Freedomain Radio

 Hi everyone,

Ive been reading lots of Murray Rothbard lately and totally agree with him when it comes to money supply being determined by the market. There is just one thing i have trouble understanding. Lets say Murray Rothbard had his way and we had a 100% gold standard and banks were not allowed to partake in fractional reserve lending (because its fraud). Since the money supply will remain pretty much constant and the production of goods and services will increase due to better technology and more competition, etc. The prices will constantly be going down and each unit of currency would have more and more purchasing power as time goes on. I think Stef also mentioned this would happen in a free market in one of his podcasts but i cant remember which one. With deflation such as this happening what is the incentive for people to invest money when the value is increasing anyway without them having to loan it or invest it. People will see it as not worth the risk to invest the money when its value is increasing anyway due to deflation. I can see a few problems with this and please let me know if im wrong as im sure im missing something here:

- Since the currency will be appreciating and banks are not allowed to loan out money they dont have (or even the money they store for their clients without asking permission) there will be a higher demand for money which means interest rates will be very high and people wanting to borrow money to start a business or buy a house would have trouble paying pay back the loans and there would be many defaults which would then make people even less likely to lend or invest.

- Less investment in the capital goods which produce consumer goods and therefore less consumer goods.

- People will postpone spending for a later date when their dollars can buy more. This combined with less investment would cause less things to be produced which means more unemployment which leads to even less spending and so on.

I guess im kinda missing the important piece of the puzzle which shows how it would result in equilibrium. I dont see deflation as a bad thing if its the result of goods getting cheaper due to improvements in efficiency however i would see it as a bad thing is everything started deflating because people were hoarding money and not investing it with the expectation that they can buy more later with the same amount.

It is quite likely that all though a general standard format would emerge for anarchic money, there would also likely be a couple exchange mediums (currently known as currency) that have similar characteristics.  Obviously, there would be slightly varying rates between the currencies as far as inflation/deflation goes.  That is one counterbalance.

Another counterbalance is the fact that the moeny isn't automatically deflating.  The people investing the money in the first place are considered the demand side of the equation, so the value of "stefbucks" obviously does not increase until AFTER that demand is present.  Deflation/inflation are effects of an action regarding a currency, not a cause.

Lastly, as Stef often likes to point out when it comes to money, gold in the 21st century and beyond isn't exactly the be-all-end-all of currency and stapling currency to it might not be necessary in many respects.

I think the podcasts you're referring to are either:

Episode 523 "Anarchic Money"

or...

Episode 218 "Stateless Economies"

It's true that under a more or less constant money supply prices would go down due to improvements in production. However

-gold is also subject to improvement in production and its production grows along with the rest of the economy.

-even with money constant and prices going down fast, it is not any different in managing from prices going up. Prices of computers have been going down since the dawn of time, but people still buy them and invest in their production.

Sure investments are more easily made if business men know that the money is worthless in a few years, but this is not an advantage for the allocation of resources. Their needs to be risk in investing otherwise the foolisch would start businesses counting on inflation to pay back their loans. They take  resources away from better use.

If falling prices would scare businessmen from borrowing for investments, new investments would not come and prices would stop going down. The loans also  have to payed back from the margin times the volume. In a free society with a constant money supply, it is likely that wages are falling as wel (money constant and population growing), but as productivity increases, you might earn 2% less money and buy 6% more goods. I think this is what was happening during the gold standard at the end of the 19th century in the usa. This period is now known amongst statist economists as horrible because of  deflation, but purchasing power grew considerably (and that is all that matters). Keep in mind the proper definition of deflation is not prices going down, but a reduction in the money and credit. So allthough prices were going down steadily, there was no actual deflation, since the money supply grew moderately.

The course of G Reisman on capitalism explains it much better than I do, including examples how the repayment of loans is not in danger under falling prices (it is a problem to pay back loans if the money supply decreases though, which is the case under current boom bust expansian and contraction of credit policies). How the reasoning behind this exactly went, I forgot. I think it was something along the lines of: if money supply remains the same and the velocity of circulation, the volume of spending stays the same. This means business men can tap into the same amount of spending going on in the economy to repay their loans. When central bankers however get scared of inflation and slam the breaks (and contract money supply), the volume of spending actually goes down and there is less money to tap into to repay loans (just as the preceding inflation boom encouraged them to increase borrwoing)

Other currencies than gold could also be possible in a free society. They could inflate to keep prices constant, although it would not be directly clear to me who would get the benefits of the inflation.

Does this help?

^^ yes it does. thanks a lot. :)

Also If I was a Free banker dude and i saw my money gettins super valuable I would improve it by adding more anti-counterfiting software into the money. Like all those little threads and stuff you see in modern money. If the economy got rich enough money might be able to get advanced enough so where if somone stole it you might be able to track it down by GPS or something.

"If I was a Free banker dude and i saw my money gettins super valuable I would improve it by adding more anti-counterfiting software into the money."

Right, probably some kind of secure digital currency might evolve along those lines (backed by gold or silver or assets etc), with retina or fingerprint identification as proof and validation of the account. Quantum encryption perhaps. Tiny microchips under the skin, or maybe you wouldn't even need a physical medium, just having a shop or banks' in-house scanning and identification technology would be more than enough. Transactions would be quick and ultra-convenient, perhaps much more so than the credit and debit cards we carry today.

Well I guess we'll never know within our lifetimes but it's nice to contemplate a free (state-less) society's economic system anyway.

I think stocks will be the currency of the future, but that's just me.

Nojus Arturas Namajunas:

I think stocks will be the currency of the future, but that's just me.

Not just you, stocks are freely competing with each other so bound to outcompete compulsary stuff in value and stocks are already available when the currency collapses. In Zimbabwe you saw the stock market going up with the hyperinflation, even in real terms ('hard currencies'). People considered stocks a safe haven. That stopped working recently in Zimbabwe I think, because the state by now makes running a business totally impossible. Shell already anounced they considered leaving, since Mugabe only allowed his friends to sell fuel.

Yeah, Zimbabwe is a total mess.