Under a gold (precious metal) based monetary system is it possible that profitable ventures would be denied funding by a physical shortage of coin ?
Using a simple analogy, lets say that there are 100 profitable applications for capital, yet there only exists 10 units of precious metal for exchange.
Essentially, the economy is negatively impacted because there is not enough physical coin to fund all the profitable ventures. The money supply cannot keep pace with the number of profitable activities.
At least under fractional reserve banking, all of the profitable ventures receive capital. I do understand that fractional banking and the Fed also fund politically motivated schemes that are unprofitable and that this process is dangerously inflationary.
However is there any downside to using a gold standard for the exchange of goods and services to replace barter?
Or do temporary shortages of precious metal due to normal market uncertainties and dislocations suggest that there can be cyclical downturns until precious metal production ramps up to meet demand and capital requirements?
You're thinking too rigidly. Market value is determined by demand and supply, right? If there is only a small amount of supply of widgets, but a high demand, the price for each widget will be very high. Say there's a trillion dollars in the economy right now (there's a lot more than that, but just go with it.) If we took half those dollars and erased them from the Earth, you'd be saying "how would people be able to afford anything? The prices would be too high and there wouldn't be enough dollars to buy everything!" But you're forgetting that ceteris paribus, each dollar would be twice as much....because prices wouldn't stay that high. They would have to come down.
Check out the first entry here:
New money that denotes fractions of gold coins would be made.
These might sound like a beginners questions, but I haven't heard a satisfying answers yet.
A) If example 2% deflation would make all investments 2% more profitable(I have heard this argument few times), wouldn't that make those investments which yield zero or even negative profit to seem like a productive ones and create bubbles? And the other way around, if it makes investments yielding 0-2% profit to seem like a unprofitable ones(I have heard this one too!) wouldn't that slow the economic growth?
B) How about debts? Rothbard said in "What has government done to our money" that people would make deals which take deflation into account, but is there any proof of that ever happened or how it would work on practice? On the other hand Rockwell said in a Daily-article that taking a debt in deflatory economy is an entrepreneurial risk and must be carried(!) just a way it is. Sounds pretty hard for the entrepreneurs.
When I have tried to research austrian papers to get answers, they use most of the time to bash fiat-money and just tell that the "lowering prices" are good thing. Often they accuse mainstream-economists for using the word "deflation" wrongly and in the next chapter/sentence use it themselves to refer into a both, money contradiction and lowering prices. Bagus was an expection, his paper about the deflation was a good one. Thanks if you are willing to answer.
If example 2% deflation would make all investments 2% more profitable(I have heard this argument few times), wouldn't that make those investments which yield zero or even negative profit to seem like a productive ones and create bubbles?
Why wouldn't people invest in the really profitable ones? Would you rather get 6% or 2% from your money?
Also, according to ABCT, bubbles that are so large they effect the whole economy [as opposed to a few people being fooled into making bad investments] are only possible if there is prior inflation. They are impossible when there is deflation.
And the other way around, if it makes investments yielding 0-2% profit to seem like a unprofitable ones(I have heard this one too!) wouldn't that slow the economic growth?
Economic growth means increased production of things people want. A company that is making 0% profit doesn't sound like it is producing things people want. And of there is more profit to be made in company A than company B, that means more people want the stuff company A is making. So investing in a rather than B will not slow eeconomic growth; quite the contrary.
B) How about debts?
I'm not sure why any of that is our concern. Nobody is forcing anyone into any loans; it is their business to take care of themselves.
BTW, do you share the same concerns when there is inflation, which hurts the opposite party? Why or why not?
Good luck in your investigation of these fascinating topics.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Chyd3nius - some additional ideas:
Just a general point: the first thing to note is that a free-market with metal based money would not necessarily be deflationary (to any significant extent), as the increased profitability e.g. of mining as a result of a metal based monetary system would increase the supply of money. The more deflation, the greater the profitability and therefore expansion of money-creating (i.e. inflationary) industries.
A) The first is a possibility, but it is doubtful that it could lead to a significant bubble. On the second, the deflation in question is a result of economic growth, isn't it? Thus, if, as the argument goes, economic growth is slowed, the deflation is less than it otherwise would have been, cancelling out the problem to that extent.
B) As a creditor, which would you prefer: the debtor to default on the debt, or for him to pay it back at the originally agreed upon value? Debts would be restructured periodically according to the extent of deflation.
On the general issue of deflation: no, the Austrians - when they act as policy advisors rather than pure economists - do not advocate a deflationary policy. They merely note that an inflationary policy is much worse.
Thank you from the answers.
BTW, do you share the same concerns when there is inflation, which hurts the opposite party? Why or why not? Good luck in your investigation of these fascinating topics.
No I don't. I have followed Mises.org for a few years by now, but haven't found answers to these questions so I decided to ask them. Especially debt-problem is always brought up when I'm talking about the hard money/commodity currency, so I'm little surprised it have raised only so little discussion from the austrians.
Well, from the utilitarian point there is a problem, or a question.
Good reasoning. Is there any paper about the debts in 'deflationary' economy(like America in the late 1800's)? If not, I think austrians should put more focus on this.
I can reverse your hypotheical and ask the question: if you fund 100 hundred failed ventures with only 10 units what do you think will happen to your money and the economy ? Pick the one you think is the most profitable, trying to fund too many (or 1000 or a million) ventures with the same amount of money is both stupid hypothetically and, more importantly, practically.
In the real world more ventures fail, they do not succeed, in real capitalism failure is absolutely a necessary thing. The huge debt problems all over the world are not because of a lack of funding of new ventures, the opposite holds true.
Centinel:Under a gold (precious metal) based monetary system is it possible that profitable ventures would be denied funding by a physical shortage of coin ? Using a simple analogy, lets say that there are 100 profitable applications for capital, yet there only exists 10 units of precious metal for exchange. Essentially, the economy is negatively impacted because there is not enough physical coin to fund all the profitable ventures. The money supply cannot keep pace with the number of profitable activities. At least under fractional reserve banking, all of the profitable ventures receive capital. I do understand that fractional banking and the Fed also fund politically motivated schemes that are unprofitable and that this process is dangerously inflationary. However is there any downside to using a gold standard for the exchange of goods and services to replace barter? Or do temporary shortages of precious metal due to normal market uncertainties and dislocations suggest that there can be cyclical downturns until precious metal production ramps up to meet demand and capital requirements?
Tell me, how do you know whether any - let alone all - of the 100 applications for capital is profitable if it hasn't even gotten funding yet? I smell a nirvana fallacy.
Also, why aren't you taking into account the fact that money (both fiat and commodity-based) circulates?
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Let's say that we fix the overall supply of money so no overall money can be added and the combination of all currency in circulation must add up to the same number throughout time.
Now as the capital stock increases (for simplicities sake we'll say that's all that improves productivity) the amount of labor needed to perform a task is decreased, this allows for costs to fall as more is produced for less. This increase in goods available and decrease in costs leads to an increase in demand for money, as money demand increases while the supply is constant the value rises, this means that each unit of money is worth more than it previously was, and therefore while the amount of money is constant the value increases, so then smaller denominations are worth the same as previous denominations were, yesterdays dollar is worth today's 50 cents, and therefore is there are profitable ventures available then we can loan them out 50 cents where we would have once given them out a dollar.
This is a slightly convoluted example, but the point is that over time money gains value and so smaller denominations have increased purchasing power, and so as long as they are profitable enough to keep up wtih the rate of interest then they will recieve loans.
Autolykos:Tell me, how do you know whether any - let alone all - of the 100 applications for capital is profitable if it hasn't even gotten funding yet?
Indeed. Under a funny money system, most of the 100 applications become "profitable" simply because there is (and must be) even more funny money printed for the NEXT 100 applications following them in order to keep the "profitable" Ponzi scheme going. That's how the whole (centrally banked) world got where it is today. Eventually, the music stops and there's not nearly enough chairs as there are "profitable" applications. Not even close.