During the inaugural class of the Mises Academy, students repeatedly raised one question: could the boom-bust cycle still occur in an ideal Rothbardian world, with a completely free market that used gold as money and kept its banks at 100 percent reserves? FULL ARTICLE by Robert Murphy
Source link: http://archive.mises.org/13091/can-gold-cause-the-boom-bust-cycle/
Can Gold Cause the Boom-Bust Cycle?
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Rothbard addresses the effect of a gold influx on pages 34-36 of America’s Great Depression. I don’t think I’ve ever entirely understood his explanation as to why it doesn’t kick off the boom-bust cycle.
That could be because his explanation of what *does* kick off the boom-bust cycle is not without problems (as is Mises’ version, which Rotbhard more-or-less faithfully follows). For a rectification, see Huelsmann’s article, “Towards a General Theory of Error Cycles” in the QJAE. After reading this, it should be apparent why a gold influx will NOT set off the cycle.
tangent: read selgin’s good money?
No; is it any good?
“But to me, the main lesson of this book is not so much about whether money should be produced by the public or private sector but the support the book gives, in my view, to the Cartalist theory of the essence of money. In effect, the balance between the metallic content and the face value of a coin represented the credible commitment of the issuer. Local confidence that an IOU could and would be honored meant that coins could generally be accepted and used in exchange.The better the credit of the issuer, the wider the circulation, and the less need for intrinsic value of the money object.”
charles goodhart, writer of the forward. it sounds a ripping yarn and i’m looking forward to reading it, but the above makes me think that selgin has picked an apparent success of token money to further his frb project. btw, it’s on the torrents.
Thanks for bringing this to attention, newson. Yet another example that the moniker “Austro-Keynesian” is apt in describing the free bankers. There is defintely a sense in which they view money as endogenous to the economy (much like the Keynesians, or at least post-Keynesians), their objections aside.
I don’t know why Goodhart thinks that what he describes is only a Chartalist theory.
Anyway, you 100% reserve guys hold money to be endogenous too. Menger & Mises regression theory is a theory of how money could arise the endogenously.
“Anyway, you 100% reserve guys hold money to be endogenous too. Menger & Mises regression theory is a theory of how money could arise the endogenously.”
I think this is very wrong, Current. The Mengerian evolutionary theory and Mises’ regression theorems are precisely accounts of how a general medium of exchange (money) arises *within* an array of exchanges, ie the market. Why do you think otherwise?
“The Mengerian evolutionary theory and Mises’ regression theorems are precisely accounts of how a general medium of exchange (money) arises *within* an array of exchanges, ie the market.”
Yes, exactly. “Endogenous” means “from within”. In economics it means a phenomenon arises from the market economy.
You’re right Current, I screwed that up big time; my apologies. Here is what I meant to say:
The advocates of counter-cyclical fiscal policy (the Keynesians) and the free bankers both view money as external in a sense to the overall economy. The Keynesians advocate that the State run deficits (which of course means, under the conditions the supporters of Keynesians economics [as distinct from the supporters of Keynesian policy] consider appropriate, that the central bank monetizes government debt, they essentially hold a State theory of money), while the (Austrian) free bankers advocate that the banks expand their issues of fiduciary media so as to (supposedly) leave the structure of production undisturbed. Both appeal to the notion of “sticky prices,” which I believe is over-stated but at any rate is something of a red herring. Both camps view money as fundamentally different from any other entity in the economy (the Keynesians believe that Say’s law does not apply to money, the Austrian free bankers believe that money can be provided outside of the structure of production). In this sense they are very similar, and distinct from the Rothbardians who would hold that changes in the demand for money *should* alter the structure of production, as money is a good, and as such is subject to the laws obeyed by any other good (money does of course have distinguishing features but these do not make it inherently different for this discussion).
> The advocates of counter-cyclical fiscal policy (the Keynesians) and
> the free bankers both view money as external in a sense to the overall
> economy.
I wouldn’t say we view it as external. Different yes. But, it’s not something “exogeneous”, it’s not something forced on the economy by government.
> while the (Austrian) free bankers advocate that the banks expand their
> issues of fiduciary media so as to (supposedly) leave the structure of
> production undisturbed. Both appeal to the notion of “sticky prices,”
> which I believe is over-stated but at any rate is something of a red
> herring.
Sticky prices really aren’t a red herring. If prices weren’t sticky and could change very quickly then no adjustment of the quantity of money would be needed. In the long run any quantity of money can perform the task of money. If prices were not sticky that would be true in the short run too.
Also, if prices weren’t sticky then there would be no Cantillon effect. Because when the money is injected at one point in the economy it would instantly bid up the price of goods, service and assets throughout.
> Both camps view money as fundamentally different from any other entity in
> the economy (the Keynesians believe that Say’s law does not apply to money,
> the Austrian free bankers believe that money can be provided outside of the
> structure of production).
No, we’re not saying that money can be provided “outside of the structure of production”.
You’re right though that we think that it’s different from other goods. Mises and Hayek thought that too.
> In this sense they are very similar, and distinct from the Rothbardians who
> would hold that changes in the demand for money *should* alter the structure
> of production, as money is a good, and as such is subject to the laws obeyed by
> any other good (money does of course have distinguishing features but these do
> not make it inherently different for this discussion).
As I was saying earlier with my “Land Money” example, it’s not so simple as that.
Let’s suppose people used titles for a “weighted-acre” of land as money. Banks hold land 100% backed for each note they issue. In that case banks could expand the money supply by simply buying land from normal farmers and issuing certificates. If the public didn’t want to hold more land they could redeem it and sell it to normal farmers. The money supply would be quite flexible.
I agree that a 100% gold standard may not be particularly flexible. If the demand for money rose then the price of gold coined into money would rise above that of industrial bullion. That would give bullion holders an incentive to send their bullion for coinage. The essential difference between the land money situation and the gold situation is that real physical work is required to coin gold. But little work is required to transfer land titles between people and convert them into a monetary form.
As I see it you 100% reservers aren’t really condemning flexibility. You could have a 100% standard and a situation where creation of money doesn’t affect the structure of production.
to current:
have you read this?
http://www.guidohulsmann.com/pdf/Demand_Money_Time_Structure_Production.pdf
Newson,
Since you’ve mentioned that paper twice I decided it was worth reading, so I read it.
What part of it do you want to discuss?
to current:
for me that paper strengthens the case for commodity monies over non-commodity monies precisely because specie money does change the time-structure of production.
also, sticky prices are not related to cantillon effects. in inflation, money prices change over time, rising as the money passes successively from earlier to later receivers, so increases can never be simultaneous across the board (austrian belief in non-neutrality of money blah, blah, blah…).
why do believers in sticky prices always wheel them out when the spectre of deflation or disinflation looms? why shouldn’t symmetry apply if they were endogenous to the market process rather than pure political trickery? why aren’t prices sticky when things are on the up-and-up?
I’ll talk about how money affects the structure of production a bit later after I’ve thought about Huelsman’s paper some more.
Regarding the Cantillion effect & price stickiness you wrote:
> also, sticky prices are not related to cantillon effects. in inflation, money prices
> change over time, rising as the money passes successively from earlier to later
> receivers, so increases can never be simultaneous across the board (austrian
> belief in non-neutrality of money blah, blah, blah…).
Yes. Now, think about the situation carefully. Let’s suppose we have “perfectly flexible prices”. The central bank lowers the discount rate and causes the commercial banks to lower there interest rate, since we have perfectly flexible prices this happens instantaneously. Now, the commercial banks lower their rates of interest to businesses and businesses then choose the appropriate strategy from their production-possibilities-frontier. The prices of the products and services businesses produce then changes. By assumption it changes instantly. As such there is no Cantillon effect, rather, the effect of a rise or fall in money supply instantly produces a rise in prices.
The same thing applies to falls in money supply, and that is the effect that mainstream economists call sticky prices. They have various reasons for why these come about. But, we can see that there must be some stickiness in prices from careful understanding of the Cantillon effect.
Let’s suppose that a large number of worker/consumers increase their demand for money. They do so by spending a smaller proportion of their income. When this happens demand and revenues at the stores they normally spend in fall. If we had perfectly-flexible prices then this change would be transmitted up the chain into wholesalers and manufacturers straight away. But, real entrepreneurial decisions take time, so this doesn’t really happen instantly. In reality wholesalers will keep their prices at their old levels until they have enough information to see that a change in market conditions has occurred, unless they have anticipated the situation. In some situations they can anticipate the situation, but not in all.
> why do believers in sticky prices always wheel them out when the spectre of
> deflation or disinflation looms? why shouldn’t symmetry apply if they were
> endogenous to the market process rather than pure political trickery? why aren’t
> prices sticky when things are on the up-and-up?
Of course, sticky prices do apply in both directions. Many mainstream economists only look at the effect in the deflation direction, that’s true. But, the consistent view is the one taken by monetary disequilibrium theorists (or Fractional Reserve Free bankers as they’re know around here). That is, prices are sticky in both directions, upwards and downward. Perhaps not equally sticky but that’s a different matter.
Often Rothbardians argue that prices are sticky in the upward direction by arguing that the Cantillon effect is correct. But, they then argue that prices are not sticky in the downward direction. This is inconsistent.
Huelsman’s paper is an example of this since he doesn’t consider the downward stickiness.
It should be noted that traditionally Austrian economists have accepted the reality of rigidities, in both upward and downward directions. Both Hayek and Mises do so. It’s only recently that some economists have rejected them in the downward direction. Perhaps they should be called “Austro-Lucasians”
.
Current, you write:
“No, we’re not saying that money can be provided “outside of the structure of production”.”
I find this a bit untenable; to increase the supply of fiduciary media, free banks do NOT have to bid away factors of production from the economy at large, like other entrepreneurs do. In this sense they are very different from other producers. I know Steve Horwitz has argued that the risk of illiquidy is a production cost, but this strikes me as vacuous and others here have agreed with me on this point (which doesn’t make me right of course, it just indicates I’m hardly a radical in opposing that particular line of argument). It also seems clear from Steve’s writings that he views the adjustments to the structure of production under 100% reserves that would occur in the face of increased monetary demand as “needlessly” costly, so he plainly views the mechanisms of free banking as being able to meet a change in monetary demand while leaving the overall production structure untouched. But this position is question-begging (again, see the Huelsmann essay newson and I have been boosting).
A further point: both the free bankers and the Keynesians believe that changes in the demand for *individual* goods can be effectively met through adjustments in the market’s price structure. To the Austrian side here I would ask: do you continue to believe that changes in the demand for present vs. future goods can be met through changes in the price structure? Because of course such a shift can only be accomodated through change in the underlying production sturcture (manifesting itself, of course, in changes via prices spreads along the structure of production). If so, isn’t this precisely the kind of market flexibility that they argue (along with the Keynesians) cannot happen on the free market (due to price rigidities)?
And a final point: it’s really not material whether Austrians of whatever stripe believe there are in fact price rigidities. What really matters is, WHY prices are rigid (downwards, presumably). Because, the resulting prescription (govt fiscal policy, free banks, whatever) can only be feasible if they address the reason for this supposed rigidity. But then this goes directly to the question of what, really, money IS. And it is here, I would claim, that the Keynesians and Austrian free bankers have a common vision quite distinct from the Rothbardians (and certainly at odds with much of Mises work, which is clearly in conflict with itself, no doubt).
to current:
“stickiness” i understand to mean a reluctance for the price to rapidly shift to clear the market, not that all changes occur simultaneously. going to your example, bank customers will react differently to the changes in the borrowing rate, and their timing will also be different, too, unrelated to the change in interest rate. even if there is no stickiness, distributional changes occur. the bank customer who borrows earlier will benefit more than he who borrows late, all things equal. the late borrower will affect the price structure later, and cannot know in advance where prices will be at that point in the future.
to btm:
accounting conventions do not include insolvency risks as a “cost” to banks, either. perhaps because it’s unquantifiable.
to current:
actually, i should have said that the bank customer who borrows first may benefit; in any case the benefit or loss is borne differently according to timing.
> “stickiness” i understand to mean a reluctance for the price to
> rapidly shift to clear the market
That’s right.
> not that all changes occur simultaneously.
But, the fact that changes don’t occur simultaneously leads to stickiness. If I bid up the price of commodity X then that has knock-on effects on commodities Y and Z. However, those knock-on effects don’t happen immediately after the price change to X. Entrepreneurs must respond by making entrepreneurial decisions, that takes time. That leads to what mainstream economists call “stickiness” because until the response has occurred the markets for Y and Z are not at equilibrium.
The idea of a market that is perfectly elastic and responds instantaneously is a neo-classical model. Even neo-classical economists like Lucas only use it as an approximation, they don’t think it represents the behaviour of real markets. Stickinesses and rigidities are always a factor in any real economy. If unions and other restrictive practices are removed that only lessens them, it cannot remove them.
Let’s suppose that we have an economy where miners sell minerals to glass makers who fire them into bottles which are bought by drinks makers. Then drinks makers put beverages into those bottles and sell them to shops who sell to consumers. Let’s suppose that consumers unexpectedly decide they need higher cash balances, so they cut back on buying beverages. That would lead to a fall in revenue for shops selling beverages. But, it would not immediately lead to a fall in the price of beverages. In the interim shops have to reduce their prices and probably their profits. Only after some time would beverage makers respond. Then later still bottle makers would respond, then finally mineral miners would respond. A similar chain of events would occurs for the wages of those involved in these industries. Some of this chain of events may be anticipated. If the change is very small no response may be necessary at some level.
This is why monetary deflation is damaging. The process of adjustment is causes profits and wages to fall until a new equilibrium is reached. This doesn’t just entail wealth redistribution it also entails forgone production.
All of what I’ve said here is consistent with what Mises and Hayek taught. Neither said that sticky prices or wages don’t exist.
Current writes:
“But, the fact that changes don’t occur simultaneously leads to stickiness.”
Isn’t it the other way around? I.e., that it’s stickiness that prevents the “rapid” (whatever that may mean) clearing of markets that one usually sees with changes in demand for non-monetary goods? I’m not trying to score points here, I think it is important to say WHY you think money is different, such that changes in the demand for it do not manifest themselves as they would for other goods. Put it this way: if you believe that money is a good that, like any other good, is subject to the laws of supply and demand (as the Rothbardians do), then any observed price rigidities (leave aside the question of whether such rigidities are in fact as commonplace as claimed) are simply macroeconomic artifices. If, however, you believe such rigidities are reflections of a real, underlying property, then you should say what this property is (including, as many post-Keynesians do, rejection of the claim that money is in fact a good).
> “No, we’re not saying that money can be provided “outside of the structure of
> production”.”
>
> I find this a bit untenable; to increase the supply of fiduciary media, free banks
> do NOT have to bid away factors of production from the economy at large, like
> other entrepreneurs do. In this sense they are very different from other producers.
> I know Steve Horwitz has argued that the risk of illiquidy is a production cost, but
> this strikes me as vacuous and others here have agreed with me on this point
> (which doesn’t make me right of course, it just indicates I’m hardly a radical in
> opposing that particular line of argument).
Lots of other businesses are in the same situation. This debate we are having is similar to the debate about “fictitious capital” with Marxists.
When someone sells an insurance policy, or a futures contract, option contract or debt the situation is similar. The agreement can have value even though no resources have been bidded away from another use.
Even contracts of a quite normal sort do that. I signed a consultancy contract for a small amount of work this morning. I expect that agreement is worth a little to the person I will be working for. But, I haven’t actually done any work yet. That this doesn’t mean that an asset has been created out of nothing. Because I am aware that I must do the work when the time comes.
> It also seems clear from Steve’s writings that he views the adjustments to the
> structure of production under 100% reserves that would occur in the face of
> increased monetary demand as “needlessly” costly,
Yes, because of the costs of monetary deflation.
> so he plainly views the mechanisms of free banking as being able to meet a change
> in monetary demand while leaving the overall production structure untouched
Not really untouched. I think what Steve would say is that no misallocation would occur because of money created to meet demand.
> But this position is question-begging (again, see the Huelsmann essay newson and
> I have been boosting).
As far as I can see, in that article Huelsmann only discusses 100% commodity money and fiat money. He doesn’t discuss fractional-reserve free-banking.
> A further point: both the free bankers and the Keynesians believe that changes
> in the demand for *individual* goods can be effectively met through adjustments
> in the market’s price structure.
Yes, and so does almost everyone else.
> To the Austrian side here I would ask: do you continue to believe that changes in
> the demand for present vs. future goods can be met through changes in the price
> structure?
Yes. Our point is though that the pain of making the change through the price structure isn’t needed. Deflation greater than productivity growth isn’t needed or desirable.
> Because of course such a shift can only be accomodated through change in the
> underlying production sturcture (manifesting itself, of course, in changes via
> prices spreads along the structure of production).
In a 100% commodity standard it can only be dealt with that way. I agree that this could work. Part of the reason I brought up “land money” earlier was to show that flexibility isn’t a feature only of fractional-reserve systems. A system based on property titles could be flexible too. Some have said that 100% gold systems would be quite flexible too, because gold could quickly be converted from jewellery into money and back again. (Mark Sousken wrote that and he was quoted by DeSoto in a paper).
> If so, isn’t this precisely the kind of market flexibility that they argue (along with
> the Keynesians) cannot happen on the free market (due to price rigidities)?
I agree with Rothbardians that the market can adjust to a rise in demand for money (or a fall for that matter). The point is though that if we wait for the market to respond to a rise in demand then that would cause unemployment and forsaken production. We don’t have to let the economy suffer that, we can have a flexible monetary system that meets the demand for money.
Incidentally, what do you think would happen in a 100% reserve system if there were a *fall* in demand for money? I’ve being writing about that recently on the Cobden centre site.
http://www.cobdencentre.org/2010/06/a-problem-with-the-baxendale-plan/
> And a final point: it’s really not material whether Austrians of whatever stripe
> believe there are in fact price rigidities. What really matters is, WHY prices are
> rigid (downwards, presumably).
Yes. I think there are many reasons, and I think that some of them can be rectified and others can’t. For example, I don’t think there is much that can be done about the relatively long term nature of employment contracts. Lots of people are more interested in a stable income from their job than a large one. But, there are some things that can be done, such as abolishing minimum wage laws.
Also, I think prices are sticky in both directions, not just downwards. I don’t think they’re necessarily equally sticky in both directions though. Which direction is stickiest depends on the situation.
>> But, the fact that changes don’t occur simultaneously leads to stickiness.
>
> Isn’t it the other way around? I.e., that it’s stickiness that prevents the “rapid”
> (whatever that may mean) clearing of markets that one usually sees with changes
> in demand for non-monetary goods? I’m not trying to score points here, I think it
> is important to say WHY you think money is different, such that changes in the
> demand for it do not manifest themselves as they would for other goods.
Leland Yeager used to say that money doesn’t trade in a market of it’s own. Rather, it trades in all other markets. That’s the crux of the difference here.
I’m not saying that prices can’t move to cope with a change in the money relation. I’m saying that it’s difficult the stickiness and rigidities in other markets add up. To effect an overall change in the price level there must be ripples of price changes throughout the economy. It’s the Cantillon effect in a different direction.
> Put it this way: if you believe that money is a good that, like any other good, is
> subject to the laws of supply and demand (as the Rothbardians do)
I do too. But, the supply-and-demand market for money isn’t really one centralised market like it is for say Apple shares. It’s dispersed everywhere money is traded in many local markets. The incentives to change a price depends on the issues connected with that local market (such as the house market in Delaware, or the market for second hand sf books in Cambridge).
> then any observed price rigidities (leave aside the question of whether such
> rigidities are in fact as commonplace as claimed) are simply macroeconomic
> artifices. If, however, you believe such rigidities are reflections of a real,
> underlying property, then you should say what this property is (including, as many
> post-Keynesians do, rejection of the claim that money is in fact a good).
I’m not really quite sure what you mean by “good” in this context. I think money is an asset, though I think it has some peculiar qualities of it’s own.
“As far as I can see, in that article Huelsmann only discusses 100% commodity money and fiat money. He doesn’t discuss fractional-reserve free-banking.”
Not explicitly, this is true, but I believe his arguments apply just as well to fractional reserve banks issuing fiduciary media; they do not have to bid away factors of production from other entrepreneurs. Do you disgree?
“Leland Yeager used to say that money doesn’t trade in a market of it’s own. Rather, it trades in all other markets. ”
I find it hard to believe even the Austrian free bankers would agree with this statement, but perhaps they do. It seems quite wrong to me.
Since you seem to be focusing on the speed at which markets clear as being central to this issue, let me put forth the following example. Let’s say the demand for ice cream increases relative to the demand for beer. Do you agree that this would make ice cream production more profitable than beer production (more profitable than before, that is)? If so, doesn’t this mean that entrepreurs would shift factors of production away from beer production and towards ice cream production? Finally, would it not be the case that such a shift would take time before markets clear? If so, do you view this scenario as problematic? If not, why is it so different from the case of increased demand for money? There seems to be a notion here that the adjustments through the price system must occur fairly instantaneously, but I can’t see why this should be the case.
Sorry this reply has taken a while, I broke my PC.
>> As far as I can see, in that article Huelsmann only discusses
>> 100% commodity money and fiat money. He doesn’t discuss
>> fractional-reserve free-banking.”
>
> Not explicitly, this is true, but I believe his arguments
> apply just as well to fractional reserve banks issuing
> fiduciary media; they do not have to bid away factors of
> production from other entrepreneurs. Do you disgree?
I do disagree. I agree with Steve Horwitz’s argument that we can’t make a differentiation between “real” capital and other capital.
Banks are not the only agents that can create assets without bidding away factors of production. Anyone who can make a loan or issue futures and options can do that. As I said earlier, that’s why marxists call these things “fictitous capital” and blame them for some of the “failings of capitalism”.
If your argument is the one that you gave before about all banks expanding the money supply at the same time, then that’s different. You’re not saying that all trades based on “non-real” assets are damaging, you’re really saying that all banks expanding at once is both likely and damaging. I agree about the damaging part, but I don’t think it’s likely in a free-banking scenario.
But, I don’t think you can really make the “real/non-real” differentiation.
For various reasons today I was looking at feudal farming today. I was looking for medieval rigs and furrows on google maps. It’s an interesting topic which is oddly related to our discussion.
People will say that in England there was once “common land”. This common land was never under “common ownership”, all land in England is privately owned or owned by the crown. The medieval commons were owned by the local lord. The local commoners didn’t own the land as a group. Rather, they all had access to the land and the right to use it for grazing. Common land was a form of option. For a meadow each local commoner had the option to use the common meadow for grazing. But, in practice the option was very similar to ownership itself, that’s why lots of people make the mistake of thinking that the commoners owned the land.
>> “Leland Yeager used to say that money doesn’t trade in
>> a market of it’s own. Rather, it trades in all other
>> markets. ”
> I find it hard to believe even the Austrian free
> bankers would agree with this statement, but perhaps
> they do. It seems quite wrong to me.
What’s wrong with it?
> Since you seem to be focusing on the speed at which
> markets clear as being central to this issue, let me
> put forth the following example. Let’s say the demand
> for ice cream increases relative to the demand for
> beer. Do you agree that this would make ice cream
> production more profitable than beer production (more
> profitable than before, that is)?
Yes
> If so, doesn’t this mean that entrepreurs would shift
> factors of production away from beer production and
> towards ice cream production?
Yes.
> Finally, would it not be the case that such a shift
> would take time before markets clear?
Yes.
> If so, do you view this scenario as problematic? If
> not, why is it so different from the case of
> increased demand for money? There seems to be a
> notion here that the adjustments through the price
> system must occur fairly instantaneously, but I
> can’t see why this should be the case.
The process you describe above may be slow, but it’s the only possible way that the economy can adjust to the change in relative demands.
The situation isn’t the same for money, because money doesn’t have to be tied to a market that clears slowly. It can be, as in a 100% reserve gold standard, where a change in the demand for gold would requires changes in the jewellery and mining markets. Or it can be more flexible, as in the fractional-reserve free-banking system or in the 100% reserve land/asset banking I mentioned earlier.
Current, thanks for the response.
>The process you describe above may be slow, but it’s the only possible way that
>the economy can adjust to the change in relative demands.
>The situation isn’t the same for money, because money doesn’t have to be tied to a
>market that clears slowly. It can be, as in a 100% reserve gold standard, where a
>change in the demand for gold would requires changes in the jewellery and mining
>markets. Or it can be more flexible, as in the fractional-reserve free-banking
>system or in the 100% reserve land/asset banking I mentioned earlier.
I think this response gets to the heart of the difference in our positions. When
time preferences change, then the adjustment process, slow or otherwise, is a
necessary part of the process, and you do not characterize the process as “painful”.
Yet, when monetary demand changes, all of a suddent we’re dealing not so much with
the speed of adjustment (which I still hold is a red herring) but rather with the
alleged non-necessity of the adjustment (which you characterize as painful, which
seems rather rhetorical, frankly). Plainly, you are assuming (as do the other ME
theorists here, Yeager, Horwitz, et al) that a change in demand for money should
leave relative prices unchanged. But this is an unwarranted assumption. Money
is a present good, and as such changes in the demand for money *should* manifest
themselves in changes in the structure of production (one of the great merits
of the Huelsmann paper is to raise these points). Mises’ conventional categorization
of goods into consumer, producer, and medium of exchange is spurious (even Rothbard
was not consistent in opposing this position). There is only one market for ALL
goods, and Yeager’s conception (echoed by Horwitz) of money trading in multiple
markets is flawed. In short, you (like the other ME theorists) are assuming money
does not fit into the present vs future goods framework. Hence you can conclude that
it is not necessary for changes in the demand for money to be accompanied by changes
in the structure of production. But I (and other Rothbardians, I would wager)
would reject this underlying assumption. The “stickiness” issue is beside the
point, as you do not advocate anything like FRB to facilitate the adjustment of
the economy is response to changes in time preference. But once it is accepted that
money is a present good, then the real argument underlying the appeals to stickiness
fall apart.
>Banks are not the only agents that can create assets without bidding away factors
>of production. Anyone who can make a loan or issue futures and options can do that.
I’ll have to respond to this later.
Current wrote:
>When someone sells an insurance policy, or a futures contract, option contract or
>debt >the situation is similar. The agreement can have value even though no
>resources have been bidded away from another use.
>Banks are not the only agents that can create assets without bidding away factors of
>production. Anyone who can make a loan or issue futures and options can do that.
That’s not really my point, although perhaps I’ve not phrased things adequately. The issue is not whether someone can “create value” by standing ready now to meet certain obligations in the future. The issue is whether this accurately describes what happens under FRB, at least in the context that I believe we’re discussing. The claim I’m addressing (or trying to address) is the common claim by proponents that FRB free banks simply meet demand for their product like any other business on the market, say, like shoe makers producing more shoes in the face of increased demand for shoes. My objection to this analogy is that shoe manufacturers cannot stimulate demand for their product by simply lowering the price of shoes; they have to acquire factors of production from the economy at large, and they have to get these factors at prices cheaper than their selling prices, otherwise they’ll go out of business. Free banks under FRB, however, CAN stimulate demand for their product by simply lowering the rate they charge on loans. They do NOT have to get factors at a profitable price from the economy at large to do this. Do you disagree with this point? (Again, this has nothing to do with the fact that the banks are constrained by the fear of bank runs, this is NOT a cost of production.)
BTW, this relates to the objection I have with your insurance analogy. Insurance companies do not have to bid away factors of production to increase their business, that is true. However, they still have to *calculate* that the obligations they potentially face in the future (ie, the resources they will have to have or acquire should claims come due) by taking on more policies are less than the premiums they receive up front. And these former costs do not depend on the will of the insurers. They too are very different from FRB free banks in this regard (as are option underwriters, etc).
I’ll answer your first reply about time-preference first….
I think that money is best categorised as a type of asset. Money provides a service in the present time to the holder of money. But, I don’t think that proves that it isn’t an asset. If you think about it a bond is the same. I’m currently quite short of funds, but I have a bond that matures in september, so I’m not that worried about it. I think all assets provide a sort of double duty, while they are held the person holding them has the reassurance that they can be spent at certain times, and when they are spent the holder can obtain a price for them.
I don’t believe that a change in demand for money should result in a great change in the structure of production. I think it’s inevitable though that it must result in some change even if it is very small. Consider the land money example, if there is a rise in the demand for money then the land banks can buy more land from normal farmers and use it to back more notes. Similarly, in an FRB system if there is a rise in demand for money then more assets to back it is needed. That could happen by banks buying more assets. Or if there were a fall in demand for timed-liabilities then assets could be shifted from them towards money substitutes. All of these actions have some impact on the interest rate and structure of production. The impact is entirely consistent with the savings preferences of the population, if there is an overall increase in saving then it is real saving.
What is wrong with what happens in the FRB case or the land-money case? I don’t think that there is anything wrong with it. I see the 100% reserve system as a system that forces the economy to jump through hoops. It provides no simple way of turning available assets into money, only the making of monetary gold from other forms of gold. But, other systems can allow that conversion to take place through paperwork. That’s the difference between this case and the case of a shift in demand for goods or a change in societal time-preference. If there is a shift in demand for ice-cream vs beer then the reason that must have significant real effects is that the factors involved in those industries are so different. But if there’s a shift in the demand for money vs everything else then what happens depends on what backs money. The process of “coining” can be a paper-exercise, as I’ve described with it FRB or land money.
Current, I’m afraid I don’t have time right now to a provide a detailed response, but I’m sure this topic will come up again. For now:
“I think that money is best categorised as a type of asset.”
Well, I strongly disagree with this statement, which is implicitly (sometimes explicitly, in the case of Selgin) shared by many other ME/FB theorists. Money is a good, not a claim.
to current:
first, regarding your drink example. people prefer cash to drinks, so what? this is nothing that any monetary injection can remedy, it’s just like consumers changing preferences from mercedes to honda. sure drink makers will suffer, just like mercedes, but why should anyone else?
as demand for money rises, the prices of all other goods fall. profit margins across the board should remain unchanged, nominal costs falling in line with nominal revenues. in real life, rigidities like labour laws prevent certain costs from adjusting down, so profits can indeed be squeezed.
you seem to be mixing the change in consumer preference (less drink) with the higher demand for cash. of course everything related to drink-making will suffer (offset to some extent by the fall in nominal costs overall), but no money injection will get people to go back to drinking as per before.
to btm:
are you related to the punk rocker?
“to btm:
are you related to the punk rocker?”
You mean GWAR? No, different guy.
Newson,
> first, regarding your drink example. people prefer cash to drinks, so what? this is
> nothing that any monetary injection can remedy,
That’s just the point, a monetary injection can remedy it. Like other goods when there is an increased demand for money that can be met with an increased supply. As you say below it’s just like consumers changing preferences between normal types of goods.
> it’s just like consumers changing
> preferences from mercedes to honda. sure drink makers will suffer, just like
> mercedes, but why should anyone else?
I don’t think anybody else will suffer.
> as demand for money rises, the prices of all other goods fall. profit
> margins across the board should remain unchanged, nominal costs
> falling in line with nominal revenues. in real life, rigidities like
> labour laws prevent certain costs from adjusting down, so profits
> can indeed be squeezed.
Yes. But, my point is that stickness and rigidities can’t even be eliminated, they are a fact of economic life. Labour laws certainly *exacerbate* them, but they don’t cause them. They have many causes, most of which are inevitable even in an unhampered economy.
If there were a rise in money demand in an unhampered economy then that would cause unemployment and a recession. That recession would be much shorter than in an economy with state-induced rigidities, it was in 1921 for example, but it would still occur.
> you seem to be mixing the change in consumer preference (less drink) with the
> higher demand for cash. of course everything related to drink-making will suffer
> (offset to some extent by the fall in nominal costs overall), but no money
> injection will get people to go back to drinking as per before.
My example perhaps wasn’t a good one. What I meant to indicate was that people increased their demand for money and therefore cut back on other expenses. One of those is drinks. The chain of price falls I describe and the show chain of response is an example of one of the things that would happen if there were an increase in demand for money without an increase in supply. What I’ve described is a secondary recession, a rise in demand for money by many agents occurs and then has knock-on effects to those who they trade with. Knock-on effects that propagate slowly from the markets the demanders act in.
A monetary injection *can* solve this problem because the demand for money can be satisfied by supplying it through the banking system.
skimming the murphy article again, i think he should have answered, “yes” to the question whether business cycles can eventuate under 100% reserving, but that frb and state-institutions exaggerate what would otherwise be a constrained byproduct of legitimate loan maturity mismatching. barnett and block would eliminate that as well, though i believe the bowden & bagus, and bagus arguments for allowing duration mismatching more defensible.
http://www.walterblock.com/wp-content/uploads/publications/barnett-block_time-deposits-fraud-2009.pdf
http://bit.ly/9rL2aR
http://libertarianpapers.org/2010/2-bagus-austrian-business-cycle-theory/
I agree. Only state intervention in the money supply can induce monetary error cycles.
If the local miner really was able to yield large quantities of gold every month, the community would probably not be using gold as their currency, at least until they had amassed so much gold in comparison to the mine’s output that its inflationary effect was minimal.
Ideally, we’d have a currency whose quantity could not ever be increased. We don’t have such a thing, but we can approximate with something like gold. Other options seem worse, since they rely on the discipline of people to not inflate the money supply.
And of course you could still have booms and busts, if everyone got crazy. I don’t think such things can be made impossible, despite what central banks believe (but have never seen), just that we can avoid causing them, by using a currency whose quantity can’t be manipulated.
I’ve liked your recent articles, where you take one simple situation and use examples to show the forces at work in a way that the reader can get a solid feel for. It makes for interesting discussion.
>If the local miner really was able to yield large quantities of gold every month, the community would probably not be using gold as their currency,
I believe that Mises thought gold was the most stable money, not perfectly stable. Also, what was the effect of the 1849 California gold discovery (recognizing that statistics can mask economic law)? I don’t think there was a bad effect.
And of course you could still have booms and busts, if everyone got crazy. I don’t think such things can be made impossible, despite what central banks believe (but have never seen), just that we can avoid causing them, by using a currency whose quantity can’t be manipulated.
How I’m pretty sure that a boomtime ‘bubble’ can only get so big and/or last so long without being artifically ‘inflated’ with new money. Thats why bubbles can be ‘forced’ to pop when the Fed stops inflating the money supply(or even just slows down on the rate of inflation).
Thus while there might be ‘booms and busts’ with a stable money supply, they wont be nearly as large or destructive, and are EXTREMELY unlikely to cause an economy wide recession/depression.
In fact I believe we saw something very similar with the comic bubble of the early ’90s. Speculators(many of whom had no interest in actually reading comics) saw that golden and Silver age comics had quite a high market price(due to their scarcity) and thus began buying new comics in hopes that they would appreciate. Comic companies, in turn began printing more comics than would have normally made sense to. Including special editions, multiple ‘collectible’ editions of comics with different covers, etc, etc. Comic prices were pushed artficaly high, until reality set in and the fact that there were so many comics(more than there was actually demand for) around pushed the price back down, the speculators stopped buying them(since again most had no interested in actually reading comics), leaving the comic companies that had printed all these comics nobody now wanted devistated.
The Fed(to my knowledge anyway) had very little to do with this, very few speculators took loans to buy comics with, and in any case that was also when the dot com bubble was getting underway.
A few things are notable about the comic bubble:
First it was short lived, it only lasted a couple of years, as opposed to the decade long dot com and housing bubbles.
Secondly, as bad as it was for comic companies, we didnt enter and economy wide recession when the comic bubble burst, even when Marvel declared bankruptcy. That was partly because of the dot com bubble that was starting up at the time, but mostly because while the bubble distorted the structure of production for comic companies, it didnt distort the entire economy. We didnt see droves of people quitting perfectly good jobs to write/draw comics, and while there were news stories about people using comics to invest, the media didnt daily espouse what a great way to make money collecting comics was.
Finally the comic producing industry recovered fairly quickly, not just the ‘big two’(Marvel and DC) but Dark Horse and numerous smaller companies. By the end of the 90′s they were again showing profits, and writing and artwork had vastly improved, largely because they had to again appeal to people who were actually reading comics, instead of just buying them in hopes they would go up in value.
I, do, in fact think we can look at the comic bubble as an example of how ‘booms and busts’ would work in a world with a stable money supply. I might be wrong, but I really do think that economy wide recessions/depressions are if not impossible, then at least EXTREMELY unlikely without the money supply being artifically inflated.
‘Ideally, we’d have a currency whose quantity could not ever be increased’.
I disagree. Theres nothing wrong with an increase in the quantity of currency per se ( Indeed, with both population growth and the growth of production of stuff generally, it would be most inconvenient if there was no ability for more money to come into being in tandem with that expansion). Now before you accuse me of Friedmanist monetarism, let me add that that money has to be permitted to come into being through a market process, either through more production, or through free-market credit, and not by central bank fiat.
Allow me to rephrase:
‘ Ideally, we need a currency that is scarce, which itself has a meaningful cost of production, and which is difficult to fake ‘.
It could be anything really, but time and again through history, the freeer markets have gravitated to precious metals, principally gold, because they have just those attributes.
One of the main evils about artificial fiat (only by-decree) currency/credit expansion is that it distorts the perception of what is truly valuable. Remember that the party responsible for the expansion (Government- Fed- Bank Cartel?) gets to spend it first, and at full value. The devaluation occurs later, and is difficult to diagnose by the common man.
Value of the currency pool in total circulation cannot have more value than the total sum of the goods (the “Economy”) available to purchase with it. Their total net values are equal with respect to each other, always.
If a bank borrows a billion lets say, and pays 0% from the Fed, uses a fractional reserve of 10%, and lends it all out as mortgages at 6%. It floods the currency supply with $9 billion, and dilutes it gradually. The bank makes $540 million a year in interest payments and prays that few people touch the principle. Any principle paid, has to be “burned”, because it was conjured with the fractional reserve method. The more principle payed back, the more the inflation of currency is reversed. (from Ashes to Ashes, from Dust to Dust)
If the bank fails to screen borrowers carefully, as was the norm not to long ago, many default, and the bank would fail if not bailed out by the FDIC (which is actually the back door of the Fed, which created the fiat to begin with) with more fiat currency.
With gold, say a very fortuitous mining company finds the “mother load” and deposits an additional billion dollars of gold into its bank’s vault in one sum in accordance with the scenario presented by Prof. Murphy. The bank keeps full reserves for all check book money, and lends out this boon at interest. The price and interest rate does fall across the board for gold, but notice that only $1 Billion can be lent out, not $9 Billion. Also notice that the $1 billion is tangible, and was not pure profit for the bank or mining co. because labor, land, energy, and capital all took their share (the pie was originally larger, and shrunk by the time it got to the bank, and some more when it was loaned out due to loan processing fees). The fiat was produced by pushing a few buttons on a computer keyboard, and multiplied upon entering the bank.
Because the gold is tangible, and is technically someone’s savings made available for loan, the mining company will carefully screen who it “lends” this gold too at interest. The bank will also carefully screen who it lends the gold too, because on a 100% gold reserve system, there is no FDIC printing press to bail the bank out if it fails. Notice the high level of prudent policy and self responsibility that accompanies the gold standard.
As the gold-backed mortgages are paid back, the principle goes back into the vault to be loaned out again later, or transferred to the mining company’s checking account. The interest goes to the bank, minus the interest it pays to the mining co.
With 100% commodity backing, in this case gold, the boom- bust is mitigated because the influx of commodity money cannot be inflated exponentially. There is a bit of inflation as the amount of currency grows faster than the goods available to purchase with it, to be sure, but it is a one time occurrence, not a governmental policy of systematic wealth redistribution, which is the entire problem with fiat (by decree of the powers that be) currency.
From Guido Hulsmann’s chapter on monetary stability in The Ethics Of Money Production:
I think that the time lag between a discovery of new gold deposits, and the delivery of the bullion or bars to the bank, would allow the market to adjust to the increase in supply, and would dampen the inflationary effect. This would in turn minimize the boom-bust cycle, as the boom is fueled by inflation.
If I recall correctly, the country in particular that acquired vast amounts of gold was Spain (mostly from Incan conquest) and the problem they had was that gold was it was spent (i.e. consumption) mostly by the crown on lavish expenditures and a large proportion on the military. Maintaining empire isn’t cheap, eh? So there was rampant price inflation in Spain, as the money was not invested into wealth producing ventures. Musta been those pesky “animal spirits”.
Another problem Spain faced was that it was heavily dominated by the Church (the Reformation never got to Andalusia) and was a heavily mercantilized country, with state granted charters and production controls, price and wage control, interest rate limits (usury laws), etc. So coupling the vast consumption, with lack of free, market clearing mechanisms, heavy barriers to investment, and state intervention into the economy, it is wasy to see why Spain’s decline was so rapid.
Geoffrey Parker’s book “Success is Never Final” details this so well, how Spain at its “height”, upon the union of Spain and Portugal in the late 16th century created an unsustainable burden, mostly of large foreign empire. (Gee, how could that be??)
That ought to fit into the Rothbardian idea that boom-bust cycles could not happen sans state intervention.
It seems to me that there is a possibly important difference on the bust side of a pure gold boom/bust as compared to a fiat credit expansion boom/bust. With the fiat credit boom/bust the effective money supply is contracted when loans cannot be repaid on a large scale. OTOH, gold will not be destroyed in a pure gold bust, but will simply end up in the hands of different owners.
Regards, Don
Your conclusion depends on the assumption that the marginal utility of monetary gold will under any and all circumstances be larger than its other forms. In fact, you assume that this difference, between the utility of eg LBMA-good bars and the equivalent mass of jewelry will be big enough for all market participants to easily recognize. I find it very hard to accept these assumptions even today, and the post-gold peak situation would mess things up even more.
Which still is convertible back to money, so what is your point? The gold isn’t destroyed, just deployed to other uses…
Actually everything is convertible back to money. Get back and rethink your assumptions.
No need. Bonds etc. are mere IOUs, redeemable in the form of more paper money.
Not everything is convertible back to money. Actually fiat is not money at all. Money is a commodity medium of exchange, fiat is forced on you, no matter the market value. Just ask Germany post WWI. Boom, Bust, Hyper-Inflation. Fiat.
The tulip mania bubble occurred in the Netherlands under a 100% specie standard. However, I recall reading an article by Douglas French explaining in terms of how the free coinage laws attracted specie from all over Europe.
boa was a fully-reserved bank for several years only (till 1614) ; it then started loaning to the city of amsterdam, bank van leening and the dutch east india co., thereby becoming a fractional-reserve bank.
It seems that such a situation occurred several times in the past.Please read again “Manias,Panics,and Crashes” by Charles Kindelberger.History is to Economics what experimentation is to “experimental sciences”The most significative gold bubble occurred in the spanish empire following the discovery of Americas and their holdings in gold above and under earth.
Nope, not really. “History” is just a collation of so-called facts. Doesn’t “prove” or “disprove” anything, so much as is in need of interpretation, especially because its facts are multifaceted, thus to even derive an economic fact one first needs prior theory to determine what it is they’re looking for… Also read the Hulsmann excerpt.
Nope. History and real life experience routinely and ruthlessly disproves many far-fetched and plain silly economic theories. For example – the extremely naive theory that only gold is money proper (as seen advocated in some places by Rothbard) is easily refuted by acknowledging existence of historical communities using silver, brass, shells, cigarettes or hides as money.
Ugh, what? Where does Rothbard argue that? Quote please. Menger would argue against that even in his Principles. And sorry, history doesn’t “prove” anything. If said shells could not be identified as money to begin with via economic theory, you wouldn’t know what it “proved”. Stop making an idiot of yourself.
So typical of rothbardites. If facts contradict theory – ignore the facts. Something cannot be identified as money by the enlightened rothbardites – it is not money. Tada! So simple, so easy to believe.
go get your facts to disprove the ABCT then
bigboy, what makes you think I’m talking about ABCT here?
Panika, WTF are you talking about?
Rothbard often uses hypothetical societies using gold as money in his writing. He has never claimed that the only form of money historically used is gold. In fact, he goes in length in “What Has Government Done to Our Money?” of other commodities that were historically used as money.
So you are either insisting that our entire movement is a work of sheer idiocy and blind devotion, or it is YOU who is failing to understand what it is that is being said.
Ignore what facts? You’ve not provided a quotation even.
“Now just as in nature there is a great variety of skills and resources, so there is a variety in the marketability of goods. Some goods are more widely demanded than others, some are more divisble into smaller units without loss of value, some are more durable over long periods of time, some more transportable over large distances. All of these advantages make for greater marketability. It is clear that in every society, the most marketable goods will be gradually selected as media for exchange. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media-in almost all exchanges-and these are called money. “Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in Egypt, and grain,beads, tea, cowrie shells, and fishhooks. Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market, and have displaced the other commodities. Both are uniquely marketable, are in great demand as ornaments, and excel in the other neccessary qualities.” Rothbard: What Has Govenment Done to Our Money, pp. 26-27
Read Econ in One Lesson, or watch the Fed Reserve video in the media section. No one ever said gold was the only choice, quite the opposite. Gold is better than most because of high utility in industry, jewelry, etc. High value to weight, is easily recognizable, divisible, and won’t burn, rust, or run away. panika2008, you embarrass yourself. this is first day elementary Austrian stuff.
Only gold as money? Actually Rothbard acknowledges the use of other items as media of exchange on page 26 of “What Has Government Done to Our money?”
“Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks.
I guess according to you Rothbard would be refuting himself here.
History is to Economics what experimentation is to “experimental sciences”
Wrong.
Experimentation relies on the existence of a control, to isolate the cause of whatever effect you are examining.
There is no such thing as a control group to compare one economy to another. First, there’s only one economy — the global one — so there’s nothing to compare it to. Second, the economy is a system with a magnitude of complexity that is so huge that most people literally cannot comprehend or even appreciate it. It can’t be replicated, because tiny variations in the initial conditions produce huge effects later in time. This is basic chaos theory.
The whole point of economics is understanding causes. Any idiot can observe the effects.
People who point to “history” to “prove” the validity of the causes they want to see never seem to grasp this basic concept, which is why they are almost always wrong, and even when they are right, it’s only by accident.
Gold is better than most because of high utility in industry, jewelry, etc.
why would this matter much when using a money item. i have read that many things other than silver/gold were used as money at some point. why would a high utility in industry and jewlery matter?? isnt the vast majority of gold not used in jewelery and industry??
Is “significative” even a word?
it may have meaning to someone posting here….ask for a definition.
I don’t think Door #2 really addresses the issue–it’s not a question of the legitimacy of the gold miner’s actions, but whether those actions, even when legitimate, can still cause a boom/bust cycle. Personally, I think it can cause the cycle to occur, but a lower price of gold would stimulate an increase in the non-monetary uses of gold, thus encouraging people to convert some of their monetary gold and remove it from the money in circulation. Thus, there would be a boom/bust cycle, but it would be minimized. In any case, it’s hard to imagine how it could be worse than what we have under the fiat/frb system.
The gold miner will decide whether to send his gold into use as monetary gold, or whether to send it into industrial uses depending on which use is most profitable at the time.
The question we should ask is: which would be the most profitable? Can we say anything about that?
Industrial maybe. It is a business decision, but suppose the market swtiches to using some other token for exchange because there is too much gold, then his advantage with having a gold mine is lost. So he will use it slowly and wisely. After all not everyone gets to stumble on free money.
>So he will use it slowly and wisely.
This could be important, especially because the context for this hypothetical question about a massive gold discovery is an economy guided by Austrian economics. Thus people, and especially economically competent, public voices, would be very alert to the possibly destructive, indirect effects of the new gold. I think the market would adjust and there would be a new equilibrating tendency. Non-money uses may be important.
no.
I agree. Door #2 didn’t quite address the issue.
I would also think that this influx of gold could create a boom/bust. The question becomes one of intensity and likelihood.
Given that all currencies will have this problem, a free market would naturally tend to pick the money which offers the best trade-off. Fiat money is not it, as it had to be forced on people.
From Rothbard’s “America’s Great Depression”: “There may certainly be other cases in which time preferences will change suddenly on the free market, first falling, then increasing. The latter change will undoubtedly cause a “crisis” and temporary readjustment to malinvestments, but these would be better termed irregular fluctuations than regular processes of the business cycle. Furthermore, entrepreneurs are trained to estimate changes and avoid error. They can handle irregular fluctuations, and certainly they should be able to cope with the results of an inflow of gold, results which are roughly predictable. They could not forecast the results of a credit expansion, because the credit expansion tampered with all their moorings, distorted interest rates and calculations of capital. No such tampering takes place when gold flows into the economy, and the normal forecasting ability of entrepreneurs is allowed full sway. We must, therefore, conclude that we cannot apply the “business cycle” label to any processes of the free market. Irregular fluctuations, in response to changing consumer tastes, resources, etc. will certainly occur, and sometimes there will be aggregate losses as a result. But the regular, systematic distortion that invariably ends in a cluster of business errors and depression—characteristic phenomena of the “business cycle”—can only flow from intervention of the banking system in the market.”
“They could not forecast the results of a credit expansion, because the credit expansion tampered with all their moorings, distorted interest rates and calculations of capital. No such tampering takes place when gold flows into the economy, and the normal forecasting ability of entrepreneurs is allowed full sway.”
But why?
Yes. Perfect…
“We must, therefore, conclude that we cannot apply the “business cycle” label to any processes of the free market. Irregular fluctuations, in response to changing consumer tastes, resources, etc. will certainly occur, and sometimes there will be aggregate losses as a result. But the regular, systematic distortion that invariably ends in a cluster of business errors and depression—characteristic phenomena of the “business cycle”—can only flow from intervention of the banking system in the market.”
It’s not that hard to imagine that sufficiently courageous, impartial and intelligent central bank could in fact make the situation better in this scenario, where better means reducing misallocation of capital. There are numerous tools of monetary contraction that such a “good” CB could use to stem the tide of endogenous money expansion and/or smooth it out over time.
Well, yeah, it would not really happen. But not because the CB has no possibility to do it. Not because of any economic problems.
It is hard. Try again.
What problem do you have with understanding OMOs? Maybe it’s time to take that undergrad econ course again?
Talk about a meaningless deflection. Just saying OMO doesn’t mean a CB can actually manage an economy. What a fatuous notion…
Panika2008,
The whole problem with the business cycle is that it is actually facilitated by the CB, not Wallstreet, because the Central Bank holds down interest rates artificially by DECREE. As with all price controls, this causes a SHORTAGE OF LEGITIMATE LOANABLE FUNDS. To fill the unanswered orders for loans, the central bank PRINTS THE DEFICIT with no backing and lends it out as if it had real purchasing power.
Think of it this way (I assume you have a job for this example): The central bank DECLARES that Panika2008′s wages are now set to $1 per hour, and CLAIMS you are available to work for anyone with a pulse, no matter what you would rather do. Since your price is so reasonable on the market because of CENTRAL PRICE CONTROLS, the demand for your labor sky rocket. Obviously you cannot fill all the orders for your time, so the government must clone you several billion times. But wait, conventional cloning takes time, and substantial investment of resources. Lets say that the CB has a magic machine called the “magic cloning press” which can counterfeit you several hundred thousand times a second for a few of a cents. PS (the CB also makes the $1 per hour not you). Get the point? Gold costs to produce, fiat currency does not. Gold has value of its own (is a commodity), fiat currency does not. Gold can’t be counterfeited at a CB’s will, fiat currency is every day.
Seems like you believed everything you learned in undergrad econ, and should actually read some basic Austrian theory. This stuff is basic. The push for sound money is the easiest to defend of all our beliefs. Except you turn your brain off.
No CB could know what the “proper” amount of money should be–their intervention would prevent the necessary economic feedback. Furthermore, no CB has any real incentive for trying to do so–central banks are specifically created to intervene in the market process of money production–the idea that they can “improve” on the market process is pure propaganda.
Agreed on the incentive. No CB has to, does, or pretends to know the proper amount of money. The effect of the influx of vast amount of gold could be somewhat controlled by withdrawing liquidity and holding interest rates artificially low – which are tools of operation of CBs. Of course they would not and could not know the “correct”, anti-misallocation level of rates, but they could smooth it out at least by emitting long-term debt in lieu of short-term – the exact reverse of what they do to artificially improve liquidity.
Assuming that the ideal amount of money in the system if fixed or as close to fixed as possible, as some lost souls here do, they could of course control the amount easily to meet that target – by emitting very-long term, constantly rolled-over debt. This is of course nuts, but in principle they could do this, to satisfy some of the misguided “austrians” commenting here.
What I meant was of course “hold the rates artificially high”.
You assume that the Economy won’t grow along with the influx of gold into the system. If the Business Cycle is avoided by rapid inflationary policy on the government’s part, Historically the economy has grown faster on the gold standard than with CB’s.
Here’s the hard part to understand:
Any time you take out a loan, you are expected to pay back MORE THAN THE LOAN, over time. The difference is determined by the INTEREST RATE. When CB’s tamper with the interest rates and hold them down, people use the credit on consumption goods and services, not capital, or wealth building goods.
When you use this cheap credit to buy a House, TV, or boat which make you zero dollars and loose value, and end up costing twice the sticker price due to interest, (as what happened recently), you end up with liabilities not assets (look those terms up in a dictionary). Liabilities are financial friction, or burden. Assets carry themselves and make profit. Credit was tampered with and diverted into the poor investments of liabilities, not assets (or capital). This phenomena is called MALINVESTMENT. Its owing $30k on a car you can only sell for $20k, all while making $40k/year. Stupid.
Had the CB done nothing, the interest rates would only allow the people who justifiably expected profit to be able to afford the loans. To say it another way, only those who could reasonably show that they knew how to use capital well enough to have it pay for it self and generate some extra (profit). It would treat borrowing as it is: a tool to some and a danger to others.
Back to the economy growing better under gold than fiat. When most of the loans are going out to responsible borrowers who can afford the rates, and pay back the loans because the things they bought with the loans generated profit when combined with skilled labor, more goods and services are available for purchase in the economy at large at cheaper prices (the whole cause and effect of the industrial revolution). These firms tend to recognize this phenomena and re-invest their money in more capital, or put their money in the bank, which loans it out to other responsible, profitable firms at interest. The money never gets squandered on Malinvestments in liabilities or stupid, excess consumption.
The economy grows, and new gold is added to the system when it is found, refined, and turned to bullion. But they grow reasonably at a similar rate, and prices reflect that.
Hi Michael,It assumes that there is no such thing as (free) “market failure”. If the action is not fraudulent, or aggressive, then it is voluntary – all transactions that are voluntary are assumed ex ante to be beneficial to the participants by the participants. This means these transactions are, from an economist’s perspective, socially beneficial on net. This further implies that such a thing as a business cycle, which is defined as massive and detrimental misallocation of resources due to distortions of one sort or another, cannot occur under such a set of conditions. So if fluctuations in supplies of money, and interest rates, occur due to fluctuations in the supply of gold bullion, there is nothing more to add to this. Fluctuations in the market, profits and losses, all occur and are expected to occur; and as long as they occur without force of fraud, no misallocations are possible and no business cycles are possible due to it either.Cheers.
This is an interesting thread. It brings up another question. If there is a lot of gold existing in jewellery then how does that stock interact with the monetary gold stock?
“The famous “gold and silver inflation” of the sixteenth and seventeenth century ….average growth rate of the money supply lay somewhere between 0.3 and 3.3 percent per annum.”
There is no way specie money supply can be inflated as fast as paper, or digital money. Even if alchemy was discovered… a free market would have the flexibility to replace gold with something else.
Also, busts under a gold standard have a clear bottom: even if 100% of debt and credit is liquidated, you still have the same amount of gold. The same cannot be said of FRB/fiat bank deposits… there is no bottom there.
Actually there is a bottom for FRB deflationary bust as well. The bottom is treasury-issued notes and bonds, which perform the function of base money somewhat similar to the base gold in a fractional-reserve gold money system (incidentally, I don’t think we will ever see anything more radical than FRB gold).
So basically promises to pay more paper money is the base?
Go figure!
Paper based on…?
Note that there is nothing unethical or dubious about a gold miner spending his justly acquired property in order to boost his consumption. We are merely arguing that this extra gold “production” is not socially useful in the same way that extra production by the farmers or dentists would be.
The use of gold is as a means of exchange of value. If you say that gold is the monopoly supplier of that means of exchange, then you increase its value. Someone who produces gold doesn’t necessarily produce gold at the same cost as the value of gold as a means of exchange. i.e. They get to make an unreasonable profit by the monopoly imposition of gold for exchange.
It’s the same with the current holders of gold. Impose it as the means of exchange and their net worth as purchasing power leaps.
ie. The rarely expressed point, I wouldn’t start from here, has the obvious question, does go back to the past cause any other problems. The answer is yes.
The real problem is monopoly, either fiat or gold.
For an example, look at silver and gold in Spain post the discovery of the Americas. Did it do them any good?
Ditto for most oil producers were Oil provides most of the government income, and there is surplus of cash.
Nick
“… the monopoly imposition of gold for exchange.”
What monopoly imposition? In a free market, gold is not imposed.
If some money is force (legal tender), then we can argue which money is the least harmful.
Even if gold is forced, the gold miners cannot be said to unfairly benefit, as presumably competition would be open.
Please get real. There was never ever in human history a moment and place that pure gold standard was assumed entirely voluntarily by a population. It was always forced by somewhat silly and probably somewhat evil bankers, such as the hardest proponent of gold standard ever, J. P. Morgan himself.
Prove it.
Please start your intellectual adventure with reading the text of Gold Standard Act, ratified on March 14, 1900 by… (drums rolling)… the Congress of the United States!
So much for “spontaneous emergence” of your beloved gold standard.
if that is the best you come up with
your fucked
bigboy, it’s OK to be government’s and its propaganda machine’s puppet and believe that some things devised, orchestrated and finalized by its operatives are some form of spontaneous order. Just accept it – you’re gov’s faithful dog. As soon as you swallow it, you’ll get rid of the dissonance inside you that brings out the uncivilized brute while pretending to discuss economy and economic history.
government made gold the only standard for redeeming paper
that what that act did you idiot
im still waiting : )
mr taco, this is the “little” fact I’m trying to bring to light, but what I’m met with is streams of saliva and exalted fury from hardcore religious rothbardites.
What that act did was bringing about gold standard as a replacement for bimetalism, another artificial (and arguably even more broken) construct of the past, of past bankers and politicians.
you dont even know what we advocate get out of here
government guess what ?
made gold interchangeable with silver
did the free market do that ?
And, while we are at it: please also check out what made gold emerge as a standard in the UK around 1717. Was it:
a) spontaneous domination of gold in free market operations, or
b) a simple trick by Isaac Newton, then warden of the Royal Mint, to effectively suppress the price of gold and boost price of silver, that led to withdrawal of silver from circulation (cf Gresham-Copernicus law) and made gold the new money of the empire?
Bigboy, I know what you advocate, but understand this: stupidly and stubbornly keeping your theory way out of sync with history is a great method to ridicule yourself. Noone will want to look at your theories, pamphlets, published papers, unless you make peace with what the world actually IS and WAS, as opposed to what was revealed in the holy scripture of Rothbard or even Mises.
first off in the free market medium of exchange can be anything
we advocate what currency the market chooses
you just showed me government messing with the currency
and setting up a commodity as a standard which we dont advocate
panika seems to be having great difficulty following the conversation, which concerns whether the influx of a commodity money can set off the boom-bust cycle. In his frustration he insults anyone who might find merit in Rothbard’s work. What a pathetic cretin.
bigboy, who is “we” when you write that you don’t advocate a return to the gold standard? I assume that this “we” must exclude Rothbard, de Soto, Ron Paul and so many people I previously thought were the very hard core of the movement?
i want a link to the exact quote of de soto, ron paul and rothbard
besides i follow more mises anyway than rothbard
I honestly give up with you. You don’t offer arguments, just rambling incoherent jumps from “point” to “point”.
bigboy, I thought that you, as a loyal and fervent follower of the religious movement, would know the position of your saints and prophets. Here goes:
Rothbard, from, uhm, “The Case for Genuine Gold Dollar” (as if the title is not enough): “I propose that the dollar be defined as a weight of a single commodity, and that that commodity be gold. (…) We conclude, then, that the dollar must be redefined in terms of a single commodity (…) There is, indeed, a case for silver, but the weight of argument holds with a return to gold. Silver’s increasing relative abundance of supply has depreciated its value badly in terms of gold, and it has not been used as a general monetary metal since the nineteenth century [why, Mr Rothbard? Let's be honest - because governments demonetized silver and forcefully deployed the "free market" (hahaha) gold standard worldwide]”
Ron Paul, from, uhm, “The Case for Gold” (again, as if the title is not enough): “A monetary standard based on sound moral principles is one in which the monetary unit is precisely defined in something of real value such as a precious metal (…) Gold is honest money (…) The time is ripe for fundamental monetary reform (…) We suggest defining a dollar as a weight of gold of a certain fineness, .999 fine”
de Soto, from “Money, Bank Credit, and Economic Cycles”: “any future reform will fail
as miserably as past reforms unless it strikes at the very root of the present problems and rests on the following principles (…) the reestablishment of a 100-percent reserve requirement on all bank demand deposits and equivalents (…) the privatization of the current, monopolistic, and fiduciary state-issued money and its replacement with a classic pure gold standard” (the most hardcore economic reform ever proposed, maybe except for outright nationalization of all of the economy proposed by some communists).
Comments?
This legislation seems directed at eliminating the gold standard slowly, to retiring and canceling silver certificates above ten dollars, and to halt the re-issuance of silver and gold coinage. It also resets the the values of gold and silver in values of dollars per ounce in an advantageous position for the treasury, and disadvantageous position for the general public. Panika, you are pretty uneducated for a loudmouth.
“the fool, having nothing worthy to say, opens his mouth and proves it.”
Old Proverb
As far as Rothbard goes in his advocacy of gold as the standard for exchange I believe it was his prefered medium because of the qualities it possessed as money (demand, divisibility, durability, etc.) That doesn’t mean that if the free market chose another commodity as its media Rothbard wouldn’t support it. Rothbard was an Anarcho-Capitalist, many say the father of Anarcho-Capitilism. In his ideal world there would be no government to enforce all those “Acts” you like to quote, therefore there would be no monopoly of force controlling and manipulating the media used as money. It would be whatever the free market chose. Rothbard simply believes (maybe incorrectly, but who knows) that gold would be chosen because of the qualities he sees as neccessary for a medium of exchange. That is why he advocates for a return to such.
Sounds like you could use a class on ABCT. By your logic there must have been an intergallactic overlord that came to earth and revealed how money could be used as a medium of exchange, if only some really smart and strong people forced everyone to use it – or at least another similar absurdity.
Missed. I didn’t even touch ABCT here. Don’t preach to me, it’s not some damn church. Please practice reading comprehension.
Drop the attitude, honestly. You don’t have the knowledge to back it up.
If gold ends up causing a boom bust cycle would not the free market participants simply switch to a different medium of exchange?
Doug French had quoted Mises from Human Action in an earlier blog entry
http://blog.mises.org/12974/wsj-letter-writers-on-gold-as-money/
I have been putting back reading French’s book on early speculative bubbles. But I suspect that in those instances gold was not just the money of the market but also money of the government. Suppose the government has significant control over the economy and recognizes gold as the medium of exchange then gold will continue to circulate even when it loses its favorable characteristics.
>It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made. [Mises]
It seems that Mises, as usual, had the answer.
Amen. So be it.
It’s interesting to trace the question “would boom be possible under pure gold standard” to its origins. For it’s not so much about gold, as it is question whether “Is it possible to guarantee, with some special rules and plans, situation when we’d have absolutely no booms and busts?“.
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It’s a bit hidden that such question has no relation to the real world, which is all about changes and inherent unknowns. Looking for answers to that queation has about as much meaning as asking under what conditions would turn the world into evenly rotating economy. (Which is a construct, a useful tool for understanding the world around us, but one which should never be confused for the real thing.)
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Also interesting to note is that knowing there’s no magic to get the ideal “no bubble ever” money done, some may drop the quest for a better arrangement, and certain paper interests would benefit if people gave up the fight.
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In the real world the question is NOT if we can setup things to make booms and busts impossible. Instead the quest is to arrange it so that the booms and busts are minized in the very practical sense. And here yes, gold gives us great advantage against paper money and most other constructs we could try to use as money. The advantage lies precisely in the ratio of how much new stuff can be brough on-line, compared to the existing stock, for a given price. The thing with the best ratio is best suited to be used for money.
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It’s an relative advantage, not an absolute one, and it will hold only till someone finds a way to easily create gold out of thin air (say, by distilling it from ocean), or Earth becomes target for gold asteroides, or any other event that’d push that new-to-stock ratio below the ratio of something else – which would then become the best pick for money.
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Is it too far from perfect? Yeah that’s precisely what I’m talking about.
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>Earth becomes target for gold asteroides
There might be a very unpleasant bust.
“Again, if we wish we can bring up the distinction between nominal and real (price-inflation adjusted) savings, but as good Misesians we must not lose sight of the “driving force of money.” We can’t fall into the mainstream trap of thinking about the economy as a set of “real” exchanges, and then throwing money on as an afterthought. Yes, the new influx of gold will drive up the gold-prices of goods and services in the community, and this rise in prices will cause lenders to insist on a higher nominal interest rate than they would otherwise. This inclusion of a “price premium” in the gross-market interest rate will work in the opposition direction of the increased savings, keeping the interest rate from falling as much as it otherwise would have.
In any event, it is difficult to see how a Rothbardian could claim that the gold miner’s actions — bringing new gold to market, which everyone is eager to acquire, and then deciding to save a large portion of his windfall income, rather than blowing it on Caribbean cruises — are somehow detrimental to the rest of the community.
Rothbard argued against the very concept of a negative externality, so long as everyone’s property rights were respected. The “correct” market interest rate in our hypothetical scenario would be just as we have described — it is the interest rate that would spontaneously emerge from the voluntary trades of everyone in the community, including the gold miner.”
This analysis is totally wrong and in the mentioned scenario a boom bust cycle would most definitely happen.
First Murphy mixes economics with ethics, worrying about whether the miners income is justified or not and tries to draw an economics answers from that. Yes the miners income is justified, but this has nothing to do with the boom bust cycle.
And second, and most disappointing is a flaw in economics reasoning, disregarding the fact that money is just a medium and nothing else.
In an economy all savings are savings of real goods. If there are no real goods that is being saved, saving money doesn’t mean anything.
So yes an economy is a “a set of “real” exchanges”.
Nobody saves money for moneys sake and nobody borrows money for moneys sake.
When someone gets a credit from a bank he doesn’t really want to borrow money, but borrow goods and services that can be exchanged for that money. But money being a tool that simplifies exchange serves as a medium, so that a borrower doesn’t borrow many different things, with very different rents. But he usually borrows money with one simple rent, called interest, and then uses that money on what he really needs to use.
So in the example, a new influx of gold is not real savings, and it only changes the exchange ratio of gold against real savings. In the scenario, the newly created money still mimics an increase in savings, where there really is none and it is still harmful in that it sets of a boom.
But of course this scenario is an unlikely scenario, and even if it is likely is frequency would be very low, compared to a fiat money system, where creating inflation is main purpose of the system itself.
Money by existing has a useful social benefit, but the increase in its amount doesn’t. Money being a function, If there is money, or rather something functions as money, in an economy it is very good thing. But this doesn’t mean that the more of it you have the better it is.
Good points Kerem. Thank you.
“And second, and most disappointing is a flaw in economic reasoning, disregarding the fact that money is just a medium and nothing else.”
I don’t disagree with your statement above (except the nothing else part) and I agree saving money equals a savings of real goods (if you mean that I save money to buy real goods later on) but I take issue with that assumption that money should have no intrinsic value.
If money does not have an intrinsic value (and is nothing more than a “medium of exchange”) then what’s to stop us from printing more of it up and encouraging more exchange. This is exactly point of view of our central bank.
I disagree with the statement that no one “saves money for money’s sake”.
You’re assuming that people save money to buy goods at a later date but what if I save money for security or in my case for freedom. If money has no value (“just a medium of exchange”), as you imply, than why should I save it?…I should spend it as soon as possible… which is an inflationist point of view (i.e. US gov and CB)
Gold on the other hand has an intrinsic value established historically and that is the reason to own gold (according to gold bugs). Paper money can become worthless where as gold retains value.
Therefore, “an influx of new gold is real savings (due to it’s intrinsic value) and though its buying power may fluctuate with supply (though I would imagine very little in purely free market) it would still retain value…I’m discounting discoveries in alchemy.
I’m not really arguing with your conclusions…I am questioning your definition of money, why people save it, and that gold broadens the definition of money… (assuming gold was money.)
Sorry Bob but I don’t think that was very clear at all. You start off asking if boom-bust cycles can happen with gold as money, but your conclusions to the second half are things like:
“We’ve finally reached our destination: If we accept that the gold miner’s nominal income — measured in gold — is every bit as “legitimate” as anybody else’s,…”
“In any event, it is difficult to see how a Rothbardian could claim that the gold miner’s actions — bringing new gold to market, which everyone is eager to acquire, and then deciding to save a large portion of his windfall income, rather than blowing it on Caribbean cruises — are somehow detrimental to the rest of the community…”
We are not debating if it is “legitimate” nor, directly, whether it is “detrimental to the rest of the community” (detrimental compared to what?). Or certainly we are asking these questions only insofar as they help us decide if the boom-bust cycle will come about, a connection you not address. I’m not sure how those conclusions are relevant, even if I don’t take sides either.
Although if this statement “Murray Rothbard thought that the boom-bust cycle could not possibly happen on a genuinely free market” is correct (ie. he thinks it IMPOSSIBLE, I’ve not read that part of MES), then Rothbard is flat out wrong. If someone finds a “significant” pile of gold which takes “insignificant” resources to mine and then spends it on, say, garden gnomes until the gold runs out, then there definitely exists some period in which the members of the economy are misled about the prices of gnomes and the prices the factors which go into the making of gnomes, meaning a distortion in the structure of production and a subsequent correction are inevitable, proportional to the size of the gold injected. That this, in practice, never has and almost certainly never will happen in practice doesn’t mean it can’t POSSIBLY happen.
The only reason the boom-bust cycle ensues is because production occurs for which there are not resources to finance it, linked to the peculiar structure of FRB. Injecting gold will just cause inflation. Nothing else.
This is true, but the peculiarity of FRB is precisely that it requires an illusion, namely that fiduciary media are money. Once this illusion is broken, then increases in the supply of fiduciary media *can* be anticipated by entrepreneurs, much like a discovery of new gold stocks. In that case, the effect of increased supply of fiduciary media by the banks will just be inflationary as well.
Provided there is no state to perpetuate the illusion, yes.
I agree, yes. Witness the historical reality of bank-state alliances (continuing to this very day).
I think the whole point of the non-legal tendered currency is that you don’t have to become a criminal simply by desiring a different medium of exchange than the one forced by threat of violence. Its to have choices when the situation dictates.
Really? What resources will be there to match the new injected gold? The difference between gold and FRB is that FRB enables much higher rate of injection. If there was a way to get the same injection rate with real metal, the quake it sends through economy would be the same.
Why do you believe that the question of the genesis of boom-bust has to do with the rate of monetary injection?
It has EVERYTHING to do with the rate of injection.
Effective market distortion is possible only when the money stock inflation is effected predictably, steadily and orderly through credit markets.
One-time, rapid injections of money (be it gold or 100$ bills), with the understanding that no more expansion will be commenced in the future (or at least no expansion beyond general, slow pace growth characteristic of last 2 decades) will have very little effect on rates, credit markets and general resource/capital allocation – because there is no reason for market actors to expect any inflation in the future, the event has to be priced in immediately, as immediate devaluation. The effect might as well be general medium-term disinflation (sharp drop of inflation way below what is implicated by the relation of money stock and productivity) – as households get to pay down their debts and get a break from the debt addiction – at least for a moment.
I have to agree with panika. Clearly, it’s not about the total amount of money. One can see that an economy can function with half the money as well as double or any other amount.
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It’s the changes in the amount of money, i.e. the first time derivative, a.k.a. rate of change. Money isn’t willed into existence at once, it has to gradually be created, i.e. things that were NOT money at one point in time, become money later. And vice versa, things can get demonetized too.
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So each local economy is adjusted to some rate of change in the money supply. (Including but not limited to, possibly, zero.) It’s changes in this expected rate that cause disruptions and needs for more adjustments. As an historic illustration, consider the french fort of Quebec, adjusted to receiving regular silver influx (soldier’s pay), having to endure late shipments (pg.11, lower left). By issuing playing cards in place of missing salaries, they saved the need to adjust to the irregularities in the rate of money supply expansion. (Discussed also here.)
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The bigger the changes, the bigger the disruptions. Guess what? The biggest changes ever seen are enabled by Fraudulent Reserve Banking. But when the Spanish shipped in all the gold and silver from America, they got a nice boom bust. It was big enough to seriously change the rate of money supply change that the old continent was accustomed to. It was big enough that Netherlands had their own bubble caused by the same metal.
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And as for believing … What had ever faith to do with it? Show me factual error in what was said and I will not only change what I say, but also give my thanks for helping me think clearly.
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“Clearly, it’s not about the total amount of money. One can see that an economy can function with half the money as well as double or any other amount.”
But one must ask what is the status of the profitable mint in a free market? Is this even a possibility? Can we really claim, as economists, that a mint could not possibly be profitable in a free market? Yet if we must concede at least this possibility, then must we not also concede that the market, in this case flatly proves the notion that more money in this case generates a net increase in social utility? I think Block and Barnett II demonstrate this is the case in spades.
re Paul Edwards: Sorry lost me here. Can’t see how the profitability of mints could possible relate to the discussed issues.
It isn’t just that it involves a quicker rate of injection. It’s also that it involves a mismatch between real interest rates and market rates and what banks actually have in terms of savings and the funds they loan out. Remember, the specified example concerns 100% Reserve Banking, not FRB where credit is expanded by several multiples of the amount of reserves the bank actually has. If it were merely the rate of injection of FRB that were the problem it’d be a question of inflation, not malinvestment, as inflation can eventually be anticipated. What makes it so pernicious on the ABCT is that the means to enact it corrupts the market signal of the interest rate and successive central bank actions disallow it from re-adjusting. I think Captain Freedom described the situation and Austrian answer to it pretty well.
Ok, let’s have an example. Banker A decides to switch from 100% reserve to FRB, doubling the money stock in local economy by printing up more gold certificates while keeping 50% reserves for them. Even though people accept his notes at par, and believe he can make the ends meet, there’s no additional resources for the additional money, so this setup leads to a proper boom and bust, with reduced interest rates, malinvestment and everything.
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Now Banker B discovers big gold deposit in his garden, large enough so he can double the money stock in the local economy, just as specimen A did, by printing gold certificates, this time covered 100% by the newly found metal. Other resources, as in case A, remain unaffected.
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The case is explicitly constructed so that the rate of injection is the same, and the only difference is in how much the notes are covered by metal.
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So, do you think the outcome in case B will be different, i.e. no cycle or a softer one? If yes, why? Or did I misrepresent the case for boom in scenario A? If yes, how?
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I’m not sure how it relates to what I said? I don’t think the rate of injection matters too much for the ABCT except in that it might necessitate quicker adaptations to anticipate the change.
Note that if Banker B simply prints up gold certificates and spends them, this does not in itself create a financial cycle – it simply creates a wave of inflation. The financial cycle is possible because Bankers are only allowed to increase the money supply by lending on credit, hence lowering the rate of interest is the only avenue for money supply growth.
This is why gold mining itself does not create a boom-bust cycle, although one can say that the miner’s personal wealth does experience a cycle of sorts.
re Inquisitor: The let me quote: The only reason the boom-bust cycle ensues is because production occurs for which there are not resources to finance it, linked to the peculiar structure of FRB. Injecting gold will just cause inflation. Nothing else.
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Original claim was about the sufficient condition for boom-bust cycle, and it put FRB in contrast to injecting gold – the claim was the cases are different.
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In real life they indeed are, as the metal severely limits the possible amount, rate and duration of new money injection, compared to what’s achievable with FRB.
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But that’s it, the difference is on a practical level.
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Theoreticaly, if we construct situation where the amount of new monetary units entering economy is the same, the outcome must be the same — because the outcome depends on the relation of (whatever people accept for) money to the other resources. These relations are the same regardless of how much are the money covered by specie.
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re Darcy: the point is the cases A and B differ only in how much are the new money covered by specie. In each case both bankers can either loan the new certificates out or spend it.
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I agree that the method they choose for injection affects the nuances of the outcome – we can get more of direct price inflation, or more of malinvestment. But that was NOT the question.
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Again, the point is that both the boom-bust and inflation consequences of money injection will happen just the same in both cases. Why? Because the change in money supply is the same, so the effect on prices and structure of the economy is the same, too.
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Money is whatever people accept for medium of exchange, and if they DO accept those gold certificates, there’s no way for them to distinguish if the banker has dig up new gold (case B) or if he went FRB (case A). Unless there’s a bank run, the case are indistinguishable.
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If you DEFINE the boom-bust cycle as: “the boom-bust cycle ensues is because production occurs for which there are not resources to finance it”, then ok.
But is this true? Where can I read this?
Any text on the ABCT? I mean it’s a malinvestment theory regarding the consequences of credit expansion.
Can you show me where please? I’m not being awkward. I’ve read lots and lots of texts on the boom-bust cycle – and I’ve just done some more checking around now. It does seem that Mises uses the word “boom” only in with regard to unbacked credit expansions – but this is pretty vague. He doesn’t use the word “bust” at all in HA – according to Acrobat.
Where, exactly, is the “boom-bust cycle”, as it is being used in this article, defined?
I don’t know, I don’t really care whether he calls it “liquidation” or “apocalypse” or whatever. I only know the theory as is exposed in HA, MES etc. and it follows the lines I mentioned.
Inquisitor – I think a casual attitude towards definitions is an obstacle in the analysis of any situation. The phrase “boom-bust cycle” is used in the title and being able to define this precisely seems to me to be reasonable and crucial. You seem to think it is just obvious? I don’t.
I wrote a big long explanation, but Captain Freedom writes something much better than I could and with which I agree substantially. You say you pretty much agree with him also. Well, CF says in summary:
“Yes, there can be a boom and bust cycle set forth in a 100% reserve gold money standard, but it will be so small and ineffectual that it will almost certainly resemble the day to day readjustments taking place in any free market economy, with resources being reallocated from here to there, firms going bankrupt while other firms succeed. One will almost certainly not see a general, entrenched bust period that we see taking place in our current monetary system.”
In other words, booms and busts could happen but he is making an educated guess that, in practice, they will be so small as to be insignificant. I agree with this, as I already said quite clearly.
I do not agree though that boom-busts under a gold standard are impossible, given a large enough amount of “free” gold injected into the economy, and if the “bust” need not involve loan defaults and a contraction of the money supply (as from an frb boom) but could comprise only the “liquidation” (an alternative word for bust you say) of malinvestments made during the brief gold-induced boom period while the prices were distorted. Although I can’t state any of that categorically because no’one has yet said, exactly, what the “boom bust cycle” in the question is.
So, should we call these “liquidations” a “bust”? You say you don’t care, but I don’t know why – fundamentally, I’m asking if we need a different word or phrase for
a) the unbacked credit expansion induced bust that involves loan defaults and a contraction of the money supply
b) the systematic economy-wide liquidation of malinvestments caused by a significant injection of gold (whose mining, for whatever reason never commanded any resources and so wasn’t already “known” to the price system) but which does not have an associated contraction of the money supply.
(Also, what word(s) do we use to describe the actual observations – the saw-tooth pattern in the unemployment figures that is a blindingly obvious cycle? We can’t call all of these things “the boom bust cycle”. Shouldn’t we define exactly what we are talking about more clearly?)
CF also says:
“Mises argued that there can be a monetary induced boom under a gold standard, but the market will not bust because by its nature, the market is capable of overpowering (that is, adapting and accommodating) the effects of the monetary infusion of gold.”
Well, I said
“If someone finds a “significant” pile of gold which takes “insignificant” resources to mine and then spends it on, say, garden gnomes until the gold runs out, then there definitely exists some period in which the members of the economy are misled about the prices of gnomes and the prices the factors which go into the making of gnomes, meaning a distortion in the structure of production and a subsequent correction are inevitable, proportional to the size of the gold injected. That this, in practice, never has and almost certainly never will happen in practice doesn’t mean it can’t POSSIBLY happen.”
I said the money went into gnomes and not the loan market, but that doesn’t matter. For a while, those engaging the price system will be misled as to the real consumption-savings ratio by this additional spending – the extra spending on gnomes will be indistinguishable for a short while from what would happen after an increase in spending due to some increase in productivity. The latter though would tend to persist ie. is a “sustainable boom” (and therefore not a “boom” at all), whereas the former is temporary and an associated liquidation is inevitable. This liquidation might be so small as to be indistinguishable from the normal market operations, as CF and Mises say, but there is nothing that says it MUST be so. That is all I’m saying.
And if this “liquidation” is deemed not to form the second half of what is being called the “boom bust cycle” here because the bb cycle is DEFINED as being a bust due to credit expansion (which means loan defaults etc.) then fine. I’m wrong. That analysis doesn’t really make sense to me though.
(Apologies for bit of repetition there, I don’t have time to edit it right now).
was this theory actually developed at the turn of the 19th century or so??
How come there are not sufficient resources to finance production for the last umm… 100 years? (or 70, depending on what you believe marks the ascent of mass FRB)
One-time injection of any amount of gold could indeed be neutral to the structure of production and interest rates (incidentally, the same is true of current system). There is a problem, though, when this injection is both intense, steady and longer-term, such as is the case with a big natural deposit being mined. Exactly as with modern governments bent on pumping a lot of money in the system, the bond vigilantes always catch up; first, they are lured to bonds speculatively, driving rates down (they believe the payer is good – whether the payer is the most powerful empire on Earth or a great mine just discovered is irrelevant), but when their profits start to slow, as the interest rates head towards zero, latent effects of inflation will strike them, causing bond market panic and general bust. There is no escape from this mechanism, unless you can guarantee that the most powerful player will not mess with the time structure of financing – and you know you can’t guarantee this, becaus this play is just so, so, so simple for him – and so lucrative as well…
That is not true.
Boom has nothing to do with financing of resources but only to do with interest.
Increase in the supply of money, no matter how it happens, only mimics extra savings not genuinely replace it. In order to save you have produce a good and not consume it.
Money is a medium and nothing else.
If nobody saved any goods and immediately consumed them, saving money doesnt mean a thing.
can you save a medium?
Prof. Murphy, I think there is an answer to this question.
But before I give my 2 trillion Zimbabwe dollars, I was hoping you could clear something up.
You wrote:
“If we accept that the gold miner’s nominal income — measured in gold — is every bit as “legitimate” as anybody else’s, then if he decides to save 9.5 tons of his new gold holdings by lending them out, it is perfectly accurate to say that the amount of savings in the community has increased.”
This argument is also used by inflationists. They also argue that if inflation is “legitimate”, then the first receivers of inflation money (typically banks) who decide to save and make available the additional money for the loan market, also represents a “voluntary” act of saving.
After all, no government dictated (under normal circumstances) that the banks must lend out that new money.
So there is a problem here. Austrians typically challenge the inflationists on this point on the grounds that the additional inflation money is not actually “legitimate”, since it is not market determined, and hence the claim that this is a voluntary act of saving on the part of those who receive the new money becomes spurious and semantic. It becomes even more difficult if the inflationist challenges the Austrian’s own position and brings up the fact that should a gold miner hit the mother lode, then it becomes very hard to defend treating the discovery of 1 ounce of new gold money, and the discovery of say 10 tons of new gold money, as equals when it comes to voluntary savings.If we imagine two gold miners, and we assume each have roughly equal costs of production, then the inflationist can focus on the possibility that one miner may make 1 ounce of gold profits (meaning 1 ounce is added to the economy’s money supply on net) whereas the other gold miner may make 10 tons of gold profits. If we assume that the first miner spent that 1 ounce on his own consumption, and we assume that the second miner also consumed 1 ounce gold’s worth of goods but saved the rest and made it available to the loan market, can we really say that the second miner “sacrificed more consumption and thus made available more resources for higher stage production”, whereas the first miner did not? Neither are making available any more nor any less real resources, by their actions. Both consumed 1 ounce worth of goods. Both are restricting, and making available, equal amounts of real resources.
So does that mean that there will be no relevant difference of the two miners actions on the rest of the economy? No, there will be a difference. One miner, by his actions, affected the loan market such that it will be higher compared to if he saved it (however small the effect that 1 additional ounce of gold has on the market rate of interest). The second gold miner’s actions will result in a downward pressure on the gross market rate of interest.
Under a 100% reserve gold standard, the rate of increase in the quantity of gold money will tend to be positive, naturally, and if we assume that a positive amount of the growing quantity of gold money enters the loan market first, then the gross market rate of interest (meaning the distribution of various interest rates) will habitually be “depressed” relative to market rate that will exist if the increase in the quantity of money and hence increase in quantity of loans were more modest.So what we have is that, in theory, gold money production is capable of launching a (temporary) boom. But will it be a what will that boom entail? I think this is where the confusion resides for most Austrians.
Is the “quasi-permanent” lowering of gross market interest rates under a gold standard capable of affecting the economy in such a way that it subsequently goes into a deflationary bust?
Mises argued no. He wrote, in Human Action:
“What catallactic reasoning can show us is merely that a slight although continuous pressure on the gross market rate of interest as originating from a continuous increase in the quantity of gold, and also from a slight increase in the quantity of fiduciary media, which is not overdone and intensified by purposeful easy money policy, can be counterpoised by the forces of readjustment and accommodation inherent in the market economy. The adaptability of business not purposely sabotaged by forces extraneous to the market is powerful enough to offset the effects which such slight disturbances of the loan market can possibly bring about.” – pg 575.
Mises argued that there can be a monetary induced boom under a gold standard, but the market will not bust because by its nature, the market is capable of overpowering (that is, adapting and accommodating) the effects of the monetary infusion of gold. The continual process of readjustment will attenuate any “imperfect” disruptions due to any volatility taking place in gold mining.I think there are two ways of interpreting this argument:
1. There will be a “boom” set in motion, yet no widespread, deflationary bust. This is because the market will almost immediately readjust once the new gold money is spread throughout the economy, and so any mal-invested capital during the boom phase will be liquidated quickly. In addition, the increase in the quantity of gold money is more or less permanent, and so, unlike fractional reserve money, the quantity of money in the economy is not going to suddenly fall if debt is defaulted on. Total spending will remain a function of the total supply of gold money. Total revenues do not fall because the quantity of gold money does not fall if debt is defaulted on.
2. The gross market rate of interest will not be affected in the precise way, and to the same extent, as the Austrian theory assumes. We could posit that entrepreneurs will adjust to knowing how to deal with the occasional discovery of gold mother lodes. One could say that during the periods of “normal” gold production, the gross market rate that will exist will be a good approximation of representing society’s time preference. There will be some volatility of course, but it is entirely possible that entrepreneurs will learn to understand the relationship of savings and gold production to interest rates. If then there should be a sudden rise in gold, and we assume the extreme and say that all of that money enters the loan market first, then entrepreneurs just may not get “fooled”. A large discovery of gold will be public news, and I don’t see how any rational investor or entrepreneur will agree to extending the average period of production just because of a one time event of some miner hitting gold pay dirt. We can imagine some entrepreneurs engaging in gaming the discovery, and “time” the market, so to speak, but every Austrian knows that doing so will just hasten the attenuation of the gold infusion and bring the boom to a close very quickly.
Now, Mises’ intended position is most probably the first explanation. He also stated in Human Action, with regards to a one-time increase in credit expansion:
“If the credit expansion consists merely in a single, not repeated injection of a definite amount of fiduciary media into the loan market and then ceases altogether, the boom must very soon stop. The entrepreneurs cannot procure the funds they need for the further conduct of their ventures. This gross market rate of interest rises because the increased demand for loans is not counterpoised by a corresponding increase in the quantity of money available for lending. Commodity prices drop because some entrepreneurs are selling inventories and others abstain from buying. The size of business activities shrinks again. The boom ends because the forces which brought it about are no longer in operation. The additional quantity of circulation credit has exhausted its operation upon prices and wage rates. Prices, wage rates, and the various individuals’ cash holdings are adjusted to the new money relation; they move toward the final state which corresponds to this money relation, without being disturbed by further injections of additional fiduciary media. The rate of originary interest which is coordinated to this new structure of the market acts with full momentum upon the gross market rate of interest. The gross market rate is no longer subject to disturbing influences exercised by cash-induced changes in the supply of money (in the broader sense).” – pgs 553-554
We can use Mises’ explanation here regarding a one time credit expansion with a one time large gold supply increase that results in a one time large increase in the supply of available loan money. One could argue that yes, there may be a boom generated by a large gold discovery. But such a boom will almost immediately end, as soon as prices adjust to the new money relation. This will minimize any possible misallocation and malinvestment. And, as every Austrian knows, the smaller and more minimized is the boom, the smaller and more minimized the bust. It is entirely likely that a gold standard “bust” will not even be observable as a bust. You might just see it as temporary problems in the farm equipment industry, or temporary setbacks in the plastics industry. It is highly unlikely that it will be even close to a fiduciary money induced bust, since we all know that fiduciary money can be increased for many years, which sets in motion a very high amount and extent of mal-investment.
The “pain” is due to the readjustment to more sound conditions. If there is minimal boom, then the readjustment pain will be minimized.
The crucial factor with fractional reserve fiat money standards is that the market’s process of readjustment and fixing the malinvestments contains within it the seeds of further pain. This is because readjustment almost invariably includes debt renegotiation and default, as well as increases in cash holding, both of which reduce the quantity of money and volume of spending. This aggravates the readjustment process, because a given readjustment process has to also readjust to previous readjustment, so to speak. The economy is a house of cards, where one card being removed has the potential to inflict further damage. As was seen earlier, under a gold standard, this spiral is minimized.In summary, I think there is an answer to the question. Yes, there can be a boom and bust cycle set forth in a 100% reserve gold money standard, but it will be so small and ineffectual that it will almost certainly resemble the day to day readjustments taking place in any free market economy, with resources being reallocated from here to there, firms going bankrupt while other firms succeed. One will almost certainly not see a general, entrenched bust period that we see taking place in our current monetary system. After all, gold miners cannot just whim into existence more gold to stave off the readjustment period that will take place in response to their previous gold infusion.
Gold isn’t “free”. The production of gold requires capital investment and labor and the viability of a gold mine is contingent on profitability just like any other business. The ratio of the expenses of extraction to the price of gold is always the determining factor for a mine to go into or even remain in production. Rising gold prices mean that deposits that could not be profitably worked are now economically viable. On the other hand, rising costs of diesel fuel, equipment and labor make other gold plays losing propostitions. In that sense, gold isn’t any different than pinto beans, pork bellies or any other commodity.
Unless you believe, as the Walter Huston character in “The Treasure of the Sierra Madre” did, that the value of gold was determined by the high percentage of failures in the search for it, Marx’s labor theory of value.
The example of a change in the amount of gold is interesting, but there is a more realistic problem that can occur with a fixed amount. Consider an IOU that is presumed redeemable for an ounce of gold, but is loaned out to many parties. This could easily be done by savings banks ‘insured’ by government. There is then an expansion of credit, which is unsustainable, under what is viewed as adhering to the gold standard. Consequently, the boom is followed by a bust (unless there are small failures whereupon no major bust occurs, but rather a transfer of wealth).
The given example is “an ideal Rothbardian world, with a completely free market that used gold as money and kept its banks at 100 percent reserves.” What you’re describing, the same money loaned out to multiple parties, is more like fractional reserve banking than a 100% reserve system.
OK, my example is akin to a fractional reserve, but it doesn’t depend upon a bank. Groups can give out many IOUs for a given ounce of gold, and they would be unsustainable. Huge Ponzi schemes, backed by government, such as Social Security, can operate within a gold standard.
The Austrian contention that in equilibrium one quantity of “money” in an economy is as good as another strikes me as wrong. Suppose there is one ounce of gold in existence for an entire economy. Of course, one may then reply that in that case gold would not be a satisfactory money. But that reply implies that the quantity of money matters. Common sense implies that to reduce transactions cost involved in barter requires “money” and that too small a quantity of money will not reduce trade transactions costs to as low a level as possible. Therefore some quantities of money are better than other quantities.
In the case of one ounce of gold, the problem isn’t so much the quantity but the divisibility that’s the problem. If it were conveniently possible to divide one ounce of gold into millions of fractions, then yes, one ounce would work for exchange as well as a million tons of gold.
Rothbard, however, has written that…
Once a commodity is in a large enough supply to be conveniently used as a money, no increase or decrease is necessary.
So, in this case, gold, if only available in a single ounce would never have become a money in the first place, since there wasn’t enough initial supply. Maybe later in time enough finally is discovered. Some have argued: What supply is enough? The answer is whatever the market decides.
Then, any new discoveries of gold, or any new real-wealth creation would simply adjust the ratio of the gold to all other goods. It is unlikely that this ratio would be need to be adjusted so drastically as is implied in the above question.
But sometimes there can be a shortage, and the market finds a solution. It either uses other commodities (e.g. silver) or it takes a coin and cuts it into eight pieces – and get’s the famous pieces of eight.
Dear Professor Murphy, I’d very much appreciate a comment about what Rothbard effectively wrote (in his “America’s Great Depression”). Looking forward to your valuable comments and guidance.
Rothbard and his silent equation of free market and 100% gold reserve banking. Ridiculous.
Are you one of these one-issue crusaders that comes here to whine about something incessantly?
Rothbard and his fanboys. Boring.
Rothbard’s obnoxious critics. Lame.
Opposition to the free market and 100% gold reserve banking: murderous
But if you prefer slavery, war, and the culinary enjoyment of a tender toddler, continue on your current path of enshroudment.
Now, seriously, why do you think that someone against the legal enforcement of an arbitrary statist construct that is the gold standard (as proposed by Rothbard) is somehow against the free market?
I’m afraid you’re not making your arguments clear. It’s one thing to say that, historically, governments have instituted a gold standard, it’s another to say that a gold standard would not exist without government enforcement.
As I’m not religiously obsessed either with gold or with anti-gold, I’m not saying a gold standard would or would not emerge spontaneously (although I deeply doubt it would emerge for a long period of time, globally). I’m just criticizing the “return” meme, ’cause what you want to return to was never spontaneous, it was always explicitly construed by governments and bankers; as such, any adornment of the “gold standard” – in its reality, in what it actually was and how it was functioning – is somewhat silly.
Why is the gold standard an “arbitrary statist construct”? Why do you say that the gold standard requires legal enforcement? Did anyone out here say that?
Because uhm, wait, maybe just because it was historically always brought about by legislation and banking cons? Maybe because it emerged in UK only after Isaac Newton manipulated silver out of circulation? Maybe because it was forced upon the population of USA in 1900 by an act of CONgress after one of the most fervent lobbying and smear campaigns in the history of american politics?
This is exactly what I was looking for prior to asking Doc Murphy. Fortunately, I was in sync with Rothbard before reading your snippet. See my comment below Ted Stein at 1:35 pm (I wrote it before reading your post).
Has real savings increased? Shouldn’t the value of gold should drop to the point where the value of the gold being saved and loaned is exactly the same as it was before?
Shouldn’t the value of dollar crash since the QE injections begun in 2008? And instead of this, what we have is major strenghtening of the USD and an extreme drop in rates. Ben Bernanke’s lunatic praxis vs Austrian theory: 1:0, unfortunately.
I think a “laboratory” analysis of a massive gold find is available to the historians – though I have not been able to find a good source.
Just look at what happened to the “old” world after Spain “discovered” all the new gold in the Americas. I’ve read that there was inflation, and that ironically Spain didn’t benefit from it as much as some other countries. But then I can’t verify that conclusion as I don’t really know how to discover the actual facts from that long ago.
One more article that makes me regret occasionally checking on this site.
Robert,
History has proven, and your piece implies, no form of economic theory, not even the Austrian School, can prevent bubbles. The greater challenge isn’t whether or not the Austrian School has an economic system that can prevent extreme business cycles, but does the Austrian School have a practical approach to deal with them when they inevitably occur. To take it a step further, if you accept the argument that cycles are inevitable, and that attempting to prevent them is a fool’s errand, what should we hope to gain at the back end of a cycle? I hope to see a great deal more dedicated to solutions, as opposed to theory, in future writings.
Fond regards,
Ted Stein
President and CEO
The Stonepath Group, Incorporated
There has not been a clear Misean/Rothbardian treatise on the effect of a tremendous, instanteneous, specie influx. It seemed to me to be integral to the fundamental understanding of ABCT and surprised me when Doc Murphy relayed the gap. However, through a few back and forths with the good Doc, this article, and now armed with an adequate understanding of ABCT I conclude:
Since the gold can only be brought out of the ground at the current structure of production rate, getting it out faster and into the hands of consumers as hard currency would require the additional capital and savings the gold itself manifests.
The mother lode would alter the interest rate, but would in effect, drive capital toward itself. The economy would shift resources, but exactly where it should go. There may be some ancillary people that misread the market and invest away from the lode, but their efforts would fail unless they were able to significantly improve the efficiency in the structure of production of their venture (where credit should go anyway). Therefore there would not be a cycle.
The transition of the economy during the lode period would create plenty of winners and losers, but humanity as a whole would become wealthier.
Now, if a 50 ton gold meteor landed harmlessly to earth or the Goonies found One Eyed Willie’s entire fleet of gold ore bourn pirate ships or Auric Goldfinger successfully completed operation Grand Slam, resources may get misallocated. However this misallocation would be no different than any other market misjudgement.
Two factors prevent sound specie money from causing a cycle in a market economy: 1) the ore is not instantaneously money 2) the speicie spike is tangible and known almost instantaneously
Thank you for this, I have always been unclear as to what Rothbard meant by:
“One crucial distinction between a credit expansion and entry of new gold onto the loan market is that bank credit expansion distorts the market’s reflection of the pattern of voluntary time preferences; the gold inflow embodies changes in the structure of voluntary time preferences.”
2nd paragraph, 1st sentence … and Murphy has already lost it with:
“Suppose we have an economy that is originally in equilibrium, where the interest rate reflects the genuine amount of savings that private individuals are taking out of their incomes.”
The interest rate has nothing to do with “the genuine amount of savings” … even if such a thing could be measured. And there is no such thing as “economic equilibrium”. If I want to trade a $50K house for $200K and I find no buyer, it doesn’t reflect an imbalance. Every single trade “screams” balance (and equilibrium). The two traders are in violent agreement.
What the Austrians seem not to realize is that the medium of exchange is “promises to complete trades”. Further, forcing one to get his hands on some gold before he can enter into such a promise is just stupid … unless you’re the one who has the gold, and make such a stipulation. Then it’s not stupid … it’s criminal.
Todd Marshall
Plantersville, TX
It is amazing to witness certitude prior to examination.
your a bitch todd
Todd: The interest rate has nothing to do with “the genuine amount of savings”
Why not? Does not interest rates (in a free market) reflect supply and demand (for money). In a not so free market, where supply can be increased with no production, the price of money (interest rate) can be moved lower.
But in a true market, without coercion, not spending money increases the available supply of goods (i.e. the genuine savings). And by saving more, there is more available to be borrowed, thus the price of borrowing is lower – as reflected in the interest rates.
You should familiarize yourself with the Austrian conception of equilibrium. Dr. Murphy would agree with Mises, Rothbard, etc. in that there is no such thing as economic equilibrium in the real world, although certain hypothetical constructs using such can help illustrate economic principles. LIKE THIS ONE.
Moreover, the context here isn’t some GENERAL equilibrium – only between credit and savings. There is no credit expansion, and demand/supply of loanable funds is unchanging over time. That’s clearly not even an attempt at describing the real world. However, it doesn’t seem unfathomable or even inapplicable. General rates of interest and saving (especially when free of distortions due to credit expansion) remain nearly constant over time compared to other prices.
Dr. Murphy’s example of a gold-induced boom in the context of a free market is reminiscent of the many thought-experiment “paradoxes” that were conjured up to refute the theory of special relativity. In every case the flaw in the “paradox” could be traced back to a violation in one of the theory’s underlying assumptions. In the present example at least two aspects implicit within the money regression theorem are violated:
1) the ownership distribution of the pre-money commodity must be approximately correlated with the ownership of general wealth
2) the production rate of the pre-money commodity must be small compared to the total owned supply
Regarding point one, if large discrepancies existed in this sense then the adoption of a poorly distributed commodity as money would yield a windfall to those who held it in disproportionate share, as the value of this commodity is raised by its new use as a medium of exchange. A free market would not permit such an “exchange” to occur since the condition of mutual benefit would not be present.
Point two simply derives from point one and the requirement that money be durable. If the production rate of gold is significant with respect to its total supply then the producer would necessarily own (at some point) a disproportionate amount of the supply. The durability of money implies that the total supply is just the sum of all previous production. So long as the commodity remains a commodity (i.e. it remains a scarce resource), the production/supply ratio must remain small.
Therefore Dr. Murphy’s example of a rapid and significant increase in the money commodity violates the underlying assumptions behind the adoption of that commodity as money. So the most fundamental argument as to why a gold induced boom is not possible in a free market is that the entire basis for the use of gold as money would be thrown into question, and other forms of commodity money would most likely be adopted.
The difference between the two scenarios is that a gold find is a natural change in supply to which markets adjust, as they do with any other supply adjustment. Even though the amount of new gold may be large, a new equilibrium will be found. If one believes the hype about the Afghanistan find, this may actually happen in another 5-15 years.
On the other hand, an increase in the money supply is artificial and not limited to a one-time event, an indication of a possible trend. In the example, $100 million was added to the credit markets, but why stop there? Since fiat money has no natural limit as does physical gold, markets may not find equilibrium, leading to boom-bust.
Previously, I submitted that Ponzi schemes, such as Social Security, could result in a boom-bust occurrence. That was to demonstrate that a gold standard by itself did not preclude economic disaster. However, it did not address the paradox raised by Dr. Murphy. To do so, permit me to consider that an inventor can instantly create and store nine times the amount of gold that currently exists in the world. What would occur?
Under scenario 1, the world continues to evaluate all wealth in terms of gold, so 90% of the world’s wealth is transferred to the inventor. This creates a bust because the dislocations undermine effective production. Conversely, in scenario 2, as wealth is exchanged for gold, the lack of adequate redemption soon results in the wealth holders use of barter (or some other currency) to exchange wealth for wealth, without a bust. Consequently, the paradox is resolved, since a bust could either occur or not.
Similarly, consider a situation where all wealth is balanced with gold, but a culprit finds a way to instantly destroy 90% of the gold supply. Here, under scenario 1, people continue to operate in terms of gold, so those who own the remaining 10%, take over all the wealth. This creates a bust because the dislocations undermine effective production. Conversely, in scenario 2 the lack of adequate redemption soon results in the wealth holders use of barter (or some other currency) to exchange wealth for wealth, without a bust. Again, the paradox is resolved, since a bust could either occur or not.
In the summary for the pro-gold case you say “Later on, when the banks become worried about rising price inflation, they will slow down or even reverse their injections of unbacked new money. The market interest rate will rise back toward its correct value, and many businesses will be caught with their pants down. ” It can be argued that rates would go higher than normal (overshoot) causing an acceleration of the downturn.
Summary for the pro-gold case you say “Later on, when the banks become worried about rising price inflation, they will slow down or even reverse their injections of unbacked new money. The market interest rate will rise back toward its correct value, and many businesses will be caught with their pants down. ” It can be argued that rates would go higher than normal (overshoot) causing an acceleration of the downturn.
“Eric June 28, 2010 at 12:29 pm Rothbard, however, has written that…Once a commodity is in a large enough supply to be conveniently used as a money, no increase or decrease is necessary.So, in this case, gold, if only available in a single ounce would never have become a money in the first place, since there wasn’t enough initial supply. Maybe later in time enough finally is discovered. Some have argued: What supply is enough? The answer is whatever the market decides.”But this makes my point. What does the word “enough” mean? Do you mean enough to reduce transactions costs considerably, or do you mean enough to actually minimize transactions costs. If you mean the former but not the latter then the “enough” size of the money supply is too small. If you mean the latter, then “enough” is the optimal money supply. (I realize I am considering only the transactions function of money, but that does not alter the point that there is an optimal quantity of money.)
I would join the debate but commodity money is obsolete, IMO, and lending at interest to one’s countrymen is forbidden in Deuteronomy 23:19-20. Common stock is a superior form of money to precious metals, IMO, and requires no borrowing or lending.
Rothbard was a great man and I learned a lot from his books. Too bad he is not around today. I’d love to hear his opinion on a bailout of everyone using legal tender fiat and on common stock as money.
were gold and silver chosen as money because they had a commodity use?? was it other factors that greatly outweighed the commodity aspect of the metals when other non commidity items have been used as money??
iron was a popular commodity but hasnt its money use been much more limited?? why is that??
it it a rather low commodity use compared to supply that made gold and silver popular as money???
Door #2 wins, but i have some comments:
“Although the above analysis was purposely constructed along Rothbardian lines, it presents a problem: Murray Rothbard thought that the boom-bust cycle could not possibly happen on a genuinely free market. That’s why he placed the analysis of Austrian business cycle theory in the section dealing with government intervention in his treatise Man, Economy, and State.”
A: Exactly. Clusters of errors, and the sustained misallocations needed for the business cycle require massive illusions that the market is just not capable of providing itself. This requires a state.
…
“The difference is that the revenues of the gold miner come, not from paying customers, but from the new gold that is brought to the surface. In this hypothetical economy, the man is literally finding money buried in the ground. After suitably polishing it up (and perhaps having someone turn it into recognizable coins), these hunks of yellow metal are perfectly interchangeable with the other units of money in people’s pockets.”
A: I disagree. Revenues of the gold miner come from all customers who buy and utilize bullion such as coin minters, jewelry manufacturers, dentistry, and electronics and other technology industries. Miners are not finding money, rather, they are finding a raw material used as an input to each of the above commercial enterprises. It is not money until it has been minted, and the bullion is not perfectly interchangeable with other units of gold coin money. In fact, bullion must trade at a discount to gold coin.
“Now we have to ask: is there anything odd or illegitimate about this constant stream of income for the gold miner, month after month? After all, he is able to use his gold production each month to pay his business expenses and to enjoy a nice lifestyle himself.”
A: None. And this goes for the minter as well.
“When push comes to shove, it is hard to see how a Rothbardian could, in any way, object to the miner’s real income (assuming he had acquired ownership to the mine in a legal and proper fashion). In the first place, the new gold lowers the purchasing power of an ounce of gold, allowing everyone to benefit more readily from gold’s nonmonetary uses (dental work, jewelry, etc.).”
A: Yes. The suppliers of the new gold bullion are going to have to allow the demanders of this resource, including the mints, to bid the price of the bullion down. This will in turn increase the profitability of each enterprise using gold bullion as an input, above the long term interest rate, which again, includes the mints. This in turn will by an arbitrage process, draw capital into these industries, and ultimately increase the supplies of these products, including the supply of minted coins. The increased production and supply of these goods will in turn, cause the prices of these goods to be reduced, and the price of their inputs to increase, until the profits of these lines or stages of production are reduced again to the level of the long term interest rates. The production of all goods impacted by the increased supply of bullion and its attendant price reductions will remain elevated from their previous levels as long as the supply of gold bullion continues to remain impacted by this new ease of extraction of the bullion from the ground.
“If we try to argue that the portion of gold that goes into cash balances (as opposed to necklaces and tooth fillings) is somehow socially useless, we run into the problem that these transactions occur on a voluntary basis, and the people trading for the gold would definitely report that they gained from the exchange.”
A: Right. As Block and Barnett II point out, it is false or meaningless to argue that any supply of money is optimal. Furthermore, only current levels of profit in the minting industry, and future entrepreneurial action and technological innovation in the minting industry, and the future profits or losses yielded due to these speculations in this industry, can tell us if the supply of coin was optimal or not.
Ultimately, an increase in the productivity in gold bullion production will result in an increase in social welfare, even to the extent that it results in a profitable increase in the production and minting of gold coin money. I agree with everything else you have written under Door #2. Door #2 is definitely the winner, from my perspective.
Boom/Bust And Inflation Under A Gold Standard.
What about intent?
Gold or any commodity money has to be intentionally chosen to be used for the purpose of serving as a medium of exchange (while some of it may be used for other uses). If the intent is to increase the money supply then relative prices will change (inflation). If the intent is to alter the capital structure then a boom/bust cycle may result (most probably will) unless for some reason such a natural entrepreneurial guess is by chance correct.
Again we return to intent.
If the intent is to alter the capital structure as a result of either ego-driven interpretation or ego-driven intervention it is inevitably bound to cause a boom/bust cycle. That kind of corruption cannot find compatibility in an economy in its pure form.
Disagree. It is still possible to have boom and bust on Gold standard, or on ANY monetary standard for that matter…
The inflation/deflation problem is purely political in nature and has nothing to do with a particular exchange medium that is considered to be money.
For example, in a kingdom on absolute Gold standard with 100% reserves, a king can order to re-mint the coins with, say, only 80% of gold in a coin considered as exchanged medium, thus creating an inflation… Conversely, ina utopic society on some island with Free Market economy, if the Islanders decide to use seashells with the trusted authority’s signature or marking on it, there will be NO inflation whatsoever despite of unlimited supply of seashells, provided the trusted authority or power broker (which is necessary for market’s functioning, and all otehr practical purposes) is honest. So the question is how to keep the broker honest, and not what to choose as token of exchange…
The only advantage of gold as money is its relative difficulty of manipulating its supply. But then again, imagine walking down the street with a handful of quids in your side pockets, you might start thinking of tightening your belt for the fear of getting too much exposure
And besides, the money is whatever the State (i.e. the alpha male of the pack) tells it to be, and you better believe it…
IMHO, it’s all about the monopoly of coercive power, that is all to it – no need to come up with elaborate theories and voluminous tomes…
It is still possible to have boom and bust on Gold standard….by gold standard do you mean gold money and not notes for gold in excess or the amount of gold??
if a miner discovered a large quantity or or gold ore isnt it likely that for teh gold ore to make its way to money that people would have to give up existing gold money (mined and minted using resources) to make the discovered gold ore into money….extraction, transport, refining, minting/smelting ??? so that an ounce of gold money to accomplish this would yield more than an ounce of new gold money??? by giving up existing gold money wouldnt that mean gold not spent on other items…less ice cream or shoe polish??? is it by virtue of this taking place that boom bust would likely not occur??? would this be something nother than boom-bust?
does teh current money system do somethign different than what i mentioned above??
Can Gold Cause the Boom-Bust Cycle?
can gold cause anything??
or does the author really mean does mining and spending gold as money cause THE boom – bust cycle?
with gold used as money, theres no guarantee you wont get a bout of ‘inflation’ if, say, a new and plentiful source of gold is discovered, or a new technology to make extraction more efficient is developed. But beyond a once-off shift in the relative value of gold/money and other stuff, the effect will be moderated naturally and adjust in time if there’s no intervention. With gold being more plentiful and worth less in terms of other stuff in the economy, it follows that the most marginal gold producers will cease production and move their capital and effort into other sectors, thus moderating the ‘oversupply’ of gold, and simultaneously boosting the supply of other stuff.
without intervention by fiat, there can’t be boom and bust cycle, because the forecasting errors made by economic participants will tend to be be in both directions – lots of small undershooting and overshooting of expectations, and behavioural shifts in response in all directions, so while particular sectors will experience increases and declines in response to pricing signals, there is no overall boom/bust cycle in the economy as a whole – its a multitude of diffuse and diverse movements in all directions, with a decline in one sector offset by a boom in another. Such ‘instability’ as emerges from this is not something to be feared, but is to be celebrated as evidence of a vibrant economy, a reflection of th edynamic adaptability of th emarket to respond to the needs of its participants. ( I suppose we cah thank heaven for small mercies: The ‘stability’ contemplated in the constitutional mandates of Central Banks across the world , but not achieved to date anywhere, is in fact nothing less than complete economic stagnation, and should be feared above all , perhaps even more than the boombust instability that paradoxically results from their attempts to stabilise! As long as they retain their interventionist power, let us hope that they continue to fail to discharge their mandates).
the problem with centralist monetary intervention is that the inevitable forecasting errors of participants are SYNCHRONISED as a result of responding to false (fiat) pricing signals – large numbers of participants all consistently undershooting or overshooting expecations at the same time. THAT’s what drives the boom bust cycle.
without intervention by fiat, there can’t be boom and bust cycle,….
why would fiat have anything to do with it if a govt mined gold and silver to use as money?
would the boom bust as you say only occur with inflating gold notes in excess of gold held???
Gold as money is barbaric. The question is: Are we barbaric too?
But let’s have liberty in money creation, usage and acceptance and we”ll see, eh? In that environment, I would bet that gold would soon be reduced in value to just its commodity value. Furthermore, I fear that gold lovers are playing the game of the central bankers who own vast amounts of it. The English used tally sticks for ~500 years with great success and those were just pieces of wood.
I recommend Ellen Brown’s book, Web of Debt. I don’t agree with her proposed solutions but the diagnosis seems spot on.
@fatbeard,
So In your opinion, using gold as a medium of exchange is barbaric, but using paper is not? Is there any logic behind your assertion or is it strictly an emotional response?
So In your opinion, using gold as a medium of exchange is barbaric, but using paper is not? Kirk
Actually paper is somewhat barbaric too, electronic bookkeeping entries are superior in some cases. As for gold, the mining of it recently killed 186 Africans via lead in their water supply from a nearby mine. The mining of gold in the Amazon is also causing damage via the mercury used to extract it.
I am a libertarian. I believe in liberty but also the rule of law. That combination can produce monies far superior to gold or fiat. If the Austrians have become wedded to gold instead of liberty and the rule of law then they have lost their way and become tools of the central bankers and monied elites.
“if the Austrians have become wedded to gold instead of liberty and the rule of law then they have lost their way and have become tools of the central bankers and monied elites.”
I couldn’t agree more. Money should be whatever the free market decides it to be. If that ends up being gold or silver or electronic or whatever so be it. Even if the dreaded fractional-reserve banking is decided on voluntarily in the free market so be it. Liberty is the most important aspect here and if it is voluntarily accepted in a free market then who can argue it should be outlawed. A very good arguement for liberty concerning money and fractional-reserve banking in a free market society is by Michael S. Rozeff: Rothbard and Fractional-Reserve Banking, A Critique, The Independant Review A journal of Political Economy, Volume 14, Number 4, Spring 2010. I admire Rothbard greatly but Rozeff makes some very strong points.
I admire Rothbard greatly but Rozeff makes some very strong points. Matt
Actually, I believe fractional reserve lending is obsolete too. But let’s have a free market and see.
when the govt disappears then you might have money liberty.
but i dont see that happening soon. when the govt said congress shall have the power to coin money and and required states to have debts settles in gold and silver coin was that more of an instance where the govt just adopted an existing market money as a fiat currency??
did that have advantages over the completely govt managed money system in place now????
“When the government dissappears then you might have money liberty.”
Agreed, except i would change “might” to would. No government, no monopoly on force. Of course you are right that government isn’t leaving anytime soon (Statists abound). As far as you other questions i’ll do the best i can, i’m kinda new. Returning to a commodity based money would make the money more “sound”. This doesn’t mean I am for the government decreeing a particular commodity as money, I am for a free market in money. I am simply saying that a commodity form of money- use gold for purpose of example-would be harder for the government to manipulate and inflate since they can’t just “create it out of thin air” like fiat paper. In otherwords this would be better then the current government “printing press” monopoly on money that we have now. If the govt decreed that gold and silver are the only legal money then yes by the definition of fiat that is exactly what it would be, although as said above a more stable fiat money.
“In otherwords this would be better then the current government “printing press” monopoly on money that we have now. If the govt decreed that gold and silver are the only legal money then yes by the definition of fiat that is exactly what it would be, although as said above a more stable fiat money.”
what has the current money supply increased by over the last 90 years?? 4 or 5 percent per year?
what has gold coin and bullion (non jewelery or industry use) increased by??? 2 or 3 percent per year???
if that is so does stable mean better??? if the money supply doubled ihn 10 years and te vast majority of the money went to ……crop yield imporvements, cheaper municipal lighting etc would that be a bad thing???
i can understand taxing someone for a 800 toilet seat as a bad thing but i havent seen where paper fiat currency is better than gold/silver fiat currency.
aside form whatever advantages the govt gets from manipulating the supply of paper dollars
what benefit is there from a market pov by using gold and silver fiat??
would the govt have to tax more in gold and silver to buy up gold/silver deposits and mine it themselves to get more revenue??
James, I’m probably not the person to be asking these questions. As I said i’m kinda new to economics (I consider myself an armchair economist who has only begun learning about it recently) I’m sorry if my attempt didn’t answer your questions, I only tried because it seemed nobody else was addressing them.
“I can understand taxing someone for a 800 toilet seat as a bad thing but i haven’t seen where paper fiat currency is better then gold/silver fiat currency.”
I agree that paper fiat currency is not “better” then gold/silver fiat currency. In fact I said that gold/silver fiat would be more sound then paper because it would be harder for the government to inflate.
The article seemed to be a discussion of how a boom/bust cycle is possible under a gold standard VS. the ethicality of a miner hitting a boom (though, why those two concepts should be opposed I don’t know). This does not deliver, as promised, a comparison of how a boom/bust scenario is possible vs. the belief that it is not possible.
The author failed to articulate any argument against the possibility of a boom/bust scenario under a gold standard. I’m left to surmise that it is the authors opinion that such a scenario is possible, therefore, IMO the article should have been titled ‘How a 100% gold standarn can still lead to a boom/bust cycle’.
has there ever been a 100 percent gold standard??
http://mises.org/econsense/ch78.asp says at the very bottom of the page :
“It is also why it would be far better to suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves.”
does the rothbard here mean gold/silver 100 percent reserves?? cigarette 100 percent reserves???
for a mining boom in gold would man many people have to give gold up to miners for them to get more gold out of the ground?? would that actually be a boom as described by so called austrians???
i think you are over-analyzing this. The gold price would simply re-adjust itself downward, and the overall price level upward. But the driver of the cycle is fractional reserve banking, not what is used as money. in a free market, money is just the market-chosen commodity to serve as money. Its the inflating, multiplying effect of FRB that causes the distortion in interest rates, and hence, the cycle. Gold and FRB would still cause the cycle, but because gold supply is inherently limited, the cycles would be of smaller magnitude.
When the new gold becomes part of the money supply, the market adjusts and is that not the end of the story? Why would there be any day of reckoning since the gold is in place and doesn’t disappear?
A massive influx of gold probably would set off an unsustainable boom (until prices adjusted), since the real problem with fractional-reserve credit expansion is that new money is created to fund investment. However, I’m willing to argue from the standpoint that such an event is unlikely to occur very often if ever (given that most of the gold in the world has probably been discovered already), and is therefore less likely to be a practical problem than, say, fiat money inflation. I would also like to point out that unsustainable booms can occur without fractional-reserve banking-the monetary inflation is the important part. For example, Revolutionary France suffered a crack-up boom after the government issued assignats, and some accounts suggest that the issue of Continental dollars during the American Revolution set off a short-lived wartime boom.
@FatBeard
Tally sticks were primarily a way for English kings to spend money they didn’t have, and couldn’t afford to collect in taxes for fear of making the theft from their subjects explicit. It broke down when the monarchy under Charles II went bankrupt from depending on the tally sticks to cover government deficits. While I tend to agree that gold would probably not be the money used on a free market, if such were allowed today (I tend toward Hayek’s views on the subject), it’s fairly clear that the history of non-commodity money is spotty, and that of fiat money is horrible.
@Bill Miller,
I suspect that both fiat and gold are tools of tyrants. Liberty, by definition, is the antidote to tyranny.
@ Fatbeard,
If they are forced upon individuals by government then yes they are. If they are voluntarily accepted in a free market then no. Gold may very well rise to the top in a free market competition of mediums of exchange simply because it has certain qualities like demand, durability, and divisiblility. Of course it could be silver, or shells or any number of things or combination of things. it all depends on the free market and what individuals decide they will accept as money. That’s the true beauty of the free market, we can speculate what could be, but since we have no free market (yet) we don’t know what will be. All we know is- like many others on this sight- is that a free market would work and would be-although not perfect-superior to the current forced system.
I agree, of course. But the completion will not be between gold and seashells. It will be between precious metals, fractional reserve lending, common stock and maybe some other candidates.
Tally sticks were primarily a way for English kings to spend money they didn’t have, and couldn’t afford to collect in taxes for fear of making the theft from their subjects explicit. Bill Miller
“Money” can be whatever the sovereign declares it to be or the free market chooses. I’ll not be enslaved to a bunch of idolatrous gold worshipers. Rather, I’ll see them stuck with gold whose value has shrunk to its mere commodity value as their slaves free themselves with civilized monies based on liberty and the rule of law. I
Mr. Murphy,
The answer is obvious if you accept the necessary implications of ABCT. That is you can have a boom bust cycle even with a gold standard and a 100% Reserve Requirement. The reason is that the Business Cycle results from the variability of the money supply. It does not matter what the money supply is or what its absolute quantity is. If that amount changes it will distort prices and any monetary induced distortion of prices hampers economic calculation. The reason gold always seems to win the role of money in the free market is that it has the lowest variability of supply. The reason for advocating a gold standard is that governments cannot manipulate the supply of gold anywhere as easily as they can manipulate the supply of a paper currency. However, that is a political argument not an economic one. Consider a thought experiment. Suppose, Menger was reincarnated into our Central Banker and he fixes the our money supply. Suppose this amount remains fixed for a 100 years while Menger plays his role. What would happen to prices? Would we have any business cycles during those 100 years.
The floor is yours Mr. Murphy
Sincerely,
George P
I’d like to point out that Murphy’s argument #1 is that gold would cause an unsustainable boom (i.e. cause investments to happen which would later be revealed to be bad investments), and his #2 argument (contrary to its title) is that there is nothing ethically wrong with the gold miner’s actions. Both are quite true.
As usual, this is a terminology problem. What is an “unsustainable boom” anyway? In argument #1, an “unsustainable boom” is tacitly taken to mean “activities which look profitable but end up not being profitable”. Unsustainable booms of this kind can certainly happen in a free economy.
In argument #2, an “unsustainable boom” is taken to mean something more like “a set of exchanges that are suboptimal to the parties involved at the time they are made”. This can’t happen in a perfect free society (where all exchanges are voluntary by definition). I don’t think this is what anybody has in mind when they use the term “unsustainable boom”.
The question of whether incoming gold has higher “social utility” than the “social disutility” of the boom/bust is a separate one from the ethics involved. All questions of utility depend upon the choice of cost function. The second argument is essentially “though inflation happens (by definition) and purchasing power is lowered by the introduction of new gold into the economy, nevertheless it is better for this to happen than not to happen, because the market allows it, and it therefore must be more optimal to let it happen than to let it not happen.”
This is true if we use the “free market cost function”, which is an aggregation of the desires/predictions of market participants as they stand now. If we used a different cost function — say, the aggregated desires of market participants in hindsight one week later, if it were possible to compute such a thing — this would probably not be optimal. That is, market participants may regret their decisions (which may have been implicitly based on future estimates as to the supply of money which were in error), and may actually make different decisions, if we somehow lived in a world with a “do over” option.
We like the market cost function because it is actually computable by the market process (as opposed to the “hindsight” cost function I mentioned, which is not), and because it takes supply and demand into account, as well as the forecasts of entrepreneurs, and thus effectively weights the desires of consumers against the availability of resources. By contrast, other cost functions are arbitrarily imposed by certain privileged sets of someones (from a sole dictator to a planning board, to the voting public). These someones either do not own (and thus cannot economically allocate) the set of scarce resources and thus cannot harmonize supply and demand (direct democracy), or else they claim sole ownership of all goods, making the system unjust (socialism).
So, to me, this is the answer to the conundrum:
“Ethical (non-aggressive) voluntary exchanges can sometimes cause unsustainable booms – bursts of activities which appear to be long-term profitable but which turn out not to be. This is a consequence of the limited knowledge of the market as a whole, and the fact that the market cannot know the future with certainty.”
In practice, the reason I favor a free-market solution is that I have excellent guarantees that the amount of inflation due to new gold discoveries will be small and limited by comparison with the amount of inflation due to a fiat system. I simply have no way to guarantee that fiat money will do anything predictable, whereas I can predict with reasonable probability what the amount of gold available on the market will be next year.
Gold is useful as a means of exchange because historically it has been found to be rare, but not so rare to be impossible as a means of exchange, and something that people value for its own sake and thus inherently desirable. In your example the miner has just struck lucky and come up with an “unfair” advantage, but such is life. If he were to consistently find massive amounts of the metal, and others did as well, then, in a free market, unregulated situation, gold would simply lose its value/credibility as a means of exchange and something else would take its place.
I cannot pretend to understand all of the terminology or the history behind some of these controversies, but it seems to me that even in a banking system wherein banks operate under the 100% reserve standard, some of these banks will inevitably fail because of bad loans or because of unforeseeable events (war, natural disaster, etc). Any time a bank loans money, it is risking its depositors’ money. But, if that is the case, is there such a thing as a bank with 100% reserves? Unless I do not understand what a bank essentially is, which is very possible, a bank with 100% reserves sounds like a contradiction in terms.
And, if that is true, wouldn’t any banking system to varying degrees of frequency and intensity be susceptible to “boom and bust”? Under a gold standard, the difference in practice may be night and day when compared to banks under a fiat money regime, but doesn’t any credit system entail this risk to some degree?
If the mine adds appreciably to the world’s supply of gold, then one expects price inflation to follow. For those holding gold, the result is negative. One can purchase less. But for those wishing to acquire gold for commercial purposes (e.g., a gold filling), the news is good, for one has to work less to acquire the same amount of gold.
If a money had no commercial value whatsoever, it would not have become a money. Thus, I don’t see the influx of more non-fiat money, in this case gold, to be a lopsided distortion of the market. Some will gain; some will lose.
As for the influx of gold causing a boom-bust: I think that depends on the intelligence of investors and their knowledge of the gold deposit. If the size of the deposit is well-known far in advance of its exhaustion, and there are no other huge deposits about to be discovered — a fact which, of course, no one can know in advance — then I don’t see a big bust on the horizon.
But there could be a bust, were investors to assume falsely that this new supply of gold were endless, and at some point the new supply were to decline to a trickle. However, if investors assumed that the supply of a money were to increase without end, they might, as others have pointed out, prefer an alternate money, thus applying the brakes to the boom as an economy switches allegiance to a more stable commodity.
All in all, I don’t see a huge problem, here, unless a new supply of the dominant money were to treble overnight, in which case there would be a huge redistribution of wealth, where the vast majority of people would end up as losers, and the few suppliers would end up as the winners.
But non-miners could have invested in gold mining companies as a hedge. Thus, to those who saw their wealth decline to a third overnight, one could say: too bad, but you could have hedged.
I haven’t read all of the hundreds of comments so far, so I apologise if anything I say was either previously said, or argued against etc., however, it does seem that the Rothbardian economic framework must permit the possibility of a non-government induced boom/bust cycle. Indeed it seems that bubbles and their popping would be the standard to expect in the free market, based on Austrian economics. After all, we do not expect, as in neo-classical models, that prices and production will adjust instantly; entrepreneurs, producers, workers are constantly responding to price signals as they perceive them, shifting their production to ways they expect to be profitable.
It is inconceivable that one should declare it impossible that entrepreneurs should all choose poorly in one instance, in their efforts to shift the structure of production closer to the true desires of consumers (constantly in flux), even if we deem it unlikely. After all, if the entrepreneurs are assumed to have this level of knowledge of the consumers’ desires, then surely we must concede that they will have this level of knowledge, or accurate expectations, of the spread of money; they seem on an equal “epistemic level”.
Thus, while historical booms have been government-caused, and while the government’s money-distortions greatly contribute to and worsen booms (and busts), it must be possible within “our” framework, at least in theory, for a boom/bust cycle (albeit shorter and less harsh) to occur without the baleful influence of the state.
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