... 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?
And major difference between the FED printing money/creating digital money is that is costs (next to) nothing and is on a whim of interventionists.
Many financial derivatives are a form of digitally created private money which cost next to nothing to produce (and were produced in much greater numbers than federal reserve notes during the lead up to, for example, the GFC). Gold does cost more to produce than dollars, but as the next guy brings up, gold production will increase if anything under low interest rates.
Of course, once interests rates go down, new production of gold (and other commodities) decreases and all that follows
Actually, I'm pretty sure gold production increases when interest rates fall or interest rates become negative as commodities become more attractive stores of value.
As the supply of above-ground gold grows, the harder it becomes to maintain even this 1% rate of expansion.
Innacurate. That may be the rate of growth this year, but there are large decadal and yearly variations.
Not only that, but Austrians have to explain the 19th century business cycle under "free banking", too, as this was largely a deflationary period. It's incorrect to say that state chartered banks and so forth increased the money supply during these booms (such as the leadup to the Long Depression), as these booms were deflationary; one can only argue that the rate of decrease slowed due to these charters.
When you speak of gold as money, and money becomes less valuable in relation to other things (decrease in interest rates), there is less incentive to produce gold than when gold as money increases in value in relation to other things (increase in interest rates). What you point out is under current monetary policy where the only safe way to store value during major inflation is in commodities.
And I disagree with your agrument concerning the 19th century. Read A History of Money and Banking in the United States. And learn how markets work, mustang/impala.
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.
When you speak of gold as money, and money becomes less valuable in relation to other things (decrease in interest rates), there is less incentive to produce gold than when gold as money increases in value in relation to other things (increase in interest rates)
The past several years of monetary expansion/low interest rate conditions, for example, have caused gold production to skyrocket. It's because gold is a relatively steady store of value despite changes in the value of those "other things".
Gold production as a whole is also procyclical, which doesn't fit your low-interest-rate-booms-reduce-gold-production theory.
Unless you're willing to explain your disagreement, that's all there is. The gold exchange standard had an immediate contractionary effect when introduced.
He said "gold as money" which you clearly missed because your example is irrelevant. Which pretty much makes it irrelevant.
What exactly is the problem?
Phi claims that lower interest rates reduce the value of commodities. The problem is that the gold supply is determined by mine production and circulation, not lending rates like "paper" money is. Lower rates on (non-commodity) money reduce the attractiveness of that particular class of money, but not commodities, as they do not originate from lending.
The major issue with you is you don't understand money as a medium of exchange. This and this alone explains why the business cycle occurs when money supply increases under fiat or even debased dollars occurs and while it is unlikely (if even possible) under a strict gold standard (without fractional reserve banking or treatin FRB as fraud). You still haven't understood the first few responses you got on this topic, mustang, which tried to explain this to you. There is a difference between using a commodity as money and using fiat as money.
As for the 19th century conundrum you are unwilling to educate yourself of (even though the book is free in PDF or audiobook format from the LvMI, oh well. I guess I will just add that FRB was widespread in America, even in the colonial/revolutionary days. Again, this is different from someone mining more gold, which could then be used for coins, jewelry, electronics, etc. And I'm not so sure what is the problem with deflation anyway. What do you mean when you say a period was "deflationary," impala?
There is a difference between using a commodity as money and using fiat as money.
Yes, one originates from lending at interest and reduces in value when interest rates fall, and one originates from mining and does not reduce in value as interest rates fall. This is my point.
As for the comment about nonmonetary uses of gold: that graph tracks the amount of gold in circulation. If you were to include all the gold used in electronics and so forth over the years, the increase in that "gold supply" would be even greater.
What do you mean when you say a period was "deflationary," impala?
Fall in prices. Incidentally, there was a monetary contraction at the same time.
alsdjfalsdjfos: Not only that, but Austrians have to explain the 19th century business cycle under "free banking", too, as this was largely a deflationary period. It's incorrect to say that state chartered banks and so forth increased the money supply during these booms (such as the leadup to the Long Depression), as these booms were deflationary; one can only argue that the rate of decrease slowed due to these charters.
Let's get something straight Mustang19: that during a period of time the price level lowered steadily is not any proof that credit-based business cycles were not under progress. Absolute measurements such as these prove nothing. What would prove something is if one could measure the historically existing price level movements from the 19th century and compare them with those movements that would have existed sans pre-existing bank regulations/licensing/price-fixes, which were not alien to the American federal government in the 19th century.
Do not make the egregious error of conflating a falling price level with a shrinking money supply: when the production of goods generally outpaces the production of money, the price level falls. This is simple enough and clearly what occurred in postbellum America.
The National Banking Acts of the civil war enabled a system of credit wherein a select few Wall Street banks could expand their credit without fear of market reaction: local banks were made to pyramid notes on state banks who were made to pyramid notes on top of Wall Street Banks' notes, meaning that those wall street banks had legally become an integral fundament to the US banking system and consequently its economy. Meaning when wall street banks issued more notes, the reaction from competitor banks was not to redeem said notes but instead use those notes as their own collateral. Wall Street banks were insulated from market action in this way and were stimulated by the enjoyment of the privilege of the cantillon effect. Under previous arrangements, banks issued their own currencies, and when they overexpanded credit competitors redeemed said notes, thus dwindling the reserves; this system functioned in a system similar to the international gold standard pre-WWI. This is not "free banking".
Then there were the first two charters of the National Bank which enabled a coordinated expansion of credit, who do not need to be explained as their structures were nakedly designed for coordinating a national credit policy and are thus vulnerable to over or under-guessing the appropriate rate of invesment in relation to available savings.
Secondly, the ABCT does not purport to explain all economic fluctuations. The point of the ABCT is to describe the effects of coordinated credit expansion so that investment exceeds available savings. Nothing else. One does not 'work back' from certain business cycles to the ABCT if, indeed, the ABCT is not the appropriate explanation. That said there are many cases in which the ABCT is applicable due to the apparently irresistable obvious benefit of credit expansion to the powerful parties of society.
If National Banking Acts and National Banks are not enough for whatever suspicions you may still harbor, please miseswiki: L.M. Shaw and Silver Sherman Purchase Act as answers to your inevitable questions on the Panics of 1907 and 1893 respectively.
EDIT: Important error in first paragraph.
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
Let's get something straight Mustang19: that during a period of time the price level lowered steadily is not any proof that credit-based business cycles were under progress. Absolute measurements such as these prove nothing. What would prove something is if one could measure the historically existing price level movements from the 19th century and compare them with those movements that would have existed sans pre-existing bank regulations/licensing/price-fixes, which were not alien to the American federal government in the 19th century.
It does kind of make you think, though. But for lack of data on that period I'll move on.
Under previous arrangements, banks issued their own currencies, and when they overexpanded credit competitors redeemed said notes, thus dwindling the reserves; this system functioned in a system similar to the international gold standard pre-WWI. This is not "free banking".
I don't question that. It was a bad system, and the Second National Bank era was not ideal, but better. However, I think there are some other cases (like Sweden and Australia) which had something that might resemble true free banking in your book.
ed: What about the period between the Second National Bank and the Civil War?
Nice to see you again, Jargon.
alsdjfalsdjfos: I don't question that. It was a bad system, and the Second National Bank era was not ideal, but better. However, I think there are some other cases (like Sweden and Australia) which had something that might resemble true free banking in your book.
I will have to inform myself of those. That said, permanent features of a political economy (I call them "passive" or "lengthy" measures, such national banking act or national banks) are not the only sources of business cycles. "Active" measures too are sources (such as devaluations of currency initiated by the treasury or new legislation fixing metals' prices).
Unfortunately there really isn't much material on this era (that I know of, at least).
I was getting bored without you :P. But seriously, why keep making all these accounts?
The interesting thing about the period immediately after the dissolution of the SNB is an influx of foreign metals that caused something like what was discussed in the OP. Say what you want about the SNB, but its ability to expand the money supply was actually quite limited and it mostly functioned to shut down expansionary state banks by calling in backed notes.
JJ's banhammer swings rather unpredictably.
Ahh, I thought you implied a fall in prices, but I just wanted to make sure you were t using it in another sense first.
Besides all that Jargon just said, let's reiterate that a fall in prices does not mean a decrease in the monetary supply. This being said, the deflationary periods then were quite beneficial to the population, as they could buy more with their money. In fact, recessions were nowhere nearly as harmful as they are today, not only because they generally did not last decades (like they tend to do with the FED directing the game), but while people had less work/less money, the money they DID have increased in value. Today, the opposite is generally true. While people have less work/less money, their money decreases in value over time because of inflation. Do you not see a major difference? In the former, people are encouraged to save, and these savings can ultimately lead to more lending/lower interest rates, and these low rates are proper market signals in that they signal to entrepreneurs that people do have money to spend in the future on new/more products. In the latter, that is, today, people are encouraged to spend and not save, and so the only way to get lending going/lower interest rates is to keep expanding the monetary supply. This is a false signal, since consumers do not have savings to spend in the future on new/more products. Thus, the business cycle, and cycle it is because at some point, the central bank must stop expanding the currency base which allows interest rates to rise, and soon enough the malinvestments fail. If it does not stop debasin the currency: hyperinflation.
Again, impala, please educate yourself on the 19th century, the law of supply and demand, how saving and investment works with spending, generally how markets operate, THEN try to understand the business cycle.
Besides all that Jargon just said, let's reiterate that a fall in prices does not mean a decrease in the monetary supply.
I agree, and I was being unclear. The introduction of the gold exchange standard was the main factor.
Anyway, it seems that you've dropped the point about increases in the gold supply being offset in any way by interest rates. Which means an increase in the gold supply would actually exacerbate the credit cycle.
If I may point something out about the influx of foreign metals: this was an unfortunate side effect of bi-metallism employed in America and the playing out of Gresham's Law. Again, Rothbard discusses this, and this period in the FREE book (check it out).
Ignoring the concerns you have (because you don't understand markets and money thoroughly) does not prove something. I cannot state it more clearly than I have, but I promise, when I do, I'll let you know. (;