Understanding Money Mechanics #2: Supply and Demand
We’ve been talking about Understanding Money Mechanics (2021), by Robert Murphy. Or, maybe I should say we haven’t been talking about it, but the book did inspire me to discuss some issues that I’ve been thinking about discussing for a long time, but hadn’t got around to. March 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy We described a common bank, which looks like this (denominated in kilograms of silver): ASSETSLoans 700kgSecurities (marketable bonds) 200kgReserves (silver coins or deposits at the bank clearinghouse) 100kg LIABILITIESDeposits 900kgShareholders’ equity 100kg This has been the typical makeup of banks literally for centuries. Banks today are actually not much different. How Banks Work Series You could extend the basic principles to credit more broadly, including direct lending, bonds, securitized loans (MBS for example), and so forth. First of all, let’s observe that the balance sheet balances. Assets and Liabilities (and equity) are equal. Thus, borrowing (deposits) and lending (loans and securities) are about equal. What determines the amount of deposits, or lending? Basically, it is supply and demand. It arises from the aggregate decisions of all the people who hold deposits, or borrow, or lend. Let’s look at these people and see what motivates them. Why do people hold deposits in banks? Basically, this is a preference for cash, in this case a convenient money substitute. Or, usually — actually a significant amount of Deposits are time deposits, which are one of the most illiquid of all credit instruments, since you can’t even sell it in the market like a bond. Nevertheless, we will begin our discussion with Demand Deposits. Why do people hold Demand Deposits? There are a number of reasons, which you can figure out pretty readily. Mostly it is because their income and expenditures don’t coincide perfectly, so there has
Understanding Money Mechanics, by Robert Murphy
Understanding Money Mechanics, by Robert Murphy, was published in 2021. It is available at mises.org in free pdf format. “This book provides the intelligent layperson with a concise yet comprehensive overview of the theory, history, and practice of money and banking, with a focus on the United States. Although the author considers himself an Austrian school economist, most of the material in this book is a neutral presentation of historical facts and an objective description of the mechanics of money creation in today’s world.” This is a good short introduction to the book. Although Murphy is certainly in the neighborhood of the “Austrian” camp, he maintains some independence, and recognizes some of the excesses and errors of the Rothbard crew. Nevertheless, the book is characterized by a confusion that certainly goes back to The Theory of Money and Credit (1913), by Ludwig von Mises; and probably well before then, as I don’t think Mises created it. Basically, it is a confusing stew between “money” and “credit.” Although much error and confusion has arisen from this, nevertheless it had some relevance in 1913, because in those days (or actually about fifty years earlier, before the spread of central banks in the late 19th and early 20th centuries), “money” and “credit” was indeed often a confusing stew, mixed together on a single balance sheet of commercial banks. In the United States in the 19th century, for example, many commercial banks issued their own banknotes; and these banknotes were on the same balance sheet as lending and deposits. You could have commercially-issued banknotes (“free banking”) that are separate from lending and deposits, in a separate company with a separate balance sheet, although probably part of the banking group company. I think this would be a good idea going forward. I’ve talked about this
Another Round Of Inflation On Deck
(This item originally appeared at Forbes.com on March 11, 2025.) In our 2022 book Inflation: What It Is, Why It’s Bad, and How To Fix It, we said: When the price of gold rises – in other words, when more money is needed to buy an ounce of gold – that usually means that the dollar’s value has decreased. … Daily price movements may not be significant. But, if the price goes up and stays there for an extended period, or if it fluctuates but the general trend is up, that signals a downturn in the value of the dollar. (p. 100) When we wrote this, it took about $1800 to buy an ounce of gold. Today, it is more like $2900. That implies an $1800/$2900=0.621 or a 38% decline in dollar value over that period. Prices will eventually adjust, over a period of years, to the new, lower value of the currency, with some prices moving faster and some moving slower. “All things being equal” (they never are but it is a good principle), we should expect a $2900/$1800 or 61% rise in prices of goods and services going forward, compared even to the inflation-boosted prices that we have had to get used to in 2022-2024. Compared to prices in 2018, when it took about $1200 to buy an ounce of gold, we should expect a $2900/$1200 or 141% increase in nominal prices. Doesn’t seem like much fun, does it. This is why we say “you can’t devalue yourself to prosperity.” No country ever got rich with a weak currency. They get rich with a stable and reliable currency, which means: a currency of unchanging stable value. You would have to increase your nominal income by 141% just to break even. Maybe more than that, on an after-tax basis. Even
Audio 2025
“Audio” means the machines that make music from recordings in the home. I’ve been working on a new amplifier, to multi-amp the Bill Woods-designed Yorkville U215s that I have around here. This has been a longstanding ambition. But, that is not done yet. Along the way, I looked around at the current state of affairs in the audio hobby. Audio series Mostly, it hasn’t changed much. There is a lot of gear hype, and still a focus on little shoebox speakers that are very nice if you want something small and convenient that doesn’t cost too much, because you have better things to do than worrying about “audio,” but are not (in my opinion) where you want to focus if you have a little ambition. I don’t bother following the chit-chat much, either in mags or review sites, or at forums like DIYAudio.com, since I already know what I want to do for the next several years. Even in the shoebox-speaker category, I would focus on horn designs. I’ve mentioned that Jonathan Weiss of Oswald’s Mill Audio is a friend of mine going back to the “tube and speaker tasting” days around 2001. More than anyone, he creates what I think of as ambitious audio devices. I was there the first time he hooked up a 300B SET amplifier to his big RCA horns, replacing some kind of EL34 Williamson-type amplifier. (It was a lot better.) Heck, I bought those RCA horns, at least the basshorns, which we lowered out of the Mill with an electric winch. Of course he has gone 10x beyond me since then. I’ve heard some of Jonathan’s designs including the Mini, DeVille and Excelsior, which are all small, and they were astonishing — because of their horns. Meanwhile, Magico released the M9, “only” $750,000 a
Economic Nationalism: The Nation-State
Today we come to one of the core elements of Economic Nationalism, which is not the economics, but the Nationalism. Economic Nationalism series In practice, this leads directly to economics as well. Why are America and Canada the only wealthy countries in all of the Americas? It has something to do with their British heritage, which has led to certain political outcomes, which in turn lead to economic policy. I have put off writing this item for a while, because it is hard to express properly the idea of the Nation, and what it means for human social organization. Here’s a description of Aristotle’s idea of the “philia”: I will have to collect some better and additional examples to this over time, perhaps from the writings of Ibn Khaldun, Arnold Toynbee, or John Glubb. Here is Glubb’s description of the early stages of National success: The characteristics of the Nation are a combination of enough similarity of thought and background (and language, religion and so forth) that a group of people can effectively work together to achieve some kind of positive outcome for the group. Any short reading of the Founders of the United States shows how rare and precarious good government is. Glubb then goes to show why empires (and nations) decline: Here’s the “Tytler Cycle”: Note again that success begins, and is sustained, by “Unity and Deep Moral Groundings.” I am sure that someone else can express these concepts better than I am doing here. Anyway, the result of all this, over a period of many centuries, was the idea of the “Nation-State.” In other words, State boundaries and jurisdictions should be defined by, and separated by, Nations. Against the “Nation State,” we can contrast several other common situations: The Multi-State Nation, such as Germany before 1871. One
A New Era Of Economic Nationalism
(This item originally appeared at Forbes.com on February 13, 2025.) The United States was founded on Free Trade. And, high tariffs. Free Trade applied between the States. The new Federal Government was given specific powers over Interstate Commerce, to prevent the States from erecting tariff barriers against each other. States were not allowed to establish their own tariffs on foreign trade. The Federal Government applied a uniform tariff throughout the United States. It was one of the principal sources of revenue, in the Nineteenth Century. Domestically, the United States had exceptional economic policy. There were hardly any taxes, and the currency was reliably fixed to gold. Trade was Free between States. With what I’ve called “The Magic Formula” (Low Taxes and Stable Money), the US got rich – even with high tariffs with the rest of the world. Immigration was highly restricted during the first half of the Nineteenth Century. No significant immigration took place until a burst of Irish immigrants, fleeing the Irish famine and British oppression, in the 1840s. In 1830, 98% of the US population was native-born. Even until 1890, almost all immigration came from Britain, Ireland, Canada, and Germany (England’s medieval ancestors). The tariffs themselves were extremely problematic, however. They invited extreme overcomplexity, with different tariffs for different goods, and even for different countries, with rates that changed suddenly. Every tariff rate became an object of political contention. High tariffs were an object of chronic disagreement between the North and South, which was only exacerbated when the election of Abraham Lincoln resulted in still-higher tariffs. During the Nineteenth Century, the United States ran a persistent current-account deficit with the rest of the world, which basically reflected the desire of foreigners to invest in the booming United States. This arrangement changed with the introduction of the Income Tax in 1913. Now, there was an alternative
2024 Reading List
For 2024, my book count dropped again, to rather low levels. This is also because the books are big: Thucydides, and especially Gibbon, are long, slow reads. In regular book format, Gibbon chapters 1-40 would probably be about 2000 pages. (I am reading the Great Books of the Western World edition, which is so tightly printed that there are actually two columns per page. The six-volume Everyman’s Library edition has 3980 pages.) Gibbon is great fun, and certainly worthwhile. You have to read it quite slowly to follow the narrative, and catch the significance. I would sometimes read aloud, by myself. Build Your Own College series For 2025, I plan to continue with Durant’s Story of Civilization (#4, The Age of Faith); read the political works of Plato, Aristotle and Cicero; and continue with the Harvard Classics of Fiction, where the next step is Hugo’s Notre Dame de Paris. I think I will take a little break from Gibbon, but will follow up later with his tale of the fate of the Byzantine Empire. This doesn’t seem like too much of an agenda — only one big book, not three as in 2024 — but I think it will still be enough to exclude a list of more contemporary works that I would like to read, or other works of economics, which were light this year. Not everyone needs to undertake this kind of intensive “liberal arts” education. I think the effort to spread this kind of education to the masses, after 1950, was mostly a failure. It is an exclusive club, and you should already know if you are in it, because you want to be in it. But, we should have a few people who are educated to this degree. In the past, it was maybe 5% of
Gold Is Still Your Only Monetary Alternative
(This item originally appeared at Forbes.com on January 25, 2025.) Today, we are seeing a lot of the institutions and bad ideas of the Post World War II Consensus breaking down and collapsing. Among these is the rather stupid notion that economies should be managed by some combination of currency and interest rate manipulation, and “fiscal stimulus” spending that amounts to utter waste, for the simple reason that it has no justification except as “stimulus.” These are the conclusions of “Keynesianism,” which has been taught in all universities since the 1940s. Note how this is completely opposed to what I’ve called the Magic Formula: Low Taxes, and Stable Money. This is the Formula that enabled the United States to become the wealthiest country in the world, and the same Formula that enabled Japan or China to achieve similar results more recently. If the US sadly deviates from this Formula today, nevertheless taxes are Lower, and the currency is more Stable, in the US than in most any other developed country today. We see that it takes more and more dollars to buy an ounce of gold; and also, more and more euros or yen. This is probably a reflection of a declining value of the dollar, euro and yen themselves, rather than any change in gold. The average price of a hamburger in New York City, in 1950, was $0.10. Today, it is a lot more than that — and still rising, at a rate that is quite unpleasant to anyone who gets hungry in Manhattan. Is there some shortage of hamburgers? Or maybe too many people have a job? (Economists keep telling us that the solution to “inflation” is more unemployment.) No, the reason that hamburgers cost a lot more now is because the dollar lost value during that
Economic Nationalism: The Capital-Labor Ratio: Foreign Trade
I think it is worthwhile to think about the Capital-Labor Ratio in terms of Foreign Trade. Previously, we took some time to think about the effects of Immigration on the Capital-Labor Ratio. January 12, 2024: Economic Nationalism: The Capital-Labor Ratio Basically, immigration means More Labor, which tends to depress the Capital-Labor Ratio, to the detriment of most people in society. Capital loves it, of course. Basically, you get the guy in the upper left corner, “Toryism,” accompanied by a vague sense of “unjust exploitation of the worker.” This tends to produce the response in the upper right, Socialism. Oscillating between these poles will destroy your society. Usually, it is hard to find this “unjust exploitation of the worker.” Wages are low, but that’s because business is marginal. Low-wage/labor-intensive businesses, in the US or around the world, the “sweatshop,” are not known for their high profit margins. Basically, it is a Bad Business Environment for both Labor and Capital. Successful, growing businesses with high profit margins (Nvidia today; Ford Motors in the past) usually offer pretty good wages. “Unjust exploitation of the worker” today mostly takes the form of cartelist behavior, for example in healthcare or education, the financial system (“usury”), or the artificial housing shortage we have today. Nevertheless, there is a persistent sense that people work all day, under difficult conditions, and are not properly compensated. Now let’s forget about immigration, and just look at trade. Trade can be seen as a kind of indirect supply of labor. When you buy cheaply produced goods from China or Vietnam, you are, in effect, importing cheap labor. That cheap Chinese or Vietnamese labor is basically competing with your local higher-cost labor. The result of this is a factory is opened in China; and closed in the US. China has more capital,
Economic Nationalism: The Capital-Labor Ratio
Until now, I’ve mostly dealt with important but, in my view, secondary aspects of the topic of Economic Nationalism. Having now addressed that, we can turn to what I consider the core of the matter, without (I imagine) being distracted by secondary concerns. Economic Nationalism series These basically fall into two categories — the Capital-Labor Ratio, and issues of Nationality that are not economic. In the 19th century, Ireland was very poor, and many Irish people immigrated to the United States. This Irish immigration, beginning in response to the Irish Famine of the 1840s, was the first major wave of immigration since the founding of the United States. Before then, for about fifty years, there was almost no immigration, which tells you that the United States was never supposed to be a “melting pot.” All of this “give me your tired, your poor, your huddled masses” stuff was pro-immigration propaganda written by a Jewish Zionist immigrant from Russia, who wanted the doors to remain open to Jewish Zionist immigrants from Russia, and which was unrelated to the making of the Statue of Liberty itself, which of course took place in France. Immigration from Russia at the time (the 1890s) was rather controversial. Along with new immigration from Italy and elsewhere, it was the first time in US history that there was significant immigration from outside Great Britain, Canada and Germany. Ireland was, in the 1840s, part of Great Britain (Ireland became independent in 1921), so basically Irish immigration was British immigration, and the Americans were British, in fact British colonists only a few decades earlier. Why did these Irish come to the United States? Basically, it was the Capital-Labor ratio. There were too many people in Ireland compared to the Industrial Capital (jobs), or the basic natural capital of arable
