Shostak cites Wicksell thus:

“There is a certain rate of interest on loans which is neutral in respect to commodity prices, and tend neither to raise nor to lower them. This is necessarily the same as the rate of interest which would be determined by supply and demand if no use were made of money and all lending were effected in the form of real capital goods. It comes to much the same thing to describe it as the current value of the natural rate of interest on capital”

When Wicksell writes this – and when the collectivist meddlers at the world’s central bankers blindly follow its precepts – clearly they are in error to the degree that:-

• it leads them into the dead-end of talking of aggregative absolute price “levels”, rather than worrying about the maintenance of a self-consistent matrix of relative prices;
• it thus induces them to attach two-decimal place “policy” significance to the post-hoc manipulation of artificially-constructed “indices” of such highly-selective price baskets;
• it ignores the bane of that disguised inflation which often appears to pass by the finished goods prices on which they focus, but which nonetheless visibly wreaks its havoc by boosting credit availability and distorting asset prices instead (though the more enlightened central banker’s outside of the Fed’s Nelson-blind and/or self-exculpatory purlieu are, it must be granted, gradually expressing awareness of this species of failings):-

However, it does seem that Shostak goes too far to dismiss the whole of Wicksell’s–perhaps clumsily-delineated–distinction between a “natural” interest rate as a non-financial entity and the prevailing, Fed & fractionally-distorted money market rate of the day.

The former – if it means anything at all – is the rate which, being set at the margin by the joint expression of individuals’ preferential ordering of all possible mixes of future or immediate exhaustive consumption, sends the best intertemporal signal about the state of relative demand for present versus future goods – and hence of the likely availability of scarce resources for productive consumption instead.

It is, therefore, a ratio between present and future goods prices and, by inference, it is an indicator both of the likely maximum price which successive batches of intermediate products may foreseeably realize at each stage in a roundabout process and also of how much the required, sequential inputs of complementary factors are likely to cost the later users, in turn – each of these estimates being clearly crucial to successful entrepreneurial calculation.

Now, yes, to the extent that, in a diverse, stratified, capitalistic economy, honest money is a sine qua non of harmonious production and upon the further condition that each unit of such a medium of exchange corresponds closely to the prior completion and sale of a valued quantum of production (and thus represents, a so-far physically-uncompensated increment to “supply”), this save-spend, burn-build, ingest-invest ratio – this natural interest rate – will have its most useful and widespread expression as a money interest rate.

However, here I feel Shostak does not so much put the cart before the horse as he denies that Dobbin has any place in the shafts at all.

This is because, setting aside the practical difficulty of envisaging multi-party, multi-product, multi-horizon system of exchange without using some form of money (conceptually, perhaps, having networks of such “swaps” form themselves on some putative, eBarter, Inc. virtual clearing house might, nowadays, lessen such want-coincident difficulties the technological way), the money rate – this honest-money, natural rate – can fundamentally be nothing other than a goods rate, or else it becomes just as ontologically-orphaned from its basic economic function as do all of today’s fiat fantasy wastrels.

In a less abstract fashion, I am not sure that the article’s chain of reasoning in its later exposition is at all consistent, either.

For example, Shostak writes:

… whenever the central bank loosens its monetary stance, the injection of new money into the economy benefits individuals who receive the newly created money first, and at the expense of those individuals who don’t receive the new money at all, or who receive it late. The early recipients can now purchase a greater amount of goods while the prices of these goods are still unaffected. In other words, the early recipients’ real wealth has increased…. implying that, all other things being equal their time preferences will decline.

But, if, with their extra money, these early recipients buy more goods – even if these are goods bound for productive consumption, rather than exhaustive, as implied by the context – this could also mean that their time preference is either unchanged (if the increase is absolute, but only proportionate) or increased (emphatically so if they borrow the funds – if they “dissave” – so as to do it).

Next:

A person with a very meagre money income can only afford means that will enable him to just sustain his physical survival. For him to undertake savings would entail a very high cost, hence his time preference will be very high. However, as his purchasing power rises he can now undertake various ventures that he previously couldn’t afford, which will generate benefits some time in the future. In other words, with a rise in purchasing power his time preference tends to decline i.e. he is likely to increase his savings. Consequently, this will reinforce the lowering of the interest rate in the money market by the central bank.

But this last act, even given its occurrence, has no effect on the interest rate, surely?

Newly-created money was given to A who hired the former pauper, B, at a higher wage than the latter earned previously: B then saved the difference.

Here, B has – after the event – perhaps validated the prior money-creation (his labour has been added but not spent), but this does not mean it will drive the cost of money down further lower (“reinforce the lowering”), only that it will not tend to push it back up towards the natural rate.

But, in any case, in the next paragraph, we reverse the argument above:

Furthermore, because the early recipients of money are much wealthier now compared to before the monetary injections took place they are likely to alter their patterns of consumption. With greater wealth at their disposal, their demand for less essential goods and services expands. The increase in the real wealth of the first recipients of money gives rise to the demand for goods which, prior to monetary expansion, would not have been considered.

Here, extra money does not mean lowered time preferences, but extra exhaustive consumption (whether Veblenian or less conspicuous) – i.e. equal or higher time preferences obtain.

Moving on again, we find that all this extra consumption (from whence – from debt-financed producer spending on factors, or directly from consumer borrowing?) lures entrepreneurs into an expansion which the banks are only too eager to accommodate:

A change in the pattern of consumption draws the attention of entrepreneurs who, in order to secure profits, start to adjust their structure of production in accordance with this new development. Now, on account of loose money policy entrepreneurs’ find it easy to secure new loans from the banking system – an economic boom ensues.

Well, as a second-round effect, perhaps, but, set out here as a prime mover in the boom, we are clearly no longer in Austrian territory, having seemingly strayed into the Keynesian Wonderland of “effective demand” where, if only the Planners can give consumers money to spend, a structure of production will miraculously erect itself to satisfy all the dreams of avarice and full employment will result, closely followed by re-election.

In truth, rather than the nascent Boom, this passage better describes the incipient Bust when later-stage entrepreneurs – eager to cater to the augmented immediate consumer demand – avidly bid away resources from higher-order firms stranded further upstream in the over-lengthened (hence savings short) structure of production.

But, let us press on:

Once however, the newly pumped money by the central bank and commercial banks starts to spread across the economy it pushes up the prices of goods and services, which undermines the purchasing power of the last recipients of money, or those who weren’t recipients at all. This is likely to lift their time preferences, which in turn puts upward pressure on interest rates. In order then to sustain the lower interest rate structure the central bank must inject another dosage of new money.

Here, we must ask; are time preferences truly “lifted”, or have savings been “forced” by the inflation? And how do the impoverished last-in-line push rates higher, in any case?

However unlikely this is, this can surely only be through borrowing to maintain present consumption, to which we say, perhaps – but, again, one must demur and point out that the more classically Austrian exposition of why the bank must act again to crank the printing press if it wants to sustain the Boom, is that it is the producers – not the starving pensioners and near-extinct small-scale rentiers -who need the extra credit in order to surf the wave of rising prices before it crashes on the reef of climbing costs and so wrecks their whole Ship of Fools on the Island of Entrepreneurial Error.

—————

For all qualifications listed above, where Shostak’s article is unimpeachable is in his steadfast avowal that central banks unfailingly occasion enormous mischief and also in his focus on the basic truth that the Fed cannot bring more wealth into existence by the use of a photocopier.

But, then, one does not need to be an Austrian – or a Wicksellian – to realize this simple fact. Mussolini, no less, in a speech before the Italian Senate, in Jan 1934 put it thus:

“Monetary manoeuvres are powerless to bring about a true and lasting rise in prices. If we wish to delude the human race we might resort to what was once called ‘clipped currency,’ but the opinion of all those who do not believe in economic and social empiricism is quite clear-inflation is the road which leads to catastrophe.”

“Who can really believe that an increase in monetary tokens can truly increase the wealth of a nation? Somebody has already drawn this parallel. It is the same as saying that if one were to reproduce a million times the same photograph of the same person, one would thereby have increased the population by a million.”

What a pity that successive spawn from the same rancid Corporatist-Mercantilist pool have chosen a wholly opposite approach to the problem of making the rest of us support their and their cronies’ lifestyles of undeserved ease and unchecked influence.

Mr. Shostak wrote:

Would it be possible in a world without money, such as suggested by Wicksell,
to establish the rate of return on present goods in terms of future goods? In
a world without money all that one would have are the rates of exchanges between
various present and future real goods. For instance, one present apple is
exchanged for two potatoes in a one-year’s time. Or, one shirt is exchanged for
three tomatoes in a one-year’s time. Again all that we have here are various
ratios.

There is, however, no way to establish from these ratios what the rate of
return is for one present apple in terms of future potatoes (It is not possible
to calculate the percentage since potatoes and apples are not the same goods).
Likewise we cannot establish the rate of return on a shirt in terms of future
tomatoes. In other words, we can only establish that one present apple is
exchanged for two future potatoes, and one present shirt is exchanged for
three future tomatoes. Only in the framework of the existence of money can the
rate of return be established. …

… Observe however, that without the existence of money – the medium of
exchange – the baker isn’t able to establish how much of future goods he must
be paid for his ten loaves of bread that would comply with the rate of return
of 10%.

As far as I can tell, this seems to be saying that it is impossible to determine
a Wicksellian “real” rate of interest–(might we also call it a commodity rate
of interest?) in the absence of some universal medium of exchange (money) by
which heterogenous and therefore incommensurate commodities can be compared.

Is this an accurate understanding?

If so, then I am a little confused. Why couldn’t we determine a real
(commodity) rate of interest? Shostak used the example of ‘present apples’
and ‘future potatoes’, so permit me to give another possible example along
the same lines.

Let us say, as in his example, that today, one present apple trades for two
future potatoes (to be delivered in one year’s time). He seems to be saying
that because there is no way of adding apples and potatoes to arrive at some
homogenous total, there is no way of determining the “real” interest rate in
this scenario. But, why couldn’t we use the PRESENT exchange rate between
(present) apples and (present) potatoes, to homogenize our accounting units
for the determination of a Wicksellian “real” rate of interest?

For example, if today, one present apple (A) trades for one present potato (P),
then we can express the current exchange ratio between apples and potatoes with
the simple equation: A = P. If today, one present apple ALSO trades for two
future potatoes (to be delivered in one year), then in accordance with the
current apple-potato exchange rate, this would be equivalent to one present
apple trading for two future APPLES (2A)–which are likewise to be delivered
in one year’s time. Now, we are no longer comparing apples to potatoes, we
are comparing ‘apples to apples’…hence there is no problem establishing the
Wicksellian “real” rate of interest on apples; it is:

(2A-A)/A = 100% per annum.

Note that this resulting calculation of “real” interest rate remains the same,
even when we use a third commodity (money) as an intermediary between apples
and potatoes. If we say that the money price of each present apple is 2 gold
doubloons (GD), and the money price of each present potato is also 2 gold
doubloons, then we have the equally simple equation A = 2GD = P; which means
that the current money-price of the 2 potatoes (which will eventually be the
repayment for the loan of 1 apple) is 4GD. Hence, we have:

(4GD-2GD)/2GD = 100%.

So, the introduction of money as an intermediary doesn’t alter our original
results. We can make the comparison directly (using the current apple-potato
exchange rate), or we can use money as an intermediary comparative device, but
either way, we achieve the same objective–simply put, we have found a way to
compare and equate heterogenous goods. Whether this is done through a direct-
barter, farmer’s-market type of exchange rate between two commodities
(apples-to-potatoes), or whether it is done through a more roundabout process
involving money, does not seem to affect the results in any significant way.

With the baker-example, the baker would need to be repaid with 11 loaves of
bread for a 10% annual return, 12 loaves for a 20% return, and so forth. If
repayment is not contracted for in loaves of bread, but will instead be made
in “commodity X”, then the desired “real” rate of interest will be used in
conjunction with the current barter-exchange rate between bread and commodity
X, in order to set the precise number of units of commodity X that will be
required for repayment.

Granted, the use of money–i.e., the standardization of measurement for all
commodities in terms of a single money-commodity–makes this whole process
much simpler… But as far as I can tell, it is not conceptually necessary.
Mr. Corrigan’s comment above about eBarter, Inc., seems to make this same point.

Is there something I am missing here? If so, what is it?