I did not want to hi-jack the other thread.
In a competitive currency wouldn't frb notes backed up by commodities possibly arise especially if there is no oversight as it is true free banking?Couldn't this breed a sense of distrust of banks especially if a few incidences of "bank runs" etc happen and were reported in the media?I guess independent auditors would also naturally arise but it seems that from observation a certain complicity develops between credit rating agencies and the institution they rate since even if they are not paid directly by them the credit rating agency depends on there existence for their business to profit.Even fiat currencies could arise if a large enough group of people to support a community were convinced to accept them. Does this fit in with competitive currency?Also what if a state democratically decided to start there own currency? Since some taxes would still be collected (even if minimal) the state would only need to proclaim taxes could be paid with the currency and that would immediately give it some value. Would government currency be outlawed?If it were this would take away rights of people in the state who wanted to voluntarily use the state currency.
What if the state gave out the currency for administrative costs only no profit would this disrupt competitive currency?Would federal government be able to issue currency with the same condition namely that it was voluntary?I like the idea of free competitive banking but it does not seem like it should be limited to the private sector as long as it is voluntary since it could serves to create checks and balances as long as the laws applied equally to all.In a free banking economy are there ways to use Gresham's law to surreptitiously undermine other banks then take them over or drive them out of business?
No thoughts on this? I am curious what the Austrian school thinks of ideas such as these.
Have they been explored by the creators of Austrian Economics?
In a free market, because there are no bail outs, banks cannot practice FRB without risking bankruptcy. Furthermore, without the FDIC and similar organizations, people would put their money into safer banks with higher reserve ratios for fear of losing their money in a collapse.
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slider123456: In a competitive currency wouldn't frb notes backed up by commodities possibly arise especially if there is no oversight as it is true free banking?
In a competitive currency wouldn't frb notes backed up by commodities possibly arise especially if there is no oversight as it is true free banking?
Why would a central bank be more reliable than a private bank? central banks even with a commodity base currency have a tendency (and an incentive) to inflate the currency.
slider123456:Couldn't this breed a sense of distrust of banks especially if a few incidences of "bank runs" etc happen and were reported in the media?
The possibility of bank runs is the incentive for banks to have honest practices (i.e. not inflating). Without governmental intervention banks that have bank runs fail and go to bankruptcy. And they would have to face accusations of fraud in case of insolvency.It's in the best interest of the banks for people to trust them with their money.
What about buying your own insurance? You could go to an insurer and tell them you use Bank X and you want coverage in case of bank failure. Insurer rates would be an indicator as to the banks solvency as well. Right?
"The best way to bail out the economy is with liberty, not with federal reserve notes." - pairunoyd
"The vision of the Austrian must be greater than the blindness of the sheeple." - pairunoyd
krazy kaju: In a free market, because there are no bail outs, banks cannot practice FRB without risking bankruptcy. Furthermore, without the FDIC and similar organizations, people would put their money into safer banks with higher reserve ratios for fear of losing their money in a collapse.
If the banks issued notes and not gold coins there would be a temptation for less scrupulous businesses to issue more notes than gold backing it since in some ways this would provide a competitive advantage especially if it is believed getting caught can be avoided. I do not think most banks would do this but wonder how much damage could be inflicted due to Gresham's law and a few bad apples. Also if there are banks operating with reserve ratio's it is a form of fractional reserve banking unless the reserve ratio is 1:1.
CorporateGhost: slider123456:In a competitive currency wouldn't frb notes backed up by commodities possibly arise especially if there is no oversight as it is true free banking?Why would a central bank be more reliable than a private bank? central banks even with a commodity base currency have a tendency (and an incentive) to inflate the currency. slider123456:Couldn't this breed a sense of distrust of banks especially if a few incidences of "bank runs" etc happen and were reported in the media?The possibility of bank runs is the incentive for banks to have honest practices (i.e. not inflating). Without governmental intervention banks that have bank runs fail and go to bankruptcy. And they would have to face accusations of fraud in case of insolvency.It's in the best interest of the banks for people to trust them with their money
slider123456:In a competitive currency wouldn't frb notes backed up by commodities possibly arise especially if there is no oversight as it is true free banking?
I do not think central banks are more reliable at all but frb does not have to be centralized having a fraction of the gold reserves of notes issued would still be fractional reserve. I do believe completely free banking with a level playing field would be more reliable but I am just questioning the mechanisms that would stop inflationary tendencies of dishonest people especially in regards to Gresham's law and decentralized frb.
I think there are also incentives for non-central banks to inflate their currency especially if they are trusted and believe they will get away with it since it can then give them a competitive advantage specifically more profit per reserve amount. I am mostly wondering about what mechanisms would stop dishonest people from taking advantage of this. It seems it could be attractive to dishonest people who would see it as the lucrative ability to print money.
pairunoyd:What about buying your own insurance? You could go to an insurer and tell them you use Bank X and you want coverage in case of bank failure. Insurer rates would be an indicator as to the banks solvency as well. Right?
Yes this does seem to be a good solution. Insurers could demand periodic audits of gold supplies in exchange for insuring them and if they did not conform then the insurance company would announce they will no longer insure them. As a result they would likely lose customers and their money would become devalued due to lack of trust. Also if the insurer announced the reserve ratio the value of that currency would change and if the currency was inflating quickly the demand would go down making it worth even less due to distrust. The only problems I see are a conflict of interest since the insurer gains by the bank paying them and volatility of trust in banks if fraud occurred a few times especially on a big scale.
Any comments on potential voluntary state based or private currencies that were not backed up by reserves but by the assets of the borrower?
What does Gresham's Law have to do with anything? You're aware of when it obtains, right?
Keep in mind that it's not just consumers who have an interest in sound banks. Other banks and business owners all do too, because ultimately they must redeem the notes they receive from consumers. If these are subpar, they will trade at a discount. If a bank systematically deceives its consumers, and this is found out, it'll be subjected to a brutal bank run. I don't see much leeway for such practises in a freed market.
Freedom of markets is positively correlated with the degree of evolution in any society...
I am mainly talking about the principle of Gresham's law where a dishonest bank circulates more notes (assuming notes are currency not coins) than reserves that back them. I wanted to know if this could be used to get a competitive advantage by a dishonest bank. I am mainly wondering about potential incentives for dishonesty and how much effect it could have on the system as a whole especially in regards to past competitive currencies. I understand that consumers and other banks have an interest in knowing the true worth of bank notes but wanted to know how this could/would be discovered in a competitive currency free market economy.
Gresham's Law only becomes operative if there's a mandated exchange rate which undervalues one of the two currencies relative to the other, e.g. silver to gold. Say gold becomes undervalued. It then becomes advantageous to buy it up, flooding the market with silver and removing gold from circulation. When exchange rates fluctuate freely there is no such issue.
Jon Irenicus: Gresham's Law only becomes operative if there's a mandated exchange rate which undervalues one of the two currencies relative to the other, e.g. silver to gold. Say gold becomes undervalued. It then becomes advantageous to buy it up, flooding the market with silver and removing gold from circulation. When exchange rates fluctuate freely there is no such issue.
That is why I said the principle of Gresham's Law in the last post. If a dishonest bank were lending out twice as many notes than their stated reserves there is a similarity to a "debased" coin in that the money would be worth less than face value and would be lent out more often and therefore circulate more. The money would be debased but the only people who would have knowledge of this to use it to their advantage would be the bank. This "debased" money would be in greater supply through loans and would slowly remove other notes from circulation if it's true worth was not discovered since they would be collecting more interest on their reserves and would eventually acquire their competitors gold reserves.. If the exchange rate floated correctly this would not be a problem since it would indicate the banks money was losing value and was therefore "bad". I am just wondering what processes have in the past or could in the future be used to discover the true value of the money in case of dishonesty. To me it seems this could be seen as a competitive advantage to a dishonest bank and provides the incentive of collecting more interest per reserve than other banks.
Easy. All other banks have to do is demand it reveal its reserves, or else refuse to do business with it. This will give consumers a cue that something is not right. The bank can refuse, and saw off the branch upon which it sits. Insurances, as you mentioned, can also make a similar demand, though I don't think it'd be necessary. The above though has nothing to do with Gresham's Law, because here it is believed that the currency is of a higher value than it actually is, whereas in the case of said Law it is known that its over/undervalued. So basically it's a matter of uncovering fraud. The minute the notes' true value is revealed, they will begin falling out of circulation and will only trade at a discounted rate. Notes with little to no backing will become worthless, and then the bank in question will be liable for its fraudulent practises in addition to suffering a bank run.
So you basically believe transparency will become the price of doing business?
I had considered this since customers would be drawn to the most transparent and therefore hopefully the most trustworthy business causing it to be a selling point.
I was also thinking that means of measuring currency circulation could arise that would point out statistical anomalies such as currency with half the reserves circulating 4x as much.
Any comments on the role other currencies could play such as currencies backed by collateral or voluntary state currencies?
Just wondering if competitive currency would lock out state or other innovative currency ideas which were not enforced but voluntary?
Also do you think currencies have to be backed by gold or silver or could they also be backed by other assets/collateral at market value similar to the real bills doctrine minus iou's and promises to pay in competition to gold standard etc where there would be incentives not to inflate since the money would become worthless and other banks and customers would not accept it?
It already is the price of doing business in many non-socialized markets. Re the backing of the currency, it can be anything consumers consider valuable, though some things are less marketable than others, hence less suitable as currency, though theoretically almost any commodity that is exchangeable can act as backing... precious metals just carry with them a number of advantages (high value/weight ratio, portable, durable, divisible, relatively scarce, slow rate of growth of supply &c.) If a currency provider can demonstrate to a prospective consumer that their currency is marketable to the extent the consumer wishes it to be (affecting whether it trades at a discount or not, or not at all), that it is capable of fulfilling redemption requests and so on, their currency will be accordingly more or less competitive. TBH, I really do not see why a free market in currency is such an issue for some people.
For me when the idea is constrained to gold only it seems to restrictive. In the past the standard was gold or silver but there have been alot of advances that have happened since then that open up new avenues for innovation and creativity which have never been experimented with, at least not in the last century. In a completely open and competitive bank market with no constraints I think the best ideas would dominate and competing currencies would serve as checks and balances that would complement one another. Also most of the drawbacks of the past could be overcome with current technology.
So you think competing currencies such as local, gold or commodity backed, real bill doctrine type, state scrip type and any other currencies that might be thought up should all be allowed as long as there is a voluntary consumer demand for them?
I do not know which of these would be accepted with enough demand to make them a reality but if the possibility existed that all of these could arise there would be a lot of freedom for individual choice and a lot of checks and balances that could counter inflationary tendencies.
I think a free market currency is hard for most people to understand and accept because money is such a mystery to most people and monetary reform is basically never discussed in the main stream media.
The gold standard is usually meant as a shackle on the government, not so much private citizens. The consistent Austrolibertarian must embrace a free market in currency. That doesn't mean "anything goes" of course, because fraudulent practises would still be outlawed and punished, but so long as the parties involved consent to what is going on, there's no real problem.