I am fully open to criticism of any part as I am not confident of all my assertions.
but anyway:
It wasn't until colonialism brought unprecedented expansion that bankers were able to get away with their fractional lending scheme. I think this is because commodity based currencies worked fine in slowly expanding economies but started to stutter when growth started increasing quickly. In a commodity based currency where the supply is relatively inelastic compared to the market (like with gold) a quick expansion in the markets causes deflation, there are now more goods and services available but not a corresponding increase in the amount of money in circulation making everything slightly more expensive. This favors people who already have large amounts of money and acts as a brake on economic expansion. So the rulers wanted credit to expand more quickly and authorized the practice of fractional reserve banking with conservative ratios at first. But the rulers who relaxed the standards had a comparative advantage (they could secure more credit with which to finance expansion). Slightly balancing this is the fact that the higher the ratio the higher the risk of a bank run, since the more highly leveraged the bank was the more vulnerable it was to small perturbations in the markets. Credit expanded at a rate that more closely matched economic expansion, and the money supply maintained a more stable value per unit.
Of course the problem was that since nominally each and every one of those units of currency lent out was supposed to be backed by a commodity in the bankers vault, this fractional reserve banking was fraudulent. And even though it was fraudulent, it seemed to work 99% of the time and created a more stable currency...so how to get the best of both worlds? This problem was solved by taking the money off of a commodity standard and making it an abstract unit. This took away the motivation for people to show up at the bank and claim their stuff. There was nothing to claim. Of course there had to be some way of controlling its value. The only way to control its value was to control how quickly banks issued it. Thus the fed was created. The fed controlled how fast money was issued by controlling the interest rate that banks paid. Why didn't the government control this rate itself? If the government controlled the fed directly, it would just print money for itself. So the fed was created as a quasi-separate entity that would loan the government money. The fact that government could not just magic money into existence without consequence would keep a leash on gov spending.
Of course this system has largely failed. Government colludes with the fed to print money and manipulate interest rates. instead of trying to match economic expansion and slowdown the fed, staffed by shortsighted people, expands credit supplies when the economy slows down fueling the next bubble. The fed has no conception of the latency of its actions. Nor a firm grasp of currency as a commodity. As a result the value of the dollar has slowly eroded.
So how do we get the best of both worlds? How do we get a currency that won't fluctuate in value but will maintain its buying power despite swings in market growth? The gold standard people have failed to convince me of its practical viability. After all didn't we have to adopt a split gold silver standard precisely because the gold standard was slowing economic growth?
nazgulnarsil:In a commodity based currency where the supply is relatively inelastic compared to the market (like with gold) a quick expansion in the markets causes deflation, there are now more goods and services available but not a corresponding increase in the amount of money in circulation making everything slightly more expensive
Which is reflected in an increase in the price of gold, which stimulates the gold production market, bringing supply into balance with demand (or as much as is possible in this world). The market self-regulates.
nazgulnarsil:This favors people who already have large amounts of money and acts as a brake on economic expansion
Yes, the good kind of brake, the one that prevents "expansion" into inefficient lines of production. You call it "economic expansion"; others call it "rent-seeking" (or "theft" if they're not good with fancy economic terms).
nazgulnarsil:So how do we get the best of both worlds? How do we get a currency that won't fluctuate in value but will maintain its buying power despite swings in market growth?
You're chasing a chimera. There is not, nor will ever be, a stable currency, because demand for money (in fact, for all goods and services) is unstable, unpredictable and uncontrollable.
You would be well served by reading The Theory of Money and Credit by Mises.
"He that struggles with us strengthens our nerves, and sharpens our skill. Our antagonist is our helper." Edmund Burke
Do you understand that when somebody "saves" it's an investment and that this capital base allows credit to be expanded from it? The more savings there are the lower interest rates will be meaning more people can get loans.
I can't wrap my head around this one. It seems to me that the more people saved the greater the rate of deflation would become, discouraging spending or loaning. why loan when you can just hang on to your money and have your purchasing power grow without risk? and low interest rates would just further discourage loaning. why loan your money out at 6% with risk if you can just hoard it and make a guaranteed 3%?
Side note: I'm not trying to be confrontational here, I'm genuinely curious about this stuff because I don't fully understand the austrian interpretation and its implications. If you guys take this condescending tone with everyone that comes and asks questions on a forum made for questions it's not surprising that the Austrian school doesn't grow. If you'd prefer to point me to a book rather than answer that's fine.
I will stockpile those resources until I have enough to attain my ends, deferring consumption (the resources do not disappear into a void.)
exactly, consumption is deferred. saving doesn't remove money from the economy permanently but it does create latency in the economic process.
so what about people who already have their basic needs met? they have a house and food and luxuries. what happens to speculation? what happens when the money he makes on top of the amount to cover his basic needs plus luxuries is saved instead of invested? In a hard currency system where the market is growing faster than the money supply, the spending power of his savings is growing. So he dies and leaves his kid a huge chunk of money, he doesn't spend it all either, he simply lives off the deflationary difference, slowly decreasing his total amount of currency. But in the meantime that it takes for him to run out of wealth to live off of say 2-3 million has been off the market for say 30-40 years and none of that money has been productive. And if he instead keeps the amount the same or grows it and passes it on to his own kid that takes it off the market even longer. That money will be out of circulation indefinitely until someone in the family spends it.
With inflation if someone wants to live off their hoard they have to re-invest it and live off the economic growth. What if the fortunes of the Rockefellers or other old money wasn't continually reinvested but instead hoarded? I think there would be an impact.
so what about people who already have their basic needs met? they have a house and food and luxuries. what happens to speculation? what happens when the money he makes on top of the amount to cover his basic needs plus luxuries is saved instead of invested?
Then it will be drawn by people who want to use the money to invest, perhaps?
Of what sort? If there is deflation, it is accounted for in saving rates much like inflation is. Where is the problem?
To darkness I condemn you...
OH I get it. If you do lend out in a deflationary environment you're getting even more of a return. You get interest from the lender but that doesn't mean the deflationary interest does away. so if you make a loan for 1 year at 5% and deflationary forces cause a 3% increase in value you've netter an 8% buying power increase. It would encourage even more lending, not less.
is this right?
Yeah, changes in the PPM are factored in to these kind of considerations. If they weren't I guess you'd be right, but if the bank wants to incentivize individuals to do business with it it'll have to offer them more than what they can get by just letting their money sit around. It can then lend that money out at higher interest rates and make a profit (note: this differs from merely storing the money, which it will charge for.)
I understand now why my points seemed nonsensical. thank you for bearing with me.
First, inflation is not theft.
Second, with deflation the uneven change in prices leads to relative prive distortions, tinkers with the interest rate, causes economic cycles, according to ABCT.
nazgulnarsil:Isn't this a problem since those who hoard wealth benefit proportionately more?
All hoarding does is to raise the PPM of the money that is still in the economy (for lack of a better term). Moreover hoarding is just the satisfaction of human desires, there is nothing different in this respect to spending.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
scineram:First, inflation is not theft.
Yes it is.
scineram:Second, with deflation the uneven change in prices leads to relative prive distortions, tinkers with the interest rate, causes economic cycles, according to ABCT.
Deflation can never cause the ABCT. Granted if interest rates were lower than before the length of the production process may be artificially short but that wouldn't result in the ABCT. The ABCT is caused my misallocation of resources resulting in malinvestments, which can only be caused by a lengthening of the production process that doesn't reflect the time preferences of individuals within society.
But I think you have to admit that HTF in relation to XCR will definitely affect the ABCDEFG. :p
GilesStratton:Yes it is.
GilesStratton:Deflation can never cause the ABCT. Granted if interest rates were lower than before the length of the production process may be artificially short but that wouldn't result in the ABCT. The ABCT is caused my misallocation of resources resulting in malinvestments, which can only be caused by a lengthening of the production process that doesn't reflect the time preferences of individuals within society.
scineram:Yes it is
Because it's fraudulant, or implicit theft. If a private individual starting writing notes for gold that didn't exist it would be fraud. Why is it any different when the state starts printing money out of nowhere? The fact is they're creating money out of nowhere transferring wealth from the original holders of the money to whoever first receives it.
scineram:An artificially short production process still does not reflect the time preferences of individuals. It is therefore also malinvestment.
No it won't lead to malinvestment, it will lead to a lack of investment.
Then why not ban coinage?
Why cannot higher interest rates divert investment the way lower rates does?
scineram:Then why not ban coinage?
Because coinage generates real wealth.
scineram: Why cannot higher interest rates divert investment the way lower rates does?
Because people will refrain from investment due to higher interest rates. Granted, artificially high interest rates will lead to a decline in overall utility, it will not lead to the ABCT though.
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