Money Supply Question

[Humphreysguitar]

Hi there,

forgive my ignorance but i'd like to know some questions from austrian economics pros concerning money supply.

I'd like to ask this question by creating an example.

Let's say there is a village with about 50 people and gold was the established commodity of exchange. Each villager had a certain amount of gold coins to trade with or buy stuff. Let's say as these 50 villagers have children and as the population grows,

1) would there still be a limited amount of gold in circulation?

2) If so, how is more wealth created if the supply of gold remains? Wouldn't there be less gold for each person.

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I wanted to ask this question because I keep reading that businessmen like Bill Gates create wealth and jobs, increasing affluence for more people. But if everything was tied to gold, how does he make more money above the available supply of gold for everyone?

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I support austrian economics but I just don't understand how they would control money supply. Thanks!

 

[NocturnalC]

Well from how I understand it, you can increase the money supply (fiat) as long as there is an increase in goods & services. As the the population and the economy grows, so should the money supply to a degree. When the money supply is increased to ridiculous amounts and the goods & services remain at the same relative level is when inflation rears its ugly head.

If gold was finite in that village, I would think that they would still be bartering goods. Or you could introduce something else in terms of money as their village grows. Gold would probably go sky high in value if the village grew and there wasn't anymore gold introduced into the economy. In a productive village with many different talents and goods available, the quality of life would increase as new talents and inventions and goods came into being for trade.

 

[sratiug]

Hi there,

forgive my ignorance but i'd like to know some questions from austrian economics pros concerning money supply.

I'd like to ask this question by creating an example.

Let's say there is a village with about 50 people and gold was the established commodity of exchange. Each villager had a certain amount of gold coins to trade with or buy stuff. Let's say as these 50 villagers have children and as the population grows,

1) would there still be a limited amount of gold in circulation?

2) If so, how is more wealth created if the supply of gold remains? Wouldn't there be less gold for each person.

-----

I wanted to ask this question because I keep reading that businessmen like Bill Gates create wealth and jobs, increasing affluence for more people. But if everything was tied to gold, how does he make more money above the available supply of gold for everyone?

-----

I support austrian economics but I just don't understand how they would control money supply. Thanks!

"They" would not control the money supply. The money supply would control itself.

How is new wealth created now? It is certainly not by printing paper money, that just enriches the con men with the printing press who are stealing that wealth from everyone else who holds dollars.

If the poplulation and wealth of the town doubles, the value of all their gold doubled to match that wealth. So the money supply effectively doubled with the same amount of gold.

 

[RSLudlum]

"They" would not control the money supply. The money supply would control itself.

How is new wealth created now? It is certainly not by printing paper money, that just enriches the con men with the printing press who are stealing that wealth from everyone else who holds dollars.

If the poplulation and wealth of the town doubles, the value of all their gold doubled to match that wealth. So the money supply effectively doubled with the same amount of gold.

sounds right.....

just an off-topic question: are you (sratiug), also the OP (Humphreysguitar)? Just an observation I made, seeing that your member name is 'guitar' spelled backwards.

 

[danberkeley]

1) would there still be a limited amount of gold in circulation?

yes. there will always be a limited amount of gold. just as there is limited amount of food, shelter, people. everything is scarce.

look at it this way: the less amount of food there is in the village, the more valuable it is because it is relatively scarce. the more people there are in the village the higher the supply of labor is and the lesser each person worth (to the the emplyer in terms of wages). if there was only one woman in the village and only 5 guys, the 5 guys would fight over the one woman. whom ever the woman finds more valuable will have her. (let's be PC and not rule out that some of the guys might choose each other over the woman).

2) If so, how is more wealth created if the supply of gold remains? Wouldn't there be less gold for each person.

wealth is created all the time. if a villager cuts down a tree and transforms it into a table, the villager has just created wealth. if a villager hunts down a bear and transforms it into a blanket, the villager has created wealth.

also, the purchasing power of gold would increase (over time), if the supply of gold did not increase.

 

[Humphreysguitar]

"They" would not control the money supply. The money supply would control itself.

If the population and wealth of the town doubles, the value of all their gold doubled to match that wealth. So the money supply effectively doubled with the same amount of gold.

Please elaborate how the money supply would control itself, this is the part where I get fuzzy.

Lets say the earth has mined all available gold/silver and no more can be found. As population continues to expand, how does a finite supply of gold accomodate a theoretically infinite population?

I just don't understand how production/business can simply "create" wealth, in the same sense that the government prints money. The employer pays his employees in gold-backed currency. He is able to pay his employees because of the revenue he receives from his business, presumably from consumers. I can only see a transfer of wealth, but I do not see more wealth being created.

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Just want to add that I'm pro-gold standard (fiat is pure inflationary nonsense), but if i want to convert more people, I need to have a rock solid understanding of how it works.

sounds right.....

just an off-topic question: are you (sratiug), also the OP (Humphreysguitar)? Just an observation I made, seeing that your member name is 'guitar' spelled backwards.

holy cow! But it would be silly to reply to myself, since I'm still confused on the issue

 

[RSLudlum]

Please elaborate how the money supply would control itself, this is the part where I get fuzzy.

Lets say the earth has mined all available gold/silver and no more can be found. As population continues to expand, how does a finite supply of gold accomodate a theoretically infinite population?

that's when 'gold dust' comes into play.

holy cow! But it would be silly to reply to myself, since I'm still confused on the issue

sorry if I confused you even more, it was just a quick observation that I had to ask about?

 

[danberkeley]

Lets say the earth has mined all available gold/silver and no more can be found. As population continues to expand, how does a finite supply of gold accomodate a theoretically infinite population?

the problem i see with your scenario is that you assume an infinate amount of population on earth. infinities do not work well in these scenarios because infinity is not a defined number like 100 billion is. anyway, money is simply a medium of exchange and history has shown that gold and silver are the two mediums of exchange that have worked the best (at one time the most common medium of exchange in prisons was cigarettes).

if no more gold is mined, the value of gold will increase relatively to other things. let's that in 2100 an ounce of gold can buy a car. by 2200, u can buy ten cars with an ounce of gold because the value of gold have inceased. the purchasing power of gold has increased.

to answer your question, perhaps gold will not be able to supply the need of everyone on earth. gold is only divisable to a certain and practical point. eventually, some other medium of exchange will surpass gold (maybe copper, tin, aluminum).

I just don't understand how production/business can simply "create" wealth, in the same sense that the government prints money. The employer pays his employees in gold-backed currency. He is able to pay his employees because of the revenue he receives from his business, presumably from consumers. I can only see a transfer of wealth, but I do not see more wealth being created.

producers and manufacturers create wealth. example: trees are transformed into tables, chairs, houses. the point is that the wood, in form of a chair, table, or house, is more valuable than in the form of a tree. table, chairs, and houses require time and effort and that is what adds the extra value to wood.

lawyers, stock brokers, and governments dont generate wealth, they simply transfer it from one party to another and take a bite in the process.

 

[Paulitician]

Wealth is created by savings and production. You can have wealth with a barter system, you just don't have a medium of exchange or a store of value, which money is supposed to be.

If gold did not increase, but goods and services did, than those goods and services would become cheaper in terms of gold. In other words, your gold can buy more. Eventually, if the gold becomes too valuable and limited and goods and services become too cheap, then the market would probably look for something more abundant to use as money.

 

[Humphreysguitar]

Oh i get it now!

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Gold is simply the most convenient commodity of exchange through history and was chosen by the market. As future progresses, it is likely that other hard assets may be chosen to back currency. To return to a gold standard now is simply a sensible return to honest money, to a tried and tested commodity.

Maybe I was being unfair by placing unreasonably long term constraints when gold wasn't meant to be the de facto choice permanently. The market decides what is right at the time.

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As for producers creating wealth, they taking normally useless resources and convert them into products that are worth alot of value to people, got it.

But how do savings create wealth? Or is it just a store of value?

I'm still unsure as to how new money enters the system. If a producer builds a table out of a tree, someone still needs to find the money to pay for that new table.

I can understand how that table might have a higher cost attached to it, but does the wealth of a country depend on how many expensive products it makes?

And if so, who injects new money into the circulation, the people who mine the gold?

 

[Humphreysguitar]

actually it's simply right

production = expanding wealth

consumption = transfer of wealth

is that about right?

 

[danberkeley]

But how do savings create wealth? Or is it just a store of value?

Say each unit of wood costs you $1. But you need five(5) units of wood to build your table. Also, your daily income is $2 and you have no money saved. $1/day of you income goes towards rent. The other $1/day goes towards candy. What you have to do is save $5 to buy the wood. You do this by not buying(saving) candy for five days. Once you have the money saved to buy the wood, you buy it. Then you build the table. The creation of wealth part comes in here. You now sell the table for $20. $20 - $5 = $15 of new wealth for you.

I'm still unsure as to how new money enters the system. If a producer builds a table out of a tree, someone still needs to find the money to pay for that new table.

Sure. but money can be anything (gold, cigarettes, performing a service) and there are many forms of payment (credit, check, money, lay away, installment plan, etc).

I can understand how that table might have a higher cost attached to it, but does the wealth of a country depend on how many expensive products it makes?

take the word "expensive" out of your question and the answer will be yes. thats why the governments GDP is misleading. it includes consumption and the bombs blown up in Iraq. it also includes money spent on rebuilding disaster zones (i.e. after Katrina).

And if so, who injects new money into the circulation, the people who mine the gold?

yeah. gold has to be mined before it can be minted.

 

[Humphreysguitar]

Thanks alot, makes much more sense now!

 

[sratiug]

sounds right.....

just an off-topic question: are you (sratiug), also the OP (Humphreysguitar)? Just an observation I made, seeing that your member name is 'guitar' spelled backwards.

You are the first person that has figured out the origin of sratiug on their own that I know of, lol... but I'm not Humphrey.

You can check out my guitar here...
http://www.myspace.com/revelstonespage

and help me get some GOLD, records sos I can run for ronrevog and bring our guard troops home, make gold and silver legal tender, and legalize marijuana which would no doubt make Mississippi the richest state in the union again.

 

[steve005]

producers and manufacturers create wealth. example: trees are transformed into tables, chairs, houses. the point is that the wood, in form of a chair, table, or house, is more valuable than in the form of a tree. table, chairs, and houses require time and effort and that is what adds the extra value to wood.

lawyers, stock brokers, and governments dont generate wealth, they simply transfer it from one party to another and take a bite in the process.

merchindising companies also create wealth(otherwise wal mart wouldn't be so rich) by making profit,

lawyers, stock brokers, and governments all generate wealth

 

[Acala]

wealth

Wealth is the aggregate of the value each individual places on the goods and services he gets. In a free market, every transaction increases wealth because each party believes that the transaction will make them better off in some way. If they didn't believe that, they wouldn't do the deal. So every deal in the free market increases the wealth of everyone involved in the deal by their own measure . In a free market, millions of transactions occur every day and each one increases the aggregate wealth a bit. That is how freedom makes us rich.

 

[danberkeley]

merchindising companies also create wealth(otherwise wal mart wouldn't be so rich) by making profit,

lawyers, stock brokers, and governments all generate wealth

i see what your saying.

 

[OptionsTrader]

You are the first person that has figured out the origin of sratiug on their own that I know of, lol... but I'm not Humphrey.
.

.sdrawkcab eman yreve daer ot em sesuac DCO yM

 

[Paulitician]

Humphryguitar, danberkeley and Acala already answered your questions wonderfully but I wanted to add a few more points.

But how do savings create wealth? Or is it just a store of value?

Without savings it'd be pretty hard to start up new/huge projects. Savings is capital accumulation that other people can borrow or that which one intends to use at a later time (so you can basically say that investing and production create wealth, same difference).

The US happens not to save because we have foreigners do that for us (our savings rate is probably negative since we save so little yet borrow so much).

I'm still unsure as to how new money enters the system. If a producer builds a table out of a tree, someone still needs to find the money to pay for that new table.

No. Think of it primitively: in a barter system, when you make a transaction, you're exchanging a good for another good (and/or service). Money enters the system as representation of good(s). Ergo, money itself is seen as a good. We use money as a medium of exchange and store of value because it's much better and easier for these four reasons: durability, divisibility, portability, and noncounterfeitability.

And if so, who injects new money into the circulation, the people who mine the gold?

Yeah... I'm not really sure exactly how money is distributed though. I suppose when new gold was mined (and then minted) it was put in banks for people to borrow?

The market decides what is right at the time.

Or it's decided by government fiat, unfortunately

 

[rapidtrends]

actually it's simply right

production = expanding wealth

consumption = transfer of wealth

is that about right?

This in my opinion is the best answer as it is the simplest one that is correct.

If I may add:

labor and production = wealth

inflation and consumption = transfer of wealth

More wealth is taken from people through inflation than most realize, especially at todays rates of increase.