... then won't a recession result when private agents increase the money supply, too?
Say there's a gold standard in place; gold is money, and the supply of gold is the money supply. If there's random year to year fluctuations in gold production, or superior capitalist production allows an ever increasing production of gold, then won't the money supply expand eventually, lowering interest rates and so forth?
But it won't cause a recession, right, because it's "good money" when private banks issue it and "bad money" when the federal reserve issues it?
http://library.mises.org/books/Murray%20N%20Rothbard/Americas%20Great%20Depression.pdf
pages 34-36
One crucial distinction between a credit expansion and entry of new gold onto the loan market is that bank credit expansion distorts the market’s reflection of the pattern of voluntary time preferences; the gold inflow embodies changes in the structure of voluntary time preferences.
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also- http://mises.org/daily/4527
“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence.""The sweetest of minds can harbor the harshest of men.”
http://voluntaryistreader.wordpress.org
Even in a gold standard, the gold is not the money supply. The amount of gold a dollar is worth makes up the standard. To mine/prospect/find more gold would be no different than producing more whatevers to increase wealth. Even then, it assumes the gold is not hoarded once found. And before a government or currency producer could tie a dollar to the gold, they would have to purchase it. It's not automatically theirs just because it came into known existence.
I've also noticed in oil or mining, whenever a new discovery is made, the stock price of producers generally jumps on the prospect that there will be more of it to sell, more profit to be made in it's production and acquisition, which if anything would drive inflation down.
I think he means if everyone used gold coins physically.
Same thing goes. You ain't going to walk around the mall with a bag full of nuggets.
Gold would be the money. The amount of gold used as currency would be the money supply.
That's fine. But the coiners and minters would not necessarily be the miners and producers. It would still have to be purchased and made into currency before use as currency. Whether it be direct metal exchange or notes directly tied to the metal.
Yes i understand now.
OK, I had a hard time even expressing it in my head, and I might not have it figured properly. Keep thinking on it, just in case.
http://mises.org/community/forums/t/14357.aspx?PageIndex=1
Private banks can create the Business Cycle through fractional reserve lending. When banks lend a fraction of a deposit they title two individuals to the same deposit: The depositor and a borrower. The borrower really gets money that that the depositor has withdraw rights to. This process takes places millions of times per day so the bank effectively creates out of thin air the money loaned to the borrowers.
Money created directly through government privilege, a central bank, gets into this process as well. So out of a small amount of new money, the banks using the fractional reserve process create lots more money.
The difference here is that with a central bank there is not limit to the amount of new money entering the fractional reserve process as a paper currency is very cheap to produce and the electronic currency of today is nearly free to produce. If the economy was under a more stable form of money (stable meaning difficult to create), the banks would not have this source of fund outside of depositors who would be very interested in the reserve percentages of the banks.
Increases and decreases in the money supply are not - in themselves - the problem. Low interest rates are not necessarily a problem, either. After all, the demand for cash balances as well as the supply of and demand for loanable funds all fluctuate over time.
As HabbaBabba is (I think) trying to say, even in a gold coin economy, there is a difference between "money" and "gold" since the gold has to be in a monetary form to be actually money. So, gold coins and bars can be smelted and turned into jewelry whenever this use of gold is more profitable than its monetary use, and vice-versa.
Increases and decreases in the supply of monetary gold in a pure-gold-coin economy are driven by the same law of supply and demand that drives increases and decreases in the production of any good. One notable difference is that - because very little gold is consumed over time (almost all gold ever mined is still above-ground in usable form) - the quantity of gold above ground is immensely larger than annual production.
Clayton -
Be sure to understand that monetary expansion does not cause recessions per se. Monetary expansion causes lower interest rates, which cause widespread malinvestments. At some point the monetary expansion must stop (lest the currency be devalued so far as to cause hyperinflation, which ends with the total destruction of the currency), which leads to higher interest rates, and it is here where the recession begins, as the malinvestments show their true colors.
But, uh, besides that, you don't seem to understand how commodity-backed currency would work at all. Start by first trying to understand how markets work first before trying to tackle the ill effects of monetary policy.
The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.
The lower interest rates misrepresent time preferences. Its the misrepresentation that causes the cluster of errors.
If a miner stumbled upon like 100 tons of gold and stores in bank on savings account, would this still cause booms and busts?
@kelvin:
See this. I'm not sure, but I'm willing to wager the "boom" and "bust" terminology actually originated here, not with the banking system.