Notes Introduction 1. Murray N. Rothbard, The Panic of 1819: Reactions and Policies (New York: Columbia University Press, 1962). 1 Money, Banking, and Inflation 1. Brian Simpson, “Money, Banking, and the Business Cycle,” audio recording (Irvine, CA: Second Renaissance, Inc., 2005) and Brian P. Simpson, Trade Cycle Theory: A Market Process Perspective (Ann Arbor, MI: Bell & Howell Information and Learning Company, 2000), pp. 78–79. 2. George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 512–513. 3. See Chapter 4 of Brian P. Simpson, Money, Banking, and the Business Cycle, Volume 2: Remedies and Alternative Theories (New York: Palgrave Macmillan, 2014) for a discussion of this topic. 4. Lawrence H. White, “A Subjectivist Perspective on the Definition and Identification of Money,” in Israel M. Kirzner, ed., Subjectivism, Intelligibility and Economic Understanding (Washington Square: New York University Press, 1986), pp. 301– 314. See in particular pp. 310–311. 5. I ignore the existence of fractional-reserve banking here. The creation of money through credit-card loans under fractional-reserve banking (to the extent that it occurs) is not particular to credit-card loans. It is true of all loans made through the fractional- reserve process and thus is not a phenomenon of credit-card loans but of fractional- reserve banking. Fractional-reserve banking is discussed below in this chapter and in Chapter 4 of Simpson, Money, Banking, and the Business Cycle, Volume 2. 6. See Steven J. Pilloff, “Money Market Mutual Funds: Are They a Close Substitute for Accounts at Insured Depository Institutions?” The Antitrust Bulletin vol. 44, no. 2 (Summer 1999), pp. 365–385 for the estimates of MMMFs that have check-writing capabilities on them. See especially p. 373. 7. White, “A Subjectivist Perspective,” p. 313. 8. Joseph T. Salerno, “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter (Spring 1987), pp. 1–6. In particular, see p. 4. 9. All data except for sweep data were obtained from the St. Louis Federal Reserve’s FRED database under the monetary aggregates and their components (values that are not seasonally adjusted). As stated in the main text for M1.5 and M1.6, only the portions of retail and commercial MMMF data on which checks can be written were used as estimates of these funds’ contribution to the money supply. The percentages 248 Notes used were 74.2 percent and 21.8 percent for retail and commercial MMMFs, respec- tively, based on Pilloff, “Money Market Mutual Funds,” p. 373. Also as stated in the main text, MMDA data have not been separated from savings account data since 1990. Hence, MMDA data are based on an estimate of the proportion of MMDAs relative to total savings deposits inclusive of MMDAs. The estimated proportion used is 55 percent and is based on the actual proportion during the years the data were reported in a disaggregated manner. Retail sweep data were obtained from the St. Louis Federal Reserve, “Federal Reserve Board Data on OCD Sweep Account Programs,” Monthly Sweeps Data. Commercial sweep data were obtained from Treasury Strategies, Inc., “2011 Deposit & Sweep Study Findings Deck.” Since 2004, I have not been able to obtain the proportion of commercial sweep funds swept into MMMFs. This figure was estimated based on trends of these data estab- lished for periods during which data could be obtained. The proportion used for 2010 was 29.5 percent. In addition, commercial sweep funds swept into MMMFs are assumed to be uniformly swept into MMMFs that do and do not have check-writing capabilities. Online data obtained October 14, 2013. 10. I ignore the effects of fractional-reserve checking here. In the context of fractional- reserve checking, turning checking-deposit money into cash can reduce the money supply since there are fewer reserves available for banks to “multiply” through the lending of checking-deposit reserves. However, the reduction of money in this situ- ation is not a function of the withdrawal of checking-account money but of frac- tional reserves, so my point is still valid. Moreover, during the Y2K event the Federal Reserve offset the withdrawals from banks with additional reserves so banks were not adversely affected and did not have to temporarily reduce their lending. 11. The quote is from Murray Rothbard, America’s Great Depression, 5th ed. (Auburn, AL: The Ludwig von Mises Institute, 2000), p. 87. See pp. 87–91 for Rothbard’s full discussion on what should be included in the money supply. Also see Murray Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: The Ludwig von Mises Institute, 2008), pp. 252–261 for further discussion. See Salerno, “The ‘True’ Money Supply” for a similar view. 12. Rothbard, America’s Great Depression, p. 87. 13. Harry Binswanger, ed., The Ayn Rand Lexicon: Objectivism from A to Z (New York: Penguin Books, 1986), pp. 104–105. 14. Rothbard, America’s Great Depression, p. 91 and Rothbard, The Mystery of Banking, pp. 254–255. 15. White, “A Subjectivist Perspective,” pp. 310–311. 16. Discussed below in this chapter and in Chapter 4 of Simpson, Money, Banking, and the Business Cycle, Volume 2. 17. See Dale K. Osborne, “What Is Money Today?” Economic Review (January 1985), pp. 1–15. See in particular pp. 1–6. 18. If one does not understand why, see the discussion on fractional reserves in the sec- tion on banking below. 19. I am ignoring the fact that the Fed cannot directly create money for the government to spend. The Treasury must first borrow from the public and the Fed must then buy the Treasury bonds from the public. See chapter 2 for more on this process. 20. Reisman, Capitalism, p. 512. 21. Merriam-Webster’s Collegiate Dictionary, 10th ed. (Springfield, MA: Merriam- Webster, Inc., 1993). 22. For some specific false conclusions to which a bad definition of inflation leads, see David Laidler, “The Price Level, Relative Prices and Economic Stability: Aspects of the Interwar Debate,” BIS Working Papers no. 136 (September 2003), pp. 1–23. See Notes 249 especially pp. 1, 6, 8, 15, and 20. In addition, for a discussion on a topic related to that of defining concepts appropriately, see Brian P. Simpson, Markets Don’t Fail! (Lanham, MD: Lexington Books, 2005), pp. 35–37. 23. See also Chapter 7 of Simpson, Money, Banking, and the Business Cycle, Volume 2. 24. Reisman, Capitalism, pp. 539 and 895. 25. For the price level in America and Great Britain during these periods, see Roy W. Jastram, The Golden Constant (New York: John Wiley & Sons, 1977), pp. 36–37 and 148–149. 26. Reisman, Capitalism, p. 895. 27. Ibid., pp. 907–920 for a thorough refutation of these and many similar attempts to explain “inflation.” 28. Ludwig von Mises, The Theory of Money and Credit (Indianapolis, IN: Liberty Fund, 1981 [1934]), p. 272 and Richard Salsman, “The Myth of Market Bubbles,” audio recording (Gaylordsville, CT: Second Renaissance Books, 2000). 29. For further explanation of what the demand for money is, including why I use the qualifier “attempt” when describing an increase in the demand for money, see the discussion of the velocity of circulation of money in chapter 2. 30. Reisman, Capitalism, p. 524. 31. Ibid. 32. See Chapter 4 of Simpson, Money, Banking, and the Business Cycle, Volume 2. 2 How Does the Government Cause Inflation? 1. Richard M. Salsman, Breaking the Banks: Central Banking Problems and Free Banking Solutions (Great Barrington, MA: American Institute for Economic Research, 1990), pp. 17–78. 2. Charles Goodhart, The Evolution of Central Banks (Cambridge: The MIT Press, 1988), pp. 4 and 19–20 and Richard M. Salsman, “The End of Central Banking, Part I,” The Objective Standard vol. 8, no. 1 (Spring 2013), pp. 13–29. See especially pp. 13–14, 16, 18–19, 23, and 26–27 in the latter reference. 3. See George Reisman, Capitalism: A Treatise on Economics (Ottawa, IL: Jameson Books, 1996), pp. 229, 654, and 762–774 for more on this. Note that this is not changed if the assets are paid off over time, since their purchase price was determined at the time of purchase. 4. The rate of profit in this example increases to 15.5 percent because the increase in money and spending increases the original 5 percent rate of profit by a factor of 1.1 (i.e., 15.5 = [(1.05 x 1.1) – 1] 100). If prices rise by 10 percent, the real rate of profit stays at 5 percent (i.e., 5 = [(1.155 / 1.1) – 1] 100). If prices rise by less than 10 per- cent, the apparent real rate of profit is between 5 percent and 15.5 percent (i.e., Real Rate of Profit = [(1.155 / (1 (Percent Change in Prices / 100))) – 1] 100). 5. There are obviously multiple rates of profit and interest in the economy. When I refer to the rate of profit or interest, think of it, as I mention in the text, as an average rate of profit or interest. Furthermore, one can think of the average rate of interest as an average of interest rates for all loan maturities. 6. While the same 2 percent gap between the rate of profit and the interest rate might not be maintained, some gap would remain. Interest rates are generally lower than the rate of profit because of the greater risk associated with equity investments rela- tive to lending. Equity provides protection to lenders by reducing the risk of lenders losing money on loans due to borrowers defaulting on loans.