NetNews Usenet Archive 1993 #3/NN_1993_3.iso/spool/sci/econ/9837

Internet Message Format | 1993-01-25 | 1.9 KB

Path: sparky!uunet!utcsri!relay.cs.toronto.edu!neuron.ai.toronto.edu!ai.toronto.edu!radford
Newsgroups: sci.econ
From: [e-mail] (Radford Neal)
Subject: Re: Inflation
Message-ID: <[e-mail]>
Organization: Department of Computer Science, University of Toronto
References: <[e-mail]> <[e-mail]> <[e-mail]> <[e-mail]>
Date: 25 Jan 93 18:48:08 GMT
Lines: 26

In article <[e-mail]> [e-mail] (William B Dwinnell) writes:

>...let's say that we live in an economy where there is a bank
>which is willing to pay 5% interest on money deposited. If anyone at
>all deposits money in that bank, his nominal wealth will increase by
>5% in in one year, right?  Let's say someone else does not. The depositor
>now has 5% more nominal wealth to play with than the non-depositor,
>and is thus more able to compete in the market than he was before, whereas
>the non-depositor hasn't changed, in terms of nominal wealth. The
>demand curve will shift, moving the quilibrium point, dragging prices
>up with it. This is what I "know".  Where have I strayed?

You forgot that the bank loans out the money that people deposit.
Somebody borrowed the money at, say, 6% interest, and now has less
nominal wealth before. The depositor has 5% more nominal wealth, and
the bank's owners and employees pick up the 1% difference. It's
quite possible that it all works out to the same number of dollars
as before, with no money having been created.

It's also possible that money WAS created - the operation of the banking
system is indeed one of the ways this is done in the present economic
system. If money was created, it will likely cause inflation, other
things being equal. This is NOT an inevitable consequence of the existence
of interest, however.

    Radford Neal