Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Central and Free Banking Theory 697money balances are perfectly compatible with different combinationsof simultaneous increases and decreases in the proportionsin which he consumes or invests. In fact his balancesof fiduciary media may rise simultaneously with his spendingon consumer goods and services, if he only disinvests some ofthe resources saved and invested in the past. As Hans-HermannHoppe points out, the supply of and demand for moneydetermine its price or purchasing power, while the supply ofand demand for “present goods” in exchange for “futuregoods” determine the interest rate or social rate of time preferenceand the overall volume of saving and investment. 142Saving always requires that an economic agent reduce hisconsumption (i.e., sacrifice), thus freeing real goods. Savingdoes not arise from a simple increase in monetary units. Thatis, the mere fact that the new money is not immediately spenton consumer goods does not mean it is saved. Selgin defends142 First off, it is plainly false to say that the holding of money,i.e., the act of not spending it, is equivalent to saving. . . . Infact, saving is not-consuming, and the demand for money hasnothing to do with saving or not-saving. The demand formoney is the unwillingness to buy or rent non-moneygoods—and these include consumer goods (present goods)and capital goods (future goods). Not-spending money is topurchase neither consumer goods nor investment goods. Contraryto Selgin, then, matters are as follows: Individuals mayemploy their monetary assets in one of three ways. They canspend them on consumer goods; they can spend them oninvestment; or they can keep them in the form of cash. Thereare no other alternatives. . . . [U]nless time preference isassumed to have changed at the same time, real consumptionand real investment will remain the same as before: the additionalmoney demand is satisfied by reducing nominal consumptionand investment spending in accordance with thesame pre-existing consumption/investment proportion, drivingthe money prices of both consumer as well as producergoods down and leaving real consumption and investment atprecisely their old levels. (Hans-Hermann Hoppe, “How isFiat Money Possible?—or The Devolution of Money andCredit,” in Review of Austrian Economics 7, no. 2 (1994): 72–73).See also the notable article by Ludwig van den Hauwe, “The UneasyCase for Fractional-Reserve Free Banking,” Procesos de Mercado 3, no. 2(Autumn 2006): 143–96.