I'm sure this question has already been debated to death around here, but I used the search option and couldn't find a thread on this particular question, so I'll start a new one.
Could an influx of new gold cause a business cycle under a 100% gold coin standard?My understanding of ABCT is that when there is an expansion in circulation credit, it makes it seem to investors as though there are more saved funds available for investment than there actually are (effectively, more consumer demand for longer processes of production). Investors then overinvest in longer processes of production, when in reality there is not enough demand (resources saved up) to make these investments profitable. Once the new money trickles down and spreads out across the entire economy, people reassert their correct savings-consumption ratio, the malinvestments are exposed as unprofitable, and the economy adjusts.
Now, if an economy were under a 100% gold coin standard, gold miners happened upon a large amount of gold in a cave, minted it into coins and put the coins into circulation, wouldn't this increase in the money supply also make it seem to investors as though real savings (demand for longer processes of production) had increased, causing them to overinvest in processes requiring more savings? And, once that new gold money spreads itself across the entire economy and consumers reassert their correct consumption-savings ratio, wouldn't these overinvestments be exposed as unprofitable and cause a recession?
Yes, I think it would.
scineram: Yes, I think it would.
So, then, is the Austrian case for gold merely an empirical one? Namely, that experience has shown us that gold money is far harder to mine, and therefore the supply of gold money is far more difficult to increase in large quantities, and therefore only causes minor (perhaps, almost unnoticeable), relatively contained booms and busts?
AustrianAntitheist:Now, if an economy were under a 100% gold coin standard, gold miners happened upon a large amount of gold in a cave, minted it into coins and put the coins into circulation, wouldn't this increase in the money supply also make it seem to investors as though real savings (demand for longer processes of production) had increased, causing them to overinvest in processes requiring more savings?
The difference here is that new gold is not 100% loaned out, which is what banks do with their credit inflation. If banks could print money and spend it instead of being required to make a loan to print money, then there would not be an investment boom.
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AustrianAntitheist: scineram: Yes, I think it would. So, then, is the Austrian case for gold merely an empirical one? Namely, that experience has shown us that gold money is far harder to mine, and therefore the supply of gold money is far more difficult to increase in large quantities, and therefore only causes minor (perhaps, almost unnoticeable), relatively contained booms and busts?
Yep.
BTW I think when Spain brought in shiploads of gold from South America it ruined their economy, and then all of Europe's as the gold spread. here's the Wiki about that:
http://en.wikipedia.org/wiki/Price_revolution
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Stranger: AustrianAntitheist:Now, if an economy were under a 100% gold coin standard, gold miners happened upon a large amount of gold in a cave, minted it into coins and put the coins into circulation, wouldn't this increase in the money supply also make it seem to investors as though real savings (demand for longer processes of production) had increased, causing them to overinvest in processes requiring more savings? The difference here is that new gold is not 100% loaned out, which is what banks do with their credit inflation. If banks could print money and spend it instead of being required to make a loan to print money, then there would not be an investment boom.
I think this 100% wrong. I refered to Spain after the discovery of America in an the previous post, and cited the wiki.
Smiling Dave: I think this 100% wrong. I refered to Spain after the discovery of America in an the previous post, and cited the wiki.
Spain did not have malinvestment, it had disinvestment.
Why does the money need to be paper for there to be an artificial boom? If there is a large influx of gold money into an economy, this would not increase the real resources necessary to fund production processes (because money is just a medium of exchange for such resources), but it might make it seem to investors as though there were now more real savings available for investment (i.e. effective demand for longer processes of production) than there actually were, causing investors to mistakenly invest in longer processes of production for which there is not enough actual resources saved up. Right?
I can see how a system where paper money is loaned out and pyramided ontop of itself could amplify inflations, but couldn't business cycle-causing inflations still happen under a gold-based system even where fractional reserve banking is nonexistant, for the reasons outlined in my above paragraph?
AustrianAntitheist: Why does the money need to be paper for there to be an artificial boom?
Why does the money need to be paper for there to be an artificial boom?
It doesn't need to be paper, it needs to be credit. If I have a 1000 gold ounces in savings, then I can make a loan for 1000 ounces to person A, also person B, person C, etc without limit as long they do not withdraw the gold but keep trading the credit notes I issued. However, I cannot simply spend 3000 ounces.
Over time, the loans I made out will be withdrawn from their accounts, and then the fractional reserve will collapse. This will require a central bank intervention of some sort.
Stranger: AustrianAntitheist: Why does the money need to be paper for there to be an artificial boom? It doesn't need to be paper, it needs to be credit. If I have a 1000 gold ounces in savings, then I can make a loan for 1000 ounces to person A, also person B, person C, etc without limit as long they do not withdraw the gold but keep trading the credit notes I issued. However, I cannot simply spend 3000 ounces. Over time, the loans I made out will be withdrawn from their accounts, and then the fractional reserve will collapse. This will require a central bank intervention of some sort.
Why does there need to be fractional reserve lending for there to be an artificial boom?
Assuming there were an economy without even 100% backed bank deposit notes--an economy in which everyone just used physical gold coins directly even--wouldn't a simple increase in the gold money supply (due to a large gold mining discovery) make it seem to investors as though market participants had suddenly started saving more (i.e. effectively demanding longer processes of production), even though they hadn't?
AustrianAntitheist:I can see how a system where paper money is loaned out and pyramided ontop of itself could amplify inflations, but couldn't business cycle-causing inflations still happen under a gold-based system even where fractional reserve banking is nonexistant, for the reasons outlined in my above paragraph?
Why wouldn't your scenario (a large and sudden increase in gold, no fractional reserve banking, no central bank) simply cause prices to rise? Why would a long term project that was not profitable prior to the gold injection, now appear to be profitable? If the gold is borrowed from a 100% reserve bank, the interest rate would reflect the time preference of the depositors (ie, long term deposits; since demand deposits are not loaned out). On the other hand, if the gold is from investors, then again, why would they suddenly choose long term projects that weren't profitable before, and across all industries, simultaneously?
It could be that the investors see higher prices, and are motivated toward the project, but wouldn't they also be able to forecast the higher costs of production too since prices are rising? The project could fail, and the injection of gold would disrupt the economy, but what would cause the simultaneous cluster of errors of investment in long term projects across all industries? Without fractional reserve banking and / or a central bank, would time preference change simply because there is more gold? Prices would rise, yes, but would time preference necessarily fall?
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
chloe732: AustrianAntitheist:I can see how a system where paper money is loaned out and pyramided ontop of itself could amplify inflations, but couldn't business cycle-causing inflations still happen under a gold-based system even where fractional reserve banking is nonexistant, for the reasons outlined in my above paragraph? Why wouldn't your scenario (a large and sudden increase in gold, no fractional reserve banking, no central bank) simply cause prices to rise? Why would a long term project that was not profitable prior to the gold injection, now appear to be profitable? If the gold is borrowed from a 100% reserve bank, the interest rate would reflect the time preference of the depositors (ie, long term deposits; since demand deposits are not loaned out). On the other hand, if the gold is from investors, then again, why would they suddenly choose long term projects that weren't profitable before, and across all industries, simultaneously? It could be that the investors see higher prices, and are motivated toward the project, but wouldn't they also be able to forecast the higher costs of production too since prices are rising? The project could fail, and the injection of gold would disrupt the economy, but what would cause the simultaneous cluster of errors of investment in long term projects across all industries? Without fractional reserve banking and / or a central bank, would time preference change simply because there is more gold? Prices would rise, yes, but would time preference necessarily fall?
I think I see your point. If banks are using only their own profits (such as from customer deposit fees) to make loans, and are not lending out their customers' deposits (i.e. no fractional reserve banking), then the new deposits of gold would not lower the banks' interest rates, and hence, would not entice investors to overinvest in longer processes of production? Is that right?
Stranger, correct me if I'm wrong, but I think your economic views arent AE, but rather of a different school.
I forget it's name, but it claims that the crux of economic woes is that money creation is always in the form of a loan by a bank.
AustrianAntitheist:Assuming there were an economy without even 100% backed bank deposit notes--an economy in which everyone just used physical gold coins directly even--wouldn't a simple increase in the gold money supply (due to a large gold mining discovery) make it seem to investors as though market participants had suddenly started saving more (i.e. effectively demanding longer processes of production), even though they hadn't?
Only if that gold ended up in the market for savings would that happen. If the gold ends up in the market for consumer goods, there will just be ordinary price inflation.