How Much Money Should There Be?

Mises Institute ^ | October 10, 2001 | Frank Shostak, Ph.D.

[SteamshipTime]

Some instructive comments from Dr. Shostak, as Greenspan opens up the currency spigots, Bush creates a second Department of Defense, and Congress prepares to consume more of the private sector.

[Free the USA]

Good post

[Red Jones]

bump

[gjenkins]

I have been asking this question of myself for about two years. I asked an economics prof., but his attitude was tipified by the question "Why would you want to read Von Mises?"

[Billy_bob_bob]

I think a good answer to the question of "Why would you want to read Von Misis" would be "Because he is right."

[Billy_bob_bob]

Misis=Mises. OOPS!

[Gladwin]

"Market clearing"

Joe gets a job at $10/hr. Inflation is 10%. Next year, he has to ask for a $1 raise to maintain his living. He may or may not get it depending on market conditions.

Joe gets a job at $10/hr. Deflation is -10%. His boss has to cut Joe's wages this year or lay off workers. This is a tough decision and is an example of "market clearing problems". It is also the situation you have if you go to a gold standard, since gold reserves are relatively fixed and cause deflation.

Deflation is not good. Just look at the problems Japan has been having for 10 years.

[vmatt]

Joe gets a job at $10/hr. Deflation is -10%.

Joe is cool with the pay cut because prices are down comparatively. Next?

[Fiddlstix]

Joe is cool with the pay cut because prices are down comparatively. Next?

Yep!

[Gladwin]

His mortgage payment has gone down too? His car payment? You mean I can call GMAC and get my car payment changed if there is deflation this month?

Try harder.

[vmatt]

Try harder.Joe trades car, refinances home and keeps job?

Seriously, I believe that our present monetary system is totally dependent on constant increases in money supply and debt. Our system must expand or collapse and this fact forces us to expand into the world ready or not, like it or not. It's like pandora's box.

[Gladwin]

It is easier to get a raise, than to refinance everything. The lag because of these adjustments, and others, is the market clearing problem.

Wages tend to be sticky, in that they go up a lot faster than they go down. So, a deflating economy tends to waste a lot of potential production while the market clears.

[Iris7]

In fact when there was hard money in the United States credit was not available for consumer loans. In a hard money environment real estate loans, car loans, home mortgages, etc. would probably not exist. The only thing banks loaned against in the old days were commercial accounts recievable, loans being due with recieved payment in thirty to ninety days.

The current system was instituted by Walpole in Britain around 1700 in order to get more money available for loans. Over time loan availability was pushed down to the hoi polloi to "increase demand for consumer goods."

It has been argued that industrialization would have been impossible without "modern central banking". Certainly Alexander Hamilton believed this, and Benjamin Franklin supported it. See the controversy about the first "Bank of the United States", Andrew Jackson and all that.

Large modern corporations cannot exist without "financing", that is, big loans. The whole "Wall Street" phenomena would collapse without Walpolean money.

[Anochka]

And do you think Japan's deflation is caused by the gold standard???? No, sport - it was created by excessive creation of fiat money and credit, just as ours is being created.

Gold does not cause deflation. In a gold standard system, prices decrease year to year while the value of money increases. In a fiat system, money loses value year to year and prices rise. I'll take the gold standard any time over vapor money controlled for and by the political and financial elite.

[Anochka]

Interesting that you defend vapor money and central banking on the basis of the goodness of debt creation, and believe that a modern economy can run only on debt. How about the only modern economy with which you are personally familiar is run on debt?

Debt = Slavery

Be sure to watch what happens to hundreds of thousands of mortgage holders in the near future - ah yes, the blessings of debt! Not to mention what's gonna happen to al those "modern" corporations who've got less than a dime in their coffers for every dollar in debt they carry.

[Gladwin]

I used Japan as an example of a country in deflation. I did not say they were on the gold standard.

Their central bank is following a deflationary policy. Their central bank could buy real assets using fiat money and inflate their economy. Deflation is bad for Japan and it would be bad for the USA.

If the USA went to the gold standard, it would result in deflation.

[Moonman62]

In fractional reserve banking, when money is repaid and the bank doesn’t renew the loan, money evaporates.

Hasn't your guy Shostak ever heard of the multiplier effect?