“Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.”

The concept of money as explained here reminds me of the Mises daily article regarding the miserly scrooge, who in contrast to the popular opinion, benefits society by not extracting the value of consumption by the process of not spending his money.

Who was the originator of this concept, and where can I learn more about it?

…is very true, and is the final answer to the question can fractional reserve banking ever be construed as non-fraudulent. Based on Frank’s point, here, I would say, under no circumstances could it be non-fraudulent.

For one, fractional reserve banking can be non-fraudulent if there is some way to determine the reserve rate of the bank issuing the currency (for example, if it’s printed on the note). The market can decide the relative values of bank notes with different reserve rates.

Note also that fractional reserve banking is not inherently inflationary. Only a reduction in the reserve rate causes inflation. Since there’s a lower bound to the reserve rate in the absence of depositor insurance, uninsured fractional reserve banking is unlikely to be inflationary.

Pual,

My feeling is that it is really easy to meld the concept of currency — a store of value, which may be exchanged for real savings – with real savings. The two are distinct even if they seem to overlap.

Savings only happens by foregoing current consumption in the midst of production, leaving you with savings. E.g., the baker creates 10 loaves, consumes two, leaving eight saved. Those eight may be exchanged, let’s say, for $2.00 each – leaving the baker with $16.00 after. The economy now has his currency (that can be exchanged for something else of value so long as it is a reliable currency) and the 8 loaves of bread. The bread sold is still savings until it is eaten or goes bad. How the wealth of $16 is used / consumed is really an up in the air variable.

It strikes me as if the crux of what you are nipping at with your question is whether capital formation is an extension of savings, or not. In other words, consumption is not final until it is final, so in many ways the consumption conversion of savings actually has a half-life unique to each good, expiring at some point. The bread example has a very short shelf life before its gone, but it could just as easily be a TV or a Car… or a piece of manufacturing machinery. That said, consumption can be weighted differently by utility: $100,000 converted into a manufacturing plant is a lot more productive than converting it into a 1,000 square foot posh home theatre for the family and the kids’ friends. E.g., durable, non durable, etc. etc.

That complexity explains why it is impossible to accurately value stores of savings in a loose money environment, and probably only marginally easier if currency were stable. However, conceptually it is very obvious the stores ought to be protected: If as a nation our loose monetary policy allows consumptive types who are more prone to blowing wads of cash on gadgets or bombs to run roughshod over more frugal and prudent stewards of savings – we’ll see a quick conversion / erosion of our stores of savings / wealth… (Meanwhile the Chinese convert their currency into machinery that produces something for sale and are saving at 40% rate…)

All that said, the sense I get is that the list of “three things you can do with money” is actually two. You may hold it with the intent of it keeping its value or perhaps earning miniscule amounts of interest, or you may exchange it for any type of good / commodity / investment — some may be an expression of savings. Some may expire sooner or later, but that is not a function of the currency; it is a function of your choice in conversion.

What helps in understanding savings is a primer on how savings are created in the first place – by forgoing current consumption. Rothbard has a great example in an early chapter of Man, Economy and State where he has a small island economy and two participants with apple trees, and once decides to save apples in order to invest them in a labor saving device…. A good read if you’ve not had the chance. I plan on doing a summary of his concept fairly soon on my own site since so many of my clients have no clue re its importance in making a country wealthy (or not).

Anyway, those are my thoughts. I look forward to the full time econs / Ph.Ds to step in and correct me where I have erred.

JCE

JCE: I’m going to imbed my comments between yours:

JCE: My feeling is that it is really easy to meld the concept of currency — a store of value, which may be exchanged for real savings – with real savings. The two are distinct even if they seem to overlap.

Paul: For a quick simplification, I like to think of money as gold coin, this means that I can think of money and real savings as the same; at least for a limited discussion on the meaning of selling saved goods for money.

JCE: Savings only happens by foregoing current consumption in the midst of production, leaving you with savings. E.g., the baker creates 10 loaves, consumes two, leaving eight saved. Those eight may be exchanged, let’s say, for $2.00 each – leaving the baker with $16.00 after. The economy now has his currency (that can be exchanged for something else of value so long as it is a reliable currency) and the 8 loaves of bread. The bread sold is still savings until it is eaten or goes bad. How the wealth of $16 is used / consumed is really an up in the air variable.

Paul: If I replace the $ with equivalent values in silver or gold, then I claim the baker who sold his bread for the money, has his real savings in money. The person who bought the bread for purposes of consumption can be said to have consumed his cash holding at the point he paid for the bread, regardless of when he eats the bread or when it spoils.

JCE: It strikes me as if the crux of what you are nipping at with your question is whether capital formation is an extension of savings, or not. In other words, consumption is not final until it is final, so in many ways the consumption conversion of savings actually has a half-life unique to each good, expiring at some point.

Paul: You might be right about what I’m driving at. I often get confused myself. However, what I think I believe is that savings and investment are equivalent concepts economically. To save is to invest. Whether the investment is in capital formation or in a subsistence fund does not change the matter.

JCE: The bread example has a very short shelf life before its gone, but it could just as easily be a TV or a Car… or a piece of manufacturing machinery. That said, consumption can be weighted differently by utility: $100,000 converted into a manufacturing plant is a lot more productive than converting it into a 1,000 square foot posh home theatre for the family and the kids’ friends. E.g., durable, non durable, etc. etc.

Paul: I would argue that buying a piece of manufacturing machinery falls under the class of savings and capital investment, and definitely not consumption, unless perhaps, if it turns out to a grave mistake and a write-off, but I’m not sure about that. Conversely, I would consider the acquisition of the home theatre for the family as pure consumption spending. The durability of the item doesn’t strike me as relevant.

JCE: That complexity explains why it is impossible to accurately value stores of savings in a loose money environment, and probably only marginally easier if currency were stable. However, conceptually it is very obvious the stores ought to be protected: If as a nation our loose monetary policy allows consumptive types who are more prone to blowing wads of cash on gadgets or bombs to run roughshod over more frugal and prudent stewards of savings – we’ll see a quick conversion / erosion of our stores of savings / wealth… (Meanwhile the Chinese convert their currency into machinery that produces something for sale and are saving at 40% rate…)

Paul: I wonder if we were on a 100% gold coin standard, would be easier to ascertain real savings. I’m thinking no, but I can’t see this all the way through.

JCE: All that said, the sense I get is that the list of “three things you can do with money” is actually two. You may hold it with the intent of it keeping its value or perhaps earning miniscule amounts of interest, or you may exchange it for any type of good / commodity / investment — some may be an expression of savings. Some may expire sooner or later, but that is not a function of the currency; it is a function of your choice in conversion.

Paul: I subscribe strongly to the save/consume/hold threesome model. I think the interest rate is based on the save/consume preferences of the people of the economy, and the people’s propensity to hold money is connected with the purchasing power of that money.

JCE: What helps in understanding savings is a primer on how savings are created in the first place – by forgoing current consumption. Rothbard has a great example in an early chapter of Man, Economy and State where he has a small island economy and two participants with apple trees, and once decides to save apples in order to invest them in a labor saving device…. A good read if you’ve not had the chance. I plan on doing a summary of his concept fairly soon on my own site since so many of my clients have no clue re its importance in making a country wealthy (or not).

Paul: I should read it.

JCE: Anyway, those are my thoughts. I look forward to the full time econs / Ph.Ds to step in and correct me where I have erred.

Paul: I appreciate your comments. Thanks.

First, a slight quibble: US dialects have confused various words’ singulars and plurals, e.g. commons, woods – and savings. The singular form of each has no final “s”.

Now some serious stuff. It is possible to use increases in the money supply to improve capital and infrastructure, but these circumstances are rare. In all cases there is a wealth transfer, and usually it leads to increased consumption (including government expenditure, which is generally consumption).

However, there have been historical exceptions. One major one is the introduction of the “culture system” or “cultivation system” in the Dutch East Indies as they then were. This involved redirceting the local economy, but it also needed a capital injection. The Dutch stretched the funds they raised twice as far by a currency fiddle, depreciating the copper coinage two for one.

The end result of the increased money supply was an increase in the size of the cash economy – along with a great transfer of wealth to the Dutch. Despite the wealth transfer and the direction of labour, it is still a material exception to the idea that money supply increases harm the economy. It all depends where they go, and this time they were applied to constructive investment.

Back when we were on a 100% gold standard the working people didn’t have any gold.

Money has become only a way of keeping score in the game of life. It was the invention of electronic money and credit cards that produced the great middle class. If the system collapses we won’t revert to 1950. We well be blasted back to 1350.

Good observation, Terry. You must be referring to where Frank states the following:

“Now what about the case where money is used to buy unprocessed material—is the unprocessed material real saving? The answer is no. The raw material must be processed and then converted into a piece of equipment, which in turn can be employed in the production of final goods and services that are ready for human consumption”

I feel like taking a stab at your question. If Frank is defining real savings as strictly the amount of consumable consumer goods not consumed and so available at a given time, then it would follow that buying unprocessed materials and in fact, any investment in capital goods to be used as factors of production would not be included in real savings. In the end, the only thing that can increase real savings is a net increase in the difference between consumer goods produced and consumer goods consumed.

So it seems to me that Frank’s position is that saving and investing are not the same after all. This strikes me at odds with Mises’s stand on the question, but i could easily be mistaken.