Study Guide to Man, Economy, and State with Power and Market

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Chapter 11: Money and Its Purchasing Power 141 output was less than necessary for “full employment.” In order to induce employers to hire more workers, the community needed to spend more and save less (thus increasing the slope of the expenditure line, so that it intersected the 45-degree line farther to the right). The fundamental flaw with such reasoning is that there can only be unemployment if wage rates are higher than the market clearing level. This can occur either through union pressure or government edict. Only if we assume that workers do care about money (rather than real) wages could hoarding have such sinister effects. G. The Purchasing-Power and Terms-of- Trade Components in the Rate of Interest Following Irving Fisher’s canonical treatment, it is standard to explain the nominal interest rate as the real rate of interest plus a “purchasing power” component. For example, if price inflation is 5 percent and the real interest rate is 5 percent, then (Fisher would argue) the nominal interest rate will be 10 percent, because lenders need to be compensated for the decline in the PPM of their money during the time of the loan. One grave problem with this is that (obviously) the nominal rate can never be negative, and so Fisher’s explanation can’t be the whole story in times of severe price deflation. Moreover, to the extent that future changes in prices are fully anticipated, present prices will adjust. “The purchasing power component, then, is not the reflection, as has been thought, of expectations of changes in purchasing power. It is the reflection of the change itself” (p. 797).
142 Study Guide to Man, Economy, and State with Power and Market 6. The Supply of Money A. The Stock of the Money Commodity The total stock of money increases with mining, etc., but decreases through wear and tear, and as the money commodity is devoted to industrial or consumption purposes. B. Claims to Money: The Money Warehouse A warehouse may issue certificates entitling the bearer to a certain good stored in the warehouse. If the community has no reason to doubt the reliability of redemption, the certificates may circulate as goods-substitutes. In the case of money, the warehouse may realize that it can issue a greater number of certificates than it can redeem; this is “fractional reserve banking” (FRB), and explains banks’ current susceptibility to “runs.” In a free market, FRB would be illegal because of its fraudulent nature. C. Money-Substitutes and the Supply of Money Because the public may accept money-substitutes as readily as the original money commodity, they are a commonly accepted medium of exchange and hence must be classified as money. “Money in the broader sense” refers to the total supply of money (including money certificates) in people’s cash balances, while “money proper” or “standard money” refers only to the supply of the original money commodity. Under 100-percent reserve banking, deposits in the banking system do not influence the total supply of
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STUDY GUIDE TO MAN, ECONOMY, AND ST
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STUDY GUIDE TO MAN, ECONOMY, AND ST
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CONTENTS INTRODUCTION . . . . . . .
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In June of 2004, I became convinced
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Introduction ix appropriate, I have
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Chapter Summary In a money economy,
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Chapter 4: Prices and Consumption 4
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Chapter Summary In the evenly rotat
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Chapter 6: Production: The Rate of
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Chapter Summary This chapter explai
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Chapter 7: Production: General Pric
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Chapter Summary Society is composed
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Chapter 4: Binary Intervention: Tax
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Chapter Summary There has been litt
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Apriorism, 1, 9 Ability-to-pay prin
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Index 251 Equilibrium, 47, 104 macr
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Index 253 Medium of exchange, 27, 3
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Index 255 See also Economy, Evenly
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