Money and Banking (article)

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Nielsio Posted: Fri, Jul 10 2009 1:43 PM

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Money and Banking
By Hans-Hermann Hoppe, transcribed and editted by Nielsio.

Trade
Let me, before I come to money, raise the prior question of why it is that there is exchange in the first place. If we imagine, for instance, that every person would be identical to every other person; like a clone of everyone else. And in addition that the factor land, the nature given resources, are also perfectly identical for every individual such that every individual finds a tree in front of him and a lake in front of him, and there is no difference in this regard. Then what we would expect is simply that everybody would produce identical quantities of identical goods and use them up in the same fashion as everybody else does. In such a situation there would not be the slightest reason even to think about the possibility of exchange. Why should I exchange one identical good for another identical good? So the first insight I want to emphasize is: it is necessary for division of labor to emerge that there exist differences, either with regard to labor (individuals), or with regard to land (the nature given factors), or both of these factors. At that moment, when differences exist, then it becomes possible that people might come up with the idea: how about exchanging one thing for another thing produced by someone else.

But we could still imagine that people would remain in self-sufficient isolation, and everybody tries to produce whatever he needs for himself. Some sociologists and psychologists have attempted to explain division of labor by postulating some innate sympathy that they have for others. In Adam Smith for instance, you find the phrase that there exists an instinct to truck and barter; and that explains the emergence of division of labor. But it is always better if one can explain a phenomenon with less assumptions rather than with more, and Ludwig von Mises develops the argument that: let's assume that everybody hates everybody else. Could we then explain the emergence of division of labor? And he says yes, we could do that also. Because all we need in order to explain the emergence of division of labor and then of a barter economy is the assumption of self-interest. That every person prefers to have more goods rather than less.

As you may know from elementary micro economics lectures, there exist two advantages to division of labor. One, the so-called absolute advantage: one person is good at one thing and another is good at something else. And given the fact that time is scarce; whatever time we spent doing one thing we can no longer spent doing something else. It is obviously advantageous to specialize in those things in which one is better, and the other person specializes in what he is better, and then they engage in exchange. And the total quantity of goods produced will be higher this way than it would be if both people had decided to produce all of the goods on their own.

And the second reason, the so-called comparative advantage, that considers the worst-case scenario. That is, we have a superior guy who is in all regards more productive and an inferior guy who is in all regards less productive. And the question then arises: does it makes sense for these people to engage in division of labor? And again the answer, it was first formulated by David Ricardo, but was applied to nations rather than to individuals and the great advance that Mises made over this was to apply the argument to the proper level of individuals, the answer is yes even under those circumstances the division of labor is beneficial for parties participating in it; provided only that the all around superior guy specializes in those things in which his superiority is particularly great and the all around inferior guy specializes in those things in which his inferiority is comparatively smaller. Again, given the fact that time is scarce, if I spent time doing A, during that time I cannot produce B, and the overall result will be an overall increase in production and increase in wealth of all people participating in it. So in all circumstances division of labor is more productive, and that explains why mankind has given up trying to be isolated and self-sufficient, and engages instead in division of labor.

Mises also adds by the way, the very important point that rather than sympathy being the cause of division of labor, it is that the sympathy that develops among people is the result of division of labor motivated initially by nothing but self-interest. That is, once you recognize that you are better off participating in division of labor, then you develop sentiments of sympathy towards you fellow man. So we don't have to stipulate that there exists sympathy at the outset; sympathy is rather the result of initially nothing but selfish motives and the recognition that these selfish motives lead to an overall increased well-being.

Money
So now we are in a barter economy, in which people produce partly for themselves and partly they produce for the purpose of exchanging their goods for the goods produced by others. And we immediately discover that there exists a fundamental problem in a barter economy. Because in order to exchange it must always be the case that I have what you want and you have what I want; that is a 'double coincidence of wants' must be in existence. If only one of these accidents happens, I have what you want but you don't have what I want, then obviously an exchange is impossible. Now, if we make the assumption that there exists certainty with respect to the future, that is, every person is perfectly capable of predicting what any other person desires at any other point in time and how much he is willing to give away in order to acquire such a good then, under conditions of perfect certainty, you can say, double coincidences of wants would always be in existence, nobody will ever encounter any difficulties getting rid of his goods and acquiring in exchange those goods that he wants. However, we of course do not live in a world of perfect certainty but in a world that is characterized by uncertainty. And in a world that is characterized by uncertainty it can happen that double coincidences are absent and we are stuck in our attempt to acquire other goods for the goods that we have produced solely for the purpose of exchanging them for something else. What do people do when they are stuck and cannot immediately, directly acquire what they want due to an absence of a double coincidences of wants? This is the beginning of the explanation of the emergence of money. Money would not come into existence under conditions of perfect certainty. Uncertainty is the necessary requirement for the emergence of money. The invention of money is the answer to this problem of what do we do if we have produced for exchange but we cannot directly acquire what we want.

The explanation for the emergence of money has been initially given by Carl Menger and then somewhat refined by Ludwig von Mises. Again, it is quite straightforward. The argument goes something like this: All we need initially is to assume that there is one bright person in society who makes a very simply observation. He makes the observation that in a barter economy not all goods (producer goods and consumer goods) that are traded are equally marketable. Not all goods are equally frequently used. Some goods are used by many people at many occasions and other goods are demanded by few people at few occasions. So given this simple observation that goods are distinguishable from each other based on their degree of marketability, this first bright person only has to do the following if he is stuck in a situation where he cannot directly acquire what he wishes to acquire. In that case, all he needs to do is find someone who is willing to buy what he has to sell and has a good to offer that has a higher degree of marketability then what I have to sell. Let's say I'm selling fish and I want pears but the pear owner is not interested in fish. But there is somebody who is selling apples, and apples are a significantly more marketable good than fish. Then, even in the case where I am personally happen to be allergic against apples and do not desire apples as a consumer good or as a producer good, would still have a motive to exchange my fish for these apples because as the owner of apples I have then the possibility of trading my apples more easily for those goods that I want. The advantage of acquiring more marketable over less marketable goods is that they are more easily resalable for those things that I really want. This person who has demanded an apple not to be used as consumer good or producer good but just for the purpose of, it is easier to resale apples and get what I want, has demanded the apple to be used as a medium of exchange, a facilitator of exchange. Now you realize immediately that as soon as a single person has demanded apples for this purpose rather than to be used as a consumer of producer good, the degree of marketability of apples increases further, above and beyond the degree that existed prior because there are still all the people who demand apples to be used as consumer and producer goods, plus there is now also one person who demands apples on account of their high degree of marketability. Now imagine other people being stuck in the same situation. The next bright guy encountering the same difficulty. It becomes in every step easier to recognize what the solution to the problem is. Just acquire something that is more marketable than whatever you have to sell, and the chance that he picks the same type of goods also increases step by step because the more people demand apples to be used for this purpose, the more rises the marketability of apples. And so we have very quickly developing a convergence towards one particular good to be selected as a common medium of exchange. More or less everybody in society uses the same good for this purpose to facilitate the reselling and attaining those things that he really wants, and this is the definition of a money. Money is defined as a common medium of exchange.

Now once we have a common medium of exchange not only does this problem of double coincidences disappear, because everybody is now willing to sell almost everything against this money, but also because we can now engage in cost accounting. Cost accounting is the practice that every businessman engages in, day in and day out, to compare the input prices with the output prices in order to determine whether he produced efficiently or whether he wasted scarce resources in the production of goods that are less valuable than those things that went in to the production of the good. In barter we have no common denominator for the various goods that we output. Only if we do have a common denominator are we able to make this kind of comparison and the decision to continue or discontinue what you do.

Now a few fundamental insights about the nature of money going beyond what I have so far explained. First of all, economic theory does not predict what commodity will be selected as a common medium of exchange. Economic theory can only predict that there are certain characteristics that a good can or cannot have that either increase or decrease the likelihood that it will be chosen. For instance, whatever is chosen as a common medium of exchange should have and will likely have the characteristic of divisibility. Because we want to make small purchases and large purchases, we want a commodity used as money that can exist in large quantities, small quantities, that can be divided into ever smaller units, and not lose it's fundamental characteristic; it remains still what it was before. If you divide a tractor, you take off the wheels, it's not longer a tractor. But if you cut an apple into smaller pieces, these pieces still remain apple pieces.

The second thing that should be mentioned is whatever is chosen as a common medium of exchange should be something that is easily portable. People should have no difficulty moving it from place to place. Because after all, the purpose of money is to facilitate exchange, so it will be very unlikely that for example lead will be used as money because that is something that is only in large quantities valuable; we want to have something that is even in small quantities a valuable thing. If lead would be money then in order to buy a car we would need a truckload of lead to pay for the car so it is an un-useful medium of exchange.

It should also be something that is easily recognizable. It should not be too difficult to figure out is that really what the person says it is.

Many goods fulfill these criteria to a certain extent, some more so and some less so. You may have seen in some economic textbooks as an example used for the emerge of money, the example of prisoners of war camps where people receive care packages and then some of the stuff that they find in the care package they have use for and for other things they have no use and they would like to exchange that for something else, and then they look again for something that is highly marketable in order to acquire these highly marketable goods in order to get what they really want for the things that they want to get rid of, and in the old days this function of a common medium of exchange was fulfilled by cigarettes. You can see that cigarettes do to a certain extent fulfill this requirement. They can be divided up, you can have cartons, you can have packs, you can have single cigarettes, and as those of you who are smokers know that even if you happen to be at night and sit there and don't want to go to the next 7-11 and then you go through your ashtray and try to identify which one of your cigarette butts is the longer one and which one is the shorter one and then you go from the longer ones to the shorter ones; so even on the level of sub-cigarettes quite fine distinctions can be made. And it is light-weight and it is easily recognizable.

I'm not sure if cigarettes would nowadays would be still fulfilling this type of function given the general health craze, it might now be that if cigarettes are in the package that people just simply throw them all out, and maybe bean sprouts would acquire this former status.

The second insight is that even though we cannot predict exactly what will be chosen as money we can say that whatever is chosen must be something that was initially a valuable consumer good or producer good traded in barter. We already had the insight that this good has a high degree of marketability. And in reverse we can say that it is impossible that something that is not a valuable commodity traded in barter can be chosen as money. This brings the question: can fiat money, pieces of paper, function as money from the outset. The answer is: no that cannot possibly be the case. We can see how paper money can come into existence but not at the beginning. The reason is this, imagine that you have some valuable good, I would like to have it but I don't have anything that you would like in return. And then I come up with glorious idea, I tear off a piece of paper and then I write 10 dollars on it and then I offer you that piece of paper and say: “Here 10 dollars, how about it?”. And naturally you would think I'm a candidate for the loony bin, but then I increase my offer because I add two zeros to it and I raise the question again, and in this case you definitely will call the local loony bin to lock me up.

So money must in the beginning be a commodity money, something that is or was initially a valuable consumer or producer good, traded in exchange.

The next point I want to make is: there is an inherent tendency for a universal money to develop. Initially at the development of money we can see that there exist various local moneys. The reason, as we saw, it is advantageous to engage in division of labor in exchange and then out of this there develops a money as a method to facilitate exchange. Now if different regions begin to trade with each other, who do this for exactly the same reason that different individuals within a given region trade, then we are still, as long as we have different types of money being used in one place from another, in system of partial barter. If I wanted to buy in some other region it would be necessary to find first somebody who wants my money and I want his money. That is a double coincidence of wants has to exist at least on this level still. And what happens there in the same way as this convergence towards one medium of exchange happens in small communities, small regions first, is the same thing. There will be a selection of a commodity that serves as a common medium of exchange in wider and wider areas. If you make it clear to yourself that the purpose of money is to make it as easy as possible then it should be clear that a money that is used on a worldwide scale does precisely this. It makes exchange as easy as it can possibly be. No other money that is only regionally used has the same advantage of facilitating exchange to the utmost degree. A universally used money does precisely this. And historically speaking we can say that at the moment when the entire world was integrated in one giant exchange market parallel to this expansion and extension of division of labor, also comes into existence an international commodity money, namely, the gold standard. So the insight is there is a tendency for a money to become an international commodity money.

The Supply of Money
The next point I want to make is: in contrast there exists a fundamental difference between money and consumer goods and producer goods. If you ask the question: what is the best or optimal supply of consumer goods? The answer is always, more is always better than less. For producer goods, the answer is the same, as more producer goods give rise to more consumer goods. If we look at money however, we reach a different conclusion. Why isn't more money better than less money? For this question we can use the angel Gabriel model, from Murray Rothbard. Imagine that the angel Gabriel comes down to earth and wants to help mankind but he has never taken an economics class; that happens even with angels. He leaves the quantity of consumer and producer goods unchanged but he doubles overnight the amount of money in existence. Then the question is: is society as a whole richer because of this? The answer is no: society as a whole is just as rich as before. All that will happen by and large is that the prices of consumer goods and producer goods expressed in this money will double. But our standard of living depends on the consumer goods and the producer goods in existence. We don't consume money, we don't produce anything out of money. Money is just a facilitator of exchange. In reverse, if the money supply falls in half, are we worse off? The answer is: no, we are not worse off. What will happen then is that the prices of goods will fall in half. What we conclude from this is that once there is a money in existence, any quantity of money is equally as good as any other quantity. More money is not beneficial to mankind and less money is not detrimental to mankind.

There are two amendments to this. The first one is that as long as money is a commodity money, such as gold, to the extent that additional quantities of gold are used for non monetary purposes (filling teeth, making complex equipment, etc), an increase in gold does increase well-being. To the extent that additional quantities of gold are used for monetary purposes, no additional wealth is created in society. In the case of paper-money, where there exists no non monetary use of it, any increase in the amount of paper-money is something that does not benefit society as a whole at all.

The second and more important amendment is: while it is true that increases in the supply of money cannot enhance overall well-being in society, it is however so that increases in the supply of money can redistribute income within society. It can make some people richer and other people poorer. Imagine again the angel Gabriel model, and we find ourselves with twice as much money as the day before. And then imagine that there are two individuals who react differently upon this discovery. The first person rushes out immediately and spends his additional money. What will then happen? The goods on which he spends his additional money will begin to rise in price. Not all goods will immediately rise in price, those goods that he spends his money on, those will rise in price first. But this person could initially buy at the old, low prices, and then drives up the prices of certain goods. Now imagine the other person waits for four weeks and ponders what he will do with his additional money. And then after four weeks he goes into the market and begins to buy. What will he find? He will find that he can no longer buy many goods at the old, initial lower prices, but will already have to pay higher prices. So that person who spent his money first gains in wealth at the expense of the person who waited. So there is an income redistribution taking place. And in reality, as you know, increases in the money supply do not occur as in the angel Gabriel model wherein we all find ourselves with more money in our wallets than we had the day before. In reality, additional supplies of money come into the hands of particular individuals at particular places. And it is those who get the money first and spend it first who gain at the expense of those who's income has not yet risen and who in the mean time have to pay higher prices, driven up by the first person who could spend the money first.

I will also mention as a criticism of a guy like Milton Friedman, that people don't have an interest in money that has a stable purchasing power. Many economists seem to think that that is the ideal money. Money that has a purchasing power that allows us to buy the same quantities of goods in the course of time. To see that this argument is clearly faulty just apply it to other goods. One has bought a house, with which three things can happen. The price of the house can go up, the price of the house can fall and the price can stay the same. What would be preferred? Most people, except maybe some Chicago economist, would say that of course we prefer a house that increases in value and only if we can have no increase in value of the house then we would prefer a house that doesn't lose value over a house that does lose value. Why should that be different with regard to money? Of course we prefer a money that increases in purchasing power over a money that is stable in purchasing power. Only if we cannot have a money that increases in purchasing power would be take a stable money rather than a money that loses value over time.

This brings me to the next economic regularity. Something for which we have historical evidence. As long as mankind on a commodity money, such as the gold standard, the tendency used to be that the purchasing power of money did in fact increase. During much of the 19th century it happened what we nowadays only see in small sectors of the economy. If you look at electronics and computers you find that they are cheaper every year. If you wait a year you can buy it cheaper than if you do it today. If you wait two more years it will be still cheaper. Prices fall in certain sectors and we also discover that falling prices do not mean that these firms can no longer make profits. Profits are the difference between the input prices and the output prices. And if prices in general fall, then input prices and output prices fall, which does not affect your profitability at all. During the 19th century, under the gold standard, this tendency that is now the exception and in most cases everything just gets more expensive from year to year, was the general tendency and prices tended to fall. In growing economies the quantity of producer and consumer goods increases. On the other hand we have gold that is used to purchase them. And what happens historically is that there are only tiny additions made from year to year to the quantity of gold. So if the goods are expressed in the gold the tendency would be for prices to fall. This is not an economic law. If we would find gold in large quantities then we could see temporary inflationary tendencies emerging. On the other hand, if you are on a paper-money standard, then you can increase the amount of money at will. So hereby it is easy to explain why prices expressed in terms of paper money increase all the time instead of fall.

So now the question is: when we look at the real world we find that it looks very different from what we would expect from theoretical insights. There is no commodity money in existence; not a single currency nowadays is a commodity money. Secondly, there is not international currency in existence; we have various competing national currencies. And thirdly, the tendency is not for money to increase in purchasing power but to decrease; in some countries more, in others less. Now how does this come about? In order to explain this we have to introduce the institution of government. In some schools of economic thought, like the Public Choicers, government is presented as if they were some sort of firm. But it should be clear that they are a very unique type of firm. First of all, an institution that funds itself through taxes does not come into existence because there was a demand for it. Nobody demands to be taxed. Secondly, regular firms, who do come into existence because there is a demand for their products, grow because their demand grows. People want to buy more GM cars, so that makes GM grow. And people stop buying GM cars, and GM goes out of business. Governments do not grow because there is more demand for people to be taxed and they also do not go out of business if people say 'lousy service last year, I would like to discontinue my cooperation with you'. So a very different form of firm at least. They are dependent on tax revenue and have the same desire as everybody else, greater wealth is better than less wealth, more income is better than less income, but raising taxes can be a dangerous thing. Lots of people have experienced chopped of heads as a result of attempts such as this. So they are looking out for a different source of income and this then is trying to gain monopolistic control over the supply of money, and all governments basically do that in a three step process. Some governments have done that earlier, some have done that later.

Government Monopoly
The three steps are this. You monopolize the minting of gold. In the free market there exist different minters of gold, who offer their coins and compete for clients. And if you have competition in the minting of gold then this is one reason to make the producers of gold coins honest. Because if you imagine that somebody says 'this is an ounce of gold' and the competitors would find out that actually it is slightly less than an ounce of gold, an advertising campaign would immediately be started: 'These guys are cheating you and take my coins that are really an ounce of gold and not his coins that say they are but actually they are less'. Governments, by monopolizing this minting, have a far easier way now of doing precisely what they blame competitors to do, namely to reduce the gold content of gold coins. You recall the gold coins, you melt them down, you remint them, you give the same quantity of gold coins back to the people but you subtract ten percent of each coin which you keep for yourself. This amounts to a ten percent increase in taxes but it is less easily discoverable what is going on. But you also realize that this attempt cannot be repeated over and over again because people will catch on to this tendency.

The second step that they undertake is this. Under free competition in the gold business, besides gold coins being offered by various gold coin minters there will also be money substitutes: people deposit their gold in banks and receive in return a ticket entitling them to this piece of gold and they pay a safekeeping fee to the institution that safe-keeps gold for them. These tickets are then accepted, if people trust the banks, as if it was real money. This is how paper can come into use, because paper in this case is nothing else but a title to something else: a title to a certain quantity of gold stuck somewhere in a bank. People are willing to accept it because they know 'this is just as good as gold is; all I have to do is take the ticket and then get the gold out'. But different banks issue their own papers. Government argues now again: “Couldn't they just print additional pieces of paper not covered by gold?”. Yes, they could. But again, it is precisely competition between banks that makes it very difficult for banks to do this: to print notes which are actually uncovered by gold. Because as soon as one competitor would find out Bank A does that sort of stuff, they would point that out and then a bank-run would occur. This possibility keeps banks honest. The second step then is that the government outlaws the private production of money certificates and says “only I can produce these type of certificates that are redeemable into gold”; and so monopolizing the issue of money substitutes. And again, as soon as it is monopolized you can see that it is then much easier to do what governments blamed private producers of money to do: to print additional tickets uncovered by gold. But if you do this, especially for a while and people catch onto this, then you will encounter eventually bank-runs. After all, there are more tickets and ticket owners out there than there is gold in the banks. So bank-runs occur and as soon as they occur then third step in the process occurs which is that from one moment on the government stops redeeming paper tickets into gold as they initially promised. These paper tickets can then float on their own because they have in the mean time acquired purchasing power, and the government says: “you can keep the paper and we keep the gold”. The gold, you have to keep in mind, is what people have initially deposited in the banks. And at the same time they outlaw the private ownership of gold: “you must deliver your gold to the government and you will be payed, generously, in the form of paper money for it”. And so, completing the monopolization and nationalization of money.

In the United States history the first step, the monopolizing of the mint, begins with the history of the United States itself. The second step, the monopolization of money substitutes, occurs with the founding of the Federal Reverse in 1913. The third step, stopping redeemability, occurs in 1933/1934.

In this situation you might think government has reached the end of the process. Now, they are the only ones that can print paper tickets up. And of course, if I appoint you to be the only person who can print paper money and nobody else can do it, you will print it. It costs almost nothing to print it, you can buy a Mercedes, BMW, and so forth, you will also find out that you have more friends than you ever thought you had who all come running to you and want to make use of this magic wand themselves. But still, there are some problems that remain in existence. If you have different countries that have their own fiat currencies then if one country inflates more than another country, it is bound that the currency of this country will tend to fall against the currency of another. No government likes to see that this becomes a permanent process, that it's currency falls all the time against the currency of other countries. Because then the danger is that people might simply drop the currency that continually falls and adopt the currency that better holds it's value and that ends this miraculous form of income. So what would be the solution to this? It is that one has to create a one world currency, a one world paper currency. And we are already on the way towards this, creating for instance the Euro which reduces the number of currencies already to three major currencies. And if you would have only one world currency, issued by a world central bank, controlled of course by the United States, then by definition this currency can no longer fall in the currency market against any other currency; and this would be the situation where inflation would reach it's highest levels.

Banking
Full reserve deposit banking works like this. People put their money in the bank, pay a fee for it, do not give up property in the money that they deposit with the bank, and one can come any time you want and redeem your money for the ticket. This type of banking is non inflationary. The amount of money certificates increases every time by the same amount as genuine money deposits have been made. And as soon as withdrawals from the bank occur then gold enters the circulation and the tickets are drawn up. So the composition of money, certificates on the one hand and genuine money on the other, changes due to depositing and withdrawing, but the total quantity of money is not affected by it and as long as people engage in 100% reserve deposit banking there is no possibility of bank runs. The second form of banking is that of savings and loan banking. Here people hand over for some time their money to the bank. The bank temporarily becomes the owner, loans it out to somebody else who then temporarily becomes the owner, and here the savers do earn an interest return. Something is being done with their money. Whereas in 100% reserve deposit banking the money is simply held in the bank and no interest can then possibly be paid. Savings and loan banking also does not involve any increase in the money supply: I have over the money to the bank, the bank hands it over to an investor, and then eventually the money flows back to the initial saver, and the income of the bank consists of the income differential. The interest that they pay the savers and the interest that they charge to the borrowers. In contrast, under 100% reserve deposit banking the income of the bank is the safekeeping fees that they collect. A savings and loan bank does not have to hold any reserves. They can loan out all the money that they have; just make sure that at the time when you have to pay the savers that the loans have have been repaid and you can repay the saver.

Differently works a hybrid form which is called fractional reserve banking. People deposit money in banks and receive the right of instant redeemability and at the same time are being paid interest. Now you can see what sort of problem this type of banking form involves. You can only receive interest if some of the money that you deposit has been in fact loaned out to somebody. Otherwise it would be impossible to pay the depositor any interest. On the other hand you have the right to have your notes instantly redeemed. But both of these things are actually impossible to do. Fractional reserve banking implies that more tickets have been brought into existence than gold to back up these tickets. Fractional reserve banks are always inherently bankrupt. If all ticket owners would come at the same time a bank would be impossible for the bank to redeem all notes into gold. From a legal point of view what fractional reserve banks do is they create multiple owners of the same piece of property. I deposit a piece of gold and get a certificate. And because banks know that not all certificate owners will come at the same time and will want to have their certificates redeemed, they have created certificates that look like other certificates except there is no gold for it available. In other words, there exist multiple certificate owners who claim ownership of the same quantity of gold sitting in the bank. And as you can imagine, if you have two owners who claim to be at the same time the exclusive owner of one piece of property, conflicts must arise, and these conflicts become revealed precisely in the bank run, when not everybody can be paid but whoever comes first is paid, whoever comes later is not paid at all. And the economic consequence of fractional reserve banking is the business cycle. Because if you create additional pieces of paper money uncovered by any gold, this will lower the interest rate below what it otherwise would have been, businessmen will begin a larger amount of investment projects than otherwise, but in fact no additional saving has taken place. The credit that has been given to the businessmen is what is called fiduciary credit rather than commodity credit. A genuine saver abstains from consumption and puts the money in a bank for a while. What he abstains from consuming can be used in order to feed the workers that are working on additional investment projects. These investment projects that are financed by commodity credit can be completed. In the case of fractional reserve banking, additional credit is given to businessmen but this is credit that has been created out of thin air; it is not backed by any additional savings. So the commodities that a normal saver abstains from using are actually not available to those who receive this paper money credit and we have then a volume of investment going on that in the long run is unsustainable due to the fact that the necessary savings in order to feed the workers, for a period that is necessary to complete the investment projects, are lacking.

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Rooster replied on Fri, Jul 10 2009 3:22 PM

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Nielsio:

I will also mention as a criticism of a guy like Milton Friedman, that people don't have an interest in money that has a stable purchasing power. Many economists seem to think that that is the ideal money. Money that has a purchasing power that allows us to buy the same quantities of goods in the course of time. To see that this argument is clearly faulty just apply it to other goods. One has bought a house, with which three things can happen. The price of the house can go up, the price of the house can fall and the price can stay the same. What would be preferred? Most people, except maybe some Chicago economist, would say that of course we prefer a house that increases in value and only if we can have no increase in value of the house then we would prefer a house that doesn't lose value over a house that does lose value. Why should that be different with regard to money? Of course we prefer a money that increases in purchasing power over a money that is stable in purchasing power. Only if we cannot have a money that increases in purchasing power would be take a stable money rather than a money that loses value over time.

There may be a good argument for money that increases in purchasing power, and I'm sure Hoppe can do better, but this isn't it. To say it's true because people like the value of their assets to go up, is to ignore all issues that make money unique compared to other goods, not to mention it seems to me this is a fallacy of composition.

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scineram replied on Fri, Jul 10 2009 3:30 PM

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Well obviously would be buyers will not like housing prices increasing.

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vilson replied on Fri, Jul 10 2009 4:13 PM

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Because then the danger is that people might simply drop the currency that continually falls and adopt the currency that better holds it's value and that ends this miraculous form of income. So what would be the solution to this? It is that one has to create a one world currency, a one world paper currency. And we are already on the way towards this, creating for instance the Euro which reduces the number of currencies already to three major currencies. And if you would have only one world currency, issued by a world central bank, controlled of course by the United States, then by definition this currency can no longer fall in the currency market against any other currency; and this would be the situation where inflation would reach it's highest levels.,,,,,,

,heheheh so far you HAD ALL THIS,,,,,americans sorry it is all your fault what is happening in world economy!!and becouse yours fraudelent bank sistem!!!it is to late for USA to stay on top like unipolar leader of the world!!!

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I. Ryan replied on Fri, Jul 10 2009 4:14 PM

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Nielsio,

Thank you!

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nazgulnarsil replied on Sat, Jul 11 2009 2:42 AM

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evidence from anthropology indicates that money probably started out as a way of dividing up loot amongst the soldiers of a conquering army and/or as tax obligation notes.  the idea that there was some sort of free banking which the statists then came along and corrupted seems naive.  statism predates money.

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nirgrahamUK replied on Sat, Jul 11 2009 6:57 AM

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nazgulnarsil:

evidence from anthropology indicates that money probably started out as a way of dividing up loot amongst the soldiers of a conquering army and/or as tax obligation notes. 

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Nielsio replied on Sat, Jul 11 2009 7:40 AM

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nazgulnarsil:

evidence from anthropology indicates that money probably started out as a way of dividing up loot amongst the soldiers of a conquering army and/or as tax obligation notes.  the idea that there was some sort of free banking which the statists then came along and corrupted seems naive.  statism predates money.

Que?

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Nielsio replied on Mon, Jul 13 2009 10:31 PM

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Rooster:

Nielsio:

I will also mention as a criticism of a guy like Milton Friedman, that people don't have an interest in money that has a stable purchasing power. Many economists seem to think that that is the ideal money. Money that has a purchasing power that allows us to buy the same quantities of goods in the course of time. To see that this argument is clearly faulty just apply it to other goods. One has bought a house, with which three things can happen. The price of the house can go up, the price of the house can fall and the price can stay the same. What would be preferred? Most people, except maybe some Chicago economist, would say that of course we prefer a house that increases in value and only if we can have no increase in value of the house then we would prefer a house that doesn't lose value over a house that does lose value. Why should that be different with regard to money? Of course we prefer a money that increases in purchasing power over a money that is stable in purchasing power. Only if we cannot have a money that increases in purchasing power would be take a stable money rather than a money that loses value over time.

There may be a good argument for money that increases in purchasing power, and I'm sure Hoppe can do better, but this isn't it. To say it's true because people like the value of their assets to go up, is to ignore all issues that make money unique compared to other goods, not to mention it seems to me this is a fallacy of composition.

That's just it. Money is a commodity and it's uniqueness is that people market wide choose it precisely because it contains value so well. This is why it's illegal to compete in the currency market, because people would flee what they have now. If people didn't value something that holds it's value better then you wouldn't have to outlaw competition.