Wednesday, April 29, 2009
Another Aspect to the Mankiw Money Madness
Taylor Conant emailed me his post bringing up a quote from Rothbard regarding "hoarding." It raises a good point that I had originally meant to discuss regarding Mankiw's negative interest rate column, but I ran out of room in my Mises Daily.
Anyway, the point is that people are increasing their demand for cash balances (or "velocity is falling") for a reason. People are uncertain about the future, and so they are (trying to) stock up on their liquid purchasing power. Money provides a service when it is "idle" in your wallet or under your mattress.
So both the grad student's suggestion (to deactivate 1/10 of the cash every year*) and Mankiw's preferred technique of debasing the money with future inflation, are designed to reduce the ability of cash to serve this purpose. Mankiw doesn't care why people are stocking up on cash, he just throws out ideas to get them "spending" again. For an analogy, it would be as if Americans kept buying cars from Japan. In order to get Americans spending money back on Detroit autos, Mankiw's student suggests putting a venomous snake in every tenth import from Japan. Mankiw, the wizened veteran, thinks that idea shows promise but is a bit impractical. Instead, he suggests a 10% tariff. (Sure, the free market is nice in theory, but in the real world Detroit car prices wouldn't fall quickly enough to clear the market, hence the need for government action.)
* Paul Nelson emailed me this, and I must confess I'm stumped. As a good Austro-libertarian economist, I favor the removal of all legal tender laws. So why am I mad at the grad student's suggestion, which strictly speaking wasn't to destroy 1/10 of the cash at the end of the year, but rather to remove its legal tender status? In other words, I (and the student and Mankiw) were assuming that taking away legal tender status for particular dollar bills was the same thing as literally seizing and destroying them. But is it?
=====================
On a completely unrelated matter, Taylor also asks me if there is any way to order signed copies of the new book. Sure, if you email me we can arrange it. I guess I would need to charge $25 per book to cover my shipping etc. (Obviously I'm giving the answer here in case anyone else wanted to know.)
Anyway, the point is that people are increasing their demand for cash balances (or "velocity is falling") for a reason. People are uncertain about the future, and so they are (trying to) stock up on their liquid purchasing power. Money provides a service when it is "idle" in your wallet or under your mattress.
So both the grad student's suggestion (to deactivate 1/10 of the cash every year*) and Mankiw's preferred technique of debasing the money with future inflation, are designed to reduce the ability of cash to serve this purpose. Mankiw doesn't care why people are stocking up on cash, he just throws out ideas to get them "spending" again. For an analogy, it would be as if Americans kept buying cars from Japan. In order to get Americans spending money back on Detroit autos, Mankiw's student suggests putting a venomous snake in every tenth import from Japan. Mankiw, the wizened veteran, thinks that idea shows promise but is a bit impractical. Instead, he suggests a 10% tariff. (Sure, the free market is nice in theory, but in the real world Detroit car prices wouldn't fall quickly enough to clear the market, hence the need for government action.)
* Paul Nelson emailed me this, and I must confess I'm stumped. As a good Austro-libertarian economist, I favor the removal of all legal tender laws. So why am I mad at the grad student's suggestion, which strictly speaking wasn't to destroy 1/10 of the cash at the end of the year, but rather to remove its legal tender status? In other words, I (and the student and Mankiw) were assuming that taking away legal tender status for particular dollar bills was the same thing as literally seizing and destroying them. But is it?
On a completely unrelated matter, Taylor also asks me if there is any way to order signed copies of the new book. Sure, if you email me we can arrange it. I guess I would need to charge $25 per book to cover my shipping etc. (Obviously I'm giving the answer here in case anyone else wanted to know.)
Comments:
interesting point at the end... perhaps the "delegalized" tender would circulate in markets anyway... especially when the legal stuff gets devalued.
Zach,
It's possible the non-legal tender would circulate, but you can't pay your taxes with it. I think I read something in Rothbard's money literature about some old English tax system that used sticks or something and people ended up circulating the sticks as money because they knew they could always make good on tax obligations that way.
But if such a law were passed or such a lottery took place, and you were a business, why would you accept such non-legal tender (at face value)? Consider, as I mentioned in my post, that an individual or business could accumulate a greater than 10% share of his money in non-legal tender and be unable to make his tax obligations...
It's possible the non-legal tender would circulate, but you can't pay your taxes with it. I think I read something in Rothbard's money literature about some old English tax system that used sticks or something and people ended up circulating the sticks as money because they knew they could always make good on tax obligations that way.
But if such a law were passed or such a lottery took place, and you were a business, why would you accept such non-legal tender (at face value)? Consider, as I mentioned in my post, that an individual or business could accumulate a greater than 10% share of his money in non-legal tender and be unable to make his tax obligations...
I reckon that declaring something to not be legal tender is different than repealing legal tender laws. Gold for example is not legal tender.
# posted by 
: April 29, 2009 at 6:03 PM
: April 29, 2009 at 6:03 PM
Mr. Murphy,
I found your venomous snake idea intriguing. Could I invite you to Washington to address the Auto Task Force?
I found your venomous snake idea intriguing. Could I invite you to Washington to address the Auto Task Force?
# posted by : April 29, 2009 at 10:51 PM
: April 29, 2009 at 10:51 PM
Logistically, an easy way to enforce such a plan would be to issue different looking currency (like the new larger denomination US$ bills) and remove the legal tender status from the old ones after a certain date. The treasury could then offer an exchange rate of 0.9 on new currency vs old currency, and a deadline for the exchange.
This would pose a number of economic and logistical problems, but its doable. If the government and gov't regulated banks refuse to accept old bills (or forcibly exchange them for the treasury), then the new currency would likely succeed (in adoption, not policy).
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This would pose a number of economic and logistical problems, but its doable. If the government and gov't regulated banks refuse to accept old bills (or forcibly exchange them for the treasury), then the new currency would likely succeed (in adoption, not policy).
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