Tag: Book notes

What Has Government Done To Our Money – Notes – Part 6

>> February 28, 2020

>> Blog Post #32

Access part 1, part 2, part 3, part 4 and part 5

Summary

Once again it is important to base all of Rothbard’s writings in the context of a free market.

In a Free Market:

  • Money originates from the choice of a commodity, by the free market, as a medium of exchange.
  • The unit of money is a unit of weight of the commodity.
  • Usually a metal such as gold or silver is used.
  • The shape and form of the money are chosen by the market participants.
  • Private coinage is a legitimate business endeavor.
  • The price of money is its purchasing power. It is a function of supply and demand on the market.
  • Government’s wish to fix the price of money is an interference with the free market and the public’s demand for money.
  • Multiple monies can co-exist on the market. Their relative prices are a function of the ratios of their respective purchasing powers.
  • Increases in the money supply dilute the purchasing power of each ounce of money.
  • Inflation is the increase in money substitutes, not covered by the same increase in the real stock level of money. It is never socially useful and only benefits certain people to the detriment of others.
  • Inflation is a fraudulent invasion of property.
  • Inflation could not exist on the free market.
  • Freedom can run a monetary system superbly, without any need for government interaction.
  • Liberty is the mother, not the daughter of order.

Keep Calm

And Enjoy

Freedom, Liberty & Absence of Government Intervention

What Has Government Done To Our Money – Notes – Part 5

>> February 26, 2020

>> Blog Post #31

Access part 1, part 2, part 3, and part 4

Stabilize the price level?

  • Some people believe money should be a fixed yardstick that never changes. This would mean government intervention, in the form of money supply management, instead of freedom.
  • However, the tools to hedge against price fluctuation already exist. Should people who do not wish to use these tools be forced to suffer from government stabilization of prices?
  • Government intervention would distort the market.
  • People would not be able to change their cash balances in proportion of prices.
  • Increased productivity tends to lower costs and prices, redistributing some of these benefits to the entire population under the form of lower costs of living.
  • Money is not a fixed yardstick. It is a commodity serving as a medium for exchanges. Flexibility in its value, in response to consumer demand, is just as important as any other free pricing on the market  

Co-existing Monies

  • Recap of what has been established so far:
    • In a purely free economy,
    • Gold and silver are used as medium of exchange,
    • Gold and silver are minted by competitive private companies,
    • Gold and silver are exchanged by weight,
    • Prices are set freely by the market in response to customer demand and product supply levels,
    • Freedom of prices = freedom of movement for the purchasing power of the money unit,
    • The resulting free economy would not be chaotic,
    • The economy would move swiftly and freely.
  • The market could very well choose to only accept one form of money but has not so far.
  • Over the past centuries, gold and silver have both been used.
  • Silver has proven to be more practical for smaller transactions and thus remained in circulation.
  • The exchange rate between gold and silver is set by the market forces of supply and demand.
  • The exchange rate and purchasing powers of the two metals will always tend to be proportional.
  • The free market is eminently orderly.

Money Warehouses

  • Gold has to be stored somewhere as it is usually awkward and difficult to transport.
  • Certain firms will specialize on the market as gold warehouses.
  • The owner of the gold maintains his rights on the gold thanks to deposit receipts and he can claim them whenever he chooses to.
  • Money being used mainly for its exchange properties and not its physical properties, it will most likely be transferred rather than consumed, making money warehouses even more important that regular warehouses.
  • Transfer of warehouse receipts becomes more convenient than the physical exchange of gold over time.
  • As the market for money warehouses develops there are three limits to the use of money substitutions in the form of receipt transfers:
  • The extent to which people are willing to use the money warehouses – we call them banks – instead of physical cash,
  • The more exchanges are carried out between clients of different warehouses, the greater the need to physically move gold,
  • The degree of confidence that clients have in the trustworthiness of their banks.
  • Paper receipts are bank notes.
  • Bank deposits are open book accounts at the banks.
  • Instead of transferring paper receipts, the client has a book claim at the bank. He makes exchanges by ordering the bank to make a transfer somewhere else. This is a check.
  • Economically there is no difference between a bank note and a bank deposit. They both represent a claim of ownership of physical gold at the bank. They are both transferred as money substitutes.
  • Token coins are the same thing as bank notes except they are printed on base metal.

Now this section of the chapter is extremely important, and it is the kind of information that you rarely see in economics textbooks when you study economics at school.

What has happened to the money supply as a result of all these money warehouse operations?

  • If paper notes or bank deposits are used as money substitutes does that mean that the money supply has increased even though the stock of gold has remained the same? Certainly not as the money substitutes are just warehouse receipts for gold that is actually deposited.
  • When the gold is transferred in the form of a money substitute being exchanged, the gold no longer exists as part of the effective money supply, but as part of the money reserve, as it can be claimed at any time by the holder of the money receipt.
  • An increase or decrease in the use of money substitutes therefore exerts no change on the money supply. Only the form of the supply is changed, not the total.
  • Banks could very well function on this 100% reserve policy and charge fees for their services. Use of their services would depend on the demand that customers have for their services.

Rothbard then proceeds to ask questions about the evaluation of fractional reserve banking, which he calls one of the thorniest problems facing the monetary economist:

Would fractional reserve banking be permitted under a free economy or would it be prescribed as fraud?

  • Banks have historically rarely stayed on a 100% reserve basis for a long time.
  • Banks have always been tempted to use seldom moving reserved for their own benefits.
  • People do not care whether gold they redeem is exactly the same gold that they deposited. They just care about the purchasing value of it.
  • Banks are tempted to use other people’s money to generate a profit for itself.
  • If banks use customer’s money, the receipts are then partially invalidated. Some receipts no longer have any gold behind them. The bank therefore becomes insolvent as it could not meet its obligations if a customer decided to redeem that gold.
  • These are pseudo money receipts that are loaned by banks on the market. The pseudo receipts are indistinguishable from the real money receipts.
  • You therefore end up having more receipts than gold in the warehouse, which falsely increases the money supply on the market, creating inflation.
  • Inflation is any increase in the money supply on the market, which does not consist in the equal increase of the stock of the physical gold.
  • Fractional reserve banks are therefore inherently inflationary in nature.
  • Bank deposits are not IOUs like a loan would be as they do not come with the promise that the bank would reimburse you a certain amount of money at a future point in time. They are warehouse receipts that are supposed to be redeemable at any point in time by the customer.
  • Fractional reserve banks create money out of thin air. They are at all times in a state of bankruptcy, that is only revealed if all customers decide to simultaneously claim their warehouse receipts, resulting in a bank run.
  • No other businesses in the world are susceptible to the same phenomenon of a bank run as a normal business takes risks with their own money, not their clients’ money.
  • Morally in a truly free market, fractional reserve banking should not exist as it is fraudulent.
  • Late coming claimants in a bank run are left high and dry.
  • On bank sizes and numbers:
    • The more banks and the smaller their clientele, the large the need to keep large reserves in case their clients claim their gold,
    • The larger the customer base of a bank is, the more it can run fractional reserve banking.
  • As monetary expansion continues with fractional banking, people who understand the truth of the system will be encouraged to create anti-bank leagues to urge bank runs.
  • This will help reduce monetary expansion.
  • Note that this is not at all to limit credit which is a promise to deliver future value at a future date and does not falsely change the money supply.

Isn’t it insane how blunt the question is:

Would fractional reserve banking be permitted under a free economy or would it be prescribed as fraud?

Before I ever started taking an interest in Bitcoin, I would have never even imagined this question and yet I consider myself as being educated. Maybe I was just educated by the wrong people / textbooks.

The level of corporate / governmental fraud we live with is endemic. I certainly do not want to be last in line if there is a bank run. And you shouldn’t either. This is the promise that holding gold yourself offered for years and that owning bitcoin (only if you hold your bitcoin keys yourself) furthers as it is less cumbersome to self-custody. Get on board people!

On a final note, maybe bitcoiners are just the manifestation of that anti-bank league that Rothbard was describing in his book. Are bitcoiners then supposed to encourage bank runs? I’ll leave that question open for you to answer. You can always post your opinion in the comments’ section below.

What Has Government Done To Our Money – Notes – Part 4

>> February 11, 2020

>> Blog Post #28

Access part 1, part 2, and part 3

The Proper Supply of Money

  • Questions about the supply of money:
    • How much money do we need?
    • Can the supply be regulated? On what criterium?
    • Should it be left to the free market?
  • The total money supply is the total weight of all the money existing in the world.
  • The shape of the money is unimportant, but if one of the shapes is accepted by the market as being more convenient, it will be chosen as the money of account.
  • The other shapes of that money will then trade at a premium or a discount.
  • Increases in the volume of money will the result of greater production of it and decreases from wear and tear.
  • The proportion of new annual production of money relative to its total stock will be fairly low as:
    • The market will choose a durable commodity as a money,
    • Money is not used up at the same rate as other commodities.
  • Few people suggest leaving the supply of money be dictated by the free market.
  • The price of money is determined by supply and demand:
    • If demand rises, prices will rise,
    • If supply rises, prices will decline,
    • So, what are the supply and demand for money?
  • Money is only useful for its exchange value:
    • If the supply rises, it will dilute its purchasing power.
  • So, it does not matter what the total supply of money is. Any number will do.
  • The market will naturally adapt by adjusting the purchasing power of the unit.

The problem of hoarding

  • Is hoarding really a menace?
  • When there is hoarding, there is an increase demand for money. Prices fall, and the purchasing power of money rises.
  • It is not irrational for people to want to increase their cash balances.
  • People have cash balances because of the uncertainty in the future.
  • Money does not only carry value at the moment of exchange.
  • People often overlook that delaying exchange in the expectation that the purchasing power of money might increase is a perfectly acceptable proposition.
  • In a perfectly certain world, no one would choose to hold cash.
  • People do not want more money; they want a greater command of goods that money can be exchanged for with the same amount of money.
  • People do not want to increase the total supply of money, as that would dilute the purchasing power of money.

Just a little note on the two items covered today. As someone who is extremely interested in bitcoin overall, I feel there are a lot of questions that are interesting to look at in the context of how bitcoin might be a new money media with intriguing characteristics that might make it very popular down the line.

  • Bitcoin proposes a fixed supply of money. People often discuss whether the total supply – 21 million bitcoin – is the right number or not, or if there should have been an annual growth rate set into the protocol at its creation. I still rarely hear the opinion that the total supply is totally unimportant, which is what Rothbard suggests.
  • For commodities such as gold, which Rothbard bases a lot of his examples on, gold does have a commodity value in addition to its pure medium of exchange properties. What are the commodity properties of bitcoin?
  • Today, most governments are implementing aggressive policies to remove physical cash more and more, diminishing the capacity of individuals to easily maintain or increase their cash balances and manage uncertainty, reinforcing individual’s reliance on governments even more in the process. Looks like a vicious circle to me.

What Has Government Done To Our Money – Notes – Part 3

>> February 4, 2020

>> Blog Post #24

Access part 1 and part 2

The Monetary Unit

  • Money is not an abstract unit
  • Historically, prices expressed in gold, dollars, or pounds, were nothing more than a unit of the weight of gold or silver necessary to purchase the item at hand.
    • The pound sterling actually began as a pound weight of silver
    • The dollar was an ounce weight of silver

The Shape of Money

  • The size or weight of money makes no difference, units are.
  • The shape of money makes no difference in the value of money.
    • Gold in a necklace is worth just as much as gold in a coin.
  • Some shapes are more convenient though.
  • Coinage enables metals to be used in more regular and smaller quantities.
  • Coinage is a business like any other, and the cost to manufacture coins is incorporated in their value on the market.

Private Coinage

  • Is seen today as a strange idea
  • Private coinage should be seen as any other business
  • Each miter would coin whatever he wants to, and the price would be set by the market
  • This is how the US Dollar came to be popular, as a competitive silver coin
  • Critics of private coinage argue that it would lead to fraud, yet they trust governments with a monopoly of coinage.
  • If indeed there was a risk of fraud, it means that we should consider government as not being able to properly deter it, as fraud prevention and punishment is supposed to be one of the functions of government.
  • But if government can be trusted to prevent fraud, should they be trusted with a monopoly of coinage?
  • Money has total control of money:
    • It may debase coin,
    • It may counterfeit coin,
    • With full legal sanction.
  • Everyday buyers of products purchase quantities of products
    • Ounces of meat,
    • Gallons of gas,
    • Etc.
  • If that can be trusted, why couldn’t private coinage be trusted.
  • By insisting that every coin in circulation, whether in pristine shape or badly damaged has the same value, governments are actually introducing price controls on the money through coercion
    • Worn coins are overvalued
    • Pristine coins are undervalued

What Has Government Done To Our Money – Notes – Part 2

>> January 31, 2020

>> Blog Post #22

Rothbard is extremely methodical and concise in his explanations. Here are notes that follow his explanation of what money is and how money came to be. Note that once again, you have an early assumption which is that we are considering money in a free society.

Some of the examples are my own, for brevity reasons

The value of exchange

  • Money wasn’t created out of nothing.
  • You don’t need money to conduct an exchange.
  • For example, you can exchange fish for lumber.
  • Without exchanges, there would be no economy and practically no society.
  • Take the fish for lumber exchange:
    • For centuries, people have mistakenly translated that mathematically by A = B. That is incorrect. (people such as Aristotle or Marx for example)
    • Voluntary exchange happens because both parties to the exchange benefit.
    • The first party will conduct the exchange because it values A over B. (A > B).
    • The second party will conduct the exchange because it values B over A (B > A).
    • They value the products being exchanged in different order.
  • Exchange is universal because of the variety in nature:
    • Human needs and wants,
    • Diversity and location of resources in nature.
  • Specialization enables
    • Man, to develop his best skills,
    • Regions, to develop their particular resources.
  • If man was forced to be self-sufficient, he would barely survive.
  • Exchange is the lifeblood not only of the economy, but civilizations itself.

Barter – Direct Exchange

  • Direct exchange of goods and services would barely suffice to sustain an economy.
  • Barter is barely better than self-sufficiency.
  • Problems that you face with barter include:
    • Divisibility: how to you exchange a house for a few grams of salt?
    • Coincidence of wants: do you need to exchange a house as often as you need salt?

Indirect Exchange

  • Born out of trial and error.
  • Indirect exchange: instead of selling A for B, you will sell A for C and then C for B.
  • Indirect exchange although it feels inherently more cumbersome, is actually very efficient.
  • People will trade for an intermediate commodity if they believe acquiring it will help them trade for the end product they want. Those intermediate commodities may possess sought after characteristics:
    • Divisibility,
    • Durability,
    • Transportability.
  • The advantages one media has over another, will increase its marketability. And the more a commodity is marketable the more it becomes even more marketable.
  • Eventually some commodities become so marketable as a medium of exchange that they are used extensively.
  • Such a media is called money.
  • Some examples of money through time: tobacco, sugar, salt, cattle, nails, copper, grain, beads, tea, fishhooks.
  • Two commodities have emerged over the centuries as the better money, displacing other forms of money in the process.
  • Their emergence is due to the free market.
  • The development of a medium of exchange on the free market is the only way that money can establish itself.
  • Money cannot originate out of the decision of a government or a group of people as money must have pre-existing prices on which to ground demand. This can only happen through the use of a commodity in barter as a first step.
  • A government is powerless to create money for an economy. Money can only be developed through the process of the free market.

What is money

  • Money is a commodity,
  • Money is not an abstract unit of account divorceable from a concrete good,
  • Money is not a useless token only good for exchanging,
  • Money is not a claim on society,
  • Money is not a guarantee of a fixed price level.

It differs from other commodities as it is mainly used for its properties of medium of exchange. As such it has:

  • A certain level of stock,
  • A demand for it expressed by the market,
  • A price, determined by the interaction of its total stock and the demand of people for it.

Benefits of Money

  • Money is generally acceptable by all.
  • Thanks to money, an elaborate structure of production can be put in place.
  • Since all exchanges are done in money, all exchange ratios are expressed in money. These are prices.
  • By comparing prices, people can more easily see the value of products on the market.
  • The establishment of money prices on the market enables the creation of a civilized economy.
  • Money helps the businessman, the laborer, the worker to make calculations, compare prices, determine profits and losses. The results of these calculations will enable man to direct money to its most productive use, the uses that will most satisfy the demand on the market.
  • There is one great function of money. It is a medium of exchange. All others function you might hear of are corollaries to that one main function:
    • Unit of account,
    • Store of value.
  •  Prices are expressed in money; they are not measured by it.

What Has Government Done To Our Money – Notes – Part 1

>> January 29, 2020

>> Blog Post #20

My little pizza experiment from the other night, and recent discussions I’ve had with an adolescent who was asking questions relative to his economics high school homework have made me want to write a few words about a book that I find extremely helpful in understanding what money is.

Why? Because I had the impression when I first read Murray Rothbard’s “What Has Government Done To Our Money” that I was actually learning how to better understand what money is.

Money is one of those terms that never seem to need to be defined in conversations between people. Most people use money every day and have done so for centuries. However, I bet you would be incredibly surprised by the answers you would get to very specific, yet basic questions about money, were you to ask people randomly in the street:

  • Where does it come from?
  • Who makes it?
  • Who owns it?
  • How is it created?
  • Etc.

Money is something that is not taught well. It actually is something that is not considered as a topic that should be learned. And this is where Rothbard comes in. He took the time to study what money is, what it should be and describes it in the simplest, most legible way I have ever seen personally.

This is a MUST-READ book, for everyone.

I have therefore decided to write some notes about it if you are interested in seeing what it is all about and in preparation for the reading that I will do to my kids when I think they will be ready for it. Reading the notes does not make reading the book optional, the notes are, the book most definitely not. You can get it for free from the Mises Institute.

The notes will be written over several blog posts. Here are the notes on chapter 1.

—

Chapter 1

Money is probably the most tangled economic problem there is while also being one where people would benefit from gaining more perspective about it.

Perhaps the confusion is due to the fact that people tend to focus on the daily and practical aspects of money instead of asking themselves some very basic questions that might offer them more perspective on the topic.

Some factors making the study of money necessary:

  • the world is extremely complex, and the economy relies heavily on inter-relations
  • over time, there has been a slow drift from firm economic principles
  • the entanglement of the state in money has been important historically
  • many proponents of the free market have stopped short of exploring how money could be established by the free market and not the state

For those reasons, Rothbard says that “It is high time we focus on the lifeblood of the economy: money.” The author proposes to explore the following questions in his book:

  • Can money be organized under the freedom principle?
  • Can we have a free market in money as well as in other goods and services?
  • What would be the shape of such a market?
  • What are the effects of various government controls?

The whole book will rely on a few assumptions that Rothbard makes in this opening chapter which are that people interested in it:

  • favor the free market
  • wish to eliminate government invasion of person and property

Happy reading!