So I've had some conversations with some others about what would happen if we adopted a 100% reserve banking system (probably backed by gold.) I argue that such a system would eliminate the constant boom-bust cycles because it would put an end to the government/banks increasing the money supply leading to artificially low rates that cause malinvestment. However, the opposition argues in return, that although it may eliminate the boom-bust cycle, it will cause significantly lower growth in the economy.
In my system, the banks would both store money for a fee and lend out time deposits. So people would have to choose whether to keep their money in time deposits or in the bank's safe. In this system, as opposed to our current one, we can assume that people would keep a much higher percentage of their money in the safe - or otherwise uninvested in anything at all - because of the risk of keeping their money in bank time deposits.
So while under our current system there's over investment/excessive growth + a boom/bust, it seems that under this new system, there's under investment yet no boom/bust.
However, I'm skeptical that the 100% reserve system would lead to under investment because it seems as if the other side is too focused on money. In other words, they assume that money in the safe is the same as potential resources not being utilized towards an economic end. It seems to me that if people put a lot more money in the safe that would cause a sharp decrease in prices which would lead to a lower interest rate that would offset the decrease in loanable money.
But I don't really know. What do you think?
thedailykrugman: However, the opposition argues in return, that although it may eliminate the boom-bust cycle, it will cause significantly lower growth in the economy.
So his argument is that more radical monetary expansion promotes greater economic growth? It's like saying a tree will grow faster if you keep a constant earthquake under it.
thedailykrugman:In other words, they assume that money in the safe is the same as potential resources not being utilized towards an economic end.
Yes and the assumption is false. Money in the safe means resources are being employed elsewhere, perhaps in stages of production further away from consumption, therebye creating a more productive economy.
If you stop focusing on the money for a second, and focus on the goods themselves, in very rare occasions will you find economic goods sitting idle. Their price may drop dramatically, but economic goods will get employed one way or another.
thedailykrugman:It seems to me that if people put a lot more money in the safe that would cause a sharp decrease in prices which would lead to a lower interest rate that would offset the decrease in loanable money.
Bingo. A downward trend in interest rates forms as prices of goods drop as stated. Investments are driven into stages further away from consumption as retail vendors and the like report poor accounting profits. Stages more distant from consumption do not immediately feel the effects of a thrifty consumer. So they can remain profitable for a lengthy period, while retail contracts.
The graph takes some studying but it's an excellent tool when you understand it.
Well we were in sound money situations in the past, and we were productive, Right? This country just did pop out of no where. if you look throughout history, the main reason why the government took out 'sound money' policies was to fund war... Plus most of us here are not really for sound money, we are for competing currencies, let the market decide what type of currency is best...
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I guess I should also remind the OP that there is absolutely no way that by itself a completely hypothetically stagnant money supply would stagnate or deter economic growth. An economy will be at a position to prosper most when it's monetary system is most stable. There will be less variances and noise generated in the pricing mechanism under such a case, so that economic calculation is exploited to it's fullest potential.
However it's just as naive to assume that the money supply should be controlled into a completely stagnant supply.
It's important to make a distinction between nominal wealth, and real wealth.
None. In fact it contributes to economic growth. This has been recognized even by Adam Smith.
it is actually really funny to hear some of the objections to sound money, like how money becomes too expensive or how people are less likely to invest... opposers talk about sound money like it is a brand new idea and has never been tested before. but the truth is that many businesses produced and invested a great amount with sound money policy... just pick up a history book...
Well, sound money has never meant full reserves. That has never been in practice before.
Then what do you take "sound money" to mean?
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