John McVey

Providers of time deposits, yes, but not of demand deposits. As well as the time depositors and equity investors (ordinary and others), it also includes those why buy the bank's debt issues of various kinds. More precisely, when it creates new money which the normal banks then use to make loans, yes. Spot on. I should specify what the resources are: they are human capacity for labour (of which the fundamental root is human intellgence), as supplemented by prior produced capital goods, be they land or plant or tools or raw materials etc. So, you - as an ultimate owner of resources arising from your productive efforts that are both part of and have contributed to the creation of - are providing funding in a particular way that creates a shift in what those resources are used to make when you invest money in a time deposit instead of spending it on consumption. You are increasing investment spending while decreasing consumption spending by same amount (ignoring changes in your demand for money itself), reflecting the fact that there is only yay much resources in total available for allocation this way or that. Bingo. By putting physical specie money in a demand deposit what you're doing is just making the ready-holding and spending of that money more convenient for yourself. You didn't mean to invest, as you are continuing the same holding demand and same spending rate as before. The only thing that changed is that now you're doing the transactions by paper or plastic or electronically instead of lugging around the specie, where that specie is kept by a bank in a vault in its capacity as a storehouse of it. If instead of being a storehouse the banking system (by whatever means) also lends out from the physical money at the same time as you spending the more convenient money substitutes, or in a fiat currency system the banks loan out new money created out of thin air by the central bank, it is giving the various markets conflicting signals about your spending preferences for consumption versus investment. The banking system is thereby giving producers of both classes of goods the false impression that the relative proportions of how resources are to be used is increased in both their favours, which is impossible. In an economy with a central bank, this is credit expansion because it is the credit market that is being used as the initial point of entry for the extra money. In an economy without one, it is credit expansion because, on the one hand, the banks are using the new money it creates by fractional-reserve notes for expanding its lending activities, and on the other, the banks are generating new money by making multiple dollars of loans on the back of a single dollar of demand deposit. The end result is the same: credit markets being given the wrong impression about the preferences of the ultimate owners of the resources that the funding is spent on. Not high and low in an absolute sense. There is no permanent relationship between the rates of interest and the quantity of money. The natural rate of interest will be what it will be, irrespective of whatever the quantity of money will be, once things are settled. It is only that the influx of new money into credit markets temporarily lowers the rates of the moment down below their natural rates (and conversely that the pulling out of money pulls rates up). Once fluctuations in the value of money subside the inflation premium component will diminish, leaving behind time preference and risk aversiveness as the chief components of interest rates, which are set by people independently of their attitudes toward the money supply and its vicissitudes. There is no law of economics that says a low interest rate is always inflationary and a high one deflationary. It is the maintenance of a fed funds rate at a target that differs from the natural rate that is inflationary or deflationary, irrespective of how high or low those rates actually are. When inflation expectations get considerable even a high fed funds rate target (eg 18%pa at one time I recall!) can remain inflationary because the natural rate is higher still at say 20%, causing the Fed to have to continue injecting more new money to maintain the rate at target against upwards pressure despite that target being screamingly high. Similarly, if there were little or no inflation expectations, and people had low time-preferences and low risk-aversiveness, a fed funds rate as low as say 3% can yet be deflationary if it is above the natural rate which may be at say 2.5%, requiring the Fed to keep on soaking up money. In both cases, these actions by the Fed worsen the very difference it is trying to stave off by those actions, generating an accelerating cycle. In addition to referring to that the theory is based on expectations and forecasts as much as it is on actual consequences, I'd make of it that there is more at work in the real world than just what has been discussed so far. Even if some people are fully aware of how the growth in the money supply is inflationary, there are those who are not and so wont change their expectations until the trend is evident in the more popular statistics. If the expectations don't change then neither will the natural rates. I don't know precisely, but I can easily imagine that the people's readings of those statistics were what made them both take more interest in gold and cut back on their lending, arising from their increased inflation expectations - gold has always been seen as an inflation hedge. That then makes the banks more likely to have shortfalls (for various reasons), and so the Fed would have to increase its pace of injection to more dangerous levels if it didn't raise its target. The Fed's people can read those same statistics plus others, figure out for themselves why this is so, and recognise the need to make that call. (Rant about the pitiful state of financial education deleted) Additionally, there are other considerations going into the price of internationally traded goods than just the consequences of inflation one would expect by looking at an economy solely as a closed system rather than one open to international trade (recall what von Mises mentioned in the passages you quoted about various schools of economic thought forgetting this fact). For instance, there is also that there are woes in other economies besides the US one, where the US is still seen as a comparative safe haven. China and key EU countries are revealing themselves to be in worse shape than the US, and so there can be a flight to the US dollar from foreign currencies, lowering the price of everything traded internationally while denominated in USD, even despite the inflation of the US dollar. JJM

I doubt it would have been an overt motivation, but if pushed I am sure they'd consider a hindrance on gun ownership and usage as a bonus. Laws for gun restrictions aren't motivated by concern for crime but by the desire to psychologically disempower the independent-minded, which lawful gunowners tend to be. People who think like that also gravitate to animal rights and environmentalist movements, casual or otherwise. JJM

The problem with that is that you're setting up an incentive for the government to criminalise more and more things, to jail more and more people on the slightest pretext, in order to get itself more workers and more income. Just as the Chinese government does now, and which is a staple in privatised-prison dystopic novels and movies. The only work that prisoners should be doing is that which is for the maintenance of the prison itself, such as cleaning and maintenance. There should not be any work that generates an income (including in the form of the mitigation of expenses) from supply of value to those outside the prison. I doubt you'll get much disagreement there. But, the motive for that should not include to get more work out of someone. No. That sort of thing will destroy a capitalist society because that will sully capitalism's reputation. "Look, come see where people are convicted of bogus crimes so the government can make money!" I think that the fact that prisons will be expensive per inmate just has to be lived with, where all one can do is lower some of the costs in housing them. The real issue for the problem of the total expense is to minimise the need for jails in the first place, which means having a free society populated predominantly by rationally selfish people. JJM

It is not a peculiarly Austrian distinction. Real capital is the physical stuff, composed of all the various assets a business uses to produce value. Financial capital is claims to a share in the real capital or fruits of its use, based on how each claimant contributed funding to pay for the real capital, and is composed of debt and equity. They go together. One cannot have real wealth without someone having a claim upon it of some kind. The movement of one type of capital affects and causes movement in the other. It happens, however, that the movements of one type of capital can be influenced by factors independent of what is happening to the other, but because they are connected those movements affect the other in due time too. In the LFC world those external influences would all only be the respective market forces for each type and subtype of capital, and the relationship between the two main types would be much easier to sort out and act upon. Of course the instruments are claims to real wealth. Part of the issue at hand is that the printing up of more claims to real wealth does not increase the total amount of viable real wealth. It just dilutes the value of each claim, and messes around with the flow of real wealth. The extra real assets produced aren't actually viable, so they are wasted. That process of wastage continues for so long as that dilution hasn't spread and settled. I knew it was a mistake to mention hysteresis. Don't worry about it, it would make things worse trying to explain a bad analogy. Each year there is yay much physical resources produced, which could be directed towards the production of consumer goods or the production of producer goods. How people spend their money determines the relative proportions. The supply of real capital means the desire to direct resources in favour of the production of the real capital, which investors do by turning their money to the buying of new financial capital (and also by allowing businesses retain some or all of the earnings). The businesses then use the proceeds of the sale of that financial capital, or the earnings so retained, to buy resources to make production goods with, ie more real capital. Credit expansion is the increase in one of the subtypes of financial capital other than by investor's desires to shift their balance of spending towards the production of real capital. It makes the users of real capital think that investors want to supply more funding for real capital than they actually do, causing those users to invest in the wrong real assets in detail and too much real assets in aggregate, both causing the resources to be wasted and thus the assets not represent true additions to real capital. Yes, because of inflation expectations. The whole thing starts when the Fed first acts to push the actual funds rate below its natural rate, and it necessarily spirals from there for so long as that actual rate is lower than the natural rate. The increase in money supply will show up eventually in the form of increasing general prices. That consequence, and the expectation of that consequence, push up the natural rate of interest because people increase their inflation premiums to compensate. That then becomes felt in the reserve accounts because of people's actions affecting the bank's activities. So, to keep the actual funds rate down at the official target the Fed has to push harder and harder against a rising natural rate, which they do by creating more and more money to buy up assets from the banks. But that is adding fuel to the fire! It cannot be a one-off, and cannot be sustained merely by maintaining the same repo book or net holdings of T-bonds. It becomes a cycle triggered by the first appearance of the gap between the funds rate and the natural rate of interest, and which accelerates as the gap increases because the action to maintain that funds rate is pushing up the natural rate. JJM

It is refutation of one of the original justifications proposed for the practice of fractional banking, the idea that most people aren't going to withdraw in specie all at once, so rather than it sitting in the vault doing nothing it might as well be out in the economy circulating instead. I thought you were raising this argument again by reference to making use of unneeded gold. If that is not what you had in mind then we're talking past each other. No, the Central Bank in a modern economy is supposed to be independent of Treasury. People get upset if there is suspicion of Treasury interfering with that independence (I'm presuming a similar attitude in the US as I find down here, but I've had my fingertips singed on that score in this thread before now). It is as foolish to blithely lump them together as "just government acting" as it is to do the same with say the Supreme Court and the White House. The Central Bank's priorities may be quite different to those of Treasury, including to the great consternation of the latter at times, just as the Supreme Court may sometimes derail the White House's plans. Yes.. and this capital destruction is distinct from monetary flows as you yourself have noted. The destruction of real capital (seeds, machinery, etc) is caused by the expansion of financial capital (inflation-generated extra debt and equity) because the messing around with the latter causes malinvestments of the former. The ABCT is a description of how there is a connection between the two that exhibits a hysteresis effect, and of what influences the size of that hysteresis. That hysteresis is the basis of the economic cycle, and is made possible only by the heavy use of some variant of fractional reserves. Credit expansion is the expansion of the debt component of financial capital ahead of investor's increase in provision for supply of real capital as intended for use at a risk-return level associated with debt funding. This causes those who demand real capital (businesses and consumers) to mistake the increase in financial capital for an increase in the supply of real capital. Private banks do it by funding credit expansion directly via fractional reserves, and increase the money supply as a consequence of those actions. The Central Bank does it by increasing the basis of the money supply directly and then getting the private banks to do the overt act of credit expansion by lending out of that increased money supply. The Central Bank is thereby taking advantage of the normal bank's pre-existing (and further encouraged) fractional reserve practices, further increasing the money supply some more, and setting them up to take the blame when it all goes sour. It is a difference of motivation and details on mechanics, but not so much of result. The lowering of a particular interest rate by the Central Bank is part of the motivation, or at least the rationalisation for the motive. By lowering the cost of capital there will be more demand for it and hence more jobs as it gets invested. Private banks don't care about the rate of interest being at any particular level, they just want to make money and use lower costs of debt as the means to attract borrowers. Either way, the lowering of interest rates below what investors are happy with at a given risk level and using credit expansion to maintain that lowness in defiance of investors leads to malinvestment of real capital. On the face of that alone, you're right, yes, it is different. What I said was that its use in practice in bulk amounts to the same thing as an outright purchase PLUS CHURN. To maintain the improperly low interest rate the Central Bank will have to continually renew expiring repos plus initiate more, at an accelerating pace. It amounts to the same effect as the Central Bank merely buying some outright and adding to its holdings over time with new money it creates. But anyway, Adrock corrected my mistaken assumption that the details of your Federal Reserve System's OMO's were the pretty much the same as those of the Reserve Bank of Australia. You're missing it because you're focusing on individual transactions while overlooking the accelerating churn with the continual-net-expansion direction. AHHA! The magic words, "in the longer run"! There is a difference between the short run and the long run, which is the basis for the above hysteresis effect. The Central Bank has to accelerate its expansion of the money supply because the flow-on effects of that expansion eventually causes people's inflation expectations to rise, which causes them to increase their required ROR's. What the Central Bank is doing is trying to stay ahead of those expectations' effects on the interbank overnight loan market. It can do so for a while, but not - as you note - in the long run. The long run then finally catches up with the Central Bank, and so it has to make the stark choice between raising the Fed Funds target on the one hand or descending into hyperinflation in the other. I swear, Roland, we'll make an Austrian out of you yet Quite. The banks draw down those accounts for other uses (including this being the mechanism by which - in Australia at least - physical notes and coins are taken from the Central Bank and put into the general economy), which is why there is routinely a need to cover shortfalls when they overdo it! But... ... but you're missing the context in which those repos / purchases are made and why the proceeds are put into those ES/reserve accounts. The proceeds lower the Fed Funds rate because they lower the demand for debt to pay off the shortfalls. That means those with an excess in those accounts then have to go to the trouble of withdrawing funds for use elsewhere, but there will still be at least some market for lending to other banks - just at a lower rate so as to attract banks with shortfalls to borrow from them instead of selling assets / repos to the Central Bank. Again, you're missing how churn will be on the march. The Fed is there, every night, increasing its repo book or making net purchases, constantly adding in new dollars to do so, in order to maintain the interest rate on overnight interbank credit at the Fed Funds target. The 'too much' will come about eventually. JJM

Thanks for the note and the heads up! JJM

That sounds like a call for volunteers to assist! Ladies, please line up and wait your turn. I'm sure the staff shortage problem will be resolved soon. We apologise for the delay, and thank you for your cooperation. JJM

Shale, tar sands - oh well, my mistake. I was also thinking in terms of cheap nukes on site lowering that effective cost requirement. There would also be that in the future oil would rise up to around the viability level as the standard fields are exhausted, then stay there with much lower volatility than today's oil prices. Synroc. It's not mixed with sand, it's mixed with titanium-based starter minerals and put through a process that incorporates the waste into new mineral structures themselves. It's supposed to be a real rock (albeit synthetic), not just entangled in glass. Another solution being worked on by the French is a type of reactor that burns up waste somehow. I don't know what the status of that project is. Incidentally, there is a passage on the alleged waste problem in Julian Simon's Ultimate Resource 2. He cites research by someone who has actually run the numbers and demonstrated that it truly is well over-blown. Again, it's politics, not science, that is the problem. JJM

One of Miss Rand's essays (I don't have my stuff at hand so I can't check which) noted that you've been pre-empted by 40+ years. She wrote (in a disgusted tone) about how someone waxed poetic about in the future people will have legally recognised rights to good orgasms and the like, which was a conclusion of a certain line of thought regarding the proliferation of bogus rights. JJM

It's a matter of actually following the physical process of what happens to the gold during the multiplying up of credit, as identified in any respectable book on the subject. Every time the bank lends out money (as gold or as claims to gold) the borrower eventually spends it. That spending becomes someone else's income, which that person then deposits back into the banking system. Some is kept as reserves, and some is forwarded to another borrower. From that borrower the process repeats, to yet another's income and back as deposits into the banking system again. Each time it cycles around the amount lent out gets smaller and smaller, until the total amount kept as reserves is - surprise surprise - pretty much the same amount of physical gold as existed before the banking system went fractional. Grand total reserves remain the same in absolute - which is the refutation of the fallacy of the idle gold - but they go down as a proportion of what they are reserves for when the fraction the banking system keeps is pushed down. There is a minor complication, not often discussed in the basic treatments in the textbooks. This is the discussion I had with Adrock. In LFC the process is limited, and so it truly is a 'pretty much the same' as above because the increase in total money supply is minimal, which in turn doesn't devalue gold all that much. In non-LFC the process goes much further, can devalue the monetary component of the value of gold considerably, and cause notable reductions in total gold held in vaults as reserves because it's cheapening increases its non-monetary use. Happiness at the prospect of that, and pursuit of government intervention to do so, was one of Adam Smith's more notable deviations from laissez-faire. First, you're confusing what the Treasury does with what the Central Bank does. It is Treasury that borrows by issuing government bonds, where all the Central Bank does is act as an auction house. Via the central bank, the Treasury borrows from various institutions (predominantly banks and insurers etc, and in the US also Social Security as a constituent of that alleged lock-box, and so on) by selling them fixed-interest debt assets. So far, that much isn't credit expansion, just an example of lending for consumption. If that were all that happened then, yes, this action would act as credit contraction because it is reducing the amount of credit available for business lending. But, this is separate from the issue of the central bank changing interest rates. Second, you're getting the sequence of cause and effect wrong as well as totally misunderstanding how Central Banks operate. Credit expansion by central banks is exactly that, an expansion. But, it does not lower rates by pursuing credit expansion - it generates credit expansion by lowering rates, and it lowers rates by inflating the money supply. Central banks don't seek to lower interest rates in general, but usually are aimed at one in particular: the overnight cash rate that banks lend to each other at. Normal banks all have accounts with the Central Bank in its capacity as a clearinghouse, called Exchange Settlement accounts (in Australia anyway, maybe named differently elsewhere), which are used by the normal banks to settle up with each other on their customers' net drawings and deposits of cheques and transfers etc at the end of the day. If a particular bank doesn't have enough to settle up all that it owes to other banks that night it can borrow the shortfall from other banks on an overnight basis (banks can also borrow directly from the Central Bank itself, but banks try to avoid that because it is onerous and is a trigger to the Central Bank raising awkward questions). Central banks lower this interest rate by printing money (today, in the form of book-keeping entries) and using it to buy (*) assets from the normal banks at above-market prices in Open Market Operations. As it happens, the assets so bought by the Central Bank are the private banks' holdings of Treasury bonds. This puts more money in the banks' ES accounts, which lowers their demand for overnight credit, and so puts downward pressure on the overnight cash rate. The Central Bank keeps on throwing in more and more book-keeping money, continually buying assets, until the overnight rate is at its official target as set by Board policy in those infamous rates-setting meetings they have. The net result, in a disgustingly convoluted manner, is that the Central Bank monetises Treasury debt and the extra money becomes additional funds for private banks to lend. There is thus increased lending in total (ie credit expansion), both of lending to the government (the purchase of T-bills and bonds) and to the private sector. (* Technically, it is not buying but a more complicated transaction called a repurchase agreement, repo for short, but it works out to be the same thing with churn thrown in) In the more uncommon event that is genuine credit contraction, the Central Bank does the opposite. It sells assets back to the banks who have excess amounts in their ES accounts (at below-market prices), which puts upward pressure on the overnight cash rate. The Central Bank keeps on soaking up money from ES accounts by selling assets until, again, the actual overnight cash rate becomes the target rate. The banking system as a whole then has less left over to lend to the private sector. This is what is true credit contraction, but it is associated with rising rates rather than falling rates. None of this is about the Central Bank setting any interest rates by direct diktat. They used to do that, but not so much any more. Today it is the jawboning of the market and the flashing of cash as required so as to lower interest rates to suit Treasury's desires not to pay high rates. As I said, it is now done by the manipulation of market mechanisms, via OMO's. The force involved is still there, but is at the much deeper level of the damn capital adequacy rules that give special preference for Treasury debt. It is because of those capital adequacy rules - the Basel I and Basel II accords - that the private banks (and others like insurance companies) will 'voluntarily' buy Treasury debt in the first place even though the returns are very low. A bank can choose not to buy those debts, but it is penalised for it in its ability to lend and also misses out on the opportunity to sell them to the Central Banks for capital gains. Those who toe the line will have more freedom and more opportunities to make money. JJM

No. The fuel in normal reactors is U235, with U238 sitting there for the ride. What a breeder does is make use of the U238 in addition to the U235. The phrase 'making more fuel than it consumes' is easy to take a bit too literally, when the reality is more along the lines of a massively increased degree of efficiency in use of material dug out of mines. Given enough time, even a breeder will run out of fuel - it is just that the said time is much longer than for a non-breeder. The technology is real, and most likely does what it is claimed to do (which will be what is used to bamboozle the public). SoftwareNerd gets the points for pointing out the right answer. The killer with these kinds of projects is the enormous capital costs, working out to very high capital charges per unit of fuel produced. There is another thread on the forum on a similar project and I was able to spot how dubious the claims were just from a few moments of promotional video. I was too generous at the time - later I did some calculations and then thought, naaaaaaahhhh... I could see just from those short shots that there would be enormous expense just in the totality of all the PVC fittings, never mind all the rest that would go into it. I spoke to my boss (a marine biologist) and she additionally noted that there are other problems with algae in enclosed vessels that the untrained wouldn't suspect, such as gas exchange balances messing about with fluid chemistry. They could be overcome, but again it would work out to be expensive capital-wise. I've heard contrary stories, about how the Saudis are massively overstating their reserves. But anyway, the point does remain that we aren't going to run out of oil any time soon as even were the normal oilfields to run dry there are still viable other sources that don't require esoteric technologies, such as Canadian shale, and after that there are the further possibilities as Matus identifies. Our fuel crises are political in nature, and you're right about there being dubious ideologies at work here. JJM

I've almost finished reading Sir Richard Branson's latest book, Business Stripped Bare. It's a very interesting read, both for its business advice and as an insight into the man. Anyone who has interested in starting their own business should get it. A review is in the works. JJM

Almost. Unless the practice of fractional reserves were rejected by all customers, all that a fully functional gold-coin standard will do is see that the reserve ratio is high, and so the extent of credit expansion will be low. The final step to 100% reserves is dependent on the decisions of individual banks and their customers. You're asking the impossible, because there is no rational basis on which to formulate a fractional reserves policy. All reserve ratios other than 100% are arbitrary. The story of the idle gold is a fallacy, because the extra loans are turned into someone else's income which then gets put into their demand deposit accounts. That starts the credit multiplication process, which does not end until the amount of gold in vaults "sitting idle" comes back to pretty much the same as it was before the process got started. The only difference is the extra (and undue) credit generated. No. The system we have today did not exist in von Mises' time. In his day, gold was the root of money and the total money supply could only be expanded through gold mining, note expansion, or private credit expansion. In that system the central bank could directly do the middle, and could encourage the third by dictating minimum reserve and capital adequacy ratios, dictating key rates, and other hands-on means. Now that we have fiat money, the distinction between gold and notes is gone, central banks are less hands-on than they use to be, and the money supply is primarily extended through the physical and electronic printing press controlled by the central bank. The central bank nowadays influences interest rates and total credit via usurpation of market mechanisms using moneys created with those presses. You really need to do research on the mechanics of both Treasury bond issues and Open Market Operations. JJM

"Fractional reserves" covers two different but related phenomena: - having more total face-value in banknotes liabilities outstanding than there is specie assigned as reserves - having more total face-value in deposits liabilities outstanding than there is specie assigned as reserves Without fractional reserves, demand-deposit accounts are where the bank acts as a storehouse and gains an income from renting vault-space and charging fees for use of its transaction facilities. A bank can then only lend out of cash put in by investors, be those investors the stockholders or the buyers of debt of various maturities. Physically, a bank can make those loans either by handing over notes to a borrower or by crediting the borrower's account. A bank can issue extra loans either by issuing notes in excess of reserves of cash put in by investors or by lending specie out of cash put in by demand-deposit customers. Either way, those extra loans are the credit expansion, which is called such in contrast to credit growth arising from increases in the real supply of capital from investors. Among other things, von Mises was noting that the mechanics of the two types of fractional reserves are different but still arrive at the same result, and that both were different again from an increase in the quantity of gold as money where that difference of gold to fractional reserves was quantitative as well as mechanical. He was also noting that the hot-button issue was not about action of people acting rationally in a laissez-faire economy but about people arguing the relative merits of various proposals for law in a non-LFC economy combined with the manipulation of public opinion in pursuit of their sociopolitical agendas (for example, the Act of 1844 he spoke of gave the monopoly on notes issue to the Bank of England, and which law was based on recognition of the consequences of the first type of fractional reserves but failure to recognise the same consequences arising from the second type). JJM

Off the top of my head, that sounds rather much as though he subscribes to the idea that we once had a clear and consistent picture of a complete moral system. If you hadn't noted that he was an atheist at the time I'd concur with Kat and think this were a prelude to a getting-back-to-the-past origins-in-religion discussion. But, that analogy does have some merit, insofar as it suggests a superior alternative. Instead of a formerly proud science now in disarray, it is more a case of science being in a primitive state with scientists not recognising the connections between the various parts because they've simply not been identified yet. It would be more fruitful to compare the state of ethical theory to the state of philosophy in general prior to Plato or physics prior to Maxwell - for example, the distinction that people make between value in a moral sense and value in an economic sense, which we Objectivists know not to be an unbridgeable gulf but the result of different contexts for the application of the same one standard of value at the heart of both. JJM

More or less. All increases can occasion the making of extra mistakes, but unexpected ones moreso. In the main, yes. Again, both can mislead, but lowering reserve ratios has a notably higher propensity to do so. Yup. As Adrock said, this is central to the whole thing, both of the full ABCT and this simple discussion of gold-finds versus fiduciary expansion. No. What banks do next is the product of the thoughts of individual bankers. Different banks will have different responses, which in a laissez-faire economy acts as another diversification mechanism. If OTOH the bank in question is the central bank, then its response is of enormous importance and effect because it affects everyone in the whole economy (in addition to it being of a much greater magnitude in general and involving substantially higher credit multipliers), and so one really gets the traditional boom-and-bust scenario. What happens in a laissez-faire economy, even one that includes the use of fractional reserves, wont have a patch on that. Possibly, but in a laissez-faire economy (including one practicing fractional banking) this would be unusual. At the mild level of fractionality as would be present in LFC, most banks would cover withdrawals by building up reserves again out of funds from maturing loans or sales of those loans to others before those banks got anywhere near defaulting on their note/deposit liabilities. Nevertheless, the risk is there, and for that reason there will always be at least some customers who do withdraw in specie. The riskier a bank operates, the greater the number of its customers who will be inclined to flee to specie when trouble brews. I should add at this point (and which was remiss of me not to mention before) that different banks will have different reserve policies. What is more likely to happen is that customers will in aggregate shift banks in favour of those that operate at higher fractions, based on their assessment of risk versus reward - they (especially corporate treasury units with coolly-calculating professional staffs doing it constantly and with big sums) will compare differing rates interest on accounts in different banks with different degrees of risk attached, and move funds as they judge fit. The aggregate fraction for the banking system then goes higher, which makes for a lower credit multiplier, which makes for a reduction in the money supply. In comparison to were the new money resulting from a gold find, yes. JJM

A downturn can happen in both. The cause (outside of government) will be the result of either someone making a mistake in capital allocation that is large enough to be felt by an unusually large number of others or the coincidental and unusual aggregation of a number of smaller mistakes happening at the same time. What a fractional-reserves system does is magnify the volume and time taken by each phase, introduce a source of reasons why the mistakes would occur together, and also to introduce a new source of reasons for making mistakes, all of which increase volatility in a manner that is difficult to accommodate in forecasts (if the attempt to do so is even made). Total malinvestments are thus greater under fractional money than non-fractional money, build up over a longer period of time, and take a longer amount of time to liquidate. Delays are only part of it, and the original emphasis I had on it was based on my error . The difference between an upswing caused by a gold find and an upswing caused by an increase in fiduciary media is that the former is more easily identified by all participants in the economy, and ahead of time, than the latter is. A gold find will be a news item before the gold comes on stream, making it easier to prepare for in a reasonable manner, whereas a significant shift in reserve policies would often have to be inferred after it is already underway and by which time individual businesses may have already have mistaken the increase in revenues for an increase in their customer's real production and hence maintainable purchasing power. On top of that, the reason why a fractional-bust is worse than a non-fractional one is that the latter does not involve a diminution of the money supply. A diminution of the money supply lowers total revenues in the whole economy, over and above the individual woes of each business or person. Just as the boom causes more people than normal to make mistakes, the diminution negatively affects more people than just those who made the original mistakes. Total expenses also fall, but they lag behind the fall in revenues because people are still contractually bound to pay prior negotiated prices for things. The economy wont return to normal until the money supply stops falling and the entire structure of all prices has changed to reflect that total smaller money supply - that is, when contracts are replaced, renegotiated, or terminated due to bankruptcy. That is the part that takes some time, partly because people can't finalise proper forecasts and pricing until the money supply stops falling, and partly because it physically takes time for the entire set of contracts to be changed (eg there will be those who wont allow renegotiation and will demand that contracts run their time, which is of course their right to demand). If, by contrast, the money supply isn't fractional then no such painful set of events is required because the money supply and total revenues merely hit plateaus at higher levels reflecting the consequence of the gold-find. This plateau is reached at the point in time where, in a fractional economy, the money supply would be just starting to fall and still has a ways to go yet before it reaches its own lower plateau. Thus people are able to reassess the value of money and make reliable forecasts much sooner after the end of the upswing than in a fractional economy, and the total amount of malinvestments to be liquidated is limited only to those who made the initial mistakes. JJM

Yes, you're mostly right, the straight capital-consumption element for specie withdrawals is being considerably overstated. Once more this is my fault. The prime reason for specie withdrawals will be concern about bank insolvency rather than for paying bills. What I have stated about delays and equilibria is correct in reasoning, but over-emphasised in its volume and hence importance. There are now, and I imagine there always will be, merchants who operate on a cash-only basis (EFTPOS and credit-card systems do cost the merchants money, up to as much as 4% of gross revenues for some systems), but they will also be the merchants whose products one is least likely to buy when one is in the red. So, my answer in post #34 to your prior question in post #33, "why do banks need to rebuild reserves," was wrong in its first paragraph. I forgot context, that of reserve rebuilding only applying to banks operating fractionally. Banks would need to rebuild reserves as part of the means to retaining its remaining custom, and in future to regain lost custom, by demonstrating that they are being prudent. The specie withdrawals (the said lost custom) would occur because there is a shift in preferences on how people express the demand for money - from risky fractional accounts or fractional notes holdings to low-risk specie, non-fractional accounts or non-fractional notes. The second paragraph of my answer then holds, but the 5m in withdrawals is solvency-concern-driven rather than bills-paying driven, and the need to rebuild reserves by 1.25m is subsequent to that. JJM

Global Warmenistas are increasingly being called out, in print, in major publications. Miranda Devine of the Sydney Morning Herald is not a nobody, and here is what she penned recently. It includes comments from Vaclav Klaus, a growing favourite among Objectivists, and also Ian Plimer, an Adelaide scientist whom I have mentioned here before and sent a thankful email to. Miranda notes of him: This is heartening news. Go, mate, go!! I also love her closing words: With more people like Klaus, Plimer, and Devine calling a spade a spade and questioning prevailing smelly orthodoxies, people will continue to think for themselves for a long time to come. JJM

New Zealand is not a lesser-developed country. It is a fully-fledged modern and industrialised nation that scores very highly on the Human Development Index - NZ ranks 19th in the world as of 2007 from among a tight bunching of similar scores, and which score is higher than that of the G7 countries of Italy and Germany. Over on the Heritage Index of Economic Freedom, New Zealand ranks 6th, one behind the USA at 5th. Australia ranks 3rd, but given the recent elections here and in NZ, they may well over take us before long. If you guys are serious about looking for places to go if the US no longer wants freedom, then Australia and New Zealand should be among the first thoughts you have - Ireland would be, too, but I think the European statists would cast evil beady eyes on it before long. I would definitely pick here or NZ as a place to go (stay, in my case) and try to fix up local problems long before I'd consider undertaking the enormous effort and highly risky proposition of gulching a new country. JJM

We don't need one - hire Bill Fichtner. JJM

No, the error was mine in post #30 (para 3). I've answered that already elsewhere, such as on this thread and this one. JJM

I had a look at my original words, and I wasn't clear enough. My fault. I meant that the effects of a single bank's expansion would spread far and wide in the time of the Conquistadors just as it would today. The difference between today and then is seconds versus a few weeks, where weeks is still quick enough in a free economy to prevent a major boom-bust cycle happening in the local area. Spain's problem was law that hindered that from happening (they put bans on gold export, which just made internal prices rise and created incentives to smuggle imports in and gold out). Right where you said it does, into your pockets. In time it would lead to the same, but there is always that delay. It is not a shift in preferences (unless bank solvency comes into question), just recognition of the fact that things don't happen instantaneously. For so long as the downturn is still in progress the equilibrium of cash in meeting cash out wont be met. One of the markers of the bottom being reached is when that equilibrium is finally met. In a non-fractional economy, the delay is very short because the money supply remains unchanged (gold stays in human hands after mining, as I noted). What having a fractional system does is make the end of the delay take longer to reach because the money supply itself is being diminished by the withdrawals, continuning to reduce revenues while the fall in expenses lags behind. The fact that the money supply is being diminished, and that actual reserves are consistently being below spec, can lead to people questioning the solvency of banks more strongly than were it not fractional, which then does change people's preferences for the concrete methods by which they express their demand for money. JJM

First up, let me correct an error. The general price rises in Europe caused by Spanish plunder being spent there were not inflation. They were just a long process of price readjustments. I'm sorry, but I don't quite understand the question? It wouldn't make any difference whether gold or fiat notes were money to the question of how quickly the effects of monetary expansion (from whatever cause) spread. The information and decisions flow from any one part of the world to another as fast as communication channels let them, and the physical money travels as fast as armoured vans on the roads go, both irrespective of what the money is made of. Because in the downturn some people will have lost their jobs, some businesses will have net drains on their cash reserves because revenues fall faster than costs, and so forth. Everyone still needs to pay the bills, so money must still be spent despite a loss of money coming in. Before the bottom of the downturn, that means a net outflow of cash from savings until expenses are reduced sufficiently, and that's without further consideration of people beginning to fear for the continued existence of their savings in the banks. If the money supply is fractional then that drawdown is a drain on reserves because the percentage of cash outflow compared to total cash stocks is higher than the percentage of liability reductions to total outstanding liabilities. Say that a bank has a policy of 75% reserves. On deposit/note liabilities of 100m, the bank has 75m in specie sitting in a vault as reserve. Customers withdraw say 5m in specie, reducing both the stock of specie and the liabilities by that amount - but 5m is a higher proportion of 75m than it is of 100m. So, now there are reserves of 70m and liabilities of 95m, making the reserve fraction fall to 70/95 = 73.6%. If the bank is to keep its remaining customers it has to raise reserves back to 75%, which on 95m liabilities means adding 1,250,000 in specie to the reserves so that 71,250,000 / 95,000,000 = 75%. JJM

Generally, across a major economy that is free, no, for two chief reasons. The first is simply the fact that the effect would be spread out far and wide in short order. That would hold - and did hold - in the time of the Conquistadors. The effects of the influx of money would flow into the whole economy fairly quickly. Steve is right that there would be at least some monetary effect, but it would not be a major boom-bust-cycle-causing event. The reason is that as the value of gold as money drops it would be tempered by a withdrawal of gold from the money supply for jewellery or other industrial use - it is the prospect of doing just that at any time that gives objectivity to the use of gold coins. Even today, for instance, in Asia there is a lot of high-carat low-sentimental-value gold jewellery whose owners are perfectly willing to part with or add to depending on their opinion of how gold is going. That writ large would be present in a laissez-faire economy, and would buffer the monetary effects. That backs up what Adrock said about the mining being production of real wealth. As to Spain, Adrock is right, there, too - Spain's problem was its lack of freedom. By contrast to Spain's living-by-plunder, the other countries upon whom they spent the money to buy goods from prospered in a more consistent manner. Yes, there was mild inflation because of gold and silver finds in the New World making their way to Europe, but the rate was so low that most didn't even notice it. If memory serves me, Adam Smith noted that fact as one of the reasons why many a land-owning family found the real value of its contractually-negotiated income go down over time and not inclined to renegotiating the contracts. Additionally, again IMSM, von Mises notes in the Theory of Money and Credit that even the big gold booms of the 19th century (California, Australia, South Africa) didn't expand total gold stocks as much as a wild imagination would be inclined to believe - about 1 or 2%pa peak, I think? Today that would be even harder to maintain, because as Steve notes there is such an enormous amount of gold already mined and ready for use. A bonanza as you describe would have to be of astronomical proportions, both figuratively and literally (cf the nickel mine in Sudbury, Ontario). The second reason is that gold, once mined, almost entirely stays in human hands forever thereafter, which is in stark contrast to the deflationary effect that banks' needs to rebuild reserves would have (bank failures even more so). The reserve-building (or failures) in a central-bank-having economy reduces the money supply, necessitating general price decreases for markets to clear again, which messes with profitability because of longer-term contractually-negotiated prices. With gold there would be almost no such price decreases in net because the money supply would not be reduced anywhere near as substantially, with effects being a lot more isolated among particular businesses. After the extra-growth phase was over the come-down-phase would therefore be considerably more muted than were the economy not free, so much so that often it would just mean the economy was merely not growing as fast as it does on average but still growing! I believe that describes a large part of the 19th century US, where people were upset because economic growth fell to 3% from 8%, but I can't remember where I got that statistic from. JJM