I am a layperson only recently exposed to the Austrian school of economics. I'm fascinated by it and I'm buying what you're selling. I do have a question:
I've read a few books by Murray Rothbard and he's critical of the fractional reserve banking system. What I do not understand: without fractional resreve banking, how can money be loaned and how could a bank possibly pay me interest? I certainly understand the risk of fractional reserve banking, especially when rerserve requirement is very low but I don't understand what the alternative is.
Thanks for your answer.
But - how do you loan the first dollar? i.e., if, as a bank, all my deposits must be backed, isn't 100% of my money not loanable?
This is an easy answer:
There are a bunch of ways to get money without making fractional reserve loans on deposits that users can claim immediately:
1. Most Common: Issue equity. That is you sell ownership in a bank, normally done through stock holders but can be done through a mutual system. In either case the investors are not contractually obligated to be paid the money back. Understand that if the bank makes more than the interest rates then the investors get more money paid back. There are many more insurance companies that use the mutual system and it has advantages.
2. Contract deposits now for money later. A certificate of deposit is an example. The agreement for higher interest rates means the depositor has limit access to their deposit unlike a checking account or passbook savings. This method includes selling long term bonds.
In all likelyhood there would arise, in a stateless society, two different kinds of institutions.
The first would be a true financial intermediary, who would facilitate the loaning of money. There profits would be the result of arbitrage. For example, person A comes to the bank offering them money for 5% per annum, they would then lend this money at a rate higher than that and (e.g. 6% per annum) and then pocket the difference as a profit.
The second would be more like a warehousing business with whom individuals would conduct a monetary irregular deposit contract. The bank would charge a sum of money in order to guard the gold (or whatever other commodity) and this is how they would make money.
"You don't need a weatherman to know which way the wind blows"
dmuldoon:how do you loan the first dollar?
You have to get a depositor (or an investor) to allow you to do so. That's what a CD is for example. Remember you only need to maintain 100% backing for demand deposits.
The definitive work on this subject from an Austrin perspective is De Soto's book Money, Bank Credit, and Economic Cycles. It's available online in pdf format here.
"most of the drivel on this thread"
I know I should be more diplomatic, but I don't know how to express my frustration. Money is always a future promised value. It is never in stored histroric value. Everyone in this thread and elsewhere talks of money as being a storage of historic value, and that only unravels into extremist nonsense. I know your notion comes from Keynes and Smith, but that is only one of the reasons that the world would be better off with their works in the trash.
"I don't know how to express my frustration"
I think maturity demands that we *don't* express our frustration: the way we feel about things is our business, not everyone else's. Deal with frustration by acknowledging it and attempting to understand its cause, and then turn it into quality actions. IOW: don't express your frustration. Attempt to effect change.
"I know your notion comes from Keynes and Smith"
I have no idea what you are talking about, but I think even you could use some lessons on the austrian conception of money and currency. They are not the same thing. *Money* is a commodity, so of course it's a store of value; but the stuff that circulates (currency) is not "money" (generally: coins I think it is fair to call both money and currency), it is, as you say, a future promised value (it is in essence an IOU).
To be concrete: in a free society, gold is likely to emerge as "money", the telltale sign of which is: it is the unit in which economic calculation is done. If people are pricing things in gold, thinking about profit and less in gold, etc., then gold is their "money". However, what is circulating is not gold (or title to gold), *even though it is denominated in units of gold*. My bank's currency is an IOU that says "I owe the holder of this IOU a certain amount of gold", but the fact that it is in units of gold does not make it "money": gold is still the money. In fact, depending on the trustworthiness of that promise, you might sell my IOU for a smaller-than-face-value amount of actual gold, helping to illustrate the gaping conceptual difference between the two.
"money and currency. They are not the same thing."
I think this is a artificial distinction.
"*Money* is a commodity, so of course it's a store of value;"
You cannot eat it wear it live in it or consume it in any way. Money is the most useless things in our society. Money has no store of value. It has no value in and of itself. It is a promise of future value.
"in a free society, gold is likely to emerge as "money",
No. Gold was used as the debt marker and so became valued for the promise it represented. Money is useless without the promise behind it, and in a totally free society, banks would not long survive. Money is a product of the banking system in a protective society. Without the banks, gold would become a rather useless metal, too soft for any real use.