Taking it from the article, according to the Hayek school, the propensity to save is an independent variable that determines the supply of money and, hence, the interest rate. By contrast, according to the Bitar school, the interest rate is merely the price of money in the interest-paying niche; hence, the interest rate reflects the ratio of demand to supply in that niche. But neither demand nor supply is an independent variable. Rather, together they define a dynamic equilibrium over time that is characterized by fluctuation or variance. The greater the variance, the greater the short-term instability in the demand:supply ratio. Thus, the interest rate is not independently determined by the propensity to save but, instead, interacts with the propensity to save by influencing it.

As for the money supply, money is a good just like any other good, in the most abstract sense of the word. The fact that the government prints money on its printing presses is as uninteresting as the fact that Hallmark prints greeting cards on its printing presses. Since money is a good, the price of money will reflect the demand:supply ratio. The price of commodity-based money will, accordingly, be subject to the instability of the respective commodity market — the market in gold or silver or rabbit feet. For the price of money to remain stable over time, the demand:supply ratio must remain stable over time.

Fiat money solves the problem of monetary instability if it is properly managed. The goal is quite simple to state: the supply should match the demand because, of course, this will maintain a stable value for the money. But what we mean by supply, here, is supply by the government to the market, and what we mean by demand, here, is demand for government products, which is reflected in all payments made to the government. Translating demand and supply to values averaged over time, we obtain this simple goal: the issue rate by the government should equal the use rate in payments to the government. That is, averaged over time, the government should issue money at the rate that it takes it in, with the qualification that the rate will increase slowly over time in proportion to the growth of the economy.

So what happens if the government issue-rate exceeds the use rate? Well, what happens if Hallmark\’s greeting card issue-rate exceeds the use rate? The supply exceeds the demand and, accordingly, drives prices down. Of course, the issue rate and the use rate are averaged over time and are subject to variance due to short-term fluctuations. But keeping this in mind, a long-run excessive supply of money will cause the price of money to decrease and, hence, interest rates to decline.

As interest rates decline, the demand for purchasing money from local banks will increase, and businesses and people will borrow accordingly. Liberals in the federal government may compound the effect by encouraging lending to marginal borrowers because that is, after all, just an all-around nice thing to do for people, and it\’s about time for banks to be nice to people.

As for a business that borrowed enough money at a low interest rate to complete half of a new factory, the business may be up a creek to finish the factory if interest rates rise sharply before money is borrowed to finish the factory. Accordingly, as the author conveys, it’s crucial for the government to maintain a stable value for money so that businesses can make long-range plans.

In the Bitar school, there is no such thing as the true, underlying reality of an unadulterated market. Rather, there is just the market with all of its complexity, one facet of which is the management of fiat money by the government. The reason for minimal government is not that government adulterates the market. The problem with government is not that government is unnatural. The problem with government is that it can readily harm the market, and the reason for this harm is often so clear that the harm can easily be predicted.

In reply to Joe D, what money ultimately delivers is what it can buy from the issuing government. If nothing else, it keeps you out of jail by paying your taxes. But presumably the government is doing some useful things, such as lawmaking, law enforcement, and road building, even if those things are not done as wisely and as skillfully as we wish.

The theory of money presented above is developed in a book that I recently finished and that I introduce at http://www.philipbitar.com.

Since the book is huge, thus far I\’ve published only an abridged version, in which I summarize the theory of money. However, the abridged version does present a theory of commerce which establishes the following: democracy is an economic necessity, but American government lacks the most fundamental feature that a democracy must have, and the result is the ever burgeoning size and cost of government. The silver bullet for solving this problem is a constitutional amendment that establishes a ceiling on the price of the federal monopoly and that places control of the ceiling in the hands of the people. The ceiling is expressed as a fraction of GDP.

I\’ve written an article on the silver bullet, and I\’ve tried to bribe Sheldon Richman into publishing the article in The Freeman. But I discovered that bribes don\’t work with an editor having a family name like his, so I\’ve just got to bide my time and wait for him to read the article. With any luck, you\’ll get a chance to read it, too.

No, it isn’t.

“Economy works on food/fuel/energy,”

No, it doesn’t. This equation of ‘value’ with ‘energy’ is a long discredited idea.

Here is my take on what is wrong with Austrian economic theory, their theory is based on gold based currency system. Economy works on food/fuel/energy, energy is essence of all living beings including humans. Gold does not have any usable energy content, hence it is just a token, when tokens are used to represent energy transfers (economic transactions) they need redemption obligation in terms or energy, otherwise it is very easy to manipulate the system and free markets cannot exist.

For eg. Ancient wisdom of getting rich while using gold currency is to understand the \"secret that gold is worthless substance\" and hold on to it for minimum amount of time. As soon as one gets gold, exchange it for something valuable like food grains and store it, food grains like rice, wheat can be stored for 20 years. When food scarcity hits the market negotiate favorable terms while exchanging food grains against gold repeat the cycle couple of time and you get rich. People who are made to believe gold is more valuable then food grains become poor losers, people who understand food grains are more valuable than gold become rich.

Using gold as currency without redemption obligation by issuer was the longest running scam in the world. Gold does not have a inherent value/energy so exchange value has to be negotiated during each transaction, hence it cannot act as store of value. During times of resource crunch / famine the last person holding gold cannot make one more exchange and he/she ends up as the looser in the series of transactions. Essentially it ends up as a ponzi scheme.

A currency needs to satisfy 3 functions to become a true representation of transactions between living beings.

1. Medium of exchange
2. Store of value
3. Delivery of value (energy)

For gold/paper tokens to be valid the issuer should be able to deliver \"value / energy\" on redemption of currency, otherwise gold/paper currency has no mechanism to satisfy the \"3. Delivery of value\" function to be real currency and ends up as a ponzi scheme which repeats itself, this is called the \"theory of business cycle\".