TL;DR: how much does fractional reserve (model II) banking inflate the money supply exactly?

Richard Werner, who many of you know, typified banks into three models. I have included simplified examples below for reference.

(I'm not a huge fan of Werner's terminology, as I would consider model III to be a type of fractional reserve banking--since $10/$100 equals 10% and $100/$1000 also equals 10%--but whatever.)

Model I: Intermediary bank model

-Man deposits $100 into a demand deposit at the bank. The bank then lends out $0 and puts $100 in the vault.

Model II: Fractional Reserve bank model

-Man deposits $100 into a demand deposit at the bank. The bank then lends out $90 and puts $10 in the vault.

Model III: Credit Creation bank model

-Man deposits $100 into a demand deposit at the bank. The bank then lends out $900 and puts $100 in the vault.

Per Werner's research and per common sense, model III best describes money creation by banks in the modern economy. Model II was applicable back in the day when banks were storing physical gold coins and surreptitiously lending out those physical gold coins. The transition from model II to model III occurred as we shifted from commodity money to representative money.

It's easy to see that model III is inflationary (i.e. man deposits $100 and suddenly $900 springs into existence and is injected into the economy). We could say that the money supply was inflated 10x, growing from $100 to $1000. It would also cause demand driven inflation, because the people who received the 900 loaned dollars would proceed to spend money that they otherwise wouldn't have had.

Now, qualitatively speaking, I can see that model II is inflationary, because it allows for demand driven inflation. But, my question is, does model II inflate the money supply? If yes, by how much?

The debate has been raging for many years, so let's air it out... what is the best way for the government to raise revenue, while still preserving individual liberty? Some will say that all taxation is wrong, and I can certainly relate to that sentiment. Taxation is a form of theft after all (as is money printing). The practical side of me realizes that the government needs some revenue to perform it's basic functions. I say basic functions, because most of what the US gov't spends is arguable beyond its Constitutional purview and lines the pockets of foreign nations, select corporations, and politicians.

I was reading that prior to 1913, the government raised almost all of its revenue from excise taxes on alcohol and tobacco. It also looks as though the governement primarly raised funds through issuing bonds for specific projects. If you want to go to war, for example, the citizens had to buy the war bonds to fund it. In return, the citizens received their money back, plus interest. Now we have the opposite. The government steals our money, doesn't consult us one bit, we receive no interest on our stolen money, and they still manage to rack up a massive deficit.

Corporation taxes get passed on to consumers. Income tax gets paid by consumers. Tariffs ultimately get paid by consumer, but do have the effect of leveling the playing field against insanely cheap foreign goods.

So what is the most fair way to approach funding the government?

An great collection of lectures for those interested in Austrian Economics and laissez-faire by one of Mises' students.

https://www.youtube.com/@GeorgeReismanCapitalism/videos

I am working on an academic paper re-iterating that price theory demonstrates that Austrian capital theory is mistaken. I do not have a definite target journal in mind, though. A reviewer for a previous rejection advised that I need to do a better job of connecting my refutation to claims from the Austrian school.

The supposed association of a longer economic life of a machine with greater capital intensity is one aspect of the Austrian school. Bohm-Bawerk (1959) argued, erroneously, that profit-maximizing would lead to adoption of techniques with a greater average period of production (APP) at a lower rate of profits, given a choice of technique. He accompanied this emphasis on the use of time in production with a subjective preference by households for consuming goods now, instead of later. His work led marginalists to write about the 'interest rate' where other economists write about the rate of (accounting) profits. Bohm-Bawerk's assumption of simple, not compound interest disguised issues in capital theory.

Ever since Bohm-Bawerk, economists of the Austrian school have attempted to discard a physical measure of capital while maintaining a position that a subjective willingness to defer consumption is associated with the distribution over time of costs and revenues in production. For example, Hayek (1936) argues against Frank Knight's treatment of capital as a permanent fund, with investment and consumption occurring synchronously in a stationary state:

An increase of capital will always mean an extension of the time dimension of investment, that capital will be required to bring about an increase of output only in so far as the time dimension of investment is increased.” (Hayek 1836, p. 204, italics in original)

Hayek associates goods of greater durability with an increase in capital and rejects the summarizing of an anticipated stream of revenues and cost with a single measure of time, such as the APP. He attempted, in Hayek (1941), to provide the analysis he calls for, of comparing entire time streams of investment. This book is generally considered a failure.

I want to continue to argue that Austrian school economists associate greater capital-intensity with, somehow or another, lengthening of the time in production, while insisting they do not rely on aggregate, physical measures.

By the way, in a prior post about an example, I argue Von Mises is mystical and confused.

What more recent literature do you think I should summarize?

Since 2008 the economic system has been riddled with problems. Inflation and rising prices have caused employment income to lose its purchasing power. Year over year the cost of living has increased while wages remain stagnant.

This has understandably caused every day people like you and me frustration, as it seems harder to get ahead.

Human nature likes to assign blame, when things go wrong. As a way to explain why something is the way it is. But is everyone really focused in the right direction?

In 2008 the economic system imploded asset prices collapsed and banks and other financial institutions faced insolvency. The government intervened and started buying troubled assets to stabilize the prices and prevent further decline.

The argument soon began of whether this was the right move. Should the government have let companies fail?

Karl Marx described in his sociopolitical theory, that capitalism was always doomed to fail. He crafted his most successful theory in economics called crisis theory. Crisis theory was the notion that the initial investment in the production of business would eventually wear off. Requiring more capital or credit to sustain the business overtime. This same notion applies in physics with the second law of thermodynamics. entropy. All things in nature eventually break down as something sustaining itself forever is impossible on earth. This is why perpetual motion cannot exist.

There is a finite amount of energy and resources to sustain our economic system. The economic system works by equilibrium of price affordability of the masses. The Goldilocks zone of affordability of the massses and profitability for the business.

If any resource in our system slows down, the price of those resources will go up. And therefore the equilibrium will no longer exist. For example if steel can’t be produced enough to match demand steel would cost more.

Eventually there comes a point where the economic system breaks down.. you cannot grow forever.

The government in an attempt to save the unbalanced economy tries to print money to save the economy from asymmetry because capital becomes inefficient and doesn’t flow equally. The government can direct money to the areas where capital is no longer flowing and artificially re capitalize these areas so these businesses can continue operations and prevent defaults and people losing their jobs.

But here lies the problem in the Marxist critique and the problem with a managed economy. Money still follows the law of supply and demand printing more just decreases its value and unlimited money is needed forever to satisfy the capitalist system indefinitely. As a Karl Marx correctly pointed out that the initial investment wears off.

Can the government be blamed? The governments job is to keep society functioning And social harmony. You could blame the government as they are the architects of society. The government is the sole reason society exists therefore they are responsible for its success and failure however the government cannot control nature. you cannot print resources and goods.. these have to be built and extracted from the earth. If something interferes with the flow of goods. Like running out of steel or an oil well running low on oil. The government can only do so much. We have to realize that the systems we live in are not normal or natural, therefore we cannot rely on the system working 100% forever. Most of human history has not been like our current lifestyle. It’s only been a little over 150 years vs 6000 years of recorded history. This is still an experiment

I read a book on Austrian economic theory some time back but I've forgotten the title, author, etc. I don't think it was HA, but it might have been. One section explained the role of the investor (capitalist) in allocating capital. The investor seeks the best rate of return that he can find on the capital that he has available, limited by some risk-tolerance (risk-appetite) which he has. In addition, since all investors are seeking the best use they can make of their available capital, the entire capital market acts as a dispersed resource-allocation mechanism. Entrepreneurs are the demand side of the capital market, since they take out loans to create or expand businesses with the aim of generating profit (that is, generate more cash than the invested capital, plus interest). In context, this was being contrasted with centralized resource-allocation schemes, ala the Politburo.

Any citations that explain this basic concept are welcome.

Edit: Found a close enough quote for my purposes in Man, Economy and State ch. 5.7, "Present and Future Goods: The Pure Rate of Interest":

The factors of production in our discussion have all been as- sumed to be purely specific to a particular line of production. When the capitalists have saved money (“money capital”), how- ever, they are at liberty to purchase factor services in any line of production. Money, the general medium of exchange, is precisely nonspecific. If, for example, the saver sees that he can invest 95 ounces in the aforementioned production process and earn 100 ounces in a year, whereas he can invest 95 ounces in some other process and earn 110 ounces in a year, he will invest his money in the process earning the greater return. Clearly, the line in which he will feel impelled to invest will be the line that earns him the greatest rate of return on his investment.

The concept of rate of return is necessary in order for him to compare different potential investments for different periods of time and involving different sums of money. For any amount of money that he saves, he would like to earn the greatest amount of net return, i.e., the greatest rate of net return. The absolute amount of return has to be reduced to units of time, and this is done by determining the rate per unit of time. Thus, a return of 20 ounces on an investment of 500 ounces after two years is 2 percent per annum, while a return of 15 ounces on the same in- vestment after one year is a return of 3 percent per annum. After data work themselves out and continue without change, the rate of net return on the investment of money cap- ital will, in the ERE, be the same in every line of production. If capitalists can earn 3 percent per annum in one production process and 5 percent per annum in another, they will cease investing in the former and invest more in the latter until the rates of return are uniform. In the ERE, there is no entrepre- neurial uncertainty, and the rate of net return is the pure exchange ratio between present and future goods. This rate of return is the rate of interest. This pure rate of interest will be uni- form for all periods of time and for all lines of production and will remain constant in the ERE.

Suppose that at some time the rates of interest earned are not uniform as between several lines of production. If capital- ists are generally earning 5 percent interest, and a capitalist is obtaining 7 percent in a particular line, other capitalists will enter this line and bid away the factors of production from him by raising factor prices. Thus, if a capitalist is paying factors 93 ounces out of 100 income, a competing capitalist can offer 95 ounces and outbid the first for the use of the factors. The first, then, forced to meet the competition of other capitalists, will have to raise his bid eventually to 95 (disregarding for simplic- ity the variation in percentages based on the investment figure rather than on 100). The same equalization process will occur, of course, between capitalists and firms within the same line of production—the same “industry.” There is always competitive pressure, then, driving toward a uniform rate of interest in the economy. This competition, it must be pointed out, does not take place simply between firms in the same industry or pro- ducing “similar” products. Since money is the general medium of exchange and can be invested in all products, this close com- petition extends throughout the length and breadth of the pro- duction structure.

I guess the big one is south korea. But if you can claim others, state them and explain why.

Pretty new on this economic learning journey. Have asked a few Austrian vs Keynesian question on /r/askeconomics and found out pretty quickly that sub does not have much room in its heart for Austrian thought. Some go so far as to say Austrian economics aren’t used at all in “modern Econ thought”. If that is true, it’s deeply disturbing. Either way, the resounding vibe is that modern economic thought can be grouped into neither camp, as it is continuously developed and built upon, just like other sciences, and that it is now a combination of Austrian, Keynes, etc.

But I am becoming more in tune to the idea that markets work perfectly only to a certain extent, and we must consider the causes, effects, and solutions to market failures like monopolies, price gouging, etc.

How come there aren’t more of you over on /r/askeconomics? I’d love to see more rebuttals to their content from your perspectives.