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Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Wed, 05 Sep 2012 05:53:36 GMT

I was reading through an article by Joesph Salerno about the TMS (true money supply), when I happened to come across an interesting comment which relates to our discussion of FRB:

...travelers' checks issued by nonbank financial institutions, such as American Express, are excluded from the TMS because they neither are riskfree claims to immediate cash nor serve as final means of payment in transactions. What a travelers' check represents from an economic point of view is a credit claim on the investment portfolio of the issuing company. The purchase of travelers' checks from American Express involves, in effect, a "call" loan by the purchaser to American Express, which the latter pledges to repay to the purchaser or to a designated third party at an unspecified date in the future. In the meantime, most of the proceeds of such loans are invested by American Express on its own account in interest bearing assets, while a fraction is held in the form of demand deposits to meet anticipated payments of its travelers' check liabilitias they "mature." In exchange for the foregone interest (and a small fee) the purchaser receives access to an alternative payments system which avoids the risk of loss associated with carrying cash payments and the potential delay or nonacceptance involved with payment by personal check drawn on a distant bank. But the travelers' checks themselves are not the final means of payment in a transaction: the sellers who receive travelers' checks in exchange quickly and routinely present them for final payment at a bank and obtain either cash or a credit to their demand deposit accounts, with the sums paid out ultimately being debited to the demand deposit account of American Express. Moreover, in the highly unlikely event that financial reverses force the issuing company into institutional liquidation, the holders of its outstanding stock of travelers' checks would be, economically and legally, in the same boat as debtholders of any insolvent business firm, having no political guarantee of a dollar-for-dollar payoff of their debt claims...

See page 2, right side.

http://mises.org/journals/aen/aen6_4_1.pdf

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Sat, 25 Aug 2012 00:33:35 GMT

I'm asking how they're exchanged at par. It is because they're exchanged at par that people don't bother to redeem them and why the bank is able to keep a very small amount of reserves

They don't trade at par, as I already said:

When did I say they must trade at par? When a bank increases its reserve ratio, that additional risk should result in a discounting of their banknotes on the open market. That is exactly how it worked in the 19th century when each bank issued its own banknotes.

I repeat, if the bank has more notes oustanding that it can redeem at any one time, their banknotes are going to be discounted accordingly.

Yes Money is whatever people use as money, but that doesn't solve your problem that supply is having no affect on the value of the bank note with respect to the specie it is backed by despite the fact that the former is constantly fluctuating with respect to the latter

Again, when did I say supply has no effect on the value of the bank note? I have been saying the exact opposite. The more banknotes the bank has oustanding, relative its reserves, the less the banknote is worth on the market.

This would be the same as if you had two banks, one full reserve bank issuing notes backed by 100% gold, and one FRB pyramiding its notes on top of its gold reserves, and their notes both trading at par with respect to gold. How can that be unless the FRB notes are simply masquarding as also 100% notes.

It can't be. The banknotes of an FRB with 10:1 reserve ratio and the banknotes of a bank with 5:1 reserve ratio would not trade the same value on the market. What the notes trade for on the market is distinct from what the bank will redeem them for. A note from a FRB bank might trade at $.80 on the dollar on the market, but that doesn't mean that when you walk into the bank they give you $.80. They will give you par, unless they cannot, in which case they have gone bankrupt. The discount from par on the open market reflects the risk of bankruptcy. The same with any bond.

Now I know you understand this problem because you initially responded by falsely claiming that the value on the notes for each bank does fluctuate to reflect these changes in supply,

What? Did you mean the value of the notes?That's what I've claimed - that the value of the notes on the market will fluctuate with the reserve ratio. I certainly didn't claim that the value on the notes (as in, what's printed on them? what the bank will redeem them for?) will change, as that's totally absurd. The bank redeems them at par unless it cannot, in which case it's bankrupt. What the notes trade for on the market is a separate issue.

however, you seemed to have realized this is nonsense

It is nonsense, hence I never stated it!

Re: Forbes S**** on Ron Paul and Murray Rothbard

DD5 — Fri, 24 Aug 2012 23:33:32 GMT

Minarchist:
You're asking me how the bank redeems notes at par if they don't have enough reserves to redeem all outstanding notes at one time?

No, I'm asking how they're exchanged at par. It is because they're exchanged at par that people don't bother to redeem them and why the bank is able to keep a very small amount of reserves.. And so, you still haven't answered the question.

Yes Money is whatever people use as money, but that doesn't solve your problem that supply is having no affect on the value of the bank note with respect to the specie it is backed by despite the fact that the former is constantly fluctuating with respect to the latter. This would be the same as if you had two banks, one full reserve bank issuing notes backed by 100% gold, and one FRB pyramiding its notes on top of its gold reserves, and their notes both trading at par with respect to gold. How can that be unless the FRB notes are simply masquarding as also 100% notes. Now I know you understand this problem because you initially responded by falsely claiming that the value on the notes for each bank does fluctuate to reflect these changes in supply, however, you seemed to have realized this is nonsense and so you are now just evading the prolem in my opinion.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Fri, 24 Aug 2012 21:52:05 GMT

You've already conceded the point before that a fractional reserve bank promising to redeem on demand is committing fraud by misappropriation.

No, I have conceded that a bank which takes deposits and loans them out is committing fraud by misappropriation. The fraud lies in the bank making an agreement with its customers to hold their funds in bailment, and then contrary to that agreement loaning out the funds. Whereas, when a bank makes an agreement with its customer to accept a loan, and the bank then loan out the funds its borrowed, there is no fraud.

It seems to me that you've now evaded the main issue so you can go back to arguing according to your terms

What point of yours have I allegedly evaded that you would like me to now address?

What is the client doing when depositing money in the bank. Is it a demand deposit or not...

If the client is depositing money in the bank then it's a deposit.

If he is making a call loan to the bank then it's a call loan.

...and?

These are hypotheticals! There is no right answer to whether the customer is doing one thing or the other. We posit that he is doing one or the other. We say "for the sake of argument, suppose the customer...." and go from there.

I'm saying, if the customer is making a loan, and the bank loans out the funds, there is no fraud.

If the customer is making a deposit, and the bank loans out the funds, there is fraud, because the bank is acting contrary to the agreement with the customer.

And so I ask you again how they are being exchanged at par when their supply exceeds the amount of specie?

You're asking me how the bank redeems notes at par if they don't have enough reserves to redeem all outstanding notes at one time? The answer is: they don't redeem all outstanding notes at once. If the bank finds itself in a situation where they get for redemption demands than they can cover, they go bankrupt.

...and?

Maybe you don't quite understand the problem here, so I'll elaborate again.

Indeed, I don't follow your argument.

A bank note that says on it 1oz gold redeemable on demand is being exchanged as a money substitute for 1oz gold. Yet there are multiple 1 oz gold notes for every 1 oz of gold. How can this be? It's as if US dollars are doulbed in quantity relative to, say, English Pounds, yet their exchange rate remains fixed.

I really think you're getting tripped up by thinking about banknotes as money. Money is whatever people use as money. Whether a town, for example, chooses to use the notes issued by the local bank as money has no bearing on the nature of those notes as such. Think about what the nots actually are. Ex hypothesi, they are not warehouse receipts; the agreement between bank and customer is not for the bank to hold the customer's funds in bailment. The bank has borrowed money from the customer, with which the bank can do whatever it pleases. The banknotes are securities. Just as the piece of paper a bank gives you for making a time deposit are securities. How much money the lender happens to have stashed away to repay future liabilities has no bearing on whether or not those liabilities are legitimate to being with.

Re: Forbes S**** on Ron Paul and Murray Rothbard

DD5 — Fri, 24 Aug 2012 21:07:17 GMT

Minarchist:
It seems to me that from your claim that a FRB commits fraud by.................

It seems to me that you've now evaded the main issue so you can go back to arguing according to your terms

Minarchist:
it should follow that a pure time deposit bank also commits fraud by not keeping reserves against the risk of loan defaults.

You've already conceded the point before that a fractional reserve bank promising to redeem on demand is committing fraud by misappropriation. It is up there in black and white. I actually considered that progress. So why are you now again making the false comparison unless you wanted to change your position again and argue that misapropriation is not fraud after all?

So the only relevant question that remains is whether the bank committs misapropriation or not. What is the client doing when depositing money in the bank. Is it a demand deposit or not...

Minarchist:
I am talking about banks issuing redeemable notes.

And so I ask you again how they are being exchanged at par when their supply exceeds the amount of specie? Maybe you don't quite understand the problem here, so I'll elaborate again. A bank note that says on it 1oz gold redeemable on demand is being exchanged as a money substitute for 1oz gold. Yet there are multiple 1 oz gold notes for every 1 oz of gold. How can this be? It's as if US dollars are doulbed in quantity relative to, say, English Pounds, yet their exchange rate remains fixed.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Fri, 24 Aug 2012 20:27:45 GMT

Notes not trading at par means there is no specie to back them up. Banks issueing their own notes in a sort of competitive currency system where their notes are not backed by any specie is not an FRB where notes are backed by specie by definition. The latter is what has existed throughout history and not the former. With the latter, notes are traded at par until it is suspected that the bank cannot fully meet its obligation, at which point the value of the notes diminishes almost instantly and a run on the bank begins. I don't know where you get your history on banking but it is certainly not from either side of the debate - full reserve free banking or " FR free banking".

Your idea of competing currencies does not exist and never has. It cannot exist in theory if backed by specie. It is not a fractional reserve bank. It has been suggested that this type of private competitive "fiat" money system can evolve out of the current system. F.A. Hayek first proposed it and ever since it has been controversial among Austrians.

I am talking about banks issuing redeemable notes.

Anyway, let me ask you this: if a bank takes a time deposit (fixed term loan) from one customer, and then loans out the money to another customer, and that customer defaults on the loan, and when the time comes for the bank to repay its debt to the first customer the bank is unable, did the bank commit fraud?

It seems to me that from your claim that a FRB commits fraud by not keeping full reserves against the risk of a bank run, it should follow that a pure time deposit bank also commits fraud by not keeping reserves against the risk of loan defaults. In each case, the bank failed to keep a sufficient reserve to ensure that their creditors would be repaid in any eventuality.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Esuric — Fri, 24 Aug 2012 19:22:25 GMT

DD5:
Your idea of competing currencies does not exist and never has. It cannot exist in theory if backed by specie. It is not a fractional reserve bank. It has been suggested that this type of private competitive "fiat" money system can evolve out of the current system. F.A. Hayek first proposed it and ever since it has been controversial among Austrians.

I’m not sure if I understand what you're saying here, and I must admit that I haven’t been following this thread, but banks have been competing amongst each other, in the issuance of bank-money ('out-side money' or 'money substitutes') at least, for quite some time (up until relatively recently, in fact). Whenever a bank extended the issue of its notes/credit money beyond the demand for them, its solvency would come into question, and whenever a bank’s solvency came into question, the market would discount its notes accordingly (through the flow of gold reserves, historically) and that bank would become more susceptible to bank runs.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Esuric — Fri, 24 Aug 2012 18:05:14 GMT

He is calling in his loan, which the bank must then pay on demand (i.e. give him the gold). If the bank cannot pay, it is in default. It did not committ fraud.

It is fraud if and only if the 'call loan' is explicitly guaranteed. As far as I'm aware, no such explicit guarantee exists (though the government implicitly makes one on behalf of the banking system in the forms of various types of pseudo-insurance).

Re: Forbes S**** on Ron Paul and Murray Rothbard

DD5 — Fri, 24 Aug 2012 17:42:54 GMT

Minarchist:
Again, who said they're being traded at par?

Notes not trading at par means there is no specie to back them up. Banks issueing their own notes in a sort of competitive currency system where their notes are not backed by any specie is not an FRB where notes are backed by specie by definition. The latter is what has existed throughout history and not the former. With the latter, notes are traded at par until it is suspected that the bank cannot fully meet its obligation, at which point the value of the notes diminishes almost instantly and a run on the bank begins. I don't know where you get your history on banking but it is certainly not from either side of the debate - full reserve free banking or " FR free banking".

Your idea of competing currencies does not exist and never has. It cannot exist in theory if backed by specie. It is not a fractional reserve bank. It has been suggested that this type of private competitive "fiat" money system can evolve out of the current system. F.A. Hayek first proposed it and ever since it has been controversial among Austrians.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Fri, 24 Aug 2012 16:52:32 GMT

You think that by using the term "call loans" you can do away with the minor little inconvience that there are suddenly multiple tittles to the same piece of property, a logical impossibility that you cannot simply contract away.

No, I simply reject your assertion that there are multiple titles to the same piece of property. If a customer makes a call loan to the bank, the bank has sole title to those loaned funds, and the customer has sole title to the resulting security. Instead of a single bond certificate which entitles the bearer to be repaid the full amount at a certain date, the customer has banknotes, or checks, which allow him to call in any portion of the loan at any time.

For the fact is that people do deposit their cash in a bank in order to increase their cash balance. And this fact is not even disputed by the most prominent FR free bankers such as Selgin and White so you are being quite "original" with your "call loan" theory.

What people actually do now in our present banking system is irrelevant. It may be that FRB as it stands is fraudulent, because the banks do mislead the customers into believing they are making deposits when they are really making call loans. But it need not be that way. It is entirely possible for the customer and the bank to both acknowledge that the "demand deposit" is a loan, in which case there is no fraud.

However, here is why what you claim cannot be. At the end of day, even in your "call loans" system, you have multiple notes/tickets/claims or whatever you want to call them all promising to be redeemed on demand at face value, while there is not enough money should they all demand at the same time what they all believe they are contractually entittled to.

I have already addressed this point. If a lender is unable to repay the loan, that is not fraud, that is default.

Now here is the question for you - How in the world are these bank notes being traded at par when their supply exceeds the supply of specie/cash that they are backed by? What happend to the law of supply and demand in your system?

When did I say they must trade at par? When a bank increases its reserve ratio, that additional risk should result in a discounting of their banknotes on the open market. That is exactly how it worked in the 19th century when each bank issued its own banknotes.

But if there are, say, 10 times the amount of paper claims with face value of 1 oz then actual amount of gold, how are they being traded at par?

Again, who said they're being traded at par?

Re: Forbes S**** on Ron Paul and Murray Rothbard

Esuric — Fri, 24 Aug 2012 16:26:10 GMT

The Author is flatly incorrect when he/she states:

Forbes:
About Rothbard’s assertion, underlying it is a fanciful belief that the alleged “money multiplier” is fact as opposed to fiction. It’s the latter.........

In truth, just as there are no sellers without buyers, there are no borrowers without savers; thus rendering the very notion of a money multiplier moot. $1 million doesn’t multiply into $10 million if it changes hands enough times; rather for someone to borrow someone else must be willing to cease using money in the near-term so that they can.

It's true that banks do not control the total supply of base-money (cash, or m0, or 'high-powered' money) but their activities, namely the creation of various forms of credit money, do indeed expand the supply of 'money' in the broader sense (m1, m2, m3, mzm). This is why cash is referred to as "base-money" in the first place. In other words, they take base money and begin pyramiding other forms of money (bank money and credit instruments) on top of it, effectively increasing the total money supply. This has been commonly understood by economists since the mid 19th century (during the debates between the Currency and Banking schools).

I can't believe this nonsense is on Forbes. This is what happens when you have journalists pretending to be economists.

Re: Forbes S**** on Ron Paul and Murray Rothbard

DD5 — Thu, 23 Aug 2012 23:16:37 GMT

Minarchist:
So, again, if you want to reserve the term "fractional reserve banking" for a situation where a bank takes deposits and then misappropriates them by lending them out, that's fine. And then we agree that FRB is fraudulent. But then let's agree on a name for the situation where a bank takes call loans and loans them out, and we can agree that that, whatever we choose to call it, is legitimate.

You think that by using the term "call loans" you can do away with the minor little inconvience that there are suddenly multiple tittles to the same piece of property, a logical impossibility that you cannot simply contract away. For the fact is that people do deposit their cash in a bank in order to increase their cash balance. And this fact is not even disputed by the most prominent FR free bankers such as Selgin and White so you are being quite "original" with your "call loan" theory.

However, here is why what you claim cannot be. At the end of day, even in your "call loans" system, you have multiple notes/tickets/claims or whatever you want to call them all promising to be redeemed on demand at face value, while there is not enough money should they all demand at the same time what they all believe they are contractually entittled to. Now here is the question for you - How in the world are these bank notes being traded at par when their supply exceeds the supply of specie/cash that they are backed by? What happend to the law of supply and demand in your system?

1 oz of gold is traded at par with 1 oz of gold. Obvious enough. But if there are, say, 10 times the amount of paper claims with face value of 1 oz then actual amount of gold, how are they being traded at par?

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Thu, 23 Aug 2012 18:07:20 GMT

a call loan has no difference from a deposit. Or rather, true deposit contracts no longer exist.

If I hand you $100, what determines whether it is a loan or a deposit? Nothing other than our agreement whereby we decide whether it is a loan or a deposit.

If a bank takes call loans, it can also take deposits (bailment). Or some banks can do call loans, and others do deposits. I don't see the problem. You can walk into bank A and say "I would like to deposit this money," and I can walk into bank B and I say, "I would like to make a $100 call loan."

We have basically two options for conceptualizing this whole phenomenon.

1. FRB is when a bank takes deposits and misappropriates the funds by loaning them out. Thus FRB is inherently fraudulent. When a bank takes call loans, that is something else entirely, and is legitimate.

2. FRB is when a bank takes call loans, and loans out the funds. Like any economic activity, FRB can be fraudulent. The bank may deceive the customer about the nature of the arrangement, and then there's fraud. But that doesn't make FRB inherently fraudulent: no more than the fact that a grocer may defraud his customers make the grocery business inherently fraudulent.

These are both accurate ways of thinking about the phenomenon in question. I happen to think the second option is simpler and more clear, but it really makes no difference. If it's agreed that a bank taking call loans and loaning out the money is legitimate, then what we agree to call this type of operation is of minimal importance.

Re: Forbes S**** on Ron Paul and Murray Rothbard

Minarchist — Thu, 23 Aug 2012 17:40:30 GMT

@DD5

Then [when the bank takes call loans] the client is not depositing money but investing it. In other words, it can't be said that the client is increasing his cash balance. He's investing it. He can't do both.

Correct. He is investing, not depositing. He is not increasing his cash balance. The banknotes or checkbook or debit card et al that the bank gives him in exchange for his investment is not "cash." Those are securities for the call loan. To write a check against the bank to which you gave the call loan is to transfer the right to call in the loan to the third party to which you wrote the check. To spend a banknote issued to you by the bank to which you gave the call loan is to transfer the right to call in the loan to whoever you gave the banknote. These media are not cash, they are redeemable for cash (namely, the cash which the bank owes the call loan lender on demand).

We are talking about the particular circumstance under which the client wishes to increase his cash balance by depositing his money in the bank for safe keeping.

If that's what we're talking about when we're talking about FRB, then I agree with you that FRB involves fraud. If the customer thinks he is placing money in bailment with the bank, but the bank is actually lending it out, that is fraud.

It [a bank taking call loans] is legitimate, but what makes this scheme of yours a fractional reserve bank then?

What is the functional difference between a bank taking demand deposits and loaning out the funds, and a bank taking call loans and loaning out the funds? I contend that the bank's operations are identical in both cases. The difference consists in how you want to characterize those operations. So, again, if you want to reserve the term "fractional reserve banking" for a situation where a bank takes deposits and then misappropriates them by lending them out, that's fine. And then we agree that FRB is fraudulent. But then let's agree on a name for the situation where a bank takes call loans and loans them out, and we can agree that that, whatever we choose to call it, is legitimate.

Re: Forbes S**** on Ron Paul and Murray Rothbard

wegreenall — Wed, 22 Aug 2012 15:21:26 GMT

Sorry, I suppose you're right, default is not fraud, but that is the basic difference between the results of the decision as to whether or not it should be considered a loan or a deposit. Clearly banks avoid being accused of what would be fraud if the deposits were actually deposits, by being able to state that they are loans and therefore they can get away with just "default". my use of the word fraud isn't appropriate if they are in fact loans, but I am operating operating from a position where logically a loan SHOULD have a term, because otherwise it's likely to be called in at a time when the funds loaned are illiquid (Golden Rule etc.), and it seems to be that other than the results of not being able to pay (whether it's defined default or fraud), a call loan has no difference from a deposit. Or rather, true deposit contracts no longer exist.