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Money and Banking within a Constitutional United States

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Conservative-Libertarian Posted: Sat, Aug 4 2012 6:17 PM

This post is somewhat of a question, but more of a discussion topic.

The purpose of this topic is to gain a consensus on what message Austrians should convey to the American people in order to gain success in the political realm. Most hear "End the Fed", and either don't know what the Fed is or think ending it is crazy, and that there is no plan to "replace" it. Of course, none of us Austrians want to replace the central bank with another, but we do need to be able to communicate what life without the Fed would be like. If we are serious about ending the Federal Reserve, we need a serious consensus plan. I don't expect it to be written in this thread, but we should start on it, and present the idea to the Mises Institute for a new Political Platform for Constitutional Money and Banking.

This topic excludes plans for anarchy or any other kind of political system, instead focusing on viable options within an originalist interpreted Constitutional United States.

The Constitution grants the government the power power to coin money, which it accepts as taxes. So, under this system there will be government issued currency.

I expect most Austrians would then propose a classical gold standard. Does anybody happen to support a silver standard or other sort of standard?

Easily accessible and understandable rebutals to anti-commodity standard money are necessary for educating the public. Books are simply too long for most people.

Competing currencies are perfectly legal under the Constitution, and the laws outlawing preventing them are not authorized, at least on a federal level. However, states are not allowed to issue their own currencies. I also assume most, if not all Austrians support competing currencies as well.

It would be instructive for explanations on how competing currencies help the economy, and how fraud is prevented in such a system.

I understand that there is a schism in the Austrian school on the ideal banking system. The "free banking" Hayekian group and the "full reserve banking " Rothbardians. Obviously, both are preferable to the current system. Free banking treats banks as any other business under the rule of law, with fractional reserve banking being legal and subject to market competition. By contrast, (mandatory) 100-reserve advocates believe that fractional reserve banking is fraud and leads to bank runs and credit cycles, so there must be a legal full reserve standard.

While I don't think it will ever happen, it would be best to present a consensus in this area to the public as well. In lieu of that, pro's and con's of both systems from economic and moral perspectives would be helpful.

Please discuss the aforementioned ideas and conflicts. I don't understand everything fully myself, and I am sure most others don't either. smiley

P.S.

Here are general guidelines for discussion in bullet format:

1-Standard discussions for United States dollar.

2-Discussions on competiting currencies.

3-Free banking vs. Full reserve banking.

 

 

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Look at ron paul.

Overall we need to minimize the role of government as a whole, not just in banking.

Minarchise then anarchise.

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Ron Paul is awesome.

However, he has not articulated the points I listed above effectively.

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hE advocates competition in currency. He does not automatically want to abolish the fed ---> audit the fed bill

He is taking steps.

He wants to expose the fed in light that other members may see what bullshit the fed is doing.

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
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cab21 replied on Sat, Aug 4 2012 8:15 PM

http://www.artforcongress.com/issues/sound-money how does this one work for you?

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Most people don't know how the Fed works. I didn't, until recently. I'm afraid any complex discussion of money theory is not going to resonate with people who are worried about jobs.

I'm unclear on how a 100% reserve would work. How could they offer loans? If only on money beyond cash holdings, it would favor giant banks and erode competition. 

Let's start with not spending more money than we take in, and not bailing out banks that are corrupt and/or make bad investments. Require war bonds to fund optional wars, i.e. wars where we are not attacked directly (every American war since WWII). Then, I think the issues of broader banking changes could be seriously considered by most Americans. Agreed that it should remain a standard government currency; a common tool is needed for free markets in the Internet age. Beyond that... Not sure. Reserve sounds sensible, but may have flaws I'm not aware of.

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100% reserve banks could loan a amount of money when they require your payment to store the money in the first place, but generally i dont see how they could loan to others. Actually i have no fucking idea how the lending would work, im reading on it right now.

You can also have an option to put it in a savings account where they loan that to other entities at which you get a few percent back.

It depends on which ever kinds of services people are demanding.

As for ABCT and the credit expansion cause by the central bank:

Go to 4:27

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100% reserves does not mean they have 100% of all deposits on hand.  Banks will be pushing customers for investment in CD type investments.  If someone buys a 2 year CD that they cant touch for 2 years, that means the banks can loan out that money.  The bank cant loan out money that a depositor can take out at anytime.  Banks would also start putting profits back into the company rather than giving them all out as bonuses.  So they would start lending on there own profits too. Imagine that?!  A bank being forced to operate like EVERY other company.  Returns on CDs would jump up a bunch because they will need it so the people would start making some money too!  Banks will probably even offer to their customers to invest on loans too.

 

as to the question at hand.  Ive thought about this and im not quite sure either.  The Ron Paul 'competing currency' is a load of crap FYI.  Ive said it on the board before, but competing currency would not work.  I'm almost positive Ron Paul knows it too.  When he suggests competing currency, like he did to bernanke, he is just proving that the fed and the US dollar is worthless.  He knows bernanke cant have competing currencies because they wont compete.  NO ONE would want federal notes if they could have gold notes.  There can be competing fiat currency and competing commodity currency like gold vs silver.  But a fiat vs gold?  fiat would go down in a ball of burning glory.  When Ron Paul says it too he wants you, the individual, to think.  He wants people who dont know how bad fiat currency is to ask themselves, 'ya, why cant i choose?  this is America! and i cant use gold as currency?  why wont the fed let me do it?'  Some people might say 'wait what? my dollar isnt backed by gold!?!? WHEN DID THIS HAPPEN?' haha, tons of people still dont know we arent on the gold standard.  Also if we have competing currency when fed notes fail the people will lose whole life savings.  We cant expect the average American to understand the theory of money.

So the most important thing is the smoothest transition to gold.  The smoothest transition would be doing the exact opposite of what when we went off the gold standard.  First we need to have enough gold to back up our current money supply 1 to 1.  Ive heard arguments even from austrians that it isnt a bad thing for the government to have a set price for gold, but i havent really understood why.  I think they are just advocating to just get money backed by gold anyway possible.  But i would like 1 to 1 against market value for gold.  So gold doesnt just flood in and out of the country.  So after the Audit of the Fed and we find how much gold this country/fed has we then start buying up (in secret) enough gold to cover our market.  We then tell everyone that in X out of time they/we will go on a gold standard and you will get new notes that can be exchanged for gold at any bank.  We tell everyone how much gold we now have so the market is aware, and we wait.  We wait for the gold prices to settle then on X date say go to your banks and exchange any cash you have for the new currency.  We then pay off ALL our debt with the old worthless currency and apologize but here you go.  Maybe next time you dont make deals with slave masters without getting the slaves permission.

whatever we do we have to have time for the market to prepare for it.  We wont be able to afford to bail anyone out and it wouldnt be moral to let people go bankrupt because of a change in policy.

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I get it.

Its easier to have 1 currency competiton law than it is to work with shitty congress to pass a bunch of laws instituting the gold standard back again.

Any transition no matter how "smooth" you try to make it will still have repercussions.

The average joe probably doesnt even know that gold was ever a currency.

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cab21 replied on Sun, Aug 5 2012 1:03 AM

there is not enought gold in the world to cover all the fiat money out there, at least mined gold, so i'm not sure a 1-1 ratio would work

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ummm...... the money supply is irrelevant.  You can multiply all the fiat currency in the world by 10000x and base it off a single gold ounce.

what i was saying is say the market price for 1 oz of gold is $1500.  So just match it for our current supply of currency.

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if what youre saying is you think there is only say a trillion dollars worth of gold out there then guess what the price of gold will rise because there is demand for more gold.  so yes gold will rise and id assume a lot since all fiat currency is backed by other fiat currency.  so if we goto gold other countries will too.  i dont think its a stretch to say gold will be well over 10k-20k an ounce.

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The whole point of a gold standard is to link the green paper to something tangible that has been seen as legitimate money, and of course to limit how many green pieces of paper you have.

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
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well i know that hah.  i was just saying how many fed notes in the world today doesnt matter when you transition to a gold standard. 

If somehow a fiat currency can create more value then any commodity then going to a gold standard would be detrimental. which is exactly what "there is not enough gold in the world to cover all the fiat money out there" would mean.

 

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I'm unclear on how a 100% reserve would work. How could they offer loans? If only on money beyond cash holdings, it would favor giant banks and erode competition.

All austrians don't support 100% reserves. Rothbard did when he was older, but Hayek and Mises didn't.

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100% reserves does not mean they have 100% of all deposits on hand.  Banks will be pushing customers for investment in CD type investments.  If someone buys a 2 year CD that they cant touch for 2 years, that means the banks can loan out that money.  The bank cant loan out money that a depositor can take out at anytime.  Banks would also start putting profits back into the company rather than giving them all out as bonuses.  So they would start lending on there own profits too. Imagine that?!  A bank being forced to operate like EVERY other company.  Returns on CDs would jump up a bunch because they will need it so the people would start making some money too!  Banks will probably even offer to their customers to invest on loans too.

 

as to the question at hand.  Ive thought about this and im not quite sure either.  The Ron Paul 'competing currency' is a load of crap FYI.  Ive said it on the board before, but competing currency would not work.  I'm almost positive Ron Paul knows it too.  When he suggests competing currency, like he did to bernanke, he is just proving that the fed and the US dollar is worthless.  He knows bernanke cant have competing currencies because they wont compete.  NO ONE would want federal notes if they could have gold notes.  There can be competing fiat currency and competing commodity currency like gold vs silver.  But a fiat vs gold?  fiat would go down in a ball of burning glory.  When Ron Paul says it too he wants you, the individual, to think.  He wants people who dont know how bad fiat currency is to ask themselves, 'ya, why cant i choose?  this is America! and i cant use gold as currency?  why wont the fed let me do it?'  Some people might say 'wait what? my dollar isnt backed by gold!?!? WHEN DID THIS HAPPEN?' haha, tons of people still dont know we arent on the gold standard.  Also if we have competing currency when fed notes fail the people will lose whole life savings.  We cant expect the average American to understand the theory of money.

So the most important thing is the smoothest transition to gold.  The smoothest transition would be doing the exact opposite of what when we went off the gold standard.  First we need to have enough gold to back up our current money supply 1 to 1.  Ive heard arguments even from austrians that it isnt a bad thing for the government to have a set price for gold, but i havent really understood why.  I think they are just advocating to just get money backed by gold anyway possible.  But i would like 1 to 1 against market value for gold.  So gold doesnt just flood in and out of the country.  So after the Audit of the Fed and we find how much gold this country/fed has we then start buying up (in secret) enough gold to cover our market.  We then tell everyone that in X out of time they/we will go on a gold standard and you will get new notes that can be exchanged for gold at any bank.  We tell everyone how much gold we now have so the market is aware, and we wait.  We wait for the gold prices to settle then on X date say go to your banks and exchange any cash you have for the new currency.  We then pay off ALL our debt with the old worthless currency and apologize but here you go.  Maybe next time you dont make deals with slave masters without getting the slaves permission.

whatever we do we have to have time for the market to prepare for it.  We wont be able to afford to bail anyone out and it wouldnt be moral to let people go bankrupt because of a change in policy.

So do you propose we set a 100% reserve requirement?

I am more in the "free banking" school. Let competition set reserve rates. Those banks with higher reserve rates are going to get the money. I propose that (voluntarily), banks always keep at least as much cash on hand as the highest depositor has in his account, plus extra for day to day transactions, that way bank runs are not likely to happen. With a 10% reserve, banks runs are likely to happen. 70% for example, not so much.

I think bitcoins are interesting as a currency as well.

The dollar should be set to the price of GOLD, not the price of gold to the DOLLAR. Otherwise it is just a phony gold standard. You might as well back the currency with copper and set the price of copper. The point is, the government is still setting the currency value at what they desire, not the market.

Isn't there a gold depository at the New York Fed? I may be thinking of Fort Knox. Anyways, I have heard the Treasury is now doing an audit.

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Excellent point.

And as I mentioned, we wouldn't have to carry a 1500 dollar gold coin around.

You could deposit the gold in a bank or state depository and have a debit card based on the value of those holdings. The account value would fluctate based on the gold market.

Missouri state Rep. Paul Curtman has a great idea.

http://www.youtube.com/watch?v=97q-7N9YNvM
 

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i think it has to be 100% reserves because if it isnt it is inflationary and then that would be stealing other people's money.  I understand the argument if the banks that risk are allowed to fail then the best bankers will rise to the top, and be more conservative.  Also the investor will understand that they are banking at a high risk bank, but the people that arent banking with them are losing their money with the inflation without their permission.  There is another option for fractional reserve banking. If a bank has their own personal currency, not gold or silver, but their OWN fiat currency.  They can practice fractional reserve banking with that currency and everyone who accepts it understands what it is.  It would act pretty much the same way as stock shares.  They will probably back it up with a known  amount of gold in case of a bank failure so the customer would take a loss, but when the company liquidates every share gets their percentage of gold (10 cents on the dollar or whatever their back up percentage is.  They would also probably give the shares monthly, quarterly, ect dividends or something.  I dont think that would be inflationary, if anyone thinks so i would like to know.  If they made the notes gold on demand that would be inflationary so i dont think that should be allowed.

I think the free market would come up with ways to for credit expansion while keeping a 100% reserve requirement.  Banks will get a million times more creative of convincing people to lock their deposits in for 'x' amount of time.  First of all banks arent giving us ANYTHING right now.  The return rates we have now might as well be 0.  Think how many more people would save in year long CDs if returns are say 8%.  If they are going to loan out your money to someone to buy a car at 10% (one of my former Marines had a car loan at 22%) then why shouldnt we get the lions share if it is our money they are loaning?  Yes, banking will not make near the profits, but lets be honest do they validate those profits?  are they creating the money or the people depositing the money?  Banking will be boring and will not make near the money, but they really dont do anything.  Wall Street should still make their money though.

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I understand that fractional reserve lending is inflationary, however I do not believe it is stealing peoples money any more than discovering a new gold mine would be. Or how a foreclosure devalues the property values of an entire neighborhood.

I believe that competing currencies are more likely to be legalized before we get rid of the Fed/return to a gold standard, so that mechanism for avoiding inflation.

 

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