Money, Monopoly & Market Intervention

Robert P. MurphyMises Academy

October 26, 2011

Lecture 4: 2nd Third of Chapter 11 of Man, Economy, and State

2nd Third ofChapter 11 of MES

1. Speculative Demand for Money

2. Clearing / Credit

3. “Keynesian Cross”

4. “Money Illusion”

5. Hoarding & Interest Rates

VI. Keynesians on Money & Interest

VII. Purchasing Power Component in Interest?

VIII. Banks

IX. “Cost of Living”

X. Purchasing Power Parity

I. Speculative Demand for Money

“self-correcting,not self-fulfilling”

II. Clearing/Credit Transactions

III. “Keynesian Cross”

IV. “Money Illusion”

V. Hoarding: No NecessaryEffect on Interest Rates

If people increase their desired cash balances, they can accomplish this through a reduction in consumption or investment spending.

VI. Keynesians onMoney & Interest

Keynes argued that people have “liquidity preference,” meaning they’d prefer to hold cash rather than risky bonds/stocks. Yet higher the interest rate, higher the “penalty” on holding wealth in form of cash.

So, other things equal, Keynesians say lower interest rates�higher demand to hold money.

VII. Purchasing Power Component of Contractual Interest Rate?

Standard view from Irving Fisher says market interest rate contains a component to allow for changes in PPM.

But Rothbard argues that if change is expected, then it won’t be handled in loan contracts—it will show up already in today’s PPM!

VIII. Banks: Money Warehouses and Credit Intermediaries

A. 100% Reserve Bank’sBalance Sheet

B. Fractional Reserve Bank’sBalance Sheet

IX. “Cost of Living” By Region

“Law of One Price” applies to money as to other commodities, meaning a uniform PPM across regions.

� What about Manhattan vs. Boise??

X. Purchasing Power Parity

In equilibrium, different moneys will trade against each other so as to equalize their purchasing powers (at least among tradable goods?).

E.g. if barrel of oil trades for 100 euros or $120, then one euro trades for $1.20.