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Source link: http://archive.mises.org/6683/the-truth-about-tulipmania/

The Truth About Tulipmania

May 25, 2007 by

Semper Augustus TulipThe story of Tulipmania, writes Doug French, is not only about tulips and their price movements, and certainly studying the “fundamentals of the tulip market” does not explain the occurrence of this speculative bubble. The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment. This scenario has been played out over and over throughout history. But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. FULL ARTICLE

{ 25 comments }

Björn Lundahl May 25, 2007 at 7:26 pm

Hans-Hermann Hoppe

The Political Economy Of Monarchy And Democracy,

And The Idea Of A Natural Order

“But these fiat money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters, such as the collapse of the Dutch “Tulip Mania” in 1637 and the “Mississippi Bubble” and the “South Sea Bubble” in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, i.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost.”

http://www.liberalia.com/htm/hhh_political_economy_of_monarchy.htm

“A fiat money experiment” is not mentioned in this article by Doug French? Something that has been overlooked?

Björn Lundahl

Horst W Hehmann May 25, 2007 at 9:59 pm

The Monetary Analysis in very the interesting article “The Truth About Tulipmania” seems to ignore one very important fact, A brutal and costly war (30Year War) was raging 1618-1648 in the Realm of the Holy Roman Empire (Germany), the eastern Neighbour of Holland. Spain with its Imperial ambitions participated in the struggle with arms and treasure, Holland although legally still bound to the Empire (until 1648), but in reality independent and a safe haven, could have attracted Flight Capital fom war ravaged Germany thus distorting the monetary analysis during Tulipmania.

Respectfully

H W Hehmann

Björn Lundahl May 26, 2007 at 4:24 am

I sent this email to Doug French. I hope that he will answer it:

Dear Doug French,

I am a member of the Mises Institute and I am a little curious regarding your article on the Mises blog “The truth About Tulipmania.”

What do you think about Hoppe’s view regarding this phenomena as he has written:

Hans-Hermann Hoppe

The Political Economy Of Monarchy And Democracy,

And The Idea Of A Natural Order

“But these fiat money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters, such as the collapse of the Dutch “Tulip Mania” in 1637 and the “Mississippi Bubble” and the “South Sea Bubble” in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, I.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost.”

http://www.liberalia.com/htm/hhh_political_economy_of_monarchy.htm

“A fiat money experiment” is not mentioned in your article? Something that has been overlooked?

The Austrian business cycle theory spells out that the business cycle is started through artificial bank credit which is created “out of thin air” and misleads business men to act as if savings have increased. This will sooner or later end up with a bust.

You wrote:

“But what made this episode unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite. As kings throughout Europe debased their currencies, through clipping, sweating or by decree, the Dutch provided a sound money policy, which called for money to be backed one hundred per cent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high seas, served to attract coin and bullion from throughout the world.”

You also wrote:

“Like other periods of heightened speculation, Dutch interest rates “declined sharply” in the seventeenth century according to Homer and Sylla (1996, p. 141).”

I wonder if this phenomena or tulip mania could be explained by the Austrian business cycle theory? Or did it only occur because of government manipulation of money?

My questions are then:

A/ Did fiat money occur in the Dutch Republic during the tulip mania period as Hoppe has mentioned? According to Hoppe fiat money brought about this financial disaster.

B/ Can this mania be explained by the Austrian business cycle theory or did the speculation occur because of government manipulation of money that increased the supply of it but did not then alter artificially saving/consumption ratio as the Austrian business cycle theory explains as a condition for the business cycle? I am a firm believer in the Austrian business cycle theory but that does exclude other financial disasters that fiat money can cause or other manipulations mastered by governments (as you have explained) without changing artificially saving/consumption ratio.

Best regards

Björn Lundahl
Göteborg, Sweden

andy May 26, 2007 at 4:33 am

Did I get the message correctly that the tulipmania was caused by government intervention of … providing a sound monetary policy?

Ken Zahringer May 26, 2007 at 10:49 am

Actually, the Dutch monetary policy was sound in only one respect – the more or less exclusive use of commodity money. This did cause a bit of a problem in itself. Holland’s neighbors used degraded and debased money, making Amsterdam a “safe haven” for coin and bullion.

The system was still full of intervention, though. The “free coinage” provision was a government subsidy of coin production. French states that “individual depositors had been allowed to overdraw their accounts as early as 1657. In later years, the bank also began to make large loans to the Dutch East India Company and the Municipality of Amsterdam.” This amounts to fractional reserve banking, albeit on a small scale. Silver production in America was essentially a Spanish government operation, with the attendant disregard for costs, was it not? And of course, bullion captured on the high seas was “found money”, obtained at miniscule cost relative to its value, making it economically similar to fiat money.

The message, to me, is twofold. First, any dramatic increase in the money supply is inflation, regardless of the nature of the money. Inflation has predictable negative effects, among them price increases and boom/bust cycles. Second, given the opportunity the government can screw up any monetary system, even a system that appears sound to the casual observer.

Great article, Doug, and a probing analysis. I, too, would be interested in your answer to Bjorn’s question, though. That’s what I love about this field – always something to think about!

Paul Marks May 26, 2007 at 3:42 pm

If people choose to use gold as money and a lot more gold becomes available then, all other things being equal, the price of goods and services will rise.

Ditto if people choose to use silver as money and …..

Or any other commodity.

But does the rising price of goods and services (caused by a lot more commodity money being available) cause a boom-bust on its own?

I doubt it.

Of course there are foolish fads in investment (human beings are just that – human), but a boom- bust cycle that disrupts an entire economy must be more than either “animal spirits” or there just being more gold and silver about.

Credit manipulation is at work somewhere.

tulipspeculator May 26, 2007 at 6:01 pm

I’m not fully satisfied with the various accounts I’ve read of tulipmania… it always feels like some key piece of history is missing from the analysis.

But this one (while not entirely satisfing either) raises interesting questions:

if gold had continued to be money (paper money was never inflicted upon us)… and then suddenly the government gained the ability to literally _create_ gold (for very little cost), kept this secret and moderated production to attempt to maximize how much ‘real’ goods they would be able to trade their newly created gold for… what would the difference between this and ‘fiat’ money be (ignoring ‘how’ one or the other came about, dealing with the present where whatever ‘money’ really has become money), the government would be ‘counterfeiting’ gold money in exactly the same way as it now does paper money (paper money may have come into being by government decree, making it illegal to have gold, and creating an artificial demand for it in taxes – but as seen in places like Iraq, it continues to be money even after the government is gone).

and then another question, what if the government didn’t manipulate the interest rate, what if there was no central bank, no lender of last resort, no credit money… but for historical reasons paper ‘money’ was now _money_, and the government (still) printed it directly for it’s own uses (an ‘inflation tax’).

What current consequences of intervention would persist in these two scenario? Would we have the full business cycle and/or just bubbles or neither? Would the interest rate be artificially lowered below the natural rate (by the ‘surprise’ effect of the new money and people not realizing the money had yet depreciated – thinking they have a greater supply of ‘present money’ with which to flood the time market thereby driving down the interest rate) even though it wasn’t manipulated directly? Or would the interest rate be higher to cover inflation? Or both – higher than the natural rate, but lower than the natural rate + inflation because of the surprise effect? Would this mean that high inflation alone (no direct interest rate manipulation, and no credit money) could bring us the business cycle?

The Austrian business cycle theory makes intuitive sense to me – price controls on the time market = problems, just like price controls on any market. But I find the way it’s generally explained seems to invite irrelevant objections (and equally irrelevant counter-objections) (the “entrepreneur would anticipate” debate)… and makes questions like the above less than obvious.

Björn Lundahl May 27, 2007 at 1:46 am

tulipspeculator

“If gold had continued to be money (paper money was never inflicted upon us)… and then suddenly the government gained the ability to literally _create_ gold (for very little cost), kept this secret and moderated production to attempt to maximize how much ‘real’ goods they would be able to trade their newly created gold for… what would the difference between this and ‘fiat’ money be (ignoring ‘how’ one or the other came about, dealing with the present where whatever ‘money’ really has become money), the government would be ‘counterfeiting’ gold money in exactly the same way as it now does paper money (paper money may have come into being by government decree, making it illegal to have gold, and creating an artificial demand for it in taxes – but as seen in places like Iraq, it continues to be money even after the government is gone).”

If an individual had the ability under a gold standard to secretly produce gold for very little cost, he would not be counterfeiting. The difference between the state and the individual is, though, that the state have no legitimate business in producing gold in the first place, but I would not at a first glance call it counterfeiting.

The justified reason in such a scenario to argue against the state’s involvement would be that the state had no right to monopolize the market and, actually, the state had no legitimate reason to intervene in individuals monetary affairs at all and by being in this business the state violates people’s rights.

“and then another question, what if the government didn’t manipulate the interest rate, what if there was no central bank, no lender of last resort, no credit money… but for historical reasons paper ‘money’ was now _money_, and the government (still) printed it directly for it’s own uses (an ‘inflation tax’).

What current consequences of intervention would persist in these two scenario? Would we have the full business cycle and/or just bubbles or neither? Would the interest rate be artificially lowered below the natural rate (by the ‘surprise’ effect of the new money and people not realizing the money had yet depreciated – thinking they have a greater supply of ‘present money’ with which to flood the time market thereby driving down the interest rate) even though it wasn’t manipulated directly? Or would the interest rate be higher to cover inflation? Or both – higher than the natural rate, but lower than the natural rate + inflation because of the surprise effect? Would this mean that high inflation alone (no direct interest rate manipulation, and no credit money) could bring us the business cycle?”

As the state had no rightful reason to print paper money in the first place and as they were counterfeited money the state have no legitimate reason for being in this business and this even if “people are used to government paper money and accepts them.” This privilege should be quickly ended even under this scenario.

If the state just printed money and distributed them, they would not cause any business cycle. What causes the business cycle is that the central bank increases the money supply through the process of fractional reserve banking (bank credit) and misleads, because of this, business men to act as if savings have increased.
For the rest I will post two very small articles which I already written and have stored in my pc.

Björn Lundahl

Björn Lundahl May 27, 2007 at 1:53 am

Recessions and The Great Depression were caused by Government Interventions!

In a purely free market (without Government intervention), the rate of interest is determined by people’s “willingness to save and invest” (which is called people’s time preferences) for future use, as compared to how much they are “willingly to consume now”. If people change their “willingness to save” (time preferences) and want to save more, the additional savings will cause the rate of interest to fall (increased supply of savings), and businesses will borrow and invest these additional savings. When the Central Bank (for example The Federal Reserve) increases the money supply and expands bank credit (which Central Banks does everywhere and all the time and always “out of thin air”), it initially lowers the rate of interest and thereby misleads businessmen to act in a manner as if true savings have increased, which in turn leads businessmen to invests those supposed savings in capital goods. New projects that were not profitable before, will now suddenly with this lower interest rate, be profitable. While this process is working, the economy is in an inflationary boom phase (expansion). Capital goods such as stocks, real estate etc, will be more demanded and invested in, and prices of those will rise faster and more intensely in relation to consumption goods. As these supposed savings have worked their way through the economy, prices of goods, services and wages have generally increased to a height which prices for them would have not reached without these supposed savings.

As mentioned, people’s “willingness to save and invest” have not changed (people’s time preferences have not changed) for it was only the Central Bank that increased, out of thin air, additional “savings”. When supposed savings have worked their way through the economy and are received, finally, in increased wages, people still spend their real wages in the same manner as before. They save/ consume in real terms and in same proportion to each other, as before mentioned increase in supposed savings. Because of this, a lack of savings will occur and the rate of interest will rise. Projects that businessmen have invested in and that seemed to be profitable when the rate of interest was lowered are now revealed to be unprofitable. All those investments are revealed to be malinvestments. Businessmen will stop investing in those projects and lay off workers. Prices of capital goods, real estate, stocks etc, will fall sharply and relatively to the fall in prices of consumer goods. The economy is in a depression phase. When those investments are liquidated, the economy is adjusted to people’s “willingness to save and invest” and to consume. The economic structure corresponds to the ratio which people want to save and consume. The economy is now healthy again.

Now then, in the 1920s the Federal Reserve, in the US, increased the money supply and bank credit, which in the 30s resulted in The Great Depression. The same story goes with Japan during the 1980s, which during the 90s, resulted in a depression, go to;

http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

In Sweden we had banks lending out heavily during the late 80s, which also, led to a depression in the 90s.

All business cycles are caused by the same phenomenon. Economic crisis can occur because of other factors such as wars, boycotts, oil prices etc, but pure business cycles have in common the same cause.

I have tried, in a very few words and in a easy manner, to explain Ludwig von Mises business cycle theory, which is also called the Austrian theory of the business cycle. All faults are mine. Friedrich August von Hayek elaborated this theory and received in 1974 the Nobel Prize* for this. Go to;

http://nobelprize.org/nobel_prizes/economics/laureates/1974/

If you want to know more about this theory, go to;

http://mises.org/rothbard/agd/contents.asp

And to;

http://mises.org/money.asp

Björn Lundahl

*Information about the Nobel Prize in Economics, go to;

http://cepa.newschool.edu/het/schools/nobel.htm

Björn Lundahl May 27, 2007 at 1:58 am

Any great and sudden change in the economy that is not anticipated such as increased or decreased savings, increased hoarding etc can cause crises and problems. Murray Rothbard has also mentioned this.

But those are rather economic fluctuations, and are they anticipated, the business community can easily cope with them without causing any problems at all.

There is a time lag between increases of the supply of money and changes in the purchasing power of money.

If monetary authorities anticipate that aggregate demand will fall in the future, and therefore increases the supply of money today, there is a time lag between those actions and their impact on aggregate demand.

Changes in aggregate demand can be anticipated by the market. Businessmen are trained specialists in their capability to anticipate changes in the market place and anticipated changes of market prices in the future cause immediate changes of prices today and the necessary adjustments.

In other words what Keynesian economists proclaim and what Monetarist economists implicitly proclaim is that economic depressions are caused through a lack in aggregate demand, can easily be refuted by the conclusion that changes in aggregate demand can be anticipated and offset through the market price mechanisms.

If there is a fall in aggregate demand, monetary authorities cannot offset this by increasing the supply of money without causing a business cycle.

Increases of the money supply can not be neutralized even if they are anticipated because there is no way to distinguish them from real savings. They are borrowed funds and as they are, actually borrowed, businessmen are factually deluded to act as if savings have increased.

Speculators can in a short term with borrowed money, reap extremely large profits through extensive speculations.

Consumers can allocate their economic recourses in two ways: consumption versus savings.

The fact is that during recessions and depressions price falls are extremely much more severe in the capital goods markets than in consumer goods markets.

In Sweden during the early 90s, as mentioned, we had an economic depression and only in one year we had an increase of the purchasing power of money of 1% while real estate prices decreased around 50%!

Stocks are titles of capital goods and prices of them fell extremely too.

The same story goes in the U.S. during the late 20s and early 30s and Japan during the very early 90s.

It is true that during depressions prices of some capital intensive consumer goods fall a lot too (durable consumer goods) but they are comparable to capital goods as they render services over a longer term of time and can be regarded as part of a economy’s fixed capital.

To put an end to business cycles, fractional reserve banking must be rejected and a 100% commodity money reserve standard adopted (such as gold and silver).

Björn Lundahl

rtr May 27, 2007 at 5:53 am

Björn Lundahl: “Any great and sudden change in the economy that is not anticipated such as increased or decreased savings, increased hoarding etc can cause crises and problems.”

Boo-hoo. Mommy, it’s not “fair”! How dare he whored his typical BS even more than “anticipated”! Take a seat slick, I’m giving the lectures. Am I not? Yeah, I think so, lol. Zee numero uno est moi.

Björn Lundahl: “But those are rather economic fluctuations, and are they anticipated, the business community can easily cope with them without causing any problems at all.”

rtr > ABCT. Unless there’s anybody left to discuss or dispute? “Coping” with willing voluntary *by definition* profit causing exchange? Yeah, the Austrian School was good, but not nearly good enough.

Björn Lundahl: “There is a time lag between increases of the supply of money and changes in the purchasing power of money.”

Wow. Just like there is a “time lag” between any change in “supply” and the recognition of that change in “supply” of everything of which supply consists? T-minus “you suk”.

Björn Lundahl: “If monetary authorities anticipate that aggregate demand will fall in the future, and therefore increases the supply of money today, there is a time lag between those actions and their impacut on aggregaote demand.”

Huh? wtf are you talking about?

Björn Lundahl: “Changes in aggregate demand can be anticipated by the market.”

Mises PWNING Paper #1337: ” … by definition of trade …” Aggregate common sense in … three … two … *I* pointed that out … rolled back the “scientific clock” 140 years … ” Not even a *single* “Thank You!” yet?

Björn Lundahl: “Businessmen are trained specialists in their capability to anticipate changes in the market place and anticipated changes of market prices in the future cause immediate changes of prices today and the necessary adjustments.”

“Credit” where “credit” is due. But thx, we are always looking for “better”, more economically “efficient”, ‘pre-Kindergarten’ explanations of ‘delivery’. Here’s a ball for you to play with, since you couldn’t even discern when to start taking notes.

Björn Lundahl: “In other words what Keynesian economists proclaim and what Monetarist economists implicitly proclaim is that economic depressions are caused through a lack in aggregate demand, can easily be refuted by the conclusion that changes in aggregate demand can be anticipated and offset through the market price mechanisms.”

“By definition of ‘trade’”, Nobel Prize # more than any of y’all got or will get. But, huh? “Anticipated” + “Offset”! Sorry, “static equilibrium” falsehood.

Björn Lundahl: “If there is a fall in aggregate demand, monetary authorities cannot offset this by increasing the supply of money without causing a business cycle.”

Weeeehhh! You forgot the exclamation point! How could “garbage” like that have *ever* been regarded as accepted? Finally, a “topic” worthy of edited contributor reflection. Hmmm… ponder taking your time.

Björn Lundahl: “Increases of the money supply can not be neutralized even if they are anticipated because there is no way to distinguish them from real savings.”

This definition brought to you buy the praxelogical meaning of = “full of $h1t” (except for the “except for” … this is how we B.S.). Total *trash* logical extension. As the de facto leader of the Austrian School I hereby reword “praxelogical” with “*epistemological”! Now we’re finally making some progress.

Björn Lundahl: “They are borrowed funds and as they are, actually borrowed, businessmen are factually deluded to act as if savings have increased.”

Wrong, n00b. It’s akin to a subjective change in valuation of say … nm … Marxist … “blah”. Put some $ down on your *fool* analysis. There’s a definition for praxelogical proof. “Businessmen”, sans the chycks, “deluded” by definition of idiocy, in *voluntary* exchange?! Like I said, like I *proved*, Nobel Prize. Not that I’m counting on explicit recounting of factual delusions … far too inefficient for my talent. Allow me (by permission of me) to rub their noses in it. Doggy training school 101.

Björn Lundahl: “Speculators can in a short term with borrowed money, reap extremely large profits through extensive speculations.”

Suk. Blah? Borrowed money = “bad”? Don’t even know that “credit” is subjectively valued …

Björn Lundahl: “Consumers can allocate their economic recourses in two ways: consumption versus savings.”

But what about when “the government” ‘fewlz’ them? Maybe it’s “allocated” “up in smoke and murrors?” (standard English = “mirrors”)

Björn Lundahl: “The fact is that during recessions and depressions price falls are extremely much more severe in the capital goods markets than in consumer goods markets.”

“T-H-E” ‘F-A-C-T’? Even after I praxelogically *proved* the ABCT *false*? Norwegian wood, iSn’t it *dumb*? Hello? McBjorn? Perhaps you could take up a funding drive to dispel your ignorance? “The fact is” … “The fact is” you suk when you get “The fact is” … “The fact is” … WRONG. Survey says … error.

Björn Lundahl: “In Sweden during the early 90s, as mentioned, we had an economic depression and only in one year we had an increase of the purchasing power of money of 1% while real estate prices decreased around 50%!”

Bow wow, yippee yo, yippee yay! Maybe you should apply for a “Pardon” from Lew? In the mean time absolutely everything with a positive price has a purchasing power of “you’re an Idiot!” But thanks for being dense enough to try to spread a *falsehood* after it’s been explicitly dragged across your face. Hey, maybe if I “posted” it in the “official” journal? *More* purchasing powah!

Björn Lundahl: “It is true that during depressions prices of some capital intensive consumer goods fall a lot too (durable consumer goods) but they are comparable to capital goods as they render services over a longer term of time and can be regarded as part of a economy’s fixed capital.”

Blah, blah, blah. Tell us the “story” about Santa Clause next. Meh, in case they want to be spanked harder on the next reply …

Björn Lundahl: “To put an end to business cycles, fractional reserve banking must be rejected and a 100% commodity money reserve standard adopted (such as gold and silver).”

Well allow me to retort. The ABCT is *proved* FALSE! Woe is we! Woe is we! Dog eat your perception? It’s time you turn in your “Mises library” to someone who can make more than Rothbardian pretencious absurdity out of it for the sake of running their mouth. The ABCT is, has been, disproved. Do you need a “formal” paper convention\/journal entry to acknowledge your stupidity? “Duh”, there you go.

You never had better, so idc, I’ll say what I want to say, the way I want to say it. And I’ll pick up the /praise tab too! Salute!

Björn Lundahl May 27, 2007 at 7:55 am

Increase of gold supplies does not either cause business cycles in a 100% gold reserve money standard.

America’s Great Depression:

“The potential range of such cyclical effects in practice, of course, is severely limited: the gold supply is limited by the fortunes of gold mining, and only a fraction of new gold enters the loan market before influencing prices and wage rates.”
Read the rest “Gold Changes and the Cycle”:

http://mises.org/rothbard/agd/chapter1.asp#problems_in_the_austrian_theory

Björn Lundahl

andy May 27, 2007 at 2:38 pm

As far as the article is clear, ther was no fraction reserve banking in Netherlands at the time of tulipmania. Thus, the tulipmania was not caused by fraction banking (however if Hoppe was right, I would then agree that the problem was caused by government intervention of printing fiat money)

The government did support sound monetary policy – it gave its name on the coins thus giving them credibility. I disagree that this was a bad thing.

I tend to disagree with the notion that the crisis cannot be created by commodity money. ACBT is concerned with CYCLES, i.e. recurring event. It does not rule out possibility of one-time crisis caused by bad investment because of unanticipated influx of commodity money.

If there was no fiat money, I would say that the crisis could be caused by influx of commodity money. The influx was much greater because of bad monetary policy of European governments – nevertheless it seems to me inappropriate to say that the crisis was caused by the intervention of the holland government.

andy May 27, 2007 at 3:01 pm

After googling a while I came across this article that suggests that Bank of Amsterdam did pracitce fractional banking, to fund a loan bank in 1614 and to the City in 1624.

Björn Lundahl May 27, 2007 at 4:49 pm

andy

“I tend to disagree with the notion that the crisis cannot be created by commodity money. ACBT is concerned with CYCLES, i.e. recurring event. It does not rule out possibility of one-time crisis caused by bad investment because of unanticipated influx of commodity money.”

“I tend to disagree with the notion that the crisis cannot be created by commodity money. ACBT (Austrian business cycle theory) is concerned with CYCLES, i.e. recurring event. It does not rule out possibility of one-time crisis caused by bad investment because of unanticipated influx of commodity money.”

“If there was no fiat money, I would say that the crisis could be caused by influx of commodity money. The influx was much greater because of bad monetary policy of European governments.”

Björn I have been having the same “speculative” thoughts. So I tend to agree with you. Well said!

This is also in agreement with Rothbard:

“Any great and sudden change in the economy that is not anticipated such as increased or decreased savings, increased hoarding etc can cause crises and problems.”

“The government did support sound monetary policy – it gave its name on the coins thus giving them credibility. I disagree that this was a bad thing.”

Björn I do not agree with you on this. I think that if we are going to pursue a free market monetary policy it should also be a 100% free market policy. No legal tender laws, no government coinage etc. Then it will be sounder and less risk of additional government manipulations and also more preventive against the government taking over the monetary system altogether.

Björn Lundahl

N. Joseph Potts May 27, 2007 at 10:40 pm

A free-market monetary “policy” (it ISN’T a policy – it’s the LACK of policy) certainly CAN include the government, if the government wishes to compete (it should not, for reasons having nothing to do with monetary policy). All that is necessary is (as mentioned above) to do away with all legal-tender nonsense, and to do away with any monopoly privileges for the government, and anyone/everyone else.

Now, the government is the participant with the legal recourse to violence, but this pertains to the government’s participation in ANYTHING, so again it has nothing to do in particular with monetary policy.

It isn’t necessary to throw the government out of the money-production business, any more than it is necessary to throw it out of the postal business (although it SHOULD withdraw on its own). All that is necessary is to allow anyone who wishes to, to compete with the government and, of course, not to finance the government’s participation with any revenues (e.g., taxes) drawn from other than the enterprise itself.

Björn Lundahl May 27, 2007 at 11:14 pm

As I said, I think it is important to not let the government to be involved in the monetary business at all.

If government bureaucrats want to “compete” they can as individuals start their own businesses.

I have already here given the reasons for why the government should not be involved in monetary affairs at all. Another is to look at history.

We all know how its starts and then ends. It is naive to think otherwise.

Government monetary “business” is greatly more harmful than their involvement in, for example, delivering postal services. It would, though, be a good thing if government bureaucrats were not involved in that too.

Björn Lundahl

Peter Sidor May 28, 2007 at 5:04 am

(Completely aside from the topics raised here, there are a few formatting issues in the article, someone may want to correct them.)

Oh, and yes, it was good reading. :)

So if I understand it correctly, the fault of this monetary system was, that it forced the valuable metals to become money, as opposed to the alternative uses of them (jewelry and all the rest). Of course, in a free market would the relative price of gold still fall, but that would make it easier to use in other venues, and in the end reduce the dramatic changes that have been noted.

Am I right with that? Just wanted to have it summed up in one small piece.

Michael A. Clem May 28, 2007 at 11:37 am

Sounds about right to me, Peter. As the Austrians define it, inflation is an increase in the money supply, period, and rising prices are simply a consequence, not a cause, of inflation.
In a fiat money system, it’s relatively easy to increase the money supply. In a commodity money system, it’s normally more difficult to do so, but in this case, it seems as if the government took advantage of a unique historical situation.

RogerM May 28, 2007 at 12:22 pm

Some alternate theories of tulipmania exist in Wikipedia. Also, the Erasmus School of Economics has an interesting page on it at http://people.few.eur.nl/smant/m-economics/tulipmania.htm

I have troubling considering tulipmania to part of ABCT for several reasons. The frenzy was limited to one commodity, tulips, in a well developed financial market. The Dutch had stocks, futures, options, and heavy industry in which to invest. Why didn’t the inflow of money cause malinvestents in anything besides tulips? In ABCT, malinvestment takes place primarily in capital-intensive industries, which tulip farming was not at the time. According to some historians, investment in tulips was limited to a small group of wealthy individuals.

I think tulipmania should not be considered as a panic or business cycle, but as someone suggested, like wealthy people chasing rare antiques or jewelry or art.

Stephen B Wong September 10, 2008 at 11:27 pm

Michael Pollan’s book “The Botany of Desire: A Plant’s-Eye View of the World (2001)” (http://www.amazon.com/Botany-Desire-Plants-Eye-View-World/dp/0375760393) offers an answer to why tulips became the object of mania rather than anything else, say, bicycles or windmills or wooden shoes. I would only summarise the points as having to do with Dutch Calvinist society, the archetypical tension between Apollonian spiring and Dionysian tidal pulls, the then unknown tulip breaking virus that produced colour streaking prized and desirable, the flower’s origins in the Ottoman Empire and its means of asexual propagation limited via offsets to produce genetic clones of the prized bulbs.

While I see that the “acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment” in a medieval society starting to give in to some conceit that money must beget money, I would argue that it was also the unique “revolt” contra the prohibition against usury and any charging of interest rather than the asset inflationary pressure of speculative trading that brought money supply policy, or more precisely, the fiat stable numeraire (or in essence a stable interest rate when all else is being debased relatively in exchange) attracting the safe-haven growth in the money supply in the Dutch economy. Yet at that point in history it could not be made a truism that all of that money supply growth must increase asset prices rather than fund wars or expand goods trade or raise taxes. The arc traced was one of Polanyi’s fictitious commodities, in the extreme, a bulbous flowering plant extracted from its habitation and made to flourish expressly for what more it will fetch in ransom at a Dutch futures market.

Matthew Houseward September 30, 2008 at 11:19 am

French’s article is perfectly in keeping with Austrian Economics. The Austrian School of Economics is not bound to gold as currency, per se. The Austrian School has recommended gold as currency because of it’s scarcity and the cost to mine and coin it. If a gold reserve were found that would double the world’s gold supply in 5 years, then gold would cease to be sound money because it’s value as a currency, its scarcity, would drastically change. Any increase in the supply of money, whether it is gold or paper, causes a business cycle. This was also evidenced in Spain around the same time period. The Spanish government was spending entirely too much of it’s productive savings to venture to the new world to mine more gold. This additional gold did not add productive wealth to Spain, it only added currency. The additional gold currency devalued the existing currency already in circulation and resulted in a business cycle that devastated the Spanish government. It was the English government which benefited from the new world the most because the English imported consumable products like cotton and tobacco that increased the standard of living of Europeans. Gold from South America increased the money supply, not productivity, not real wages, and not standards of living.
Gold is not fiat money because it is, in fact, a desirable commodity that people want and use. But it’s value and it’s scarcity can still change, and these changes, if they are drastic enough, can still result in a business cycle.
If gold ever fails as a currency, it is not because the Austrian School was wrong. The Austrian School maintains that gold is a valuable currency in so far as it is consistently scarce and valuable. To say that Austrians are eternally tied to gold is to say that Austrians say that gold is best because they say it is. That would be a fiat currency, which Austrians vehemently oppose. The nice thing about gold is that even when new reserves are found, and the supply of gold increases, it can and will only increase to the point where it takes more gold (real productive wealth) to mine and coin gold (the commodity and currency). Once that point is reached, or some point close to it, then the supply will stabilize again, and golds value as a currency will stabilize again. But to deny that the boom and bust associated with the dramatic shifts in supply is, in fact, a business cycle, is, to say the least, un-Austrian.

Olav November 13, 2010 at 8:51 pm

Goddamn…how come I’ve never learned about Tulipmania in all these years of PUBLIC education? I’m born in the Tulip-nation for god sake.

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