WWW.DISSERTATION.XLIBX.INFO
FREE ELECTRONIC LIBRARY - Dissertations, online materials
 
<< HOME
CONTACTS



Pages:     | 1 |   ...   | 13 | 14 || 16 | 17 |   ...   | 18 |

«8 CENTRAL AND FREE BANKING THEORY T his chapter contains a theoretical analysis of the arguments raised for and against both central and free banking ...»

-- [ Page 15 ] --

First, we must point out that the monetary equilibrium analysis of modern free-banking theorists contains many of the same limitations as the traditional neoclassical analysis, which, both in a micro- and macroeconomic context, merely deals with the final state of social processes (monetary equilibrium), a state to which the rational, maximizing behavior of economic agents (private bankers) supposedly leads. In contrast, the economic analysis of the Austrian School centers on dynamic entrepreneurial processes, rather than on equilibrium. Each entrepreneurial act coordinates and establishes a tendency toward equilibrium, which, nevertheless, is never reached, because during the process itself circumstances change and entrepreneurs create new information. Thus, from this dynamic point of view, we cannot accept a static model which, like that of monetary equilibrium, presupposes that immediate, perfect adjustments between the demand for and the supply of fiduciary media take place.

In real life, each banker, according to his insight and entrepreneurial creativity, subjectively interprets the information he receives from the outside world, both in terms of his level of optimism in evaluating the course of economic events, and in terms of the volume of reserves he considers “prudent” with a view to maintaining his solvency. Hence each banker, in an environment of uncertainty, decides each day what volume of fiduciary media he will issue. In the above entrepreneurial process, bankers will clearly commit many errors which will manifest themselves in the unilateral issuance of fiduciary media and will distort the productive structure.

rise in the demand for money are exceptional, like wars and natural disasters. Seasonal variations are comparatively less important and a freebanking system with a 100-percent reserve requirement could counteract them with a seasonal transfer of gold and slight price modifications.

Money, Bank Credit, and Economic Cycles Granted, the process itself will tend to reveal and eliminate the errors committed, but only following a period of varying length, and damage to the real productive structure will not be avoided. If we add that, as we saw in the last section, the supply of fiduciary media tends to create its own demand, we see it is highly unlikely that a fractional-reserve free-banking system (or any other market) could reach the “monetary equilibrium,” that its theorists so desire. For in the best of cases, private bankers will attempt through a process of trial and error to adjust their supply of fiduciary media to the demand for them, which is unknown to bankers and tends to vary as a consequence of the very issuance of fiduciary media. Hence scholars may debate whether or not the entrepreneurial coordination process will bring the coveted state of “monetary equilibrium” within bankers’ reach, but scholars cannot deny that throughout this process entrepreneurs will commit innumerable errors in the form of the unjustified issuance of fiduciary media, and that these errors will inevitably tend to affect the productive structure by provoking economic crises and recessions, just as the Austrian theory of economic cycles explains.124 Second, a large or small group of bankers could also collectively orchestrate the expansion of fiduciary media or decide to merge in order to share and better “manage” their reserves, thus increasing their capacity to expand credit and improve profits.125 Unless fractional-reserve free-banking theorists wish to prohibit this type of entrepreneurial strategy (which we doubt), it will obviously result in credit expansion and consequent economic recessions. It can be argued that inconcert expansion will tend to correct itself, since, as Selgin maintains, the total increase in interbank clearings will raise the variance in the clearing of debits and credits.126 However, aside from Selgin’s assumption that the total volume of metallic reserves in the banking system remains constant, and 124See Jörg Guido Hülsmann, “Free Banking and Free Bankers,” Review of Austrian Economics 9, no. 1 (1996): 3–53, esp. pp. 40–41.

125Remember our analysis contained in pages 664–71. See Laidler, “Free Banking Theory,” p. 197.

126Selgin, The Theory of Free Banking, p. 82.

Central and Free Banking Theory

despite the doubts of many authors regarding the effectiveness of Selgin’s mechanism,127 even if we allow for the sake of argument that Selgin is correct, it can still be argued that the adjustment will never be perfect nor immediate, and therefore in-concert expansion and mergers may provoke significant increases in the supply of fiduciary media, thus triggering the processes which set economic cycles in motion.

Third and last, with every increase in the overall stock of specie (gold) banks keep as a “prudent” reserve, a fractionalreserve free-banking system would stimulate growth in the issuance of fiduciary media which does not correspond to prior rises in demand. If we remember that the world stock of gold has been mounting at an annual rate of 1 to 5 percent128 due to the increased world production of gold, it is clear that this factor alone will permit private bankers to issue fiduciary media at a rate of 1 to 5 percent per year, regardless of the demand for them. (Such creation of money will produce an expansion followed by a recession.)129 In conclusion, significant (fiduciary) inflationary processes130 and severe economic recessions131 may occur in any fractional-reserve free-banking system.





127See, for example, Schwartz, “The Theory of Free Banking,” p. 3.

128Skousen, The Structure of Production, chap. 8, pp. 269 and 359.

129We cannot rule out even greater credit expansion in the event of shocks in the supply of gold, though Selgin tends to play down the importance of this possibility. Selgin, The Theory of Free Banking, pp. 129–33.

130Let us remember that for Mises (see footnote 120 above): “Banking freedom per se cannot be said to make a return to gross inflationary policy impossible,” especially if an inflationary ideology prevails among

economic agents:

Many authors believe that the instigation of the banks’ behavior comes from outside, that certain events induce them to pump more fiduciary media into circulation and that they would behave differently if these circumstances failed to appear. I was also inclined to this view in the first edition of my book on monetary theory. I could not understand why the banks didn’t learn from experience. I thought they would certainly persist in a policy of caution and restraint, if they were not led by outside circumstances to abandon it. Only later did Money, Bank Credit, and Economic Cycles

THE THEORY OF “MONETARY EQUILIBRIUM” IN FREE BANKING

RESTS ON AN EXCLUSIVELY MACROECONOMIC ANALYSIS

We must point out that the analysis of modern free-banking theorists ignores the microeconomic effects which arise from increases and decreases in the supply of and demand for fiduciary media instigated by the banking industry. In other words, even if we admit for the sake of argument that the origin of all evil lies, as these theorists suppose, in unexpected changes in economic agents’ demand for fiduciary media, it is clear that the supply of fiduciary media which the banking system supposedly generates to adjust to changes in the demand for them does not instantaneously reach precisely those economic agents whose valuation of the possession of new fiduciary media has altered. Instead this supply flows into the market at certain specific points and in a particular manner: in the form of loans granted via a reduction in the interest rate and initially received by individual businessmen and investors who tend to use them to initiate new, more capital-intensive investment projects which distort the productive structure.

Therefore it is unsurprising that modern free-banking theorists overlook the Austrian theory of business cycles, since I become convinced that it was useless to look to an outside stimulus for the change in the conduct of the banks.... We can readily understand that the banks issuing fiduciary media, in order to improve their chances for profit, may be ready to expand the volume of credit granted and the number of notes issued. What calls for special explanation is why attempts are made again and again to improve general economic conditions by the expansion of circulation credit in spite of the spectacular failure of such efforts in the past. The answer must run as follows: According to the prevailing ideology of businessman and economist-politician, the reduction of the interest rate is considered an essential goal of economic policy. Moreover, the expansion of circulation credit is assumed to be the appropriate means to achieve this goal.

(Mises, On the Manipulation of Money and Credit, pp. 135–36) 131“Crises have reappeared every few years since banks... began to play an important role in the economic life of people.” Ibid., p. 134.

Central and Free Banking Theory this theory does not fit in with their analysis of the issuance of fiduciary media in a fractional-reserve free-banking system.

These theorists thus take refuge in an exclusively macroeconomic analysis (monetarist or Keynesian, depending on the case) and, at most, use instruments which, like the equation of exchange or the “general price level,” actually tend to conceal the truly relevant microeconomic phenomena (variations in relative prices and intertemporal discoordination in the behavior of economic agents) which occur in an economy upon the expansion of credit and growth in the quantity of fiduciary media.

In normal market processes, the supply of consumer goods and services tends to vary along with the demand for them, and new goods generally reach precisely those consumers whose subjective valuation of them has improved.

However where newly-created fiduciary media are concerned, the situation is radically different: an increased supply of fiduciary media never immediately and directly reaches the pockets of those economic agents whose demand for them may have risen. Instead, the money goes through a lengthy, cumbersome temporal process, or transition phase, during which it first passes through the hands of many other economic agents and distorts the entire productive structure.

When bankers create new fiduciary media, they do not deliver them directly to those economic agents who may desire more. On the contrary, bankers grant loans to entrepreneurs who receive the new money and invest the entire amount without a thought to the proportion in which the final holders of fiduciary media will wish to consume and save or invest. Hence it is certainly possible that a portion of the new fiduciary media (supposedly issued in response to increased demand) may ultimately be spent on consumer goods, and thereby push up their relative price. We know (chap. 7, p. 567)

that according to Hayek:

[S]o long as any part of the additional income thus created is spent on consumer’s goods (i.e., unless all of it is saved), the prices of consumer’s goods must rise permanently in relation to those of various kinds of input. And this, as will by now be evident, cannot be lastingly without effect on the Money, Bank Credit, and Economic Cycles relative prices of the various kinds of input and on the methods of production that will appear profitable.132

Hayek clarifies his position even further:

All that is required to make our analysis applicable is that, when incomes are increased by investment, the share of the additional income spent on consumer’s goods during any period of time should be larger than the proportion by which the new investment adds to the output of consumer’s goods during the same period of time. And there is of course no reason to expect that more than a fraction of the new income [created by credit expansion], and certainly not as much as has been newly invested, will be saved, because this would mean that practically all the income earned from the new investment would have to be saved.133 As a graphic illustration of our argument, let us suppose that the demand for fiduciary media increases, while the proportion in which economic agents wish to consume and invest remains unchanged.134 Under these conditions, economic agents must reduce their monetary demand for consumer goods, sell bonds and other financial assets and, especially, reinvest less money in the different stages of the productive process until they can accumulate the greater volume of bank deposits they wish to hold. Therefore if we suppose that the social rate of time preference has not altered, and we use a simplified version of the triangular diagrams from chapter 5 to represent society’s real productive structure, we see that in 132Hayek, The Pure Theory of Capital, p. 378.

133Ibid., p. 394. This appears to be the extreme case of an increase in saving which manifests itself entirely as a rise in balances of fiduciary media, the case Selgin and White use to illustrate their theory. See Selgin and White, “In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are Misesians!” pp. 104–05.

134Such a situation is definitely possible, as Selgin and White themselves recognize when they affirm: “An increase in savings is neither necessary nor sufficient to warrant an increase in fiduciary media.” Selgin and White, “In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are Misesians!” p. 104.

Central and Free Banking Theory Chart VIII-1 the increase in the demand for fiduciary media shifts the hypotenuse of the triangle toward the left. This movement reflects a drop in the monetary demand for consumer and investment goods, since the proportion of one to the other (or time preference) has not varied. In this chart, surface “A” represents economic agents’ new demand for (or “hoarding” of) fiduciary media (see Chart VIII-1).

The fundamental conclusion of the theory of monetary equilibrium in a fractional-reserve free-banking system is that banks would respond to this rise in the demand for fiduciary media by expanding their issuance by a volume equal to that of the new demand (represented by surface “A”), and the productive structure, as shown in Chart VIII-2, would remain intact (see Chart VIII-2).



Pages:     | 1 |   ...   | 13 | 14 || 16 | 17 |   ...   | 18 |


Similar works:

«University of Illinois Library Africana Collections and Services, Room 325 International and Area Studies Library Acquisitions List May 2012 001.092 M664m. Minishi, Labourn. My Life, My Story. Nairobi: Acacia Publishers, 2010. 016.30963 An781. An Annotated Bibliography of Population and Reproductive Health Researches in Ethiopia, 2002-2007. Addis Ababa, Ethiopia: Population Dept., Ministry of Finance and Economic Development, 2008. 016.72809678 K560a. Kimati, V.H. and M.S. Mazanda. Annotated...»

«Stone Circle Associates, LLC Business, Financial and Tax Services 1113 Odenton Road TEL: (410) 674-7445 Odenton, MD 21113-1606 FAX: (410) 674-3771 Dear Prospective Client: We understand that you are interested in using our services to prepare your income taxes. We have enclosed the following: 1. An Individual Income Tax Return Check List to help you prepare your tax information. 2. A Client Information Sheet for you to complete. 3. A brief description of our firm and our services. 4. Standard...»

«Mississippi Management and Reporting System Department of Finance and Administration MMRS Policies and Procedures 2503 ACE Access Terms of Use (TOU) Revision Date: 01/2008 Version: 3 2503 ACE Access Terms of Use V3 01/2008 Table of Contents 2503.1 INTRODUCTION 2503.2 SCOPE 2503.3 DEFINITIONS 2503.4 OPTIONS 2503.5 FORMATS 2503.6 POSTING 2503.7 NOTIFICATION 2503.8 RETENTION PERIODS 2503.9 CORRECTED W-2s 2503.10 RULES and REGULATIONS _ Page: 2 of 9 2503 ACE Access Terms of Use V3 01/2008 2503.1...»

«CENTER ON NONPROFITS AND PHILANTHROPY RESEA RCH RE PORT From Camps to Campaign Funds The History, Anatomy, and Activities of 501(c)(4) Organizations Jeremy Koulish January 2016 ABOU T THE U RBA N INS TITU TE The nonprofit Urban Institute is dedicated to elevating the debate on social and economic policy. For nearly five decades, Urban scholars have conducted research and offered evidence-based solutions that improve lives and strengthen communities across a rapidly urbanizing world. Their...»

«Studiies on ttheAgriicullturall aandFood SSector Studies on the Agr cu tura and FFoodSector Stud es on he Agricultural nd ood ector iin Transiitiion EEconomies inTrans t on Economiies n Transition conom es Agricultural Transition in Post-Soviet Europe and Central Asia after 25 Years International Workshop in honor of Professor Zvi Lerman Edited by Ayal Kimhi, Zvi Lerman Leibniz Institute of Agricultural Development in Transition Economies Agricultural Transition in Post-Soviet Europe and...»

«The impact of armed conflict on firms’ performance and perceptions Carly Petracco and Helena Schweiger Abstract This study is the first to explore the short-run impact of armed conflict on firms’ performance and their perceptions of the business environment. We focus on the August 2008 conflict between Georgia and Russia and use the Business Environment and Enterprise Performance Survey data before and after this armed conflict. We can exploit the variation in armed conflict exposure to...»

«Returns to handedness in professional hockey By Dennis Coates1 and Sara Azmoudeh Fard Draft: October 18, 2011 Research in economics has examined many determinants of earnings, including whether an individual is left or right handed. In the soccer labor market, being able to kick well with both the left and the right foot is rewarded with a salary premium. This paper examines pay and performance for hockey players that shoot left-handed versus those that shoot right handed. We find that after...»

«The Public Option in Housing Finance Adam J. Levitin†* and Susan M. Wachter** The U.S. housing finance system presents a conundrum for the scholar of regulation because it defies description using the traditional regulatory vocabulary of command-and-control, taxation, subsidies, cap-and-trade permits, and litigation. Instead, since the New Deal, the housing finance market has been regulated primarily by government participation in the market through a panoply of institutions. The...»

«VICTORIAN PRINCIPALS ASSOCIATION INCORPORATED (Reg. No.: A0031775R) (ABN: 53 483 039 713) th 45 ANNUAL GENERAL MEETING Friday 13 November 2015 Victorian Principals Association 45th Annual General Meeting Welcome A warm welcome is extended to VPA Members and Life Members attending the 2015 Annual General Meeting. Gabrielle Leigh President Program 11.15am Registration 11.30am Welcome and Acknowledgement of Country – Gabrielle Leigh, President 11.35am VPA Annual General Meeting – Anne-Maree...»

«The Business & Management Review, Volume 4 Number 3 January 2014 Toward a regional integration along Nigeria -Niger border: a case study of KatsinaMaradi Crossing Waisu Iliyasu Department of History and Security Studies Umaru Musa Yaradua University, Katsina, Nigeria Keywords Regional integration, unrecorded crossborder, trade, impacts Abstract Regional integration had been a subject of discussion among academics and policy makers in West Africa. In Nigeria,crossborder trade had been in...»

«Feb 13, 2015 PAULINE FATIEN DIOCHON Educator and Researcher in Management PhD in Management (HEC Paris, France) Organizational Behavior, Leadership Development, Coaching, Business Ethics, Critical Management Studies, Social Psychology, Qualitative Research Methods EDUCATION Core Education Ph.D. HEC School of Management, Paris, France 2008 Ph.D. in Management, Organizations & Human Resources “Coaching ambiguities: from threat to opportunity”, supervisor Dr G Amado D.E.A. University Paris 7...»

«Supporting International Trade Global Markets Correspondent Banks Trade Finance Equity Funds Finance Electronic Banking Currency Risk Management Market Intelligence Contents Bank of Ireland Supporting businesses to grow internationally Supporting Businesses 1 Case Study 4 Trade Finance 6 Correspondent Banking 7 Invoice Finance 8 Our Global Markets Proposition 10 Currency Risk Management 11 Electronic Banking Solutions 12 Equity Funds 14 Useful Contacts and Information 18 Bank of Ireland...»





 
<<  HOME   |    CONTACTS
2016 www.dissertation.xlibx.info - Dissertations, online materials

Materials of this site are available for review, all rights belong to their respective owners.
If you do not agree with the fact that your material is placed on this site, please, email us, we will within 1-2 business days delete him.