Economics Questions

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

Juan — Sun, 22 Mar 2009 22:57:16 GMT

Meambobbo, there are reasons for coins to be more demanded than other forms of gold, I agree, but that was not really my point.
I was just underlining the fact that gold coins are valuable because they are made of a valuable commodity known as...gold.
This is fundamentally different from scineram's belief that gold coins are valuable just because they are a 'medium of exchange'.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

meambobbo — Sun, 22 Mar 2009 22:10:26 GMT

Juan:
meambobbo:
I think it'd be safer to say coins have a higher market price than jewelry
But that's not necessarily true. Jewels may have artistic value and so be more valuable than raw gold. Or may trade at a small discount (to pay for reprocessing).

True. But what I am essentially saying can be compared to this example, which should clearly illustrate what I am talking about.

Imagine a 100 lb block of stone, inside of which there is 1 gram of gold uniformly distributed throughout. It is nonsense to think this block could be a medium of exchange or that it will fetch an equal or higher price than its gold content, in terms of gold. To be more effectively employed as a medium of exchange, it must be refined, which is not an abundant process produced by nature.

As far as jewelry vs coins go, it simply depends upon consumer preference and supply. If most gold is in coin form and there is a high demand for jewelry, jewelry may be more expensive...and vice versa. If gold were remonetized, we should surely see higher demand for gold coin than gold jewelry, but only because monetization of gold would effect its coin demand necessarily higher than jewelry demand.

As far as monetized jewelry goes, I don't think this would be a normal occurrence. Gold jewelry may not be as easy to determine authenticity, being non-standardized weights and sizes. Coins can easily be tested by size and weight - free markets would likely be prone to providing such standards as well, among many producers. I think most merchants would demand gold coin, or if accepting jewelry, demand a larger gold content. Finally, even if the demand and supply schedules for each commanded an identical market price, no one would be able to reliably exchange jewelry to coin at identical weight, because no one is willing to market an exchange service without charging a fee.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

Knight_of_BAAWA — Sun, 22 Mar 2009 22:07:47 GMT

Maxliberty:
The banks don't have demand deposits now. So it is you discussing fantasy contracts. My point is very simple, banks that turn all deposits into some for of time deposit will crush the other banks because they will be dramatically more profitable.

Non-praxeological assertion.

Maxliberty:
Also, if the defintion of time deposit is any delay on redemption then the distinction between instaneous redemption and one minute delayed redemption is idiotic. Banks could still offer exclusive actual demand deposits where they store your gold but this will be the overwhelming minority of accounts.

Evidence of this is the current system, you could open a bank tomorrow that offered 100% backed gold redemption, but we don't see any.

Because they are ILLEGAL.

Maxliberty:
Finally, the phrase fractional reserve is quite misleading

No, it is not.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

meambobbo — Sun, 22 Mar 2009 21:53:13 GMT

scineram:
I call BS too. Warehouse receipts had to be renewed in every 6 months and a fee paid. The bank also offered fiduciary media, and a lot of people eventually sold their receipts for banknotes or let them lapse.

The bank's money also became legal tender for large transactions. Also, there were no true audits, it appears, which could have meant it was practicing FRB, or issuing fiduciary media. This seems to have been the case, as later on the price premium on its receipts diminished in terms of gold on the open market. It is unclear when the bank took to such a policy.

As another point, the bank claimed to hold gold/silver reserves against receipts that expired. It seems this was pointless, as it would actually be holding > 100% reserves. Maybe the bank was mismanaged. I am not suggesting that it is clear-cut proof of market demand, but it tends to indicate it. Market preference...impossible to say.

scineram:
Way before central banks or deposit insurance the practice emerged as early as the 14th century in Italy for example.

And the banks that enjoyed the most success seemed clearly powerful in politics. They were not treated strictly as market entities. Nor were they clear about their fractional backings. And I can't find any historical record of a bank run during this time, seeming to show that people weren't aware of it. I'm not arguing that FRB MUST generate a bank run - only that their complete historical absence should say something about how the public felt about these deposit contracts. The more people became aware of FRB over history, and the freer the market has been allowed to work, the more bank runs have been prevalent. This was true in America in 1933 when bank runs were effectively outlawed via outlawing gold ownership.

...

Also, I am not arguing that 100% reserve banking would be as popular as FRB currently is. Poor people may be more likely to trade actual commodity money than receipts. I do believe there would be a market for it, however.

What about digital gold currencies? Are these not 100% reserve banks? Yes, some have been shown to be not truly 100%, and have gone bankrupt. Others have audits and have survived the equivalents of bank runs. That these exist despite legal tender law, the tax code, and other subsidies to the "official" monetary/credit system, should suggest that 100% reserve banking would enjoy market share for currency in a free market.

Of course there is no such thing as a 100% reserve bank for federal reserve notes. Being part of the federal reserve means you don't really have to worry about bank runs. Thus, FRB is far more profitable to both the depositor and banker because the ordinary downside risks to both are simply socialized through government.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

bbnet — Sun, 22 Mar 2009 21:11:49 GMT

GilesStratton:
Not unless Austrians have eschewed this whole "subjectivism" business lately.

Oops yes, value for anything is very subjective depending on an individual's value scale, e.g. Peter prefers an ounce of gold in jewelry while Paul prefers an ounce of gold in coins.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

Juan — Sun, 22 Mar 2009 20:51:18 GMT

James Greene:
I can't believe how explosive this thread became! Is it often that threads get this long?

Well, this subject never ceases to amaze me. I keep wondering if some ppl just don't get it, or else prefer to believe in fairy tales, or maybe work in the banking 'industry' (aka mafia.)

GilesStratton:

bbnet:
The 'price' of gold 'money' takes into account the gold that is in coins and jewelry
Not unless Austrians have eschewed this whole "subjectivism" business lately.

What do you mean ?

scineram:
[coins]They are valuable precisely because they are money.

No. They are money because they are valuable. That's what commodity money is all about.

scineram:
I prefer being paid interest as banks invest my money.

That sort of remark shows that you're either clueless, or purposely obscuring matters.

meambobbo:
I think it'd be safer to say coins have a higher market price than jewelry

But that's not necessarily true. Jewels may have artistic value and so be more valuable than raw gold. Or may trade at a small discount (to pay for reprocessing).

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

scineram — Sun, 22 Mar 2009 19:19:44 GMT

meambobbo:
I call BS. The Bank of Amsterdam offered this service during the Tulip Mania episode in the mid 1600's. It was so wildly popular, it caused a large surge of commodity money to enter the Netherlands, which was partially responsible for the tulip bubble.

I call BS too. Warehouse receipts had to be renewed in every 6 months and a fee paid. The bank also offered fiduciary media, and a lot of people eventually sold their receipts for banknotes or let them lapse.

meambobbo:
The only reason it hasn't succeeded in the free market, is because it has never been subject to the enforcement of a free market. All banking and money operations have generally enjoyed monopoly privileges by the monopoly government backing them...or were based around such an institution.

This is pure assertion. Way before central banks or deposit insurance the practice emerged as early as the 14th century in Italy for example.

meambobbo:
Thus, there is no means to hold banks liable for fraud when they promise 100% reserve and practice FRB.

There should be. But nobody promises 100% reserves except warehouses and safety deposit boxes.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

meambobbo — Sun, 22 Mar 2009 19:07:42 GMT

scineram:
There was not any significant demand for money warehousing historicaly.

I call BS. The Bank of Amsterdam offered this service during the Tulip Mania episode in the mid 1600's. It was so wildly popular, it caused a large surge of commodity money to enter the Netherlands, which was partially responsible for the tulip bubble.

The only reason it hasn't succeeded in the free market, is because it has never been subject to the enforcement of a free market. All banking and money operations have generally enjoyed monopoly privileges by the monopoly government backing them...or were based around such an institution. Thus, there is no means to hold banks liable for fraud when they promise 100% reserve and practice FRB.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

scineram — Sun, 22 Mar 2009 13:05:40 GMT

WisR:
You say 100% backed deposit banking would not be profitable, but it would. I would put my money into a bank that had a currency and deposits backed up 100% by gold in a heartbeat, and would shun any bank that could not prove it had 100% backing for its deposits and competing currency.

There was not any significant demand for money warehousing historicaly. You are free to do that even now if you pay the fee. I prefer being paid interest as banks invest my money.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

WisR — Sun, 22 Mar 2009 04:58:11 GMT

Maxliberty:

Evidence of this is the current system, you could open a bank tomorrow that offered 100% backed gold redemption, but we don't see any.

No, a bank could not open which offered 100% backed gold redemption for a competing currency. That's why there are legal tender laws. Any attempts to create competing currencies have been shut down by federal agents. You could not open a bank tomorrow that issued money backed 100% by gold, again that's why there are legal tender laws, to prevent this sort of thing.

And if it was possible to do so, many people would rush for the exits and start demanding to be paid in a currency that held its value. If the current fractional reserve based banking system we have today were exposed to true competition by doing away with legal tender laws and allowing anyone to accept any money they wanted for goods and services, there would be a flight away from the dollar.

Offering 100% backed redemption for dollars would be pointless when you're competitors have a legal right to inflate their value away. That's the system we have today, so it's obvious that no bank is going to offer 100% backed deposits (with the exception of people who like to store their cash in a safety deposit box) - what advantage does that convey?

But what you can't seem to understand is that in a free market for money, there would be competing currencies. You say 100% backed deposit banking would not be profitable, but it would. I would put my money into a bank that had a currency and deposits backed up 100% by gold in a heartbeat, and would shun any bank that could not prove it had 100% backing for its deposits and competing currency.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

meambobbo — Sun, 22 Mar 2009 00:00:26 GMT

James Greene:
Coins would actually be slightly more valuable than raw gold because work has gone into them to make them coined.

This sounds like a labor theory of value. I think it'd be safer to say coins have a higher market price than jewelry or dust, etc, because they have greater demand.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

scineram — Sat, 21 Mar 2009 02:47:34 GMT

Juan:
The problem is, you seem to believe that 'money' has value just because it's money, when in reality things work backwards. Gold coius are valuable money because they are made of valuable gold, not because they are coins.

They are valuable precisely because they are money. They can be exchanged. Turning them into jewelry is costly and they lose exchange value. And vice versa.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

hayekianxyz — Sat, 21 Mar 2009 02:10:17 GMT

bbnet:
The 'price' of gold 'money' takes into account the gold that is in coins and jewelry

Not unless Austrians have eschewed this whole "subjectivism" business lately.

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

James Greene — Sat, 21 Mar 2009 01:54:09 GMT

Juan:
Gold coins are valuable money because they are made of valuable gold, not because they are coins.

Coins would actually be slightly more valuable than raw gold because work has gone into them to make them coined.

I havn't been reading this thread for the past several pages, and actually only read that last sentence of your post, haha. I can't believe how explosive this thread became! Is it often that threads get this long?

Re: 100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

Juan — Sat, 21 Mar 2009 01:39:58 GMT

scineram:
Isn't the demand for the two different? I want to be paid in coins not necklace when I sell something.

The ratio of exchange of gold against all other goods (its price...) is set by the demand/supply of gold, regardless of its shape...

Again, converting jewelry into coin, or vice versa, doesn't create (or mine) new gold. So, there's no increase in the supply of gold, so there's no change in the price of gold. 'Gold-money' doesn't lose value when new coins are minted.

The problem is, you seem to believe that 'money' has value just because it's money, when in reality things work backwards. Gold coius are valuable money because they are made of valuable gold, not because they are coins.