Show Notes
One of the most difficult things to understand about banking is how money is created out of thin air. Current commercial bank liabilities are immediate. The banks do not have the reserves to redeem all demand notes. Thus, banks are inherently insolvent. But, government has eliminated runs on banks. Banks are not allowed to fail when they are mismanaged. Central banks are sold to the public as restraining inflation, but central banking was created to allow inflation. The inflationary process generates the boom and bust business cycle. The Bank of England was a great racket. The public accepted new money that was created out of thin air. The King had given the Bank a monopoly on money creation. President Jackson tried to get rid of the US central banks. Banks created the Federal Reserve System in 1913. The Fed banks now have a monopoly on all paper money. By legal tender law, one must accept Federal Reserve Notes. The Federal Reserve manipulates the money supply by manipulating the Federal reserves. The Central Bank is a lender of last resort. Every bank will be bailed out. Economists were mainly concerned about the crashes, not the booms, of business cycles. Mises understood that the banks were inherently inflationary. He understood that the expanded money supply was going to commercial banks to loan to longer-term production projects like construction. This credit expansion was not based upon consumers having saved anything. The boom was a bad distortion. It promoted malinvestment. The crash was inevitable and a good thing. Austrians would stop inflating. Austrians during the crash would keep government hands off. 1920 was a great example of this Austrian Theory of the Business Cycle at work. The seventh of eight sessions from Murray Rothbard's Economics 101 series.
More from Economics 101
Micro economics starts with the basic fact that each person has short term and long term goals, like buying a ham sandwich and graduating from college. People act in the world to accomplish something. Human action is purposive. You employ different means to achieve certain goals. Rothbard begins with the simple situation of Crusoe – one laborer- on an island. Capital is everything used in production that is not land or labor. Production ends up with consumer goods which are consumed. The free market coordinates everything. No world planning board can do this. Micro economics is the study of how all this works. Resources are scarce not superabundant. Humans prefer stuff now rather than later. This is called time preference. Preferences are ordinal, (a, b, c), not cardinal (1, 2, 3). Action is risky. The entrepreneur is a risk-taking capitalist. Our discipline is qualitative, not quantitative. The Law of Diminishing Marginal Utility states that as a person increases consumption of a product, while keeping consumption of other products constant, there is a decline in the marginal utility that a person derives from consuming each additional unit of that product. The lower the price the more will be purchased. The higher the price the less will be purchased. The first of eight sessions from Murray Rothbard's Economics 101 series.
Many believe that if governments would just issue greater quantities of money then all problems would be solved. In truth that would create unsurmountable problems by lowering the purchasing power of each money unit. Money is the one good that is not made better by increasing its supply. Rothbard discusses how money originates. Products are originally merely exchanged between people. This is the barter system and it is based upon the double coincidence of wants. Very shortly, one or two commodities like wheat or tobacco emerge on the market as more marketable than others. Money is now a medium of exchange. Calculations and the process of accounting become possible when there is money. Gold and silver emerged over years as the best money. Metals were exchanged in measures of weight, like grams. The slippery slope was created when, instead of weights, names were used for money like francs or dollars. The second of eight sessions from Murray Rothbard's Economics 101 series.
Profit is total revenue minus total costs. Ours is not just a profit system, it is a profit and loss system. Losses are a sign that you wasted land, labor, or capital, yet those who make profits are criticized. Entrepreneurship is an art not a course you can learn. Labor earns wages. Land earns rent. Capital earns interest. Confusingly, the word capital means both the machines used to produce goods and the funds available for investment. Bohm-Bawerk answered the question of where interest rates come from. Time is the key element in the earning of interest. The capitalist who pays out while he waits for the product to be sold before being paid, performs a vital function of paying for land and labor now. The capitalist is rewarded by being paid a discount on labor and land, discounted by the rate of interest. There are all sorts of rates of time preferences. The third of eight sessions from Murray Rothbard's Economics 101 series.
Minimum wage laws force unemployment up. All of those with few skills looking for an entry position will be denied because they cannot add enough value to the business labor field to be paid minimum wage. Unemployment follows minimum wage hikes. Marginal workers are being denied the labor market. There were workers in canning businesses making thirty cents an hour who were disemployed when a forty cents minimum wage was enacted. By changing definitions of employment government agencies manipulate figures. Population growth issues have often been irrational. Overpopulation in one area could be under population in another. Optimum (maximum) populations depend on market systems and capital investment. As levels of living rise, parents decide upon lower birthrates. The fourth of eight sessions from Murray Rothbard's Economics 101 series.
Rothbard covers the principles of demand and supply curves. Prices are at the seat of the whole system. Use the logic of reality. The most mobile labor force is teenagers. Over time, capital equipment per laborer increases. Real wage rates increase. Consumer prices decrease. Unions cannot determine wage rates without putting companies out of business and causing unemployment. They attempt to control the labor market by restricting people. Unions have very little power when labor is ample. There were no labor unions from 1885 to 1935. Unions were first established in construction, coal mining, and entertainment fields, but they were a small percent of the workforce. The National Labor Relations Board determined what a bargaining unit was. They preferred industrial unions to craft unions. Unions made employment government-regulated rather than free-market. Union growth has been in government agency areas. The fifth of eight sessions from Murray Rothbard's Economics 101 series.