In the latest convo between @GeorgeGammon and @JeffSnider_AIP, George gives the following example.
A total of 10 gold coins exist in an economy. Alice agrees to give Bob wheat in exchange for a gold coin. But instead of both sides of the exchange happening now, Alice
A total of 10 gold coins exist in an economy. Alice agrees to give Bob wheat in exchange for a gold coin. But instead of both sides of the exchange happening now, Alice
gives Bob the wheat now, and she agrees to accept the gold coin from Bob in a year. George and Jeff both say that this is an increase in the amount of purchasing power and therefore an increase in the total money supply.
The scenario they are describing is actually “commodity credit” and it does *not* result in an aggregate increase in purchasing power nor an aggregate increase in the total money supply. Proponents of Austrian Economics have no issue with commodity credit.
George & Jeff neglected to distinguish between “commodity credit” vs “circulation credit”. In their scenario, Bob ends up with wheat, and Alice ends up with a paper claim that says Bob will pay her a gold coin in a year. The total money supply remains unchanged at 10 gold coins.
The paper claim does *not* circulate as money. Why on earth would it? Next time you need to pay a $100 bar tab, try paying with a piece of paper that says your buddy Jim owes you $100. See how that goes.
The only way that credit results in an aggregate increase in the money
The only way that credit results in an aggregate increase in the money
supply is if unbacked paper claims circulate as money, i.e. “circulation credit”. Once more claims exist than underlying base money, we’ve created a system of fractional reserve banking.
As @stephanlivera recently summarized it: “a system of fractional reserve banking is only
As @stephanlivera recently summarized it: “a system of fractional reserve banking is only
sustainable with government intervention, typically a central bank lender of last resort, or with government granted permission for banks to not grant in-specie redemption (i.e. not letting customers withdraw their coins).”
In the bar tab example, the only way that the paper debt of my buddy Jim would ever be accepted as payment is if a government/central bank ultimately backed it up, so that the receiver of the payment didn’t feel they had to trust or underwrite Jim’s ability to pay the debt.
George and Jeff made some interesting points throughout their latest discussion. I’m a frequent follower of their content. But on this point, commodity credit does not lead to an aggregate increase in the money supply or purchasing power.
Regarding the creation of
Regarding the creation of
circulation credit, it is a *redistribution* of wealth from those who previously held the base money or held fully backed claims to base money. It is the same dynamic as the issuance of additional shares of stock resulting in a dilution of value for pre-existing shareholders.
For some reason, nearly everyone forgets this reality when it comes to money.
One might argue we “should” redistribute wealth via the creation of money and circulation credit, but that does not change the fact that the creation of money and circulation credit out of thin air
One might argue we “should” redistribute wealth via the creation of money and circulation credit, but that does not change the fact that the creation of money and circulation credit out of thin air
is a confiscation of value from those who previously held base money or held fully backed claims to base money.
I’ll be writing a long form article for Swan on the topic of fixed money very soon!
I’ll be writing a long form article for Swan on the topic of fixed money very soon!
and CC @CaitlinLong_ who has eloquently spoken in the past about the significant difference between commodity credit and circulation credit!
• • •
Missing some Tweet in this thread? You can try to
force a refresh
