Question about Rothbard's "The Mystery of Banking"

Hello everyone, I have a quick question about the mystery of banking. Here is the ste-up: In the third chapter about money and overall prices where Rothbard is explaining the supply and demand of money. Quote from page 27: "Suppose that the purchasing power (PPM) is suddenly very high, that is, prices are very low. M, the money stock, is given, at $100 billion. As we see in Figure 3.3, at a high PPM, the supply of total cash balances, M, is greater than the demand for money. The difference is surplus balances - money, in the old phrase, that is burning a hole in people's pockets. People find that they are suffereing from a monetary imbalance: their cash balances are greater than they need at that price level. And so people start trying to get rid of the their cash balances by spending money on various good and services." So basically the money supply is greater than the demand. There is a surplus in the cash balances, that is, money that is burning a hole in people's pocket. What does he mean by burning a hole in people's pocket? Since their cash balances are greater than they need at the price level, I'm just not understanding how it burns a hole in people's pockets. Thanks very much!

If you got up one day and saw that the entertainment system that you had been drooling over for six months could now be had for $20, that $20 note in your wallet wouldn't stay there for very long.  I think that is the meaning behind that saying.

In a much milder way, something like that did happen when China came onto the world market in a big way.  Of course in the case of China there are disturbing signs that the party is coming to an end...

If people have more money than they currently demand, they will spend it. That is what he means. 

Synchroma: The reason Rothbard's statement is confusing is that it is wrong. Rothbard ignores the "Law of the Reflux", which says that unwanted cash will be returned to the bank that issued it. If someone else wants that dollar, the bank will re-issue it. If not, the bank will retire the dollar, and it will have no effect on prices. This sort of question, and several others, are addressed by the real bills doctrine, and a good place to read about that is www.csun.edu/~hceco008/realbills.htm or google it if I made a typo.

Mike Sproul:

Synchroma: The reason Rothbard's statement is confusing is that it is wrong. Rothbard ignores the "Law of the Reflux", which says that unwanted cash will be returned to the bank that issued it. If someone else wants that dollar, the bank will re-issue it. If not, the bank will retire the dollar, and it will have no effect on prices. This sort of question, and several others, are addressed by the real bills doctrine, and a good place to read about that is www.csun.edu/~hceco008/realbills.htm or google it if I made a typo.

 

That's talking about hard cash and not 'money'.

My bank account doesn't reduce in value if the Fed decides the demand for paper money is down this month so they retire more money than they replace with crisp, clean new bills just like when they fire up the presses around Christmas time to fulfill the extra demand for paper money for gifts and whatnot doesn't result in monetary inflation.

All that money is still out there in computer land existing in some database waiting to be spent... 

 

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Actually now that I poked around your site a bit I see that there is a lot of work to be done to poke some holes in your 'no such thing as fiat money' theory...

 The fed retires the fed's money, and wells fargo retires wells fargo's money.If people find one day that they have more checking account dollars than they want to hold, those dollars can be retired by the issuing ban. The retirement (or "reflux") is so easy that people don't realize it happens. Those checking account dollars were created as computerized bookkeeping entries, and when they are retired, it is just a blip in the computer.

 

Mike Sproul:

 The fed retires the fed's money, and wells fargo retires wells fargo's money.If people find one day that they have more checking account dollars than they want to hold, those dollars can be retired by the issuing ban. The retirement (or "reflux") is so easy that people don't realize it happens. Those checking account dollars were created as computerized bookkeeping entries, and when they are retired, it is just a blip in the computer.

 

OK, so what you are saying is that because the ability to deflate the currency supply exists that inflation isn't possible.

While this is true in theory it doesn't happen in practice as can be attested by the fact that a dollar in 1913 is worth about $.10 in real purchasing power today.  The whole fractional reserve system is built on the ability to inflate the money supply and is only sustainable if the currency isn't backed by a real commodity in contrast to your idea that monetizing debt is a suitable 'commodity' to back the bank issued money.

Interesting theory but it doesn't in any way explain away the existence of inflation or prove that 'fiat' money isn't real. 

Inflation happens when the money-issuing bank does not adequately back its money. That is definitely possible. For example, if the fed issues $1 in exchange for bonds worth only 99 cents, then the fed's assets have not kept up with its liabilities, and inflation will result.