Economics Questions

Re: Fractional reserve banking

Arman — Thu, 30 Aug 2012 02:36:37 GMT

"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.

Re: Fractional reserve banking

Alternatives Considered — Wed, 29 Aug 2012 18:59:15 GMT

"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.

Re: Fractional reserve banking

Arman — Wed, 29 Aug 2012 18:37:28 GMT

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.

Re: Fractional reserve banking

Alternatives Considered — Wed, 29 Aug 2012 01:25:00 GMT

"most of the drivel on this thread"

Muted.

Re: Fractional reserve banking

Arman — Mon, 27 Aug 2012 02:35:21 GMT

The problem as I see it is that economists of all stripes are certain that there is and that there must be a storage of value within money. Money is not a storage of value but a storage of promise. That is why the bank can create money within its lending operations. The promise of the bank, whether in check, account, or bank drafts is money. The printing of the fed notes are worthless chits of paper while within the banking system and become worth something only as they are issued at the bank and become a portable promise. The confusion transferred throughout academia to all students who will be professors leaves me intensely frustrated as does most of the drivel on this thread. Promises are portable and transferable. Stored wealth, not so much. Trying to make money what it is not, regardless what the intention can only end in stupidity. It is such a shame that all academia's comprehension of money is founded on Smith's propaganda and Keynes' confusion. You'd think there might be some wit somewhere to be found.
If the etherial promise of the bank cannot have real value in society, the individual's promise would be equally worthless. Over constrain the local banks creation of credit, and there will be nothing left of banks or money.

Re: Fractional reserve banking

Alternatives Considered — Thu, 23 Aug 2012 22:41:03 GMT

Actually, I think that is perfectly reasonable, and I agree that a free market in currency and banking etc is what is needed... there's a reason states so jealously guard their monopoly on this front. It's incredibly lucrative to them to do so.

Re: Fractional reserve banking

Alternatives Considered — Thu, 23 Aug 2012 22:36:44 GMT

"Can some decipher this post on fractional vs full reserve banking by Steve Keen ?

He seems to be trying to say that 100 % reserve banks will also create credit out of thin air. I dont understand his justification and explanation of this."

To understand, you really have to understand the difference between "money" and "currency", which requires understanding the difference between "ownership/title" and "a contractual obligation to pay someone money", also known colloquially as an "IOU". Neither of the two writers at the blog you mentioned is properly understanding these differences, including the Austrian.

In Austrian theory, "money" is the "hub commodity" at the center of a hub-and-spoke trading pattern: people trade other resources/commodities for the hub commodity, and then trade that hub commodity for other resources/commodities. In a free market, as Menger has detailed, the precious metals have done very well as money for a variety of straightforward reasons (divisibility, durability, etc). Let's speak of gold from now on as money, since that has and is likely to be the most common commodity used as money. As a *commodity*, gold is subject to the same strong property laws of libertarian systems: specifically, at any given time, only one "title" exists to a given unit of gold, representing ownership. This title is legally equivalent to the gold itself.

When someone "deposits" money in a bank, there are two ways to structure that transaction. The first, warehousing, is the simplest. In this transaction, *no title for the gold/money is transferred*: the depositor still owns his gold and still retains title to it. Because it is the depositor's property, the warehouse cannot do anything with it, since the definition of "property" is "the ability to control the commodity". Were such a warehouse to lend this money out, it would be fraud instantaneously.

The second kind of transaction, and in most scholars' opinion the one that is far more common today, is one in which ownership of the money *is* transferred to the bank. In exchange, the bank issues what is essentially an IOU: a contractual promise to pay the "depositor" a certain amount of money under certain conditions in the future. It may *feel* like you still own your money (your gold), but you do not. Hence, you have no say over the disposition of that money. That money can be lent out by the bank however they want: it's *their* money, they own it. There is nothing fraudulent about that: when they loan the money out to a borrower, ownership of that money is transferred to that borrower, again for an IOU, this time from the borrower, again with certain contractual statements about the conditions of paying off the IOU, penalities for being late in doing so or not doing so, etc. The borrower cannot guarantee that he can pay that loan back, so the contract includes penalties and clauses for non-performance.

The same is true of all IOUs, including the one from the bank to the depositor. The bank owes the depositor, but they can't guarantee that they'll be able to pay them back, to penalties and other clauses are put in the contract in case of non-performance.

Here's where the confusion comes in: both title to commodities and IOUs - which are *not* title to commodities, and thus legally are very different things- have value in the market and can thus be traded in the market, and to add to the confusion, they are both denominated in the same units: the units of money (gold). Thus, if I have title to 10 oz of gold, as indicated by a deposit receipt with a warehouse, I can use it to buy something that costs 10 oz of gold. Legally, there is no risk to the merchant: I own the gold, and only one person can own something. Now consider, say, the IOU that a depositor got from a bank. If they deposited 10 oz og gold, the bank gives them an IOU *denominated* in gold: 10 oz gold. This is *not* title, however. There is some chance of default, of contractual non-performance. It is legally possible to construct these IOUs such that they are fully transferrable, and thus "currency" is born. Note that clearly, such currency *is intimately tied to the issuer*. It is also *defined by construction* as debt: it's an IOU! As a market actor, if presented with such an IOU by someone as a form of trade, yes, it is delineated in "gold", but it is not title, and because there is some risk of default, most market actors will not accept these IOUs at face value, they will insist on a discount representing the contractual risk in that IOU. The amount of discount will depend on things like the issuer's reputation, their reserve ratios, etc, etc.

So what are some of the implications of looking at this correctly with libertarian property law?

1) FRFB is not "fraud" as long as the depositor's contract with a bank is clear that they are transferring ownership and in return getting a contractual obligation to be paid in the future.

2) Banks cannot make "money": money is a commodity, and the only way a commodity like gold can come into existence is by mining etc. The amount of property title always, by definition, equals the amount of property.

3) Banks can issue IOUs, which generally manifest as currency issued by the bank and redeemable at the bank under the conditions of the contract that the IOU incorporates. They are in the same units as "money", but are not money themselves, even though they can float freely in the market and are likely to be used in market transactions, albeit at a discount compared to money itself.

4) There is no legal requirement for the amount of IOUs issued to have any particular relationship to the amount of assets - including money/gold - of the bank. However, you expect *market forces* to pick and choose desired combinations of risk and benefits, to reward the issuers of IOUs who do so responsibly and with a track record of honoring them, etc. "Joe's bank" is unlikely to get many people to take his IOUs.

5) As a result, a free society would have both 100% backed money - since this just direct title over the money/gold - and fractionally backed currency, issued by banks when creating credit.

[As a nice aside, this helps slot in other things that have been suggested in a free society, e.g. poor person A gets a judgment awarded to him against rich person B: they can't collect themselves, to they sell the "debt" to a collection agency at a discount vs "face value". Well, this is really just the same thing as above: the award to A is an IOU from B, that is, "currency" issued by B. Like any currency, it can be sold in the market, including for other currency. So A sells his currency drawn on B to C for some other good (quite possibly a currency drawn on some more standard, reliable issuer, e.g.a bank), which C does because they think that X of B's currency is worth more than .8 (or whatever discount rate they paid) of bank D's currency. Once you see IOUs - debt - as currency, but not title, it all snaps into place.]

Re: Fractional reserve banking

EEmr — Thu, 23 Aug 2012 18:48:38 GMT

Can some decipher this post on fractional vs full reserve banking by Steve Keen ?

He seems to be trying to say that 100 % reserve banks will also create credit out of thin air. I dont understand his justification and explanation of this.

http://www.debtdeflation.com/blogs/2012/07/14/mish-steve-debate-steve-says-i/

Re: Fractional reserve banking

protection — Mon, 12 Mar 2012 04:40:41 GMT

Banking on proper principles:

http://www.yamaguchy.com/library/gouge/inq_27.html

William Gouge, A Short History

Re: Fractional reserve banking

Richard of Howell — Tue, 21 Feb 2012 02:16:23 GMT

Re: Fractional reserve banking

tothemax — Sun, 19 Feb 2012 06:53:23 GMT

z1235:
Fractional money inevitably becomes fiat money. Dillution of property boundaries inevitably erodes freedom.

This is the biggest sticking point, and the biggest fault in Austrian economics at the moment. Its quite a blemish on an otherwise great school of economics.

A demand deposit, is a debt. It is not a bailment. There is no precedent in law that suggests otherwise. This is the problem with de Sotos position. He demands that the definition of 'demand deposit' fits his personal taste, not societies collective agreement. And as White quite smoothly rebuts: 'fine, but we'd solve this simply by calling it a 'payment account'' (indeed in the UK, 'current account' is used most often).

Given that a 'demand deposit' is a debt, the bank both owns and possesses the money. The depositor retains an IOU only, not ownership nor possession.

If it were the case that it was a bailment (which it is not), the following would occur:

The depositor could only withdraw from the physical location of the deposit. I.e. no ATMs or using other branches. [this doesn't happen]
The depositor could earn no interest [this is not the case]
The deposits would not show up as bank assets on their yearly balance sheet publication [it does, ive checked]
Failure to deliver the depositors money on demand would cause a criminal liability, rather than bankrupcy. [it causes bankrupcy]

Austrian economics should collectively accept the position of its Free Banking faction.

Re: Fractional reserve banking

slider123456 — Wed, 28 Sep 2011 07:25:23 GMT

This is an outlandish idea but since your name is Alternatives Considered here goes.

If currency laws were struck down and I was say... Warren Buffet, I could decide I wanted to make my own currency and a bank. I could call them Buffet Bills. I would make millions or maybe billions, depends on the market, of digital dollars and give them to people with good credit and collateral. Then write up a digital contract which states that if the person spends my digital Buffet Bills he has to begin repaying me the next month at x amount with x interest and automatically put up collateral in case of default. I then get to create and spend the interest into the economy as it comes due, if I take a loss then my future interest earnings will go down or I might have to raise my rates to compensate which gives me an incentive to not make bad loans so a competitor does not steal my idea and do a better job. If someone does default then the contract would state that the collateral has to be put up for sale to get back the Buffet Bills owing, I can't just keep the collateral. Market rates based on US dollars could be used as the baseline at the beginning and market forces would take it away from there. If I convinced people I was reliable and honest, not running around spending my currency like monopoly money but keeping it all strictly collaterized and soaking up defaults with that collateral to avoid inflation, then there is no reason to believe I could not make a go of it. It could very well fail but without currency laws someone could try and eventually someone would come up with some idea that worked. Because of that possibilty I believe the biggest problem is currency laws and the government enforced monopoly. I would not even go so far as to say that Government, especially states, should not be allowed to devise their own currencies and possibly demand taxes be paid with it but a choice to not have to carry Government currency, or do so if you wish, would be a boon to the entire economy because it would place competition into the one thing practically every act of commerce and trade has in common in this day and age, currency. If you are dealing in an uncompetitive monetary system then the efficiency and competition of the economy means nothing because it will be undermined by the wasteful and inneficient monopoly that is mandatory in order to participate in it. Frb would very likely not survive under such competetive conditions and to have what would likely not survive in a free market imposed by law through a monopoly is absolutely unethical and I would even say it smells of something that a communist country would devise, at the very least it has some parallels and similarities.

Re: Fractional reserve banking

z1235 — Wed, 27 Apr 2011 00:02:36 GMT

Alternatives Considered:

I totally get it if you say "FRB is allowed in a free society, but I'm going to fight like hell to educate people about what it is and how they have better alternatives".

We're on the same page.

Re: Fractional reserve banking

Alternatives Considered — Tue, 26 Apr 2011 23:58:07 GMT

z1235:

As for which is a bigger threat to free markets, observe the present (global!) outcome after centuries of FracRB (coming in and out of bed with princes), mass delusions, and utter brainwashing. We're currently participants in a 0%-reserve FracRB scheme (yes, your "dollars" are backed by Jack Crap), issued at will out of thin air by "banks", funding governments and wars through massive covert taxation (inflation), and most of the 6 billion people (sheep?) don't even peep a squeek (They're actually asking for more because meeting everyone's "demand for money" makes us all feel good!)

Which one is a bigger threat to freedom, again?

Violence.

You can't seriously expect me to buy into the notion that FRB is the *cause* of all that, rather than the violence of government?

And you can't seriously advocate that the way to freedom is to violently eliminate freedom (in this case, the freedom of actors to conduct business between themselves freely, namely, a bank and myself)?

I totally get it if you say "FRB is allowed in a free society, but I'm going to fight like hell to educate people about what it is and how they have better alternatives". I'm already a partial subscriber: I wouldn't put any serious amount of wealth into a FRB. But I would be a partial customer, at least until I see a better deal. I am distinctly unconvinced that this is so dangerous that violence must be used to prevent FRB.

Re: Fractional reserve banking

z1235 — Tue, 26 Apr 2011 23:44:51 GMT

Alternatives Considered:

Worded correctly, it seems obvious that the contract I'd have with such a bank would not represent property violations, and any call to "outlaw" FRB would seem far, far more of a threat to the free market than the one you are concerned about.

I'd let private courts decide on the "fraud" charge. As for which is a bigger threat to free markets, observe the present (global!) outcome after centuries of FracRB (coming in and out of bed with princes), mass delusions, and utter brainwashing. We're currently participants in a 0%-reserve FracRB scheme (yes, your "dollars" are backed by Jack Crap), issued at will out of thin air by "banks", funding governments and wars through massive covert taxation (inflation), and most of the 6 billion people (sheep?) don't even peep a squeek (They're actually asking for more because meeting everyone's "demand for money" makes us all feel good!)

Which one is a bigger threat to freedom, again?