... 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?
Unpronunceable pseudo,
As long as a run is on an individual bank but not on the banking system as a whole, deposits are just redistributed from the bank that is perceived by depositors as more risky, and hence run on, to other safer and financially sound banks.
But there is reason to suspect that, under free banking, panics would be unlikely even without deposit guarantees. As Gary Gorton has shown in several articles (Gorton 1985a, 1985c; Gorton and Mullineaux 1985), in a market where bank liabilities are competitively bought and sold there would not be any risk-information externality. Note and deposit exchange rates would reflect potentials for capital losses depending on the soundness of underlying bank loans and investments. Chapter 2 showed how note brokerage systematically eliminates note-discounting except when it is based on risk-default generally acknowledged by professional note dealers, including banks themselves. In short, note brokerage produces information on bank-specific risk. With such information available to depositors, no information externality could cause bank runs to spread indiscriminantly through a banking system. After confirming through the newspaper that there is no discount on the notes he holds, a bank customer would feel no urge to redeem them in a hurry. Gorton also points out that, even though no distinct secondary (arbitrage) market exists for the risk-pricing of deposit liabilities, so long as notes and deposits of any one bank are backed by the same asset portfolio (as would be the case under free banking) the existence of a secondary note market provides depositors with all the information required to prevent them from staging a redemption run.
One of the more common tasks the clearinghouses take on is to serve as a credit information bureaus for their members. By pooling their records, Ruritania’s banks can discover whether people have had bad debts in the past or are presently overextended to other banks. This allows them to take appropriate precautions (Cannon 1900, 135). Through a clearinghouse banks can also share information concerning forgeries, bounced checks, and the like. Clearinghouses may also conduct independent audits of member banks to assure each member bank that the others are worthy clearing partners. For example, beginning in 1884 the New York Clearinghouse carried out comprehensive audits to determine its members’ financial condition (ibid.). Others, such as the Suffolk Bank and the Edinburgh clearinghouse, took their bearings mainly from the trends of members’ clearing balances and the traditional canons of sound banking practice. Those two clearinghouses enjoyed such high repute that to be taken off their lists of members in good standing was a black mark for the offending bank (Trivoli 1979, 20; Graham 1911, 59).
"It's almost like you randomly quoted a section of a book that was tangentially related to the discussion just to make it look like there's something there."
Even on the assumption that a free banking scheme does not prevent banking crisis, the banking system would be more unstable under regulated banking system anyway. See Legal Restrictions, Financial Weakening, and the Lender of Last Resort (Selgin, 1989).
It depends on what you mean by "regulated". After all, Glorious USSR had no business cycle at all.
Anyway, I think we can agree that pretty much any market economy is going to have a business cycle. There are reasons to think that a gold standard in particular is likely to introduce procyclicality.
Now let's say you have a bunch of free banks operating on an incontrovertible paper standard, lending against sound commercial bills drawn to finance capital goods (real bills doctrine). A random shock drives up money and prices. How's the market going to correct?
The boost in prices raises the nominal value of goods, increasing the volume of bills. Banks lend new money against these bills because of the real bills criterion. The extra money underwrites further price increases. Under fractional reserve systems they would eventually run into reserve limits. But real bills face no such constraint.
Unless you want to outlaw real bills along with fractional reserve banking, which wouldn't exactly increase the efficiency of capital markets. Without real bills, financing long production chains in modern economies would be a lot more difficult. Each stage in the production chain would need capital equal to the purchase price of its operating and material costs for the entire production cycle.
Say the economy starts making a $20 shirt. The shirt requires ten production steps, each with a $1 profit. Without real bills the participants in the production chain will require $19+$18+...$10 = $100. Someone somewhere needs to save $100 in order for a $20 shirt to be made. So real bills are not something you want to regulate.
But again you're acknowledging that any market economy is going to have a business cycle, so it's down to particular regulations. I can't say every single one out there is justified. But as for whether deposit insurance increases the probability of bank runs, well, they seemed to have suddenly stopped happening about 80 years ago.
Note that FDIC deposit insurance doesn't prevent bank failures when the bank is insolvent. Deposit insurance comes into play only after a bank has gone bankrupt. If more people put money into a crappy bank, fine, it just accelerates the failure. Insurance just prevents this process from triggering a systemwide run and bringing down the good banks along with it.
Ban-Evader:Anyway, I think we can agree that pretty much any market economy is going to have a business cycle. There are reasons to think that a gold standard in particular is likely to introduce procyclicality.
Again you're being highly disingenuous - to the point of being intellectually dishonest. Just where in this thread do you see any sort of consensus emerging that happens to coincide with your preestablished conclusions?
Ban-Evader:But again you're acknowledging that any market economy is going to have a business cycle, so it's down to particular regulations.
Where in this thread has Rudolph Toppfer, or anyone else for that matter, acknowledged that any market economy is necessarily going to have a business cycle?
I sure hope you didn't think that ignoring me would make me go away.
The keyboard is mightier than the gun.
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Well, you're right. He never did.
He just kind of like, made a mention of assuming it for the sake of argument and never really challenged it.
Even on the assumption that a free banking scheme does not prevent banking crisis, the banking system would be more unstable under regulated banking system anyway.
Voluntary time preferences, sure, whatever, but Austrolibertarianism says that increases in the money supply cause the business cycle.
I don't know what Austrolibertarianism says about trade cycles, but I know that most Austrian economists agree that business cycles are primarily caused by an increase in the supply of money beyond the demand for money so that market interest rates are suppressed below the equilibrium rate (yielding disequilibrium in the loan market and simultaneously expanding consumption and investment). So no, merely increasing the supply of money will not necessarily yield an 'Austrian business cycle.'
I know exactly how the Austrian business cycle is supposed to work
No you do not. Your original post does not critique the Austrian theory of cycles at all. In fact, you have done the exact opposite. You have assumed its validity in an attempt to show or highlight certain imperfections which would persist even if we adopted some libertarian policy proposals. But libertarianism has absolutely nothing to do with the ABCT or Austrian economics in general, and no libertarian believes that accepting some of our proposals with respect to monetary reform would usher in a period of perpetual peace and prosperity. So not only do you attack a straw man, but you completely ignore the thing you're trying to refute. Way to go!
The supply of gold need not have anything to do with the real economy or the capital stock; it fluctuates yearly for all kinds of unpredictable reasons just as central bank interest rates do.
The sort of supply shocks that you're worried about have proven to be much more mild in terms of severity and frequency relative to the monetary disturbances and shocks that have, in part, defined the last century and continue to this day. The term hyperinflation itself is a product of twentieth central bank policy. In other words, history has shown that you should be much more worried about the ambitions and machinations of politicians and central bankers who care more about their own power then social welfare.
And if central bank monetary expansion was enough to cause a boom, then you wouldn't see private banks creating their own money to meet financing needs. CDOs, MBSes, related mortgage derivatives- these were all forms of privately created money, and they expanded much faster than the supply of federal reserve notes during the 2000s boom.
First of all, various financial derivatives and securitized bonds are not considered part of the money supply. They do not enter circulation and they do not act as a commonly accepted medium of exchange. They are simply financial assets. You may want to look up the definition of money before you come here and embarrass yourself.
But the point you raise initially is actually quite interesting and relevant, but for reasons I doubt you actually understand. It’s true that central bank policy alone, i.e., an expansion in the supply of monetary base (high-powered money) has, in itself, practically no effect on the greater supply of money and therefore relative prices, but the key is that our current financial and monetary system, by systematically cartelizing the banking system, has eliminated the organic mechanisms that yield monetary equilibrium (which can only exist in a competitive banking system).
Mises states (Theory of Money and Credit, 1912):
“A single bank carrying on its business in competition with numerous others is not in a position to enter upon an independent discount policy… Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible for them to follow an independent interest policy. But in doing so, they help to stabilize the objective exchange value of money. To this extent, therefore, the theory of the elasticity of the circulation of fiduciary media is correct; it has rightly apprehended one of the phenomena of the market, even if it has also completely misapprehended its cause (pp. 347).”
In other words, the central banks sets into motion a process by which the financial system begins pyramiding various forms of money on top of the newly created base money, while simultaneously lowering yields on traditional investments. This, in turn, creates a demand for newer, riskier investments with higher yields. So the phenomena you’re describing is something that the ABCT actually predicts.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Which is exactly what a shock to the privately created money supply would do. (Unless you literally mean some kind of permanent price floor was in effect, in which case there would be an obvious shortage of goods and people would be standing outside banks waiting for credit which wasn't available... which doesn't happen.)
The sort of supply shocks that you're worried about have proven to be much more mild in terms of severity and frequency relative to the monetary disturbances and shocks that have, in part, defined the last century and continue to this day.
There have been large swings in gold production during gold rushes and the like. Circulation has also been all across the chart as discussed for pages and pages. Fortunately, your theory is incorrect and these money supply changes have had negligible impact on the business cycle.
No need to be defensive. M4 includes things like commercial paper (when asset backed, it becomes a securitized bond and financial derivative) and bank credit to the commercial sector.
A CDO is as much money as anything else. The fact that nobody walks into Wal Mart and buys groceries with them doesn't mean such a transaction couldn't occur if both parties agreed. If the head of Bank of America trades the head of Citibank 50 CDO certificates for a blowjob, he's perfectly able to to that (prostitution laws aside).
The CDO itself doesn't carry any liability either. If you walk up to Goldman Sachs and say, "I want to cash this CDO in and get my liability back", they're just going to drool. The security might be associated with a contract that's triggered under X or Y series of events, but there isn't even a guarantee that those events will occur.
They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible for them to follow an independent interest policy.
So if the demand for money increases... they increase the money supply.
In other words, the central banks sets into motion a process by which the financial system begins pyramiding various forms of money on top of the newly created base money, while simultaneously lowering yields on traditional investments.
Just like private banks do with financial derivatives?
Ban-Evader, what definition of "money" are you using?
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"A random shock drives up money and prices."
"There are reasons to think that a gold standard in particular is likely to introduce procyclicality."
"But as for whether deposit insurance increases the probability of bank runs, well, they seemed to have suddenly stopped happening about 80 years ago. ... Insurance just prevents this process from triggering a systemwide run and bringing down the good banks along with it."
"He just kind of like, made a mention of assuming it for the sake of argument and never really challenged it."
Random shock... and how did that happen ? What about the chain of causality ? Long term inflation (as opposed to a short-lived) does occur without legal tender laws.
The gold supply is constantly increasing. It has been for well before the US government existed. If that isn't long term inflation I don't know what is.
Historical episodes of Free banking (with FRB) have been spared from such business cycles.
No they haven't. Unless you want to go back before the industrial revolution or something, but that isn't really applicable.
The Selgin paper doesn't address the fact that the business cycle moderated after the introduction of the Fed and countercyclical policy. I don't expect any institution to be "perfect", just "less-imperfect".
It's likely that many deposit insurance schemes are overfunded, but lowering DI isn't the same as getting rid of it entirely. Looking at introduction of new schemes is a different story.
Money is anything that can be used for final payment for all goods or services.
In that case, anything and everything can be "money".
Hey, if someone's willing to accept it as payment for one or more goods and/or services...
Which is exactly what a shock to the privately created money supply would do.
It may or may not. We should expect gold exploration and production to increase when the demand for it increases (either as money or for industrial use). Thus, the supply of gold would react to the demand for it, yielding a sort of equilibrium for the monetary base. In other words, it would act as a stabilizing mechanism. This, of course, may not always work out this way. But highlighting this fact is not enough to justify your argument. You must show that your system is superior. No one here (that I know of) is claiming that adopting libertarian policy recommendations will yield some sort of utopia.
There have been large swings in gold production during gold rushes and the like. Circulation has also been all across the chart as discussed for pages and pages.
It's simply undeniable that these supply shocks are negligible, again both in frequency and severity, when compared to the monetary disturbances created by politicians and central bankers. This is an objective fact, and I'm not going to go over all of the various hyperinflation's and severe inflation's that have occurred over the last century.
M4 includes things like commercial paper (when asset backed, it becomes a securitized bond and financial derivative) and bank credit to the commercial sector.
Asset-backed commerical paper =/= collaterized debt obligations and/or mortgage backed securities.
A CDO is as much money as anything else. The fact that nobody walks into Wal Mart and buys groceries with them doesn't mean such a transaction couldn't occur if both parties agreed.
This is incorrect. Commercial paper is considered part of the broader money supply because it constitutes the reserves for the shadow-banking system, and because it is practically perfectly riskless and almost perfectly liquid. CDO's were neither riskless (as we found out), used as reserves for any sort of bank nor were they perfectly or near perfectly liquid (though they were very liquid).
The use of financial derivatives as a hedge against risk is an expected effect of monetary injections for the reasons already mentioned. The point is that the central bank, through the manipulation of m0 and cartelization of the banking system, is actually able to increase the demand for credit through monetary policy (as opposed to organic mechanisms adjusting the supply of credit to the demand for it; the causal chain is reversed).
No..
[edit] I'm actually too lazy to read all of the comments in this thread.
The fact that they aren't used as reserves, have terrible liquidity or bear risk doesn't negate their existance as a store of wealth and medium of exchange. You can go ahead and still argue they aren't money, and I agree they aren't something you would want to bet your retirement on, but that's a really academic discussion because derivative purchases can expand credit just as readily as currency can.
The point is that the central bank, through the manipulation of m0 and cartelization of the banking system, is actually able to increase the demand for credit through monetary policy...
Definetly. As a matter of fact, in the real bills example I gave a page or so back, this could happen with any issuing institution.
But if the central bank has the power to create its own demand, can't it reduce it, too? Under your theory, shouldn't we have some central bank that freezes the monetary base and lets the market value of its bills adjust to satisfy demand? That way there's guaranteed to be no money supply growth and no inflation. Why risk it by allowing private banks or anyone else to print additional money?