I believe that you understand the case in favor of the proposition that clearing systems do not add to production. The main points that you reference are quantity of money does not matter; clearing systems only affect money demand.

What I think that you are addressing is the relationship between theory and practice.

If something is impossible in theory then it can’t work in practice either, so long as you have a correct theory. As Rothbard used to say, commenting on the oft-heard “great theory but it won’t work in practice” – theories that don’t work in practice are bad theories.

In economics we use constructs like the ERE and all other things being equal so we can understand the effect of a single change. In the real world, there are always multiple causes and multiple things changing. The relationship between theory and practice is that you need a theory in order to understand real world situations. If we look at a real world situation in which cause A existed and result B occurred, that doesn’t tell us much about the relationship between A and B. There are many possibilities – A cause B; B caused A; some third factor X caused both A and B; B happened in spite of A; A happened in spite of B; A and B had nothing to do with each other; A caused B but only because of the presence of some co-factor C, and so on. Identifying a particular clearing house that existed during a period of the growth of global trade does not help us much in narrowing down the causal relationship. We need a theoretical argument for that.

Fekete has used theory to defend the idea that the adoption of real bills leads to an increase in production. Most of the quotes that I used came from his article came from an analytic argument. His argument is wrong, and therefore it cannot be that the world works the way he says.

I’m not saying that clearing does not matter at all. Only that it does not do what Fekete says it does. It is very useful in reducing the number of cash transactions.

This post reminds us that 1. economy can work using any amount of money 2. the clearing systems decrease demand for currency, which may have similar effective effects as raising currency supply. Ok. Then things are discussed inside the imaginary construct of Evenly Rotating Economy, and belief is expressed that (a) Fekete works within ERE too, (b) non-ERE transition things won’t change the outcome. This concludes as clearing systems don’t matter, growth is there with or without them.

Let me challenge the ERE thing. Yes Fekete does a bit of storytelling, but then his claim is about a real-world clearinghouse, one that operated till 1914, and other that could operate again. Similarly the title, “Did Real Bills Enable the Growth of Trade”, sounds realworldly, y’know, it’s about the real world, like, say “What were consequences of Reagan’s action in the PATCO standoff”.

It is a real question about real world – do the clearing systems help, or not?

While ERE is great tool, one of the few we have, none else than Mises cautions against taking results from ERE analysis and presenting them as real-world results.

It may still be possible to show that clearing doesn’t matter, and Fekete is wrong in advocating them. But regarding this piece, my opinion is that it failed to present a clear chain of argument in support of such results.

That said, I’ve read the AEF’s paper, and agree the bad situation was made much worse by missing clearinghouses, and especially for workers through the loss of their “virtual wage fund”.

But in real life capital goods come in discrete quantities, and hardly can all be always fully utilized. Same with supplies, there needs to be some buffer. Trying to run near 100% utilization and with little supplies means less tolerance for the unforeseen (errors, accidents) – it may not be worth the risk. Also let’s mention the most common reason for underutilization of existing productive capacity – lack of demand.

Now in such situation there is a way to produce more goods without adding anything: by employing the unused productive capacity already in place. If there’s new demand, owner may be willing to run machines longer, pay workers more and run down his stockpiles, in order to bring more goods to market.

Now in the Cash&Carry scenario the distributor needs to raise additional currency to demonstrate said demand to the manufacturer, before he can show goods to consumers, who will ultimately justify efforts of the whole chain by paying in specie.

Here the currency may become the limiting factor. The situation where additional money is needed in the chain to satisfy additional demand, but it’s hard to borrow it, is the one that’s interesting: if we play by “Cash&Carry” rules we may know what should be produced, and who would buy it, but there may not be enough currency to carry it all out. On the other hand, if those involved can trust each other, doing sale on credit (invoces, clearing, etc) saves the day.

I think that money are important part of the overall capital structure, which enables production of goods and services from raw materials, labor and time. And while it’s true that ERE can work with any arbitrary amount of money, in the case of changes, when the capital structure needs to shift to reflect the new situation, there may develop local shortages of currency, just as there can be lack of any other inputs to the structure – labor, machinery, time, supplies.

In that case clearing system would come handy. As things trend toward equilibrium, the rebalancing of money occurs too. Part of that space can be filled by currency diverted from elsewhere, while part may be satisfied by the paper medium, which was originaly meant only for clearing, but is right there, and may become money. (cf. Mises’s regression theorem of money creation, neccessary condition: to be in use for non-monetary purpose before becoming money.)

It means that if a dollar is worth 1 ounce of silver, it’s because the issuer of that dollar holds assets worth 1 oz. for each dollar it has issued. If you valued that dollar at, say, 1.4 oz., then you would set yourself up to lose wealth, just as if you paid $14 for a share of stock backed by only $10 worth of future earnings.

Money is a good. This is true of fiat money and commodity money. This is true of any money under any monetary system – there is no way to fix the value of money. It is the most marketable good in the economy. But it’s value is not constant. The value of money is expressed in terms of the prices of goods offered for money, which change from moment to moment. There is no way to fix the value of money.

Attempts to “stabilize” the value of money on the supply side are self-defeating because money prices and money demand depend on money supply. Changes on the supply side introduce a feedback into the price system that is destabilizing.

You may be making this point, but I just wanted to make this clear.

Savings = putting aside real goods for future consumption. Resources that are not consumed are funneled towards investments, though it is done through the financial system and in the form of money. The desire to increase cash balances, for whatever reason (facilitate transactions, maintain a stable purchasing power, or for security during uncertain periods), does not constitute saving in anyway whatever.

Think of Crusoe on his island. If he chooses to hold trillions of dollars then he is not saving; he is merely hoarding cash. Crusoe cannot do anything with that cash; he can neither build a spear nor a fishing net (investment) with that money. To think of savings in monetary terms is to decouple it from investment, the very point of saving. Economics is supposed to pierce through this smokescreen. Savings is investment in the long run (savings is investment at all times in a barter economy).

The Austrian definition of savings, which is the only meaningful definition, is this: Saving is the demand for future goods, or goods that will come to fruition sometime in the future. Money is an economic good, but it is neither a future good (capital good) or present good (consumer good); it’s merely the common medium of exchange.

Most “Austrian” economists agree that money should be backed by precious metals because of all the dangers and costs known to arise from an unbacked currency (mis)managed by a government. So I think that Fekete’s ideas on Real Bills is really a generalization of a specie backed currency. In the past, Real Bills circulated in commercial markets and these bills displaced operating currency thus freeing it up for other uses, i.e., the bills became part of the money supply. The argument from Fekete and the original advocates of the RBD is that such bills circulate as a sort of secondary money and that this was valid and not arbitrary because the circulating bills were backed not by specie but real, actual goods and the amount that could be created was finite because of this link to real goods.

Fekete’s arguments are weak and confused and he fails to demonstrate why a system based on the RBD is even necessary in today’s modern financial system (I think the fully developed commercial paper market makes circulating real bills unnecessary). However, if you grasp that Fekete is groping towards defining an objective monetary system that does not allow the creation of arbitrary credit anywhere in the system, then you might see the value in his work. It also explains the oddity of an alleged currency crank who is clearly not a statist and advocates many free-market principles. Dismissing him as a currency crank is to miss the crucial point of his work.

Defining a monetary system that does not allow the arbitrary creation of credit either within the banking system (see any number of countries that have destroyed their currency) or outside the banking system (see the recent mortgage crisis) has not been achieved and is one of, if not the most important, unsolved problems in economics. This problem was not solved by the Banking School or the Currency School or von Mises or Fekete or many others — it is difficult problem but learning from these failures could provide the leads to finally solve this question and thus the resolution of the business cycle and recurring economic depressions.

that would certainly seem to matter

do they reduce the demand for money?? do you want less money or more??

or do they reduce the need for hand to hand exchanges of money??? but demand for money and subsititutes would be unable to know exactly???

what is the correctness of neo-rbd??? that is operated at all…somewhere???