Austrian Definitions of the Supply of Money
We were recently talking about M2, and how it is basically a measure of the banking system. April 27, 2025: Understanding Money Mechanics #6: Blame M2 We would expect the banking system to, more or less, follow the progress of Nominal GDP as a whole. And indeed this is what we see. We looked at the recent example of Greece: Greece had some serious economic difficulties during this time. However, it didn’t have much of anything to do with the money. Greece shared the euro currency, with Germany, France and the other members of the Eurozone. The other euro users didn’t really have much problem, so we can see that this was not a monetary problem with the euro. It was a problem, basically, of bad economic policy. All of this focus on “M2,” which is basically just a correlate of Nominal GDP (with “third generation” Monetarists now just focusing on NGDP directly, or NGDP Targeting), adds up to an excuse to apply some kind of monetary “stimulus,” in response to non-monetary problems caused by other factors. This we saw during this time in Greece, as many economists wanted to “stimulate” the Greek economy through some kind of “easy money” solution. To facilitate this, they wanted Greece to leave the eurozone and basically introduce a domestic floating currency, whose value would promptly fall. Usually, these arguments are not for devaluation explicitly. They focus on other matters, such as “M2.” However, significant currency depreciation is the expected result; and indeed, these methods wouldn’t work without it. If they could work without it, you could just do it without leaving the euro (or, Gold Standard in the 1930s). From this recent Greece example, we can then extend to the Great Depression period, when exactly the same arguments were made for exactly the
Audio 2025 #2: More Blah Blah
Here’s more chitchat about “audio,” because apparently 2025 is the year I just can’t shut up. Over the winter — a pleasant time to be indoors with a soldering iron — I worked on another amplifier that I have been thinking about for a long time. The first thing I ever built was a little amplifier based on the LM1875 chip from National Semiconductor/Texas Instruments. This is a tiny little thing, the size of a dime, which is a fully functioning 20 watt amplifier. Basically, you just attach a power supply, and feed it a signal, and it works. In bulk quantities, it costs $1.58 each. It was introduced in 1992. In the 1990s, chips like these (including the big brother LM3875 and its successor the LM3886) went into millions of consumer-fi products, and made millions of people happy, without anyone ever being very impressed about their sound quality. In the early 2000s, amplifiers based on chips like these became very popular among DIYers, both because of their simplicity, but also because it was revealed, especially by a Japanese company called 47 Labs, that they could actually sound quite good — better than most commercial gear at any price, at that time. Audio category That first little amplifier (it was one channel) was driven by +/- 12 volts from a stack of non-rechargeable 6v lantern batteries, making about four watts of output. Those batteries actually lasted about six months, as I recall. It was good! I listened to it on a variety of open baffle speakers. The first was a Fostex FE103, in mono, mounted on a 6″ wide board and with the addition of “wings” in the form of cardboard from boxes taped on to expand the baffle size. This was quite promising, and started a long series of
The Gold Standard Documentary Episode 2
Here’s the second episode in my documentary on the gold standard. https://www.youtube.com/watch?v=PlMZX-OmgrA
The Gold Standard Documentary Episode 1
For a long time, I wanted to do a documentary on YouTube about monetary topics. Here is the first episode.
Understanding Money Mechanics #6: Blame M2
We’ve been talking about an unhealthy admixture of Money and Credit that goes back at least to the 1913 era, and I think well before then too. There is a lot of error that arises from this. Credit is very complicated. It is a giant amount of contracts, of all different sorts. Once you start mixing Money and Credit, then you take something that might inherently be pretty simple (in our example silver coins, and silver coins alone), and then start mixing it with something that is very complicated (all the varieties of credit contracts in an economy, and all of their effects). I like to say sometimes that “credit is just people making deals.” This is a way of reminding us that we don’t really have to understand all this complexity. It is just people making deals. We should keep our eye on the Money, which in my example is literally silver coins, a very simple thing. In more practical terms, it is some money unit whose value is fixed to gold. Understanding Money Mechanics Series This mixture of Money and Credit has one prominent problem, which is this: It is not hard for an Authority, of some sort, to maintain a stable currency value. Historically, it just meant making coins with an unchanging amount of gold (let’s use gold now instead of silver). Basically, the Coinage Act of 1792. The coins don’t change, no matter what happens to Credit. Later, it meant maintaining the value of the circulating medium, Base Money, at an unchanging value compared to gold, which was very successful and not at all problematic during the 19th century. Since only the currency issuer (today Central Banks, historically multiple issuers but working on the same principle) manages the supply of this Base Money, we see that
Tariffs Done Wrong
(This item originally appeared at Forbes.com on April 23, 2025.) Economic Nationalism, done right, could work very well for the United States in coming decades. The most glorious period for US business, before 1913, was a time of high tariffs and controlled immigration. But, it was also a time when there was no Income Tax; and, in this pre-Federal Reserve era, the money was fixed to gold. The result was very good. The United States, at first a promising “emerging market,” ended up a global superpower. The present era of Globalism dates from Bretton Woods Agreement of 1944, passes landmarks such as the North American Free Trade Agreement of 1994, but reached its full expression with the inclusion of China into the World Trade Organization in 2001. This was paralleled by a range of technological developments, empowered by the new Internet, which made long-distance supply chains possible. Although this Globalist trend arguably did benefit the world as a whole, it is not clear at all that it benefited American citizens. Many industries were “hollowed out,” with unemployment, underemployment and depressed wages the first consequence. A weak domestic economy did little to pick up the slack. Supply-chain dependency proved incompatible with a trend toward a more “multipolar” world, where China or Russia’s growing regional authority combined with American exhaustion with its post-WWII role as global policeman. Within this framework, certain Economic Nationalists (such as Pat Buchanan) have argued in favor of an across-the-board flat rate tariff, avoiding the aggravating complexity of different rates for different products from different countries. It is basically the tariff equivalent of a flat-rate retail sales tax, and might be in the range of 10% to 20%. To this might be added some country-specific (but still flat-rate) tariffs, depending on the situation, perhaps 5%-20%. For some reason, we
Understanding Money Mechanics #5: Beginning At The End
Now it is time to say a few words about the book that got me going on these topics: Understanding Money Mechanics (2021), by Robert Murphy. April 13, 2025: Understanding Money Mechanics #4: Fiat MoneyApril 6, 2025: Understanding Money Mechanics #3: Chain of CausationMarch 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy This is a fine book. It is succinct and plain-spoken, not given to jargon or dogma, or sophistry to score political points. Mostly I agree with its arguments and conclusions. Also, it has some nice charts. Unfortunately, the Austrian Tradition is characterized by oceans of text arguing about generalities and principles. This has been a feature of the “Austrian school” since the 1880s, as it sought to provide an alternative view to the “Historical School” popular at the time. If you read Human Action, by Ludwig von Mises for example, I don’t think there is a single historical example cited, although you can tell that his discussion of general principles was motivated by historical events. Since there are no historical examples, there is also no need to ever provide any kind of real-world data. While there are some advantages to the focus on principles, a methodology which excludes any kind of real-world example, on principle or simply in imitation of people like Mises, is certainly in danger of losing the plot entirely, and drifting off into an imaginary land that doesn’t have much relation to reality. And this, I would say, has characterized the “Austrian school” for about the last century. November 27, 2016: The Tyranny of Prices, Interest and Money 2: The Old Historicism Murphy refers to real-world events, including some historical chapters going back to the beginnings of US history, and later, recent events including the
Understanding Money Mechanics #4: Fiat Money
We’ve been talking about “Understanding Money Mechanics,” by this time only vaguely related to a book by Robert Murphy of the same name. April 6, 2025: Understanding Money Mechanics #3: Chain of CausationMarch 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy Last time, I talked about the various influences that determine the amount of lending and deposits at banks (which must balance on the Balance Sheet), and their relation to Reserves, and where those Reserves come from. Thus the chain of causation is: Economic Conditions -> Bank Lending and Deposits -> Bank Reserves -> Demand for Silver Coins -> Supply of Silver Coins to meet this Demand. In a simple silver coin system, or actually in any proper system which fixes the value of the currency to silver (or, better yet, gold), the amount of money is determined by the demand for money, with the supply of money automatically adjusting to meet that demand, thus maintaining a stable currency value (stable relative to the benchmark, silver or gold). This is common today in the form of a currency board. I wrote a whole book about this, Gold: The Monetary Polaris. Read Gold: The Monetary Polaris However, that is not the way things are in a floating fiat system, as we have had since 1971. Here, the amount of money (base money) is determined by the whims of the central bank manager. It is not an automatically-adjusting system where supply meets demand, at a stable price. But today’s floating fiat situation (you can hardly call it a “system”) is not quite a situation of complete discretionary abandon either. Typically, there is some kind of mechanism that, in practice, adjusts somehow so that the supply of money does meet the demand, at
Understanding Money Mechanics #3: Chain of Causation
At some point, I’m actually going to talk about Robert Murphy’s book Understanding Money Mechanics. But, not yet. March 30, 2025: Understanding Money Mechanics #2: Supply and DemandMarch 23, 2025: Understanding Money Mechanics (2021), by Robert Murphy So far, we’ve postulated a somewhat hypothetical scenario where all monetary transactions take place with silver coins, but the rest of the credit system (mostly banks but also all bonds, securitized lending, and so forth) is basically the same as we have today. This is to illustrate the difference between Money and Credit, which have been confusingly mixed together basically since the late 19th century. The Money is silver coins, and they are very simple. They are just unchanging coins of silver. The amount of silver in them doesn’t change, but the quantity of silver coins does change, basically rising or falling depending on the aggregate desire of people (we are imagining a place like Britain in the nineteenth century) to hold silver coins. The value of the silver coins is the same as the value of silver everywhere. We are assuming that the coins are not debased or altered in some fashion, and that surrounding regulations and so forth (such as import or export controls on silver) are either nonexistent, or ineffective enough as to be not much different than if they were nonexistent. We are assuming that the value of the silver coins is basically pretty stable, as was the case for many centuries in the past, but not so much after 1870. In the 1870s, silver’s market value was destabilized, for what was I think the first time in human history. Only gold today has the stable value characteristics that both gold and silver once had. So, we are imagining that these silver coins have a reliably (though not perfectly)
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
