Tuesday, September 27, 2011

Are Cantillon Effects an Argument Against Government Spending?

The answer is: not even close. You can frequently find Austrians or free market libertarians arguing against government intervention – particularly Keynesian policies – by appealing to “Cantillon effects.” The question is: do Cantillon effects provide a convincing, sufficient argument on their own against government intervention by spending programs that increase the quantity of money? Not on their own they don’t.

First, a government that engages in deficit spending covered by bond issues to the domestic private sector is not increasing the money supply, so presumably the Austrian objection is to deficits covered by direct central bank money creation (the issue of fractional reserve banking is a separate one, because private fractional reserve banks could exist without any government even existing). Secondly, the assumption underlying both the quantity theory of money and the idea of Cantillon effects is that money supply increases are merely exogenous, which ignores the fact that in the modern world money supply is mostly endogenous (this does not deny of course that you can sometimes get exogenous increases). But let us put aside these latter concerns for the moment.

The Cantillon effect is an idea derived from the work of Richard Cantillon (c. 1687–1734; for his life and work, see Pressman 2006: 17–20), in his Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), which was composed between 1730–1734 but published in 1755 (although the expression “Cantillon effect” appears to have been coined by Blaug 1978: 159). The Cantillon effect is the idea that price level changes caused by increases in the quantity of money depend on the way new money is injected into the economy and actually where it affects prices first. New money will then spread out altering the level of prices and structure of prices or relative prices (Blaug 1996: 21). Another way of saying this is that, although prices rise as the quantity of money increases, contrary to the naive quantity theory of money, prices do not rise proportionally, but in a complex manner that depends on who received the money and how they spent it.

But, since the Cantillon effect applies equally to privately induced changes in the quantity of money, as well as to government-induced ones, it cannot be a serious objection on its own against government intervention raising the quantity of money unless it also invalidates all private causes of the expansion of the money supply. Austrians favour complete free trade and complete freedom of capital movement. They would demand what would be called absolute liberalization of the capital account. But, since foreigners (from investors in financial markets or foreign direct investment to mere tourists) can cause significant changes in the money supply, it is clear that the actions of private agents also cause Cantillon effects, and in fact with large flows through a country’s capital account even very significant Cantillon effects. If any process that caused Cantillion effects was ruled out because of alleged impairments to economic calculation, then all injection of money via a capital account would be unacceptable under any such Austrian/libertarian argument.

Moreover, there is a further difficulty: Cantillon’s monetary theory holds that increases in the velocity of circulation (V) are equivalent to increases in the quantity of money (M), and that is not implausible. Therefore increases in the velocity of circulation would also cause Cantillon effects, and you would then have the bizarre situation where Austrians would logically have to object to any changes in the velocity of circulation as well, to prevent Cantillon effects.

This issue is related directly to Hayek’s attempt to make money neutral as a way of preventing an Austrian trade cycle from happening. Piero Sraffa had already attacked Hayek for this unrealistic idea in 1932 when reviewing Prices and Production (1931):
“The starting-point and the object of Dr. Hayek’s inquiry is what he calls ‘neutral money’; that is to say, a kind of money which leaves production and the relative prices of goods, including the rate of interest, ‘undisturbed,’ exactly as they would be if there were no money at all. This method of approach might have something to recommend it, provided it were constantly kept in mind that a state of things in which money is ‘neutral’ is identical with a state in which there is no money at all: as Dr. Hayek once says, if we ‘eliminate all monetary influences on production ... we may treat money as non-existent’” [Prices and Production, p. 109]. .... (Sraffa 1932: 42).
By the time of Denationalisation of Money: The Argument Refined. An Analysis of the Theory and Practice of Concurrent Currencies (1990; 1st edn 1976), even Hayek is quite clear that any attempt to create neutral money in the real world is pointless:
“Although I have myself given currency to the expression ‘neutral money’ (which, as I discovered later, I had unconsciously borrowed from Wicksell), it was intended to describe this almost universally made assumption of theoretical analysis and to raise the question whether any real money could ever possess this property, and not as a model to be aimed at by monetary policy. I have long since come to the conclusion that no real money can ever be neutral in this sense, and that we must be content with a system that rapidly corrects the inevitable errors.” (Hayek 1990: 87–88).
The search for a monetary policy that has no Cantillon effects is a bizarre quest for fools, as it requires making money neutral. As Hayek himself found out this is impossible:
“Hayek’s first approach to monetary problems was to search for a way to neutralize the effects of supply of and demand for money which were independent of at odds with the supply and demand for real goods: a concept of ‘neutral’ money. As it works out, this becomes a strict interpretation of a quantity theory of money, virtually paradoxical in that no change in the supply or demand for money could take place without affecting relative prices; that is, it could not be neutralized.” (Kresge 1999: 7).
Even in a Rothbardian world of 100% reserve banking and commodity money, Cantillon effects would still happen if money entered via an anarcho-capitalist country’s capital account, and if increases in the velocity of circulation occurred.

Cantillon Effects on their own constitute no argument against government spending that increases the money supply (i.e., such as monetising a deficit as in New Zealand from 1937-1938). If it did, all private sector activity that causes Cantillon Effects would also be unacceptable (if the libertarian objection is economic) or immoral (if the objection is an ethical one).

Update

I was going to write a post about this video below, but quickly realised there are doubts about whether this guy was even a financial expert at all. What was the BBC thinking!



BIBLIOGRAPHY

Blaug, M. 1978. Economic Theory in Retrospect (3rd edn), Cambridge University Press, Cambridge.

Blaug, M. 1996. Economic Theory in Retrospect (5th edn), Cambridge University Press, Cambridge.

Hayek, F. A. von, 1990. Denationalisation of Money: The Argument Refined. An Analysis of the Theory and Practice of Concurrent Currencies (3rd edn; 1st edn 1976), The Institute of Economic Affairs, Westminster, London.

Kresge, S. 1999. “Introduction,” in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 6. Good Money, Part II. The Standard, Routledge, London. 1–36.

Pressman, S. 2006. Fifty Major Economists (2nd edn), Routledge, London and New York.

Sraffa, P. 1932. “Dr. Hayek on Money and Capital,” Economic Journal 42: 42–53.

92 comments:

  1. LK,

    "New money will then spread out altering the level of prices and structure of prices or relative prices (Blaug 1996: 21)"

    Have you done anything on the quantity expansion vs. price expansion argument. What does the empirical evidence show?

    For me it seems that everything boils down to that argument.

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  2. "Have you done anything on the quantity expansion vs. price expansion argument. "

    I am not sure what you mean by "price expansion"? You mean supply-side inflation caused by rises in factor input costs?

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  3. This seems to be intuitively obvious - in fact I've been inadvertently using these Cantillon effects as arguments _for_ monetary stimulus. You can clearly increase demand just by printing money, as long as you don't distribute it proportionally to existing wealth - just because some people will become relatively wealthier (ie, the logic behind the Sraffa quote).

    For some reason, this mechanism reminds me of Kalecki's criticism of the General Theory, where he describes a model in which the multiplier is a function of the difference between the marginal propensity to consume of capital and of labor.

    Would a coarse division like that (print money and give it to capital vs. print money and give it to labor) make a useful model for demonstrating this effect?

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  4. "You can clearly increase demand just by printing money, as long as you don't distribute it proportionally to existing wealth"

    By this, do you mean if the central bank created $2000 dollars and gave to lower income earners and middle class people and told them to spend it on goods and services? Yes, in principle it would, though many people might use most of it to pay down debt as well, of course, which wouldn't be stimulative.

    Merely creating money by QE as excess reserves in the banking system doesn't stimulate demand in a significant way, because we live in an endogenous money world, the multiplier is a myth, and new debt/credit flows in any year/time period are demand constrained (demand has been stagnant or falling in recent years), and banks have become more conservative in their lending standards.

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  5. "Yes, in principle it would, though many people might use most of it to pay down debt as well, of course, which wouldn't be stimulative."

    Paying down debt is exactly equivalent to saving, so at the very least such a policy would mean that debts are eliminated sooner and so the excess demand for money ends sooner - in other words, shortening the recession. And any amount that was consumed would of course be stimulative, so that seems to be an argument 'for' in any case.

    But I do agree that money creation as excess reserves is useless, since you're saving all of it and not paying down any debt overhang. QE has to increase demand through the mechanism of inflation, which is equivalent to giving money to people in debt.

    If you want to stimulate consumption or investment immediately, you can always print money and finance government operations with it directly.

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  6. "Paying down debt is exactly equivalent to saving, so at the very least such a policy would mean that debts are eliminated sooner and so the excess demand for money ends sooner -"

    "exactly equivalent to saving"? I don't think so.

    If you pay down the principal of your debt you destroy broad money. The bank writes down the principal listed on the asset side of its balance sheet. You have not bought producible commodities with that money.

    The interest accrues to the bank and *might* or it might not be relent.

    "If you want to stimulate consumption or investment immediately, you can always print money and finance government operations with it directly."

    I agree.

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  7. "If you pay down the principal of your debt you destroy broad money."

    Sorry, you're right. To clarify: it's equivalent from the individual's perspective in a money-demand sense. Insofar as saving/borrowing alters the supply of money there are further effects, but I should think they are much smaller than the effect of increasing the individual's propensity to spend future income rather than repay debts with it.

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  8. First, a government that engages in deficit spending covered by bond issues to the domestic private sector is not increasing the money supply,

    The MMT folks have shown this to be false; deficit spending covered by bond issues do create net financial assets. Think of it like this: Government spends X (economy is at +X); Person Q buys bond for X (economy is back to 0); Government issues a bond worth X (economy is back to +X). The result is exactly the same as if the spending had not been accompanied by the bond sale, except that the new net assets are represented as securities instead of liquidity. However, given that banks are capital (and not reserve) constrained, those treasuries can be leveraged to generate a deposit - i.e. liquidity. It's the same net outcome.

    Thus, the consolidated government sector IS capable of exogenously affecting the money supply through fiscal policy (vertical money creation), while monetary policy acts on the endogenous (horizontal) aspect of the money supply by attempting to alter demand for bank loans.

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  9. "Yes, in principle it would, though many people might use most of it to pay down debt as well, of course, which wouldn't be stimulative."

    Why would money created and issued by the central bank be more likely to be spent on debt repayment than money spent by the fiscal authorities?

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  10. "The result is exactly the same as if the spending had not been accompanied by the bond sale, except that the new net assets are represented as securities instead of liquidity. "

    But then this hinges on exactly how you define the money supply, doesn't it.

    M1 = currency in circulation outside bank vaults (and also excluding bank reserves) + checking/transactions accounts (or demand deposits) and other checkable accounts + travelers checks

    Government bonds and private sector financial assets are not included in M1.

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  11. "Why would money created and issued by the central bank be more likely to be spent on debt repayment than money spent by the fiscal authorities?"

    It would not be "more likely". Either spending from

    (1) a deficit (matched by $for$ bond issues or no bond issues) or
    (2) money created by the central bank and given to people

    might see in all these cases a significant amount of that money used to pay down debt in an environment were private debt is excessive, private balance sheets are in a terrible state, deleveraging and debt deflation are present.

    Axel Leijonhufvud refers to this process as debt deflation/deleveraging causing “financial sinkholes in private sector balance sheets” for fiscal policy.

    Of course, I don't deny that government fiscal policy does help the private scetor delever, but it needs to be done on a big scale. Probably a more sensible policy is just massive writing-off and restructuring of debt, using monetary policy to protect depositors and keep the financial system solvent, before large-scale Keynesian stimulus.

    Although I think Leijonhufvud's skepticism about the usefulness of government fiscal policy is exaggerated, he makes a reasonable point here:

    "The lesson to be drawn ... is that deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. If the sinkholes are large, this will take a long, long time. Today, they are enormous. Policy must address both the capital accounts and the income accounts ..."

    http://cje.oxfordjournals.org/content/33/4/741.full

    Leijonhufvud, A. 2009. "Out of the Corridor: Keynes and the Crisis," Cambridge Journal of Economics 33: 741-757.

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    Replies
    1. "Although I think Leijonhufvud's skepticism about the usefulness of government fiscal policy is exaggerated, he makes a reasonable point here:"

      Someone else who is skeptical?

      “ . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen. “
      http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

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  12. "Probably a more sensible policy is just massive writing-off and restructuring of debt, using monetary policy to protect depositors and keep the financial system solvent, before large-scale Keynesian stimulus."

    I agree. I haven't read the Leijonhufvud essay, but this seems implicit in Fisher's classic essay.

    In retrospect, it is clear that the failure to accompany TARP with a forced write-down and restructuring of debt was terrible policy. The administration's quiet murder of bankruptcy reform, and its negligent handling of HAMP were similarly poisonous.

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  13. The system is probably headed towards another financial crisis, with the failure to purge the bad assets and non-performing loans, and no proper financial regulation.

    But then again it might just be another "lost decade" for the next 10 years or so, just like Japan. Difficult to say.

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  14. First, a government that engages in deficit spending covered by bond issues to the domestic private sector is not increasing the money supply, so presumably the Austrian objection is to deficits covered by direct central bank money creation

    A deficit occurs when the government doles out more money than they acquire. It is absurd to suggest that deficits can be "covered by bond issues", because a bond issue is money received, and money received reduces what would otherwise be a larger deficit.

    If the government does borrow then, and it borrows enough to "cover" what would otherwise be a deficit, then the government would not be running a deficit at all. It would be running a balanced budget. Money in (through taxation and borrowing) would equal money out. So if the government is running a deficit, then that must mean that all borrowing is already accounted for in the money received, which is itself less than the money doled out, and that difference causes the deficit.

    This is basic accounting that seems to go way over your head.

    (the issue of fractional reserve banking is a separate one, because private fractional reserve banks could exist without any government even existing).

    The fact that fractional reserve banking could take place in the absence of government, due to inadequate enforcement against fraud, does not in any way imply that fractional reserve banking is consistent with free market principles, any more than the fact that other types of fraud, or violent acts such as murder, rape and theft, could also take place in the absence of government, does not imply that these actions are consistent with free market principles either.

    Governments have not, and almost certainly will never, totally eliminate crime, and anarchist societies have not, and almost certainly will never, totally eliminate crime either. That crime will take place no matter what legal system is in place, does not imply that such crimes are consistent with the philosophy and ideas behind the legal system. Just laws tend to be broken to some degree because there are evil people in the world. Positive laws tend to be broken to some degree as well, for the same reason and for other reasons as well, depending on the specific positive law in place.

    Moreover, just because it is possible for Mr. X to defraud Mr. Y in the absence of government, that does not mean that fraud is justified in the presence of government, nor does it mean that if government says it's OK then it's OK.

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  15. Secondly, the assumption underlying both the quantity theory of money and the idea of Cantillon effects is that money supply increases are merely exogenous, which ignores the fact that in the modern world money supply is mostly endogenous (this does not deny of course that you can sometimes get exogenous increases). But let us put aside these latter concerns for the moment.

    Free market advocates who (rightfully) hold fractional reserve banking to be fraudulent, argue that because fractional reserve banking violates traditional legal principles of private property contracting, then it means money created in this way is in fact "exogenous," not "endogenous," to the free market process.

    The only justified production of money in a free market then is any and all money production that does not violate these contracting principles. Thus, if precious metals were being used as money, then a gold miner who digs up gold from his own property, or gets permission to dig it up from someone else's property, would be justified in producing and then spending that money. Would there be the Cantillon effect thereafter? Yes. Is this Cantillon effect justified? Yes. Does that mean that the Cantillon effect cannot by itself be sufficient to reject government spending? Yes. Are there any Austrians or free market advocates saying that the Cantillon effect by itself is sufficient to reject government spending? ABSOLUTELY NOT. That is a straw man against Austrians and other free market advocates who hold that government spending is not justified on the basis that the money is acquired, directly or indirectly, through violating private property rights.

    The Cantillon effect is not argumentatively used by Austrians to reject the morality of government spending. It is used by Austrians to reject the Keynesian (tacit or explicit) notion that printing money benefits the general population, and hence the macroeconomy, instead of who it actually benefits, which is the early receivers only. Those who receive the new money last, typically fixed income earners, for example pensioners, and almost all of those who work for a wage, they experience inflation and the Cantillon effect through a decreased purchasing power of their incomes as the prices they pay rise before their incomes rise, or both prices and incomes rise, but prices rise by more than incomes, which is in principle the same thing.

    It is a response to the Keynesian claim "the economy is in recession, so the government should print and spend money to stimulate the economy."

    It is not a response to the moral claim "The government is morally justified in taking people's money by force and then spending it on themselves and their friends."

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  16. But, since the Cantillon effect applies equally to privately induced changes in the quantity of money, as well as to government-induced ones, it cannot be a serious objection on its own against government intervention raising the quantity of money unless it also invalidates all private causes of the expansion of the money supply.

    Yes that's true, but the argument for a free market in money production does not contain the premise "It would eliminate the Cantillon effect." The argument for a free market in money production does contain the premise (among others) "It would minimize the Cantillon effect."

    The reason it would minimize the Cantillon effect is based on the praxeological nature of money. If the general population comes to use gold or silver as money, then it would be because the general population considers gold and silver to perform the function of money the best out of all other commodities. But should there be a huge discovery of gold, say a deposit that would dwarf the existing supply of gold, then gold would become less attractive relative to other, more rare commodities. The Cantillon effect would no doubt take place. But if the supply increase is large enough, which is equivalent to saying if the Cantillon effect is large enough, then gold would cease to be money entirely, and the general population would come to use some other commodity as money instead. At that point, the new commodity that is used would be minimal in the Cantillon effect, which is equivalent to saying that the free market process has minimized the Cantillon effect.

    Compare all this to government fiat money, in which case the entire population is FORCED to use by threats of government violence against person and/or property, where the Cantillon effect can be raised far above what the general population would otherwise have consented to, and there arises rightful and justifiable complaints of the Cantillon effect harming their interests, due to the fact that they cannot use another money. There is a huge difference between me being a monopoly counterfeiter of paper money that everyone is coerced into accepting, where I could simply print my own money and buy up what others labor to produce, and give nothing of real value in return, and a free market system where each individual is minimized in terms of how much money they can produce and where everyone else other than the producer of money is not obligated by force into accepting it.

    I would have no problems at all with central banks and governments printing up all the zillions of paper dollars they want, just as long as I am not coerced by law into accepting them as legal tender, nor compelled to pay the government taxes in those paper dollars which of course means I have to sell my wealth to others and then find paper money to then pay the government.

    MMTers are right about one thing, and it's because they didn't originate the idea: The demand for US dollars ultimately derives from the government's taxing people in US dollars. If the government did not tax people in US dollars, but in copper coins say, then copper coins would become money because everyone who produces and earns ANYTHING, would be coerced into accepting copper coins to be used to pay taxes, and hence copper would become a universal medium of exchange, i.e. money.

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  17. Austrians favour complete free trade and complete freedom of capital movement. They would demand what would be called absolute liberalization of the capital account. But, since foreigners (from investors in financial markets or foreign direct investment to mere tourists) can cause significant changes in the money supply, it is clear that the actions of private agents also cause Cantillon effects, and in fact with large flows through a country’s capital account even very significant Cantillon effects.

    In a free market, foreigners who happen to own lands that contain most of the world's commodity money, would be the world's largest originators of the Cantillon effect, but by no means will it be larger than central banking systems, which in principle and empirically are the world's greatest originators of the Cantillon effect. And again, the difference is not just in the size of it, but more importantly in the fact that in a free market anyone can "opt out" of any money they want, if they judge that the value of their own income and cash balance are declining too rapidly in value on account of prices around them rising too much too fast.

    The Cantillon effect is not an argument against the morality of money production, it is an argument against the Keynesian notion that printing money benefits the general economy and get "get the economy out of recession."

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  18. 1/2

    If any process that caused Cantillion effects was ruled out because of alleged impairments to economic calculation, then all injection of money via a capital account would be unacceptable under any such Austrian/libertarian argument.

    The concept of economic calculation extends beyond just the money itself. It applies to the production of money as well. Economic calculation subsumes how money production itself is valued relative to other commodities as well as other industries entirely, and whether or not money production should be expanded, or whether other goods production should be expanded. This is in fact a critical aspect of economic calculation.

    It might be asked, OK, if printing money in a fiat system messes up economic calculation and causes the business cycle, then wouldn't digging up gold in a gold standard do the same? What is the "correct" amount of money production then? What is the mechanism by which money production is put into harmony with other real goods production? Here is where the Austrian discovered concept of economic calculation gets really interesting in my judgment.

    The way money production and real goods production are put into harmony, that is, how economic calculation in money specifically, and economic calculation in the capital structure of the real economy are put into harmony, such that economic calculation distortions are minimized, is through the praxeologically based law of marginal utility, the uniformity of profit principle, and of course supply and demand.

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  19. 2/2

    Observe. Suppose that real production of wealth expands, and the production of money remains the same, such that the marginal value of money rises relative to real goods. What would happen? Well, the prices of real goods, and hence the profitability in real goods production, would fall relative to money production profitability. That would in turn lead to an incentive to invest relatively more capital in money production and relatively less capital in real goods production. This will then expand money production relative to real goods production, and the "price" of money would fall (meaning the purchasing power of money would fall) and hence profitability in money production would fall relative to real goods production, such that the differences in profit tend to be eliminated. Of course I am ignoring risk and other determinants of profit for simplicity, in reality the rates of profit will probably differ, but this does not contradict the principles that all else equal, investors prefer more profits to less profits, and that the rates of profit in different industries tend to equalize each other over time.)

    As I noted in one of my previous responses in one of your previous submissions, rates of interest are a function of the rates of profit. Since the pursuit of profit and avoidance of losses tends to balance money production with real goods production, and that profits are a function of time preference, and that interest rates follow profits, it means that interest rates will tend to reflect the true time preferences of individuals.

    Now, with central banking / fractional reserve systems, this balancing tendency between money production and real goods production no longer becomes a function of individual marginal utilities and individual time preferences. It becomes a function of the arbitrary whims of central bankers to print money.

    The economic calculation criticism of socialism is not just limited to socialism, it also applies to ANY central planning to any degree, including centralized money production in an otherwise market oriented system.

    Central bankers simply do not, and cannot, predict what the individual marginal utilities of millions of people will be, such that they know what interest rates ought to be, as opposed to what they would be in a free market process where individual marginal utilities would in fact be manifested in what prices people pay for goods and what interest rates they will lend and borrow money.

    This is why inflationist systems messes up economic coordination. It's not because of the inflation per se, it's because those who control the printing presses are not operating in a market process system and do not know how much money should be produced and what interest rates should be, and so they print and they set rates INCORRECTLY. And this is not a problem of intelligence of central bankers. It doesn't matter how intelligent they are. They are by the nature of reality unable to predict what choices people will make and what values they will have, which determine all economic data.

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  20. Only if money production itself came under the umbrella of economic calculation, of profit and loss, can a division of labor society filled with individuals each of whom have no knowledge what the structure of production should be, be able to put into harmony money production relative to real goods production.

    "Free banking" that contains fractional reserve is a step in this direction, but it still does not get there because while it rejects government violations of legal principles of contracting, it condones private fraud. But because even fractional reserve banks have one foot in the market process, of economic calculation, of profit and loss, it results in better outcomes compared to central banking systems. This is why we have seen that the two worst economic calamities in US history, the Great Depression and the current Great Recession, occurred under central banking, and not free banking with fractional reserve, or free banking without fractional reserve.

    Similarly, it's also why there were repeated booms and busts during the free banking with fractional reserve during the 19th century, as opposed to no booms and busts during the age of 100% reserve in 17th century Amsterdam.

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  21. Moreover, there is a further difficulty: Cantillon’s monetary theory holds that increases in the velocity of circulation (V) are equivalent to increases in the quantity of money (M), and that is not implausible. Therefore increases in the velocity of circulation would also cause Cantillon effects, and you would then have the bizarre situation where Austrians would logically have to object to any changes in the velocity of circulation as well, to prevent Cantillon effects.

    This is false. Increases in the so-called "velocity of money" are not increases in the quantity of money. They are increases in the amount of times a given money supply is turned over in trades, which in other words means how many goods and services are produced and exchanged over a period of time.

    The more goods and services are exchanged per unit of time, the higher the "velocity of money" will be, and this is true even with an unchanged quantity of money. Velocity is, then, the number of times money passes hands, which is the same thing as saying how many times goods and services are produced and sold.

    The Monetarist equation PV = MQ, or, equivalently, MV = PT, is fallacious. See Rothbard's "Man, Economy and State", ch 11, Sec. 13.

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  22. This issue is related directly to Hayek’s attempt to make money neutral as a way of preventing an Austrian trade cycle from happening.

    Utterly false. Hayek only utilized the concept of neutral money in "Prices and Production" as a mental tool only, so that he can better understand money's affect on production, just like he used equilibrium as a mental only so that he can better understand non-equilibrium in the market. They are not characterizations of the market, nor are they advocacies of what a market should be. They are MENTAL TOOLS only.

    Hayek, in "Prices and Production," pgs 129-130, writes:

    "It is frequently assumed that the concept of neutrality provides a maxim which is immediately applicable to the practical problems of monetary policy. But this need by no means be the case, and the concept was certainly not primarily intended for that purpose. It was destined in the first instance to provide an instrument for theoretical analysis, and to help us to isolate the active influences, which money exercised on the course of economic life."

    Hayek utilized the concept of neutral money so that he might form a better understanding of the NON-NEUTRALITY of money and how money would affect production.

    Piero Sraffa had already attacked Hayek for this unrealistic idea in 1932 when reviewing Prices and Production (1931):

    “The starting-point and the object of Dr. Hayek’s inquiry is what he calls ‘neutral money’; that is to say, a kind of money which leaves production and the relative prices of goods, including the rate of interest, ‘undisturbed,’ exactly as they would be if there were no money at all. This method of approach might have something to recommend it, provided it were constantly kept in mind that a state of things in which money is ‘neutral’ is identical with a state in which there is no money at all: as Dr. Hayek once says, if we ‘eliminate all monetary influences on production ... we may treat money as non-existent’”

    That isn't an "attack." That is just a repeat of what Hayek said.

    By the time of Denationalisation of Money: The Argument Refined. An Analysis of the Theory and Practice of Concurrent Currencies (1990; 1st edn 1976), even Hayek is quite clear that any attempt to create neutral money in the real world is pointless:

    “Although I have myself given currency to the expression ‘neutral money’ (which, as I discovered later, I had unconsciously borrowed from Wicksell), it was intended to describe this almost universally made assumption of theoretical analysis and to raise the question whether any real money could ever possess this property, and not as a model to be aimed at by monetary policy. I have long since come to the conclusion that no real money can ever be neutral in this sense, and that we must be content with a system that rapidly corrects the inevitable errors.”

    What a dishonest characterization of what Hayek argued. You are insinuating and making it appear as if Hayek originally advocated for neutral money as a policy tool, then along comes the wizard Sraffa to the rescue, who sets Hayek straight with an "attack", and then Hayek with his tail between his legs retreats into a corner and "admits" he was wrong all along to advocate neutrality as a tool.

    What a load of bollocks.

    Hayek ALWAYS held money neutrality to be a starting point, a mental tool, to understand how money is not neutral on production. Sraffa did not "attack" Hayek for advocating neutrality as a policy tool. Sraffa just wrote that Hayek used neutrality as a starting point in theoretical analysis. That is not an attack on Hayek advocating for neutrality as a policy tool. You're wrong.

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  23. The search for a monetary policy that has no Cantillon effects is a bizarre quest for fools, as it requires making money neutral. As Hayek himself found out this is impossible:

    Hayek did not "find out" it is impossible. He always knew that money has a real effect on production. He always used neutrality as a mental tool only.

    This is the second time you have misrepresented Hayek's usage of various mental tools as if Hayek held them to be actual characteristics of the market. The first misrepresentation was when you fallaciously accused Hayek of holding that the market actually reaches equilibrium, instead of the truth, which is that he held that it is a mental tool only. Now you're misrepresenting Hayek by fallaciously accusing him of advocating for neutrality as a policy tool when it too is also a mental tool only.

    You are either being purposefully intellectual dishonest, or you are so fixated on spreading the agitprop mantra "Sraffa refuted Hayek" that you set up straw men instead of Hayek's actual arguments.

    “Hayek’s first approach to monetary problems was to search for a way to neutralize the effects of supply of and demand for money which were independent of at odds with the supply and demand for real goods: a concept of ‘neutral’ money.

    Hayek did not try to "search for a way to neutralize money." He searched for a way to understand money and its effect on production, and his theoretical starting point was neutrality of money. Sraffa misrepresented Hayek's position.

    Even in a Rothbardian world of 100% reserve banking and commodity money, Cantillon effects would still happen if money entered via an anarcho-capitalist country’s capital account, and if increases in the velocity of circulation occurred.

    No, only if money was produced, meaning commodity dug up from the Earth, NOT if velocity increased. An increased velocity is not a causal concept. It is a reflection of an increased rate of spending, which means an increased rate of purchasing goods and services over time. With a given fixed quantity of money (Did you see that? Fixed quantity of money. Another mental tool, and not a policy prescription or characterization of the market), an increased velocity means that the same supply of money is being turned over in exchanges more often. That is NOT inflation and it does NOT set into motion the Cantillon effect.

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  24. "Paying down debt is exactly equivalent to saving, so at the very least such a policy would mean that debts are eliminated sooner and so the excess demand for money ends sooner -"

    "exactly equivalent to saving"? I don't think so.

    Actually he's right. Saving is using money for purposes other than consumption. Paying down debt is not an act of consumption. It is reducing one's liability, which increases one's net assets. If one pays down their debt, that requires them to abstain from consuming.

    If you pay down the principal of your debt you destroy broad money. The bank writes down the principal listed on the asset side of its balance sheet. You have not bought producible commodities with that money.

    Only if the debt was created through credit expansion would money be "destroyed" through repayment. If someone saves $1000 from their income, then lend it to someone else, the borrower does not "destroy" money by paying back the $1000 loan. The money supply remains the same.

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  25. The system is probably headed towards another financial crisis, with the failure to purge the bad assets and non-performing loans, and no proper financial regulation.

    Bad assets and non-performing are prevented from being purged, i.e. the economy does not go through a needed correction, when the government prints and spends money in an attempt to reverse the correction.

    You just made a case against Keynesian policy, and you just made an argument consistent with the Austrians!

    That's funny.

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  26. Are there any Austrians or free market advocates saying that the Cantillon effect by itself is sufficient to reject government spending? ABSOLUTELY NOT.

    In other words, you agree with the fundamental point of this post.

    But if the supply increase is large enough, which is equivalent to saying if the Cantillon effect is large enough, then gold would cease to be money entirely, and the general population would come to use some other commodity as money instead.

    How? By inducing hyperinflation as the gold entered an economy, was used to buy goods and services, bidding up their price, and causing loss of confidence in the gold-based currency?

    Such a process would not protect the value of the gold-based currency from collapsing.

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  27. "Suppose that real production of wealth expands, and the production of money remains the same, such that the marginal value of money rises relative to real goods. What would happen? Well, the prices of real goods, and hence the profitability in real goods production, would fall relative to money production profitability. That would in turn lead to an incentive to invest relatively more capital in money production and relatively less capital in real goods production. This will then expand money production relative to real goods production, and the "price" of money would fall (meaning the purchasing power of money would fall) and hence profitability in money production would fall relative to real goods production, such that the differences in profit tend to be eliminated

    Keynes already dealt with this idea:

    "In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible” (Keynes 1936: 230–231).

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  28. "An increased velocity is not a causal concept."

    That human beings are acting through increased economic activity and causing increased velocity is obvious. That doesn't refute the idea that this increased velocity causes Cantillon effects.

    In fact, in high-inflation or hyperinflation episodes inflation rates exceed the growth rates of the money supply, because the velocity of circulation of money increases with high inflation rates.

    It is absurd to say that this has no affect on relative prices (i.e, have Cantillon effects).

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  29. "Similarly, it's also why there were repeated booms and busts during the free banking with fractional reserve during the 19th century, as opposed to no booms and busts during the age of 100% reserve in 17th century Amsterdam."

    No booms and busts??

    Have you never heard of the tulip bubble of 1636–1637?

    No busts?:

    "However, in February 1637 prices suddenly broke down and tulip bulbs could not be sold at 10 % of their peak prices. In subsequent years the price decline continued and caused a deep recession in the Netherlands."

    Matthias Salge, Rational bubbles: theoretical basis, economic relevance, and empirical evidence, p. 2.

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  30. Does anyone have any info on Amsterdam 100% reserve banking? I mean, how did the banks lend out - were there time deposits or something?

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  31. If Holland in the 17th century really had (as Pete maintains) a 100% reserve banking system, then the existence of the tulip bubble and following recession disproves the idea that such a system would prevent business cycles.

    As for some readng on it:

    Huerta de Soto, Money, Bank Credit, and Economic Cycles, p. 98ff.

    George Selgin provides a critique of the Rothbardian view here:

    http://www.freebanking.org/2011/05/31/the-state-and-100-percent-reserve-banking/

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  32. Are there any Austrians or free market advocates saying that the Cantillon effect by itself is sufficient to reject government spending? ABSOLUTELY NOT.

    In other words, you agree with the fundamental point of this post.

    Well, yeah, the fundamental point stands and I agree with it, but you did say that Austrians are saying it's sufficient to reject government spending, which is not true.

    But if the supply increase is large enough, which is equivalent to saying if the Cantillon effect is large enough, then gold would cease to be money entirely, and the general population would come to use some other commodity as money instead.

    How? By inducing hyperinflation as the gold entered an economy, was used to buy goods and services, bidding up their price, and causing loss of confidence in the gold-based currency?

    In principle yes, but in practice, gold/silver and other commodity monies are the least susceptible to hyperinflation out of all other possible monies. It's one of the reasons commodities have historically been used as money for many thousands of years.

    Such a process would not protect the value of the gold-based currency from collapsing.

    You say "protect" as if people's property rights are being violated in this case, when they are not. If freedom of contract and respect for property rights results in a transition from one money to another, due to changing technology, resources, and valuations, then what should be protected are the rights of individuals to freely contract with the new money if they so choose. What should not be protected are the special interests of the older money producers, under the dubious name of "stability."

    A movement into alternative money already implicates a collapse of the original money.

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  33. 1/2

    "Suppose that real production of wealth expands, and the production of money remains the same, such that the marginal value of money rises relative to real goods. What would happen? Well, the prices of real goods, and hence the profitability in real goods production, would fall relative to money production profitability. That would in turn lead to an incentive to invest relatively more capital in money production and relatively less capital in real goods production. This will then expand money production relative to real goods production, and the "price" of money would fall (meaning the purchasing power of money would fall) and hence profitability in money production would fall relative to real goods production, such that the differences in profit tend to be eliminated

    Keynes already dealt with this idea:

    Oh brother...

    "In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible” (Keynes 1936: 230–231).

    That last statement is the crucial statement, but it is merely an unbacked claim. If there is a rise in the demand for more commodity money, then it does in fact follow that there will be "maximum diversion" of investment at the world stage, provided of course capital is free to move from place to place, which is of course already implied in the Austrian framework anyway, so any governmental barriers that prevent international capital re-allocations cannot serve as an argument against what I said above. Keynes "dealt" with it yes, but from what you have cited, it does not conclusively refute what I said.

    Of course, the proximate standard for when and how capital will be diverted, as the rates of profits between real goods production and money production become larger and larger, is the profit motive of investors. At some point, should the rates of profit were to become so great, then even the most strict governmental barriers would not be enough to stop the international movement of capital and commodity money. The profit motive will not only eventually overcome any risks of getting caught, but even the individuals in government, the regulators, will not be able to withstand it, because either they will personally invest in commodity production out of the purview of the public record, against local laws, or they will accept bribes from commodity producers who are earning such high profits on account of the heretofore prevention of capital investment in gold production (which is economically the same as enforcing a monopoly which earns higher profits than normal).

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  34. 2/2

    The principles I laid out above when it comes to commodity money production, are more powerful than laws and regulations. At some point, discrepencies in profit will be just too difficult to tolerate, that even regulators will not be able to maintain it. You see this now in statism with MONOPOLY regulators who have ultimate authority.
    Imagine a world without monopoly regulators.

    The chances of commodity money production lagging real goods production for extended periods, away from what freely operating individual marginal utility would generate, thus resulting in persistently high "abnormal" profits in money production relative to real goods production, is, for all intents and purposes, zero. If a black market can exist in totalitarian states like the former USSR, where the punishment was death, then surely in a social democracy, where the punishment would be more along the lines of money fines or imprisonment, won't stop it either.

    In fact, in this country the drug trade is a prime example. The drug trade and the punishments governments dole out, and the high profits in the industry, can be viewed as economically similar to a commodity money economy that is not, due to governments punishing those who seek to use commodities as money, producing enough commodity money to satisfy the demand for commodity money relative to the demand for other goods and services. Perhaps this is the reason why gold and silver persistently fetch high dollar prices. Just like drugs are still demanded despite their being illegal for consumption, gold and silver are also still demanded for storing value (money) despite gold and silver being outlawed as money.

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  35. "An increased velocity is not a causal concept."

    That human beings are acting through increased economic activity and causing increased velocity is obvious. That doesn't refute the idea that this increased velocity causes Cantillon effects.

    Yes, it is true that increased "economic activity" does not serve to refute the claim that increased velocity causes Cantillon effects. But that was not my argument. My argument is that the claim can be refuted by understanding the fact that increased velocity does not bring new money into existence. Increased velocity, all else equal, must come out of the existing money supply. All increased velocity means is that the rate of selling goods and services over time has increased. That does not generate Cantillon effects because people have to produce and sell at a more rapid pace in order for the increased velocity to be made manifest. Those who sell at a more rapid pace are not receiving new money that did not exist before. They are receiving new money that already existed, and already owned by those who themselves acquired that in their exchanges through themselves selling goods and services.

    What increased velocity means is simply that the rate of selling goods and services has increased. The Cantillon effect does not occur under this process because no new money has been introduced that did not already exist before.

    In fact, in high-inflation or hyperinflation episodes inflation rates exceed the growth rates of the money supply, because the velocity of circulation of money increases with high inflation rates.

    This makes no sense. Saying that with high inflation, prices increase faster than the rate of money production, because velocity increases with high inflation, is equivalent to saying that an increase in velocity increases prices. That is not true. Increases in velocity can only occur through an increased speed of goods and services production and selling, and increasing the speed of goods and services production and selling does not put any upward pressure on prices. If anything, selling more goods and services can only put downward pressure on prices, if prices are going to be affected.

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  36. It is absurd to say that this has no affect on relative prices (i.e, have Cantillon effects).

    Relative price changes are not the core of the Cantillon effect. Yes they take place, but these relative price changes are secondary to the main principle of the Cantillon effect, which is the redistributive effects of increasing the supply of money.

    "Similarly, it's also why there were repeated booms and busts during the free banking with fractional reserve during the 19th century, as opposed to no booms and busts during the age of 100% reserve in 17th century Amsterdam."

    No booms and busts??

    Have you never heard of the tulip bubble of 1636–1637?

    Yes, I have heard of the tulip craze, but it was not an economic bubble. It was a short term, rapid, but only partial market, "boom", much like furbies in the 2000s, and hoola hoops in the 1970s, after which it rapidly declined.

    It was not your classic example of a boom and bust that we now typically associate with whole economies. See the work of Doug French:

    http://mises.org/daily/2564

    No busts?:

    "However, in February 1637 prices suddenly broke down and tulip bulbs could not be sold at 10 % of their peak prices. In subsequent years the price decline continued and caused a deep recession in the Netherlands."

    It did not cause a "deep" recession in the Netherlands. It would have been relatively benign, but many tulip bulb speculators and growers were wiped out, because the Dutch government cancelled virtually all tulip contracts, which prevented tulip growers from finding new buyers or recover money owed to them by buyers supposedly under contract.

    The reason why the quantity of money grew so much so rapidly, was because the bank's international prestige attracted gold from around the world, and because of free coinage laws that served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips.

    I see no reason why a universal 100% gold standard will lead to such a localized speculative mania, since all banks all over would be equally attractive, and there would be no government intervention that would lead to localized "free coinage" while everywhere else there would not be, which would lead to force-based, not market based, diversions of commodity money away from non-free coinage areas into free coinage areas.

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  37. If Holland in the 17th century really had (as Pete maintains) a 100% reserve banking system, then the existence of the tulip bubble and following recession disproves the idea that such a system would prevent business cycles.

    The tulip mania was not an economy wide boom and bust, and the reason why it took place was because of a very acute and rapid influx of gold money into the country, due to, ironically, the bank's reputation of soundness relative to other banks in other nations.

    If the US were to adopt 100% reserve banking, and no other country did, then we should also expect that the US banking system would carry such prestige that there might be a huge influx of money into the US economy, which would of course generate a boom, and once the money influx stops, there would no doubt be a correctional period (bust).

    This is why only an international movement towards 100% reserve gold would avoid that kind of short term correction.

    The principle here is that if a good idea is implemented in one location only, there will probably be too rapid of an increase in activity, followed by an equally rapid levelling off of activity, which would most likely require a painful correction. But this cannot go one over and over and over again the way it occurs with fractional reserve central banking systems.

    Any boom and bust in a 100% gold system could only take place if the 100% reserve is not universal, and then, it would be a one time event in the initial periods of the transition, after which there would be no more reason for all the world's gold to flow into that 100% reserve country, since most of the money is already there.

    These types of booms are similar to the initial boom that the US experienced after 1971, when Nixon closed the gold window. For some time after, since the world accepted the US dollar as reserve, the US was able to experience a rather large boom since they could just print money and buy up real wealth from around the world and import it. The rest of the world did not have this ability, which is why they couldn't have such a boom themselves. But with the good, came the bad, because by having the ability to print money that the world accepts, the US will eventually have to go through a massive correction as the world stops accepting the dollar. At that point, there will be a huge depression. But does this fact alone say that paper money necessarily generates a boom bust? No, it actually does not. For it is possible in principle for money to be paper, and no boom and bust will be generated, as long as paper loans don't exceed paper savings.

    With one country going 100% reserve gold, it's the exact mirror. There will likely be a short term boom, followed by a correction, but that in itself does not mean that 100% reserve generates booms and busts. The boom and bust was generated by a discreprency between the local 100% reserve and the rest of the world's fractional reserve, and in the case of Holland 17th century, "free" coinage which only exacerbated the money growth. Speculation and booms and busts cannot be made permanent if the world was 100% reserve. There might be a transition period of correction, but almost certainly not the recurring booms and busts you see with fiat money.

    The only possible boom bust with 100% reserve banking the world over is if there is a large discovery of commodity money, and then, only if that money goes into investment. But I think theory and history show that recurring booms and busts are not possible with 100% reserve. After all, after the tulip mania ended, for the next 60 years or so, there were no recurring booms and busts in Amsterdam.

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  38. Didn't Keynes talk about a "generalised Quantity Theory of Money" that was separate from the classical Quantity Theory of Money? I think it was in Book V of [i]The General Theory of Employment, Interest, and Money[/i].

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  39. And, anyway, Austrians confronted with the tulip mania have already seen it refutes their theory and tried to explain it here:

    Andy Duncan, "Austrian Light on the History of Bubbles," Mises Daily, May 31, 2010
    http://mises.org/daily/4341

    According to this, it now turns out that the 100% reserve, free market Dutch system wasn't even this at all, because

    (1) the Dutch policy of 'free coinage' "meant that more bullion was turned into coin than a free market would otherwise have produced."

    (2) the Bank of Amsterdam was founded in 1609 and given a state monopoly on the trading of all specie.

    (3) the Dutch state naval fleet stole bullion from the Portuguese eastern empire and silver bullion from the Spanish western empire, increasing the money supply, and

    (4) there were also free flows of gold/commodity money to Amsterdam, owing to free trade and investment flows, and rising flow of specie from the new world.

    Now, while (1), (2), and (3) were market distorting factors, number (4) was not. It is, moreover, unclear to what extent (1), (2), and (3) expanded the money supply compared to (4).

    And even if factors (1), (2), (3) had not existed, in theory factor (4) could cause the necessary monetary expansion to fuel bubbles under a 100% reserve system anyway, so Rothbardians have

    (1) not dealt with that problem and
    (2) now have no empirical evidence whatsoever of any system in real world that has been a 100% reserve banking system free from market distortions.

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  40. "Yes, I have heard of the tulip craze, but it was not an economic bubble. "

    Not an economic bubble?!

    "This encouraged trading in tulips by all members of society; Mackay recounted people selling or trading their other possessions in order to speculate in the tulip market, such as an offer of 12 acres (49,000 m2) of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy that was purchased for a basket of goods (shown at right) worth 2,500 florins."

    http://en.wikipedia.org/wiki/Tulip_mania

    "It did not cause a "deep" recession in the Netherlands. It would have been relatively benign,

    I see. Zero evidence actually presented.

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  41. More proof that there was no bubble:

    "In 1635, a sale of 40 bulbs was recorded for 100000 Dutch florins, which was much more than the 150 florins that the Dutch people were earning on average in a year. Single bulbs such as the Viseroij ... sold for between 3000 and 4,200 florins, an amount equal to 15 to 20 times a year's salary for school craftsman."

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  42. And, anyway, Austrians confronted with the tulip mania have already seen it refutes their theory and tried to explain it here:

    Andy Duncan, "Austrian Light on the History of Bubbles," Mises Daily, May 31, 2010
    http://mises.org/daily/4341


    The tulip mania does not refute the Austrian theory. It confirms it. If fiat money can generate booms and busts, then surely a commodity standard that mimics fiat would have the exact same economic effects.

    The question is whether a boom financed by a large commodity influx can generate repeated booms and busts. Of course a rapid influx of commodity money will generate a boom that would later require a correction if the influx levels off. No Austrian disputes this. But you won't see recurrent booms and busts. Not unless there are recurrent rapid influxes of commodity money, which in terms of world production of gold, does not take place. There might be partial areas of the world that have rapid influxes of money, which are accompanied by outflows of money elsewhere, which will lead to a correctional period of bust in the outflow area and boom in the inflow area. But overall, a 100% reserve system has not once ever lead to a bubble covering the entire area commodity money was used.

    It's the same in principle as individual firm to firm or industry to industry changes. Individual firms can experience a massive inflow of money, which may lead to the firm owners to speculate and make the wrong investments, if their sudden rapid inflow of money is followed by a rapid collapse. You see this all the time in the market. But these events accompany an equal and opposite outflow and then inflow of money at other firms. Overall, there is no economic boom and bust. There was a partial boom and a partial bust, then a partial bust and partial boom.

    In other words, the size of the market must be taken into account when we speak of "economic booms and busts."

    Since the market in Holland was not an isolated market, you have to consider all the world markets that experienced a gold outflow, which must have financed the gold inflow in Holland. The boom in Holland was accompanied by busts elsewhere. There was no economy wide boom, meaning Holland + Exporting gold economies. Holland was sort of like an individual firm that experienced a rapid increase in investment, only to be followed by a successive outflow of investment.

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  43. Also,

    Similarly, it's also why there were repeated booms and busts during the free banking with fractional reserve during the 19th century, as opposed to no booms and busts during the age of 100% reserve in 17th century Amsterdam.

    There was a clear trade cycle in Holland in the 17th century with booms then recessions in early 1620s, and 1626-1631, and 1660s.

    Paul F. State, A brief history of the Netherlands, p. 82.

    And there clearly was fractional reserve banking going on in Holland in the 17th century anyway:

    "As is evident, during this entire period, to all intents and purposes the Bank of Amsterdam maintained a 100-percent cash reserve. This allowed it, in all crises, to satisfy each and every request for cash withdrawal of deposited florins. Such was true in 1672, when panic caused by the French threat gave rise to a massive withdrawal of money from Dutch banks, most of which were forced to suspend payments.

    Huerta de Soto, Money, Bank Credit, and Economic Cycles, p. 100.

    If these banks failed or suspended payments they were FR banks.

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  44. Now, while (1), (2), and (3) were market distorting factors, number (4) was not. It is, moreover, unclear to what extent (1), (2), and (3) expanded the money supply compared to (4).

    My guess is that (4) was minimal, because after the tulip mania collapsed, there was still gold inflow from the world, but there were no recurrent booms and busts thereafter during the 17th century. The next boom and bust occurred after the 100% reserve was abandoned, a couple of generations later, into the late 17th, early 18th century.

    And even if factors (1), (2), (3) had not existed, in theory factor (4) could cause the necessary monetary expansion to fuel bubbles under a 100% reserve system anyway, so Rothbardians have

    (1) not dealt with that problem and

    (2) now have no empirical evidence whatsoever of any system in real world that has been a 100% reserve banking system free from market distortions.

    First, empirical evidence is not what provides support for economic propositions, because mutually exclusive economic theories can each be consistent with past economic data.

    Second, the problem of rapid influxes of commodity money into a 100% reserve commodity money economy has in fact been "dealt with," ironically in some of the Austrians sources you noted. Rothbard dealt extensively with the issue of rapid increases in the supply of moneyin 100% reserve commodity economies


    "Yes, I have heard of the tulip craze, but it was not an economic bubble."

    Not an economic bubble?!

    No. It was a sector specific "bubble." There was not an economy wide bubble such that many separate industries each went through a boom and bust at the same time, the way modern fractional reserve economies go through boom and bust.

    In 2008, not only did the banking sector collapse, but also the car industry, the retail industry, construction, manufacturing. Virtually all industries were affected. In the tulip craze, it was tulips that boomed then bust.

    Unfortunately, in today's economic academia, there arose a penchant for calling economy wide bubbles after specific sectors, for example "the nasdaq bubble", and "the housing bubble." These are misnomers because the bubble was actually much more general across the economy. The reason why specific names are used is because of the effects of central banking. Central banks tend to reverse economy wide corrections, but they tend to fail to reverse corrections in ALL sectors. Usually one sector goes first, then other sectors would go too, but central banks usually print enough money in time to stop the corrections from spreading from the initial problem sector.

    So instead of seeing an economy wide correction in 2008, we saw more of a housing correction only, while other sectors were "saved." So we say "housing bubble" because the first industry to go belly up was housing. The entire car industry in the US would have gone through major corrections as well, and much of everything else too, if the Fed did not print money to reflate the bubble. But they did, and all the problems were not flushed out of the economy, which is why you yourself admitted that a collapse is coming due to a failure to purge the malinvestments holding back recovery.

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  45. "It did not cause a "deep" recession in the Netherlands. It would have been relatively benign,

    I see. Zero evidence actually presented.

    Well, I can't point to you a 17th century Holland that contained a government that did not cancel all tulip bulb contracts. I can only point you to a 17th century Holland that did cancel the contracts. I can't point to you a 17th century Holland that did not make "free coinage" legal to match the rest of the world. I can only point you a 17th century Holland that did make it legal whereas everywhere else it was illegal.

    What I can point to you is that Austrian economics does accept that a boom could potentially take place on the basis of a rapid and temporary influx of commodity money in a 100% reserve system, but having said that, 100% reserve commodity money is the system that minimizes it.

    We can postulate using economic theory that in a world stage, with 100% reserve gold, should all the gold already be mined and used in circulation, then the supply of money would be fixed, and if this persists, no boom and bust cycle would be possible, unless there is a rapid influx of commodity money from space.

    Imagine being a space traveller, and finding a planet made of pure diamond, and then extracting trillions of tons of it, and then travelling to a planet that has had a diamond money standard and have not had a boom and bust for millenia, since all the diamonds were mined out of that planet, and then you go there and start to make purchases with your diamonds. No doubt the local economy would go through an inflationary boom, and if your expenditures went on for long enough, then once you exhaust your supply of diamonds, assuming they still accept diamonds as money, there will no doubt be a huge correction on the planet as they now have to adapt to the new money conditions and all those who speculated erroneously, will suffer tremendous losses. A recession period will occur.

    The question is, does their millenia of no boom or bust, only to be followed by boom and bust on account of your appearance, mean that 100% reserve commodity money fails to prevent boom and bust? I guess it would depend on what you mean by fail. If you mean that 100% reserve will never accompany a boom and bust for trillions of years, then of course the answer is no. But we can say that 100% reserve commodity money minimizes the boom and bust.

    On Earth, there has never been a world boom until the entire world went on paper. We are currently in the initial stages of a worldwide monetary meltdown. Fiat paper, while being able to delay corrections and thus make it empirically appear as a way to stop booms and busts, contains a seed of its own destruction, and will make localized tulip manias seem like Wal-Mart making one penny less in sales.

    I can't give you empirical evidence that 100% reserve commodity money will forever stop boom and bust, not only because there is no empirical evidence, but also because in theory, it is possible for a boom and bust to occur in 100% reserve.

    What I can say is that in 17th century Holland, there was no economy wide boom and bust, meaning in most industrial sectors. There was speculation in tulip bulbs brought about by an influx of gold money. Many people lost lots of money. But the textiles industry, the (non-tulip) agricultural industry, the banking industry, these industries did not experience a boom and then bust, so it is wrong to say that Holland's ECONOMY went through a boom and bust.

    Even with the huge influx of gold, the 100% reserve system was able to localize the boom in tulips as opposed to everything like we get in 2011 with fractional reserve.

    The economy wide extent of fractional reserve makes the entire economy go through boom and bust all the time.

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  46. Also you don't even need FRB for the broad money stock to be expanded by fiduciary media: mere use of bills of exchange signed by merchants who do not yet have the money to pay their IOUs will do it, as these bills of exchange are widely used by business people as a means of payment before actual money is claimed for them when they are due.

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  47. More proof that there was no bubble:

    "In 1635, a sale of 40 bulbs was recorded for 100000 Dutch florins, which was much more than the 150 florins that the Dutch people were earning on average in a year. Single bulbs such as the Viseroij ... sold for between 3000 and 4,200 florins, an amount equal to 15 to 20 times a year's salary for school craftsman."

    Yes, there was no economic bubble. There was a boom in tulips, much like there was a boom in furbies and hoola hoops, only the boom in tulips was financed by influx of money, rather than reducing spending elsewhere.

    Also,

    Similarly, it's also why there were repeated booms and busts during the free banking with fractional reserve during the 19th century, as opposed to no booms and busts during the age of 100% reserve in 17th century Amsterdam.

    There was a clear trade cycle in Holland in the 17th century with booms then recessions in early 1620s, and 1626-1631, and 1660s.

    Paul F. State, A brief history of the Netherlands, p. 82.

    I checked pg 82, and I see no mention of the above claims.

    It does mention the 1660s, when it states that there was an "agricultural depression" in the 1660s due to a massive influx of agricultural competition from English grain and dairy (which is not an economy wide bust by the way), but there is no mention of the 1620s, nor 1626-1631.

    What are you talking about?

    And there clearly was fractional reserve banking going on in Holland in the 17th century anyway:

    "As is evident, during this entire period, to all intents and purposes the Bank of Amsterdam maintained a 100-percent cash reserve. This allowed it, in all crises, to satisfy each and every request for cash withdrawal of deposited florins. Such was true in 1672, when panic caused by the French threat gave rise to a massive withdrawal of money from Dutch banks, most of which were forced to suspend payments.

    Yes, it was not always exactly 100%. But the standard was 100% reserve, and for the most part, it was maintained.

    If these banks failed or suspended payments they were FR banks.

    Signal-wise, yes, but it's not causal in the If-then" way you stated it.

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  48. It seems to me that a free-banking system only exacerbates the exact problem that occurred in most of the financial crises we have seen to date. The correlated failure of banks is a feature of such crises, and if we are to depend on voluntarily-accepted currency, then a crisis of confidence in these same banks only exacerbates the problem by dramatically reducing the money supply exactly when demand for money is greatest. I have yet to see an argument for that sort of monetary system that overcomes this basic problem.

    Many of the historical details regarding the dramatic failures of semi-free systems (many based on commodities and directly derived bills of credit) can be found in later editions of Kindleberger's classic Manias, Panics, and Crashes.

    In addition, it's hard to see that the principles of supply and demand can function effectively in a hypothetical market for money creation, even ignoring these other gross failures. The marginal cost of printing money is always less than the value of the money (which is the whole point of paper currency), and so seigniorage is inevitable and profit excessive. For the extreme case, of course, see present-day Somalia, where supply and demand drives the issuance of banknotes and so they are worth nothing but the paper they are printed on - and a whole industry survives on the seigniorage from printing those notes. Money prices are not at all responsive to the demand for money, but instead to the demand for the underlying commodity -- paper. The same is true in any commodity-based system, which is why those systems are particularly vulnerable to booms and busts.

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  49. Also you don't even need FRB for the broad money stock to be expanded by fiduciary media: mere use of bills of exchange signed by merchants who do not yet have the money to pay their IOUs will do it, as these bills of exchange are widely used by business people as a means of payment before actual money is claimed for them when they are due.

    As long as there are not more property titles than there are property objects, then FRB is not taking place. Bills of credit and other IOUs are not in themselves generative of fractional reserve. Only if there are more property titles to money than exists money, does frb arise.

    If IOUs were used as money, then that in itself is not fractional reserve. Only if the underlying money is given more than one owner, would those IOUs be reflective of frb.

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  50. We can postulate using economic theory that in a world stage, with 100% reserve gold, should all the gold already be mined and used in circulation, then the supply of money would be fixed, and if this persists, no boom and bust cycle would be possible, unless there is a rapid influx of commodity money from space.

    Also this is plainly false. There is no way to avoid private quasi-money creation, whether it's in the form of bonds, or loans, or credit, or whatever. At some point in any economy, a risky enterprise will fail, demand for money will increase, and if the money supply is fixed, you get a classic 'general glut' caused by negative equilibrium interest rate - a recession/depression based on an impossible price for money, the only solution to which is new money creation. A fixed money supply only makes economic downturns worse because it mutes the ability of the economy to expand and to recover.

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  51. "What I can say is that in 17th century Holland, there was no economy wide boom and bust, meaning in most industrial sectors."

    That is false. Holland's trade cycle was driven by its overseas commerce since this was the largest sector, and its own cycles spilled over into other sectors by effects on demand, investment and consumption.

    There were economy wide recessions
    c. 1615-1616, early 1620s, 1626-1631, c. 1645 and 1660s.

    Lee A. Craig and Douglas Fisher, The European macroeconomy: growth, integration and cycles 1500-1913, p. 133-134.

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  52. "As long as there are not more property titles than there are property objects, then FRB is not taking place. "

    That's precisey the point: there are.

    If I am a merchant with a good repuation, I can get a bill of exchange today to pay for goods without having the commodity money to pay for it.

    The bill of exchange will function as a mean of payment and medium of exchange in the community (perhaps in many exchanges) until it falls due in the future after I have earned the necessary commodity money.

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  53. Ben:

    1/2

    We can postulate using economic theory that in a world stage, with 100% reserve gold, should all the gold already be mined and used in circulation, then the supply of money would be fixed, and if this persists, no boom and bust cycle would be possible, unless there is a rapid influx of commodity money from space.

    Also this is plainly false.

    "Also" this is false? Where's the first falsity?

    There is no way to avoid private quasi-money creation, whether it's in the form of bonds, or loans, or credit, or whatever.

    Sure there is. Legal enforcement of traditional property rights contracting. As long as there are not more property titles than there is property, there is no frb, despite the introduction of "quasi-money." As long as the number of "quasi-money" property titles does not exceed the number of "quasi-money" property objects, it's justified and not frb.

    At some point in any economy, a risky enterprise will fail, demand for money will increase, and if the money supply is fixed, you get a classic 'general glut' caused by negative equilibrium interest rate - a recession/depression based on an impossible price for money, the only solution to which is new money creation.

    False. If there is a general increase in the demand for money, then what people are actually seeking to acquire is increased purchasing power. In a free market, a general increase in the demand for money will result in a decline in the demand and hence prices of real assets. At some point, the increase in the demand for money will taper off as people's cash balances come to be high enough relative to prices, that the extra demand for money (actually purchasing power) is satisfied.

    It is not true that money production is ipso facto necessary or else the economy will implode. If people seek to increase their cash balances, and their desire is so great so as to generate tremendous money hoarding, and a general correction is needed, i.e. a recession ensues, then a recession will just speed up the process of prices falling, and will act to eventually halt the increasing demand for money.

    It seems like all you need to think about is "recession", and your brain turns off because it is allegedly time for government to do the thinking, to step in, to spend, to "solve" the problem. That's nonsense. Peace always has the best foundation for solving economic problems such as these. No additional coercion against innocent people is needed, nor can it solve the problems anyway. Violence simply cannot solve the myriad of complex social and economic problems that accompany recessions.

    All this does not mean that in a free market, an increase in the demand for money won't lead to more money production. It could, if the rate of profit in the money production industry becomes so large relative to the profits in real goods production, that investors will allocate less capital in real goods production and more in money production. After all, the pursuit of profit is ultimately what drives the price system and the economy in general. All the loud "I need more" mouths and all the money in the world won't be able to produce anything in a division of labor society. Only saving and investment in a context of the price system can do it.

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  54. Ben:

    2/2


    A fixed money supply only makes economic downturns worse because it mutes the ability of the economy to expand and to recover.

    Not if you understand that the short term, deeper correction that would accompany a fixed supply of money during an initial collapse, is a positive thing to happen. A recession IS a recovery. A recovery is not postponing the needed corrections to a later date by inflation, where it will be worse, so that you don't need to go through correction now, where it will be bad, and worse than it otherwise would be at that point, but far less worse than what will happen in the future once the effects of inflation wears off and the old problems arise again, in addition to new problems created on the basis of the new inflation.

    If you would rather experience a lighter recession today, and a more painful recession tomorrow, over a tougher recession today, and recovery tomorrow, then I guess I can't say you are economically wrong to ask for inflation today. But you'd still be morally wrong, because calling for inflation is just calling to exploit people who receive the new money last, and benefit the people who receive the new money first, without succeeding in lifting everyone up in general.

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  55. "What I can say is that in 17th century Holland, there was no economy wide boom and bust, meaning in most industrial sectors."

    That is false. Holland's trade cycle was driven by its overseas commerce since this was the largest sector, and its own cycles spilled over into other sectors by effects on demand, investment and consumption.

    False. You just made that up. You are hoping that it did, but you have no evidence that it did.

    There were economy wide recessions
    c. 1615-1616, early 1620s, 1626-1631, c. 1645 and 1660s.


    You already claimed that and cited a source (Paul F. State, A brief history of the Netherlands, p. 82.) that does not in fact show what you claimed it showed.

    How is this latest source:

    Lee A. Craig and Douglas Fisher, The European macroeconomy: growth, integration and cycles 1500-1913, p. 133-134.

    any different?

    I checked Google books, and this time (ass opposed to last time) the relevant pages are not shown.

    What does it say EXACTLY on pages 133-134, and was there a previous round of credit expansion, i.e. fractional reserve, prior these corrections?

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  56. Just like drugs are still demanded despite their being illegal for consumption, gold and silver are also still demanded for storing value (money) despite gold and silver being outlawed as money.

    In the United States, gold is not only legal to use as money, it's once again legal to contractually require it as payment. See 216 Jamaica Avenue, LLC. v. S & R Playhouse Realty Co., 2008.

    You may have heard that Utah recently passed legislation mandating gold-backed currency as legal tender. According to Austrians, this is bad: it does not mean gold is now decriminalized as currency (that was already the case); rather, it is now a crime for businesses to refuse it for payment of debts, similar to ordinary fiat currency.

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  57. "As long as there are not more property titles than there are property objects, then FRB is not taking place. "

    That's precisey the point: there are.

    Hence there is FRB, hence there is fraud, hence it sets the conditions of a trade cycle in motion.

    If I am a merchant with a good repuation, I can get a bill of exchange today to pay for goods without having the commodity money to pay for it.

    Sure, but you're not using money to pay for it, nor is there more property titles than there is property in your example. If you gave me your computer, and I gave you a promise to pay back to you, that is not fraud, and that is not frb.

    Even if you turn around and trade that promise to someone else, it's not fraud. Only if that paper is a transferable claim to money on demand, and that money has more than one claim to it, would it be frb and fraudulent.

    The bill of exchange will function as a mean of payment and medium of exchange in the community (perhaps in many exchanges) until it falls due in the future after I have earned the necessary commodity money.

    If the bill itself functions as money, and it's not backed by money on demand, the money of which does not have more than one property title, then it's not frb. It's a 100% reserve standard, because every money and money substitute, has at most one owner.

    With modern day FRB, the money that backs a demand deposit claim, actually has more than one ownership claim to it, because banks grant ownership titles to that money, to more than one party. They grant ownership rights to the depositor, and to the borrower as well.

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  58. Pete:

    Sorry , I meant 'also' as in 'this is an addendum to my previous comment'.

    Anyway: I think we are arguing two sides of the same coin. You said: " what people are actually seeking to acquire is increased purchasing power", and I agree.

    But deflation is substantially worse than a policy of money-supply expansion. In particular, deflation increases the burden of the debt that is the cause of the bust, so it worsens the problem. Inflation reduces that burden in real terms, and so dramatically shortens the recession.

    Is it a net transfer from creditors to debtors? Yes - that's the point. It is beneficial in aggregate because a policy of insolvency/liquidation always entails a fight over defaulted debts, which is yet another barrier to recovery.

    And the 'needed corrections' that are key to your theory can still happen. Relative price changes can and do occur in a general inflation, just as easily as in a general deflation. So nothing about the deflationary approach changes relative reallocations.

    So why not improve conditions generally through money-supply expansion?

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  59. "If the bill itself functions as money, and it's not backed by money on demand,

    Of course, it is: bills of exchange are discountable: I can take it to a bank and get money for it at a discount.

    the money of which does not have more than one property title, then it's not frb."

    I didn't say it was FRB - that is a red herring evasion.

    I said the use of bills of exchange in this manner expands the broad money stock, inflating the money supply.

    It also leads to Cantillon effects.

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  60. "If the bill itself functions as money, and it's not backed by money on demand,

    Of course, it is: bills of exchange are discountable: I can take it to a bank and get money for it at a discount.

    If it's backed by money, then the bill itself cannot be a money. Money can't be backed by money. Money is final payment backed by nothing but itself.

    If you can take it to a bank in exchange for money, at a discount or whatever, ON DEMAND, and that money at the bank also has another party with a property claim to it, ON DEMAND, then it's frb and fraudulent. If that on demand money at the bank only has one property owner, then it's not frb and not fraudulent.

    "the money of which does not have more than one property title, then it's not frb."

    I didn't say it was FRB - that is a red herring evasion.

    I didn't say you did say it was or was not frb. It's not a red herring. It's important to this whole discussion that includes frb as a major topic, among others. It is my argument. It doesn't matter what you said about that point specifically. I contributed it on my own account, not to divert but to distinguish between justified bills of credit and unjustified bills of credit.


    I said the use of bills of exchange in this manner expands the broad money stock, inflating the money supply.

    Well, sure, it does, and would be justified, as long as these quasi-money bills, and the hard-money that backs it, are all voluntary and not made mandatory money through legal tender, and as long as both the bills and the hard money do not have more than one property owner associated with them. If the bills are redeemable on demand, if the money backing the bills are the on demand property of the owner of the bill, then it's not a loan, but a transferable claim to money, that itself functions as means of exchange.

    It also leads to Cantillon effects.

    Not if the money backing the bills is redeemable by the bill holder on demand whereby the money backing the bills is not also given property ownership to another party on demand. If the money backing the bill is associated with more than one property title, then it's frb, fraudulent, and yes, it also leads to Cantillon effects.

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  61. 1/2

    Ben:

    Sorry , I meant 'also' as in 'this is an addendum to my previous comment'.

    Fair enough.

    Anyway: I think we are arguing two sides of the same coin. You said: " what people are actually seeking to acquire is increased purchasing power", and I agree.

    The key disagreement then is over the issue of whether or not a general rise in demand for money holding will generate forces to decrease prices, and if so, whether decreasing prices and stable or increasing cash balances can accomplish this task.

    I say yes, you might disagree.

    But deflation is substantially worse than a policy of money-supply expansion.

    For who? Certainly not those on fixed incomes who pay lower prices. Certainly not those who earn less income, but pay even less in terms of prices, which leads to a real rise in income.

    Deflation does not negatively affect everyone, just as inflation does not benefit everyone.

    Deflation tends to punish those who originally benefited from prior inflation at the expense of those who didn't. Deflation therefore does have a moral justice component attached to it.

    In particular, deflation increases the burden of the debt that is the cause of the bust, so it worsens the problem.

    Only for those in debt, or in too much debt relative to their income.

    A good dose of deflation will lead to people doing what I consider to be an economically healthy thing to do, which is hold higher cash balances relative to their spending streams, so that they have a better backstop for future income shocks.

    Money is supposed to be highly valued as cash, or else it could not be a money. The more money tends to be hoarded, the better. Imagine your and everyone else's cash balances remaining the same, but your spending streams, and thus prices, are in the pennies and dollars. $0.10 for a nice suit. $10.00 for a brand new car. $100.00 for a new home. And so on. Imagine that prices are so low that full employment is being tended towards such that the rate of unemployment is less than 3%. Imagine 90% resource utilization, with a 10% buffer in case the demand for goods rises in the future.

    Would this not be vastly superior to persistent and shaky credit expansion inflation, and highly indebted income earners who overcome their declining purchasing power and standard of living by going deeper into debt to finance their consumption, such that when the credit expansion house of cards collapses, there is unpayable debt and higher prices to boot?

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  62. "I said the use of bills of exchange in this manner expands the broad money stock, inflating the money supply.

    Well, sure, it does, and would be justified, as long as these quasi-money bills, and the hard-money that backs it, are all voluntary and not made mandatory money through legal tender, and as long as both the bills and the hard money do not have more than one property owner associated with them.


    So a bill of exchange

    (1) circulating as means of payment/medium of exchange unbacked by commodity money is fraudulent.

    (2) if I as a merchant have signed a bill of exchange but the deposit (backing it) at my bank is practising FRB, then that bill of exchange is fraudulent.

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  63. 2/2

    Ben:


    Inflation reduces that burden in real terms, and so dramatically shortens the recession.

    No, inflation only benefits some people at the expense of others. Those debtors who are benefited benefit at the expense of those who receive the new money last, such that their incomes don't change, but they have to pay higher prices for goods, and still pay the debt they owe which will make up a larger portion of their expenditures?

    Yes, inflation shortens the period of correction, but that doesn't mean that the corrections are no longer required and we can ignore them. Inflation does not ERASE the needed corrections. It only pushes them further down the road, where the needed correction period is WORSE than it would have been had the corrections run their course. Yes, you currently have a smaller recession now. But you will get a bigger recession later on. But hey, we're all dead in the long run, so pass of the pain to future generations, which is exactly what past generations hoodwinked by Keynesianism have done to us.

    How is hurting our children for our own sake a positive thing to strive for? It makes no sense to me, but then again, I'm just a peace advocate.

    Is it a net transfer from creditors to debtors? Yes - that's the point. It is beneficial in aggregate because a policy of insolvency/liquidation always entails a fight over defaulted debts, which is yet another barrier to recovery.

    Defaults and bankruptcies FACILITATE economic correction and thus recovery. The economy is not a place to get doped up and stupid. It's a place for individuals to pursue their separate interests in exchanges.

    Default and liquidation are not barriers to recovery. They are what cures depressions and leads to recovery. Bad investments made in the past on the basis of funny money should be corrected, resources and labor should go to where consumers value them horizontally and vertically, as well as, and most importantly to the trade cycle, across time as well.

    And the 'needed corrections' that are key to your theory can still happen. Relative price changes can and do occur in a general inflation, just as easily as in a general deflation. So nothing about the deflationary approach changes relative reallocations.

    False. Corrections cannot occur if investors are still being misled by artificially low interest rates, and funny money that is not a product of voluntary exchange and thus individual marginal utility, but of the arbitrary whims of central bankers and the commercial banks that can issue credit ex nihilo that is not backed by money they have on hand that was received from savers.

    Market interest rates mean something in the economy. They are not just arbitrary exploitative barriers to investment. They communicate how much people are saving versus how much they are consuming.

    So why not improve conditions generally through money-supply expansion?

    Money that is backed by mandatory legal tender laws cannot improve conditions generally by being expanded by arbitrary whims of governments. Not if the problems are caused by past money expansion.

    Falling prices in the basis of voluntary exchange is what can improve conditions generally after being harmed by inflation.

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  64. "I said the use of bills of exchange in this manner expands the broad money stock, inflating the money supply.

    Well, sure, it does, and would be justified, as long as these quasi-money bills, and the hard-money that backs it, are all voluntary and not made mandatory money through legal tender, and as long as both the bills and the hard money do not have more than one property owner associated with them.

    So a bill of exchange

    (1) circulating as means of payment/medium of exchange unbacked by commodity money is fraudulent.

    No. Bills of exchange that are backed by money on demand, that money of which has more than one property title attached to it, is what is fraudulent.

    The bill of exchange not backed by anything is not fraudulent, as long as the bill itself is not given more than one property title.

    (2) if I as a merchant have signed a bill of exchange but the deposit (backing it) at my bank is practising FRB, then that bill of exchange is fraudulent.

    If the bill is redeemable in money on demand, but the money is not actually available by the bank at all times, because the bank has granted another ownership title to that money, then the trustee of the bill's credit is not fulfilling the terms of the bill contract. If people keep accepting the bill however, and they know and accept that the bill is essentially "lying", in that it's not backed by what it says it is backed by, then the bill is a weird non-fraudulent means of payment, but the bill would no longer be backed by anything, which would make it not a bill redeemable on demand for money, but a money itself.

    If at any time a holder of the bill believes that the bill is backed, because either he read the contract and took it literally, or he just doesn't understand how banking works, then it would be fraud. By latest polls, over 70% of people in the UK for example believe that their bank actually has their money available at all times, ready on demand. That means only 30% know and understand that their deposits are not actually there.

    Not that any of this would in any way change if the 30% goes to 99%, or even 100%, because in the case of a bank run, the bank simply cannot honor it's agreement that it promised, and so the demand deposit contracts would cease to have a demand deposit nature, and be bills of credit instead. Since bills of credit and demand deposits are irreconcilably different contractual types, the contracts themselves are not universally enforceable, and thus null and void.

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  65. Anonymous:

    "Just like drugs are still demanded despite their being illegal for consumption, gold and silver are also still demanded for storing value (money) despite gold and silver being outlawed as money."

    In the United States, gold is not only legal to use as money, it's once again legal to contractually require it as payment. See 216 Jamaica Avenue, LLC. v. S & R Playhouse Realty Co., 2008.

    Gold is not legal to use as money. See the FBI raid on Liberty Dollars, and see Legal tender laws.

    The US government does not accept gold as taxes, which means people have to acquire US dollars in exchange to pay the government, which means dollars, not gold, are legal tender.

    Yes, citizens can trade gold as money, but any "capital gains" they make on gold, i.e. any depreciation of the dollar, is taxable, which destroys the whole ability of gold to function as a money. To say that "sure, use gold, but we'll imprison you and/or tax you more" is not exactly saying gold is legal money.

    You may have heard that Utah recently passed legislation mandating gold-backed currency as legal tender.

    Legal tender in the state of Utah, but still not legal to the feds, which is like saying smoking marijuana in your house is now legal, but the feds will still prosecute you.

    If any level of government uses threats to prevent gold as money, and enforce US dollars as legal tender, then gold cannot be a money. There is a difference between what is written by law and what "laws" are enforced.

    According to Austrians, this is bad: it does not mean gold is now decriminalized as currency (that was already the case); rather, it is now a crime for businesses to refuse it for payment of debts, similar to ordinary fiat currency.

    No, gold was not already decriminalized as currency. See Liberty Dollars and legal tender laws. But yes, it is wrong for any state to mandate what businesses ought to accept as payment. Gold is economically superior to fiat paper, but that doesn't mean that it is justified to enforce gold, or fiat, or any other money.

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  66. "Not that any of this would in any way change if the 30% goes to 99%, or even 100%, because in the case of a bank run, the bank simply cannot honor it's agreement that it promised,"

    So your argument here is that an institution taking in money from its clients and contractually obliged to return to them exactly what they are rightly entitled to, because it cannot honour all the clients' claims at one time when all or even a large number required some or all of the money they are entitled to, is fraudulent?

    The FR banks are fraudulent because they have have made contracts that under certian circumstances, they cannot possibly honour all the contracts, even though under many circumstances (perhaps even most of the time) they can honour these contracts easily?

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  67. Gold is not legal to use as money. See the FBI raid on Liberty Dollars, and see Legal tender laws.

    It's clear you never went to law school, because you don't understand how to read cases. I'd expect our resident libertarian judge to chime in here too... but as the joke goes, "What do you call the person who graduated last in their class at medical school? Doctor."

    The case has not even been decided, for one. The FBI raids people on occasion, sometimes they are found guilty and other times innocent. Too often they go in with guns blazing and the public is denied its right of adjudgment, but that's another story. It's unfortunate that innocent people have to go to court and be subjected to prosecution, but that will happen in any legal system. The actual charges are not "using gold as money" but "conspiracy to possess and sell coins in resemblance and similitude of coins of a denomination higher than five cents" et al. The prosecution argued that NotHaus was trying to pass off his currency as official United States legal tender, and that his currency was similar enough to state currency that an ordinary person could be confused, not that he was using gold or silver as currency per se. The defense is still fighting that one on appeal, so in a legal sense what you're citing hasn't even 'happened' yet.

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  68. Corrections cannot occur if investors are still being misled by artificially low interest rates...

    But see, I never mentioned interest rates. My argument survives even if the bank controls only the supply of money, but does not set the supply of credit.

    Interest rates are a crude tool for adjusting the supply of money by encouraging private money creation. But since the central bank can adjust the money supply directly - what is wrong with an inflation-based, but not interest-based, approach to the problem?

    You also said: "Default and liquidation are not barriers to recovery. They are what cures depressions and leads to recovery."

    But what if the default is endogenously determined by the money supply? That is, if liquidity is sufficient, then the firm is sound; if not, then it defaults. There is no "true" insolvency when the problem is liquidity - in this case money is not simply reflecting some underlying reality but it is actually causing the economic conditions. So I don't agree that there is an underlying "failure" disguised here, and to take it as an unproven (crucial) assumption of your theory is not logically sound.

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  69. "Not that any of this would in any way change if the 30% goes to 99%, or even 100%, because in the case of a bank run, the bank simply cannot honor it's agreement that it promised,"

    So your argument here is that an institution taking in money from its clients and contractually obliged to return to them exactly what they are rightly entitled to, because it cannot honour all the clients' claims at one time when all or even a large number required some or all of the money they are entitled to, is fraudulent?

    Yes, it is fraud, because the reason they cannot honor all their agreements is because they granted more than property title to the same property. Such a thing can only result in wealth transfer, not wealth creation, which is why in a bank run you see some depositors taking possession of property, whereas others are denied property, despite the fact that the deposit contract is to keep money available ON DEMAND.

    If the deposits were plain vanilla loans, THEN it would be non-fraudulent, because then the bank would be taking ownership over the money, which a transfer of property title to the same property, which maintains the one to one ration of property title to actual property.

    The FR banks are fraudulent because they have have made contracts that under certian circumstances, they cannot possibly honour all the contracts, even though under many circumstances (perhaps even most of the time) they can honour these contracts easily?

    A demand deposit is not "the storage warehouse owner will only let their friends take ownership of your couch and 1 out every 1000 days, you will ask for your furniture but we won't have it available." A demand deposit contract is "the storage warehouse owner will NOT let anyone take ownership of your couch, because YOU are the owner and as long as your demand deposit contract is valid, you REMAIN the owner. At NO time can the bank grant ownership rights of your property to someone else. The only way to grant ownership rights to a third party is if you LOANED the money to the bank, such that the bank takes ownership of the money, which they then transfer to the third party."

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  70. Anonymous:

    Gold is not legal to use as money. See the FBI raid on Liberty Dollars, and see Legal tender laws.

    It's clear you never went to law school

    Oh great, someone who believes his arguments are supported if it is communicated that he went to law school. You know how you know you're talking to a vegetarian, or someone who doesn't own a TV, or a law school student? THEY WILL TELL YOU.

    because you don't understand how to read cases.

    You don't understand that if gold could be used as money, then the Liberty Dollars would not have been raided.

    The case has not even been decided, for one.

    The enforcement has been decided, and enforcement is where the law is actually manifested. If there is an unwritten "rule", but it is enforced, then it is law in the praxeological sense. It makes no difference to the person if he is sent to jail, or robbed, according to an unwritten, or written law. It's what is enforced, not what is written. If it were only what is written, then we'd still be a constitutional republic, and not a growing police state.

    The FBI raids people on occasion, sometimes they are found guilty and other times innocent.

    Oh great. Random acts of violence. Now I feel better.

    Too often they go in with guns blazing and the public is denied its right of adjudgment, but that's another story. It's unfortunate that innocent people have to go to court and be subjected to prosecution, but that will happen in any legal system.

    Yeah, the thing though is that when it comes to the US dollar, there is a distinct domestic as well as foreign pattern of US government behavior.

    They constantly enforce against competition with the US dollar, and they constantly invade other countries whose leaders threaten or plan to sell oil in something other than US dollars. I hope you don't believe in the myth that the US is war mongering against Iran and Libya, and Iraq, because they want to "spread democracy." No, it's because the leaders of those countries were just about to start selling oil in non-dollar currencies, when suddenly they became murderous dictators in the media and need to be overthrown by benevolent US and UN soldiers.

    The actual charges are not "using gold as money" but "conspiracy to possess and sell coins in resemblance and similitude of coins of a denomination higher than five cents" et al.

    You're so naive. Of COURSE they will cook up some bogus counterfeiting charge. They have to find SOME connection to SOME law, or else they will rightfully be judged as oppressive tyrants. Clearly you have no idea that in recently released documents, the government considers ALL domestic movements of currency competition, as potential terrorist plots.

    The prosecution argued that NotHaus was trying to pass off his currency as official United States legal tender, and that his currency was similar enough to state currency that an ordinary person could be confused, not that he was using gold or silver as currency per se.

    Utterly false and a myth. The Liberty Dollars are not at all anything like a US government dollar, and even if it were, if the government were open to currency competition, then ANY currency would be allowed, including ones that "appear to a reasonable person as a US dollar."

    The defense is still fighting that one on appeal, so in a legal sense what you're citing hasn't even 'happened' yet.

    THE ENFORCEMENT HAS HAPPENED. That is enough to intimidate others into not doing the same thing.

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  71. Ben:

    Corrections cannot occur if investors are still being misled by artificially low interest rates...

    But see, I never mentioned interest rates.

    I didn't say you did. I said interest rates. Artificially holding lower interest rates prevents the needed corrections to inter-temporal discoordination.

    Inflation prevents the needed corrections to non-temporal, inflation generated distortions.

    Inflation does not affect the economy everywhere equally. It affects the economy in disjointed ways, and once a given round of inflation ends, corrections are needed to re-allocate resources away from non-producing derived demand (government and their friends in the market), to producing-derived demand (private business owners and laborers).

    Inflation in our economy enters through the banking system, which affects both interest rates and money supply, so just because YOU didn't speak of interest rates, that doesn't mean they're not applicable.

    My argument survives even if the bank controls only the supply of money, but does not set the supply of credit.

    You mean banks just prints money and spends it? Banks are not allowed to do that. They are only allowed to issue credit out of thin air. Only the Fed can create new money that is not credit.

    The Fed creates new money, and if that money is merely spent, then the distortions will not be intertemporal in nature, but rather horizontal in nature.

    Interest rates are a crude tool for adjusting the supply of money by encouraging private money creation. But since the central bank can adjust the money supply directly - what is wrong with an inflation-based, but not interest-based, approach to the problem?

    Inflation does not do anything to lift the general economy. It only diverts wealth away from those who receive the new money last, to those who receive it first. Those whose incomes are fixed, experience inflation as rising prices. That reduces those people's standard if living, it does not increase it.

    Inflation is not a generally beneficial phenomenon.

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  72. Ben:

    You also said: "Default and liquidation are not barriers to recovery. They are what cures depressions and leads to recovery."

    But what if the default is endogenously determined by the money supply?

    A money supply that is built by fractional reserve, and thus susceptible to deflation, is NOT "endogenous" to the market process that outlaws property fraud.

    And even if it did take place by the banking system, then the problems that past credit expansion generated that distorted the real economy, thus setting it up for future collapse and deflation, those problems can be solved by peaceful exchange and no more frb fraud, which of course means deflation.

    Yes, that means bankruptcies, yes that means bank failures. Yes, that means temporary unemployment. But as bad as these are, they are superior to inflating and printing money to stop the corrections, such that the next bust will be even worse than the last one.

    Credit expansion simply cannot solve the problems caused by credit expansion.

    That is, if liquidity is sufficient, then the firm is sound; if not, then it defaults. There is no "true" insolvency when the problem is liquidity - in this case money is not simply reflecting some underlying reality but it is actually causing the economic conditions.

    You're ignoring what caused the initial monetary deflation in the first place. You're ignoring the previous credit expansion that made the deflation possible.

    Investments that are made on the basis of credit expansion, must be liquidated if recovery is to occur. Not all firms will require liquidation, because sometimes, investors guess right as to true consumer preferences. They will be ok in deflation.

    So I don't agree that there is an underlying "failure" disguised here, and to take it as an unproven (crucial) assumption of your theory is not logically sound.

    That does not follow. You cannot say "so" here. The underlying failure is not "disguised." It's wide out in the open. It's the Federal Reserve and government. They continue to set the economy up for crashes.

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  73. I think we've finally got down to the point where you're saying "markets are perfect and their outcomes are good" and I'm saying "markets fail constantly and the Fed and the government are our protection against that."

    Empirically, logically, and theoretically, I am right. You are right under an extremely unrealistic set of assumptions.

    I do want to thank you for the argument, though: I have never seen the 'fraud' case made with respect to money quite the way you have here, and it definitely is a useful frame of reference for thinking about what is 'money' and what is a 'claim on money'.

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  74. if the government were open to currency competition, then ANY currency would be allowed, including ones that "appear to a reasonable person as a US dollar."

    Actually, that's fraud; and not the whiny libertarian-fraud that includes FRB, but actual real fraud. Like selling poison advertised as food, or selling fake airbags as genuine. If a reasonable or ordinary person can't tell those two things apart, it isn't 'caveat emptor', it's justified state intervention.

    THE ENFORCEMENT HAS HAPPENED.

    You've more than outed yourself as a raving lunatic conspiracy theorist, so I'll just leave this here. <3

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  75. Update

    I was going to write a post about this video below, but quickly realised there are doubts about whether this guy was even a financial expert at all. What was the BBC thinking!

    Same thing as what the Head Of UniCredit Securities is thinking?:

    http://www.zerohedge.com/news/step-aside-bbc-trader-head-unicredit-securities-predicts-imminent-end-eurozone-and-global-finan

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  76. "Same thing as what the Head Of UniCredit Securities is thinking?:"

    No, I was referring to the fact that he's told people that he's "an attention seeker" and some people think the whole thing was a practical joke.

    http://www.telegraph.co.uk/finance/economics/8792829/BBC-financial-expert-Alessio-Rastani-Im-an-attention-seeker-not-a-trader.html

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  77. "Empirically, logically, and theoretically, I am right. You are right under an extremely unrealistic set of assumptions."

    No. Emprically, logically and theorerically, you are wrong and Pete is right.

    " you're saying "markets are perfect and their outcomes are good" and I'm saying "markets fail constantly and the Fed and the government are our protection against that." "

    The problem in this assertion is that every single instance you cite as evidence that markets fail constantly is actually an instance of intervention failing. Thus, all evidence shows that interventionism fails constantly. That in turn means that government (as the agency that 'intervenes') creates trouble and solves nothing.

    And Pete - Thanks a ton. Enjoyed reading your dismantling of LK.

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  78. No, I was referring to the fact that he's told people that he's "an attention seeker" and some people think the whole thing was a practical joke.

    http://www.telegraph.co.uk/finance/economics/8792829/BBC-financial-expert-Alessio-Rastani-Im-an-attention-seeker-not-a-trader.html

    FTA:

    "I agreed to go on because I'm attention seeker," he said on Tuesday. "But I meant every word I said."

    Oh, and speaking of LK's adherence to utilitarian ethics, researchers have found a strong link between utilitarianism and psychopathic personalities:

    http://www.economist.com/node/21530078

    That would explain LK's lack of remorse for advocating for violence against innocent people.

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  79. http://www.theonion.com/articles/historians-politely-remind-nation-to-check-whats-h,26183/

    Great link

    http://www.economist.com/node/21530078

    That article attacks the crude Bethamite hedonistic version of utilitarianism
    That sort of utilitarianism does indeed cause some ugly moral decisions.
    However, I don't advocate it, as pointed out repeatedly to you before.

    It would be curious to see the same sort
    studies applied to natural rights theorists, to see exactly what their mentality is.

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  80. Question for the Austrians:

    Are all insurance schemes fraudulent? After all they can't pay off all policy holders their maximum claim at the same time, can they?

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  81. Argosy Jones:

    Are all insurance schemes fraudulent? After all they can't pay off all policy holders their maximum claim at the same time, can they?

    Insurance does not have a "demand deposit" type contractual arrangement. When you set up say accidental insurance, and you pay premiums, that money becomes the property of the insurance company. It's not yours any more. Insurance is not a system where you pay a series of sums of money whereby the money is retained as your property and gradually grows over time, such that the insurance company agrees to pay you any amount out of that lump any time you want on demand.

    Insurance is a system whereby you pay a series of premiums that become the property of the insurance company, and in return they promise to give you a pre-determined lump sum, but not any time you want, not on demand, but rather when certain events transpire.

    Insurance is thus a credit instrument, because you are transferring ownership of your money to them based on their credit worthiness, their reputation and so on.

    As with all credit, there is always a positive risk attached to it, which means insurance payers are taking a risk that the company might not pay the lump sum. If all the clients got into an accident at the same time, and all submitted claims at the same time, then it's possible the insurance company might not be able to pay. If they do fail to pay, then because it is a credit instrument, then I would say the company is not committing fraud, because they never misappropriated their client's money. The premiums are the company's money.

    Whether or not there is a government law that would hold insurance companies liable if this happened, I do not know.

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  82. 1/2

    That article attacks the crude Bethamite hedonistic version of utilitarianism. That sort of utilitarianism does indeed cause some ugly moral decisions. However, I don't advocate it, as pointed out repeatedly to you before.

    Utilitarianism IS based on the philosophy of hedonism. To say that you're a utilitarian, but against hedonism, is like saying you're a natural rights ethicist, but against objectivity.

    You haven't said WHICH "version" of utilitarianism you do in fact advocate. You have only been continually compelled to say "I don't support that!" when your premises lead you to that conclusion.

    Since you have not yet said what "version" of utilitarianism you do support, after being asked repeatedly, it means either you are not even sure of which ethics you do support, or you are sure, but you just don't want to say it explicitly, because you're afraid to be directly refuted on it. Either way, the strategy for exposing your ethics is the same.

    Ergo,

    Since you don't subscribe to "crude hedonistic versions" of utilitarianism, logically that means that you MUST adhere to SOME objective, i.e. "natural", rights based ethic. I am not saying that you are correct in any way, just that you have no other recourse but to appeal to some non-subjective foundation in order to find refuge away from the hedonistic aspect of utilitarianism.

    The reason why this must be the case is because purely subjectivist ethics necessarily leads to "crude hedonism". Subjectivist ethics implies that if individuals find happiness in some action, regardless of what it is, then it is morally justified. The only way that you can escape this is by appealing to something other than the individual's mere desires. You have to appeal to something else about the individual.

    If every last person on the planet, except you, being the sole exception, adhered to some "crude hedonistic" utilitarianism, then what does your ethics say is the morality of everyone else's ethics? Would you reject their ethics as wrong and your ethics as right, or would you accept their ethics as right and your ethics as wrong?

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  83. 2/2

    There is something else that should be noted. You might believe that "rules-based" and "preference" and "act" and all other "types" of utilitarianism are all different, but in terms of the objective-subjective dichotomy, I trust that you realize that they are all subjective.

    Every utilitarian ethicist could not agree or disagree with another utilitarian ethicist based on the rationalist foundation, because they all reject the notion that ethics can be founded upon the rationalist foundation. They could only agree and disagree with each other by chance, so to speak, depending on what they happen to find happiness in. One utilitarian type could be made consistent with another type by whim. For example, "rule" and "preference" types can be made consistent if it so happened that individuals preferred rule-based utilitarianism. Similarly, "act" and "rule" utilitarianism can be made consistent if it just so happened that individuals find pleasure in acting in accordance with moral rules that create the most happiness.

    For all types of utilitarianism, a utilitarian ethicist could not possibly hold that another type of utilitarian ethics are right or wrong according to the objective, rationalist foundation. They could only ever say "I agree/disagree with you."

    Finally, and MOST importantly, this is the best for last...

    Since you reject objective, i.e. "natural" rights ethics, then I can say that from an objective ethicist's point of view, you have no objective foundation from which to base your rejection of it. This is because you NEED an objective foundation upon which to say that ANYTHING, even an ethical proposition, is "right" or "wrong." Right and wrong are objective concepts, not subjective concepts.

    You cannot legitimately say, from your point of view, that I am wrong to argue that an objective ethic exists. For your own position is that ethics are subjective, which means you could only say "If you find happiness in adhering to natural rights ethics, then I cannot say you are wrong and I must accept it as a valid ethic in the totality of all ethics. I just disagree with you."

    But that is not what you are saying. You have been attempting to go through a painstaking logical analysis of why natural rights ethics are wrong. Clearly then, by your own actions, you hold logic as what EVERYONE ought to strive for. If you didn't, then you would not even attempt to change natural rights ethicist's minds to be more in line with your own by telling them that they should stop being natural rights ethicists for this, this, and this reason. You are, therefore, telling me and everyone else that logical consistency, and being correct in one's arguments, are universal ethics. You are saying that everyone ought to think and behave logically, and that everyone should prefer being right as opposed to being wrong.

    You are calling for a universal, objective ethic, and yet you deny that such a thing is possible, or desirable.

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  84. Fractional reserve banking does NOT require two people to hold onto the same piece of property twice.

    Furthermore, the Liberty Dollar people were making false claims about the applicability of the Liberty dollar. They were engaging in real fraud, by deliberately lying about the uses of their product.

    In other words, Austrians want to make something that isn't fraud illegal, and keep real fraud legal and protected by private property.

    Austrian economists at the Mises Institute and Ron Paul are trying to control our lives, and we should reject it.

    --successfulbuild

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  85. "Insurance does not have a "demand deposit" type contractual arrangement. When you set up say accidental insurance, and you pay premiums, that money becomes the property of the insurance company. It's not yours any more. "

    Exactly like FRB:

    http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html

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  86. "Insurance does not have a "demand deposit" type contractual arrangement. When you set up say accidental insurance, and you pay premiums, that money becomes the property of the insurance company. It's not yours any more."

    Exactly like FRB:

    No, not exactly like FRB. Demand deposits are not the property of banks. They are the property of the clients. LOANS become the property of the banks.

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  87. Anonymous:

    Fractional reserve banking does NOT require two people to hold onto the same piece of property twice.

    Correct. It DOES require that more property titles exist than property. That means at LEAST two parties are having ownership claims over the same property.

    Furthermore, the Liberty Dollar people were making false claims about the applicability of the Liberty dollar.

    No, they were not making false claims. They communicated what they were, and their clients understood.

    They were engaging in real fraud, by deliberately lying about the uses of their product.

    Lying to the state regarding an unjust law is not fraud, it is justice.

    In other words, Austrians want to make something that isn't fraud illegal, and keep real fraud legal and protected by private property.

    False. Austrians want to make what isn't fraud legal, and to make what is fraud illegal.

    Austrian economists at the Mises Institute and Ron Paul are trying to control our lives, and we should reject it.

    False, they are trying to liberate your life.

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  88. LK,

    Your patience is legendary and awe inspiring. I'd have given up by now.

    Anyway back to my original comment.

    ISTM that it the degree to which firms, overall, either expand production or put up their prices in respond to demand stimulus that is the key to the entire debate.

    PK economists tend to believe that capitalist firms will naturally quantity expand and not price expand. Mainstreamers tend to believe that capitalist firms will price expand rather than quantity expand. The more nutty mainstreamers seem to believe that firms will quantity expand in response to private spending and price expand in response to government spending.

    And there seems to be very little solid science to confirm or deny any of those positions.

    I think there is mileage in your point above that whatever happens when the private sector increases its spending is likely to be what happens when the government sector increases its spending.

    Does each economy therefore have a figure you can find that describes its production systems propensity to produce more goods in response to an increase in demand rather than simply to increase its prices.

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  89. "ISTM that it the degree to which firms, overall, either expand production or put up their prices in respond to demand stimulus that is the key to the entire debate. "

    Oh, yes, I see now what you meant above.

    The Post Keynesian or even "honest" neoclassial literature by New Keynesians has any amount of evidence that firms with unused capacity simply expand production/quantity of goods they produce when new orders come in.

    Some quick references:

    The essential feature of the post-Keynesian markup model of price determination is that prices are determined by costs and that demand changes have no effect on prices but only on quantities. Firms set prices by adding a markup to costs; when demand changes the price is kept the same, with quantities being adjusted instead by varying delivery lags, inventories, hours of work, employment and so on.

    Henk-Jan Brinkman, Explaining prices in the global economy: a post-Keynesian model, p. 34.

    http://books.google.com.au/books?id=U--FKXD3exUC&pg=PA34&dq=%22the+essential+feature+of+the+post-Keynesian+markup+model+of+price+determination%22&hl=en&ei=Y12FTpruIIqfmQWG9Y0M&sa=X&oi=book_result&ct=result&resnum=1&ved=0CC0Q6AEwAA#v=onepage&q=%22the%20essential%20feature%20of%20the%20post-Keynesian%20markup%20model%20of%20price%20determination%22&f=false

    (2)
    "The firm normally has some reserve capacity that enables it to adjust to changes in demand by way of quantity adjustment, leaving its price constant. "

    The economics of income distribution: heterodox approaches, p. 148.

    http://books.google.com.au/books?id=6hv3sBmA22UC&pg=PA148&dq=prices+firms+adjust+quantity+%22post+keynesian%22&hl=en&ei=wVyFTt-1DKeImQXG9d0B&sa=X&oi=book_result&ct=result&resnum=6&ved=0CEgQ6AEwBQ#v=onepage&q=prices%20firms%20adjust%20quantity%20%22post%20keynesian%22&f=false

    Just put these words into Google books:

    prices firms adjust quantity "post keynesian"

    You will the literature you need.

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  90. Correction:

    You will *find* the literature you need

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  91. Typical Keynesian tactics - misstate the opponents argument, and then beat up the strawman.

    The Cantillion effect has to do with central banks more than it does government spending.

    Government spending is evil in and of itself, as it is not subject to market forces, and always involves coercion. It moves resources from the productive private portion of the economy to the parasitic "public sector"

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