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« Mises and His (Apparent) Call for 100% Reserves | Main | The Obama Administration's Push Me-Pull You Theory of Recovery »

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Regarding TTOMAC I think Steve is exactly right.

Nikolaj quotes a passage from the first edition where Mises attacks fiduciary media in the context of that time and place. But earlier in the 2nd edition he specifically supports it.

p.322 "Some have demanded the prohibition of the issue of such notes as have no metal backing; others, the prohibition of all clearing transactions except with full metallic cover; others again, and this is the only logical position, have combined both demands.
Such demands as these have not been fulfilled. The progressive extension of the Money Economy would have led to an enormous extension in the demand for money if its efficiency had not been extraordinarily increased by the creation of fiduciary media. The issue of fiduciary media has made it possible to avoid the convulsions that would be involved in an increase in the objective exchange- value of money, and reduced the cost of the monetary apparatus. Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them. In the early days of the modern banking system they played a further part still by strengthening the credit- negotiating activities of the banks (which in those times could hardly have proved profitable if carried on for their own sake alone) and so brought the system safely past those obstacles which obstructed its beginnings."

Later on page 326 after mentioning the problems fiduciary media could cause he writes "Consequently the chief rule to be observed in the business of a credit-issuing bank is quite clear and simple: it must never issue more fiduciary media than will meet the requirements of its customers for their business with each other. But it must be admitted that there are unusually big difficulties in the practical application of this maxim for there is no way of determining the extent of these requirements on the part of customers. In the absence of any exact knowledge on this point the bank has to rely upon an uncertain empirical procedure which may easily lead to mistakes. Nevertheless, prudent and experienced bank directors - and most bank directors are prudent and experienced - usually manage pretty well with it."

Wow - that second quote is terrific Current.

Dear Steve,

this is also my last comment on this topic, because I got tired of repeating most obvious points without real feedback from you. This exchange entered the zone of diminishing returns already. So, just a couple of my final notes about specific points from your newest attempt do defend undefendable.

Horwitz:

“I do NOT believe Mises thought that creating fiduciary media in and of itself triggered the cycle. If you believe that the cycle is triggered by inflation, then you have to go back to Mises's definition of inflation to see what triggers the cycle: a supply of money (explicitly including fiduciary media) greater than the demand to hold it. The cycle is triggered by that excess, not by the use/emission of fiduciary media per se. “

Mises 1 (Human Action p. 442): “The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle. Of course, if the additional amount issued is not large, neither are the inevitable effects of the expansion.”

Mises 2 (TTOMAC, pp.407-408, third edition) : “The possibility of causing temporary fluctuations in the exchange ratios between goods of higher and of lower orders by the issue of fiduciary media, and the pernicious consequences connected with a divergence between the natural and money rates of interest, are circumstances leading to the same conclusion. Now it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issue of fiduciary media.”

As you easily can see from this, my failure to be persuaded by your argument is not a product of my stubbornness or bad will, but of my lack of ability to take as valid argument mere expression of personal attitude, which is directly contradicted by all available textual evidence.

As for new Mises citation you provided, it again does not work at all as evidence for Mises's acceptance of fractional reserve system. At the contrary, it only illustrates and further elaborates quite uncontroversial assertion that possibilities for credit inflation are much smaller under free banking system than under CB, due to impossibility for banks to inflate in concert, and to internal mechanisms within the system that tend to limit FM issuance, and to counteract it once it spreads excessively. But, that has nothing to do with the thesis you impute to Mises, that he preferred FRB to 100%, which is to say, that he believed that modest credit cycle was better than no credit cycle. Link between Mises's assertion that FB is lesser evil than CB, and your assertion (attributed to him) that FB is first-best policy is still missing. You only repeat again and again that blatant non-sequitur without any evidence (actually, with abundant evidence to the contrary I have presented, which you decided simply to ignore).

Current
"Nikolaj quotes a passage from the first edition where Mises attacks fiduciary media in the context of that time and place. But earlier in the 2nd edition he specifically supports it."

With only one little inconvenience that he reprinted the same "outdated" passage both in second and in third editions, where he described it as a final word on the subject.

Every case of Mises arguing for 100% reserves that you have found was made in the context of how to constrain governments. When you find a passage where he says 100% GOLD reserves is the best of all worlds, then we'll talk. I've given you passages where he says ONLY free banking can accomplish the goals he has. You haven't given me the equivalent on your side.

If you think I'm just asserting a personal preference, please feel free to say the same about Ebeling, Selgin, Rizzo, O'Driscoll, and even Gary North. Rizzo and O'D both have indicated their agreement with my reading based on this series of posts. So have several other commenters on this blog.

Are we all nuts? Are we all invoking our personal preferences? How many of the most serious Mises scholars of this generation do you need to hear from to consider that perhaps YOU are reading in Mises what you want to read?

Steve,

Lawrence H. White agrees to, or at least he did in 1983 -- talking to an audience which included Murry Rothbard. I included a link to his talk in the previous thread where he mentions the issue.

For whatever it's worth, I had this same discussion with Rizzo, Ebeling, and O'Driscoll at ThinkMarkets several months ago, and, for whatever reason, was finally banished by Rizzo.

So, whatever else that means, it certainly means that we ought to appreciate the free speech we have been accorded here.

"I do NOT believe Mises thought that creating fiduciary media in and of itself triggered the cycle."

Indeed, unless I'm mistaken does Mises not state in Human Action that it is only if newly created money enters the loan market that the busienss cycle is kicked off?


Steve,

Selgin does not count on your list because he openly stated that Mises agreed with proponents of thesis that free banking would automatically lead to 100%, and his present excuse that he only employed poetic language in that citation, is comical (what about Salerno, Hoppe, De Soto, Hulsman, who all agree with me and Selgin. They are not "serious"?).

I reiterated I suppose 10 times, and you were perfectly unable to refute, that your ascribing to Mises Fisher's and Simon's reformist view about monetary reform was flat out wrong, because he actually severely criticized what you attribute to him as his own program, (adoption of 100% reserve within present CB system). Introducing 100% was according to Mises only first step in reform, that should be followed by abolishing of CB and all legislative prerogatives of banks. So, please refute that Mises criticized Fisher's idea about 100% under CB instead to embrace it. If you cannot, please stop to repeat the same unsubstantiated claim that Mises proposed 100% only within CB system.

“Every case of Mises arguing for 100% reserves that you have found was made in the context of how to constrain governments. When you find a passage where he says 100% GOLD reserves is the best of all worlds, then we'll talk.”

First, burden of proof here is on you. You must find citation where Mises says that FRB is best of all worlds, and specifically, that it is better than pure 100% reserve system. You must prove that Mises believed that without CB, FM emission would have POSITIVE effects.

Second, here it is (again, for the fourth or fifth time):

“The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle. Of course, if the additional amount issued is not large, neither are the inevitable effects of the expansion”.

So, “NO MATTER WHAT ITS QUANTITY MAY BE”. Any quantity of FM sets in motion credit cycle (contrary to your interpretation). Only without FM, i.e. with 100% reserves credit cycle can be avoided. So, in monetary issues 100% system is clearly best of all worlds.

Q.E.D.

And there is more:

Mises: “it is obvious that the only way of eliminating human influence on the credit system is to suppress all further issue of fiduciary media. The basic conception of Peel’s Act ought to be restated and more completely implemented than it was in the England of his time by including the issue of credit in the form of bank balances within the legislative prohibition.”

So, only way to eliminate HUMAN influence on credit system is 100% (not only way to eliminate GOVERNMENT influence on credit system).

Q.E.D.

I repeated many times those points and your inability to refute them, (apart from reiterating your own subjective impressions and personal attitudes) I consider as the end of debate.


Richard, just above, wrote:

"'I do NOT believe Mises thought that creating fiduciary media in and of itself triggered the cycle.'

Indeed, unless I'm mistaken does Mises not state in Human Action that it is only if newly created money enters the loan market that the busienss cycle is kicked off?"

Here was that statement of his, P 555.

"If...while the banks expand credit, it is expected that the government will completely tax away the businessman's 'excess' profits or that it will stop the further progress of credit expansion as soon as 'pump-priming' will have resulted in rising prices, no boom can develop. The entrepreneurs will abstain from expanding their ventures with the aid of the cheap credits offered by the banks because they cannot expect to increase their gains. It is necessary to mention this fact because it explains the failure of the New Deal's pump-priming measures and other events of the 'thirties."


Nik,

You are either dishonest or a fool. It was Cernuschi himself to whom I attributed "poetic" language (that is, resort to hyperbole); and it's plain as day that Mises didn't believe that free banking would literally lead to 100% reserves. IF I ever wrote in a manner suggesting otherwise (and as soon as I'm back home I will check the passage of TFB to see whether you've stripped it of it's context or misquoted it--as I think you are perfectly capable of doing), then I was simply wrong to have done so then., and I recant--which means that Steve is perfectly entitled to include me among those who agree that Mises was not a (consistent) exponent of 100% reserves.

In any event, having now got a good grip of your methods of disputation, I will say for my part that I won't waste another moment disputing with you or your likes--and I hope others will have the good sense to take the same course. I've been a teacher for a quarter century, and I know a hopeless case when I see one!

Nik,

You are neither dishonest nor a fool but a great student of Mises, and those who would deny you the respect you deserve forfeit it themselves.

Your critics make no sense. The real Mises, they tell us, is not to be found in Human Action but in a lecture somewhere, and not in what he actually said but in what they infer from it.

That wasn't Mises. He would have left nothing so important out of Human Action, and he would not have left it to inference anywhere. If it wasn't in Human Action, it wasn't anywhere else elther, and, if he didn't come right out with it, he didn't say it at all.

Prof. Horwitz has said that he would boot out anyone who talked the way Prof Selgin talked to you. I hope he doesn't carry through with that threat. Prof. Selgin's sticks and stones may break our bones, but his name-calling doesn't hurt us, and his opinions, for the most part, inform us.


And, furthermorer, it's just inconceivable that after all Mises had said about credit expansion and the business cycle he would ever have countenanced credit expansion, under any circumstances and to any extent.

Its just inconceivable.

That just wasn't Mises.

Lesvic (my last words to you on this subject because you are, as George said of Nicolaj, not going to be convinced whatever I say):

1) Those two Mises lectures were given 2 and 3 years after the publication of Human Action. For all your worship of "the master," you must think him quite the fool to have written a 900 page book only to contradict it 2 years later. Was he confused? I submit not. I submit that the 51 and 52 lectures are totally consistent with Human Action, unless you so waterboard the text of the book as to make it confess to your hoped-for reading of it. If I were asked to lecture about Austrian macro two years after my book was published, I'd sure as hell be saying pretty much what I said in the book. If I wasn't, I damn well should provide an explanation why I've changed my mind.

Mises was a brilliant man. Your interpretation requires that he was horrifically inconsistent from 1949 to 1951/52. Mine doesn't. Occam's Razor would suggest that in the absence of some explanation on his part, the simpler theory is the more plausible.

2) I've quoted several times from Human Action in this debate, including the passage on 443 where he says that "free banking is the only method available for the prevention of the dangers inherent in credit expansion" and "Only free banking would have rendered the market economy secure against crises and depressions." Note he does NOT say "Only outlawing fiduciary media would have..." nor "Only a 100% reserve gold standard would have..." nor "Only ending all increases in the supply of money or credit would have..."

He says "Only free banking." And it is quite clear from the context what he means by free banking.

Once again, your preferred theory of the cycle (that any issue of fiduciary media/credit expansion sets it off) might be right or wrong, but I don't think it's what Mises believed. So the choice is yours: stick with Mises or stick with your theory. I don't think you can have both.

It seems like everyone's last words here are like Brett Favre's last retirement.

Prof. Horwitz,

You wrote,

"I've quoted several times from Human Action in this debate, including the passage on 443 where he says that 'free banking is the only method available for the prevention of the dangers inherent in credit expansion' and 'Only free banking would have rendered the market economy secure against crises and depressions.'

I certainly agree with that.

You go on,

"Note he does NOT say 'Only outlawing fiduciary media would have...' nor 'Only a 100% reserve gold standard would have...' nor Only ending all increases in the supply of money or credit would have...'"

I wouldn't say that either. I wouldn't outlaw fiduciary media. I don't think you need a 100% reserve gold standard. And I don't think you need to end all increases in the supply of money or credit to render the market economy secure against crises and depressions.

But neither would I ever say that there ought to be some credit expansion. Yet, you would infer my having said that, as you are inferring Mises' having said it.

I can assure that any such inference would be completely wrong in my case, and, pari passu, unwarranted in that of Mises.

Again, you have nothing that Mises actually said, but only your inference of what he said.

You conclude,

"He says 'Only free banking.' And it is quite clear from the context what he means by free banking."

Credit expansion?

That may be clear to you, but not to me.

Where, in Human Action, not some lecture, does he clearly and explicity say that, though he was generally opposed to credit expansion, there may be some exceptional circumstances in which it was needed?

Where?

Nowhere!

Mises, the credit expansionist, is all smoke and mirrors.

Prof. Horwitz,

I overlooked this statement of yours:

"Once again, your preferred theory of the cycle (that any issue of fiduciary media/credit expansion sets it off) might be right or wrong, but I don't think it's what Mises believed."

It isn't what I believe either. But neither does it follow from a little poison's being relatively harmless that it does any good.

Selgin,

hysterical insults would not remove the fact that you said:

"Mises’s support for free banking is based in part on his agreement with Cernuschi, who (along with Modeste) believed that freedom of note issue would automatically lead to 100 percent reserve banking;"

So, according to you Mises "agreed" with Cernushi who beleived that free banking would automaticaalz lead to 100% reserve. What was exactly what I did attribute to you. Whether you today stick to the same opinion is completely besides the point. I was allowed to use your published work as support for my thesis.

Therefore, I would like you to make publicly an apology for your disgraceful behavior. You should check your own citation prior to calling somebody dishonest or a fool.

But even apart from the problem whether Selgin or anybody else (today) considers that Mises believed FB would "automatically lead to 100% reserve" or maybe, as Selgin says on other place in his book that FB "will somehow lead to suppression of fractionally-based inside monies" (p.164) it is clear as a day that Mises preferred FB to CB only insofar as it brings about LESS credit inflation, i.e. leads to suppression of fiduciary media.

We still need some explanation where Mises said the FM emission could be useful, and better than 100% reserve system. And whole house of card of Mises-fractional-reserve-free-banker theory rests on the thesis that he somewhere said that. But, we don't know where.

Prof. Horwitz,

I don't know how, from my contention, that credit expansion was always useless if not disastrous, you were able to infer my supposed conclusion that it was always disastrous.

But the fact that you did so in my case certainly justifies skepticism of your conclusions about Mises arrived at by the same method.

So rather than inferring his support of credit expansion, give us one, just one, direct statement of his to that effect.

Prediction: we'll never see it, for the simple reason that he would have hung himself before saying such a thing.


TTMOAC, Part III, Chapter 1, Section 4 (312 in the 1954 edition). Mises is discussing how a free banking system would work. He writes:

"Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. THEY INCREASE OR DECREASE THEIR CIRCULATION PARI PASSU WITH THE VARIATIONS IN THE DEMAND FOR MONEY, so far as a lack of uniform procedure makes it impossible for them to follow an independent interest policy. But in doing so, they help to stabilize the objective exchange value of money. TO THIS EXTENT, THEREFORE, THE THEORY OF THE ELASTICITY OF THE CIRCULATION OF FIDUCIARY MEDIA IS CORRECT..."

Mises is saying (in 1954!) that in a free banking system it is proper that banks increase their circulation of fiduciary media (if that is not a "credit expansion" what is?) in the face of a rising demand for money. My arguments (and those of White, Selgin and others) suggesting that the Fed should follow the same policy is an attempt (perhaps wrong) to get it to mimic what a free banking system would do.

Mises is saying that a credit expansion is the appropriate response *under free banking* to an increase in the demand for money. THERE is your evidence that Mises believes credit expansion can be neither useless, nor disastrous, but necessary and desirable.

Whether the same logic applies to a central bank facing an increase in the demand for money is another matter. Mises doesn't explicitly say so. But to say that Mises never supported the expansion of the issue of fiduciary media is contradicted by that passage in TTOMAC.

Once again, if you want to claim expertise on Mises's monetary theory, it would help if you'd read more than HA. The fact that you found TTOMAC too confusing or difficult to finish is pretty good evidence that we should not trust your judgment about what he has to say about monetary theory elsewhere.

And with that, I am DONE. I have a week at Mercatus in front of me which will be a lot less frustrating than continuing to bang my head against this wall.

Nikolaj, judging by Selgins response (bitchy even by his standards), I'd say you hit a nerve.

Prof. Horwitz,

You wrote,

"Once again, if you want to claim expertise on Mises's monetary theory, it would help if you'd read more than HA. The fact that you found TTOMAC too confusing or difficult to finish is pretty good evidence that we should not trust your judgment about what he has to say about monetary theory elsewhere."

You don't need that evidence not to trust my judgment, nor anyone else's. For economics is not a faith, but a science, and based, not on judgment, but reason.

Why must I claim expertise to challenge the teachers? Isn't that what a good student is supposed to do?

And isn't a good teacher supposed to encourage his students to do so?

And what do you think of a teacher who says,

"I've been a teacher for a quarter century, and I know a hopeless case when I see one!"

Well, I've been a student for a lot longer than that, and I think I know a petty intellectual tyrant when I see one.

Back to economics, if I may be permitted, and, you wish to be our teacher: assuming that you have quoted Mises accurately and thoroughly, and correctly represented his thoughts, the fact remains that Money and Credit was originally written long before 1954, the publication date of the edition you referred to. So, do the words in that edition represent his thoughts at that time as well as at the earlier time?

And, if so, why were they omitted from Human Action?

And, since they contradict his words in Human Action, surely, at some point, he would have tried to reconcile the contradiction.

Where did he do so?

And why have you omitted that from your own presentations?

Don't you think that this is strange, if not unbelievable?

Even in the system that Mises supports from political reasons as a first step towards genuine free banking: A central bank with 100% reserves, the monetary authority would also expand the Monetary Base in the context of higher demand for money. As soon as local prices start falling reflecting the higher demand for money, you would have an inflow of gold via the trade balance, following the simple mechanism described by Hume, and then the Central Bank would expand the monetary supply.
So the monetary supply will expand anyway, it wont stay fix. Or if u want to go one step further, mines will start producing more gold.
Above mechanisms simply dont work while u dont have commodity money.
The debate here is what do you do while this solution is not politically accepted.
Doing nothing is one alternative, trying to mimic what the market would do if it was free is another one.
If I would be ill in a place without private medicine, I wouldnt mind visiting the public hospital before dying.

All of this is tantamount to the "discovery" that Mises advocated all-round central planning and the abolition of private property.

Something is fishy about this and I'm going to find out what.

Possible explantions. Mises was bipolar or there was a Mises imposter. But don't tell me that the real author of Human Action advocated credit expansion under any circumstances.

Ivo,

An "influx of gold via trade imbalance" is how the debtor nation or individual pays for his purchases on credit. His doing so increases the supply of money in the hands of the creditor but not throughout the whole market.

There are two reasons why gold mines producing more gold is not the same thing as printing presses printing more money.

First, gold is not just a claim to real goods but a real good itself.

Second, the supply of gold is not subject to the same manipulation as the supply of paper money.

While an increase in the supply of gold wildly disproportionate to the increase in the supply of other goods would create the same distortions as a wild increase in the supply of paper money, that is just not an empirical reality, for it's a lot easier to crank up the printing presses than to extract more gold from the earth.



Ivo says:

"Even in the system that Mises supports from political reasons as a first step towards genuine free banking: A central bank with 100% reserves, the monetary authority would also expand the Monetary Base in the context of higher demand for money."

And that was precisely the reason why Mises criticized that idea of 100% under CB, as proposed by Fisher and Simons, as untenable, and advocated abolishing of CB altogether in the next step.

But, where he said that once the second step is implemented (abolishing cb, i.e. instituting "free banking"), the next, third step should be undertaken, by abolishing 100% reserve requirement? That is key non-sequitur here on which the very thesis of Mises fractional reserve banker rests. He simply did not say that anywhere, because he supported 100% reserve. If he really wished fractional reserve free banking as final monetary ideal, he should simply propose abolishing of central bank and letting existing fractional private banks to operate freely. Why would he introduce such unnecessary, mind-boggling complications with 100% reserve system requirement in the first place?

Nikolaj,

Because Mises understood the political constraints of different historic situations pretty well.
Therefore he made a proposal to tie the Central Bank's hand with 100% reserves to avoid inflation. That was his concern at that very moment: inflation after the 2nd World War.
You can read the volumes that Dr. Ebeling is editing with the Lost Papers to see how Mises advise on political economy sometimes deviates from pure theory in an ideal world.
From a theoretical perspective Mises supports free banking with free management of reserves everywhere.
He supported 100% reserve for Central Banks (sort of a Currency Board) just for political reasons.
And he never supported 100% reserve for private banks anywhere.
I dont think he felt that u have to legislate about the natural path of the banking industry evolution.
If he thought that free banking was going to lead naturally to 100% reserves, and please note that this is not the same than forcing 100% reserves, he got it wrong.
Mises was not totally consistent on these issues and this is why there's room for disagreement among his followers.
But there's also progress in science and White/Selgin/Horwitz and others are refining these ideas on very solid theoretical/historical basis, while Rothbard followers keep advocating supposed moral issues like fraud, promoting bad deflation and ignoring the empirical evidence of banking history.

Dg,

We dont disagree about the relative merits and advantages of a commodity reserve system.
But this system is not at work at the moment.
So you have to choose between doing nothing or to try to mimic the market at best with all its constraints. For me the market is free banking, for ohers the market is 100% reserves.
If you would live in a country with a monopoly on crude oil and the demand for crude oil goes up, what do u do? Do you let the monopoly to increase supply or do you leave the suppy unchanged?
Dont tell me that the best is not to have the monopoly cause we all know that.

Ivo,

There is a crucial difference between the demand for money and for oil. For oil is an object and money a medium of exchange, and while the supply of the objects of it, oil, apples, and oranges, determines our wealth, that of the medium of it, money, has nothing to do with it. We are richer with 100 than with 50 barrels of oil, but no richer with it at $100 than at $50 a barrel.

What is important about the medium of exchange is not the total amount of it but the ratios of it at which the different objects of it enter into it. What matters is not that apples go for 10 dollars a box and oranges for 5, but that apples go for twice as many dollars as oranges, whether it is 10 for 5, or 2 for 1.

Since a greater supply of money renders no greater service than a lesser supply of it, there can never be a market demand for more of it. The greater demand for money in the market means something entirely different. It is a greater marginal rather than greater total demand for money. More goods chasing the same number of dollars means a greater demand for each dollar, not a demand for more dollars.

So, increasing the supply of dollars is not a response to market demand, nor a “mimicry,” but a distortion and frustration of it.

Dg,
We disagree. I dont buy the idea that any amount of money is neutral to the market process.
But I already know your position so for the benefit of the rest we dont need to continue arguing about it. For me is enough to understand that there're disagreements and to learn about the rationale or lack of behind the arguments . When Austrians advocate and speak about sound money, they dont all support the same idea. Life goes on!

I should have said,

nor a mimicry of the market

Ivo,

To sum up, the crucial difference is that while a greater supply of oil renders a greater service than a lesser supply of it, a greater supply of money renders no greater service than a lesser supply of it.

Ivo,

Do you mean to say that, after all this, you know something the rest of us don't, and refuse to share it with us?

I guess George hasn't gotten back home yet, to check whether Nikolaj quoted him correctly. Then again, maybe he has.

Prof. Horwitz,

Here, again, the passage from Money and Credit, which you have cited as evidence that Mises supported credit expansion:

"Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money.”

We know that the fluctuating market demand for money is a greater or lesser demand for each dollar, not for more dollars, and, surely, Mises knew that, too.

He continues:

“THEY INCREASE OR DECREASE THEIR CIRCULATION PARI PASSU WITH THE VARIATIONS IN THE DEMAND FOR MONEY so far as a lack of uniform procedure makes it impossible for them to follow an independent interest policy.”

I understand the part in boldface, but not the rest of it.

In the boldface part, he’s saying that the banks operate in a certain way, which was not necessarily to approve of the way they operated.

Without knowing what the rest of the statement meant, I could not draw any inferences from it.

He continues:

“But in doing so, they help to stabilize the objective exchange value of money.”

In other words, they help to keep prices stable. But, again, saying that they do so is not necessarily saying that they should do so. And he surely didn’t believe that they should do so.

He concludes:

“TO THIS EXTENT, THEREFORE, THE THEORY OF THE ELASTICITY OF THE CIRCULATION OF FIDUCIARY MEDIA IS CORRECT..."

What is the circulation? Is that the amount of the media, the number of dollars?

What is its elasticity, its stability as something else changes?

Without more of the surrounding context, I don’t what he was getting out.

But, one thing is certain. There is still no clear-cut, unambiguous endorsement of credit expansion.

I meant, what he was getting at, not "getting out."

But the point is, that on a matter of such great importance, wouldn't Mises have made his position crystal clear? Would he have left any doubt about it? Wouldn't he at some point have said simply that, "though I generally disapprove of credit expansion, I acknowledge certain circumstances in which it was warranted."?

You still haven't presented us with any such statement by him. All you have given us are statements out of context that could mean God only knows what.

D.G.,

If Mises was opposed to credit expansion under any circumstances, then he was not a very good economist.

Even in a 100% reserve system, there would be expansions and contractions in the supply of credit, because the rate of saving and investment would not be constant. In other words, so long as credit expansion is matched by an expansion in savings, there need not be any economic distortions.

The point about fractional reservs in a free banking environment, is that FR banks would not be able to expand credit unless their depositors where also increasing their savings.

Something interesting just occurred to me.

If "deflation" is defined as a decrease in the money supply not matched by a decrease in demand, then what Boettke, Horwitz, Selgin, and others (including myself) have described as a "good deflation" does not exist.

It *seems* like deflation, because the non-money side of the price ratio increases, (thus increasing the purchasing power of money). However, this change is brought about because productivity has been enhanced, so the increase on the non-money side of the price ratio *costs the same as before*.

In consequence, this definition of "deflation" can neither be identified as a decrease in the supply of money nor a decrease in prices (expressed in money).

Am I getting confused here?

Lee Kelly said:

"Even in a 100% reserve system, there would be expansions and contractions in the supply of credit, because the rate of saving and investment would not be constant. In other words, so long as credit expansion is matched by an expansion in savings, there need not be any economic distortions."

But, saving is not expanded when new fiduciary media is emitted, that's the problem. Saving as category could have "praxeological" meaning only in 100% reserve system. In fractional reserve system we have no way of distinguishing between saving and demand for money. Inflationary credit is masquerading as saving. Every expansion of bank liabilities matched by increase in cash deposits "looks" like a saving, but it does not have to be necessarily (money has a third function as well, that of insurance against uncertainty, so every increase in bank cash balances held by the public does not mean necessarily increase in saving. Austrian free bankers, just like Keynesians, believe it does). And that is the main reason why Mises says that every emission of fiduciary media leads to credit cycle, because banks that way create some portion of their credit supply "out of thin air" that have distortive effects on relative prices and thus on structure of production. And you cannot know within that system what portion of cash balances is "genuine saving" and what portion is insurance against uncertainty. Free banking can reduce that problem, but ONLY by suppressing or decreasing emission of FM, and cannot eliminate it altogether. Only in 100% reserve system you know unequivocally what is the "real" saving - and that is amount of gold that individuals, banks and other institutions voluntarily invested in production.

Ivo,

only thing that is missing from your interpretation of Mises is how he could at the same time to advocate fractional reserve system as first best, and to believe that every increase in fiduciary media emission leads to credit cycle?

Nikolaj,

If an increase in money demand is not "genuine saving," but "insurance against uncertainty," then why hold money from a fractional reserve bank? That makes no sense. Why not withdraw gold and store it in a safety deposit box?

The implicit assumption here is that fractional reserve banking is fraudulant, and that people are being duped into thinking their money is something it is not.

In any case, I see no reason to suppose that, in a free banking environment, banks would not offer both fractional reserve and 100% reserve services, so people who wanted "insurance against uncertainty" would know where to go.

And, in my opinion, saving is *enabled* by the emmission of additional money -- provided it is matched by a rise in demand. Because unless savings can be redeployed quickly, time will be wasted while resources depreciate, and when savers eventually spend their money it will have less purchasing power.

Kelly,

First, you wrote,

"so long as credit expansion is matched by an expansion in savings, there need not be any economic distortions."

The expansion of real savings lowers the interest rate. The credit expansion lowers it even more.

How is that not a distortion?

Then you wrote,

If "deflation" is defined as a decrease in the money supply not matched by a decrease in demand..."

Demand for what, goods or money?

Then, further down, you wrote,

"good deflation" does not exist.

How about the withdrawal of money from the market when rioters and looters are running wild in the legislatures and courts as well as the streets? Isn't it a good thing to get money out of their reach? Isn't that a good deflation?

I agree with the last part of your statement, if I understand it correctly, that falling prices resulting from increasing production does not constitute deflation.

Just as inflation is simply an inflation of the money supply, deflation is simply a deflation of it, and just as there could be inflation without a corresponding increase in prices, there could be deflation without a corresponding decrease in prices

If the supply of goods goes up while the supply of money goes up, prices may be constant.

If the supply of goods goes down while the supply of money goes down, again, prices may be constant.

Inflation and deflation cannot be defined by rising or falling prices but only by increasing or decreasing supplies of money.


D.G. said: "The expansion of real savings lowers the interest rate. The credit expansion lowers it even more."

The increase in savings does not expand credit unless there is some mechanism to get the saved resources in the hands of borrowers.

In a 100% reserve system where banks operated as financial intermediaries, a customer would go to his bank and request to invest some fraction of his deposit; the bank would then take possession of some of the customers's gold and expand its credit supply.

Supposing the customer invested 50% of his deposits, then his account will be divided in two: 50% demand deposits (DDs) and 50% time deposits (TDs). Although the DDs are claims to gold sitting in the bank's vault, TDs are bank liabilities, i.e. promises to pay some quantity of gold plus interest on a specified date.

One important thing to notice is that even in a 100% reserve system, there can be two "claims" on the same gold -- the TDs of the investor and the DDs of whoever the bank lends to. Both would circulate as money, because people with a long time preference would be indifferent to accepting TDs instead than DDs.

The primary difference with an FR system is all deposits are bank liabilities (like TDs) and available on demand (like DDs). It seems like the best of both worlds, but there is a catch -- presuming we have a responsible FR bank, there is a small probability of a bank run or an option clause preventing withdrawal. That is the only major difference.

Both would create the same quantity of money, except in a 100% system it would be in two different forms. In a FR system, a bank would issue only one type of money, and it would be up to the bank manager to figure out his customers time preferences (i.e. what portion of deposits are being held like DDs and what portion as TDs). So long as they get it right, there is, in principle, no difference between 100% and FR systems.

Where differences do emerge, I think FR would be superior.

Kelly,

You wrote,

"The increase in savings does not expand credit unless there is some mechanism to get the saved resources in the hands of borrowers."

And growing beef doesn't expand any waistlines unless there is some mechanism for getting it onto people's plates.

True enough, but, what is so enlightening about that?

Is there something in the free market keeping beef off of people's plates, or savings out of commerce?

Do we need some poor subsitute for beef or savings to get the real thing to market?

Do we need horsemeat to get beef to market, or funny money to get real savings into commerce?


Prof. Horwitz,

I have found the passage in Money and Credit that you referred and nowhere thereabouts do I see the statements you attributed to Mises.

You said that in that section “Mises is saying that in a free banking system it is proper that banks increase their circulation of fiduciary media.”

I see no such statement there.

You said that “Mises is saying that a credit expansion is the appropriate response *under free banking* to an increase in the demand for money.”

I see no such statement there.

Prof. Horwitz,

You win.

I have just found this passage in Money and Credit:

"In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur."

I am dumfounded, flabbergasted, incredulous.

It makes no sense to me, but there it is.

So, what can I say except, well, shut my mouth!

Nicolaj,
You ask: only thing that is missing from your interpretation of Mises is how he could at the same time to advocate fractional reserve system as first best, and to believe that every increase in fiduciary media emission leads to credit cycle?

Mises says clearly that credit cycle in free banking will be minimized and those cycles wont have practical importance. I think he was wrong there cause i dont see the cycle developing, even if small, but that's another issue.
In my humble opinion Mises realizes that speaking about money there's no perfect system and he then advocates for what he perceives as the less bad/dangerous. It's a sort of comparative insitutional analysis.

DGL:

I'm not interested in winning. I'm interested in good economics. Of course that you've now found that quote is sort of strange since THAT is the quote I provided that started this whole debate in the first place, months ago.

Good to see you're reading TTOMAC though.

Ivo says:

"Mises says clearly that credit cycle in free banking will be minimized and those cycles wont have practical importance. I think he was wrong there cause i dont see the cycle developing, even if small, but that's another issue."

But, critical problem here is; if you assume that Mises preferred free banking with fractional reserves to free banking with legal requirement of 100% reserve, you must demonstrate that he actually believed fiduciary media has positive role to play in economy, and actually can improve economic results in terms of avoiding credit cycle. Not only that with FR FB pressures for inflation would be "minimized", but that economic efficiency overall would be that way "maximized" . But, that is exactly the opposite of what Mises is saying about FM all the time.

* after "credit cycle" above in my previous comment, it should be added "(compared with results of 100% reserve system)".

Prof Horwitz,

You're entitled to stick it to me, after all I've put you through. But, in my own defense, would it have been strange had I doubted that Mises had ever advocated central planning or the abolition of private property? To me, this is akin to that. And, even after seeing it with my own eyes, I still find it hard to believe.

Can you, as a great Mises scholar, explain, if not how he could have made such a glaring error, why he omitted it from Human Action, his magnum opus and summation of his best work?

Rather than my reading any more of Money and Credit, perhaps I understand why I stopped reading it forty years ago.

For monetary theory, I'll take Rothbard.

Nik,

I too advocate free banking, but without abolition of fractional reserve banking, not because I approve of fractional reserve banking, but because I approve of free banking, and it wouldn't be free if any kind of it were abolished.

As to whether or not fractional reserve banking had a useful and beneficial role to play, I don't know. I doubt it. But, however much I might dislike it, I would certainly dislike dictatorship even more.

Nikolaj,
You believe that free banking generates inefficiencies.
I believe that bad deflation generates inefficiencies.
Fine, we disagree.

Ivo and Dg Lesvic,

it's not primary topic here what you and I believe, but what Mises believed.

I am also not 100% sure whether Mises was right about inefficiencies of fractional reserve system. But, it should not and it could not be ignored that he HAD believed that any amount of fiduciary media emitted creates inefficiencies.

DGL,

I don't think he omitted it from HA. I think it's there but just not as clearly. You have to read closely and see context. And as I noted earlier, in that 1951 lecture, he says nearly the identical thing to what's in TTOMAC, so he didn't abandon it.

I wish Mises himself were here to tell us what is going on, because it's just all so strange.

But, regardless, the bottom line is still, to inflate or not to inflate, oops, to ease or not to ease.

That is the question, and I still say that our enigmatic Austrian was clear enough on that.

NO!

Interpreting Mises by picking out quotes is very difficult. He often works by proposing a set of simplifications, then stating things within that context.

I don't know if Mises was a monetary equilibrium theorist in the first edition of TTOMAC, or if he was in Human Action. It's quite clear though that he was in the later editions of TTOMAC. It seem to me that this is good evidence that this was his position.

Nikolaj quotes page 408-410 which in turn quote the first edition of TTOMAC. If you read the context though it's quite clear Mises is showing the reader how prescient he had been in 1912. The details of the points being discussed he had already treated earlier in TTOMAC. I think it is unlikely that he quotes that part of the first edition in order to retract comments he made earlier in the second edition (and further editions).

I think that Steve Horwitz and co are mainly right. I think other folks are taking things out of context, it is a difficult topic though.

The fact remains that Human Action was the centerpiece of his life's work, and if there is a conflict between Human Action and any other of his work, Human Action wins.

The Mises of Human Action was unambiguously opposed to credit expansion, inflation, easing, or whatever you want to call it, under any circumstances.

I don't really take that perspective. Mises wrote several long books on subjects that he only deals with in sections of Human Action. I think those books should be taken as the main account of what he thought for those topics.

Also, as Steve Horwitz has mentioned Mises used monetary equilibrium ideas in articles in the 1950s. He could have updated TTOMAC when it was re-issued in 1953. He added a chapter on monetary reconstruction but apart from that didn't change anything. He doesn't say in that chapter that he considers his earlier ideas wrong. He could have written that and pointed his readers to Human Action, but he didn't.

from Mises, Human Action, 3rd Rev Ed.:

"The services which money renders can be neither improved nor repaired by changing the supply of money…The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do.” P 421

“It is possible by means of an increase in the quantity of money to delay or to interrupt this process of adjustment. It is impossible either to make it superfluous or less painful for those concerned.” P 431

from Nikolaj:

in "Return to sound money" from 1951 Mises repeats:

"The first step must be a radical and unconditional abandonment of any further inflation. The total amount of dollar bills, whatever their name or legal characteristic may be, must not be increased by further issuance. No bank must be permitted to expand the total amount of its deposits subject to check or the balance of such deposits of any individual customer, be he a private citizen or the U.S. Treasury, otherwise than by receiving cash deposits in legal-tender banknotes from the public or by receiving a check payable by another domestic bank subject to the same limitations. This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day of the reform" (p. 448).

"Rigid 100% reserve" does not sound as an expression of great enthusiasm for fractional reserve banking to me. :)

Those were not just inferences drawn from Mises but his own clear unambiguous statements in opposition to credit expansion under any circumstsnces. Where do you find any such clear unambiguous statements by Mises himself to the opposite effect?

D.G.,

Do you really think that Mises opposed credit expansion "under any circumstances"? Although I don't care for Mises much, I do think he was a good economist. I would never attribute to any good economist the view that credit expansion is to be opposed under all circumstances.

Do you realise that credit expansion would also occur in a 100% reserve system?

I think that Mises meant what he said, not what you think that he thought.

Sorry,

Of course I meant

think what he thought

not think that he thought

Nikolaj:

If you think that Mises was of the view-- "if something provides no social good, then it should be outlawed," then you are clueless about classical liberalism. Freedom of contract is a good institution. It is almost certain that some contracts will have bad consequences, but giving government power to prohibit particular contracts is dangerous. Whatever problems (if any) that are created by fidicuary media issued by competitive private banks are less serious than the danger of giving government the power to interfere with banking.

Having central banks operate on a 100% reserve gold basis is economically equivalent to not having central banks and just using gold as base money. Mandating the reserve policy of competitive private banks is going to require looking at all sorts of bank deposits and determining which are money and which are not. Further, what happens when nondepository institutions issue fidicuiary media? Investment banks funding with overnight commercial paper? Suppose industrial corporations do so? This involves regulationg the credit instruments issued by all borrowers, especially nonbank financial institutions.

These simple scenarios where credit is all created by banks, and banks fund their activities with fiduciary media--well, it isn't always that way.

I have written a reply to you. The blog is not accepting it for some reason though.

Has anyone had any problems recently?

Does anyone know what the blog doesn't like?

DGL, I'll deal with the comments in TTOMAC first...

In "Monetary Reconstruction", part four, of TTOMAC Mises is describing his plan for monetary reconstruction.

The passage you quote doesn't demand 100% reserves. It says "This means a rigid 100 percent reserve for all future deposits; that is, all deposits not already in existence on the first day of the reform". Existing deposits are to remain backed in the way they were previously. It is increases that must be covered.

I don't think that such a situation could continue for very long. How would the state be able to rigourously check that a deposit is old? If I took £300 out of my account and opened another account with it that wouldn't be a new deposit, but how would the state make sure of that? In the long run I can't see any good way.

I think that this proposal is part of a reconstruction scheme, not something meant to be permanent. I think that Mises intends a return to the old gold standard and free banking, which is what he says earlier on p.438 of the PDF (or p.448 of the Liberty Fund edition) "Sound money still means to-day what it meant in the nineteenth century: the gold standard." Later in part four he advocates free banking.

So, I think that the phrase you describe as unambiguous is not so.

You give a challenge to me:
"Where do you find any such clear unambiguous statements by Mises himself to the opposite effect?"

The problem with this is that Mises describes inflation and deflation using monetary equilibrium terms. He doesn't use the same terms you do. As you mention earlier he writes: "In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange value of money must occur."
(that's on p.240 of my PDF, and I think ~p.250 of the Liberty fund edition).

We have discussed p.312 extensively. You say this page isn't clear because Mises doesn't approve of the stabilization of the objective exchange value of money. He is quite clear a little later on p.323 (of the PDF) "The progressive extension of the Money Economy would have led to an enormous extension in the demand for money if its efficiency had not been extraordinarily increased by the creation of fiduciary media. The issue of fiduciary media has made it possible to avoid the convulsions
that would be involved in an increase in the objective exchange value of money, and reduced the cost of the monetary apparatus. Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them. In the early days of the modern banking system they played a further part still bystrengthening the credit negotiating activities of the banks (which in those times could hardly have proved profitable if carried on for their own sake alone) and so brought the system safely past those obstacles which obstructed its beginnings."

He also says quite clearly on p.326 "Consequently the chief rule to be observed in the business of a credit-issuing bank is quite clear and simple: it must never issue more fiduciary media than will meet the requirements of its customers for their business with each other. But it must be admitted that there are unusually big difficulties in the practical application of this maxim for there is no way of determining the extent of these requirements on the part of customers. In the absence of any exact knowledge on this point the bank has to rely upon an uncertain empirical procedure which may easily lead to mistakes. Nevertheless, prudent and experienced bank directors - and most bank directors are prudent and experienced - usually manage pretty well with it."

Current,

Here is an excerpt from my essay, The Cause and Cure of the Depression, explaining the difference between marginal and total demand for money.

Inflationism is not limited to the Keynesian School but has found favor in the Chicago and Austrian Schools as well. Since goods are as much the demand for money as money for goods, when production and the supply of goods goes up, so does the demand for money. And, it follows, then, according to these Keynesian Chicagoans and Austrians, that, just as a greater demand for, say, oil, calls for a greater supply of it, a greater demand for money calls for a greater supply of it.

But oil is an object and money merely a medium of exchange. While the supply of the objects of it, oil, apples, and oranges, determines our wealth, that of the medium of it, money, does not. We are richer with 100 than with 50 barrels of oil, but no richer with oil at $100 than at $50 a barrel. What matters is not the total number of dollars but the ratio of one price to another, not that apples go for 10 dollars a box and oranges for 5, but that apples go for twice as much as oranges, whether at 10 to 5 or 2 to 1.

While a greater supply of oil renders a greater service than a lesser supply of it, the greater supply of money renders no greater service. So there cannot be a market demand for any greater number of dollars. The greater demand for money in the market means something entirely different, a greater marginal rather than greater total demand for money. With more goods chasing the same number of dollars, there will be a greater demand for each dollar, but not for more dollars.

So, increasing the supply of dollars is not a response to market demand, but a distortion of it.

You're right in pointing out that Mises is not in favor of trying to undo any credit expansion of the past. He is just against any further expansion.

But, then, you refer to a passage in which it would certainly seem that he is advocating a credit expansion.

And, so, the puzzle remains.

But, whatever Mises said in one place and then in another, I'm against credit expansion period.

Now, what about the passages in Human Action....

p.421 "The services money renders are conditioned by the height of its purchasing power. Nobody wants to have in his cash holding a definite number of pieces of money or a definite weight of money; he wants to keep a cash holding of a definite amount of purchasing power. As the operation of the market tends to determine the final state of money's purchasing power at a height at which the supply of and the demand for money coincide, there can never be an excess or a deficiency of money. Each individual and all individuals together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small."

This is something monetary equilibrium economists agree with, AFAIK. It is a "quasi-static" argument. That is, at any particular time money is worth X, at some later time it is worth Y. At both times it provides the advantages of indirect exchange. As Mises points out the operation of market ensures that the value of money will tend to a market-clearing price.

However, this has little to do with the dynamics of changing prices though. Mises discusses this in section 5 and section 7 of chapter XVII (the chapter we're discussing). In those discussions Mises mentions that deflation does not undo inflation. He also mentions that money isn't merely a "numeraire".

This brings us to the different topic of whether 100% reservists are right or wrong.

In the Rothbard argument you mention it is quite right to say that any amount of money can provide the services of money for society as a whole. But though that is the case a change in the objective exchange value of money from the money side creates many costs elsewhere.

I can't tell if you or Rothbard have written the various parts of your message. Anyway, in the message it says:

"While a greater supply of oil renders a greater service than a lesser supply of it, the greater supply of money renders no greater service. So there cannot be a market demand for any greater number of dollars. The greater demand for money in the market means something entirely different, a greater marginal rather than greater total demand for money. With more goods chasing the same number of dollars, there will be a greater demand for each dollar, but not for more dollars."

Now, remember that in good economics we take the view of the individual actor, and then we look outside from that centre. We are methodological individualists.

For each person a stock of money does provide a service. It is a sort of hedge against uncertainty. With it a person can hold a fund of purchasing power that can be used for whatever they want. That whatever can be variable, there is no need to decide beforehand exactly what it is.

If one person becomes more sure of his future purchases he can pay for them up-front and hold less money. His demand for money fall. The reverse is the case if he becomes more uncertain about the future. By extension the same sort of thing is true if a great mass of individuals act at around the same time.

The words you quoted above were mine, not Rothbard's.

Apart from not understanding AFAIK, I don't have any problem with anything you said.

Maybe I've missed something, but it all seemed to conform to my position.

I suppose that you agree so far just shows that Austrians don't have that different views of money.

To go further though.... What a holder of money is concerned with is that it provide a fund of purchasing power. If a bank can provide it's customers with a larger fund when they want it, then why not? Why can't they respond to an increase in uncertainty by issuing more money.

If people actually begin spending that money, rather than holding it then the outflow from the bank's region of operation will increase. That outflow requires the bank to redeem to obtain specie to use elsewhere. So, the bank must restrain expansion if their extra issue becomes inflationary.

If banks hold 100% reserves consider what happens when their is an increase in uncertainty. People must with-hold spending in order to obtain more money. This produces deflation and an increase in the purchasing power of money that allows each person to hold more purchasing power. However, it produces all the problems of deflation too. Then, as the economy recovers and people become less uncertain they run down their money stock. This then produces inflation. (These are points Horwitz pointed out in previous discussions.) Why should economies have to go through all that?

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