Money as Debt
(the story about the history of banking and how it works today)
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Tuesday, January 1, 2008
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I watched this entire video. There is a lot that is good in it. But I think a lot is flawed from the perspective of the Austrian school of economics.
ReplyDeleteAnybody else notice this?
Joe E.
I should have given an example. The producers of this video propose that the gold standard can never be trusted in any form, even as a 100% gold reserve currency. They claim that it is open to fraud, for example, the printing of more bills than there is gold to back it.
ReplyDeleteThey propose instead that the government just create money itself which is not a debt instrument, which doesn't involve interest payments. In one way it is clever. Now the unknown stock holders of the Federal Reserve bank would not get any income. However, we would still have the problem of a government taxing us via the inflation tax, i.e. taxation without representations. And so government would continue to grow.
Frankly, only constant vigilance will ensure that we end up with honest money. As far as I can tell, the best currency possible, the best target to shoot for, would be a 100% gold or silver reserve currency.
Interested in feedback.
Joe E.
It is all about how to control the money supply. Now we have a couple of economics at the Fed figuring out what the money supply is going to be. But really why does a money supply needs to grow? What if we just say from this moment the total money supply is going to be 100 trillion dollars. The money supply is not going to be more or less. Would that not be a good idea? At least then the Fed can not create times of prosperity or recession by messing around with interest rates and therefore controlling the money supply as they wish.
ReplyDeleteNow I know this may sound stupid, but I really have never read about a stable money supply. Why has that never been tried?
(sry if this sounds stupid, I don't know very much about economics!)
Actually, that is perfect. Murray Rothbard himself wrote that there is no social advantage to increasing the money supply. All other commodities benefit us when there supply grows. But money qua money does not benefit us when its supply grows. (Of course, if gold were money, then increasing its supply would be a benefit via its use as a luxury, or commodity...decoration and jewelry. But this would be a disadvantage in as much as it is money. Furtunately, gold's increase in supply last I read is around 2% per year, very minimal. And so it doesn't have that bad an impact upon the "store of value" that gold provides.
ReplyDeleteBut back to your point: A fiat currency,debt based or not debt based like Lincoln's greenback(as is being proposed by this video), or a 100% gold reserve currency would all work, that is, would not give us a boom/bust cycle if the supply remained constant.
The point of contention is what would the market prefer? Or what would be the easiest to protect against fraud? I think a 100% reserve gold and/or silver currency would be the easiest to protect against fraud. But open to suggestions.
Your intuition though is exactly right. I wish I could give you the reference from Rothbard's Magnum Opus from which I recall reading the above mentioned statement.
all the best,
Joe E
I cannot understand how having a constant money supply would be beneficial, because population is not. So as the population grows there would be less money available for each individual and therefore a lower standard of living?
ReplyDeleteYes that is a good point. The money supply needs to grow with the growth of the population. But who is to say how much the population is growing?
ReplyDeleteWhat the government is now doing with for example inflation numbers is that they guess at the numbers of new born and death, and so control the inflation figures as they wish.
Good discussion guys!
@ To they guy above
ReplyDeleteYou can see how many people obtain a citzenship or permanent residence, or are born. And then you see how many people have died.
So then you know how the much the money supply needs to grow to keep up with the population.
I agree, it would be easy for the government to monitor the population growth and adjust the money supply accordingly. But then the question is by how much? It would just be some arbitrary number chosen by the government say $40,000 for each new person, but that individual may not contribute $40,000 worth of labor to the economy and so there would be an unjust increase in the money supply leading to inflation.
ReplyDeleteSo I see avoiding inflation as impossible and money backed by gold or silver as the most stable option imo.
@ To the guy above (again ;-)
ReplyDeleteYou don't need to figure out how much someone is going to contribute to the economy. The government just looks to the rate of the growing population and if for example the population gained 1% this year then the government just adds 1% of new money to the money supply.
And how is that new money brought into circulation? The government builds something of value to the economy, like for example it upgrades the infrastructure so that economy will be benefit from the new money added to the money supply.
@ the guy above
ReplyDeleteGood point, I stand corrected :)
The only thing i can think of now that i don't like about a stable money supply (such as the one proposed in this documentary) is that for someone to become richer it means that everybody else has to become poorer.
@ the guy above
ReplyDeleteWell the thing that people become poorer when others get richer is happening all the time. For example if your investments yield more then the growth of the money supply you are basically doing the same thing as with the suggested stable money supply. I don't think that there is any solution to that.
I should have come back and checked this conversation sooner.
ReplyDeleteA point in regard to the "problem of stable money supply combined with a growing population." There really is no problem here according to the Austrian school of economic thought.
If the money supply is relatively constant, and the population increases along with its overall productivity, then there will be proportionally more goods than money. As a result there WILL NOT BE A SHORTAGE OF MONEY, rather prices of goods will tend to fall. And this will have no adverse effect upon real wages. Remember, a smaller and smaller amount of gold will then still buy the same amount in such a scenario.
Wages may have to fall a bit, nominally, for this to work in some such scenarios. But the real wages would not necessarily fall.
One other thing to keep in mind, is that other things might start acting as "quasi money" as Dr. Rothbard talks of in one place. In other words, as people start to hold more and more weath in the form of land, stocks, mutual funds, bonds etc., the demand for cash (gold in our scenario) will tend to moderate. So I would think that prices of goods may not fall as much as they otherwise would.
The bottom line is that an unchanging supply of money is not a problem with an increasingly more productive population or an increasing population. Prices of goods will just adjust downward to compensate with no concomitant socially negative impact, all other things being equal.
all the best,
Joe E.
All of your points about the increase or decrease in the money supply is based on the belief that you can trust the people with the currency machines to do the right thing. You are dreaming. The same people who can turn on and turn off the counterfeit bill machines can also make or break economies, make or break political elections, i.e. they can "control" a whole nation. These people want "control." That is why they are in the positions they are in. Politicians put them there. What they want, they get. "Give me the control over a nation's currency, and I care not who makes it's laws." Remember that quote?
ReplyDeleteThe money supply can be fixed, loosely, but linked to production as production is really the only source of wealth a nation has. The more apples you grow, for example, the richer you are, and the richer the country becomes. The more efficient and innovative you become, the richer you become. Perhaps the supply of money could be linked to production, kind of in the same way it is linked to gold if you dig more of it up. RMJ Atkinson, not needing to be unknown.
ReplyDeleteTo illustrate my previous post, let me say this: If the supply of apples grows and the supply of money, (gold in my scenario) stays the same or grows only very slowly via mining, then there is no shortage of money. How so? The price of apples just goes down. The same quantity of money then simply buys more. So how can there be a shortage in the quantity of money, or in the quantity of money? It is a non issue. The Keynesians are wrong.
ReplyDeleteJoe E.
Meant to write: "So how can there be a shortage in the quantity of money, or in the quantity of gold?"
ReplyDeleteJoe E.
Yes but then there would practically be an inverse relationship between prices and population. So an increase in population would result in deflation which is rarely good for an economy.
ReplyDeleteYes, there would tend to be an inverse relationship between prices and population.
ReplyDeleteDeflation however is only bad when there is "inelasticity" in wages. That is what leads to the dreaded increase in unemployment, not deflation itself. If wages can drop, then a deflation becomes irrelevant. What becomes relevant is productivity. As productivity rises, the standard of living rises.
The supply of money staying the same then has no bad effects, rather just the good effect of preventing the business cycle, and causing prices to drop for the consumer.
some thoughts,
Joe E. Dorner
All those argue against a constant money supply dont realise that the new money is not created homogenously in all the economy and therefore it distorts the price structure. As Hayek states, the people who first receive the new money take advantage of the people who receive the new money after, because the purchasing power of it falls while this money is spread through the economy. This is the main cause of the boom bust cicles, because when the growing supply eventually stop some goods are overvaluated over the others and this lead to a fast reestructuraion of all the economy structure.
ReplyDeleteFurthermore, any creation of money, is a transaction of wealth from those that have savings, to those than can create it. That is, mainly from middle class savers, to bankers. Very rich stock holders are safer of this process, but middle class just tend to keep their savings in cash or deposit accounts.
As it was said in some other comment, the only problem of a constant money supply scenario, is that wages should be free to fall nominally, because otherwise the cost of production would tend to be higher in a deflation economy. There is no other problem and the fear that supply-siders spread about the "deflation spiral" it's just a fake mith. Electronics industry is a good example of how market can gain profits of deflationary goods even in a inflationary environment.
Well said haymor!
ReplyDeleteJoe E Dorner
Great discussion guys, keep it going! I love this website! Finally more knowledge and truth about economics.
ReplyDeleteBy the way: we should have some forum around here. Discussing all this stuff. Someone needs to mail the admin.
Perhaps the admin. could tell us how many hits this site is getting. Whoever set this up came up with a good idea. I agree.
ReplyDeleteOne of the best forums, from a technical view point, is the bogleheads forum. Check it out at www.boglehead.org. They are simply an investment forum and do not allow economics to be discussed. I don't participate there anymore. But perhaps somebody could set something up similar to it.
all the best,
Joe E. Dorner
I love your site and information and wanted to see if you have seen this and would help spread the word?
ReplyDeleteThe Obama Deception HQ Full length version
http://www.youtube.com/watch?v=eAaQNACwaLw&feature=PlayList&p=CD93A57FA4A1545B&index=0