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jmherbener
ParticipantThere are two issues involved. The first is the private property status of money substitutes. It’s clear how money certificates are consistent with private property. It’s not clear how fiduciary media are so. People hold (i.e., own) fiduciary media as part of a ready stock of medium of exchange and yet, simultaneously the un-backed portion is lent to other people to use as a medium of exchange. Rothbard thought fractional reserve banking, as it has been practiced, was fraudulent. Take a look at the following article to see the back and forth of the debate with free bankers.
http://mises.org/journals/qjae/pdf/qjae1_1_2.pdf
The second issue is what would happen on the market if all the legal privileges for fractional reserve banking were eliminated. Then demand deposits would be highly liquid assets and if banks wanted to stimulate customers to hold such balances by ensuring that the deposits serve as a medium of exchange, they would need to hold very high, if not 100%, reserves. Otherwise non-customers of the bank of issue would not accept the deposits as a medium of exchange. As you note, this view is taken by Rothbard. It was also the view of Mises and Salerno. Take a look at the following piece by Salerno.
ParticipantCantillon effects are disproportionate and non-synchronous changes in particular prices that are produced by a change in the money relation. When the money stock increases, the prices of some goods rise to a greater degree and the prices of other goods rise to a lesser degree and the prices of some goods rise sooner and the prices of other goods rise later. Because of Cantillon effects, increases in the money stock change the pattern of production in the economy.
These effects are named after Richard Cantillon who described them in his treatise, An Essay on the Nature of Commerce in General.
http://library.mises.org/books/Richard%20Cantillon/An%20Essay%20on%20Economic%20Theory.pdf
ParticipantConcerning your first question, take a look at Part 1 in Murray Rothbard’s A History of Money and Banking in the United States.
ParticipantThe Great Depression came as a result of the disruption of the world economy and destruction of the international gold standard in the First World War. For all its faults, the international gold standard did impose some fiscal and monetary discipline on countries. Governments that inflated their currencies to help fund their expenditures lost gold reserves to the more prudent countries and suffered booms and busts in the process of inflating the money stock and then deflating as they lost gold.
The period of suspension of the gold standard during and after the war gave states a taste of the power they could wield unfettered by the old monetary and fiscal constraints. But, they did concede that an international monetary system was conducive to, if not essential to, the restoration of international trade and the world economy. They constructed the gold exchange standard, established in the mid-1920s, to try to restore international trade while allowing exercise of their new powers of monetary inflation. Far from penalizing excessive monetary inflation, the gold exchange standard penalized lack of harmonization of monetary inflation among different governments. That is, its purpose was to foster a coordinated monetary inflation among the member countries. As they all inflated together in the latter half of the 1920s, they all went through the boom (and subsequent bust) together. Even so, the inflation was disparate in different countries and one by one states decided to abandon the gold exchange standard too.
The classic work to read on the international aspects of the Great Depression is Lionel Robbins, The Great Depression.
http://library.mises.org/books/Lionel%20Robbins/The%20Great%20Depression.pdf
ParticipantOne approach you might take is to read mainstream works. You could start with a principles level book like Mankiw’s, Principles of Economics. But introductory books tend to gloss over the core of mainstream economics, which is modeling. To get a treatment of that, you have to move to intermediate level works. You might try Snowden and Vane’s book, Modern Macroeconomics.
Another approach is to read critiques of the mainstream paradigm. Take a look at Murray Rothbard’s articles:
http://mises.org/rothbard/mantle.asp
Ludwig von Mises’s book, Human Action, has sections that critique the mainstream approach.
http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf
ParticipantAs I understand it, critical minimum effort theory is a model that has built into to its operation the result that population growth will outweigh capital accumulation per capita unless a certain threshold is met, which underdeveloped countries cannot normally meet.
I’m afraid that CMET, like Malthus’s theory, will prove inaccurate in predicting real economies. There are no constants in the relationships among variables in human action.
ParticipantAs I understand it, Nurske’s theory is if the state of an underdeveloped country takes the wealth of its poor citizens and spends it on capital projects across the economy it will increase productivity which will then expand markets domestically. That way, the underdeveloped country can enjoy economic growth without integrating into the world economy.
His argument defies every sound economic theory about economic growth. Economic growth requires capital accumulation, i.e., saving and investing directed by entrepreneurs into capital projects that produce goods that satisfy people’s preferences. The quickest way for poor people to experience economic growth is to integrate their activities into the already developed world economy. Then they can rely upon the saving, production, and entrepreneurship of other people instead of merely their own.
Take a look at P.T. Bauer’s book, Equality, The Third World, and Economic Delusion and David Osterfeld, Prosperity versus Planning,
ParticipantBob Murphy has written study guides to Rothbard’s, Man, Economy, and State and Mises’s Human Action that you might consult.
Also, there is a glossary for Human Action by Percy Greaves called Mises Made Easier.
ParticipantThere was a proto-Austrian line of thought among classical economists. It started with Richard Cantillon went through Turgot to J.B. Say and the French Liberal School, including Frederic Bastiat. This line was part of what is called the continental classical economists. Bastiat influenced the leading American economists before the end of the 19th century including Francis Wayland.
The British classical economists, Adam Smith, David Hume, David Ricardo, Jeremy Bentham, Robert Malthus, James Mill, John Stuart Mill, were the forerunners of today’s neoclassical school.
Take a look at Murray Rothbard’s second volume on the history of economic thought, Classical Economics, to get an idea of which classical economists would be valuable to read. His discussion of Cantillon, Turgot, and Smith are in the the first volume of his history of thought, also available online at mises.org.
ParticipantThe current monetary system has fiat money produced by a central bank and fiduciary media (money substitutes with a fractional reserve of money). The point of the system from the view of the state is to permit unlimited monetary inflation and credit expansion controlled by the state. The state desires the system to have fractional reserve banking because that is the source of credit expansion and credit expansion is the method the state uses to fund its own debt. Credit expansion is also lucrative for banks. In fact, it is so lucrative that banks have a tendency to extend it too far setting in motion bank runs. So the state must regulate the fraction to keep the banking system intact.
If the central bank wants monetary inflation and credit expansion it could provide more reserves to the banks by issuing fiat money and buying assets from banks or it could allow banks to lower the fraction of their reserves or some combination. Normally, the Fed has left the reserve fraction the same and regulated monetary inflation and credit expansion by buying assets from banks. Before the crisis, banks held a 6-7 percent reserve against their fiduciary media, i.,e., their checkable deposits.
I cover these points in my lecture on Monetary Policy. Also, take a look at Rothbard’s, The Mystery of Banking.
http://library.mises.org/books/Murray%20N%20Rothbard/Mystery%20of%20Banking.pdf
ParticipantA monetary system can have two types of media of exchange: money and money substitutes. Money is the general medium of exchange. Money substitutes are perfectly secure, on-demand, at-par redemption claims for money. Money plus money substitutes constitute the system’s money stock. In our system, for example, Federal Reserve Notes are money and checkable deposits are money substitutes.
There are three types of money: commodity, fiat, and credit. Commodity money has (roughly) the same value of the commodity from which it is made as its purchasing power as a medium of exchange. Commodity money comes into existence by people’s choice within a market and can be maintained entirely by private enterprise. Fiat money has less value of the commodity from which it is made than purchasing power as a medium of exchange. Fiat money can only come into and maintain existence from the intervention of the state. Credit money occurs when the state declares that it will make something money or a money substitute in the future and people believe the state and therefore, use the item as money today.
There are two types of money substitutes: money certificates and fiduciary media. Money certificates have a 100 percent reserve of money into which they can be redeemed. Money certificates would be produced by private enterprises as warehouse receipts (i.e., owners titles to money being warehoused) of money owned by people and stored by the private enterprises. Fiduciary media have a fractional reserve of money into which they can be redeemed. Fiduciary media come into existence through intervention of the state.
With these categories as background, one can define different monetary systems by combining the different types of money and money substitutes. For example,
Free Market: commodity money and money certificates.
Classical Gold Standard: gold coin money and fiduciary media.
Current Monetary Regime: Fiat money and fiduciary media.Then one could add contingent conditions to tailor the description of the system to particular cases in the real world. For example,
Gold Exchange Standard: gold bullion money and fiduciary media.
And, of course, there could be more complex contingencies, as say under the National Banking System.
If I were to take a guess at classifying the systems you mention, they would be as follows.
Commodity Money: commodity money and fiduciary media.
Sovereign Fiat: fiat money and money certificates.
Debt Based Fiat: fiat money and fiduciary media.In our current system, money itself (i.e., currency or Federal Reserve Notes) is printed by the Federal Reserve. Banks bring money substitutes (i.e., checking account balances) into existence by creating credit. The process of monetary inflation and credit expansion is driven by the financial gain to the state for printing more fiat paper money (and having credit expanded by the banks) and the indefinite profitability for banks to issue more fiduciary media by creating more credit.
ParticipantYou haven’t specified the proximity of the item used as money to the attainment of your end. That is the key to classifying an item as a consumer good, producer good, or medium of exchange.
The condition that “without it, it would not be possible to attain my end” applies to all goods chosen by a person in his action. Without a car, I cannot attain my end of commuting to work. Without labor, steel, rubber, and so on a car cannot be produced and my end cannot be attained. Without money, I cannot buy a car and my end cannot be attained. Consumer goods, producer goods, and money all contribute to the attainment of an end and therefore, all of them have psychic value to a person, not just the consumer good.
The item used as money is a consumer good to a person when he attains his end directly in one action with the item. Let’s say gold coins are money, and I hold a particular gold coin for its sentimental or historical value. When I do this, the coin is not a medium of exchange to me. I have classified it as a consumer good because it gives me psychic value directly. Then let’s say I give the coin to my son who classifies it as money. As a medium of exchange, the gold coin cannot directly satisfy my son’s end. The only function of a medium of exchange is to facilitate trade. He must eventually spend it to acquire a consumer good that directly satisfies his end.
ParticipantSumner’s proposal is for the Fed to target potential NGDP. So if the Fed thinks that potential NGDP will increase by 4 percent per year, it would inflate the money stock by, say, 6 percent per year. He considers this superior to a monetary policy that targets the price level.
http://www.adamsmith.org/sites/default/files/resources/ASI_NGDP_WEB.pdf
A basic problem with this from the Austrian view is that any monetary inflation and credit expansion will set in motion the boom-bust cycle. To avoid the boom-bust cycle, money production must be left to the profit and loss test of the market.
Here is Bob Murphy on Scott Sumner:
http://mises.org/daily/4904/Following-the-EfficientMarkets-Hypothesis-into-Absurdity
ParticipantOf course, the object used as a medium of exchange could also be valued for some other end. Gold could be valued for dental work or wads of FRNs for a keepsake or to light cigars. But in such cases the gold or the FRNs are no longer money. The person acting has reclassified the objects themselves as consumer goods. But money itself, the general medium of exchange, has its value as a good derived from the value a person attaches to the medium of exchange function.
So a person has an end he wishes to attain. He then identifies objects in the world as suitable means to attain his end. He perceives the structure of the means in a sequence of steps to attain his end. In analyzing his action, economists refer to the good that he chooses to directly attain his end a consumer good. The goods that are used to make the consumer good economists call producer goods. The general medium of exchange economists call money. The categories are fixed and universal. In his action, a person chooses what in particular is a consumer good, producer good, and medium of exchange. But that does not affect the definitions of the categories of goods.
ParticipantConsumer goods and producer goods are defined by their proximity to the attainment of an end. A consumer good satisfies an end in one action. A producer good takes more than one action to satisfy an end. Saving is done to earn interest which is a step toward attaining more valuable consumer goods in the future. Holding money (as money itself, i.e., the medium of exchange) is done to deal with uncertainty but does so only because money can be spent to accommodate unforeseen occurrences. Money’s usefulness (as money itself and not the general usefulness of the object used as money, like gold) is as a medium of exchange. But to obtain the use value of the medium of exchange, it must (eventually) be spent to acquire goods that then are used to satisfy ends.
In economic logic, we don’t refer to intermediate steps toward the attainment of an (ultimate) end as attaining (intermediate) ends. There is just the (ultimate) end attained at the end of all the necessary steps. If I wish to satisfy my hunger in the morning, then eating bacon and eggs directly attains my end. So they are consumer goods. The money I use to buy the bacon and eggs at the restaurant indirectly satisfies my hunger. The labor of the waitress and cook, likewise, indirectly satisfy my hunger. So neither money nor labor is a consumer good.
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