[jmherbener]

Thomas Malthus advanced underconsumption against Say’s law. Malthus accepted that production (supply) of all goods generates income sufficient to buy all the goods produced, but he denied that people must spend all of their income. Effective demand depends on both the income and the will to spend it. Keynes would later incorporate Mathlus’s concept of “effective demand” into his own system and Keynesians, like Paul Krugman, would use it to claim that increasing income inequality leads to inadequate aggregate demand since the middle class must spend their income just to sustain themselves but the rich have discretion. For example, if entrepreneurs have produced under the expectation that everyone is spending 95% of his income and then some people grow wealthier and spend only 75% of their income, overproduction will result. Malthus and Keynes, at least in some places, admitted that savings represents potential demand through investment. But, the uncertainty involved in the process of S-I producing future consumer goods could not guarantee enough effective demand to buy all the goods produced. Finally, even if the process of S-I operates properly, there could be hoarding which would bring aggregate demand up short of buying all the goods produced. In any case, the result is a cut back of production. Underconsumption is an explanation for depression.

Underconsumption cannot cause a depression on the unhampered market economy. Entrepreneurial production decisions are guided by profit and loss. Hoarding increases the purchasing power of money. The lower prices allow all the goods produced to be purchased. As prices of consumer goods fall, entrepreneurs lower their demands for producer goods and their prices fall. Profit is maintained and production continues. Shifts from consumption to saving-investing raise the prices of capital goods relative to consumer goods leading entrepreneurs to shift production accordingly. The built up capital structure renders more consumer goods in the future, which satisfies the shift from consumption to saving-investing in the present.

A depression is the correction of the malinvestment and overconsumption of a previous boom. Credit expansion through monetary inflation suppresses interest rates leading to an unsustainable build up of the capital structure and overconsumption. The correction of the bust appears to be underconsumption as people shift toward saving-investing. The over-expanded areas of consumer goods production, e.g., housing, autos, etc. suffer decline.

[jmherbener]

The problem economically with fractional reserve banking is similar to the problem of fiat money. Neither the production of fiduciary media, i.e. fractionally backed money substitutes, nor the production of fiat money can be regulated by profit. Without profit and loss as a guide, production will be inefficient. A bank can issue fiduciary media out of thin air by making a loan to a customer and writing the funds into his checking account. The bank is not intermediating credit from a saver by doing this but creating it with the issue of fiduciary media. It is always profitable to issue more fiduciary media. The interest a bank earns on the loan is always greater than the nominal cost of writing funds into a checking account.
In like fashion, a central bank prints fiat paper money. It is always profitable to print more. Without special privileges in law, like legal tender laws, fiat money would not arise on the market. Fiat money would not develop a wide clientele as a medium of exchange in free competition with commodity money.
In like fashion, fiduciary media is supported by legal privilege. Money certificates came into existence as warehouse receipts for money. The “bank” did not own the gold money placed by the customer in its vault for safe keeping. In order to legally loan the funds warehoused by a customer, the state had to supplant bailment contracts with “deposit” contracts. But, legislation cannot bring about conditions contrary to economic reality. It merely creates inconsistencies in private property claims. Fractional reserves mean that more than one party holds mutually exclusive claims to the same money.
In a “deposit” contract, the customer transfers ownership of money to the bank who then issues a claim to pay the customer money in the future. Such contracts are suitable for intermediating credit. Without special privileges in law, deposits would not develop a wide clientele as a medium of exchange in free competition with money certificates.
Take a look at Murray Rothbard’s What Has Government Done to Our Money?

[jmherbener]

This classification of money arose in the attempts to explain the value of money. The value of a consumer good comes from the aid it gives in directly satisfying a person’s end. Money does not directly satisfy a person’s end. The value of money is in facilitating exchange. The value of a producer good comes from the aid it gives in producing consumer goods that directly satisfy a person’s end. Producer goods are used up in production. Steel becomes a fender for a car, labor services are used up in assembling the car and so on. Money is not used up when rendering its services. It trades from one person to another to another with its physical integrity intact.

The other issue you raise is the item used as money. Let’s start with fiat paper money. In that case, it should be clear that its value cannot come from it being either a consumer or a producer good.

In the case of silver or some market commodity, people will arbitrage the stock of silver across all the different uses that have sufficient value so that the value of a unit of silver is the same in each use. Even so, the value of a silver coin is determined by the value people place on it as a medium of exchange. Just as the value of silver spoons is determined by the value people place on silver spoons as a consumer good.

This does not create an overlap of categories of goods, but a diversity of classification of a single object (silver) according to its uses (consumer good, producer good, medium of exchange).

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