... 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?
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.
That doesn't answer the question. Voluntary time preferences, sure, whatever, but Austrolibertarianism says that increases in the money supply cause the business cycle. That's what happens when gold supply increases.
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.
That's bad news for libertopia.
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.
That doesn't answer the question. Expansion of the money supply causes inflation, and with it inevitably an extension of credit and a credit boom. 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.
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.
I know exactly how the Austrian business cycle is supposed to work, and I'm pointing out the logical consequences.
If someone found 100 tons of gold and deposited it in the bank, would it still cause booms and busts?
According to Austrain business cycle theory, yes, that's exactly what is supposed to happen whenever the money supply expands. You can even replace "gold" with "federal reserve notes" and it'll amount to the same effect under the theory.
It's just something that Mises apparently never really thought about.
So the real question is, "can you guys respond so that I can cherrypick some bits and pieces to make it look like I totally pwned you fools, dawg? I'm really insecure."
At least Marxist-Leninists make the effort to cover up their bullshit. You guys aren't even putting in the effort.
For what it's worth, I agree, expansions of the money supply unrelated to the capital stock are not particularly likely to cause a recession. That means any expansion of the money supply, gold or not.
The assumptions the Austrian business cycle makes to establish this are pretty flaky. Supposedly a persistent capital structure error is supposed to occur when the central bank lowers interest rates, undervaluing capital and causing excess demand for it.
This capital structure error on the part of entrepreneurs is a form of market failure. If we're willing to assume that market failure occurs in this one particular instance, what's to prevent it from happening elsewhere in the economy.
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.
Plus, if Austrian theory really worked and the structure of production shifted to a longer term during booms, then short-term, speculative, real estate flipping/currency/inventory investment would decrease during booms relative to long-term fixed capital investment. That's not what happens.
Yes because, hurr durr business cycle is inherent feature of capitalist economy hurr durr kill the bourgouiuisese!!!!!!!!! Is totally a perfect theory without any holes in it.
------------------------------
In the free market economy, it takes gold to mine gold. In the current system we are in, we can just push a button and out comes all our money.
http://mises.org/daily/4527
If you took time to read the link you would find that austrians stand on 2 postitions of this issue.
You can still conclude that gold can cause the boom-bust cycle in a free market 100% gold economy.
There are 2 paths that you can go down.
The reason why we advocate gold, is because it is nearly impossible to expand the money supply that quickly with a rare metal.
If anything, most austrians I know, dont necessarily advocate gold, but advocate free market moneys that spontaneously emerge.
“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
I know exactly how the Austrian business cycle is supposed to work
Clayton -
"You ain't going to walk around the mall with a bag full of nuggets."
you might need 1 gold coin. but mostly you would be walking around with many silver coins.
each silver coin is roughly 30 dollars....so you wouldn't need alot. each gold coin is roughly 2000 dollars....so you definetely don't need to walk around with one unless you are going to purchase a massive amount of stuff.
1 oz coins would be pretty hefty, if coins were going to be actually used in daily transactions, I would expect them to more like the size of say dimes.
You cannot truly understand the business cycle without understanding markets, which is what I recommended you do, mustang19.
Again, monetary expansion causes artificially low interest rates which causes malinvestments that collapse when interest rates rise/the monetary supply contracts.
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. If interest rates are high, gold (and all other commodities) become more valuable. So people build more mining machines and such an do work to produce more value (in some cases, gold and silver). But more machines are built to harvest grains, or process grains or metal, or all sorts of valuable things are made. When the gold is deposited, and not under fractional reserve banking, that "new money" doesn't go to anyone that didn't earn it. If it is dumped into investment banks, it's no different than people saving money and doing so. It's not printed out of thin air with no work or value behind it. What's more, without fractional reserve banking or a lender of last resort like the FED, there are no bailouts. This makes malinvestments less likely.
Of course, once interests rates go down, new production of gold (and other commodities) decreases and all that follows. Do you not see the difference? It's huge. In the free society, no interventionists get to decree when interest rates go up (or down) on a whim. This allows entrepreneurs to do what they do properly, which is predict where the market is going and take risks.
Again, impala, learn how markets work. Then try to understand the business cycle. You have failed at both so far.
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.
Phi est aureum:be sure to understand that monetary expansion does not cause recessions per se. Monetary expansion causes lower interest rates, which cause widespread malinvestments.
I don't think this statement explains the effect clearly.
Lower interest rates on their own do not cause widespread malinvestments. The malinvestments appear because lower interest rates naturally occur when individuals save more, demonstrating their preference for future goods over current goods. However, in the case of a lowering of rates due to credit expansion there is no corresponding action by individuals and so what investors think people are doing and what people are actually doing is much different.. It is this desync that causes the malinvestments and the eventual bust.
alsdjfalsdjfos:Expansion of the money supply causes inflation, and with it inevitably an extension of credit and a credit boom. 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.
As a quick aside before I begin, the supply of gold isn't that important. Just the supply of gold used as money.
I believe the reasoning behind your original statements are more or less correct, even if your conclusion (recession) is exceedingly unlikely. The brief thought I've given the subject* leads me to believe that addition of gold-as-money to the economy would result in the same alterations to the economy that occur with the addition of dollars-as-money. Namely, if spent on consumption goods then there would be a net transfer of wealth from everyone else to the money producer and if loaned then there would be some level of malinvestment.
The advantage of gold is, therefore, one of degree not one of kind. You simply can't generate gold at the rate you can paper money. The economy should be more than capable of handling the delta in money supply without significant disruption (ie recession). It would act more as a friction instead. It is also important to note that Austrian Economics does not advocate forcing people to use gold, instead leaving it up to the market to decide the preferred monetary medium. If gold's supply fluctuated enough to be a problem I believe it would be replaced in the market by something without these issues.
* Further investigation may well reveal that the rather simplistic models talked about in this thread don't do justice to the true differences in how a miner (or even a dollar printing machine) brings money into the economy versus how the Fed creates money backed by the issuance of government debt. Understanding this process may highlight how Rothbard's statements are actually correct.
@cporter
Absolutely. I should have mentioned that specifically, but I thought it was implied when I talked of the difference between money printed out of thin air v. people depositing gold as savings. My bad.
The advantage of gold is, therefore, one of degree not one of kind.
This is the essential point that rebuts this particular troll-argument. However, I will note that the difference in degree is so large as to be - for all practical intents - a difference in kind. Annual production of gold adds around 1% to the overall gold supply, and that's using all the latest technological means for extracting gold. As the supply of above-ground gold grows, the harder it becomes to maintain even this 1% rate of expansion. By comparison, the Fed has maintained around 10% annual increase in the money supply for close to four years straight now (not as measured by the absurd CPI, of course, but shadowstats has shown that annual inflation is pretty close to 10%). Unlike the case with gold, inflation does not become increasingly difficult over time. It costs no more to add another 10% to the money supply next year than it did to add it this year. And there is nothing preventing the Fed or any central bank from increasing the money supply at ratest well above 100% per year (cf Zimbabwe), a situation that is simply inconceivable in the case of gold.
"It costs no more to add another 10% to the money supply next year than it did to add it this year."
I see the grain of truth to that, but it will cost more and more. The only way to make it cost less is to print proportionally more high numbered currencies or increase the cap on the currency value.
Schools are labour camps.
@eliotn
What??
@eliot: What Phi said... Wha??
You know, I think I know what he means (correct me of I'm wrong eliotn).
IF they literally printed all the new money, I suppose you would be right (that to continually increase the monetary supply by 10% every year, more and more bills would need to be printed, thus more cost, unless they printed larger and larger denominations). However, most of the new money is in a digital form. Most is never physically printed. Hence, there is no cost (besides a few clicks and taps on a mouse and keyboard).