Hello. I've been dabbling in AE for a while, and I love it! I have also been thoroughly enjoying the entire Mises website, including the forum discussions. As I am not much for introductions, this is it.
As to my question ... I was recently listening to Lew Rockwell's interview with Tom DiLorenzo concerning Tom's February 9th testimony to Congress. As I searched the internet for the text of Tom's testimony, I came across the following blog: http://fauxcapitalist.com/2011/02/10/thomas-dilorenzo-testifies-to-congress-that-central-banks-create-panics-but-what-about-commercial-banks/. The author (obviously not an Austrian economist) critiques Tom's testimony and asks a question of him and other Austrians. There is one reply to the author's article (and a subsequent response to the reply), but my ignorance does not allow me to confirm the accuracy of either. Will someone, perhaps by posting a response to Tom's critics, help me to better understand the Austrian position?
Thanks,
'Z'
Lew Rockwell Interviews Tom DiLorenzo
http://www.lewrockwell.com/lewrockwell-show/2011/02/23/188-among-the-dc-slime-artists-tom-dilorenzo-on-congress-the-fed-and-the-smearbund/
Text of Tom's Testimony
http://www.lewrockwell.com/dilorenzo/dilorenzo200.html
Here are the transcripts from the hearing.
“What he fails to point out, however, are the boom-and-bust cycles that were created in the United States without a central bank. Namely, from 1837 to 1913.”
Money supply expansion occurred prior to the Federal Reserve System. It happened at the state level and with the two past central banks in the U.S.
“The question I have for him and other Austrian economists is, without an increase in the money supply, where is the money supposed to come from to pay interest on the debts issued by banks and other lenders?”
Does this not show the entire monetary system is bad? For example, imagine the entire money supply is $1,000,000. That money was released into the economy via loans with interest, say 10%. So all the loans, if to be repaid, would require a total $1,100,000, more than the entire money supply. Thus loan delinquency, if not default, is inevitable.
Have a look at these:
If I build a house where does the money come from to pay for it? Is this not the same question you are asking? If a bank lends me 1000 dollars at 10% interest I have to repay $1100 dollars. So I spend my thousand dollars creating some good. Another person relinquishes money to buy tat good and if I am a good businessman I payoff my loan and pocket the profit. The bank is not the only person in the economy with money.
Isn't the monopoly creation of money itself also part of this problem?
Yes. A Monopoly over money allows a central bank to charge whatever it wants for its product. This is the same problem as with other monopolies. In this case, I suppose interest rates would be the determining factor of the cost of its product. In a free-market competition, supply and demand drive price structures. With a sound money economy, mining companies would be in competition to extract metals and the demand for metal would drive the price structure to a point where mining would be profitable or unprofitable. So in that case the money supply would be regulated by market forces.
“What he fails to point out, however, are the boom-and-bust cycles that were created in the United States without a central bank. Namely, from 1837 to 1913.” Money supply expansion occurred prior to the Federal Reserve System. It happened at the state level and with the two past central banks in the U.S.
Austrian economics does not deny that the business cycle exists even without inflation. Manias do develop, prices really do sometimes come unmoored from reality and float off into the psychosphere and cause misallocations of capital that are only later uncovered. The point is that inflation makes the business cycle far more intense than it would otherwise be and it removes the ordinary market clearing mechanism making things even worse. Instead of short down-turns in specific industries that are quickly corrected, we get economy-wide crashes that wipe out entire economic sectors and geographies.
Clayton -