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
Money wasn't severed from gold to solve any "problems". Governments issue paper notes when they want to spend more money then they own.
Study American monetary history.
P.S.
Yes, all government currencies are crappy. Thats why Austrians advocate market currencies.
it was a problem from the perspective of those who wanted more credit...primarily rulers, but can't you also say that in a free market a lack of credit hurts entrepreneurial pursuits?
What lack of credit would that be?
The chill that you feel is the herald of your doom! Irenicus' Diaries.
nazgulnarsil:but can't you also say that in a free market a lack of credit hurts entrepreneurial pursuits?
No.
Creating aditional money does not "grow" the economy, that is completely false. Money is not wealth, it is used to exchange wealth. Creating new money does not create new wealth, but when new money is created it redistributes wealth.
yes, but if people create additional wealth without there being any corresponding increase in units of currency then you have deflation.
nazgulnarsil: yes, but if people create additional wealth without there being any corresponding increase in units of currency then you have deflation.
Yes, which is very good, everyone's money becomes more valuable, and prices will drop.
Also, When you create money out of thin air it makes everyone's money weaker, and is a form of theft.
Isn't this a problem since those who hoard wealth benefit proportionately more? hoarding acts as a brake on economic activity because people have much less reason to invest in new business ventures. with mild inflation most rich people reinvest their money.
What is the point of endless hoarding? Hoarding usually takes place in view of economic crises.
nazgulnarsil:Isn't this a problem since those who hoard wealth benefit proportionately more?
And by hoard wealth you mean what exactly? People saving money for houses, cars, their kid's college fund? Saving is what drives the economy.
nazgulnarsil:with mild inflation most rich people reinvest their money.
This does not change that inflation is theft.
Also the more people save in banks, the more the banks can loan out for different business ventures.
there is no point to endless hoarding but that doesn't stop people from doing it. humans are not rational.
how does saving drive the economy? taking money out of circulation does not drive the economy.
here is a hypothetical: say we return to a hard currency and some rich people start hoarding, as this catches on the hoarding further drives deflation which encourages to hoard even more etc. This kind of thing used to happen and there's no reason to think it won't happen again.
nazgulnarsil: there is no point to endless hoarding but that doesn't stop people from doing it. humans are not rational. how does saving drive the economy? taking money out of circulation does not drive the economy. here is a hypothetical: say we return to a hard currency and some rich people start hoarding, as this catches on the hoarding further drives deflation which encourages to hoard even more etc. This kind of thing used to happen and there's no reason to think it won't happen again.
Who said that saving money is removing it from circulation? What the other posters have pointed out is the fact that "hoarding" - meaning stuffing the mattress with cash is not feasible except possibly in a major economic depression. If the depression is not hyperinflationary it still is not necessarily the best option to hoard it but if it's done and the money supply does decrease and prices fall, rates rise, and savings (capital) becomes more lucrative then that's a good thing. 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. Savings allow for increase in productive capacity, productivity creates wealth. How do savings not drive the economy?
No, they are rational to the extent that they choose the means they believe is best adapted to attaining their end. And man is most certainly rational in a broader sense, albeit not unfailingly. So what end is it that hoarding fulfills?
Have you even done rudimentary economics? Loanable funds come out of savings. Say I want to build a house, yet I can only gather a limited number of resources at any given time. I will stockpile those resources until I have enough to attain my ends, deferring consumption (the resources do not disappear into a void.) That is saving, and the house can only come out of this stockpile. Money represents all the goods that it can be exchanged for on the market (think of its price in terms of all these goods.) That is the only difference between it and other commodities. Saving money provides the resources necessary for investment, because it can be exchanged for said resources.
This kind of thing used to happen and there's no reason to think it won't happen again.
If it does, so what?
nazgulnarsil:This kind of thing used to happen and there's no reason to think it won't happen again.
No, it didn't.
There is no problem with hoarding. If the money supply were to be reduced this would cause a reduction in prices, but not a reduction in the amount of commerce.
nazgulnarsil:humans are not rational.
Then please stop sharing your irrational opinions.
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