The Specific Value of Money
The task of the theory of money consists merely in dealing with that component in the valuation of money which is conditioned by its function as a medium of exchange. FULL ARTICLE by Ludwig von Mises
Bookmark/Share
|
Comments (53)
Comments (53)
Mike Sproul
"One can fairly assume that such credit money could remain in use as a medium of exchange even if it were to lose its character as a claim against a bank or a treasury, and thus would become fiat money. Fiat money is a money consisting of mere tokens which can neither be employed for any industrial purposes nor convey a claim against anybody."
1) If the issuer of money holds no assets against that money, then if there is a 20% fall in the demand for money, the issuer will have no assets with which to buy back 20% of its money.
2) If the issuer of money holds assets that are worth even 1% less than the money it has issued, then there will be a speculative attack on that currency. The currency will lose value and the speculators will gain as the currency falls.
3) If banks can issue so-called fiat money, and hold no assets against it, then there should be some historical example of a bank that issued money (of positive value) without holding assets against that money. There has never been such a bank.
4) If the peso, for example, has value because of supply and demand, then as foreign currencies like the dollar start to circulate in Mexico, the demand for the peso will fall and it will lose value. This will further reduce demand for pesos, more dollars will invade, and the peso will fall to zero. Meanwhile, on quantity theory principles, the US would get a free lunch from the invading dollars. A better answer is that the peso, like all currencies, has value because it is backed by assets, and not because of supply and demand.
Published: November 25, 2009 9:44 AM
T. Ralph Kays
Mike Sproul
That is so stupid that it is laughable.
Published: November 25, 2009 11:39 AM
Nate Y
Mike Sproul,
If anyone decides to respond to your nonsense, it will be shredded to pieces. I'm hoping it happens because I'm going to make some popcorn. Having a paper debt obligation no one wants under the "asset" column of a bank/central bank balance sheet doesn't magically make it so. There's more accurate term for such "assets". Happily, the term avoids all the financial/economic complications. They're properly called "crap".
Published: November 25, 2009 11:51 AM
T. Ralph Kays
Nate Y
Couldn't have said it any better. Maybe we should officially name Mike Sprouls monetary theory "The Crapper Concept"
Published: November 25, 2009 12:11 PM
Shay
Yes, nobody pay attention to Mike Sproul; what he says makes no sense and it's a wonder it even looks like English. So don't try to understand it, because we won't even discuss its content, not that it has any, since it's just gibberish. We could easily refute his posting in a factual manner, without any ad hominem, but that would be a waste of our time, so don't ask.
Published: November 25, 2009 12:13 PM
Mike
Right on, Shay. I must say I've been disappointed with the general maturity level on the Mises blog. I was hoping that since people interested in real economics are likely to be pretty bright, it wouldn't be just like every other Web 2.0 outlet for waste disposal. I seem to be mistaken.
Were I to expect to be taken seriously, I might suggest that people don't speak up unless they wish to contribute actual thought to the discussion. Otherwise, you're just making yourself look like an idiot, and Austrian economics look like a gaggle of idiots.
I'm not saying you must reply to every anti-libertarian post. Most of us don't have that kind of time. Just that if you don't feel like taking the time to do so, don't make an ass of yourself by flaming.
Nor am I saying that you can't ridicule or show contempt for a ridiculous post, as it doesn't do us any good either to pretend to take blather seriously. But do it smartly - work such jabs into an otherwise devastating logical analysis.
Published: November 25, 2009 12:46 PM
Flattus Maximus
Mike Sproul is the intellectual equivalent of a dirty sanchez.
Published: November 25, 2009 12:53 PM
Nate Y
Mike,
I'm assuming you're a different Mike and not Mike Sproul.
So it seems like you're not saying much of anything. Other than you want everyone on this board to act just like you, to know what you would like to read before you read it, and to conform to your personal style and standard of analysis. The posts on this forum are by an large incredibly intelligent and graciously civil. There are moderators on this board and they perform their job well when needed.
How about you take your own advice? Contribute an actual thought to the discussion rather than attempt to be the passive aggressive Mises.org hall monitor. Give us your thoughts on "The Specific Value of Money" and on Mike Sproul's 4 points of criticism. Have at it.
Published: November 25, 2009 1:15 PM
Shay
I have a feeling that the Real Bills Doctrine has flaws, but I want to understand intuitively, rather than just assume others are right. It's really sad that nobody has offered any technical refutation in this thread yet. I'm part way through a piece by Robert Blumen and I think this might help things fall into place. Here's one of the main points that stand out so far, distilled in my own words:
Consider gold as currency, without banks. B loans A $100. B's purchasing power is less by $100, and A's greater by $100, so average demand is unchanged, and thus prices are unaffected.
Now, consider a bank which prints money. The bank loans A $100 it just printed. Now A has $100 more purchasing power, without any apparent corresponding decrease in anyone else's. But the amount of goods available didn't increase, therefore prices will increase as a result of spending this money. The decrease in purchasing power will occur, but will be spread among all holders of dollars. So in effect, all holders of dollars are forced to collectively loan the $100 to A.
Published: November 25, 2009 1:42 PM
Beefcake the Mighty
Shay, Mike Sprouls fallacious monetary beliefs have been well discussed (and refuted) on at least two other threads on this blog this week.
Published: November 25, 2009 2:02 PM
T. Ralph Kays
Shay,
Beefcake is absolutely right, the only one who doesn't understand how thoroughly Mike Sproul has been refuted is Mike Sproul himself.
Published: November 25, 2009 2:06 PM
Mike
Whoa, quite an extrapolation, Nate Y.
I'm in Shay's shoes here. I'm relatively a newcomer to Austrianism (currently reading Human Action). I'll read an article that makes a lot of sense to me. Then I'll read a comment in opposition that also makes sense to me. Since my background knowledge is not at a point where I could analyze the post myself, I was eager to hear what the others here had to say. Alas, all I saw were flames.
So, since you utterly misunderstood my motives for writing the previous post (as evidenced by the meaning behind your name calling), let me make them clear. I am not trying to play "hall monitor". I am stating facts about how certain behaviors on this forum appear to a curious onlooker. You know, the sort of people you might want to join your ranks someday.
So go on, keep shouting down anyone who makes a reasonable- (to an outsider) sounding disagreement. I'm not trying to restrict your liberty to tie your own hand behind your back while attempting to fulfill your mission, whatever it is you're trying to do here. Just stating that that is precisely what you are doing.
Published: November 25, 2009 2:13 PM
T. Ralph Kays
Mike
We welcome you here and I am happy to hear that you are actually educating yourself in a reasonable and thought out way. As Beefcake pointed out, on at least 2 other threads just this week Mike Sproul and his rantings have been dealt with thoroughly, you are welcome to read them. Those threads degenerated into the equivalent of a catfight primarily because Mike Sproul is incapable of considering any points but his own. We are trying on this thread to shut down Mike Sproul to prevent him from destroying this thread before it even gets going.
A good place to start with the Real Bills Doctrine might be wikipedia.
Published: November 25, 2009 2:24 PM
Shay
Heh, the Wikipedia page has the same content as Mike Sproul's website, so it doesn't offer much help. The article I linked to earlier was the best I've found so far as a rebuttal to the RBD.
"We are trying on this thread to shut down Mike Sproul to prevent him from destroying this thread before it even gets going."
You're doing a piss-poor job of it, then. It looks like a person with a peanut allergy going into hives at the hint of peanut, to avoid possible ill effects, all the while almost suffocating due to the swelling. The best way to deal with flawed ideas is to either post a concise summary of they're points are wrong and easy to be misled by, or link to a discussion which does so if it's hard to summarize. Immediately starting with ad hominem replies just clutters the discussion with useless crap (one reason I won't even touch some of the threads you mentioned), antagonizes others, and doesn't help those like me who want to discuss the facts instead of how much of a poopie head some think the other guy is.
I'm all for decimating flawed ideas in an objective, reasoned way. Technical brilliance trumps character attacks any way, and are fun to read. I'm actually enjoying the RBD, as it's like one of those math puzzles where you apparently prove that 2=1, but only after lots of careful thinking see where yourerror was. Understanding why you made the error is rewarding, because you can learn to avoid it in the future.
Published: November 25, 2009 2:42 PM
Nate Y
Mike,
Oh please. I didn't shout you down at all. And again, turn your critical gaze inward. In your first post you suggest that some of us in this thread are making ourselves "look like idiot[s]" and making Austrian Economics "look like a gaggle of idiots". And you say I'm the one guilty of name calling with my "hall monitor" quip? Give me a break.
Also, you say you only saw flames in this thread. My first post contained a clear counter to Mike Sproul's fourth criticism (and it also applies to his third criticism).
Here's what he said: "...the peso, like all currencies, has value because it is backed by assets, and not because of supply and demand."
In response I said (interlaced with my jabs): "Having a paper debt obligation no one wants under the "asset" column of a bank/central bank balance sheet doesn't magically make it so."
Is this merely a flame?
I may go through his points one by one but I'm not encouraged by the prior threads.
Published: November 25, 2009 2:42 PM
Mike Sproul
Shay:
"The bank loans A $100 it just printed. Now A has $100 more purchasing power, without any apparent corresponding decrease in anyone else's. But the amount of goods available didn't increase, therefore prices will increase as a result of spending this money. The decrease in purchasing power will occur, but will be spread among all holders of dollars. So in effect, all holders of dollars are forced to collectively loan the $100 to A."
A's net worth has not changed, since he owes the bank $100 and he pledges $100 worth of his property to the bank as security for the loan. 'A' previously had clear ownership of the $100 worth of property. Now he has 100 newly-printed dollars, but he can no longer spend the $100 worth of property. His power to purchase goods is negligibly affected.
Another way to think of it is to suppose that each dollar is redeemable at the bank for 1 oz. of silver. It's obvious that if the bank issues 100 new dollars in exchange for 100 oz., then each dollar is worth 1 oz. But what if the bank issues another dollar in exchange for something worth 1 oz, say, a square foot of land? The backing theory, aka Real Bills Doctrine, says that each dollar is still worth 1 oz, since the square foot of land could obviously be sold for 1 oz. of silver, and then the bank would have $101 backed by 101 oz. Even if there were no silver to be had, the bank could always sell the land for $1, retire the dollar, and then there would be $100 laying claim to 100 oz.
The backing theory also says that if the bank issued another dollar and got no assets in return, then each dollar would be worth 100/101=.99 oz. Quantity theorists talk as if the land makes no difference, as if the extra dollar is inflationary whether or not the bank got the land in exchange.
Published: November 25, 2009 2:54 PM
T. Ralph Kays
Shay
That is all fine with me, but we did all that and it doesn't work with Mike Sproul. Don't say later that we didn't warn you.
Published: November 25, 2009 3:01 PM
T. Ralph Kays
Shay
Sadly Mike Sproul is not a very good proponent of the Real Bills Doctrine, he doesn't appear to actually understand it. There are plenty of people here who would probably enjoy discussing RBD, including me, but doing it with Mike Sproul present is like trying to make out with your girlfriend with her grandmother in the room. You aren't going to get anywhere interesting.
Published: November 25, 2009 3:14 PM
Carlos Novais
Imagine a person that have a job, so produces something valuable for someone, an hoards all the money income consuming zero (it´s impossible i know but for the sake of the argument...).
Are we suposed to think that this is bad for the economy?
Well no, hoarding will increase the purchasing power of money, so in the end it´s like that person have chosen to be a voluntary slave for the rest of society or a robot with no maintenance costs whatsoever.
But i guess we could hear voices telling that the "no consume" plus hoarding is terrible for the economy.
Published: November 25, 2009 4:43 PM
Emil Suric
@Mike Sproul.
What the hell does "backed by supply and demand" mean anyways? And how do currencies have value because of assets? All value is demand based, the supply curves are merely previous demand curves; value comes from the individual. Commodities have value because they're employed towards specific ends, and not because they supposedly "backed by assets." The commodity with the highest degree of marketability, that is, the commodity which is most valued by that community, will be employed as a medium of exchange. This could be gold, silver, feathers, shells, giant boulders, or whatever. So much confusion.
Published: November 25, 2009 5:22 PM
Gerry Flaychy
When I go to a bank deposit $100 in cash in a checking account, the bank issue me $100 in account-money.The $100 in cash is an asset, and we can then say that the $100 cash is «an asset against that money». Thus, in this case, to say that the issuer of money holds no asset is not true.
But perhaps you mean something else. Then can you tell us more precisely what exactly do you mean ?
Published: November 25, 2009 6:09 PM
Mike Sproul
Gerry Flaychy:
The Mises quote at the start of my post asserted that money can have value even when it is not backed by assets. My point #1 asserted that this is not the case with real banks. All banks hold assets as backing for their money, and if they lost those assets, their money would lose value.
Published: November 25, 2009 10:16 PM
Mike Sproul
Gerry Flaychy:
The Mises quote at the start of my post asserted that money can have value even when it is not backed by assets. My point #1 asserted that this is not the case with real banks. All banks hold assets as backing for their money, and if they lost those assets, their money would lose value.
Published: November 25, 2009 10:17 PM
No Such Things As Hyperinflation
3) If banks can issue so-called fiat money, and hold no assets against it, then there should be some historical example of a bank that issued money (of positive value) without holding assets against that money. There has never been such a bank.
http://en.wikipedia.org/wiki/Hyperinflation
Published: November 25, 2009 11:24 PM
No Such Things As Hyperinflation
Mike Sproul is an idiot. Let me guess: there's no such thing as hyperinflation either, right?
Published: November 25, 2009 11:26 PM
No Such Things As Hyperinflation
Mike Sproul is an idiot. Weimar Germany backed all 500 quintillion Marks worth of its notes. It had 500 quintillion Marks worth of IOUs, so they were backed.
Published: November 25, 2009 11:28 PM
Nate Y
Mike Sproul,
You say: "The Mises quote at the start of my post asserted that money can have value even when it is not backed by assets."
This is not what the Mises quote asserts. Read it again.
Published: November 26, 2009 12:43 AM
Beefcake the Mighty
Mike Sprouls example well-illustrates his confusion. As was pointed out repeatedly on the earlier threads, the value of the notes backed by the land is NOT the face value of the notes (1 oz of silver in this example), but rather the MARKET value of the underlying land. In other words, the value is driven by supply and demand. As far as I know, Mike Sproul has not even addressed this point, let alone refuted it. Hence great annoyance with him is completely justified.
Published: November 26, 2009 8:16 AM
Beefcake the Mighty
Let's note another point: the land-backed note and the silver-backed note are not both perfectly fungible with money proper; obviously only the silver-backed note is. The land-backed note is some other investment vehicle, which in case people haven't noticed, typically aren't accepted in daily transactions.
Published: November 26, 2009 9:19 AM
No Such Things As Hyperinflation
LOL I didn't realize that Weimar Germany actually printed about 500 quintillion Marks. I just thought that was an insanely big number.
Published: November 26, 2009 9:25 AM
Gerry Flaychy
Thank you Mike Sproul for your clarification. Now I can see where the problem was: in the interpretation of some words.
Published: November 26, 2009 10:06 AM
Beefcake the Mighty
And as T Ralph has stressed, collateral, which plays such a central role in RBD, in NOT the property of the bank. Even here, RBD cannot appeal to any kind of "backing."
Published: November 26, 2009 10:17 AM
T. Ralph Kays
The Origin of RBD, a fable by T. Ralph Kays
Most scholars believe that the advent of the theory we now know as the Real Bills Doctrine is lost in the murky shadows of early human history. Take heart however; thanks to an amazing family tradition of maintaining a detailed and completely accurate oral history I can bring you the astounding tale of my ancestor, the inventor of RBD. (Originally called the Ralphs Bills Doctrine, and yes I am named for my illustrious relative)
It all happened a long, long time ago, back when all commerce was based on barter and consumers had no regulatory agencies to protect them from the predatory practises of big business. Ralph was a potter and made a poor living in a small village. The poor living was possibly due to most of the pots he manufactured being lopsided and only randomly being capable of containing liquids for more than a few minutes. His son later claimed that the dubious quality of his pots was caused by his fathers preoccupation with discovering the science of economics.
Ralph was pondering his lack of success in making trades at the weekly marketplace, held in his village, for the items his family needed, when a flash of brilliance lit up his face. It wasn't his fault! It was because there was no common item of exchange that people could trade with to get the things they needed! He pondered through the night in his little grass covered hut, and by early morning had a solution. He spent the first hours of daylight scribbling on many small pieces of papyrus and by mid-morning was ready to implement his plan. First, he hung a large sign over the door to his hut that read "Ye Olde Banke", and with everything ready, went out in the village to proclaim his genius to everyone. He explained how everyone would benefit from his innovation, how everyone would save valuable time by being able to conduct business with new efficiency, how people would be able to easily pass their wealth on to multiple heirs, how the village would finally be able to fund the civic improvements that so many yearned for. (In truth Ralph was the only one yearning and most of his yearnings involved civic improvements built of clay somehow) Then he showed the villagers all 100 of the scraps of papyrus that he had so carefully scribbled on.
" I have invented currency" he announced "and it can be traded for anything. We will call them Ralphbills and everyone will use them."
" For what?" someone in the crowd said, "you've already scribbled on them so we can't write on them and the only other use would leave ink all over our arses."
"No, they are valuable not for what they are, but for what they represent", Ralph paused dramatically at this point, then in a hushed voice said "these represent my home". He looked around expectantly, but was disappointed to see only blank stares. "My home, you know; the hut, the garden, the goat pens, the beautifully landscaped front yard, the outhouse; the whole kit and caboodle!" He looked around as his meaning slowly dawned on the crowd. "Everyone recognises my home has value, right? These represent my home, you could say, the value of these is backed by the value of my home!"
"So you are saying, if I go home and scribble on 100 pieces of papyrus and come back here I can trade them for your home?" came another voice from the crowd.
"No, no, no" said Ralph, "that would be counterfeiting, I will only trade my home for these specific pieces of papyrus. See they all have unique serial numbers."
"What if I don't have all 100, what if I only have 10 of them?" from a third villager.
"If you have 10 then you have one tenth of the value of my home" said Ralph. "These are MONEY" Ralph cried triumphantly.
Pudgy little Ralph Jr cried out "but daddy, daddy, that means...."
"You are right" crowed Ralph, "we are RICH."
to be continued
Published: November 27, 2009 3:27 PM
Gerry Flaychy
What I understand is that the $100 of IOU's lend by the bank will be redeemable for the same $100 of gold coming from a depositor who already received $100 of IOU's redeemable for that same gold, thus adding $100 of money to the supply of money, while in your first example the $100 is only transfered from B to A, thus adding no money to the supply of money.Thus, in your first case the average demand is unchanged, while in your second case the average demand is changed. Also, while in your first case the prices will be unaffected by the loan of B to A, in your second case prices will be affected by the loan of the bank to A.
Is it what you mean ?
Published: November 27, 2009 5:11 PM
Gerry Flaychy
There is also the case where A borrows $100 from a bank in exchange of an IOU, due, say, in 60 days. Therefore the purchasing power of the assets he already has is untouched, and his personnal purchasing power is thus increased by $100.Even in the case of a loan secure by a specific property, say a tv set, if A keep this specific property with him, he may sell it and spend the money of the sale altogether with the money borrowed. (The problems will come only if A don't reimburse the loan.)
Whatever the case, if the money lend comes from a precedent deposit in a checking account (reserve money), this new money (newly-printed dollars) is added to the money supply (say M1).
If the money comes from a term deposit (with no possibility of withdrawal before the term), then it is just a indirect transfer of money from B to A: no new money, and nothing is added to the money supply (say M1).
Published: November 28, 2009 5:52 PM
fundamentalist
Mike Sproul's RBD is nothing but a denial of subjective value theory. It tries to give money an objective value based on the collateral backing the money loan. As such, it tries to set economics back almost 200 years. It denies that money is a commodity and that it loses value as the quantity of money increases relative to other goods. Even gold will lose value as its quantity increases relative to goods and services. That's an historical fact and undeniable. But somehow, paper escapes the laws of economics in Sproul's scheme. Maybe it should be labeled Houdini economics instead of the Real Bills Doctrine. There is nothing real about it.
Published: November 28, 2009 11:04 PM
T. Ralph Kays
fundamentalist
Great point, right on target. Somehow 'value' is magically transported from collateral to banknotes.
Published: November 28, 2009 11:23 PM
Mike Sproul
Fundamentalist:
Gold is a commodity; paper bills are not. As more gold is produced, its price will fall. As more paper bills are issued, the issuer normally receives assets of at least equal value, so the amount of backing per bill stays constant as more are issued, and the bills hold their value. Only when money issuers fail to get or keep adequate backing do the paper bills lose value.
Published: November 29, 2009 12:52 AM
T. Ralph Kays
Mike Sproul
"As more paper bills are issued, the issuer normally receives assets of at least equal value, so the amount of backing per bill stays constant as more are issued, and the bills hold their value."
Are you completely insane?
Published: November 29, 2009 12:56 AM
Beefcake the Mighty
T Ralph, agreed, that Fundamentalist makes a great point, and that Mike Sproul is insane. RBD, at least in his hands, is akin to voodoo.
Published: November 29, 2009 7:05 AM
fundamentalist
Mike: "As more gold is produced, its price will fall. As more paper bills are issued..."
You can repeat your mantra a million times, but repitition doesn't make it true. Why does gold fall in value when more is produced? Because the quantity of gold is greater relative to goods. It's the same with potatoes and apples. If you suddenly increase the supply of potatoes and not apples, their value relative to apples will fall. That's how subjective valuation works. In the same way, if you increase the volume of paper, no matter what backs it, its value relative to goods will fall, and it doesn't matter if you call that paper "money."
By claiming that money has the intrinsic value of the collateral backing it, you are denying subjective value theory and trying to set economics back 200 years, as Keynes did.
Published: November 29, 2009 9:49 AM
fundamentalist
PS, the late Scholastics of Salamanca discovered the quantity theory of money, so the RBD is an attempt to reset economics to what it was before 1500.
Published: November 29, 2009 9:51 AM
Gerry Flaychy
"Gold is a commodity; paper bills are not. As more gold is produced, its price will fall."For the market, 'paper bills' represent gold, so if more are issued, then it will be like issuing more gold, and, all other things being equal, the price of gold and 'paper bills' will fall all together, taken in the sense of their purchasing power: a 'paper bill' redeemable for 1oz of gold will continue to buy the same thing as 1oz of gold, and "vice versa".
.
"Only when money issuers fail to get or keep adequate backing do the paper bills lose value. "
I would rather say when, in the 'normal' course of business, a money issuer fail to redeem completely his 'paper bills' to some peoples, and that the news of this situation begins to circulate among buyers and sellers, do the 'paper bills' lose value in relation to gold: if, say, peoples can get only ½oz of gold for each of their 'paper bills' redeemable for 1oz of gold, and for all of them, then in the market they will be treated as ½oz of gold while the 1oz of gold itself will continue to be treated as 1oz of gold.
.
But nowadays in our present monetary and banking system, the situation is somewhat different because bankers have developped over time many 'tricks' to counter this problem, some with the help of government(s), some by themslves.
Published: November 29, 2009 10:54 AM
Mike Sproul
Fundamentalist:
The theory of value applies to commodities, not to pieces of paper and computer blips that are claims to other things.
Gerry Flaychy:
If the issue of paper money displaces gold from circulation then the total demand for gold will fall and its value will fall. Each unit of paper money will still be worth 1 ounce, but the ounce itself is worth less. But once gold is no longer used as money, the issue of more paper won't reduce the demand for gold any more, and thus will not reduce gold's value. Meanwhile, as long as banks only issue new units of paper money in exchange for stuff worth 1 ounce, each unit of paper money will still be worth 1 ounce, even as more are issued.
Published: November 29, 2009 5:38 PM
Lord Buzungulus, Bringer of the Purple Light
"The theory of value applies to commodities, not to pieces of paper and computer blips that are claims to other things."
It's official; this guy is officially off his friggin' rocker.
Published: November 29, 2009 7:14 PM
Gerry Flaychy
Even if bank's promissory notes redeemable for 1oz (bank notes) are lend in exchange for stuff worth *less* than 1oz, they may be traded in the market as if they were 1oz of gold itself, as long as the bank can redeem them for 1oz of gold each time that somebody comes at the bank to redeem them.
This is possible because, as long as a sufficient percentage of the issued notes stay in circulation, thus without being redeemed, it's then become easy for the bank to redeem the others. The bank has just to watch closely this percentage and not issue more bank notes than required by the situation.
Published: November 30, 2009 6:14 PM
T. Ralph Kays
Wow, I just sold 3 ounces of gold, the US currency I was paid with weighs close to the same amount, the paper dollar (even in $100 denominations) is close to being worth less by weight than gold.
Published: November 30, 2009 6:37 PM
Mike Sproul
Gerry Flaychy:
If a bank has issued $100, its assets must be worth at least 100 oz. If assets are 99 oz, and customers know it, there will be a bank run as people rush to redeem their dollars for gold. The last person in line will get nothing. If speculators see what's happening, they will sell the dollars short and profit from the fall of the bank's dollars.
Published: November 30, 2009 11:20 PM
Gerry Flaychy
That's why the banker has to be prudent in the choice of his customers and their assets or collaterals, in the quantity of bank notes issued and the quantity that usually comes back to be redeemed, in the quantity of gold in his possession, and in the rapidity with which he can find supplementary gold if needed.If every bank note coming in to be redeemed is redeemed, and also, if the bank has done that for many years, then even if for a certain period his assets worth less than the bank notes issued, there will be no bank run, and no loss of worth for its bank notes.
If for any reason a bank run happens, even if its non-gold assets are worth more than the extra gold needed, if it can not change them enough rapidly in gold, he wil be out of business. That's were the question of the 'tricks' comes into the picture.
So, it is not only a question of the worth of its (non-gold) assets. It is important, yes, but it is not the one and only factor.
Published: December 1, 2009 10:52 AM
fundamentalist
Mike: "The theory of value applies to commodities, not to pieces of paper and computer blips that are claims to other things."
On what grounds do you exempt pieces of paper and computer blips from the theory of value? If people place a value on something, then it falls under the principles of subjective value. It doesn't matter what that something is made of. If you can give me a good reason why those are exempt I'd seriously consider it. What you call compute blips I can use to buy clothing or a car. I would get very upset if someone took away from me my computer blips.
Published: December 1, 2009 12:26 PM
Mike Sproul
Fundamentalist:
Let each blip be a claim to 1 oz. of silver. If a blip sold for 1.01 oz in the market, quantity supplied would be infinite, and quantity demanded would be zero. If a blip sold for .99 oz., quantity supplied would be zero, and quantity demanded would be infinite. Both the supply and demand curve are horizontal at 1 oz. They are meaningless. The value of those blips is determined by their backing (assets worth 1 oz.), not by supply and demand.
Commodities have production functions and are produced using scarce resources. Not so with blips. Commodities are consumed by people. Not so with blips. That's why the theory of value applies to commodities, and not to blips.
Published: December 1, 2009 12:37 PM
Gerry Flaychy
Does the value of money in the market determined by supply and demand ?
Is there a difference between the 'value of money' and the 'purchasing power of money' ?
Do we have 2 theories of value or only one ? If 2 is the case, which one is the best ?
That are the questions.
.
In our present monetary and banking system, $10 of account-money (blips) have the same purchasing power in the market as $10 in Fed notes. If this purchasing power of the money change, it changes for those two forms of money in the same proportion, while $10 of account-money (blips) continue to be change for $10 of Fed notes at the bank, and vice versa.
Published: December 1, 2009 1:30 PM
T. Ralph Kays
RBD
At the heart of RBD is the assertion that if credit expansion is backed by adequate collateral for the new loans, then the money, or money substitutes, thus created have real value, and therefore will not cause inflation or lead to the business cycle as described in ABCT. The money, or money substitutes, have value because the collateral used to guarantee the loans has value.
Some of the less sophisticated proponents of RBD assert that when the new money, or money substitutes, are created then an equivalent value assett is also created, namely the loan itself, which can be traded at the push of a button. That loans are traded this way is irrelevant however; the critical point is, was a new assett actually created? When a loan is made, say on a home, the homeowner gives up part of their claim to the property in exchange for present money, the loan represents the claim they surrendered to the bank. Instead of a new assett coming into being, what has actually happened is that an existing assett has been divided between two entities. To argue otherwise would amount to asserting the right of homeowners to take out a loan on their home and still be able to use the equity thus encumbered as they please. They could sell it and pocket the money, they could take out as many loans as they wanted against that same equity, there would be no limit to their claim to the collateral. That is clearly not the case.
RBD proponents are offended when it is claimed that the credit expansion that occurs under their system results in "money being created out of thin air". People who make this claim point to the fact that after the credit expansion occurs the only new assets (please see previous paragraph) are the new money or money substitutes. RBD hinges on the claim that the value of the collateral creates the value of the money, or money substitutes, that come into existence with the credit expansion.
Their are two basic divisions in the discussion of value, there is the objective theory of value and the subjective theory of value. The objective theory of value asserts that objects have intrinsic value apart from the opinions of humans and that it should be possible to measure objectively this 'value'. There are many different schools of objective value theory, even though not one of them has ever successfully been able to measure 'value'. The subjective theory of value, the one at the core of Austrian economics, holds that value is determined differently by every individual and that no object has an intrinsic 'value' apart from the opinions of individuals.
RBD proponents must explain their assertion that the value of the money, or money substitutes, created under their system derives from the value of the collateral behind the loans, using one of these two basic philosophies of 'value'. If they choose the objective theory of value they should be able to define the value of the collateral without reference to money, after all, the value of the money comes from the collateral, it is a derivative of the value of the collateral. They should also be able to explain what constant unit of measure is appropriate to 'value'.
More often RBD proponents follow somewhat of a subjective theory of value, but there is a serious problem with this approach. They use the term 'value' extensively, but, when pressed, they admit that what they really mean is the money price of the collateral behind the credit expansion that creates the new money, or money substitutes. So the 'value' that establishes the 'value' of the money, or money substitutes, is in fact the money price of the collateral. But the money price of the collateral would depend entirely on the 'value' of the money, and the 'value' (or money price) of the collateral is what establishes the 'value' of the money. It is an endless circular argument.
What one is left with is the Austrian explanation of prices and their function in the free market. The 'value' of money, or money substitutes, adjust, along with every other item in the market, in order to clear the market. Clearly the abundance of any item in this world will be reflected in its 'value', including money.
Published: December 31, 2009 12:48 AM