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Source link: http://archive.mises.org/8397/the-great-gold-robbery-of-1933/

The Great Gold Robbery of 1933

August 13, 2008 by

It’s been 75 years since the federal government, on the spurious grounds of fighting the Great Depression, ordered the confiscation of all monetary gold from Americans, permitting trivial amounts for ornamental or industrial use. From the point of view of the typical American classroom, on the other hand, the incident may as well not have occurred. A key piece of legislation in this story is the Emergency Banking Act of 1933, which Congress passed on March 9 without having read it and after almost no debate. FULL ARTICLE

{ 78 comments }

Paul Marks August 13, 2008 at 11:23 am

A very good article.

GlennC August 13, 2008 at 11:37 am

Thomas,

A great article, perhaps a cautionary tale.

You note the irony of Roosevelt on the gold coin. How about the irony of Andrew Jackson on the $20 Federal reserve note?

ernie g August 13, 2008 at 12:01 pm

Andy Jackson who’s tombstone reads

I killed the bank,

Referring to the Bank of The United States ( 2nd edition)

Eric August 13, 2008 at 12:23 pm

For all its failures, the Federal Govt has suceeded enormously well in its ability to interpret the constitution as it sees fit.

“Lysander Spooner … could not exonerate the Constitution, for it “has either authorized such a government as we have had, or has been powerless to prevent it. In either case, it is unfit to exist.”

Great quote.

rube goldberg August 13, 2008 at 12:34 pm

of course this fraud only works one way, i.e. gov’t defrauds citizens. try and turn the tables via taxes for example…

http://www.liberty-watch.com/volume03/issue08/coverstory.php

Curt Howland August 13, 2008 at 12:43 pm

This article reminds me of Hanse Hoppe. His comment that government was an efficient provider of “bads”.

The first time I heard that phrase, I almost laughed. The laugh was half-way up my throat when it hit me just how painfully true the statement was, and how un-funny no matter how funny it sounded at first.

Oh, the hypocrisy of US government currency with the word “Liberty” on it.

rube goldberg August 13, 2008 at 12:54 pm

note that in sept 2007… Robert Kahre Defeats IRS

http://www.thought-criminal.org/2007/10/01/media-blackout-161-federal-tax-charges-0-convictions

maybe there’s hope… but how long can it last?

fundamentalist August 13, 2008 at 2:54 pm

The Constitution did not authorize the government we have, but it is powerless to prevent it. The Constitution has no arms or legs, no police or jails. It can’t execute those who violate it. It must rely on people to do the work for it. Unfortunately, most of the people elected to defend the Constitution have been traitors. I’m sure that if the Constitution had arms and hands, it would strangle a lot of people for abusing it.

michael August 13, 2008 at 7:52 pm

In all fairness we should take a moment to consider the Great Gold Blunder of 1925.

Back when the British pound was the world’s default currency, the Great War came along, forcing Great Britain to suspend the gold standard in 1914. Then after the war Churchill reluctantly restored the link to gold, in 1925.

The effect was instantaneous. Investment funds dried up overnight and the world began its plummet into the Great Depression. This untimely return to gold was the major factor responsible for the lack of access to liquidity, and the banking house of cards.

The problem was not in leaving gold for a second time, in 1933. It was getting back on it unwisely in the first place.

Tom Woods August 14, 2008 at 12:24 am

No, the problem was getting back on it at the prewar gold parity, which made no sense.

See http://mises.org/daily/377

michael August 14, 2008 at 7:49 am

A very reasonable thesis, Tom. A return to a gold standard would have been far more successful had Britain bit the bullet, realized the pound could never safely return to its prewar level of value and acceded to the world’s demand for more money, relative to its stock of physical gold.

So I eagerly turned to your article by Joseph Salerno. And the first thing I encounter is his opinion being offered about democracy, that it is “a political system which we have all learned by now is the great enemy of freedom in all its social and economic manifestations”.

If Salerno is to be our guide, I think I’d like a clarification. Just what did he mean by that?

Secondly, what mechanism would you suggest society use to retain the ability to expand the world’s money supply as needed, in light of the need for expanding its economy amid the obvious expansion of the number of humans– its economic contributors? Frantically dig for more gold?

Or are more people just obliged by the dictates of this gold-based system to get along with less money? This seems to me a recipe for the progressive impoverishment of mankind.

Money, to me, only has utility for us humans as a medium of exchange. And as there become more goods and services for us to exchange, and more people in the pool of exchangers, it seems only rational to propose an expanding supply of money.

The limitations of retaining a gold standard are obvious: whether it is the Bank of England or the vault at Fort Knox, the central bank of any leading nation is bound at some point to run short of sufficient metallic bricks to fuel the fires of its expanding commerce.

rtr August 14, 2008 at 9:36 am

Michael, I substituted “Oil” for your “Money”.

“Oil, to me, only has utility for us humans as a medium of energy movement. And as there become more goods and services for us to move, and more people in the pool of movers, it seems only rational to propose an expanding supply of oil.”

Notice how absurd that sounds? You can’t wave a magic wand to increase the supply of something subjectively valued. If you could, the supply would be infinite and worth zero. It could only maintain value in the short term by using violence to artificially restrict competitive production.

The supply production of everything which is subjectively valued will be increased to its maximum capability, by definition of more stuff of more value resulting in increased wealth.

Why build houses? We can just pretend we all live in giant mansions represented by pieces of fiat paper, and can ever increase economic expansion for all goods and services, not just “money”, by pretending to wave magic wands.

Tom Woods August 14, 2008 at 9:57 am

Michael, why would there need to be more money to correspond to more people? This is an extremely common, unexamined fallacy. Couldn’t the existing stock of money, which will increase slightly over time due to additional mining activity, simply be allowed to increase in value? The same amount of money can facilitate whatever number of exchanges we need it to. This is a false problem.

Suppose, though, for the sake of argument, that Martians stole all but three atoms’ worth of gold. The remaining gold supply on Earth would probably have fallen below the threshold at which it could any longer function as a medium of exchange. At that point, the market would shift spontaneously into another such medium, a la Menger and Mises.

In any event, most gold standards are really silver standards, with gold being reserved for larger purchases.

ktibuk August 14, 2008 at 11:19 am

This fallacy that, the nominal amount of money must increase with the increase in production, or there would be problems, is aÅŸready being debunked all over the fiat money world.

Lets say there is 1 billion dollars worth of money in circulation. If economy grows by say 5%, mainstream economists say, money supply should grow by 5% or by 50 million dollars and become 1.050.000.000 They say the nominal amount must increase, otherwise purchasing power of money increases gradually and this causes problems.

But in the history of fiat money crazy things happen. Things like hyperinflation which causes bills of 1.000.000 dollars to exist and can only buy a loaf of bread. I live in Turkey believe me, I know.

And you know hat happens after a while?

Government decides to get rid of some zeros. In Turkeys case 6 zeros. 1 million lira becomes 1 lira.

And do you know what this means. It means in nominal terms the money supply decreases by a million over night. If you realy care about the nominal amount of money in circulation, that is a crazy deflation.

And it isnt the end of the world, life goes on by every one getting rid of 6 zeros.

fundamentalist August 14, 2008 at 11:27 am

ktibuk, You make a very, very good point. Americans haven’t seen anything like you describe where the state just lops zeros of the currency, but I have lived in one country where they did that. And you’re right, the number of zeros doesn’t matter.

rube goldberg August 14, 2008 at 12:36 pm

TW is correct. not only that, this also addresses the fallacy that gold is not a good “investment” since it does not pay interest. true enough, but a persistent increase in relative value behaves like a low interest rate money market or CD with the exception being that with gold the increase is a real increase and not merely a slower degradation of value like a money market or CD.

michael August 14, 2008 at 2:07 pm

rtr– I’m not crazy about your analogy of money and oil. Oil is an actual substance. No, you can’t wave your magic wand and create more of it. But money is a symbolic substance, and a creation of the human mind. You can create as much or as little as you like.

Why don’t we then create an infinite amount? Obviously, because then it would all be worthless. The purpose behind a managed economy is to create an optimum amount, so it does optimum work in distributing resources among the pool of those who use money as their distributive medium. Whether too much or too little, the wrong amount of money makes things difficult. Either an economy overheats and inflation occurs, or it underheats and stagnation occurs. Right now, sadly, we have a little of both.

A government that was more under the direction of wise heads, rationally deciding what was best for the nation, could intelligently determine the best amount of money to put into circulation. The one we have, unfortunately, is unduly influenced by a bloated and unregulated financial services sector. So it makes unwise decisions that favor bailing these people out from the consequences of their mistakes.

A return to goldbacks would precipitate another Great Depression. So, of the three directions I describe here, the one I favor is one where honest and intelligent managers decide how much money makes our engine run smoothest and leanest.

The problem is not unlike that of a carburetor. Too much gas, the engine floods and stalls. Too much air and it chokes out. Certainly this is not such a complicated problem that the human race is unable to solve it for optimum performance!

rube goldberg August 14, 2008 at 2:17 pm

Michael, a carburetor does not require honest and intelligent managers to regulate it. if one were to put honest and intelligent managers in charge of the carburetor do you think it lead to optimal performance?

michael August 14, 2008 at 2:34 pm

Thank you, everyone, for your comments regarding having a flexible money supply. I trust none of you actually feel I’m recommending that it be increased willy-nilly, so we can all be rich. Even though that seems to be the tone of your comments.

Let’s examine a situation we would encounter immediately if we were to switch to a fixed money supply. We have, in this exercise, decided on a convertibility rate that reflects the total amount of gold in vaults around the globe, and divided by all the money we’re guessing we have out on the street. Gold is probably then worth about $2,000 an ounce.

On the first day of the new regime, when companies come to the window for tide-me-over operating loans, the teller tells them “Sorry, sir. All our money’s out on loan.”

So he goes back and tells his chief of operations to shut down the presses. And he tells his workers they’ll have to take an unpaid break until some of their accounts payable come in, and he can afford to pay them more wages.

This happens routinely to most businesses, other than the wealthiest. So no one’s accounts payable come in, and the affected companies flounder for a while before going out of business.

With so many out of work, consumers no longer consume. Now even the largest companies use up their operating capital, stop the line and tell their workers to go home. Mortgage holders default, and whoever they owe the money to also goes under. The credit industry collapses, followed by the financial industry.

We have a word in the language for when this happens. It’s called a “depression”.

The solution is to keep the cash window open for business, and to never refuse any reasonable request from a customer with a good credit rating. Naturally, there does come a time when you have to tell some of your customers you’re cutting them off, they’re having too much fun out there. But you never, in service to the principle of initiating an elegant-seeming system, just cut everyone off. That way we drown.

michael August 14, 2008 at 2:40 pm

Rube– You say “a carburetor does not require honest and intelligent managers to regulate it”. But of course it does. Substitute the words “capable mechanic”. That is the job description of the head of any great central bank, like the Fed. Some do a better job than others, but the job is still necessary.

michael August 14, 2008 at 2:42 pm

Rube– You say “a carburetor does not require honest and intelligent managers to regulate it”. But of course it does. Substitute the words “capable mechanic”. That is the job description of the head of any great central bank, like the Fed. Some do a better job than others, but the job is still necessary.

rtr August 14, 2008 at 3:36 pm

Michael, “money” is an “actual substance” too. That’s the point. That’s the only reason it has scarce subjective economic value.

You can’t create as little or as much money as you want except by using violence to prohibit competitive production, exactly as it is so for every other good and service. This will always result in a lower quality less resilient fake artificially scarce money, that will eventually destroy those that are forced or fooled into believing it is something by nature it is not, which would not occur with a free market determined money, whatever it’s form, a gold standard, or something else. All trade whatsoever, including exchange of goods for “money”, only occurs because that which is received is valued more than that which is given away in exchange.

There’s no such thing as a “wrong amount of money” any more than there is such a thing as a “wrong amount of oil”, or “wrong amount of corn”, or “wrong amount of houses”. There’s no right or wrong amount for anything. More is always better, if it’s something which is subjectively valued. The whole purpose of the division of labor is too produce more stuff than can be produced without the division of labor, enriching all through specialization, surplus production, and trade. Increasing a real scarce money would always by definition be increasing real net subjective economic wealth.

Nobody can rationally centrally plan decide “what is best for the nation” when it comes to the money supply, just like nobody can rationally centrally plan decide “what is best for the nation” when it comes to the supply of any good whatsoever. Mises showed that socialism and communism cannot calculate optimal production outputs. Values are subjective, and always changing. Prohibiting free trade is only causing poverty, causing society to be net less wealthier than it otherwise would be. That goes for money creation too.

No person or central planning committee can decide how much coffee makes “our economic engine run smoothest and leanest”. It’s absurd to likewise think a central planning committee could make a similar determination for money. There’s no such thing as an honest and intelligent manager that uses violence to control others, by definition. Such an ideal is an oxymoron. The only honest and intelligent approach is decentralized non managed free trade determined strictly by changing subjective valuations.

Money is just another good, no different than oil, corn, or houses. Money is a proxy measure of disparate subjective valuations of different things. “One dollar” is a priori no different than “one sea shell” or “one ounce of gold” or “one grain of sand” or “one kernel of corn” or “one tomato plant seed” or anything whatsoever. All that matters is whether the thing is subjectively valued as an end good by most people that it becomes the most commonly traded good in exchange.

A critical mass must subjectively value money purely as an end good, and solely not as a medium of exchange. If something devolves into a pure medium of exchange, it’s value will collapse into being worthless, a hot potato desired by nobody. At that point a new money form will evolve. This is seen repeatedly in post fiat currency collapses, black market substitute money forms such as cigarettes, diamonds, gold, silver, and anything else which can be traded for something else of value.

The primary cause of the Great Depression was a collapse of trade brought on by artificially increasing the costs of trade through world wide State intervention tariff increases. The collapse in purchasing power of money was just a secondary aftershock, by definition of money being non free trade determined by the market.

rtr August 14, 2008 at 5:01 pm

There’s no such thing as a “fixed money supply”, except if it is enforced by artificial scarcity violence. It is *impossible* to run out of “money” just as it is impossible to run out of all things which are subjectively valued, by definition of action. People are willing to trade those things for other things of greater value, which already exist, or can be produced.

Wages can be paid in anything that is subjectively valued. A shoe factory can just as easily pay its workers in shoes. If shoes are subjectively valued, those workers can trade those goods for all sorts of other goods, including “money”. Thus, both the owners and workers of the shoes factory have shoes to trade to others who want shoes. This is all “money” ever is in a division of labor trading, by definition labeled, “society”.

If one person in the world “hoarded” all the gold, it wouldn’t matter the slightest iota to the functioning of the rest of economic activity, which at it’s foundational functional core is at all times merely a matter of producing more stuff of subjective value through the division of labor than can be if all were autonomous producing only for themselves in pre- Stone Age Robinson Caruso isolated poverty, and trade distributing each individually surplus produced good. The leather used to make shoes could become the new money. Or the cows used to produce the leather could become the new money. (And cows have been used as money in societies, used as dowry gifts, used as displays of wealth.)

It wholly depends on what people want, on what they subjectively value. Nobody values a “means of exchange” unless there is somebody else out there that values that “means of exchange” as a pure end good. When there no longer is somebody else out there that values that “means of exchange” as a pure end good, prices will signal the collapsing purchasing power of that “means of exchange”, as there is no reason to send that “means of exchange” from here to there, revealed through trade price signals which suddenly signal an absence of demand, an absence of subjective value, at the margin, or completely for that class of “money” good. That is a signal to stop wasting time and resources producing crap nobody wants.

Even farmers have a limit as to how much fertilizer they need for their fields. And they suddenly might not want previously “as good as gold” crap fertilizer for their fields anymore, having come to prefer chemicals. And so too may fiat currency systems one day disappear as worth less than animal excrement, or perhaps just slightly more than animal excrement, to be used as toilet paper to wipe away animal excrement and flushed down the toilet.

I nominate the Mises Institute sell knockoff fiat currency toilet paper alongside other trinkets such as the money clip. I’m sure we could find a tender “legal” artist rendition, if not some abandoned post WWI marks. That’s a commodity we could all take stock of. :P

Peter August 14, 2008 at 7:45 pm

A government that was more under the direction of wise heads, rationally deciding what was best for the nation

Ah yes, that’s always worked out so well in the past, hasn’t it…like for Mao and Stalin and Pol Pot…

michael August 14, 2008 at 8:53 pm

rtr– I’ll have to seriously disagree with you. You say “There’s no such thing as a “wrong amount of money” any more than there is such a thing as a “wrong amount of oil”, or “wrong amount of corn”, or “wrong amount of houses”. There’s no right or wrong amount for anything. More is always better, if it’s something which is subjectively valued.” But there is certainly such a thing as a wrong amount of money.

Germany, in the 1920s, had way too much money. So does Zimbabwe today. By what measure? By the ratio of money to available goods. THAT is the calculation that should be observed in regulating the money supply. Don’t they cover this in macro-econ 101?

Then you say “No person or central planning committee can decide how much coffee makes “our economic engine run smoothest and leanest”. It’s absurd to likewise think a central planning committee could make a similar determination for money.”

Again, very wrong. When farmers grow too much of a given commodity, the market punishes them by lowering the price being offered. Exactly the same thing holds true on the money market. Make too much of it, and the market will punish you for your sins.

The basic lesson to be learned is that when people are given a preference, they will choose the medium they believe holds the greatest store of value. And whether that is dollars, Euros, yen or cowrie shells, the locus of their preferences determines exchange rates.

So I would propose this. Set up an office in the Caymans (I wouldn’t try this at home), buy up a load of gold bullion and issue notes on it, convertible to a given quantity of gold. If the market has more confidence in your pieces of paper than it does in the USA’s scrip issues, it will reward you by buying your product.

I think the dollar will retain a decisive advantage. Because while your paper may be convertible into gold, the dollar is convertible into anything one can think of to buy. Including gold.

newson August 14, 2008 at 11:43 pm

rtr says:
“The collapse in purchasing power of money was just a secondary aftershock…”

deflation increases the purchasing power of money. the dollar’s real value increased during the depression.

i agree with you on the devastating effects that smoot- hawley had on trade, but how do you explain the business cycle, if you don’t believe in the austrian boom/bust monetary theorem?

ktibuk August 15, 2008 at 3:35 am

Michael, you believe in many fallacies about money but the root of it all is this.

“The solution is to keep the cash window open for business, and to never refuse any reasonable request from a customer with a good credit rating.”

Lets say I am a very credible person. Also lets say you have 1 million dollars in the bank. Although this is not possible in the real world, lets assume I guarantee you 100% that I will pay you back, can you Michael lend me 10 billion dollars?

I bet you would want to lend me 10 billion dollars, even with a small interest, lets say 1% annually.

But can you?

You can’t because you don’t have it.

Just like you cant lend me your car if you don’t own a car.

Unfortunately this is the rule of the universe we live in. You can not eat you pie and have it too. You can not create something valuable just like that, out of thin air.

But this is essentially what the banks do, with the aid of the central bank, right?

CBs don’t have the money they lend, but they create it at will and lend it out. Thus increasing the money supply in the process.

So given the laws of our universe how is this possible?

It is possible because what they actually do is not create additional wealth but, take wealth from every other money holder and and give it out to some person. In other words redistribute the wealth

Did they increase the money supply by 1%? This means they stole roughly 1% of every previous money holders wealth and gave it to some specific person(s). Yes that additional 1% isn’t as valuable as the money before but it is better than nothing right? At least for the ones getting it effortlessly.

In short if you don’t have something, creditworthiness of the person asking for that thing means nothing.

ktibuk August 15, 2008 at 3:53 am

Also Michael, I believe you think the all knowing central planners must adjust the money supply. Ä°ncrease it when the economy grows and decrease it when the economy contracts, right?

You think it would be bad, if lets say economy grows by 5% and the money supply stays the same.

Lets say there is 1 trillion dollars in the economy. I don’t know how you could measure it, but lets assume for the sake of the argument you did and economy grew by 10% that year.

Therefore you would want to increase the money supply by 10% right? You must therefore create 100 billion dollars and give it to some people some how and make the money supply 1.1 trillion dollars.

You believe if the money supply stays the same, 1 trillion dollars that would be bad.

I, on the other hand have a dramatically opposite proposition

I propose not only leaving the money supply the same, but do something much worse.

I propose that we decrease the money supply by 90%. I propose I would, in one night, make the money supply 100 billion dollars in total instead of 1 trillion dollars.

And I say nothing would change. No great depression, no recession nothing.

Just, make the FED declare that they are throwing out a zero in all the money that exists. Let everyone know, and Voila!!!

100 dollars is 10 dollars know, and everything that was 100 is now worth 10 dollars. You were making 200.000 dollars a year, no you are making 20.000.

Sounding strange? People living in the US 70 years ago didn’t find those numbers that strange.

And that is just one zero. I wasn’t kidding when I said that we threw out 6 zeroes a couple years back, in Turkey.

rtr August 15, 2008 at 9:23 am

Michael, *how* can there be a wrong amount of money? By definition of being “money”, it has positive non zero subjective valuation. Everyone always defines themselves as being richer the more money they have. Similarly, a society is richer the more of everything of subjective value it has. The more stuff you have, no matter the form of that stuff, the more wealth you have.

Germany, in the 1920s, had too much fake fiat non real “money”. And it only briefly had that too much fake fiat non real money because its quantity was only artificially scarce. Germany had too little real, subjectively valued, money. If that artificially scarce fake fiat money just kept adding multiple zeros to each note each day, nobody would have continued to value that fake fiat money (and that’s exactly what happened). But it wasn’t the particular quantity that mattered, it was the form that mattered. Something either is and continues to be subjectively valued, or it is not, and is worthless.

How many fiat currencies collapsed in just one mere 20th century? The value of gold has never collapsed to zero, unlike many multiple examples of fiat currencies.

There is no meaningful steady “ratio of money to available goods”. That’s a fundamental epistemological error of “monetary theory”. There’s no meaningful steady ratio of any particular subjectively valued good to any other particular subjectively valued good. This is, of course, where and why the original fatally flawed error belief that the total supply of money must match the total value of all other available goods originates, in some total outstanding proportion or in some circulating “available” proportion. This is where the “equation” of value with trade exchange for money error was inserted. Different things are always independently subjectively valued. Economic action is *preference*. Exchange is *preference*. Macro Econ 101, and their pseudo-Marxist “use-value” of monetary theory is demonstrably wrong.

Michael: “When farmers grow too much of a given commodity, the market punishes them by lowering the price being offered.”

Farmers don’t grow commodities from centrally planned quota output demands of the State. The State can’t control the weather, can’t control crop output, can’t control subjectively valued demand, and thus can’t control the price.

Does the price for the whole good (every marginal unit) go to zero if they produce one bushel “too much”? If everybody dropped what they were doing and only focused on growing as much coffee as they could with all available resources would people suddenly stop drinking coffee? No, by definition of coffee being and continuing to be subjectively valued as a drink, coffee bean crops would still have a positive subjective value (and they might even build houses out of sacks of coffee beans), in this extreme case just an incredibly cheap price for coffee, perhaps as cheap as salt ocean water or desert grains of sand.

Nobody is “punished” for any productive action. That production is either wanted by others, or it isn’t. If one is only producing to trade for the production of others, then others not wanting what you are producing is a price signal to stop producing whatever particular thing one is producing, and instead produce something else that is wanted.

The more coffee is produced, the more the price of coffee goes down because it is less scarce. This is exactly what happens and what should happen with all division of labor surplus production. You get more net stuff for less net effort than if every person were to try to duplicate that production on their own. More is produced, by definition lowering prices. That’s the whole point of the division of labor. Everybody benefits from lower prices, everybody benefits from more stuff.

Everybody who subjectively values coffee as an end good to be consumed is better off with lower prices (just like the world would be net wealthier if oil cost one cent per gallon rather than four dollars per gallon). For every lower price for every particular employment or good, everybody else who is not producing that particular good is better off richer. And thus, because of the division of labor specialization, everyone is massively much wealthier from lower prices, from more stuff available, from all the other particular branch production of the division of labor that are not their own, that they “lose” (read: smaller gain due to increased competition efficiency) from their own particular production branch.

If prices don’t go down, that signals the market to keep producing more, to not cut or slow production. If prices go up that signals to increase production even more. (Austrian economic theory currently incorrectly believes “malinvestments” can occur, but relative prices are all that matter; they’ve yet to shake fundamentally flawed “monetary theory” as well.)

Otherwise if prices decline “too low”, the market will signal better more subjectively valuable things to produce instead through higher prices, increasing net economic wealth even more than if it just continued to satisfy ever marginally declining lower priced subjective value of an ever less scarce thing (still increasing net economic wealth every action step of the way, by definition of subjective value). You’d still be increasing positive net economic wealth, you’d just be increasing it far slower than if you instead focused on producing things that satisfied the highest priced most marginally demanded by others production.

Every person doesn’t need or want one hundred houses, especially if it were to mean they would have to go with zero cars and have to walk to each of those houses instead of driving there. But you aren’t going to be poorer because you have one hundred houses instead of one house.

Money is not a measure of value, just like the quantity of oranges, or the quantity of any other good, is not a measure of value. The exact same marginal unit of every good which is traded, money included, is by definition valued *differently* by two different persons. One thing is preferred to the other thing for one person, and vice versa for the other person. That which is received is valued more than that which is given away in exchange. This holds exactly for money just as it holds for any other goods.

If you trade one dollar for one loaf of bread, you value the loaf of bread more than one dollar, and the baker values the one dollar more than the loaf of bread.

Michael: “buy up a load of gold bullion and issue notes on it, convertible to a given quantity of gold. If the market has more confidence in your pieces of paper than it does in the USA’s scrip issues, it will reward you by buying your product. I think the dollar will retain a decisive advantage.”

When the government does it, the citizens are forced to subsidize it. Of course the dollar would retain its “decisive advantage” because such competing gold backed currency notes are *illegal*, as illegal as importing cocaine, in the territory of the United States! (Though expect the proposed post fiat dollar collapse “Amero” to be goldish tan colored rather than green.) You can and will be imprisoned for such free market activity. You think the fiat Privafederal Reserve wants to compete against that and lose its monopoly czar power? You must exchange those gold backed currency notes at a bank or currency exchange for dollars first. You can’t just walk into a store and swap gold backed currency notes for goods. That would be considered barter and tax evasion.

Michael: “The basic lesson to be learned is that when people are given a preference, they will choose the medium they believe holds the greatest store of value”

Sure, when they are *permitted* such a choice. And given the multiple examples of fiat paper currency total collapses in less than a century, they won’t choose (when they can) any such fiat paper that is known to be as artificially scarce as a grain of sand as their store of long term value. The US Dollar has already lost 99% of its value in less than a century. That shows perfectly how the choice has been valued. Now it’s just a matter of ninety-nine point ever increasing decimals percent.

And as per the original article, the government preferred to use violence to seize the gold holdings of private individuals. If fiat dollars were more valuable than gold, why would the government have cared about any comparatively puny substandard gold holdings? They only cared because the government couldn’t counterfeit gold, couldn’t attempt to steal most of the productive output of citizens through various taxations, false “capital gains” taxation theft through pure inflation, and devaluation of government debts promised. It’s looting, plain and simple, and the result is a mammoth thug machine bureaucracy.

rtr August 15, 2008 at 11:15 am

newson: “how do you explain the business cycle, if you don’t believe in the austrian boom/bust monetary theorem?”

There is no “business cycle”, Austrian or otherwise. It’s a waste of time to try to explain something that doesn’t exist, that is a mirage brought upon by faulty monetary theory.

newson: “deflation increases the purchasing power of money. the dollar’s real value increased during the depression.”

That’s a monetary theory error myth. The money supply during the Great Depression might have declined a couple tenths of a percent for a year or two, while prices sunk, and production output and the number of trade transactions collapsed. There were still debts and taxes that had to be converted into dollars, and government programs paid wages in fiat dollars. But removing gold backing convertibility sure didn’t increase the “purchasing power” of the dollar, didn’t increase it’s subjective value.

Or maybe this is just the flip side of the inflation confusion. Just because the supply of money goes down, doesn’t mean the subjective value demand (“price”) for that money doesn’t decline even more than the supply.

If you didn’t want to lose real assets that were financed with dollar debt, you had to suck it up and convert more scarce real goods into pretty much the same limited dollar supply. (That of course won’t happen in today’s society, with a massive change in average contempt for the “morality” of honoring debts, people will just walk away en masse just like the corporations they’ve learned their lessons from.) Trust is killed, the risk of production is too great, as the fruits will be seized upon by layers of government. Every other neighbor is a thug, who has no problem voting to seize and redistribute your property.

If the dollar was so valuable, then why weren’t people willing to produce stuff to be exchanged for dollars? They stopped production because the legal tender was garbage (wasn’t a “necessary” highly marginally subjectively valued demanded good, especially in a time of crisis); better to do nothing or the bare minimum than waste your time slaving for the benefit of others (this will happen again as younger generations of workers won’t do anything except sit on your ass law and paper pushing bureaucracy jobs instead of slaving to pay for the retirement and health care expenses of baby boomers). Real productive output will decrease. The money just stays the same, remains out “there”. But nobody really wants that fake money, which is exactly why the number of trade transactions dry up. The relatively fewer remaining trade transactions for money which do occur out of desperation, or are debt contract enforced, massively skew and distort the “data”, perhaps misleading some into believing fewer dollars can generally buy more real goods, which is definitely not reality. Nobody would voluntarily willingly sell their houses for 50% less fiat paper dollars if they didn’t have to. They just have no choice, so that transaction is mistakenly categorized as a “trade”.

You see this again with the collapse in housing prices far exceeding the nominal decline in money supply. Taxes, regulations, and bureaucratic lawsuits are just too high and burdensome. The country is bankrupt. Debts are worth small fractions of the nominal amount. Does that mean since debt is cheaper, we are better off? Of course not. That debt was part of the “money” supply. Any loss is subjective value is a loss in wealth.

“Debt” isn’t another real good or service. It’s IOU “money”. And the collapse of debt obligations results in the collapse of “purchasing power” of money, though sure, the fiat cash bills don’t lose nearly as much in purchasing power as the debt IOUs, unless the government hyper-inflates the currency into oblivion ala Germany. So pick your poison, or try to take equal portions of deflation and inflation.

It’s still nonetheless a loss in subjectively valued “purchasing power” of the total money supply, though it is possible the remaining fewer marginal units can get recorded as trading for “more” goods in some instances, though I highly doubt you would ever see this “generally”, as evidenced by the collapse in the number of trade transactions.

michael August 15, 2008 at 1:35 pm

ktibuk– You’re telling me “Michael, you believe in many fallacies about money but the root of it all is this…”, in response to my comment that one should “never refuse any reasonable request [for credit] from a customer with a good credit rating”.

But you’re propping up your thesis with total absurdities. Your example: “[L]ets say you have 1 million dollars in the bank. Although this is not possible in the real world, lets assume I guarantee you 100% that I will pay you back, can you Michael lend me 10 billion dollars?”

This would be a ridiculous request, and quickly denied. But suppose I am not just some bank, but the central bank of an industrial nation. I am not constrained by the amount of specie I have in my vault, but rather by the mandate that I keep my country’s currency strong and viable, and its economy healthy and functioning.

Further, let’s assume that you, my customer, are an established large corporation with annual receipts in the range of one billion dollars (profits perhaps in the hundred million range). And you want a quick loan of one hundred million.

Seems like a safe enough bet. I’ll advance you that money.

I, as an individual, can’t give you a car if I don’t have a car. But a central bank can, within some practical limits, create a hundred million out of thin air, should it choose to in the service of its mandate. And its clientele– the entire world of traders in dollars– won’t mind a bit. Until and unless it screws up.

The reason? Dollars are an imaginary construct. We keep them going by the confidence we place in them, and the skills exhibited by those who manage their creation. If they are skillful the value of their product ($) is retained, while the object of the exercise– the circulation of sufficient money to be a facilitator for commerce– is upheld.

If I may offer an opinion, I think a confusion between gold, a useful metal, and money, an invention for facilitating commerce, lies at the root of your thinking. In our economy they are two very different things.

Finally you offer that “CBs don’t have the money they lend, but they create it at will and lend it out. Thus increasing the money supply in the process.”

Yes they do. But at the same time they also retire money– by selling notes from their reserve, such as T-bills. And if they’re running short they can just raise their interest rates, slowing the whole borrowing binge. They do, in fact, have certain ends that have to be met.

They should, in all this, be prudent. And as this is an election year, I fear they are keeping their issuance of credit far too loose. The original intention, that the Fed be kept independent of any given administration, has over time been undercut in some degree. Plus, I’ve never been a major fan of Mr Greenspan and his priorities.

So the prognosis is for the Fed to not do anything really crazy– but at the same time, not to always chart what we might think was the absolute optimum course for the financial world, between inflation and stagnation.

All in all? I still favor monetary linkage with someone’s intelligent guidance, over linkage with some arbitrarily named metal.

michael August 15, 2008 at 2:18 pm

Here follows something, ktibuk, that if you think about it for a moment you should agree is not a very good idea:

“I propose that we decrease the money supply by 90%. I propose I would, in one night, make the money supply 100 billion dollars in total instead of 1 trillion dollars.”

The immediate net effect would be to make every holder of dollars ten times richer. That is, unless you propose that the “old dollars” all be handed in in exchange for “new dollars”, and all prices be ordered to change accordingly.

And if that is your plan, then nothing will have been done. Call them dollars or dimes, the ratio of money to goods or services offered for sale will have been unchanged. The only change will have been to the numbers.

But let’s assume you mean that everyone holding dollars is suddenly ten times richer in buying power than they were the day before– while the amount of goods and services remains unchanged. In that event the ratio is disrupted. And prices– in the new dollars– will ratchet upward until once again they reach the same old equilibrium.

That is, if today a hundred dollars holds a hundred units of purchasing power, by your plan tomorrow it would hold a thousand units.

The day after, it would be again worth no more than a hundred units. The quantity of buying power can’t change– it’s dependent on the amount of product being offered for sale. Only the numbers can change.

Nice try. But you can’t get rich that way, by merely lopping off a zero or two. If you could, every nation would lop off a zero from time to time– transforming a tepid two percent growth rate, for example, into a commendable 20%.

newson August 16, 2008 at 8:42 am

rtr says:
“The money supply during the Great Depression might have declined a couple tenths of a percent for a year or two…”

from memory, money supply shrunk by about one-third from 1929 to 1932. nominal prices of just about everything (bar wages) fell dramatically. why isn’t that an increase in purchasing power for the dollar-holders, and a corresponding impoverishment for dollar-debtors?

the severance of the gold-dollar link in ’34 didn’t give the dollar a purchasing power boost, agreed.

you’ll have to flesh out your no-such-thing-as business-cycle-theorem. i mean we are on hallowed ground here, the resting-place of mises.

you’ve raced into church and screamed “god is dead!”. now you’ve got some explaining to do.

rtr August 18, 2008 at 8:40 am

newson, if the money supply shrunk by a third, where did it go? Did they eat it, bury it, burn it? Did it drown in the ocean? Was it kidnapped for ransom by aliens? If it just disappeared up and vanished, it wasn’t real “money” in the first place.

I find the belief you parrot, expressed by both Milton Friedman and Ben Bernanke, that the money supply decreased by a *THIRD* utterly laughable, at best gross negligence, at worst a pure propaganda lie. But feel free to prove me wrong. Unfortunately the Federal Reserve has in the last few years cut off the data set showing how money supply changed from 1900 to present. But *you* go track down the now missing data, specifically from this data set pre-1959 back to 1913. My memory, including analyzing the Great Depression period in an excel spreadsheet (which is unfortunately deleted from an old computer – didn’t know the Fed would cover up past data – guess they ran out of space on the internet — is that money supply only decreased by tenths of a percentage point for a couple of years).

Here’s the link for the data set starting at 1959:

http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt

In the meantime, we shall proceed as if my memory is more credible than your memory. :P

Here’s a link, to get you started,for M1 & M2 from ’26 to ‘42.

http://www.sjsu.edu/faculty/watkins/depmon.htm

But no matter what non credible numbers anyone gleans from non credible sources, this will inevitably just get back to everyone and their brother calling anything and its sister “money”. Fundamentally flawed “monetary theory” confuses quantity and subjective value. If a Ponzi scheme at one time represented wealth as evidenced through trade transactions, then it was never a Ponzi scheme, right? If people suddenly tomorrow subjectively value gold half as much as they do today, that doesn’t mean half the money vanishes. And if people suddenly the next day subjectively value gold twice as much as they do today, that doesn’t mean twice the money appears from out of nothing. That goes for all derivative substitute forms of money too. Subjective valuation is not “money”. Money is itself subjectively valued, and that subjective valuation can change independent of supply.

Just because something isn’t voluntarily forthcoming in active trade, doesn’t mean the supply has disappeared. That’s as ridiculous, absurd, and disingenuous as claiming that the supply of houses is only equal to the supply of houses which have “for sale” signs on them. Uh, no, the supply of houses is equal to the supply of total houses outstanding, whether they are being happily occupied as homes, in the process of being flipped as investments, or in any state of action or non action by the owners whatsoever. The supply goes down when hurricanes and voluntary demolitions bring them down (or perhaps when a fictional monster such as Godzilla eats them), the supply goes up when new ones are built. But when it comes to “monetary theory”, sloppy methodology is the rule (and the Austrians, especially Rothbard, don’t escape such necessary needed house cleaning criticism either).

But if we want to be esteemed government economists like Milton Friedman and Murray Rothbard (whose intellectual achievements we can consider roughly equivalent), we’ll just pretend if you aren’t willing to sell me your house for the price I want to pay, that your house just doesn’t exist. But no esteemed 20th century intellectuals are immune to their deserved lambasting. We can line up every Nobel Prize winner and laugh at what idiots they are when it comes to understanding “monetary theory”. But we must nevertheless proceed to correct their errors even if some start crying like a naive 18 year old girl who’s just been told “you don’t know what love is”, even if they are professional so-called expert economists who really “don’t know what money is”.

Maybe we should break down the housing supply the way they break down the money supply.

http://en.wikipedia.org/wiki/M2_(economics)

H0: Physical Houses. A measure of the house supply which combines any existing or standing houses held within a central jurisdiction and the amount of physical houses circulating in the economy (the poltergeist moving furniture is not included in this measure). H0 is the most liquid measure of the housing supply. It only includes walls or roofs that could quickly be converted into livable abodes.

H1: H0 + land deposits, which are property accounts. This is used as a measurement for economists trying to quantify the amount of houses in circulation. The H1 is a very liquid measure of the housing supply, as it contains houses and land that can quickly be converted to livable abodes.

H2: H1 + room and bath deposits, basement deposits, and non-commercial condominiums. H2 is a broader classification of houses than H1. Economists use H2 when looking to quantify the amount of houses in circulation and trying to explain different economic housing conditions. H2 is a key economic indicator used to forecast square footage McMansioninflation (a variable introduced by the British economist Sir McMansionin [citation needed]).

H3: H2 + big time fancy schmancy rent hotels, institutional resorts, short-term commercial lease agreements, along with other larger “slightly” lesser liquid buildings. This is the broadest measure of housing and is used by economists to estimate the entire supply of houses within an economy.

Yeah, they don’t have the first clue as to WTF they are talking about. But this is fun, so let’s keep going. :P

Dale -Short Sale- Kirkland August 18, 2008 at 6:00 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:01 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:01 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:01 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:03 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:03 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:03 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:03 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

Dale -Short Sale- Kirkland August 18, 2008 at 6:04 pm

Well, I don’t see us ever going back to the gold standard. Too much water under the bridge and this is what many of our forefathers left England for. Maybe we need a new country?

I think not. What needs to be done is to slowly turn this ship around before we hit the iceberg. This needs to be started at a family level – which would then permeate to a political level. May take a few generations.

rtr August 19, 2008 at 2:53 pm

newson, if the money supply shrunk by a third, where did it go? Did they eat it, bury it, burn it? Did it drown in the ocean? Was it kidnapped for ransom by aliens? If it just disappeared up and vanished, maybe it wasn’t real “money” in the first place?

Here’s an example of the absurdity of mainstream monetary theory, mocked with the substitution of housing supply for money supply:

http://en.wikipedia.org/wiki/M2_(economics)

H0: Physical Houses. A measure of the house supply which combines any existing or standing houses held within a central jurisdiction and the amount of physical houses circulating in the economy (the poltergeist moving furniture is not included in this measure). H0 is the most liquid measure of the housing supply. It only includes walls or roofs that could quickly be converted into livable abodes.

H1: H0 + land deposits, which are property accounts. This is used as a measurement for economists trying to quantify the amount of houses in circulation. The H1 is a very liquid measure of the housing supply, as it contains houses and land that can quickly be converted to livable abodes.

H2: H1 + room and bath deposits, basement deposits, and non-commercial condominiums. H2 is a broader classification of houses than H1. Economists use H2 when looking to quantify the amount of houses in circulation and trying to explain different economic housing conditions. H2 is a key economic indicator used to forecast square footage McMansioninflation (a variable introduced by the British economist Sir McMansionin [citation needed]).

H3: H2 + large chain commercial rent hotels, institutional resorts, short-term commercial lease agreements, along with other larger “slightly” lesser liquid buildings. This is the broadest measure of housing and is used by economists to estimate the entire supply of houses within an economy.

Just because something isn’t presently voluntarily forthcoming in active trade, doesn’t mean the supply has disappeared. That’s as ridiculous, absurd, and disingenuous as claiming that the supply of houses is only equal to the supply of houses which have “for sale” signs on them. The supply of houses is equal to the supply of total houses outstanding, whether they are being happily occupied as homes, in the process of being flipped as investments, or in any state of action or non action by the owners whatsoever. The supply goes down when hurricanes and voluntary demolitions bring them down (or perhaps when a fictional monster such as Godzilla eats them), the supply goes up when new ones are built.

Coming up next, a mocking of Fractional-”Room” Housing.

newson August 19, 2008 at 10:53 pm

rtr says:
“if the money supply shrunk by a third, where did it go? Did they eat it, bury it, burn it? Did it drown in the ocean? Was it kidnapped for ransom by aliens? If it just disappeared up and vanished, maybe it wasn’t real “money” in the first place?”

yep, maybe bank credit is just willed into existence, as the austrians emphasize.

Ireland August 20, 2008 at 12:23 am

Exactly as newson says.
The used phrase of choice which describes what fuels a boom is money being created out of thin air. This thin air place is where such money goes back home when the fraud is exposed and corrected in the followup bust. That’s ABCT in two sentences, here’s hope it wasn’t too fast to follow.

This also illustrates why it’s so important what we use for money. There’s still unsolved technical difficulties in converting thin air into gold, while there’s proven technology that works in the cases of paper money and bank credit. It’s called “fractional reserve banking backed by a central bank” for the latter, and “printing press (or, today, its electronic equivalent)” for the former. Perhaps even rtr heard about it.

ktibuk August 20, 2008 at 4:16 am

rtr: “newson, if the money supply shrunk by a third, where did it go? Did they eat it, bury it, burn it? Did it drown in the ocean? Was it kidnapped for ransom by aliens? If it just disappeared up and vanished, maybe it wasn’t real “money” in the first place?”

Yes “money disappears” during deflation but you are partially right in your last sentence that it wasn’t “real money” to begin with.

In other words, for deflation to occur first there has to be prior inflation.

Even without the fiat money, through fractional reserve banking, money supply can be increased. But this increased supply also function as money in an economy affecting everything that money affects. So they are treated as “real money” and that is the main problem.

There isn’t that much money in reality, but everyone acts as if there was.

Deflation, therefore can be defined as, realization of the real amount of money and thus adjusting the books according to reality. In the real world this happens when banks fail and the people who cant get their money write off their loses.

If the CB and the government doesn’t let the banks fail, then there is constant inflation. If the constant inflation is close to production growth this parasitsm can go on for a while. The products prices may not fall and may increase a little but that doesnt destroy the currency.

And financial crises can be dealt with not deflation, but decreasing the inflation by what is called as “tight monetary policy”.

rtr August 20, 2008 at 9:27 am

newson :”yep, maybe bank credit is just willed into existence, as the austrians emphasize.”

Exactly like all subjective value for all things whatsoever, at every marginal unit for all such things, is just extrinsically willed into subjectively valued existence too.

msHmA: Part 3, Chapter XI. Valuation without calculation in paragraph 3.XI.11:

“An inveterate fallacy asserted that things and services exchanged are of equal value. Value was considered as objective, as an intrinsic quality inherent in things and not merely as the expression of various people’s eagerness to acquire them. People, it was assumed, first established the magnitude of value proper to goods and services by an act of measurement and then proceeded to barter them against quantities of goods and services of the same amount of value. This fallacy frustrated Aristotle’s approach to economic problems and, for almost two thousand years, the reasoning of all those for whom Aristotle’s opinions were authoritative. It seriously vitiated the marvelous achievements of the classical economists and rendered the writings of their epigones, especially those of Marx and the Marxian school, entirely futile. The basis of modern economics is the cognition that it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged. People buy and sell only because they appraise the things given up less than those received. Thus the notion of a measurement of value is vain. An act of exchange is neither preceded nor accompanied by any process which could be called a measuring of value. An individual may attach the same value to two things; but then no exchange can result. But if there is a diversity in valuation, all that can be asserted with regard to it is that one ‘a’ is valued higher, that it is preferred to one ‘b’. Values and valuations are intensive quantities and not extensive quantities. They are not susceptible to mental grasp by the application of cardinal numbers.”

rtr August 20, 2008 at 9:50 am

Ireland: “This thin air place is where such money goes back home when the fraud is exposed and corrected in the followup bust.”

Tibet? The graveyard for all forsaken formerly subjectively valued no longer “loved” goods? :P

“Haha…send him home. I just send him home. Time to go home there, ball. (putts) Son of a ***** ball! Why didn’t you just go HOME! ARE YOU TOO GOOD FOR YOUR HOME?! ANSWER ME!!” :P

Ireland: “This also illustrates why it’s so important what we use for money.”

How about *what* we use for utensils and plates? Are those disposable plastic forks, paper plates and Styrofoam containers that end up in the trash after eating lunch out or getting food to go from a restaurant causing malinvestments in the fine china, crystal glass, and other metallic utensils markets? Should this substitute imposter faux “silver”-ware be banned?

See, you are again committing the Marxist “use-value” fallacy. The “what” is immaterial. Only that it is subjectively valued is material.

rtr August 20, 2008 at 10:33 am

ktibuk: “Yes “money disappears” during deflation but you are partially right in your last sentence that it wasn’t “real money” to begin with.”

That doesn’t make any sense. By definition of it having been traded it was subjectively valued for real.

ktibuk: “In other words, for deflation to occur first there has to be prior inflation.”

Subjective value can disappear with no inflation. But of course Austrian monetary theory also confuses quantity with subjective value demand. If you asked an Austrian economist what happened to ten oranges in a grocery store the price of which subsequently drops by half, would the Austrian economist answer there only remains five oranges?

ktibuk: “Even without the fiat money, through fractional reserve banking, money supply can be increased.”

By definition increasing net economic wealth.

ktibuk: “But this increased supply also function as money in an economy affecting everything that money affects. So they are treated as “real money” and that is the main problem.”

That’s no different than an increase in supply for any good whatsoever. What’s the “problem”?

ktibuk: “There isn’t that much money in reality, but everyone acts as if there was.”

There’s an epistemological abuse of the word “act”. It either has subjective value as evidenced through trade action, or it does not.

ktibuk: “Deflation, therefore can be defined as, realization of the real amount of money and thus adjusting the books according to reality. In the real world this happens when banks fail and the people who cant get their money write off their loses.”

You lost me. So some of those observed actions of trade exchange aren’t “reality”?

ktibuk: “If the CB and the government doesn’t let the banks fail, then there is constant inflation. If the constant inflation is close to production growth this parasitsm can go on for a while. The products prices may not fall and may increase a little but that doesnt destroy the currency.”

Why would by definition increasing net subjective wealth through increased supply “destroy the currency”?

ktibuk: “And financial crises can be dealt with not deflation, but decreasing the inflation by what is called as “tight monetary policy”.”

So getting richer more slowly is preferred to getting richer more quickly?

Note: These criticisms apply to all monetary theories, not just any parts which may be particular to Austrian theory.

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