histhasthai: Yours is called dogma.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Juan:Can you explain why bogus property titles and inflation are 'good' ?
What, and hijack the thread?
They're not bogus property titles, it's you (among others) who keep insisting that what we're talking about is warehouse banking plus fraud. I can't really keep arguing against a strawman once it's already been pointed out to you that that is what it is.
Does it help to think of it as a loan to the bank that is callable, subject to the bank's adequate liquidity? Help me figure out how to explain it so you don't keep bringing it back to a degenerate form of warehousing. It's not warehousing, it's got no relation to warehousing, and if you insist on trying to stuff it into the warehousing model, you're going to keep making nonsense claims about fraud and insolvency.
The state won't go away once enough people want the state to go away, the state will effectively disappear once enough people no longer care that much whether it stays or goes. We don't need a revolution, we need millions of them.
Anonymous Coward:Perhaps you can explain how bailment law doesn't apply to banks and how the managers are morally able to do whatever they want with their customer's property irregardless of their individual wishes.
After the late 19th century, banks were allowed to use limited liability incorpation. This means that if a bank was insolvent, the depositors got shafted in bankruptcy court, if the bank's assets were insufficient to pay depositors. Fractional reserve banking is inherently unsound, so a newspaper printing a rumor of a bank's insolvency is sufficient to cause insolvency.
In 1933, President Roosevelt confiscated the gold from US citizens. If you deposited a gold coin in a bank in 1932, you were unable to withdraw it after President Roosevelt seized the gold.
In both cases, State violence protected bank management from the consequences of their fraud. The first example was limited liability laws. The second example was an outright seizure of property by government.
According to common law or natural law, bank owners and management would be personally liable for any shortfall. In a free market, given the choice of depositng gold in a fractional reserve bank or a sound bank, most customers would choose a sound bank.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
Does it help to think of it as a loan to the bank that is callable, subject to the bank's adequate liquidity?
I can't really keep arguing against a strawman once it's already been pointed out to you that that is what it is.
Help me figure out how to explain it so you don't keep bringing it back to a degenerate form of warehousing.
it's got no relation to warehousing,
Juan:What should be done is to describe things as simply and accurately as possible.
OK. You deposit 100 GO in my bank, demand deposit, knowing full well that I will have only a 50% reserve, and so there is a chance I will default on your demand and convert it, by the terms for default in our contract, to a time deposit, along with whatever penalty the contract provides (out of my own assets or the interest recieved from the loan). So far no fraud, right? Now, I loan 50 GO to a guy who wants to buy a hammer. It's the gold you deposited, but I told you that is what I was going to do with it, so still no fraud. There is now 100 GO in notes out there, your original note only, 100 GO liablility on my books. My assets are 50 remaining GO, and the hammer guy's obligation to repay 50 GO, but at a later date. No insolvency, only a risk of immediate demand default that you were aware of going in, and no risk to your principle.
Let's try it another way. You deposit 100 GO and get a note. I loan to the hammer guy a demand note for 100 GO. My liabilities are now 200 GO in notes out there. My assets are 100 GO - since I gave none of it away - plus the 100 (GO or notes) obligation from hammer guy. 200 GO (equivalent), total assets, still no insolvency, still 50% reserves and the same chance of default. (If he pays back with the note I gave him, instead of gold, it's just a wash, but his interest would have to be paid in gold or redeemable notes from another bank in this constrained example.)
Either way, if I loan out any more of the gold, or issue any more notes, now there's fraud. My reserve is below 50%, violating the contract with you and the others I've issued notes to.
It works the same at whatever reserve we want to talk about. Obviously, 0% reserve is no longer risk, but a certainty, since the first withdrawal would be defaulted on. The exact reserve level chosen would be arrived at by the market, but whatever it is, it works the same way.
Your example of my issuing notes willy-nilly without regard to what my reserves actually are is a violation of the contract, and is fraud. It's a strawman, because the premise here is a contractually set minimum reserve, and that the contract is honored by the bank. If you assume otherwise, there's no issue to discuss here.
Juan:So, the fact that FRB came about as a fraudulent form of warehousing is either historical fantasy, or has really nothing to do with the matter at hand
The latter, though I don't concede that it came about strictly through fraud. Regardless, the fact that it was used fraudulently does not mean that it is inherently fraudulent. People write bad checks, does that mean that checks are inherently fraudulent? Anybody can find a way to use any financial tool for fraud, it doesn't mean the tool is fraudulent. Your claim smacks of the anti-gun argument, guns are used to murder people, so guns are bad.
histhasthai: liberty student:100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency You think the bank just gave them away? No, they acquired assets in the form of loans. You're just being obstinate. I pretty much take that as having no real argument, and refusing to admit it.
liberty student:100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency
You think the bank just gave them away? No, they acquired assets in the form of loans. You're just being obstinate. I pretty much take that as having no real argument, and refusing to admit it.
So a bank can make money appear out of thin air and give it to someone to buy a house and you think that the house backs this new money?
Since the house existed prior to the magical money production this didn't create any new wealth so the only valid argument is that the bank produced a fraudulent claim on the house since they didn't actually own the assets that were used to exchange for it nor did these assets exist prior to the bank printing them up.
Doesn't really fit into the theory that the only way wealth can be created is through mixing land with labor does it? But I suppose that's just dogma too, isn't it?
Not even mentioning how this inflationary pressure causes all the other buyers of houses who don't have access to a magical money supply source to have to pay more as they have to exchange real goods for real goods instead of wealth redistribution magic beans for real wealth.
histhasthai:AnonymousCoward: You've apparently missed a whole chunk of this thread.
Yup, my Real Bills Doctrine Bullsh*t Detector™ went off and I just had to jump in...
So, what'd I miss? A moral justification for fraud or how banks aren't morally obligated to follow common law?
The gun analogy doesn't hold.
You're missing the point, that no one in their right mind, under free banking, without legal tender law, is going to risk banking with an organization that practices insolvency as their core business competency.
1. We know fractional banking is not sustainable indefinitely.
2. We need to be able to trade the receipts outside the bank as tender in order to float the system in the short term. You're right, it's not warehousing. No one would warehouse if they thought they put gold in, and have a 80% chance of getting it out. Even if the bank would hold it with a premium (interest), the chance of a total loss, likely exceeds the cost to warehouse with a full reserve institution. I'm no actuary, but as mentioned multiple times, who would insure a company that practiced insolvency as their primary operational imperative.
FRB is not a sound or rational or likely business model without (i) fraud, (ii) legal tender law or as FSK mentioned (iii) limited liability when they go down and the depositors burn.
fsk: Anonymous Coward:Perhaps you can explain how bailment law doesn't apply to banks and how the managers are morally able to do whatever they want with their customer's property irregardless of their individual wishes. After the late 19th century, banks were allowed to use limited liability incorpation. This means that if a bank was insolvent, the depositors got shafted in bankruptcy court, if the bank's assets were insufficient to pay depositors. Fractional reserve banking is inherently unsound, so a newspaper printing a rumor of a bank's insolvency is sufficient to cause insolvency. In 1933, President Roosevelt confiscated the gold from US citizens. If you deposited a gold coin in a bank in 1932, you were unable to withdraw it after President Roosevelt seized the gold. In both cases, State violence protected bank management from the consequences of their fraud. The first example was limited liability laws. The second example was an outright seizure of property by government. According to common law or natural law, bank owners and management would be personally liable for any shortfall. In a free market, given the choice of depositng gold in a fractional reserve bank or a sound bank, most customers would choose a sound bank.
Sorry, man, I know how it came about I just wanted a moral justification for it from the FRB advocates as they are the ones that deny that banks operate as a warehousing operation and that money is somehow different from every other good in existence.
I'm one of those 'money is not special' dogma spouting crackpots...
* boinks the cowardly crackpot *
liberty student:You're missing the point, that no one in their right mind, under free banking, without legal tender law, is going to risk banking with an organization that practices insolvency as their core business competency.
Where's the insolvency in the examples I gave? Nowhere. Aside from that, I'm not missing the point, I consider it an open question of how people will balance the risk/beneift analysis.
liberty student:1. We know fractional banking is not sustainable indefinitely.
You assume it, completely without basis, as an axiom that precludes any actual analysis of whether it is true or not. You confuse what the Federal Reserve Bank does with fractional reserve banking, and cite the former as an historical example of the latter.
liberty student:FRB is not a sound or rational or likely business model without (i) fraud, (ii) legal tender law or as FSK mentioned (iii) limited liability when they go down and the depositors burn.
You're just making that up, or parroting what somebody told you. Again, looking at my example, where do the depositors get burned by losing their cash? Where's the fraud? And legal tender laws would not protect it, they would undermine it by insulating it from market discipline, and make it into what you fear it is.
histhasthai: Now, I loan 50 GO to a guy who wants to buy a hammer. It's the gold you deposited, but I told you that is what I was going to do with it, so still no fraud. There is now 100 GO in notes out there, your original note only, 100 GO liablility on my books.
Anonymous Coward:I'm one of those 'money is not special' dogma spouting crackpots...
It's not crackpot, money is not special. It has characteristics unique to it, as does every other commodity, that suit it to a particular purpose. It's an economic good traded in the market not much differently than corn or copper, except in the mechanics of it. The one thing that might be considered "special" about it is that it is never ultimately consumed. But it's not unique in that - water and energy, for example, are never consumed, either. It's the fact that the purpose it is suited for is at the core of all economic activity, and that it use is so abstract, that lead people to have mystical fears about it, and dogmatic beliefs in what it should and should not be.
Juan:it turns out that your scheme has magically converted 100 GO into 150 GO ?
If you're arguing that it's inflationary, does it mean you've at least given up arguing that it is fraud or insolvency? Cause I'll address that, but not if you're just going to come back later, after I successfully counter it, with the fraud and insolvency again.
But not tonight in either case, it's late.
histhasthai:It's the fact that the purpose it is suited for is at the core of all economic activity, and that it use is so abstract, that lead people to have mystical fears about it, and dogmatic beliefs in what it should and should not be.
What, like sound?
All money really does is to let someone trade some goods or labor for another good or someone else's labor and by printing up some fradulent claims on either of these things you are merely redistributing wealth from the producer of the goods or services to the person with the magic bean tree.
Simple as that.
What you leave out of your examples is the market pricing on this money substitute that you produce through FRB that will almost certainly reflect the perceived values of the backing commodity. If you have 50GO in reserve and print up 150GO the market will tend to price the total 150GO at the backing 50GO since they know that's all that it is really worth.
Or at least that's how it used to work when people traded in different currencies and there were no restrictions on the money changers.
Juan: hjmaiere: Here's something I've been thinking about for the last few months: What if there were people who understood Austrian economics just as well as the scholars associated with the Mises Institute, but had no interest in its moral implications? You mean, people like Greenspan ?
hjmaiere: Here's something I've been thinking about for the last few months: What if there were people who understood Austrian economics just as well as the scholars associated with the Mises Institute, but had no interest in its moral implications?
But I suspect Greenspan is not a true member of the plutocracy. I suspect he is merely a professional intellectual in their employ. The people who really decide things seem strangely anonymous. Witness the massive military bases being built in Iraq that have been on the drawing board since at least 1996. Someone somewhere simply decided that this was going to happen. (And no, the neocons are not the ones in charge. They are also merely profesional intellectuals in the employ of the plutocracy.)
It seems as though there are two main issues being debated:
1. Is FRB inherently fraudful?
2. Would FRB exist in a free market?
If a bank fully discloses their practices and lives up to them (as in histhasthai's example), how can this be considered fraud? It seems as though some people are treating the bank notes as gold itself, but there is nothing on the bank note saying there's a one-to-one relationship between current gold reserves and outstanding notes, only a promise to deliver x ounces of gold on demand (perhaps with an asterisk *). This is an important distinction.
And there's every reason to believe FRB would exist in a free market. There is a benefit to both bankers (more lending for greater profits) and depositors (earn interest on deposits). Of course there is additional risk, but it's up to the market to determine what risk it wants to bear and how it wants to be compensated. As histhasthai pointed out, the risk is largely one of "we don't have your gold right now, but we will in a week" versus "we don't have your gold at all, sorry, it's gone".
If you want to see a similar practice in action, look at the airlines. They overbook flights because, statistically, they expect a certain amount of no-shows. They pass this additional revenue onto you through lower tickets prices. It's a win-win situation, even accounting for the "runs" they have where more people than expected show up and they have to buy out existing tickets at a premium. Government does not force airlines to do this, the market chooses this.
There a so many post i cant reply to all of them.. instead i'll try and summarize the disagreements.
1. There is the idea that debt/deposits is money.
2. There is the idea that there is a money multiplier.
3. There is the idea that debt is inflationary.
All of these are flawed.
Number 2.. I wrote this (somewhere) about there being no money multiplier:
Well back to it.. I think the biggest reason people have got the idea that fractional reserve banking is evil.. is because of this idea of the "money multiplier". Yeah we all heard about it in that movie.. "money as debt". The reasoning goes something like this: "Did you know, banks loan out 50 times as mouch money as they have in the reserves?" That sure sounds like banks are multiplying money, that they are creating money out of thin air. And if they can create 50 times as much, why not a thousand, or a billion? It sounds like there is no end to the madness. The govt should regulate this abomination now!
Well the reasoning sounds reasonable but isnt.. there is no connection between the size of the reserves and the amount of loans a bank has made. The reasoning should be "Did you know that a bank lend out 98% of the deposited money". This might still sound abit scary, but it is clearer that there is a limit, and that there is no money creation invloved. A bank can not lend out more money than people deposit with it. So at most it can lend out all of it, thats the limit. After it has lent out all the money, it cant lend out any more. It cant create any money. Looking at it this way and you might start to realize that maybe fractional reserve banking is not such a evil thing after all, and that the govt does not need to regulate it.
Number 1 and 3. Credit/deposist not being money, and it not being inflationary.
Imagine you loaning out a dollar to your friend. You no longer have the dollar, what you are left with is a note with his promise to repay a dollar on demand. He loans it out to his mother, and he is left with a promise to repay a dollar on demand. His mother loans it out, to her friend and etc.. until eventuall every person in the world has borrowed and loaned out that dollar to someone else. Has the money supply increased? Did that one dollar of money multiply into billions of dollars of money. Hell no. There is only one person, the last person to borrow the money that got to buy anything with the money. Maybe he spent it buying a candy bar. The price of candy bars might go up abit because off this one dollar. So all those billions of dollars of credit did not affact any prices, because noone could buy any with them. You could try to convince some shop owner to sell you a candybar for that piece of paper that your friend gave you. The one that says. "Thanks man, i'll repay you a dollar whenever i see you next time.". The shop owner probably wont accept that as payment as he does not trust you or your frioend. Well lets say he knows you are good kids, and say okay. Has that made money out of the credit, has that incresaed the money supply? Hell, no. All you have done is sold him your right to be repayed a dollar. You have sold him the debt of your friend. You will no longer get back that dollar you lent your friend, the shop owner will. You see? The money supply is the same. The amount of lending or borrowing has not increased. Or more importantly the amount of lending and the amount of borrowing is still the same. It all equals out, there is billions of dollars worth of borrowings out there, but there is also siz billion dollars worth of lending out there. And they all cansel eachother out to that one physcial dollar you had in the first place, that dollar might be on the other side of the world but you can get it back, or rather the shop owner can get ite back, by telling your friend he wants it back. Your friends will ask his mother, and she he friend.. etc until the last person to lend that dollar, the one that spent it.. pays back a dollar.. and that dollar makes its way all the back to you.. or rather to the shopowner that you sold your claim to that dollar.
Cedit is not money, as for every credit out there there is a debt. This ensures that for every body living above his means, by buying stuff "On credit" there is someone having lent that dollar out, and thereby not being able to buying anything with that dollar, meaning he is living below his means. It all equals out. Debt is not money, and deposit notes it not money. Therefore debt and credit creation is not inflationary.
Cheers
PeterWellington: It seems as though there are two main issues being debated: 1. Is FRB inherently fraudful? 2. Would FRB exist in a free market? If a bank fully discloses their practices and lives up to them (as in histhasthai's example), how can this be considered fraud? It seems as though some people are treating the bank notes as gold itself, but there is nothing on the bank note saying there's a one-to-one relationship between current gold reserves and outstanding notes, only a promise to deliver x ounces of gold on demand (perhaps with an asterisk *). This is an important distinction. And there's every reason to believe FRB would exist in a free market. There is a benefit to both bankers (more lending for greater profits) and depositors (earn interest on deposits). Of course there is additional risk, but it's up to the market to determine what risk it wants to bear and how it wants to be compensated. As histhasthai pointed out, the risk is largely one of "we don't have your gold right now, but we will in a week" versus "we don't have your gold at all, sorry, it's gone". If you want to see a similar practice in action, look at the airlines. They overbook flights because, statistically, they expect a certain amount of no-shows. They pass this additional revenue onto you through lower tickets prices. It's a win-win situation, even accounting for the "runs" they have where more people than expected show up and they have to buy out existing tickets at a premium. Government does not force airlines to do this, the market chooses this.
Good post, another similar thing is:
- Corn and future contract on corn. The farmers are selling next years corn even though they dont own it yet. This is not fraud as long as the farmers deliver on their promise. The futures contract is a promise to exchange the paper contract for real corn next year.
- Insurance companies pool of money being invested instead of stored in some vault. When you pay your monthly insurance fee.. that money does not go into some bag with your name on it. Its invested into stocks or loaned out. If you make a claim, some stocks are sold.. and you get back money to the amount in the contract.This is how Warren Buffet raises most of the money he invests. As long as he is able to make a profit on the invested money, he is able to keep his promise and contract with the insured. This is not fraud.
- Shorting stocks, wich is selling stocks you dont own yet. Once the buyer wants to sell the stock, you buy it for him. So you sell something before you actually buy it. This is not fraud.
PeterWellington:It seems as though some people are treating the bank notes as gold itself
The whole point is for it to act as a substitute for gold and to trade on par with actual gold coin. If you print up a note that says that it is worth 1oz of gold (*payable at the discretion and convenience of the issuing bank) who's going to treat that as a substitute for gold?
This whole theory breaks down as soon as a non-bank customer gets their hands on a note and turns up at the bank demanding payment and is told that what they have in fact traded their real goods for is a time deposit with said bank, come back in three weeks and they will make good on the note.
This is the very definition of bankruptcy.
PeterWellington:There is a benefit to both bankers (more lending for greater profits) and depositors (earn interest on deposits).
Who's saying that depositors wouldn't earn interest under a 100% reserve banking system?
They would probably earn higher interest under such a system since loanable money would be at a higher premium since it couldn't be created out of thin air and with no real backing. Plus FRB devalues the currency and makes savings less attractive to the Average Joe because they lose real wealth as time passes, one of the key Keynesian plans to induce consumer spending and keep the velocity at a suitable level—hoarding is the debil after all.
Which leaves us with the real beneficiaries of FRB, the bankers themselves. They get to earn interest off a Ponzi scheme in essence. This causes monetary inflation and as there is more money chasing the same amount of goods leads to all the problems associated with inflationary policies with the only clear winners being the people who control the printing presses.
Without proving that FRB isn't inherently fraudulent it is pointless to even discuss if it would exist under a free market system because protection from fraud is one of the three necessary conditions for a free market to exist.
Y'all can start with the 'fraudulent claim to real goods' accusation that no one seems to want to address.
Oh, and I wouldn't equate the airlines with a free market system by any stretch of the imagination.
DriftWood:- Corn and future contract on corn. The farmers are selling next years corn even though they dont own it yet. This is not fraud as long as the farmers deliver on their promise. The futures contract is a promise to exchange the paper contract for real corn next year.
There's a big, huge as de Nile, difference between a producer of corn selling a promise to their future crop and the grain silo they have a storage contract printing up some warehouse receipts over and above what is actually in their care because they noticed at some time in the past that all the corn never gets withdrawn all at once.
Two entirely different concepts that you are trying to equate which simply isn't the case.
DriftWood:- Insurance companies pool of money being invested instead of stored in some vault. When you pay your monthly insurance fee.. that money does not go into some bag with your name on it. Its invested into stocks or loaned out. If you make a claim, some stocks are sold.. and you get back money to the amount in the contract.This is how Warren Buffet raises most of the money he invests. As long as he is able to make a profit on the invested money, he is able to keep his promise and contract with the insured. This is not fraud.
Yet another entirely different concept than FRB.
The insurance companies are in the business of pooling risks of all the members and aren't in a bailer/bailee relationship like banks. You aren't entrusting 'your' money to them but are buying a service from them where they manage the pooled money of all the individual clients and pay it out to those who suffer losses covered under the conditions of the contract.
I can't (well, if I actually had auto insurance) go to my car insurance carrier at the end of my six month contract and demand payment of the funds that I paid them because I had no claims during this period and wish to move my money in another risk pool. This isn't the way it works.
DriftWood:- Shorting stocks, wich is selling stocks you dont own yet. Once the buyer wants to sell the stock, you buy it for him. So you sell something before you actually buy it. This is not fraud.
What?
You borrow the stock from the owner, under the promise that you will return it at a future date, and sell it at the current market price. When the end of the agreed upon time expires you buy the stock at the current market price and return it to them.
At no point during this transaction is there multiple claims to the same property since it is merely a loan from one individual to another.
Now if the original owner printed up a counterfeit stock certificate and loaned that then you would have a good analogy with FRB but that's not not how the system works.
Nice try though...
PeterWellington: It seems as though there are two main issues being debated: 1. Is FRB inherently fraudful? 2. Would FRB exist in a free market? If a bank fully discloses their practices and lives up to them (as in histhasthai's example), how can this be considered fraud? It seems as though some people are treating the bank notes as gold itself, but there is nothing on the bank note saying there's a one-to-one relationship between current gold reserves and outstanding notes, only a promise to deliver x ounces of gold on demand (perhaps with an asterisk *). This is an important distinction. [...]
[...]
Sorry, but bank notes started out as exactly that: a bailment contract—a contract that specifically said "I will store your gold for you." Under free-market conditions, banks that tried to slime their way along with a mere "promise to deliver x ounces of gold on demand" found themselves going out of business. The unsustainability of FRB under free-market conditions is not a mere matter of theory, it is historical fact. Apologists for the plutocracy try to portray bank runs as some sort of random tragic economic natural disaster against which a benevolent government must provide protection. It wasn't. A bank run was a bank being caught in an act of fraud. It's that simple.
It is also a historical fact that banks did offer exactly the kind of non-fraudulent pooled-savings services people have been trying to describe here. That piece of paper basically said: "You are part owner of the money we lent out at interest." That piece of paper was called a 'share.' Under free-market conditions, no one confused that piece of paper with actual money. There is a fundamental difference between credit and bailment. In other words, that piece of paper may have been an asset against which people might lend you money, but that piece of paper never itself functioned as money. Again, this is not a mere matter of theory. This is historical fact.
As I said, banks could only get away with fractional-reserve banking by seeking very specific privileges from the government in exchange for fincancing government spending—typically to finance war. The very first central bank in the western world was exactly this. In 1694, William Patterson offered to loan William III money to fight France in exchange for a monopoly on bank note issue in England. He sought this privilege exactly because he knew it would allow him to get away with fractional-reserve banking, i.e. making money by lending and investing money he didn't really have. Thus, the Bank of England was born.
This is what central banks and fractional-reserve banking have always really been about. Everything else is deliberate obfuscation.
This must be the third time you've cited Money as Debt. It pertains to the fiat FRB system IIRC, which is already heavily regulated and controlled. I find it peculiar that you argue that under this arrangement there is no fraud nor any multiplication of claims to a given good. It might not be the case under free-market FRB with full disclosure, but you do not make enough of an effort to differentiate the two, which I think increases people's hostility here to your arguments.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
Anonymous Coward:If you print up a note that says that it is worth 1oz of gold (*payable at the discretion and convenience of the issuing bank) who's going to treat that as a substitute for gold?
Again, the note does not say it's worth 1oz of gold. It contains a promise to pay 1oz of gold. So you're right, they shouldn't be treated as the same commodity because they're not. It's up to the market to determine the difference in "worth", knowing full well it runs the risk of not being able to redeem the note on demand. I think that's the source of us seeing this issue differently. If you treat a promise to pay one ounce of gold as you would an actual ounce of gold, then that's on you.
Anonymous Coward:Oh, and I wouldn't equate the airlines with a free market system by any stretch of the imagination.
The airlines are heavily regulated, but it's a cop-out to dismiss anything related to the airlines without looking at how regulation affects the issue. The government is not forcing airlines to overbook flights. There is nothing that's preventing airlines from stopping this practice yet it continues.
hjmaiere,
Arguing that the practice of FRB is evil because it has been mis-used is like arguing guns are evil because they have been mis-used.
The way that banks and governments have controlled money now and throughout history is an abomination, but I don't blame that on FRB. I'm not arguing that the current system is valid, but that under a free market with full disclosure, there's nothing inherently evil or implausible about FRB.
Can you address my comparison to airlines overbooking flights as well as DriftWood's examples? Do you believe those are legit practices?
Jon Irenicus:It pertains to the fiat FRB system IIRC, which is already heavily regulated and controlled. I find it peculiar that you argue that under this arrangement there is no fraud nor any multiplication of claims to a given good.
I've tried to point out, perhaps not vehemently enough, that the notes are not property claims, but performance claims, with the implication in my examples that they are "backed" by some combination of reserves and debt assets of a fully solvent bank. Peter Wellington gets at this just below your post.
It is the mistken blurring of the difference that actually leads to the worst problems we have, in that the debt backed liabilities themselves are currently counted as reserves under the assumption that they are true receipts, or property claims, and thus "as good as gold" -and, of course, following on that the elimination of the backing altogether and the counting of pure fiat notes as reserves backing up other fiat notes. In my examples, I hope it was clear that this could not happen and still conform to the contract, but in any case, I'll get to it in more detail later (just taking a short break from work right now).
Jon Irenicus:you do not make enough of an effort to differentiate the two, which I think increases people's hostility here to your arguments.
Probably.
PeterWellington: hjmaiere, Arguing that the practice of FRB is evil because it has been mis-used is like arguing guns are evil because they have been mis-used. [...]
As I've tried to point out several times, the argument is not that FRB is evil and should be outlawed. The argument is that fractional-reserve banking won't happen, and never has happened under conditions that lack fraud or coercion. You can issue all the Peter's-Fractional-Reserve-Bank-Notes (PFRBNs) you want. I don't care. People, as a rule, won't use them as money.
There are praxeological reasons why this is the case. Money is anything used to facilitate indirect exchange. In theory, almost anything that someone somewhere values can function as money. So I suppose it is possible that someone somewhere sometime might use a PFRBN as money, just as it is possible that someone somewhere sometime might use a chicken, or a Shania Twain CD as money.
In practice, certain things have certain qualities that make them serve really well as money: portability, divisibility, fungibility, durability, and market demand independent of its function as money. Absent coercion, markets tend to settle on precious metals for use as money, because they satisfy all of these qualities.
There were situations where people found it more convenient to trade warehouse receipts for gold in place of the gold those warehouse receipts represented. But, those situations were contrived and depended heavily on the trust placed in the institutions that issued those warehouse receipts. In the case of PFRBNs, they might be a great way to save money and make a little interest, but even in purely non-fraudulent conditions, backed by 'safe' investments (which, back when these things were called 'shares' included things like house loans ironically enough), there is little reason people would accept these things as money. There's zero reason to think that a competing bank would accept them as money. Banks accepted the notes of competing banks out of a duty to customer service, but they redeemed them for specie or their own notes as immediately as possible. There's no way they would ever consider them an asset against which they could issue further deman-deposits.
In short, the notion of fractional-reserve banking under truly free-market conditions really is absurd once you think it through.
I agree with most of what you wrote about money, but I don't agree that FBR under a free market is absurd. I think we already see several similar practices in our market today that were not brought about by government (as DriftWood and I have mentioned). Let's take a company that does world-wide business insuring home owners against fire damage. Do you require that the company be solvent in case of some type of monumental disaster that burns down 90% of the homes on the planet? Personally, I wouldn't demand that, but you may. I would take advantage of lower rates while you would pay more for peace of mind. In other words, as long as the insurance companies are divulging this information, there's no fraud and the market can decide. The same can be said of FRB.
It seems as though the belief that FRB isn't viable stems from the notion that wealth is somehow being created out of thin air. The only thing being created out of thin air are the notes promising to deliver gold (or whatever other commodity is being used). Real wealth can be created over time. If we consider gold as a form of wealth, then the simplest example would be prospecting for and finding gold. This makes it possible to pay back loans with interest without anyone getting screwed over. But "finding gold" can be replaced with any productive activity that creates value.
This is why FRB isn't a Ponzi scam. It's based on statistical behavioral patterns of depositors and borrowers, matched in such a way that it's unlikely there will be a conflict (when managed properly), much in the same way as insurance companies operate.
PeterWellington: hjmaiere, I agree with most of what you wrote about money, but I don't agree that FBR under a free market is absurd. I think we already see several similar practices in our market today that were not brought about by government (as DriftWood and I have mentioned). Let's take a company that does world-wide business insuring home owners against fire damage. Do you require that the company be solvent in case of some type of monumental disaster that burns down 90% of the homes on the planet? Personally, I wouldn't demand that, but you may. I would take advantage of lower rates while you would pay more for peace of mind. In other words, as long as the insurance companies are divulging this information, there's no fraud and the market can decide. The same can be said of FRB.
No, your analogy is flawed. Fractional-reserve banking presumes far more than merely that Peter's-Fractional-Reserve-Bank-Notes (PFRBNs) be of value. That's not in question. It presumes that PFRBNs will serve as a money—as a medium of indirect exchange. That's the absurd part.
Money (by the Austrian definition) is anything that facilitates indirect exchange. If someone accepts something in trade not because they intend to consume it (in the economic sense), but because they intend to trade it for something else, that thing is functioning as money. As I said, things that are portable, fungible, divisible, durable, and have value independent of their use as money tend to serve well as money. Together, these properties could be described as remarketability. (Economic text books will add that money is used as a unit of accounting and a store of value. But this is only a cororllary of their use as a common medium of exchange.)
For Peter's Fractional Reserve Bank to practice fractional-reserve banking, it must have the ability to issue pieces of paper (representing shares on the bank's assests) as if they were money. This requires not only that regular people accept these pieces of paper as money (which is absurd), but that other competing banks accept them as money (which is doubly-absurd).
If a bank accepted the bank note of another bank as if it were money, it would be favoring the other bank (which is making double interest on a title to real money) at its own expence (whose assets now include risky titles to another bank's outstanding loans). And no customer of a bank is going to allow a bank to redeem its notes in some other bank's notes. It simply will not happen.
But this provides insight into the true function of a central bank. If by law there is one and only one legal kind of bank note, then banks are no longer in competition with each other for the trust of their depositors. The banks have effectively been cartelized. The banks win, and by no coincidence, the government wins, because (at least originally) the primary legal way to create new bank notes out of thin air was to 'buy' government securities.
PeterWellington: [...] This is why FRB isn't a Ponzi scam. It's based on statistical behavioral patterns of depositors and borrowers, matched in such a way that it's unlikely there will be a conflict (when managed properly), much in the same way as insurance companies operate.
Can you provide a single example from history where fractional-reserve banking operated under free-market conditions in the way you describe?
hjmaiere:Can you provide a single example from history where fractional-reserve banking operated under free-market conditions in the way you describe?
Can you let me know in what countries and in what time periods you consider free markets to have existed?
I know we're going back and forth a little here, but the most important thing to me is the issue of force/fraud. I think we both agree that we don't want a government or anyone else forcing a currency or bank notes on us. It seems like you also agree that FRB practiced in a free market with complete and honest disclosure is not fraud (putting aside the issue for a moment of whether or not people would actually partake in it). Please correct me if I'm wrong there.
If that's the case, then the debate over FRB being feasible is interesting, but really a moot point as the market will decide, as neither of us would forcefully interfere.
I think our main point of contention is the use of these notes as money.
hjmaiere:Fractional-reserve banking presumes far more than merely that Peter's-Fractional-Reserve-Bank-Notes (PFRBNs) be of value. That's not in question. It presumes that PFRBNs will serve as a money—as a medium of indirect exchange. That's the absurd part.
hjmaiere:So I suppose it is possible that someone somewhere sometime might use a PFRBN as money, just as it is possible that someone somewhere sometime might use a chicken, or a Shania Twain CD as money.
If you look back on my posts, I've consistently said that these types of notes would not function as gold itself (or whatever), but merely as a promise to deliver gold. I think our only real disagreement is what value these promissory notes would have. You think the gold/PFRBN parity would be huge, I think it would be fairly small for a trusted, well-run, and honest bank that completely discloses the nature of the notes. Again, the market would decide.
PeterWellington:If you treat a promise to pay one ounce of gold as you would an actual ounce of gold, then that's on you.
That is the presumption behind the issuance of the note.
PeterWellington: Anonymous Coward:Oh, and I wouldn't equate the airlines with a free market system by any stretch of the imagination. The airlines are heavily regulated, but it's a cop-out to dismiss anything related to the airlines without looking at how regulation affects the issue. The government is not forcing airlines to overbook flights. There is nothing that's preventing airlines from stopping this practice yet it continues.
The fact that a practice continues does in no way reflect the validity nor the morality of said practice, just look at taxes.
Bit of a red herring anyway hence the reason I dismissed it out of hand.
PeterWellington: [...] If you look back on my posts, I've consistently said that these types of notes would not function as gold itself (or whatever), but merely as a promise to deliver gold. I think our only real disagreement is what value these promissory notes would have. You think the gold/PFRBN parity would be huge, I think it would be fairly small for a trusted, well-run, and honest bank that completely discloses the nature of the notes. Again, the market would decide.
But if PFRBNs are not fradulent, then they are not a promise to deliver gold. They are merely a claim on the assets of a bank (i.e. its outstanding loans and investments). This is not a promise to deliver gold. A bank may offer to buy that PFRBN from you when it can (that is, 'redeem' it when it can), but it is not, and cannot legally be a promise to deliver gold on demand.
More importantly, none of this has anything to do with the gold/PFRBN parity. It might occasionally be the case that PFRBNs preserve and even grow wealth better than gold, at least over time. That's completely irrelevant. PFRBNs still won't trade as money any more than any other equity will. People don't trade Google stock as money. The reason is because it takes too much localized knowledge to know the true worth of PFRBNs at any given moment. It takes a long time for something to broadly establish people's trust in its remarketability and thus allow it to serve as a medium of exchange. It took the touchstone for gold to establish itself as a truly practical medium of exchange. And there is a huge accounting advantage to using a common medium of exchange. For PFRBNs to displace gold as a common medium of exchange, it needs to be more remarketable than the gold it supposedly represents. And this is logically impossible.
You need to really understand what money is to understand why PFRBNs won't be money under non-fradulent, non-coerced conditions. Money is not merely an asset. It is not merely a (present or future) claim on an asset. It is a medium of exchange, and this something very very different.
hjmaiere:But if PFRBNs are not fradulent, then they are not a promise to deliver gold. They are merely a claim on the assets of a bank (i.e. its outstanding loans and investments). This is not a promise to deliver gold. A bank may offer to buy that PFRBN from you when it can (that is, 'redeem' it when it can), but it is not, and cannot legally be a promise to deliver gold on demand.
Couldn't the same be said of a non-fractional reserve bank? Let's say there's a new bank in town that has 5 ounces of gold reserves. You deposit 10 ounces of gold and it provides you with 10 notes, each can be redeemed for an ounce of gold at any time. If it lends your 10 ounces of gold to a borrower, you would only be able to redeem 5 of your notes until the loan was paid off. In other words, you can't redeem all your notes on demand as promised. And who's to say the loan will be paid off? What if the borrower defaults? Aren't you, in essensce, holding a fractional reserve note now?
hjmaiere:You need to really understand what money is to understand why PFRBNs won't be money under non-fradulent, non-coerced conditions. Money is not merely an asset. It is not merely a (present or future) claim on an asset. It is a medium of exchange, and this something very very different.
But you've said that anything of value can technically function as money. So what we're really debating is the degree of remarketability. Again, this is very difficult to determine. Your opinion may be closer to the truth, who knows, it's up to the market to decide and again, if you wouldn't use force to stop such a practice then I think all's well and good.
I'm very late to this dance, but the issue in my mind seems to come down to consent of the currency user.
It is not by accident that currency over the centuries has gravitated always to that which best retains the purchasing power of the user. To the extent some bank wishes to issue fractional reserve notes vs. ones that are backed by some type of commodity -- be it precious metals or some kind of basket of commodities -- that'd be for the market to sort out, and there's little doubt that competing currencies would be quite healthy for any economy.
I could also imagine a fractional reserve note being issued into the marketplace and used, but not without some type of compensation for the portion of unbacked risk. Why would one otherwise accept the risk? Granted, one accepts the risk that the exchange rate of whatever is backing your currency of choice could lose value vs. whatever you intend to buy, and that is a risk on invariably must take. But it should at least be up to the user of a currency and not for some corrupted, self-serving institutions to decide.
I suspect this is why most any fractional reserve currency in history must always be fiat, and always created on the earned trust of a unit of currency that was previously backed. Rothbard beats that point to death in his books. And, it is also why inflation permeates fractional reserve currencies and goes hand in hand with every central banking apparatus ever created.
Surely, one can conceive a FRB that does not abuse the trust of the public, but the inherent corruption of such organizations and their creators tells a different story. The analogy someone made to guns (that its the user that is the problem) is apples to oranges. And nobody is saying “outlaw central banks” or the FRB.
We are saying just put it up to competition and let it survive on its own merit and track record. No chance of that IMO, should we be released of those shackles.
PeterWellington: hjmaiere:But if PFRBNs are not fradulent, then they are not a promise to deliver gold. They are merely a claim on the assets of a bank (i.e. its outstanding loans and investments). This is not a promise to deliver gold. A bank may offer to buy that PFRBN from you when it can (that is, 'redeem' it when it can), but it is not, and cannot legally be a promise to deliver gold on demand. Couldn't the same be said of a non-fractional reserve bank? Let's say there's a new bank in town that has 5 ounces of gold reserves. You deposit 10 ounces of gold and it provides you with 10 notes, each can be redeemed for an ounce of gold at any time. If it lends your 10 ounces of gold to a borrower, you would only be able to redeem 5 of your notes until the loan was paid off. In other words, you can't redeem all your notes on demand as promised. And who's to say the loan will be paid off? What if the borrower defaults? Aren't you, in essensce, holding a fractional reserve note now?
Be careful. What do you mean by "note" in this case? Is it a warehouse receipt? If so, the bank has committed fraud by lending out my gold. Is it merely a promise to pay back a certain amount of gold any time I demand it, but oh, by the way, only if the bank happens to have enough reserves on hand at the time? If so, why would I accept such a note? I might if it paid interest (in which case it would really be a timed deposit), or if it represented not gold, but partial ownership of the bank itself (in which case it would be stock). In either case, the note wouldn't function as money. I couldn't just expect just anyone to accept it as a form of payment. I might be able to find someone I could sell it to, but it would be valued as if it were a timed-deposit or as stock. It wouldn't be valued as a warehouse receipt for gold. Specifically, it wouldn't be valued as an asset upon which further bank credit would be further pyramidded. It wouldn't facilitate fractional-reserve banking. No new money is created.
Fractional-reserve banking is when a bank somehow issues claims on its assets (outstanding loans and investments) and people treat them as if they were warehouse receipts for gold. This doesn't happen in a free market.
PeterWellington: hjmaiere:You need to really understand what money is to understand why PFRBNs won't be money under non-fradulent, non-coerced conditions. Money is not merely an asset. It is not merely a (present or future) claim on an asset. It is a medium of exchange, and this something very very different. But you've said that anything of value can technically function as money. So what we're really debating is the degree of remarketability. Again, this is very difficult to determine.
But you've said that anything of value can technically function as money. So what we're really debating is the degree of remarketability. Again, this is very difficult to determine.
No, it's usually pretty obvious in a given market what's functioning as the common medium of exchange and as the unit of accounting. At one time salt functioned as a common medium of exchange. And while it is conceivable that you could find someone somewhere that would accept salt in trade for something (in which case, for you, salt would be functioning as money), fractional-reserve banking presumes not merely that PFRBNs could function as money in some conceivable situation, but that they are functioning as money.
PeterWellington: Your opinion may be closer to the truth, who knows, it's up to the market to decide and again, if you wouldn't use force to stop such a practice then I think all's well and good.
Your opinion may be closer to the truth, who knows, it's up to the market to decide and again, if you wouldn't use force to stop such a practice then I think all's well and good.
I would not use force to prevent someone from non-fraudulently trying to practice fractional-reserve banking. But I would know for a fact that if someone was actually getting away with it, that somewere someone was lying or pointing guns at people—probably both.
Yall need to cut Histhasthai and Driftwood some slack. They are essentially correct.
I believe Mises himself wanted to allow competitive FRB, as he thought that was the only means to keep banks from keeping insufficient reserves. 100% reserve requirement would mean the government could just as simply litigate a 50% or a 1% reserve requirement...then bail them out with tax money if they faced a bank run. If the market were in charge, individuals would manage the risks and rewards of FRB in the case of individual competing banks.
The most important thing is that banking and government are separate. The Panic of 1819 was caused by the government allowing banks to refuse note redemption in specie after the banks funded the government through the War of 1812, allowing basically 0% reserve (although I'm sure no banks operated as such). Also, we got the 2nd National Bank, who operated similarly in principle, until it had to contract credit to repay the LA purchase, due completely in specie. Government intervention allowed artificial credit expansion throughout most of the nation. You'll notice the Panic of 1907 was particularly caused by stricter regulation and chartering of banks as opposed to the trusts, who operated essentially as much riskier fractional reserve banks. The market took it to them in the panic, but JP Morgan claimed to be savior, doing the worst possible moral hazard and bailing them out. Of course, his intention was to pave the way for a central bank, thus legitimizing the system of insolvency as opposed to policing it. The prior system of wildcat banking, while still far from ideal, was probably the closest.
As a side note, in Rothbard's America's Great Depression, he mentions that at the time there was virtually no difference in demand and time deposits, other than their reserve requirements. Banks basically allowed them to be used as demand deposits. Thus, they offered larger pay-outs for time deposits, as they carried a smaller reserve requirement.
Also, let's not pretend that physically keeping gold on hand is completely safe. You can be robbed, or you may simply lose it. You may feel safer keeping it in a fractional reserve bank. Essentially, you must weigh the risk with the institution, not the system. And FRB is not dependent upon bank notes that circulate as currency. My bank doesn't trade out the Federal Reserve Notes I give them with Regions or Capital One Notes. It simply keeps an account balance for me, which identity is required to change (of course there's always identity theft). In this manner, a bank account may be more secure than physical possession.
And bank werehousing still exists, if you want to do that instead of time deposits, fractional reserve demand deposits, or physical possession: they're called safety deposit boxes.
Check my blog, if you're a loser
PeterWellington:I think our only real disagreement is what value these promissory notes would have. You think the gold/PFRBN parity would be huge, I think it would be fairly small for a trusted, well-run, and honest bank that completely discloses the nature of the notes. Again, the market would decide.
I've been think on this point a bit and have come to the conclusion that any parity between a 'promise to pay' and the commodity promised would present a arbitrage opportunity. Sort of like selling a bond at auction with the difference between the redeemable price and the paid price being the interest rate.
So basically what we have here is a situation where the banks are giving you a debt instrument and expecting repayment in specie or fungible equivalent while also expecting you as the buyer of their debt to pay not only full parity price with the underlying currency but also pay interest on top of this for the privilege of 'borrowing' their debt for your own uses.
All I really see happening here is that the bank is charging a premium to the loanee for the privilege of undersigning their 'promise to pay' to the merchants who they buy goods and services from. In essence all that is happening is that the bank is borrowing from the merchants indirectly through the person who receives these goods and services.
If through time the bank has developed a good reputation and has shown their ability to redeem these debt instruments then people will accept them as a substitute for cash the same as if you were to run a tab at the bar until payday.
If this is a correct analysis then I would have to say that this system isn't really FRB but something entirely different, more like the bankers acting as a co-signer for a whole lot of individual loans made to their customers.
What say ye, yay or nay?
There is really not much of a difference between these different types of deposit notes.. and types of gold debt.
A deposit note that is redemable for gold on demand, where the collateral is gold locked into someones safe.. compared to one where the collateral is gold mortages are not that different. Both deposit notes have value, and can be used as money. They are not gold, but contracts of exchangeable for a certain amount of gold. The deposit note backed by gold mortage.. can be just as stable in value as the other. It all depends on the bank, how it well it manages its contracts and how trustworthy it is. Even if the bank says it keeps all its customerts gold in vault. It would be practically impossible to know, imagine people regularly go to the bank and demand to see that their gold coins are still in the vault. How does the customer know that those gold coins that he gets shown and gets to count are his? How does he know that the next customer wont be shown the same gold, thinking its his. It would be very hard if not impossible to enforce a law that made fractional reserve banking illegal.
Back to the topic about fractional reserve banking being evil because it creates money. It no more creates money, than any other form of lending and borrowing. Say you lend gold to your friend (on a time fixed basis or a until you need it back basis.. does not matter). Your friend gets to use the gold, thats clearly money. And you have a contract denominated in gold, that says your friend will buy that contract for a fixed amount of gold on request or at some future date. You might be able to trade that debt contract for goods, with people who trust your friend. If a bank was used as a middle man. You might be able to trade that contract with people that did not know your friend but trusted the bank. This contract is not money, its a debt bond. Its not gold, its debt. You see what im getting at?
The gold debt that happens trew fractional reserve bank lending is no more gold, than any other gold debt is gold. Other banks would not accept these gold debts as a replacement for real gold, than any other form of gold debts. If a bank got a hold of another banks gold debt bond that could be redemed on demand, it would redeme it and get the real gold. Why wouldnt they?
You see, this distinctions between these different gold contracts.. be it irregular deposit notes that are backed by gold in gold vaults, irregular deposit notes backed by gold mortages, and timed deposit notes backed by gold mortages.. makes little sense when it comes to gold or money. None of them are gold, and none of them are money in this sense. But all of them could be easily traded for gold, and in this sense they are money. Deposit notes backed by gold mortages are only a worse money than if the mortages that backed them where to risky borrowers at low interest rates.