... 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?
Why must anything prevent the amount of gold in circulation from fluctuating under a gold standard?
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So nothing? Okay, I'll take that answer.
I didn't answer your question - I rejected it. Furthermore, I attacked the foundation on which your question seemed to be based. Do I need to repeat what I asked? I'll be happy to do so until you answer it.
Gold circulation fluctuates wildly, so it's not clear what's going to stop it.
Anyway, here's some Swedish data. Sweden has had a business cycle since the 19th century.
http://www.riksbank.se/Upload/Dokument_riksbank/Monetar_hist/Moneysupply1871_2006.xls
During the period 1871-1895, base money grew 8%. This was a period of multiple recessions despite little growth in the currency supply. If less than 1% monetary base growth can trash an economy, bad news for gold.
So I guess you're left with 100% reserve banking- not because it works, it's probably a disaster in practice due to lack of overnight lending, but because there are hardly any examples of it in practice in an industrialized economy. Which requires fractional reserves banking to be illegal, and that's a pretty statist form of financial regulation.
I also gotta point out that outlawing fractional reserve banking alone will not stop the growth of the money supply. There are many types of privately created money, such as financial derivatives and the M4, that don't involve 100% backing. In order to really stop the growth of money creation it's necessary to have some really broad restrictions on financial activities such as mortgage backed securities, credit default obligations, etc. It would require an Austrian version of Dodd Frank, except a thousand pages longer.
Ban-Evader:Gold circulation fluctuates wildly, so it's not clear what's going to stop it.
When was the last time gold was used as money? And just what do you mean by "wildly"? And just what do you think obligates me to go along with your necessarily subjective interpretation of fluctuations in gold circulation?
Ban-Evader:Anyway, here's some Swedish data. Sweden has had a business cycle since the 19th century.
So has the United States. Your point?
Ban-Evader:During the period 1871-1895, base money grew 8%. This was a period of multiple recessions despite little growth in the currency supply. If less than 1% monetary base growth can trash an economy, bad news for gold.
What definition of "base money" are you using? What definition of "recession" are you using? What definition of "trash an economy" are you using? Does that 8% growth figure apply to the entire period or to each year on average? (No, I'm not opening up that spreadsheet yet.)
Ban-Evader:So I guess you're left with 100% reserve banking- not because it works, it's probably a disaster in practice due to lack of overnight lending, but because there are hardly any examples of it in practice in an industrialized economy. Which requires fractional reserves banking to be illegal, and that's a pretty statist form of financial regulation.
See above, Ban-Evader. You're being intellectually dishonest to an extreme, and I'm sure it's deliberate - though I fail to see how this is bringing you any real amusement.
Aside from that, please provide the definition of "disaster" you're using. Along with that, please explain exactly how lack of overnight lending probably (if not necessarily) leads to a "disaster".
Finally, do you consider it "statist" to protect oneself (let alone others) against fraud?
Oh and since you ignored my earlier question, I'm going to repeat it: Why must anything prevent the amount of gold in circulation from fluctuating under a gold standard? I'll repeat this question in every post I make to you from now on in this thread (at least) until you answer it. Do you understand?
It's used as money all the time. You just can't use it to buy groceries at Wal Mart. What obligates you? Nothing, I guess, you can just not care about whether Austrian Business Cycle Theory makes sense all you want.
1) currency 2) see source 3) credit cycle 4) entire
I'm just going to paste Wikipedia if you don't mind.
The most common criticism of full-reserve banking, and by contrast, argument for fractional reserve banking, is the need for financial intermediation. Small savers often cannot lend or invest their meager savings, for want of knowledge and sufficient capital to make a loan. Likewise, without financial intermediaries, borrowers must seek out someone who can loan them the exact amount they need, instead of being able to draw on several loans from different small savers. Savers also face significant risk as individual investors, since if they lend to a single firm or individual, that entity can collapse, with the savers having lost the money they lent. Furthermore, if they act as individual lenders, savers must wait for their loans to mature before recouping their money; a bank can make their deposits available at any time. There are also significant economies of scale in banks making investment and lending decisions, as they have access to knowledge and expertise which individual investors or lenders generally do not. Under full-reserve banking, a great deal of money would sit idle, as savers stored up their money, while entrepreneurs went without much-needed capital.[9][34][35][36]
Of course. Plus, 100% reserve banking would not stop growth in the money supply because there are all kinds of financial derivatives to fill the role of fractional reserve banking. Are those going to be outlawed too?
Oh and since you ignored my earlier question, I'm going to repeat it: Why must anything prevent the amount of gold in circulation from fluctuating under a gold standard?
Because if it doesn't you get growth in the money supply.
alsdjfalsdjfos:this is irrelevant anyway, because the amount of gold being mined does not necessarily reflect the amount of gold in circulation, which fluctuates dramatically.
I don't think this is true. Do you have any figures for the amount of gold in circulation? Either way, the amount of fluctuation in available gold is far outstripped by the amount of fluctuation in dollars so it's fairly trivial to say that gold is a better currency than the dollar.
You seem to think that gold fluctuations are somehow an issue for Austrian Economics or ABCT in specific, however they really have nothing to do with one another outside of AE/ABCT describing things that will occur in the event of fluctations in gold availability. It may very well be an issue for people who want to use gold as money (and I doubt even that), but that is not something that reflects on AE/ABCT at all.
Re. gold reserves.
You're still missing the point. Let's say there are 10,000 tons of above-ground gold and new mining is 100 tons this year (1%). Next year, the stock of above ground gold will be 10,100 tons and, to maintain a 1% increase in gold supply, 101 tons will have to be mined. So, the amount of gold being mined per year must increase exponentially to maintain a constant rate of increase in the gold supply. This is a consequence of the fact that the vast, vast majority of gold is not consumed into an unusable state.
In the case of fiat dollars, this is just a matter of ledger entries. It costs no more to write "1,000" than it costs to write "100". Either way, increases in the fiat money stock are very close to costless, regardless of the size of the increase. Hence, the central bank can guarantee a constant rate of increase in the supply of fiat money from year to year. This is in stark contrast to gold mining where new technologies must be discovered, new deposits must be located, more human resources must be drafted, and so on. There is no way to be sure that any particular rate of gold supply increase can be maintained indefinitely.
Clayton -
also i would add that the market understands that gold is being mined and new gold will hit the market at a somewhat regular rate. So the price of gold already has the expected additional gold valued in to the price. So there is a smooth fluctuation in prices.
vs
the fed's secret board meeting where the public literally have no idea whats going on.
Not true; see the table a page back.
It may very well be an issue for people who want to use gold as money (and I doubt even that), but that is not something that reflects on AE/ABCT at all.
As long as people continue to use gold (and other instruments subject to money supply growth), that's supposedly going to cause credit growth.
So, the amount of gold being mined per year must increase exponentially to maintain a constant rate of increase in the gold supply. This is a consequence of the fact that the vast, vast majority of gold is not consumed into an unusable state.
As Jargon said, a megahertz of computing power used to cost much more than it does today before Free Market Capitalist Innovation was unleashed. If asteroid mining ever becomes practical, there will have to be regulations to prevent gold mining technology from causing rapid money supply growth.
Although I guess there's no point because normal fluctuations in gold circulation will cause extended periods of money supply growth anyway.
There is no way to be sure that any particular rate of gold supply increase can be maintained indefinitely.
As discussed in the past several pages, the gold supply in use as money is the amount of gold in circulation, which fluctuates greatly.
You're also ignoring the fact that many financial derivatives (mortgage back securities, credit default swaps, etc) are forms of privately produced money which cost next to nothing to create.
Besides, even if the Fed was only increasing the monetary base 1% per year, wouldn't you still blame it for every single business cycle?
How do you know that "once money supply growth falls below X% a year, there won't be any more credit cycles?" How do you know that a 1% rate of growth is insufficient to cause a credit cycle?
Wouldn't it be desireable to instate some government regulation that outlawed bringing new monetary gold into circulation to stop growth of the money supply?
@als: You're all over the map. Remember that Austrian economists are not married to the chemical element Au. It really doesn't matter what is used as money, so long as the market selects it. But there are very good reasons to believe that gold, rather than some other element, will continue to be money into the foreseeable future.
@als: You're all over the map.
You're not providing an argument.
Remember that Austrian economists are not married to the chemical element Au. It really doesn't matter what is used as money, so long as the market selects it. But there are very good reasons to believe that gold, rather than some other element, will continue to be money into the foreseeable future.
Great. So how do you know that a 1% rate of growth in the gold supply is insufficient to cause the credit cycle?
What about the much greater variations in circulating gold, derivatives, and other forms of privately created money? Why doesn't this monetary growth cause credit cycles?
your base money and gold reserves chart doesnt prove anything. in fact it disproves your point. every great fluctuations in the market was government interference.
through the 1890 was the free silver. where the west was expanding and huge silver deposits were discovered so in order to push exports they wanted a soft currency so they over valued silver to gold (or under value of gold). This caused gold to leave the market because the people were not willing to use their gold as money and everyone started using silver. one of the biggest political factors in the 1896 election was silver or gold. well the silver candidate lost and gold started coming back out.
1907 was the recession
1913-1920 - the fed was founded and world war 1. with the huge jump in paper money people took out gold from the market.
1920-29 was of course the credit boom and everyone getting rich spending money.
1933- all gold is confiscated and made illegal. then gold was repriced from 20 to 35 bucks. which drew out a ton of gold from everywhere.
then of course the huge decline in the 40s was WWII where the whole world was printing. So everyone wanted their gold back.
Then from then on out you can just look at the increase of paper money and the correlation with gold leaving the market.
I'm not a historian their a thousands of books out there on these subjects and time periods. and i could of added a lot more detail, and i probably left out other huge points and government interference that caused the variance.