Monday, April 4, 2011

Private Issues

Four comments from Macromania:
I have cropped these comments to focus the topic.
karthikraoa said...

Who cares what the government inflation numbers state. Government has a vested interest to have low inflation numbers... So there is a lot of hedonics/substitutions etc. that reduce the inflation numbers. If you look at the M3 money supply growth yoy, it is around 20%...
March 19, 2011 11:45 PM

David Andolfatto said...


Most of M3 is private money creation; liquidity created in the act of extending collateralized loans (i.e., banking).

...Normally, the stock of base money is tiny relative to M3. I haven't looked lately, but I suspect that the Fed's balance sheet expansion, along with the contraction in private lending, base money now constitutes a larger share of M3.

March 20, 2011 6:54 AM

The Arthurian said...

David, YES!! Most of M3 is private money creation; liquidity created in the act of extending collateralized loans (i.e., banking).

Nonetheless, M3 (out-of-date though it may be) is huge in comparison to base money. It seems to me that M3 (or some variant) must have much more to do with inflation than base money does...

I conclude that the blame for inflation lies more with private money than with base.
March 20, 2011 8:48 AM

David Andolfatto said...

I am not sure about your proposition that private money is more responsible for inflation than base money. I don't think history bears this out, as a general rule, at least. (I'm thinking, for example, of the US "free" banking era 1836-63).
March 20, 2011 10:27 AM

I thought this was great. I put karthikroa's observation and David's together, and one of mine was relevant. I thought so, anyhow; David was not so sure.

A question arises: Can I show that private money did cause inflation in that 1836-1863 era?

Just off the top of my head, I think we were on a gold standard in that era. And I think money being tied to gold would have changed the nature of the problem. It would have changed the way the problem worked itself out.

Some people might say being on gold prevented inflation. But if you go with that view, you still have to allow that Problem X, the problem that finds relief in inflation, could still have existed and would have had to find a different outlet.
Bear with me. Problem X is not the same as "printing money."
This, then is my hypothesis: When the quantity of money was restrained by ties to gold, the inflationary consequences of the private-money-creation process found a different outlet.


The Arthurian said...

See the guest post by Geoffrey Williams, at EconBrowser:

Guest Contribution: “‘Lending money to people across the water’: The British Joint Stock Banking Acts of 1826 and 1833, and the Panic of 1837”

Also, his working paper.

The Arthurian said...

From Bagehot's Lombard Street:

Professor Jevons showed, and so far as I know, was the first to show, the necessity of eliminating these temporary changes of value in gold before you could judge properly of the permanent depreciation. He proved, that in the years preceding both 1847 and 1857 there was a general rise of prices; and in the years succeeding these years, a great fall. The same might be shown of the years before and after 1866, mutatis mutandis.

And at the present moment we have a still more remarkable example, which was thus analysed in the Economist of the 30th December, 1871...:
'This general rise of price must be due either to a diminution in the supply of the quoted articles, or to an increased demand for them...
'We believe it to be due to the combined operation of three causes—cheap money, cheap corn, and improved credit...'