if I pay with a check, the money in my account might have been created by a loan. Same with paper banknotes issued on loan by either the fed or a private bank. No matter the form of payment I use, I could be spending borrowed money, and it makes no difference if that money was borrowed last year or at the point of purchase.

Current May 4, 2010 at 11:23 am

Though I’m reluctant to do so I agree with Mike Sproul here. The “finality” can’t be the issue because checking accounts and notes are similarly not “final”.

Michael Pollaro May 4, 2010 at 11:54 am

The thinking here is they are final because people accept them as a money surrogate, that is a final means of payment

Current May 4, 2010 at 12:23 pm

Yes. I don’t think we really disagree in that case, it’s just a matter of what “final” means.

I’d put it like this…. Today credit cards are not really money substitutes. Consumers spend them as money subsitutes and businesses that deal with consumers accept them as money subsitutes. However, other businesses generally do not accept them as money subsitutes. So, businesses that deal with consumers must convert their credit card payments into checking account money. It’s this last part that causes the lack of finality that you point to. A business that accepts credit card payments must convert them, as I understand the technology there is no choice in this. If there were some way that businesses could store up credit card payments without using checking accounts and then spend them later, then there would be a better case for calling them money subsitutes.

Andras May 3, 2010 at 3:08 pm

I can not see either why credit cards are different. Adding them to monies would help to explain the current felt broad deflation as well. (But that would be too confusing at this blog.)

cret May 5, 2010 at 1:59 am

Credit cards should not be counted as money since they are lent into existence, and must ultimately be repaid with a check, paper bill, or coin.

are credit cards ever thin aired into existence??? does that happen??

if the so-called fractional reserve method lent currency to a credit card as opposed to a conventional loan and created bank-currency too???
bringing new currency into existence??

frank May 7, 2010 at 8:56 am

I predict that in 100 years (possibly in only 20 and maybe even in 10-15) that credit cards WON’T EVEN EXIST, much less be counted as “money”.

David Hillary May 3, 2010 at 3:05 pm

I’ll be the first to admit I didn’t read the entire article. The article is built on a faulty foundation, that the quantity of money is important for macroeconomics such as the interest rate, inflation rate, price level etc.The money unit is a standard of value, and does not need to be used to discharge debts or mediate transactions. Debts can be cancelled or offset, and debts can be contracted as a means of mediating trade. The stock of one form of debt outstanding, e.g. demand deposits, does not have significant macroeconomic implications, and it could be replaced by other substitutes (many of which arise as an artifact of regulation of banking). Without banking regulation in the US, why would US banks have cayman island branches?

Andras May 3, 2010 at 3:12 pm

We despise Keynesian aggregates but we love our aggregates!

Current May 4, 2010 at 2:52 pm

There’s some truth in that sarcasm…

Hayek’s compliant about Keynes is that his aggregates are so wide that they conceal important problems. Hayek isn’t really suggesting “no aggregates” as an alternative, he’s really suggesting a broader and more complicated set of aggregates.

Current May 4, 2010 at 12:25 pm

No, it really is important. Read Mises “The Theory of Money and Credit” he gives a good explanation of why.

Dick Fox May 3, 2010 at 4:35 pm

Mike Sproul,

You make a very good point. I would also add that all monetary instruments have some impact on the effect of money supply as do fiscal changes, sentiment, and a whole host of other influences.

You are closer to a proper definition of what Mises meant in The Theory of Money and Credit with:

Money supply = standard money + money substitutes

At the time of the writing “standard money” was gold and money substitutes were instruments that could be converted to gold.

I actually don’t understand why Austrians persist in making the same monetary mistake as the Keynesians and the monetarists. You cannot adequately define money to have any meaning. What is more important the supply of dollars or the value of a dollar?

While it has less meaning than when we were on the gold standard, the change in the price of gold is still the only way you can even get a hint of what the value of money is. Today the whole world is on a dollar standard, and the dollar is a psuedo-fiat currency that cannot stand without being valued in real goods. Even if you could define money by determining monetary instruments, you still couldn’t measure the supply of these instruments in the real economy with any accuracy. Such an attempt is just spitting into the wind. But even if you could what would you have? Simply a number with no real meaning until you knew the value placed on it by transactors.

This is why the dollar-gold exchange value is the best measure of the dollar, not the supply.

Mike Sproul May 3, 2010 at 8:28 pm

A good way to think of the various monetary aggregates is that derivative moneys like checking account dollars, credit card dollars, etc. are call options on green paper dollars. There might be 1 million shares of GE stock in existence, and various firms might have issued another 2 million calls on those shares. Nobody would claim that if the quantity of calls rose from 2 to 3 million, GE stock would depreciate. And rather than being interested in the total number of calls issued, smart investors would only care about the number of calls issued by particular companies.

Similarly, An increase in the number of derivative dollars would not affect the value of base dollars, and people who are currently trying to measure how many derivative dollars there are should instead focus on the number of derivative dollars issued by particular companies.

Dick Fox May 4, 2010 at 7:38 am

Mike,I agree, but I still must ask, do you believe that the monetary aggregates can actually be determined with any accuracy? Even base dollars in circulation can’t really be determined. How many have been destroyed, how many are sitting idle in shoe boxes, how many are overseas held by both governments and private individuals? It is still more important to know the value of the dollar than the supply.

That is not to discount analysis of derivative dollars in assisting in why the value of the dollar is where it is, but that only gives us a weak approximation at best.

Michael Pollaro May 4, 2010 at 8:37 am

The Supply of and Demand for money determine its value, right? Don’t you need to have a handle on both?

Mike Sproul May 4, 2010 at 11:02 am

Dick Fox:

Monetary aggregates can’t be determined accurately, but of course Chase Bank knows exactly how many checking account dollars it has issued, and mastercard knows exactly how many credit card dollars it has issued, and Toys r us knows exactly how many gift certificate dollars it has issued. The value of each Chase dollar is determined by the amount of backing Chase holds relative to those dollars, and not by how many dollars have been issued by mastercard or toys r us.

I had an interesting exchange with JP Koning about how many paper dollars are in shoeboxes, lost in fires, etc. He checked the balance sheets of several defunct european central banks to see how many paper pounds, pesos, francs, etc were outstanding before the european central bank was established. Then he checked how many were returned to the central bank after the euro took over. He estimated that about 3% of the outstanding paper money failed to come back to the central bank, so it is potentially destroyed, but of course it could also be in collections.

Michael Pollaro:
“Supply of and Demand for money determine its value, right? ”

That’s certainly what Austrians say, and macro texts say the same. But I say that the value of money is determined by its backing, just like any other financial security. You can get a further explanation by clicking my name above.

Anyone who has studied monetary theory knows that it takes a lot of tortured reasoning to imagine how fiat money can get off the ground and have positive value. The backing theory (aka real bills doctrine) has no such twisted logic.

Michael Pollaro May 4, 2010 at 11:44 am

Here’s how I see it…

Fiat money’s value “sprung” from the exchange value earned by commodity money, slowly but surely, because people sadly came to accept fiat, and thus gave it value in exchange. Yes, government legal tender laws, court rulings favoring fractional reserve banking, fractional reserve banking -> deposit insurance/central banking, etc all helped, but in the end, in the final analysis, people accepted the imputation of value from commodity money to fiat

We have a case of this as recently as the intro of the euro. How did the the euro come to be? From the value imputed to it my the prior exchange values of the currencies euro countries.

Current May 4, 2010 at 2:47 pm

I put this in the wrong place.

Current May 4, 2010 at 12:34 pm

Let’s examine the Banking school theory that you hold…

>> Supply of and Demand for money determine its value, right?
>
> That’s certainly what Austrians say, and macro texts say the same. But I say
> that the value of money is determined by its backing, just like any other
> financial security

But, how do you demonstrate that? You persistantly claim that Austrian theory contains “tortured logic”. However, how do you justify the idea that the supply and demand for money results in it having a value determined by it’s backing? It’s pretty complicated to try to do so isn’t it?

Michael Pollaro May 4, 2010 at 2:40 pm

Don’t mean to be curt, cause really appreciate all your great feedback, but in response to your question, Human Action, Chapter on Indirect Exchange.

Current May 4, 2010 at 2:49 pm

Michael Pollaro,

Are you addressing me or Mike Sproul?

Current May 4, 2010 at 12:45 pm

> A good way to think of the various monetary aggregates is that derivative moneys
> like checking account dollars, credit card dollars, etc. are call options on green
> paper dollars. There might be 1 million shares of GE stock in existence, and
> various firms might have issued another 2 million calls on those shares.
> Nobody would claim that if the quantity of calls rose from 2 to 3 million, GE stock
> would depreciate. And rather than being interested in the total number of calls
> issued, smart investors would only care about the number of calls issued by
> particular companies.
>
> Similarly, An increase in the number of derivative dollars would not affect the
> value of base dollars, and people who are currently trying to measure how many
> derivative dollars there are should instead focus on the number of derivative
> dollars issued by particular companies.

You’re making a completely invalid comparison between a medium of exchange and a security. A security (or a call option) is not widely acceptable as a payment for goods. To exchange a security require indirect exchange, selling the security, procuring money, then buying something else.

Money is different, it is the means of indirect exchange. As a result stocks of it are useful. Also, government can force people to use what it defines as money for particular payments. As the Neo Chartalists have reminded us this is very important.

What determines that American’s use the dollar is that political power which “flows from the barrel of a gun”. Competition in currency is prevented by law and that constitutes the “real backing”.

I urge folks on this forum to read the criticisms of the real bills doctorine in Mises works before believing what Mike Sproul says.

cret May 5, 2010 at 2:05 am

I actually don’t understand why Austrians persist in making the same monetary mistake as the Keynesians and the monetarists. You cannot adequately define money to have any meaning.

is the current dollar system money or a currency that blurs definitions of money??? currencies that i saw defined as a unit of reckoning, or dollar leverages, etc.

maybe money can be easily defined but national managed currencies, adding new definitions of the dollar, may make defining the current fiat currency/money more difficult.

Allen Weingarten May 3, 2010 at 5:18 pm

“Money is the general medium of exchange, the thing that all other goods and services are traded for, the final payment for such goods and services on the market.”

I might be mistaken, but the above statement does not appear logical. In a barter system, goods & services are the final payment for other goods & services. Whether gold or paper money is the medium of exchange, the final payment remains that of other goods & services. Why would anyone want money if that were the “final payment”?

Michael Pollaro May 3, 2010 at 6:45 pm

Money is a good. Its role, its value is as a medium of exchange/store of future purchasing power. Money is the good that all in the economy value and hold precisely because it has been given value by the market as a medium of exchange -an objective exchange value, and as such can be readily exchanged again and again for the goods are services people want, avoiding the cumbersome process of barter. As such it is the final means of payment in an advanced economy

Andras May 3, 2010 at 7:09 pm

An objective exchange value? Where are we?

Michael Pollaro May 3, 2010 at 8:13 pm

Hi Andras,

Maybe I am using incorrect terminology. This is what I mean…

The demand for money is a function of its exchange value in the immediate past, adjusted for expectations about its exchange value in the future. But without it first having objectively observed exchange value in the immediate past, it would have no value as a medium of exchange at all. This is unlike any other good on the market

Allen Weingarten May 4, 2010 at 7:32 am

The fact that money has exchange value does not make it “the final payment” or it would not have to be redeemable (by goods & services). It is only because money is redeemable (in a timely manner to goods & services) that it has exchange value.

Michael Pollaro May 4, 2010 at 9:58 am

To clarify, I meant once a thing becomes money it becomes the final payment in an economy, and it is so because it is the one good that everyone is prepared to exchange for all other goods and services (and valued as such over cumbersome barter). The starting point in the exchange is money’s objective exchange value, adjusted by its expected value in the future

cret May 5, 2010 at 2:09 am

ounce (agreed upon weight) of metal for good….isnt that objective??

unit of reckoning (i reckon…) for good….is that objective???

Ned Netterville May 3, 2010 at 5:57 pm

What about gold? Should it not be counted in the money supply? With the price of gold approaching $1200, and cable and network television stations resplendent with gold brokers’ ads touting gold investments, is it not time for gold to resume its place in the money supply? There certainly are a rapidly growing number of people throughout the world who not only invest in gold but who also keep their “cash reserves” in the form of gold in order to avoid the theft of their cash by government devaluations of fiat currencies. Gold may not yet be universally acceptable in exchange transactions worldwide in a form that is readily available for such use, but that defect could and probably will be rapidly cured. Of course determining what the national supply of monetary gold is may not be easy since many people, remembering that President Roosevelt once confiscated everyone’s gold, are inclined to keep their gold balances secret. What say you, Mr. Pollario and fellow Misians?

Michael Pollaro May 3, 2010 at 7:15 pm

Hi Ned

Tx for the comment

Gold is not money, now. It has be demonitized. That doesn’t mean I think it can’t be money again. In fact, its “bull” run these past 9 plus years is evidence that it is emerging as a real money possibility, once again

The other day, I shared these thoughts with a reader who is also a distinguished gold investor when he questioned why I defined fiat currency as standard money and not gold, pointing to Mises as explicitly pointing to gold and silver commodity money as standard money in his work. This may help clarify my thoughts with respect to your question, and address some other reader comments as well. A modified the conversation a bit …

True Mises wrote during the gold std era, but Rothbard did much of his monetary work post that era. as did Salerno who co-developed TMS with Rothbard. I think both Salerno and Rothbard would tell us that Federal Reserve notes and Treasury coin in a fiat standard is what gold was in Mises gold standard era; that Federal Reserve notes and Treasury coin are standard money / currency under a fiat standard

This brings me to gold’s place in a fiat standard. I don’t think gold is money (yet), because as you suggest it must first be exchanged for money before it can be used to extinguish a debt / serve as a final means of payment in trade. Money is the general medium of exchange, and the sad fact is gold is not that now, fiat money is. People are accepting of this sad fact – they let the governments (and courts) of the world demonitize gold, their money. Call it Mises regression theorem taken one step too far.

Having said this, that doesn’t mean I think gold is not as Mises would say a secondary media of exchange, and quite possibly on its way back as money. Indeed, I think we have a possible reverse regrsesion theorem at work….

When I think of money I think of two attributes:

- medium of exchange
- and the derivative of the medium of exchange, a store of value

Gold was demonitized as a medium of exchange but NOT as a store of value. Why not as store of value – because many realized that this demontization of gold was a gross mistake.

The fact is money losses its value as a medium of exchange as soon as people realize that they can not depend on, as Mises said, its objective value in exchange. Now, in the face of governments around the world destroying the value of their currencies by their endless printing press activities, people are flocking more and more away from fiat money as a store of value and more and more to gold. They sell fiat money for gold, to preserve their wealth, then sell that gold for fiat when they want to trade. The way I see it, if these governments take their printing activities too far, the depreciation in the value of fiat will become so pervasive, so fast, that people will no longer want to hold fiat for even a small amount of time, and gold will defacto reemerge as the medium of exchange. In that sense, gold is money in hiding, waiting to pounce, and in an accelerating fashion as people lose more and more faith in fiat as a store of value.

DBW May 3, 2010 at 6:36 pm

My hat’s off to Mr. Pollaro; I’m a fledgling investor myself and I think this article is quite spot on. I completely agree with your analysis of Rothbard+Salerno; I think others here are a little confused as to the context of money in their own terms. Today, it can be reasonably argued that the greenback is not “true” money at all because it is in fact enforced through legal tender and banking laws under the Federal Reserve System. Yet in spite of this reality, it is still money for purposes of acting as a medium of exchange to settle current debts FOR THE REST OF US. Perhaps you could had included this into your article to avoid any more confusion.

In either case, I find your emphasis on timely redeemability to be very important. However, when it comes to demand deposits I want to add onto what you wrote. Clearly it is money because it is technically redeemable on demand for EQUAL UNITS (mind you, units of virtually nothing), yet it is treated as a loan through the regular inclusion of interest for the depositor and the existance of deposit insurance (which is completely the opposite of enforcing solvency). Economic historians like Jesus de Soto have already pointed this out with their examination of the legal morphing of deposits and loans; thus our banking system is not a really a “banking system” in the honest and traditional sense. In reality, it is an illusionary banking system whose customers are bamboozled into thinking it is solvent (as Rothbard argued as you already know) while the thieves in question know full well the nature of the beast.

In short, what’s making today’s money system work as “money” is fraud. “Money” to the little guy is not going to be “money” to the man behind the curtain. As soon as that curtain falls, you can bet that the little guy will change his mind. Until that happens, it is reasonable to measure today’s money supply in the terms you just described for purposes of forecasting market conditions.

Michael Pollaro May 3, 2010 at 7:40 pm

Tx DBW. Your are right, legal tender laws, etc have given fiat money legitimacy, and I should have pointed that out. As I pointed out above, I would add that we the people accepted these edicts as they came down and thus gave fiat money value.

Michael Pollaro May 4, 2010 at 11:29 am

May I ask the readers, at least those who find value in tracking the money supply…

1. if they find my money supply data series useful
2. suggestions on improving those metrics – format, whatever

Tx

Vincent Cook May 4, 2010 at 1:48 pm

The characterization of MMMF shares as not being proper money substitutes from an Austrian perspective is simply wrong–as a practical matter, they are always redeemed at par on demand, and in the latest crisis were even bailed out by the Federal Reserve to make sure that they wouldn’t fall below par.MMMF accounts are “shares” in the same sense that credit union and mutual S&L accounts are “shares.” The crucial point is that the sponsoring institution fixes the value of each MMMF share at a dollar, and the market treats them as such and not as a form of equity tied to a fluctuating pool of loans. The possibility of MMMF shares falling below par is about as credible as the possibility of redemption of savings deposits by a bank being delayed; it may be permissible legally, but no institution could actually get away with it and stay in business. Rothbard’s and Salerno’s point about the de facto status of savings deposits as equivalents to money in spite of legal technicalities is also true of MMMFs.The only real question about MMMFs is what sponsoring institutions would do if a loan pool was insufficient to provide at-par redemption. Back when MMMFs were relatively new and Rothbard was writing about them, one could be forgiven for doubting the credibility of the at-par redemption feature of MMMF shares. The stabililty of such funds, after all, depends on attempts by the regulators (in this case, the Securities & Exchange Commission) to require high credit quality, rather than require fractional reserves and surplus capital as is the case with banks. Moreover, at that time MMMFs didn’t enjoy the benefit of state-backed “deposit insurance” and central bank loan facilities. While there are clear incentives for sponsoring institutions to bail out their MMMFs if they got in trouble, Rothbard can be forgiven for not realizing that they would do so. Since that time, however, MMMFs have built up an impressive track record of almost never “breaking the buck,” and sponsoring institutions have in fact bailed out their funds rather than putting at risk their reputation for at-par redemptions. Moreoever, given the Fed’s recent actions, there should no longer be any question about the monetary status of MMMFs–in the latest crisis, MMMFs got a couple of their own special bail-out facilities from the Fed. Obviously, the risk of fluctuations in the value of loan pools won’t be perceived to be a problem if it is understood that the Fed will buy up any bad loans.

Michael Pollaro May 4, 2010 at 2:52 pm

Great points Vincent, especially on Fed backing, a point I should have addressed.

I had this very conversation with some other practicing Austrians, and I made your similar case – if MMMFs get access to the printing press, and as a result can maintain par value then why not a money substitute? I think the answer is they are not final payment and to count them is in fact double counting. Noting the second part of Salerno’s quote…

Unlike a check drawn on a demand deposit or MMDA, therefore, an MMMF draft does not simply represent a direct transfer of current claims to currency, but a dual order to the fund’s manager to sell a specified portion of the shareowner’s asset holdings and then to transfer the monetary proceeds to a third party named on the check. Note that the payment process is not finally completed until the payee receives money, typically in the form of a credit to his demand deposit.

Don Lloyd May 4, 2010 at 4:34 pm

Michael,

“…I had this very conversation with some other practicing Austrians, and I made your similar case – if MMMFs get access to the printing press, and as a result can maintain par value then why not a money substitute? I think the answer is they are not final payment and to count them is in fact double counting…”

It’s more fundamental than that. MMMF’s are not even any kind of payment if the recipient won’
t accept them at full value. It would be an unbelieveable miracle if anyone has ever been able to pay a tow truck driver or a convenience store clerk with an MMMF.

One of the most important monetary insights of Austrian Economics is that of Mises when he says that, in the absence of uncertainty, there would be no need for money, and therefore no need for making the sacrifices that holding money inevitably entails. Unfortunately, this insight seems more ignored than applied.

Regards, Don

cret May 5, 2010 at 2:20 am

if the asset cant be sold that the mmmf dollars purchased does the depositor, if that is a correct word for putting dollars into an mmmf, s.o.l or do they get the asset and not any dollars…unless the bank has some around???

is money in an mmmf more not a deposit than a deposit?? is it more of a property title???

Michael Pollaro May 5, 2010 at 8:36 am

Hi Don

I thought mises said in no need to have cash holding, not no need for money

Anyway, totally agree, a huge monetary insight. And it underpins the difference between money/money substitute and a secondary media of exchange too, doesnt it. A point I should have made

Current May 5, 2010 at 8:46 am

> I thought mises said in no need to have cash holding, not no need for money

Yes. Joe Salerno calls this “Rothbards Equation”:

Demand for money = Demand for money to make exchanges immediately + demand for money to hold

The first component is sometimes called the transactional demand for money. Selgin calls it psuedo-demand.

If there is no uncertainty then the second component, the demand to hold no longer exists, but the first component still does.

Vincent Cook May 5, 2010 at 1:36 pm

Michael, there are two points to consider here. First, the MMMF draft is a final means of payment. Unlike the situation with credit cards, a payor using such a draft is not subject to any future obligation.
Second, there is, legally-speaking, no “dual order” involved. A MMMF draft orders the trustee of the MMMF to pay a fixed sum of money on demand to the payee or to an endorsee designated by the payee. When the trustee accepts the draft, the assets of the fund are charged with an obligation to pay this sum of money, transforming some or all of the payor’s MMMF shares into a freely transferable money claim.
In this respect, the MMMF draft is no different than an ordinary bank check. As for the mechanics of how the payment is made, a MMMF, like a bank, will usually keep a small fraction of its assets in some other form of money, usually another money substitute like a bank deposit, that can be easily converted to cash if the payee so desires. While sale of other fund assets might be necessary when there are heavy net redemptions, this in principle is no different than how a bank operates. Banks too must sell off portions of their loan portfolios when faced with heavy redemption demands.
Even taking in consideration the behavior of truck drivers and convenience store clerks, the only practical differences between banks and MMMFs are that MMMFs don’t have local brick-and-mortar branches to facilitate cashing of checks (though these days not all banks do either), MMMFs use other money substitutes as reserves rather than keeping vault cash or federal reserve deposits (though banks too sometimes rely on accounts at correspondent banks to minimize their use of money in the narrow sense), and MMMF accounts sometimes have provisions that freeze new deposits for a period of time (typically 15 days).
For purposes of calculating a corrected TMS, inclusion of MMMFs would mean subtracting the value of the bank deposits that MMMFs keep as reserves, much as interbank deposits are subtracted from the deposit figures that the Fed publishes as a part of M2. It might also make sense to exclude that portion of MMMFs (and savings deposits as well) that are not instantly liquid due to restrictions on withdrawal.

Mike Sproul May 4, 2010 at 3:13 pm

Michael Pollaro and Current:

Consider the Bank of England’s suspension of concertibility on Feb 26, 1797. Before that date, the paper pound was backed and convertible into gold at about 4 pounds to the oz. After that date, the Bank’s assets were unchanged, but convertibility was suspended. You might claim that the pound suddenly became fiat money on that date, but that is clearly not the case. The pound changed from being backed and physically convertible, to being backed and physically inconvertible. Some people at the time observed that thet couldn’t get gold for their pound and so they thought it was unbacked, but of course convertibility was resumed in 1821, something the Bank couldn’t have done if it didn’t have assets with which to buy back the pounds.

If your belief in fiat money is correct, you should be able to point to some bank, central or otherwise, that ever issued money (of positive value) without holding assets against that money. I don’t know of any such bank, and I don’t expect to ever see one, because such a bank would be getting a free lunch, which would attract competing currencies until the value of the bank’s money was driven down to equality with its backing.

DBW May 4, 2010 at 4:42 pm

“Some people at the time observed that thet couldn’t get gold for their pound and so they thought it was unbacked, but of course convertibility was resumed in 1821, something the Bank couldn’t have done if it didn’t have assets with which to buy back the pounds.”

There is a difference between redeemability and solvency. Just because the bank resumed redeemability doesn’t mean that it could meet the demands of ALL the depository receipts at any time. I highly doubt this was the case in 1821, since many if not most banks throughout history have been guilty of “fractional reserve banking”, which is a form of embezzlement. In fact, fractional reserve banking counts on customers not demanding their deposits. Thus, just because its redeemable doesn’t mean the bank in question has 100% asset convertability i.e. solvency.

About the term “fiat money”: a fiat currency can only be fiat if there’s government enforcement barring competetion in the minting and passing of money. Otherwise competition in the market, as you described, would squeeze out the fraudulent banks. Clearly this is not the case today, hence why Austrians consider the greenback fiat currency.

cret May 5, 2010 at 2:28 am

“In fact, fractional reserve banking counts on customers not demanding their deposits.”

would you say that this is what takes place now? fractional reserve banking?

cret May 5, 2010 at 2:32 am

About the term “fiat money”: a fiat currency can only be fiat if there’s government enforcement barring competetion in the minting and passing of money.

since foreign coin circulated in early us history would that make silver a non-fiat money based on constitutional writings???

Current May 4, 2010 at 5:03 pm

Several denominations of Somalian currency existed for some time after the Somali government ceased to exist.

I understand the “free-lunch” idea that you have promoted. The problem here is that you presume perfect competition between currency issuers, but nothing of that sort exists.

The central banks can dupe everyone and extract seignourage from currency exactly because the governments support them using tax laws, legal tender laws and underpriced deposit insurance.

Mike Sproul May 4, 2010 at 8:53 pm

Current:
The positive value of the unbacked Somali currency could have resulted from peoples’ expectation that they would someday be honored. Once that expectation is gone, the currency would lose all value. People sometimes mention the Iraqi Swiss Dinar, but that was ultimately redeemed in another currency, so in that case peoples’ expectations were not disappointed.
Supporting a currency through tax laws gives the currency backing. The currency is backed by the government’s assets–i.e., taxes receivable.
If you’re willing to admit the role of competing currencies, then you’d probably agree that when countries are small, weak and close together, fiat money becomes less likely. Of course that doesn’t stop quantity theorists from lumping together all inconvertible currencies and calling them ‘fiat’.

DBW:
When I say that a bank can buy back all the pounds it issued, I don’t mean they have to buy it back in silver or gold. A lot of a bank’s currency might have been issued in exchange for bonds, and there’s nothing wrong if the bank uses those same bonds to buy back some of the currency it has issued.

Michael Pollaro:

“The thinking here is they are final because people accept them as a money surrogate, that is a final means of payment”

I will accept a toys r us gift certificate as final payment, since I know I will be spending it the next time a birthday party comes along. Would you add them to your definition of money? “Finality” is a red herring, as is the attempt to draw lines separating ‘money’ from ‘surrogates’. Call it what you will, people pay it and accept it just the same.

Michael Pollaro May 5, 2010 at 8:46 am

Mike Sproul,

That would be you exchanging a good or service for a Toys gift certificate that can only be spent at Toys. No a general medium of exchange?

In addition, are we not right back to travellers’ checks, only more specific, as to the reason for exclusion.

I can’t see how you get around final payment as not fundamental to a medium of exchange

Current May 5, 2010 at 8:49 am

I won’t accept a Toys’r'us voucher. There isn’t even a Toys’r'us in the city I live in.

Regardless of finality it’s not money unless it’s *widely accepted*.

Michael A. Clem May 5, 2010 at 9:15 am

I can’t use a Toys’R'Us certificate to buy groceries or gas. Unless I have a specific need or desire to get something at Toys’R'Us, why would I want to accept one of their certificates?

P.M.Lawrence May 5, 2010 at 9:39 am

“Supporting a currency through tax laws gives the currency backing. The currency is backed by the government’s assets–i.e., taxes receivable.”

Beep. You keep trying this on, and you keep being slapped down for it. The second sentence is merely an accounting way of describing the consequences of the first sentence, but the backing is in the first lot, not in the second. Those taxes receivable are not “the government’s assets” in (say) the sense that rents receivable are, they are just the government’s way of writing up its demands with menaces on the books. That is, it is the menaces that are doing the backing, and there are no taxes receivable assets doing the backing, just taxes receivable artefacts emerging from the backing. Whereas rents receivable relate to something with an independent existence (rentable property) and are limited by that and match a value going the other way (use of the property that would not otherwise be accessible), taxes receivable only reflect whatever the government decides to demand with menaces and can be increased arbitrarily (which is what makes it fiat), even though there is a practical limit to the value that can be seized. And no, not being punished is not a value going the other way that would not otherwise be there, because the value of not being punished is just precisely what people would have had if they weren’t menaced. That is, whenever governments decide they want some more and revalue their tax receivables upwards to show it, they do not confer anything going the other way that people want, they just lower the boom harder. And no, what governments spend taxes on is not a benefit of that sort even if taxpayers do happen to like that, because there is a deliberate disconnect in the system (taxes are “unrequited payments”).

None of this is saying that governments can’t collect taxes. It’s just pointing out that they don’t have backing assets to do it, just backing menaces.

Current May 5, 2010 at 11:27 am

Your right. Recently because of the Chartalism thread I read Randall Wray’s working paper on this.

Surprisingly he is starkly honest about this. He says that taxes are mearly a specific form of fine. An income tax is a fine for earning income, a property tax is a fine for owning property. He points out that any certificate that is acceptable to the taxman is a sort of plenuary indulgence that excuses the holder from a fine if they hand it over.

The more “Chartalist” content of Randall Wray’s output is dubious though.

Current May 4, 2010 at 9:17 pm

> The positive value of the unbacked Somali currency could have resulted from
> peoples’ expectation that they would someday be honored.

Or perhaps honouring them isn’t necessary. Perhaps once the network effect has ensured that a currency is frequently used, and that there is no competition or likelihood of forgery, then there is little reason to use a new money.

> Supporting a currency through tax laws gives the currency backing. The currency
> is backed by the government’s assets–i.e., taxes receivable.

I don’t think that it is. The only way that government assets “back” the currency is through the means that Chartalist point to. The government state “by fiat” what constitutes valid money for payment of taxes.

If you don’t accept that view then what is your explanation?

> If you’re willing to admit the role of competing currencies, then you’d probably agree
> that when countries are small, weak and close together, fiat money becomes less
> likely.

Yes.

> Of course that doesn’t stop quantity theorists from lumping together all inconvertible
> currencies and calling them ‘fiat’.

You are the one who is doing the “lumping”. You are lumping together currencies that may be redeemed in the future, such as the credit money issued by the Bank of England during suspension, with fiat currencies. I know that you don’t like the word “fiat”, I don’t like it either because really the market must accept a currency for it to become a medium of exchange. But, the point is that the government can rig the competition.

None of what you have said disproves the quantity theory of money at all.

cret May 5, 2010 at 1:40 am

Against this theory of fiat money I propose that money’s value is determined by the value of the assets backing it.

or how accurate at holding its value is, or how durable it is, or how to constantly change the iou level when backing assets change in value????…are there other factors than just the backing assets??

if silver is money and the properties of silver are its value as a money would that be different economically??

sure ious can loose value if the assets backing them as you say loose value. how then does the io part remain intact?? by constantly changing the io part??? what do you owe with a iou when it looses value??

Current May 5, 2010 at 8:56 am

I think that there are factors other than the backing assets. That’s why I disagree with Mike Sproul.

cret May 5, 2010 at 1:41 am

can you state in a sentence or so what the quantity theory that you are referring to says???

Current May 5, 2010 at 8:59 am

The Quantity theory is the theory Mises and the other Austrian economists normally used. The “mechanical” quantity theory of Milton Friedman is the easiest to explain, though Austrian economists prefer a more complex version.

MV = PT

M = quantity of money
V = velocity of circulation of money
P = Price level
T = total goods traded against money

So, suppose the velocity of circulation stays the same, and the total good traded stays the same. If the quantity of money rises then the price level rises.

cret May 6, 2010 at 1:11 pm

is that meaningful in any way whatsoever???

velocity (was that actualy a historical term from ages past to describe money movemetn at all??) staying the same???

total goods traded staying the same??

has it ever been used in measuring anything??? acurately??

Current May 6, 2010 at 2:23 pm

It’s a poor system to use for actual measurement of economies. None of the variables involved stay the same and some are very difficult to measure.

However, as a tool for understanding it is very useful. As I said earlier read Mises “The Theory of Money and Credit”, where he explores a more sophisticated form of Quantity theory.

Mike Sproul May 4, 2010 at 11:22 pm

Current:

My explanation for how taxes back money is that a tax-collecting government is like a rent-collecting landowner. If his land is worth 1000 oz of silver, then the landowner can buy groceries by writing silver IOU’s, which he accepts for rent. He could safely issue up to about 400 oz worth of these IOU’s before people start to worry that his land is not worth enough to buy them all back. And if he issued 2000 of those IOU’s, people would value them at 1000/2000=.5 oz each. The IOU’s have value because of the land backing, not because the landowner increases demand for them.

If it is network effects and liquidity demand that give somali notes positive value, then the demand for those notes would be decreased as rival moneys come to be used. If those rival moneys are also fiat money, then their issuers get a free lunch, so the incentive to circulate the rival notes is strong. No amount of government proclamation (especially in somalia) is going to stop rival moneys from invading and reducing the value of fiat money to zero.

Against this theory of fiat money I propose that money’s value is determined by the value of the assets backing it. No free lunches, no problems with rival moneys, no need to explain how fiat money somehow acquires value in spite of having no value. No need to draw arbitrary lines declaring this stuff as money and that stuff as money substitutes. Money just has value for the same reason that any other financial instrument has value. It is backed by the assets of its issuer.

Current May 5, 2010 at 9:14 am

The problem with your landowner example is that a landowner isn’t the same as a government.

You write “And if he issued 2000 of those IOU’s, people would value them at 1000/2000=.5 oz each”. That surely makes sense if each individual has a choice between using the landowners IOU as a means of exchange or using something else. But, in the case of a government fiat money that isn’t the case. The costs of using some other form of money may be very high.

I mean, I don’t want to hold assets in Euros (or pounds or dollars for that matter). However, since I live in Ireland I have no choice. I can’t practically hold a money more likely to retain it’s value and then convert it whenever I need to make a transaction.

The point you are missing here is that a good is only a money when it is a medium of exchange. If there is only one medium of exchange then there is no choice. Choice must be created by a gradual process.

You write:
> If it is network effects and liquidity demand that give somali notes positive value,
> then the demand for those notes would be decreased as rival moneys come to
> be used

But, of course, such a process could take many years. Any rival money must first become an accepted medium of exhange in one particular place, it’s acceptance must then spread elsewhere.

> If those rival moneys are also fiat money, then their issuers get a free lunch, so the
> incentive to circulate the rival notes is strong.

No, a fiat rival would not be at all plausible. The point of the old somali notes is that it’s known that nobody can print them. If someone could then they wouldn’t be used. Any rival must be credit money or commodity money.

You are in some ways right that there is no “free lunch” for a fiat money issuer. Because they must build up an army, a government and taxation in order to ensure their money is used.

cret May 5, 2010 at 1:25 am

i guess money supply matters. i dont know if the current dollar system in the us is a money system or not. perhaps a national currency system since the silver weight dollar isnt the dollar used…so i have been told.
the govt, if what i read is true, makes what it calls manetary policy and post money supply figurres. the govt money may not be what many at mises sites call money…i am not sure
if dollar supply increases as a percentage of existing dollars can be an indicator of economic troubles then i suppose watching the dollar measure may make some sense.

but i havent been able to determine that.

cret May 5, 2010 at 1:29 am

If his land is worth 1000 oz of silver, then the landowner can buy groceries by writing silver IOU’s,

wouldnt the landowners silver ious be false??? wouldnt they be ious to a value of land at one point being estimated at 1000oz worth of silver??

did the land enter the market in the same way that 1000 oz of of silver???

Michael Pollaro May 5, 2010 at 9:09 am

Current,

Would really appreciate your thoughts (any others as well) on the Treasury’s SFP account at the Fed. Shostak includes, as he sees no difference between the SFP and the Treasury’s General Account. I exclude on the grounds given in the essay – the former a reserve management tool under the control of the Fed, the latter a checking account under the control of the Treasury. Its been very volatile and quite big at the margin since it was created

Current May 5, 2010 at 10:03 am

I agree with you.

When dealing with the issuer of money the reason for holding a stock of money becomes important. Normal government departments hold money for the same reason that other agents hold money, they hold a reserve of the medium of exhange that they can use as they like without having to make firm decisions in advance.

But, when government is acting in it’s capacity as money issuer the situation is different. In that case a reserve is really an instrument of monetary policy.

Consider another example, during the cold war many governments kept a large stockpile of note and coin money. The thinking is that if a minor nuclear war occurred the banking system would be smashed, so there would be much greater demand for note money. This was all very optimistic and would probably not have worked. But, is that money stock part of the overall money stock? I would argue that the answer is no.

It’s similar, if the treasury accumulate money in a Federal reserve account for the purposes of monetary policy. We shouldn’t really include it in the monetary aggregate.

This sort of thing is entirely true of gold standard and free banking situations too. Let’s say we have a bank that have £1million of gold bullion. They issue £1million of notes against it to customers. But, since printing is cheap they actually get £10million of notes printed, they just keep the remaining £9million worth of notes in their vault for future use in case they buy more gold later. That £9million note stock shouldn’t be counted in an aggregate measure of money substitutes. Similarly, let’s say a free bank finds that it’s reserves are inadequate and takes back in some of it’s notes, that’s a reduction in money supply.

Michael Pollaro May 5, 2010 at 11:59 am

Current

Tx for that

To clarify…

I INCLUDE the Treasury’s General Account at the Fed, as well as the Treasury’s deposits in commercial banks, in my TMS calculation, like Salerno, because I see them as transaction accounts. I EXCLUDE the SFP account because I consider it a reserve account

Are you suggesting I should be EXCLUDING all these accounts from TMS? Or are you suggesting I should be EXCLUDING the General Account and SFP Account at the Fed, because they are a reduction in deposit reserves (as per the Fed’s H.4 release), and INCLUDING only Treasury Deposits at commercial banks in TMS?

I must say, I have a tough time looking at the General Account as a reserve account simply because the Fed says so on its H.4

Current May 5, 2010 at 12:27 pm

I think that you are right in your definitions.

The General Account is like a normal account, it’s not really for conducting monetary policy. The SFP is for conducting monetary policy. So, as the general account is held for the normal reasons for holding money I think you’re correct in including it in money aggregates.

Ned Netterville May 5, 2010 at 9:43 am

M. Pollaro: “I don’t think gold is money (yet), because as you suggest it must first be exchanged for money before it can be used to extinguish a debt / serve as a final means of payment in trade.”

Michael, That gold must first be exchanged for fiat currency is true in most cases because not many people are capable of readily determining the (exchange) value of gold. (Gold-wise individuals are always happy to conduct their exchange transactions in gold.) Also, the exchange value of gold in its most common, transportable form (one-troy-ounce coins and small ingots) is generally too large of a denomination for most prospective recipients to acept for want of sufficient cash on hand to break a $1200 unit. Even 1/10th-ounce gold coins are cumbersome in this respect. Of course the problem of making change for large-denomination money units also inhibits the usefulness of large-denomination fiat-currency bills. Try purchasing your next McDonald’s meal at the carry-out window with a 1000-dollar bill and you may discover that the “official” fiat money doesn’t work either. Does that mean that $1000 FRNs are not money? For folks who are wise in the ways of gold, the aforementioned problems are are readily surmounted, and for them gold fulfills your definition of money completely.

Gold cannot be “demonetized” by government edict or action. Back in the late 1970′s the US Treasury announced a plan to conduct monthly auctions of substantial quantities of the nation’s gold supplies for the expressly stated purpose of “furthering the US desire to continue progress toward the elimination of the international monetary role of gold,” ostensibly by driving down its price, which had risen from $35 an ounce to $180 after Nixon’s 8/15/1971 executive order cutting the last tie between the dollar and gold. (See, http://en.wikipedia.org/wiki/Nixon_Shock; also see, http://www.lewrockwell.com/blumert/blumert35.html) Until then, foreign banks and governments could covert dollars to gold at the old Bretton-Woods rate of $35. The auctions, initially scheduled to continue indefinitely, were ignominiously abandoned without comment after a year and eight months as the price of gold rose relentlessly throughout the period of the Treasury’s “demonetizing” experiment to $400, and was soon thereafter above $700. (Notably, US Treasury gold reserves fell from 701 million ounces in 1949 to less than 270 million ounces by 1979.) Within months after the Treasury’s first gold auction the dollar lost 74 percent of its value in terms of gold! If, as many economists posit, the definition of money is “a store of value and a medium of exchange,” then gold is the only money there is. The rapid inflation and economic stagnation that characterized the US economy during much of the 1970s was certainly due in large part to the detachment of the dollar from its last tie to gold.

It wouldn’t take much, and certainly would not require government legislation or a Federal Reserve regulation, to restore gold to its inherent position as this nation’s premier money. If, say, Walmart (and it need be only Walmart) began accepting gold coins tomorrow at the current fair-market value of the coins at all of its stores, in relatively short order gold coins would replace FRNs as America’s money of choice. And if Walmart also sold gold coins at a fair-market price, the company would rapidly become the largest and most profitable gold dealer in the world. A return to gold as standard money–but not necessarily a “gold standard” as commonly understood–may not be as unlikely nor as far off in the future as most folks think. Markets are wonderful mechanisms for affecting positive change.

Michael Pollaro May 5, 2010 at 11:22 am

Ned

Believe it or not I am in general agreement. I do believe gold is money, the ultimate one, only its undercover

My logic…

Cash is held by individuals because we have a system of indirect exchange in an uncertain world. And while it is held, the most uncertain thing faced by that individual is the future purchasing power of that cash.

With that in mind, i think of one “cash” holdings as follows …

Cash holding = fiat money + gold

Fiat money is the generally accepted medium of exchange, because by law it can always be used for all debts public and private. But fiat is a horrible store of purchasing power in one’s cash balance, because of course the producer of that fiat has the want and ability to increase its quantity at will.

Gold was essentially “outlawed” as the medium of exchange, but it was not outlawed as a store of purchasing power. And the fact is, it is a great store of purchasing power because its supply is by and large contained and independent of political whims. In this respect, gold is “cash” held in one’s “cash” holdings as a store of purchasing power, not as a medium of exchange.

But, and here’s the way I look at it, one could say gold is medium of exchange in waiting, waiting for the producer of fiat, with its printing press, to put so much uncertainty in fiat’s future purchasing power that it is more and more replaced in one’s cash holding by gold. And, if that same producer pushes too hard on that printing press, one could make the case that gold would indeed emerge again as the medium of exchange, with or without the authorities in the mix.

Post Bretton Woods, and to this day, the authorities declared war on gold, I think, not as a medium of exchange but as a store of purchasing-power-come-medium-of-exchange. They got/get that their abuse of the printing press threatened/threatens the desire to hold fiat in one’s cash balance as a store of value and that will eventually lead to the demise of fiat as the medium of exchange in favor of gold, with or without the authorities on board

IMO, it could happen

Don Lloyd May 5, 2010 at 3:34 pm

Michael,

“Cash is held by individuals because we have a system of indirect exchange in an uncertain world. And while it is held, the most uncertain thing faced by that individual is the future purchasing power of that cash”

No, the most uncertain thing is your future pattern of unpredicted expenditures between paychecks, for example. You hold enough real money in order to not (usually) run short before your next paycheck. If and when you do run short, you risk not being able to make profitable unscheduled purchases which require actual money, usually at the point and time of sale.

Interesting sidepoint – you have a bank checking account which can be accessed by either a check/debit card or an ATM, using the same card. Is the account balance to be considered as money? Only to the extent that you expect that your unscheduled purchases can be accomplished with the check/debit card. Something that needs to be converted to money is not money no matter how convenient. Thus the balance that sits behind the ATM is not money, although its existence may reduce the demand/need for money. Only the check/debit card is a form of final payment.

Regards, Don

Michael Pollaro May 5, 2010 at 4:18 pm

Agreed, Don, point well taken. Having said that, perhaps I overstated the case as the most important uncertaity is loss of purcahsing power, but I don’t think it changes my analysis of fiat vs gold

Thoughts?

Don Lloyd May 5, 2010 at 4:30 pm

Michael,

No, gold is not money (anymore), but just something else that can be sold for money. No-one will accept gold diectly for goods unless you overpay.

Regards, Don

Current May 5, 2010 at 4:53 pm

I agree with Don that Gold isn’t money anymore, though it is a store-of-value.

Calling it “money in waiting” is interesting. In “The Causes of Economic Crises” Mises describes something similar happening after hyperinflation. In that case, according to Mises, as the inflation progresses people start to bring in foreign money and when it gets very bad they switch to using that.

Current May 5, 2010 at 4:29 pm

>> Cash is held by individuals because we have a system of indirect exchange in
>> an uncertain world. And while it is held, the most uncertain thing faced by that
>> individual is the future purchasing power of that cash”
>
> No, the most uncertain thing is your future pattern of unpredicted expenditures
> between paychecks, for example. You hold enough real money in order to not
> (usually) run short before your next paycheck. If and when you do run short,
> you risk not being able to make profitable unscheduled purchases which
> require actual money, usually at the point and time of sale.

I’m not sure that you too are really disagreeing much. What Michael is saying is that once you have removed some of the effect of the uncertainties of the market by holding money you are left with some uncertainties over whether the money will hold it’s value.

On p.170-171 of “The Theory of Money and Credit” (Liberty Fund Edition) Mises writes:
> “What is called storing money is a way of using wealth. The uncertainty of the
> future makes it seem advisable to hold a larger or smaller part of one’s
> possessions in a form that will facilitate a change from one way of using wealth
> to another, or transition from the ownership of one good to that of another, in
> order to preserve the opportunity of being able without difficulty to satisfy
> urgent demands that may possibly arise in the future for goods that will have
> to be obtained by way of exchange. So long as the market has not reached a
> stage of development in which all, or at least certain, economic goods can
> be sold (i.e. turned into money) at any time under conditions that are not
> too unfavourable, this aim can be achieved only by holding a stock of money
> of a suitable size.”

cret May 6, 2010 at 12:18 am

Of course the problem of making change for large-denomination money units also inhibits the usefulness of large-denomination fiat-currency bills.

is this a problem in a market sense or is this were retail savings accounts/credits would flourish?

give a 1200 dollar gold coin to a merchant, but aa 100 dollar item and have 1100 dollars of gold backed credit with merchant?? has that occurred before??

Mike Sproul May 5, 2010 at 11:56 am

Current:
“No, a fiat rival would not be at all plausible. The point of the old somali notes is that it’s known that nobody can print them. If someone could then they wouldn’t be used. Any rival must be credit money or commodity money.”

I’m speaking of rival (so-called) fiat moneys (like green paper dollars) issued by other countries (like the USA). Naturally they would be, and are, used. Their issuer earns a free lunch, so there is a strong incentive to circulate them.

Current May 5, 2010 at 1:28 pm

Yes. As I understand it you are right about that. But, those other fiat money only work because they have a foothold in other states.

My point is that you can’t make a new fiat money without making a state first and forcing people within that state to use it.

Mike Sproul May 5, 2010 at 4:30 pm

And my point is that if a state issues money that is backed but inconvertible, then some people (i.e., quantity theorists) will wrongly believe that it is unbacked, just because the government doesn’t pay out gold or silver for it. When the state declares that it will accept that money for taxes, then some people will complain that they are ‘forced’ to use it, when they are actually free to use any money they want in private transactions.

If there were such a thing as truly unbacked money, then all the established ‘fiat’ moneys on earth would be eagerly vying to be used outside of their own area, and local ‘fiat’ moneys would lose all value. Finally, if there really is such a thing as fiat money, why do all central banks that we know of bother to hold assets against the money they use? Isn’t it possible that the dollars that appear on the liability side of the fed’s balance sheet actually ARE liabilities of the fed? Doesn’t it seem at least remotely possible that the fed’s assets, which its balance sheet identifies as “Collateral Held Against Federal Reserve Notes” actually ARE collateral held against federal reserve notes?

Current May 5, 2010 at 4:45 pm

What you are trying to claim here is the bringing a fiat money into existence using force is similar to the backing that a commodity money has.

Of course that isn’t true, an entirely different piece of theory must cover it.

> When the state declares that it will accept that money for taxes, then some
> people will complain that they are ‘forced’ to use it

They *are* forced to use it for taxes.

> when they are actually free to use any money they want in private
> transactions.

Perhaps. But, here we get into network effects. If a money is already widely accepted and the economy is geared towards using it then it is very difficult for a change to occur. A Michael mentions above governments have managed to do this by progressively moving from a gold standard to the fiat money we have now.

If we were on a gold standard now, and the government introduced a special certificate for paying taxes then those certificates may not become money. Because the economy would be setup for gold.

> If there were such a thing as truly unbacked money, then all the established
> ‘fiat’ moneys on earth would be eagerly vying to be used outside of their own
> area

What makes you think they aren’t? As I mentioned in a previous post in Britain they made it illegal to transact in non-pound above a particular amount.

Do you think that the US are really unhappy that the international drugs trade uses dollars? There is a lot they could do about it, but strangely they do nothing.

> and local ‘fiat’ moneys would lose all value.

Local fiat money aren’t very successful.

> Finally, if there really is such a thing as fiat money, why do all central banks
> that we know of bother to hold assets against the money they use?

If the central bank didn’t hold reserves then what would be the problem? Through what possible means would the money concerned become worthless?

Mike Sproul May 5, 2010 at 5:56 pm

If a central bank’s assets are sufficient to buy back all the money it has issued at par, then if there should be some decline in demand for its money, that central bank can use its assets to buy the money back, and the money’s value won’t change. A central bank that has no assets is unable to buy back its money, so a decline in demand for that money would cause a fall in its value.

Current May 5, 2010 at 9:35 pm

How does that make the currency worthless? You haven’t explained why there should be a decline in the demand for the central bank’s money.

Mike Sproul May 5, 2010 at 10:52 pm

If, for example, the Canadian central bank held no assets, while the fed’s assets were sufficient to buy back every fed dollar that had been issued, then a random event like the end of the christmas shopping season would cause a decline in demand for both currencies. The fed would be able to buy back its dollars, while the canadian central bank would not, so the US dollar would hold its value while the canadian dollar would fall. Nobody would want to hold canadian dollars when they can hold US dollars instead, so canadian dollars would lose more value, with no stable solution short of zero value.

Current May 6, 2010 at 8:06 am

That change in demand would be quite small and would only reduce the currencies purchasing power by a small degree.

The government could just raise taxes to compensate, and hold the money they bring in.

Mike Sproul May 6, 2010 at 3:53 pm

Which means that the Canadian dollar is backed by the assets (taxes receivable) of the Canadian government. If they had no such taxing ability, the value of the canadian dollar would be zero, regardless of whether the supply of canadian dollars was limited, and regardless of whether those dollars could potentially serve as a medium of exchange.

Current May 6, 2010 at 4:52 pm

> Which means that the Canadian dollar is backed by the assets (taxes
> receivable) of the Canadian government

But now you’re back to confusing the power to tax with an asset. Whatever coercion is it isn’t an asset. The point here is that the bonds the Fed hold have nothing to do with it, despite what you originally claimed.

You have often complained about the term “fiat” money. You claim all money is backed. But, the problem with this is that you don’t see a difference between the different ways in which that occurs. If the economics profession were to follow your definitions we could call everything “backed money”. But, then we would have to make a separation between “money backed by assets” and “money backed by force”. So, why should we drop the words commodity money and fiat money?

> If they had no such taxing ability, the value of the canadian dollar would be zero,

It would drop to zero over time, not necessarily a short time. It depends on how easy it is for other monies to compete with it.

Peter Surda May 7, 2010 at 6:29 am

Dear Mike,

you have yet to reply to my objection that as long as the income tax is higher than inflation rate of legal tender, the legal tender has a comparative advantage relative to other currencies and therefore they are crowded out of circulation. Income tax on currency exchange gains is calculated by using the exchange rates at the time of the transaction, rather than the time of paying the income tax, and is due in legal tender. This defines the incentives (or sets boundaries) for the seller with regards to what currency to ask for. The power of legal tender on the other hand defines the incentives (boundaries) for the buyer with regards to what currency to use. In order to preferring currencies other than legal tender, both parties must see it as an advantage. A buyer wouldn’t accept a price that was increased by more than the inflation rate of the legal tender, but the seller has no net gain if the currency exchange gains are consumed by income tax. So, unless these conditions can be fulfilled simultaneously, legal tender has a comparative advantage and crowds out other currencies.

This is, in my humble opinion, a reason why the effect you mentioned does not happen, only if the inflation rate of legal tender is too high (according to my theory, higher than income tax, but there are probably some additional effects).

Current May 7, 2010 at 10:06 am

That’s exactly right. And there are also the network effects of legal tender. Any change would require a great deal of cost because of all the ways money is used.

Current May 7, 2010 at 10:12 am

You seem to understand this topic quite well. Both why Mike Sproul is wrong and why the proponents of commodity backing overstate their case. Do you think you could write an article about it for mises.org? (I don’t know if they would publish it). It would be very useful to have an article to point newbies to whenever Mike Sproul joins a thread.

If you don’t I will.

newson May 7, 2010 at 10:26 am

to current:
recently in your to-and-fro with a chartalist on the blog you mentioned you had reservations about the austrians’ views on the origin of money, presumably the regression theory. what were they specifically?

Peter Surda May 7, 2010 at 10:49 am

I don’t think I understand the topic “well”, as so far I seem to disagree with everyone to some extent. More likely I’m missing something, and I’m just stubbornly trying to find out what happens in the “gaps”.

Current May 7, 2010 at 2:38 pm

Peter Surda,

Even if you don’t understand it all, it may be useful to start a debate.

Newson,

I think that the regression theory is basically correct. The problem is that we concentrate too much on “goods” and “commodities”. In p.42-44 of “The Theory of Money and Credit” Mises discusses things in this way. But, there are other things that can take part in the competition, titles and debts, for example. If the state give out certificates excusing people of certain “crimes” then these indulgences would have an exchange value.

I think we are guilty of looking at the situation too narrowly.

It’s a matter of historical circumstance whether the market chose a commodity as money or a property title, a debt title, or a form of indulgence.

The regression theory explanation really refers to anything valuable, not necessarily a commodity.

DBW May 5, 2010 at 12:43 pm

I think there is a significant element missing in this discussion on what constitutes genuine money and what is “fiat money”. Genuine money has valuable non-monetary uses becaused it evolved through basic bartering as Rothbard explained much earlier. In other words, genuine money is simply a good (be it a service or commodity, but a thing that’s objectively measurable!) that is so marketable that it happens to be a medium of exchange. Fiat money on the other hand not only has the government enforcement to give it a competing edge, but also tends to evolve toward having no valuable non monetary uses since the precedent for dictating to the masses what constitutes legitimate money exists. I highly doubt that people prefer dollars today ORIGINALLY as money because they loved its artistic watermarks or its cotton-based material; there are so many substitutes that it begs the question why its valued as the primary money in the U.S. at all.

Thus, people will use the dollar as a means of exchange when all other alternatives are made unprofitable in comparison thanks to government intrusion. And it doesn’t help that most if not all governments in the world have fiat currencies of their own; good luck finding a country that respects your freedom to trade with whatever you wish.

Yes there is still competition when it comes to currencies, true. You can still move to a better fiat currency than the one you currently are forced to possess. Unfortunatley, since each said government retains the “right” to inflate to better take advantage of its citizens, you’d just be jumping from one sinking ship to a lesser sinking ship.

Yes Cret, fractional reserve banking still exists today; instead of insolvency to redeem all the goods in question at any time, it has been replaced with the insolvency of redeeming all the illusionary “value” (subject to hot debate, of course, thanks to the fact that there is no actual good the ISSUER guarantees in return we can actually measure) or purchasing power that each unit of money is expected to buy in the present…because it has been devalued through inflation (that much is certain!). It is still a form of embezzlement; just a far craftier way of hiding it than was done in the distant past.

Today “banking” is akin to voodoo in comparison to the original true and honest banking systems of the past.

Mike Sproul May 6, 2010 at 5:35 pm

So the power to take wealth from people is not an asset. Good luck explaining that to the accounting profession.

The fed’s bonds are the fed’s assets. Since the bonds are backed by the government’s taxing ability, the fed’s dollars are ultimately backed by taxes.

“If the economics profession were to follow your definitions we could call everything “backed money”.”

Well yes. Yes we could. Imagine that.

“It would drop to zero over time, not necessarily a short time.”

It would take about as long as it takes for stock prices to react to news about the company.

Current May 6, 2010 at 6:08 pm

> So the power to take wealth from people is not an asset. Good luck explaining
> that to the accounting profession.

Does an accountant write on his books that a piece of land is worth zero because the government may raise the rate of tax on land to 100%? No. We treat tax rises specially, otherwise there would be no concept of private ownership in economics because the argument could be made that since the government can expropriate any property at any time then it’s all government property.

> The fed’s bonds are the fed’s assets. Since the bonds are backed by the
> government’s taxing ability, the fed’s dollars are ultimately backed by taxes.

What you have argued above is something quite different. You have argued above that taxes create demand for money *directly*.

You haven’t shown how the bonds have anything to do with it. They really only provide an easy method to do OMOs.

>> “If the economics profession were to follow your definitions we could call
>> everything “backed money”.”
>
> Well yes. Yes we could. Imagine that.

My point is that we would then have to create two different theories of money one for money “backed” by taxes and another for money backed by asset. Obviously the two problems are quite different. So, there is no need to remove the distinction.

You are campaigning to remove a distinction that is very useful.

>> “It would drop to zero over time, not necessarily a short time.”
>
> It would take about as long as it takes for stock prices to react to news about
> the company.

You can’t compare it to a stock price. Consider all of the machines and processes made that use dollars. Consider all the people who have used nothing else.

Stock’s are entirely different because they trade in a centralised market-place. Money has no similar centralised market-place. Rather, money trades in all the market-places for other goods. That structure cannot move instantly like a centralised market can, the slow process of price signalling must occur.

Mike Sproul May 7, 2010 at 8:49 am

Current:
You should find an accountant who is willing to discuss whether tax collections are the government’s asset. You obviously won’t take my word for it. Likewise for my attempt to explain that a piece of paper that allows its holder to claim one ounce of silver from the paper’s issuer is worth the same as a piece of paper that relieves its holder from paying 1 ounce to the paper’s issuer.

Current May 7, 2010 at 10:03 am

I don’t think you understand my point. I agree that a “piece of paper that relieves its holder from paying 1 ounce to the paper’s issuer.” is an asset, though not quite the same sort of asset as a claim to silver.

My point is what is the status of tax *increases*? The potential for these is why we need a different theory.

Consider if a state has a fiat currency and the bonds held by its central bank depreciate in value. In that case the currency won’t be driven out of circulation. Rather the government will raise taxes and bail out the central bank.

It’s for reasons like this that we need to treat taxes differently than assets. My point about accounting is that it only really considers the current situation with regard to taxes, but not the future. It would be impossible to consider everything that could happen in the future, so it uses the simplifying assumption that “ownership” is a concept that will continue to be respected.

jerry May 7, 2010 at 7:31 am

Mike Sproul – I’m not going away as long as you continue to comment here. Please answer the very simple questions I put to you, showing how your “theory” managed to generate a clear contradiction?

http://blog.mises.org/12367/should-the-quantity-of-money-be-increased/comment-page-1/#comment-683011

Your refusal to answer really is quite lame.

Michael Pollaro May 7, 2010 at 11:21 am

May I ask the readers again, at least those who find value in tracking the money supply…

1. if they find my money supply data series useful
2. suggestions on improving those metrics – format, whatever

http://trueslant.com/michaelpollaro/austrian-money-supply/

I provide this data for free

Don Lloyd May 8, 2010 at 12:17 am

Michael,

While tracking the money supply may well be useful, it is logically limited in its usefulness.

Since the (any form of) money supply is made up of a sum of different components, any given money supply number can be composed of an infinite number of different combinations of money supply components. If you were to claim that an increase in the money supply of x dollars would result in an economic effect y, that same claim would also have to be true of each and every money supply component taken separately. This would appear to be nonsense.

Regards, Don

Paul Nofs May 12, 2010 at 12:46 am

Michael,

Your essay was well done and I found your explanations compelling. The charted results were interesting, especially the the comparison between TMS1, TMS2 and M2 %change.

My intuition suggests that these charts may have some value, because it uncovers variations that were hidden by the M2 numbers. Technically, I have not the skill to comment on the selection of components.

‘Fiat lux!’ is Latin for “Let their be light!!” Fiat money is legal creation, pure and simple. Enforcement is the key to acceptance. However, free market actors demand a return on their efforts making acceptance problematic.

U.S. M2 money supply has been borrowed and then some. Every year we pay a nickel for every dollar of debt, almost half to the Federal Reserve. And the debt is nearing 100% of GDP reducing our ability to pay what we owe. So our money, our medium of exchange costs us a nickel a year to use and has lost 1% of of its value on average for the last 96 years.

In 1914 a dime would buy a dozen eggs and a quarter would buy a gallon of milk with change. Today the silver in that Mercury Dime and the Standing Liberty Quarter would buy a dozen eggs and a gallon of milk. In terms of eggs and milk silver has proven its value over 1000 years.

In 1958 a four year Harvard Education and room and board cost 43 ounces of gold at $35.00/ounce. In 2010 it is estimated that Harvard education, room and board would be $50,0000 or 43 ounces of gold.

The house I bought in 1985 for 200 ounces of gold ($300/ounce) at current (deflated) market prices is valued at 66 ounces of gold. Why are the banks crying to the government for bailouts? Some people have paid for years only to have their asset taken from them without compensation. Banks got mortgage payments, escrow funds use, the real property (the house) and a government bailout to cover their apparent “losses”.

The corruptibility of fiat currency have been well documented and explained. I do not question its inclusion in your efforts in the current financial environment. I do question it value and dependability as money even in the short term.

As an exercise I have been looking for charts that express values in ounces of gold or silver. Copper,iron, aluminum and nickel, the industrial metals should be considered as they are useful for other activities besides their store of value or money.

Do you have the values for the charts that go to 1960. Further? I have in mind an analysis that might provide some interesting insights. Mostly interested in actual values, by month, quarter or year.

Thanks for a thought provoking article and web site. It’s may be a new standard. It’s clear from the work of Mr. Williams over at shadowstats.com that the government’s numbers lack credibility and the market must (should) fend for itself.

Paul Nofs May 12, 2010 at 1:17 pm

errata:
U.S. M2 money supply has been borrowed and then some. Every year we pay a nickel for every dollar of debt, almost half to the Federal Reserve. And the debt is nearing 100% of GDP reducing our ability to pay what we owe. So our money, our medium of exchange costs us a nickel a year to use and has lost 1% of of its value on average for the last 96 years.

Two and a half cents a year rather than a nickel. Inflation and the interest on the debt needs 3.5% of the value of every dollar in M2 just to stay even.

Addendum: The wild yet regular variation in the QoQ% change is troubling.Would such a thing normally be possible with a gold or silver money (a measure of value that has that value, at least historically.) What would the psychological effects be of having money available one quarter and curtailed the next. Why are they inducing this uncertainty into the market? The semi irregular nature of that kind of pattern has been proven an effective way to train animals. What do they want us to do?

tralphkays May 12, 2010 at 1:48 pm

Mike Sproul said earlier on this post :”If a central bank’s assets are sufficient to buy back all the money it has issued at par, then if there should be some decline in demand for its money, that central bank can use its assets to buy the money back, and the money’s value won’t change. ”

Once a bank has issued pieces of paper and used them to acquire REAL goods, why, when people begin questioning the value of the pieces of paper, would the bank give up the REAL goods that it has acquired for paper that it doesn’t know itself will still have value? If there is no legal obligation to redeem the paper for specific goods, why would the bank give up its wealth? That a bank is wealthy in and of itself does not give holders of paper issued by said bank a legal claim to their assetts. Why would any bank ultimately care about the value of paper that other people hold? Altruism?

tralphkays May 12, 2010 at 2:01 pm

Furthermore, under Mike Sprouls system, as a bank swapped its real wealth for pieces of paper its assett base would be shrinking, which would continually reduce the value of the paper, by his own theory. Plausibly this would continue until the bank has nothing but paper, which at that point, by his own theory, the paper would be worthless. Does anyone really think any bank would ever deliberately give their wealth away for nothing?

Comments on this entry are closed.

Previous post:

Next post: