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Source link: http://archive.mises.org/12875/this-is-surely-a-record/

This is surely a record

June 2, 2010 by

700 comments on this post.

{ 26 comments }

Dennis June 2, 2010 at 9:04 am

Arguably, the number of comments to this article reflects the importance of, and the differences among some members of the Austrian School of Economics regarding the topic. In particular, proponents of the modern free banking school need to come to terms with the fact that Austrian Business Cycle Theory demonstrates that an increase in fiduciary media by the banking system causes the business cycle. This catallactic conclusion regarding fiduciary media cannot be escaped.

Current June 2, 2010 at 11:12 am

The discussion between Free-banking Austrians and 100% reservists is very important.

But, I don’t think the thread in question is a very good example of it. Most of it is simply mudslinging.

Beefcake the Mighty June 2, 2010 at 11:22 am

Current, I know you (understandably) stopped following that thread (I somewhat regret my own continued participation in it), but I posted a question to you last week, in reply to your reply on the insurance analogy (although the question pertains to a different issue re. ME), did you have a look?

Current June 2, 2010 at 3:18 pm

I’ll reply here rather than on the monster-thread-o-doom.

> One of the arguments put forward by the ME theorists in favor of FR free banking
> is that, under a 100% reserve system, changes in the demand for money can only
> be accomodated through changes in the price system, which are (supposedly)
> costly due to the “stickiness” of prices. Now, I believe this issue (stickiness) is very
> greatly overstated, but let’s accept it for the sake of argument.

The price stickiness doesn’t have to be for the reasons New Keynesians point to. Joe Salerno has worked out a different, more Austrian, theory of price stickiness which I think makes more sense.

> Isn’t it true that, increased demand for *base* money is JUST AS problematic under
> free banking as it is under a 100% reserve system?

It’s certainly problematic, but I think it’s less problematic.

> Therefore, aren’t the ME theorists making one of the following assumptions:
>
> 1. Under FR free banking, there will be NO changes in demand for base money,
> only changes in demand for fiduciary media.
> 2. Changes in demand for base money can be accomodated not just through
> increases in supply of base money, but ALSO through increases in supply of
> fiduciary media?
> 3. 1 and 2

White gives four factors that affect the demand for specie:
* 1. The money stock demanded.
* 2. The demand for notes versus specie such as coins.
* 3. The reserve-ratio that the various banks decide to use.
* 4. The proportion of total note issue outstanding to various banks.

Point 4 makes a difference since each bank won’t use exactly the same reserve ratio.

The Free banking view is that none of these will cause great problems. In particular, when the demand for money rises the rate of circulation diminishes. That reduced circulation means a lower redemption rate. That in turn means that banks can use a lower reserve ratio, and issue more fiduciary media. The reverse occurs if the demand for money falls.

Banks need more specie if they want to expand fiduciary media in a market where the demand for money is fixed or falling.

Beefcake the Mighty June 2, 2010 at 3:33 pm

Thanks Current, let me take a look. However, this comment:

“> Isn’t it true that, increased demand for *base* money is JUST AS problematic under
> free banking as it is under a 100% reserve system?

It’s certainly problematic, but I think it’s less problematic.”

strikes me as illogical. Demand for base money is demand for base money, why
would the nature of the monetary system matter (unless the assumptions I believe
are being made, which you address, are at play)?

Current June 2, 2010 at 5:26 pm

In a 100% reserve standard an increase in demand for money *is* an increase in demand for base money. In a fractional-reserve free-banking system it’s something quite different.

In a free-banking system the combined action of the banks means that a rise in demand for money-in-the-broader-sense need not also cause a rise in demand for base money.

I suppose if a rise in demand for specie occurs then it’s just as problematic as in a 100% reserve standard. But, it’s less likely to happen.

Beefcake the Mighty June 2, 2010 at 6:04 pm

“In a 100% reserve standard an increase in demand for money *is* an increase in demand for base money. In a fractional-reserve free-banking system it’s something quite different.”

Exactly my point: the ME theorists are making an apples-to-oranges comparison.

Current June 2, 2010 at 7:05 pm

> Exactly my point: the ME theorists are making an apples-to-oranges comparison.

In what sense do you mean? What particular set of ideas of the ME theorists do you think makes an unfair comparison?

Beefcake the Mighty June 2, 2010 at 9:21 pm

It’s apples-to-oranges because the ME theorists *presuppose* a situation where there exists demand for fiduciary media (and then focus on better vs worse ways of provision, eg central banking vs free banking, a point I believe newson has made in some form here before), which obviously doesn’t exist under a 100% reserve system. They claim that increased demand for money is problematic under 100% reserves, but not (or at least less so) under FRB, but what they really mean is that under FRB increased demand for fiduciary media can be better accomodated, which is of course true (but trivially so). If one believes that increased demand for money-in-the-narrow-sense can occur as distinct from demand for money-in-the-broader-sense (and I don’t believe the free bankers have ever denied that bank runs could not occur under their system, which is precisely an example of this distinction manifesting itself), then there is no reason to believe that FRB has any particular advantages over 100% reserve banking.

You write:

“In particular, when the demand for money rises the rate of circulation diminishes. That reduced circulation means a lower redemption rate. That in turn means that banks can use a lower reserve ratio, and issue more fiduciary media.”

You seem to be illustrating my point: you’re not making a distinction between base money and fiduciary media, a distinction which 100%’ers would say is cruical, but which seems absent from the ME literature (correct me if I’m wrong).

Beefcake the Mighty June 2, 2010 at 9:31 pm

I should have written here, “I don’t believe the free bankers have ever denied that bank runs could occur under their system”

ludwig June 3, 2010 at 6:29 am

BM: “I don’t believe the free bankers have ever denied that bank runs could occur under their system”

Maybe, but it is not at the focus of their argumentation, or they suggest this kind of scenario is unlikely (in the sense of improbable) in a developed free banking system.

Beefcake the Mighty June 3, 2010 at 8:04 am

Ludwig, my point is simply that the free bankers themselves do not deny that monetary demand *can* separate into demand for base money vs demand for fiduciary media (eg, under a bank run), regardless of how likely they think such an occurrence is or whether they explicity recognize such a bifurcation.

ludwig June 3, 2010 at 8:12 am

BM: “my point is simply”

Nope. They precisely start from such a bifurcation. Their story about how the system ensures the constancy of MV starts from considering changes in the demand to hold for bank-issued liabilities, not changes in the demand for base money, that is, shifts from inside money to outside money. I know you do not care about what I say, but try to reread them more carefully.

Beefcake the Mighty June 3, 2010 at 8:26 am

“I know you do not care about what I say”

Not true, I have found some of your comments very interesting, despite the fact that you are extremely rude, egotistical, resentful, and often engage in thoroughly obnoxious behavior (like praising your “brilliance” under a pseudonym, quite distinct from using a pseudonym as such).

In fact I appreciate your correction of me here. Let me point out that your correction (of an issue rather tangential to my original query) does involve recognition of my main point: by considering a scenario where changes for demand of bank liabilities (a demand dependent, of course, on the willingness of the banks to supply fiduciary media) take place, they are considering a scenario that has NO counterpart under 100% reserves. Thus their comparison of the two systems is apples-to-oranges.

ludwig June 3, 2010 at 8:43 am

BM: “they are considering a scenario that has NO counterpart under 100% reserves.”

This is indeed trivially true.

On the other hand they consider that shifts from currency to deposits and vice versa will be inconsequential under their system, but of couse this is not the same as a shift from inside money to outside money (it is rather a change in the composition of inside money) and does not compare to what happened during historical episodes where there really was a (contractionary) multiplier effect.

Beefcake the Mighty June 3, 2010 at 8:57 am

“On the other hand they consider that shifts from currency to deposits and vice versa will be inconsequential under their system, but of couse this is not the same as a shift from inside money to outside money (it is rather a change in the composition of inside money) ”

I’m not following this; how is a shift from currency to deposits not a shift from outside money to inside money?

ludwig June 3, 2010 at 9:08 am

BM: “I’m not following this; how is a shift from currency to deposits not a shift from outside money to inside money?”

Under free banking a shift from inside money to outside money would mean:to redeem either currency or deposits into gold. But both currency and deposits are components of inside money under free banking, so shifts between these do not affect the quantity of money.

Beefcake the Mighty June 3, 2010 at 9:21 am

Ludwig, thanks for the clarification.

Beefcake the Mighty June 3, 2010 at 11:31 am

Steve has stated:

“When we talk about goods and services, we assume that the adjustment to changes in demand will take place first through an adjustment in price (in the short run anyway), and that such adjustments are desirable. Supply might adjust in the long run.

It’s different with money. If money demand rises, we can supply more real balances either through an increase in the nominal supply or through a fall in the price level with the supply constant. Either solution will get us back to monetary equilibrium.

The argument of MET folks is that relying on the price level to do the work is extremely costly in terms of its macroeconomic effects. That’s the argument about price not adjusting perfectly and instantaneously. During that adjustment process, we get the recession.

This is Yeager’s point about money having no price of its own to adjust. When money supply and demand are out of equilibrium, the adjustments must come from ALL prices and that process is socially costly. Precisely because money is the opposite side of exchanges from goods and services so it is that the proper adjustment mechanism in disequilibrium is the “opposite” one from goods and services: quantity instead of price.

Bill’s post is one of the clearest explanations I’ve ever read of why adjusting through a change in the nominal money supply does not create the costs that some say it does.”

at http://www.coordinationproblem.org/2010/05/woolsey-on-malinvestment-and-monetary-equilibrium.html. Yes, this is a blog post, but the argument he makes here is echoed throughout his published writings. It seems clear that he means to contrast a situation where the banking system cannot increase the money supply (100% reserves) with one that can (FRB), in light of changes for the demand for money as such; he makes no distinction between inside and outside money when speaking of that demand. But of course, free banking can only increase the supply of inside money, not outside money.

newson June 3, 2010 at 12:04 am

btw current. you should take a look at the hoppe festschrift – hülsmann has an important article on an aspect overlooked or understated by mises and rothbard “the demand for money and the time structure of production”. it’s another important reason to shy away from the me schismatics.

Beefcake the Mighty June 3, 2010 at 6:07 am

Totally concur with this recommendation.

ludwig June 3, 2010 at 6:25 am

Anyone is free to send a copy of this paper to one of my email addresses.

Beefcake the Mighty June 3, 2010 at 8:01 am

Ludwig, the paper doesn’t exist stand alone but can be found here:

http://mises.org/books/property_freedom_society_kinsella.pdf

Brent June 2, 2010 at 3:52 pm

It is sort of funny that you now have six comments on a post about there being a lot of comments on another post!

danny June 2, 2010 at 5:30 pm

Yes, Brent. Let’s try and beat the record.

Havvy June 3, 2010 at 12:57 am

The best part of that is that those comments have a minimum length greater than the maximum length of most comments on other blogs, when you remove outliers. No +1 posts either! That is one of the reasons I enjoy this site. People who respond intelligently.

PS: You have a lot of whitespace around the words “Leave a Comment”. You could easily change it to “Leave an Intelligent Comment” if you don’t mind losing a few more bytes per page load, and possibly get people to think just a *little* bit more before posting.

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