These are notes from the sixth lecture given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them.
This lecture was given by Prof. Hoppe.
Three Types of Goods
- Consumer — directly useful.
- Producer — used to produce consumer-goods.
- Money — common medium of exchange.
Barter Economy
- Why exchange goods in a barter economy? In a world with different resources, there are benefits to the division of labor:
- Absolute Advantage — pne person is good at something, another at something else. If they specialize, they can produce more net goods and trade.
- Comparative Advantage — everyone specializes in the area where they’re the most competent, both superior and inferior people, because of the scarcity of time. This results in more being produced.
- Absolute Advantage — pne person is good at something, another at something else. If they specialize, they can produce more net goods and trade.
- In order for A and B to exchange, each must have a particular good that the other wants: Double-coincidence.
- With perfect knowledge, all exchanges could be barter.
- However, in the real world, there is imperfect knowledge (uncertainty). E.g., A has something that B wants, but B has nothing A wants. How do you solve this?
Indirect Exchange: Money and the Monetary Economy
- Not all goods on the barter economy are equally marketable.
- So, an individual trades a less marketable good for a more marketable good.
- Thus, individuals buy the good not just for its use, but also for a medium of exchange.
- Result: That more marketable good becomes even more marketable, because you still have people using the good directly, and now there is one person for indirect exchange.
- Less intelligent people copy the very intelligent person, who uses the good for indirect exchange.
- More and more people copy said individual, because that good becomes even more marketable, and the benefits become greater.
- The good develops into money.
Benefits of Indirect Exchang
- Can engage in cost-accounting, with a common unit.
- Commodity that develops as money must be valuable in the first place, and can not be worthless paper at the beginning.
Features of Money in a Monetary Economy
- Must be a valuable commodity to begin with.
- Divisible.
- Transportable.
- High value per unit weight.
- Easily recognizeable.
Evolution of World-Wide Money
- Division of labor is beneficial, and encompasses the entire globe.
- If there are different moneys, you still need an international commodity money.
- As the market begins to encompass the entire world, one expects the evolution of a world-wide money standard to better facilitate exchange.
- That is exactly what happened with the Gold Standard.
Money as a Good
- If you double or half the money-quantity, by enlarge prices will adjust to increase or decrease, so society is no richer or poorer.
- So, any given quantity of money is as good as any other.
- Newcomers to inflation, or first-spenders of new money, will gain at the expense of second-comers, or second-spenders:
- First-receivers can buy lots of goods at low prices, increasing the price of those goods, and enrichening themselves.
- Second-comers find higher prices in those goods.
So, inflation makes some richer at the expense of others.
- First-receivers can buy lots of goods at low prices, increasing the price of those goods, and enrichening themselves.
- However, increases in the money supply make us richer to the extend that the “money” is used for non-monetary purposes; obviously, this doesn’t apply for fiat paper-money.
Falling Prices Under the Gold Standard
- The supply of goods expands faster than the supply of gold, so the prices in terms of gold tend to fall.
- This does not harm business, because the cost of their inputs goes down as well.
- Some individuals, like Milton Friedman, think that the purchasing power of money should be stable. This is absurd, because people wnat the value of their money to raise, and because the world is constantly in flux.
Explaning the Fiat Regime
- Current world system:
- Not commodity money.
- Purchasing power of money decreases.
- Rising prices.
- Not commodity money.
- States:
- Want to increase income.
- Can tax (coercion).
- Inflation (thievery) — safer.
- Want to increase income.
- The State aims to control money:
- Convince people that the State needs to have a monopoly on gold coins, to prevent fraud:
- The free market really prevents fraud, because competitors would capitalize on any fraud by a company.
- Monopoly State encourages fraud; e.g., debasement.
- The free market really prevents fraud, because competitors would capitalize on any fraud by a company.
- Obtain monopoly on money substitutes — e.g., title tickets to gold, bank notes — arguing that it’s necessary to prevent fraud:
- Again, it is competition that prevents deposit fraud, because if the bank issues fraudulent notes, competitors point that out, they redeem their bank notes, consumers redeem their bank notes, and there is a bank-run.
- However, if you are a monopolist, you can print out money tickets and there are no competitors to call you on it; but, people eventually realize this anyways.
- Again, it is competition that prevents deposit fraud, because if the bank issues fraudulent notes, competitors point that out, they redeem their bank notes, consumers redeem their bank notes, and there is a bank-run.
- Once the State has a monopoly on gold coins and tickets (bank- notes), it declares that it will no longer redeem bank-notes:
- Now, the bank-notes are cut from gold.
- The tickets will still have “value”, because they have become the unit of exchange.
- Now, the bank-notes are cut from gold.
- Convince people that the State needs to have a monopoly on gold coins, to prevent fraud:
- Historically, this has happened, such as in the US.
- Limitation: If other countries inflate slower, you have a problem, because of currency competition.
- Solution: World Central Bank, to create a world fiat money, which allows inflation at an unprecedented rate.
- Tendency towards a World Central Bank: Euro (because Germans weren’t inflating), Dollar, Yen; leading to a World Central Bank dominated by the US.
Banking and Increases in the Money Supply
- Safety-deposit banking — people pay a premium to the bank to store their money safely, and the bank issues bank-notes. So long as the bank-note to gold ratio is 1:1, there is no increase in the money supply.
- Savings and loan bank — another function of the bank is to allow savers to obtain interest by loaning money to loaners. The bank obtains income income between the interest differential. This system needs no reserve, and is not inflationary.
- Fractional Reserve Bank — issue more bank-notes on gold than is at hand, and loan out money while at the same time offering to redeem at any time. This is fraudulent and inflationary:
- Two people ahve title to the same property, which is fraudulent.
- When the bank extends a loan to people, that implies it gives a commodity to the borrower.
- Normally, when people defer money to savings, they are deferring their purchases into the future, and allowing business to make investments.
- But now, people are spending money as well.
- So there is not enough money for both the spending and the future spending; thus, busines-investments fail.
- Normally, when people defer money to savings, they are deferring their purchases into the future, and allowing business to make investments.
- Two people ahve title to the same property, which is fraudulent.
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