[jmherbener]

The interest rate is the inter-temporal price of money, i.e. the exchange ratio between present money and future money. Fundamentally, it is determined by people’s time preferences, i.e., their preferences for a given satisfaction sooner instead of later. The interest rate is manifest in two ways. First, the contract rate of interest for credit transactions and second, the price spread between output prices and input prices in production.

The total stock of money and the total demand for money determine money’s purchasing power, which is the inverse of the prices of goods.

The exchange rate between different moneys adjusts to keep the purchasing power of any one money the same everywhere. So if the demand for the dollar increases, with the money stock the same, the purchasing power of the dollar will increase. This means both that prices will fall domestically and that the dollar will appreciate internationally.

The demand for money and time preferences are independent of each other. They refer to two different ends and actions to attain those ends. Time preference is the preference to attain a given satisfaction sooner instead of later. A person acts inter-temporally to satisfy his time preferences. If his time preference is low he lends to someone with higher time preference and earn the rate of interest. The demand for money is the preference to retain money balances, instead of lending them, for the purpose of dealing with uncertainty.

The interest rate would not be directly affected by high demand for money or low demand for money. If demand for money were high, then the purchasing power of money would be high, i.e., prices of goods would be low. If the demand for money were low, then the purchasing power of money would be low, i.e., prices of goods would be high. But the price spread between output prices and input prices need not be affected. Suppose an iPad Air sells for $500 and has costs of $450 for a price spread of $50. If money demand increased sufficiently, then the iPad Air might sell for $250 but the entrepreneurial demand for inputs would also fall and so costs wind up at $225 and the price spread of $25 renders the same rate of return.

Money is neither “easier to come by” in periods of price inflation nor “harder to come by” in periods of price deflation. It’s precisely the change in the purchasing power of money that make any stock of money suitable to perform all exchanges in society. The increased stock of money during inflation induces no surplus of money because people use it to increase their demand goods, which bids up their prices. At the higher prices, they spend more money but are just able to buy the goods offered for sale. And the reduced stock of money during deflation induces no shortage of money because people reduce their demand for goods, which lowers their prices. At the lower prices, they spend less money but are just able to buy all the goods offered for sale.

If a change in the purchasing power of money is unanticipated by people, then the rate of price inflation or deflation will affect the price spread between output prices and input prices and market rate of interests will be higher or lower, respectively. But this does not affect people’s time preferences.

[jmherbener]

First, the free market economy cannot be blamed for the impositions on it from an international system of pegged exchanged rates among different fiat currencies issued by the world’s central banks. A free market economy would tend to have a single, commodity money everywhere. In such a system, people increase their demands for some goods by decreasing their demands for other goods. Money moves to into the hands of those selling goods for which demand has increased and out of the hands of those who are selling goods for which demand has decreased. It’s not a social problem that production of the goods experiencing falling demand shrinks and production of the goods experiencing rising demand grows. For example, if demand for consumer electronics increases and for automobiles decreases, it’s not a social problem that Silicon Valley prospers and Detroit declines. Put another way, if California used “Golden Bear” currency and Michigan used “Great Lakes” currency, it would be incorrect to say that appreciating exchange rates of the “Golden Bear” against the “Great Lakes” is the cause of the decline in profitability of California producers who sell into Michigan. The problem for those producers is that their customers are earning less income because they are selling goods people no longer want as urgently as other things.

Second, in a world of various fiat currencies movements in exchange rates, just like all other prices, are an effect of changes in underlying preferences people have. If the French increase their demand for Dutch natural gas relative to say vacations in Paris, then they must increase their demand for Dutch guilders relative to French franks. The Dutch producers of natural gas prosper by satisfying this greater demand. French workers in the tourist industry in Paris earn less income and reduce their demand for Dutch wooden shoes, and therefore their demand for Dutch guilders, and the producers of such shoes earn less income. Whether or not the dutch guilder appreciates against other currencies depends on the extent to which the increase demand for guilder by those buying natural gas is offset by the decrease in demand by those not buying other Dutch exports.

Third, in a world of various fiat currencies, each currency will tend to have the same purchasing power everywhere it is traded. For example, if the dollar had greater purchasing power in France than in America, Americans would buy more French goods, which means they would sell dollars for franks leading to a devaluation of the dollar in France. This would continue until the purchasing power of the dollar was roughly the same in America as France. So the Dutch guilder could only appreciate against other currencies if their was a purchasing power disparity of the guilder in different places. This could occur if the world demand for Dutch guilders increased on net from a shift toward buying Dutch natural gas. But, any appreciation would be only temporary if the purchasing power of the guilder in different countries was not changed by the shift of demand toward Dutch natural gas.

Take a look at the New Palgrave Dictionary of Economics entry on the Dutch disease:

http://www.dictionaryofeconomics.com/article?id=pde2008_D000264&edition=current&q=dutch%20disease%20&topicid=&result_number=2

[jmherbener]

You might also consider Henry Hazlitt’s Economics in One Lesson:

https://mises.org/books/economics_in_one_lesson_hazlitt.pdf

And Shawn Ritenour’s Foundations of Economics:

http://www.foundationsofeconomics.com/index.php

[jmherbener]

Under a gold coin standard, the name dollar is defined as a weight of gold. So there is no dollar price of gold. There are only dollar prices of goods and services. Once defined, the dollar equivalent to gold does not change. If ten dollars is a defined as equivalent to a half ounce of gold, then a half ounce of gold cannot fall from $10 to $9. A half ounce of gold can fall in purchasing power relative to goods, but not in a dollar defined name.

If one foot is defined as equivalent to 12 inches, then the “value” of the foot cannot fall to ten inches. Feet and inches are just two different names for an equivalent length. A person’s height could change from 5′ to 6′ but that would still be equivalent to a change from 60″ to 72″. So the price of a month’s rent could change from a half ounce of gold to an ounce of gold, but that would be equivalent to a change from $10 to $20. Gold ounces and dollars are merely two different ways of referring to the same thing.

Under a gold coin standard, a bank note is not traded for a gold coin. A bank note is redeemed by the issuing bank for the equivalent amount of gold. This is what makes bank notes a substitute for gold coins. Merchant accept either a half ounce gold coin or a $10 bank note because they know that the bank that issued the $10 bank note will redeem it for a half ounce gold coin. So gold coins and bank notes both trade for goods and services, but not for each other. The legal way of seeing the relationship between bank notes and gold coins is that bank notes are titles of ownership to gold coins. A $10 bank note issued by the First National Bank is a legal title of ownership to a half ounce gold coin. The FNB stamps this fact on the bank note. For example a $10 bank note might have the words, “pay to the bearer of this note, $10 in gold” stamped on it. So, the value of a bank note in terms of gold is fixed contractually by the issuing bank. The bank does this to create general acceptance of its bank notes as a substitute medium of exchange for gold coins.

[jmherbener]

Needless to say, a paper purporting to show that demand curves slope upward to the right has been controversial.

Here’s are a few answers to Card and Krueger:

http://mises.org/daily/2596/Minimum-Wage-Laws-Economics-versus-Ideology

http://mises.org/daily/6638/Welfare-Minimum-Wages-and-Unemployment

https://mises.org/daily/2130

Here’s a piece claiming that Krueger himself disavowed the conclusion you cite:

http://www.forbes.com/sites/susanadams/2011/08/31/obama-nominee-pulled-back-on-minimum-wage-defense/

[jmherbener]

Bank notes were simply claims to a fixed dollar equivalent of gold. For example, a $10 bank note could be redeem at the issuing bank for a $10 gold coin. So the bank note had the same exchange value as the equivalent gold coin.

[jmherbener]

In addition to the source I listed above, take a look at the epilogue to Section 5 (pp. 486-490) in Murray Rothbard’s book, A History of Money and Banking in the United States.

http://mises.org/books/historyofmoney.pdf

In short, foreign dollar redemption for gold under Bretton-Woods was, in practice, done mainly by foreign central banks. As the U.S. inflated dollars in the 1960s, the dollar devalued against gold and foreign central banks began to redeem dollars for gold. Gold was flowing out of the U.S. Treasury in the late 1960 and early 1970s. This is one reason, Nixon closed the gold window in August 1971.

U.S. commercial bank notes were not redeemable for gold or silver under the Federal Reserve System, which started operations in 1914. Commercial banks exchanged their gold reserves for Federal Reserve Notes and the Fed came to own the “country’s” gold stock. If Americans wanted to buy foreign goods, they just traded Federal Reserve Notes for foreign currencies. They did not need to convert to gold first.

Finally, under Bretton-Woods, foreign governments stored their gold in the U.S. So when a trade imbalance required gold to move from the U.S. to a foreign country, it would simply be moved from one part of the vault in Fort Knox to another.

[jmherbener]

It’s not the near zero percent Federal Funds Rate, which the Fed manipulates, or the near zero percent short term rates, which are influenced by the Fed policy, that is causing entrepreneurs to sit on cash instead of investing. Mid-term and long-term interest rates are low, but not at unprecedented levels. Ten year Treasuries are at 2.54 percent and 20 year at 3.47 percent.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

The reason entrepreneurs are sitting on the sidelines is uncertainty generated by government policies. Take a look at Robert Higgs’s work on this point.

http://mises.org/daily/6275/Regime-Uncertainty-Some-Clarifications

[jmherbener]

The exchange ratio of gold to other goods is not fixed, but fluctuates with changes in people’s preferences with respect to gold coins relative to other goods. The dollar is just a name for a weight of gold, so the dollar must have a fixed definition in terms of gold. In a pure gold standard, money is gold coins. As Rothbard points out, we can dispense with the name “dollar” altogether and just name the gold coins by their weight. In other words, we could call a gold coin “1/20th of an ounce.” Or we could call the gold coin of 1/20th of an ounce of gold some made up name like “Hayek.” Then two Hayeks would refer to 1/10th of an ounce of gold or two 1/20th of an ounce coins. Neither the Hayek nor the dollar is a fixed “value” for the coin. Instead it refers to the fixed weight of gold that the coin contains.

[jmherbener]

The IMF was the enforcement mechanism of the Bretton-Woods international monetary arrangement. B-W, established at the end of WWII, created an international dollar standard in which all countries held dollars as a reserve against the issue of their own currencies. Each foreign currency was pegged to the dollar. The system was designed so that all countries could inflate their currencies in unison without facing devaluations and trade imbalances. If the Fed inflated the dollar by 10 percent, then other countries could obtain increases in their dollar reserves sufficient to permit 10 percent increases in their own currencies. Prices would then rise proportionately in each country and exchange rates would stay the same. There is a moral hazard in the system, however, as each country has incentive to over inflate its domestic currency if other countries act to support the pegged exchange rate. The IMF, then, was designed to impose austerity conditions on over-inflating countries to prevent the system from falling apart.

The U.S. gained from this system as the monetary inflation of the Fed could stimulate credit expansion in the U.S. without domestic price inflation, as much of the new money was held overseas.

Here is Henry Hazlitt on Bretton-Woods:

http://mises.org/books/brettonwoods.pdf

And Murray Rothbard:

http://mises.org/books/whathasgovernmentdone.pdf

[jmherbener]

Rothbard wants the dollar to be defined as a weight of gold. Under the Coinage Act of 1792, the dollar was defined as 247 4/8 grains of pure gold. In other words, the Treasury minted $10 gold coins each with 247 4/8 grains of pure gold. The dollar currency was a redemption claim for gold such that a person could take a $10 bill and redeem it for a $10 gold coin. Gold coins were money and currency was a redemption claim for money.

http://www.constitution.org/uslaw/coinage1792.txt

Defining the dollar was part of Congress’s power under the Constitution in Article 1, Section 8, Clause 5, which reads, “[Congress shall have the power] to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Just as Congress might adopt the mile as a standard of measure and define a mile as 5,280 feet, it might adopt gold as money and use the dollar as a currency name defined as $10 = 247 4/8 grains of pure gold.

http://constitutionus.com/

Under this system, the market would determine the purchasing power of gold. But the name “dollar” is fixed by definition.

[jmherbener]

A medium of exchange is a facilitator of exchange, A facilitator of exchange could only be purposefully chosen by persons who were already exchanging. Exchange must already be present in order for the medium of exchange to facilitate it. Persons faced with a problem in making their exchanges chose to use a facilitator to help overcome the problem.

The very first trades in history would have been made by the small number of the first human beings who chose to live in community. It isn’t possible that money could have facilitated their trades. If Cain, the farmer, came to Abel, the shepherd, and asked him to accept some of his grain in exchange for a lamb, either this exchange would be made in barter terms or not at all. Money could not possibly facilitate trade until there are a significant number of goods trading among a significant number of people so that some goods are more salable than other goods. In those circumstances, some traders would face the problem of barter and solve it by using a another good to make an indirect trade. This is what money is, a facilitator of exchange.

Historical evidence could never confirm or deny this conjectural history. The archeological evidence of money being used in the oldest ancient cities has no relevance to claim. (Of course, there would be money in the more advanced division of labor in cities, that’s precisely what the theory claims.) And no matter how far back in history an archeological find of human activity may go, something more ancient could have existed for which there is no archeological evidence.

[jmherbener]

Take a look at the article by Bob Murphy on this issue.

http://mises.org/daily/5598/have-anthropologists-overturned-menger

[jmherbener]

Some U.S. Treasuries held overseas are owned by private parties and some by governments. Private parties hold them for the same reason that private parties in the U.S. hold them, they are perceived as highly liquid, low risk assets. Foreign government hold U.S.Treasuries for both political and economic reasons. You have to investigate each case to find out what the reasons are. Here is an article a bout Belgium’s recent buying spree:

http://www.economicpolicyjournal.com/2014/05/peter-schiff-belgian-bond-buying-mystery.html#more

Here are the foreign holdings of U.S. Treasuries by country:

http://www.treasury.gov/ticdata/Publish/mfh.txt

Some U.S. dollars held overseas are owned by private parties and some by governments. Private parties hold them because they serve as a medium of exchange and store of value. Foreign governments have political as well as economic reasons for holding U.S. dollars. You have to investigate each case to discover the reasons.

Here’s an analysis of foreign dollar holdings in 1996:

http://www.federalreserve.gov/pubs/bulletin/1996/1096lead.pdf

Here’s a more recent analysis:

http://www.federalreserve.gov/pubs/ifdp/2012/1058/ifdp1058.pdf

[jmherbener]

When the Chinese buy and hold U.S. Treasuries, they are not holding dollars. They sell yuan to acquire dollars and then spend the dollars to buy the securities. The dollars, then, go back to the U.S. Treasury. The same thing happens, when the Chinese buy real assets in America, like golf courses. The Chinese buy and hold securities to earn the rate of interest. They buy and hold American golf courses to earn the rate of return on their investment.

What affects the purchasing power of the dollar is the total stock of dollars and the total demand to hold dollars themselves. Since the early 1990s, the majority of dollars, the actual, physical currency, has been held overseas. Today more than 60 percent of all dollar currency is held overseas. It is this demand to hold dollars that affects the purchasing power of the dollar. Imagine what would happen to its purchasing power, if foreigners suddenly decided they no longer wanted to hold any dollars and they were all repatriated to the U.S..

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