Originally posted by Minarchist: Or if I sell my shares of IBM, and your shares loses value, did I violate your property rights?
Or if I sell my shares of IBM, and your shares loses value, did I violate your property rights?
Your IBM shares are actually backed by the physical assets of the company. So no.
Originally posted by Minarchist: So, if I sell my house, and as a result, your house loses value, did I violate your property rights?
So, if I sell my house, and as a result, your house loses value, did I violate your property rights?
Your house is a physical commodity in and of itself, so no.
Originally posted by Minarchist: When the bank inflates and your savings lose value, they have violated your property rights
When the bank inflates and your savings lose value, they have violated your property rights
Yes, because they have inflated the money supply with printed pieces of paper backed by thin air.
Devaluing the money you have earned backed by your hard labor.
You are trying to support your argument with and apples to oranges comparison.
You have 3 transactions and you are trying to say that the two that are backed by or are actual physical commodities are exactly the same as the one that is backed by thin air.
I’m not buying it.
Aso it is important to remember that it is not the legal tender laws which give money its value, it is its use as a medium of exchange - the influence the government has over whether or not a medium of exchange will become so is much less than most people would believe (as we know from Mises; T of M and C).
consider you have some wheat in a warehouse. You have certificates for that wheat, so you can claim it back any time. If you go and get the wheat out, and they don't have it, they have misappropriated the wheat you deposited with them.
Correct. And the same would be true in the case of "demand deposits" if they actually were deposits, but they aren't, they are call loans. It is not misappropriation for the bank to loan out the money you loaned to them, because that is what you agreed for them to do when you loaned it to them. The same as with a regular time deposit. The only way FRB can be fraud is if the banks pretend that they're deposits, but if they recognize that they're loans, there is no fraud.
Bank runs are a result of fraudulent activity.
Bank runs are the result of numerous creditors of the bank (people that made call loans [aka "demand deposits"] to the bank) calling in their loans all at once, and the bank not having enough money to cover all liabilities. It's the same as when a broker gets a margin call. There's nothing fraudulent in this. The customers who lose their money took a risk as creditors. They knew they were making a loan, and they knew it was possible that the bank would be unable to relay the loan. They chose to make the loan anyway because they thought the risks were outweighed by the rewards. FRB supplies a real demand. Customers can make time deposits, take risk, and earn interest. They can deposit their money in a money warehouse, and have access to their money without taking any risk, but they have to pay for this service. OR, they can make a call loan, which allows them the benefits of money warehousing, but without the fees and/or with some interest.
So the reason that it's fraud when the bank sells paper money is because the paper money is not redeemable for something else?
So your position is that selling paper is a crime, unless that paper can be exchanged for something else?
Your house is a physical commodity in and of itself, so no
Paper is a physical commodity, is it not?
Sigh, it seems you have no reasoning behind your position. Just these slogans "money from nothing," "backed by thin air." Where is it written that it's unethical to sell pieces of paper unless they can be redeemed for other things? That makes no sense at all. And the paper itself IS something.
No, I'm trying to figure out why you think FRB is fraud. Apparently it's just because it involves fiat money. And so now I want to know why fiat money is fraud in your opinion. Repeating slogans like "backed by think air" does not argue your case.
First off, of course a "time deposit", that is, in historical legal principles, a loan, not being available on the date of redemption is fraud, just as much as the other case. This of course is the reason for the relatively forgotten "Golden Rule of Banking", that says that you should not undertake maturity mismatching between your liabilities and your assets.
Yes, the value of money is based on its use as a medium of exchange, but no money can be forced to become the medium of exchange just through legal tender laws. Legal tender laws cannot force anyone NOT to accept some other commodity or even fiat money as money. Or, they can attempt to, but it will probably not last forever. This however is in my opinion secondary to our main discussion, which is apparently whether or not deposits are loans or not.
We can safely ay that terminology (be it judicial or just common phraseology) clearly has not helped us, since deposits and loans are both names for what we are referring to, I call them demand deposits, you call them call loans. The question is then what defines a loan and what defines a deposit? is there some difference? historically, yes. surely there also exists the idea that i could, for example, take out a classic regular deposit contract with a friend using my cigarette lighter. inevitable the terms of such a contract would stipulate that he should be able to give it back whenever i want, and cannot use it, even if he really wants to. We would have to consider this a deposit contract, not a loan contract.
An irregular deposit contract then, should follow the same principles. here we come to the heart of the matter, and that is that modern banking law and policy appears to view these wilfully named "demand deposits" as loans to the bank. This is where DeSoto hits hard in his book - he is dealing with the question of with whom availability lies in such a contract - but you seem to be saying that availability can be held by both parties simultaneously. Or, that it doesn't matter, because if i claim my deposit they'll pay me with someone else's money. The principles however should apply to a bank with only one deposit (like in the case with my friend).
If they at any time are unable to pay me the money that I have the right to claim at any time, then that would have to be considered fraud, because in our contract we have stated that I can ask for my money back at any time.
Well, if it is a loan contract then I took on a risk and can't ask my money back at any time, according to your statements. Or at least, I cannot consider it fraud when they cannot pay me back, even though the original contract (even in case of it being described as a "call loan") says i CAN claim it back whenever I want. So I simultaneously can and cannot call it back. It is fraud if they can't pay it back, but also NOT fraud because it's a loan (that stipulates... that... I can demand it at any time???).... As you can see in this situation it appears our demand deposit/call loans are somewhat of a Schroedinger's bank deposit. My demanding my call loan and it not being repayable is a sign of breach of contract (ie, fraud), but I am not allowed to consider it fraud because it is a loan and therefore i took on that risk, etc.
The only reason it happens in practice on any large scale is because of the "law of large numbers". Chances are that if I want to take my money out, somewhere else there will be money available to give to me. This does not change the principles. It is also interesting how a bank could possibly avoid maturity mismatching in a situation when it has no idea what the maturities are on its deposits, because they don't have one!
What is their evidence that the multiplier is false? I mean most modern mainstream econ teaches about it, let alone Rothbard. I know some people argue banks first make loans and then find the backing for it, which still means creating credit out of thin air.
The only reason fiat money is "valued" at present is because there is the belief that the US government stands ready to back it with its debt. Fiat money isn't valued due to what it is made out of but because it is widely accepted in transactions because of conditions the government has made favourable for it. I do not deny that banks which are able to accurately plan ahead cannot engage in fractional reserve banking on a free market, particularly by careful matchurity matching, but it still has fuck-all to do with the paper itself. The paper is just a claim on something else. Even for fractional reserve banks it is. Of course it isn't unethical to sell paper per se. It is, however, to try and sell it as a claim on something else under false pretenses. That is a very different scenario.
Freedom of markets is positively correlated with the degree of evolution in any society...
Originally posted by Minarchist: Because by any normal definition, the printing of paper money is not fraudulent per se.
Because by any normal definition, the printing of paper money is not fraudulent per se.
It only becomes Fraud when you get people to actually use it as money, when it is backed by nothing.
You are telling people it is worth something when it is not. (the value of the paper it is printed on notwithstanding)
Originally posted by Minarchist: As I said already, fraud requires deception. If a bank prints paper money, and people accept it willingly, knowing full well it is not redeemable for anything,
As I said already, fraud requires deception. If a bank prints paper money, and people accept it willingly, knowing full well it is not redeemable for anything,
Ahhh… but the only way people will accept paper money for any other use than their ass is if they believe (correctly or not) that they can then redeem it for something of value.
In order to get people to accept the paper money then you have to tell them or at least imply it is redeemable for other commodities.
That is the whole point of money –so we can exchange the fruits of our labors without having to engage in direct bartering all the time
And if that paper is not directly backed by any physical asset or commodity you have just deceived people.
Originally posted by Minarchist: where's the deception? Where's the fraud?
where's the deception? Where's the fraud?
The deception is that you have gotten people to accept money that is inherently worthless because it is not backed by anything.
Whether or not they have willingly gone along with your Scheme is irrelevant. Once again, it just makes you a great con man.
First off, of course a "time deposit", that is, in historical legal principles, a loan, not being available on the date of redemption is fraud, just as much as the other case
A borrower being unable to repay his creditor is fraud? No, it's default.
Yes, the value of money is based on its use as a medium of exchange, but no money can be forced to become the medium of exchange just through legal tender laws. Legal tender laws cannot force anyone NOT to accept some other commodity or even fiat money as money.
They don't have to. If you're a borrower, and the State has decreed that your creditor MUST accept fiat currency, and that fiat currency is less valuable than any other currencies you could potentially use to repay the loan, you have an incentive to repay the loan in the less valuable fiat currency. Gresham's law. Bad money drives good money out of circulation. But anyway, as you say, this is tangential to the issue at hand.
The question is then what defines a loan and what defines a deposit? is there some difference?
Certainly. A deposit is a bailment.
http://en.wikipedia.org/wiki/Bailment
And a loan is money (or some other property) which the lender expects to have returned to him in accordance with whatever conditions the contract stipulates.
surely there also exists the idea that i could, for example, take out a classic regular deposit contract with a friend using my cigarette lighter. inevitable the terms of such a contract would stipulate that he should be able to give it back whenever i want, and cannot use it, even if he really wants to. We would have to consider this a deposit contract, not a loan contract.
Sure, this is a deposit, a bailment concerning money.
An irregular deposit contract then, should follow the same principles.
That's the whole thing. It isn't an irregular deposit contract. It isn't a deposit contract at all. It is a loan contract. If there is any fraud in FRB, it lies solely and only in the fact that what is actually a loan is deceptively named a deposit. But of course this problem could be remedied, without changing the operations of FRB at all, if the banks simply called the thing what it is.
you seem to be saying that availability can be held by both parties simultaneously.
No, availability (if you mean "who has the money") lies solely with the bank. What the customer has is the right, per the call loan contract, to call in his loan at any time. That is what he's doing when he writes a check or withdraws cash from a branch or an ATM.
Or, that it doesn't matter, because if i claim my deposit they'll pay me with someone else's money.
That is how ALL banking works. It is not fraud for a bank to pay back a creditor with someone else's money. If I loan a bank $100 on a time deposit, and a year later they repay me with someone else's money (i.e. not literally the same dollar bills I gave them), is that fraud? Of course not. Money is fungible. No creditor cares whether he gets paid back with the exact same bills that he loaned. The bank is not obligated to pay him back the exact same bills that he loaned.
The principles however should apply to a bank with only one deposit (like in the case with my friend). If they at any time are unable to pay me the money that I have the right to claim at any time, then that would have to be considered fraud, because in our contract we have stated that I can ask for my money back at any time.
The obligations of the bank toward the call loan lender are the same as the obligations of the bank toward the time deposit lender. The bank in both cases is within its rights to take the money it was loaned and do whatever it pleases with it. The bank in both cases has an obligation to repay the lender at the designated time: either at the end of the term, or when the loan is called in. A failure to meet this obligation is not fraud. It just means the bank has defaulted. Default is not fraud.
Well, if it is a loan contract then I took on a risk
Yes
and can't ask my money back at any time
No, you can ask for your money back at any time. That's why it is a call loan. The obligation to repay comes into effect when the creditor says it does, as opposed to at a predetermined time in the future. That is the only difference between a time deposit and a call loan.
I cannot consider it fraud when they cannot pay me back, even though the original contract (even in case of it being described as a "call loan") says i CAN claim it back whenever I want
Again, default is not fraud.
So I simultaneously can and cannot call it back.
You have the legal right to call back the money, the bank has a legal obligation to give you the money. But what if the bank CANNOT give you money? That is default, not fraud.
It is fraud if they can't pay it back
No, it's default - as with any other loan. Do you think all defaults are frauds?
My demanding my call loan and it not being repayable is a sign of breach of contract (ie, fraud), but I am not allowed to consider it fraud because it is a loan and therefore i took on that risk, etc.
I hate to keep repeating myself, but when a borrower is unable to repay a loan, he is not guilty of fraud. He is in default.
All commerical banking is about managing risk. In the case of time deposits, the risk to be managed is the risk of default on the loans the bank makes with the money lent to it by its customers on time deposits. If too many default, the bank will be unable to repay its customers whn the terms of the time deposits expire. In the case of call loans, there's that same risk of default on the loans the bank makes with the money it borrowed on call loans, and there is also the risk of "margin call" (aka bank run) where all the call loan lenders call in their loans at once. If a bank fails to manage its risk property, it may default - but it is not thereby guilty of fraud.
Originally posted by Minarchist: Where is it written that it's unethical to sell pieces of paper unless they can be redeemed for other things? That makes no sense at all. And the paper itself IS something.
Where is it written that it's unethical to sell pieces of paper unless they can be redeemed for other things? That makes no sense at all. And the paper itself IS something.
This is not the argument I am making and you know it – you are being intentionally obtuse.
Can't people use whatever they want as money? Why does money have to be backed by something for it to be legitimate?
Again, value is subjective. If people agree that a paper currency is worth something, then it is worth something. Your opinions notwithstanding. But in fact, I'll bet you don't even really believe it's worthless. If you do, how about you mail me all your federal reserve notes? They're worthless, right?
Do you think people might accept a paper currency in payment because they know they can go to the store and buy things with it? Do you have a job? Are you paid in FRNs? Why do you accept them? Is it because....they have value insofar as you can buy thing with them?
Correct, and paper money can be and IS RIGHT NOW being used for exactly that purpose.
And if that paper is not directly backed by any physical asset or commodity you have just deceived people
So when you accept your paycheck, you are being deceived? You don't know that the paper money you're paid in is irredeemable?
The deception is that you have gotten people to accept money that is inherently worthless because it is not backed by anything
Again, value is SUBJECTIVE. Nothing is "inherently worthless" or "inherently valuable." Why is gold good as money? Is it "inherently valuable"? Is "VALUABLE" stamped on its molecular structure? No, it is valuable because people agree that it is valuable.
......by the way, you do realize that FRB banks operating in a free market would be issuing paper notes which ARE redeemable for a commodity currency, right? Not that issuing irreedemable paper money is wrong or should be illegal, it's just that it cannot compete with hard currencies in the absence of State intervention such as legal tender laws.
Its important to point out that this article isn't a Steve Forbes article...I know some may be getting that impression. His website has a ton of writers from all different schools, but mainly free market.
Anyhow, I don't see how FRB is fraud.
Then you need to make your argument a little more clear.
Minarchist:A borrower being unable to repay his creditor is fraud? No, it's default.
It's very easy to conduct an argument on your terms and only on your terms. What borrower and what creditor? Listen to people here. They reject the very notion that the depositor is a creditor so you are not addressing them. He is depositing money for safe keeping and other financial services. He is holding money. He is not investing it. Big difference according to Misesian/Austrian theory of money and credit. Now you have to prove your initial premise and not assume it.
What borrower and what creditor? Listen to people here. They reject the very notion that the depositor is a creditor so you are not addressing them. He is depositing money for safe keeping and other financial services. He is holding money. He is not investing it. Big difference according to Misesian/Austrian theory of money and credit. Now you have to prove your initial premise and not assume it.
You're right, it all boils down to whether you view a "demand deposit" as a genuine deposit (bailment) or as a call loan.
What I am saying is that it is legitimate for a bank to take call loans. I call this practice fractional reserve banking.
If you want to say that fraction reserve banking is when a bank takes bailment of money, and then misappriates it, well then fine FRB is fraud.
But then what about what I'm talking about! What if a bank takes call loans? Call that whatever you want, call it SuperDuperCallLoanBanking. It doesn't matter. Is or is that not legitimate? I say it is, for all the reasons I've put forth.
"If ABC Bank prints up banknotes that say 'ABC banknote" how is that counterfeiting money? They aren't pretending to print banknotes, they are printing banknotes. There is no deception here." and "Again, explain why a bank printing money is counterfeiting"
ABC Bank isnt printing banknotes and calling them 'ABC banknote' they are calling them physical gold where you can exchange it at the ABC bank. If ABC bank wants to make fiat currency i have ZERO problem with it. I believe in a free market there is a market for a fiat currency.
what is your definition of couterfeiting then?!!?!? this is dictionary.com definition of counterfeit -
ABC Bank isnt printing banknotes and calling them 'ABC banknote' they are calling them physical gold where you can exchange it at the ABC bank. If ABC bank wants to make fiat currency i have ZERO problem with it. I believe in a free market there is a market for a fiat currency. what is your definition of couterfeiting then?!!?!? this is dictionary.com definition of counterfeit - made in imitation so as to be passed off fraudulently or deceptively as genuine; not genuine; forged: counterfeit dollar bills. If a bank prints a note that says its worth one gold ounce and it doesnt have that gold ounce to back it up then they are committing fraud
If a bank prints a note that says its worth one gold ounce and it doesnt have that gold ounce to back it up then they are committing fraud
What you're calling fraud (failure of the bank to redeem banknotes for gold) is default.
A customer walks into the bank with 100 oz of gold. He makes a call loan to the bank. The bank can do several things, it can give him a checkbook, it can simply enter credits into an account, or it can issue him banknotes. What are these banknotes? If the customer presents them at the bank, is his withdrawing his deposit? No. 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.
What if the customer who got the banknotes from the bank spent them at the grocery store, and the grocer comes in to redeem them at the bank? The same thing as before, except the grocer is now the one calling in the loan. And again, if the bank cannot repay (give him the gold) it is in default. It did not commit fraud.
The same with checks. If the customer writes a check to the grocer, and the grocer takes the check to the bank to cash, he is calling in the loan.
Whatever the details, a failure of the bank to redeem for gold is nothing other than a default on a loan, which is not fraud.
no its not default. defaulting is when you cant make a scheduled payment so you default on the loan. When they give out notes they dont care if they ever get them back. So they will inherently always because they are writing notes that they know they cant pay back.
whats the point in calling it a call loan or demand deposit. we are talking about the same thing here.
The fact is they are claiming that one of there notes is x amount of gold that they dont own. they dont have. That doesnt exsist. They have fraudulently declared that one of there notes is X amount of gold when it is actually just a piece of paper. They have lied. They have counterfeited. They have committed fraud.
You are stuck in the idea of giving banks or anyone that authority to counterfeit. Think if money was something else. What if money was land? what if money were homes or boats or cars or eggs or cigarettes or albino bulls. Think about what they are actually doing when they give out something that isnt theirs. Think about the markets that the market the goods actually compete on. Its not right.
no its not default. defaulting is when you cant make a scheduled payment so you default on the loan.
So if you fail to make a scheduled payment it's default, but if you fail to make a payment on a call loan (unscheduled) then its fraud?
So when a broker fails to meet a margin call (exactly the same as a bank failing to repay a call loan) he is guilty of fraud?
When they give out notes they dont care if they ever get them back. So they will inherently always because they are writing notes that they know they cant pay back.
They don't "know they can't pay back." If they knew that, they wouldn't do it. They don't WANT to go bankrupt. They know that there's a possibility that they wont be able to repay the loans, and so they manage that risk.
If I borrow money from a bank knowing there's a chance I won't be able to repay it, am I committing fraud?
The fact is they are claiming that one of there notes is x amount of gold that they dont own
When a corporation issues a security (borrows money), that piece of paper represents money which the corporation does not own. It represents money which the corporation plans and hopes to own when it comes time to repay the person holding the security. Did the corporation commit fraud?
They have lied. They have counterfeited. They have committed fraud.
Ok, so who is the victim of this fraud?
Also, would you define what you mean by fraud?
Here is a legal definition I found through Google, I don't know if this is what you mean by fraud:
A false representation of a matter of fact—whether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury. Fraud is commonly understood as dishonesty calculated for advantage
You are stuck in the idea of giving banks or anyone that authority to counterfeit.
I fail to see how FRB involves counterfeiting. The banknotes can be exactly what they say they are: securities for call loans. That it is possible for the bank to default on this obligation does not make the banknote counterfeit. By that logic, the corporate security I mentioned above would be counterfeit because it's possible that the corporation might default.
By way of analogy:
Suppose a gambler at a casino makes 5 bets on 5 different tables, and the casino let's him make these bets without actually putting down the money on the table. He knows that if he loses all 5 bets, he won't be able to cover the loss. He could cover, say, 4 losses, but not 5. Does this mean that he committed fraud?
I would say the gambler did not commit fraud. The casino knew very well it was possible that he might not have the money, and they decided it was worth it to let him make the bet anyway. No one was deceived. And if the gambler loses his 5 bets, he will owe the casino what he owes them. If he doesn't have the money, then he is in default. The casino can come after him for whatever it can get.
So, say a bank and a depositor agree to these terms:
The depositor will be able to request any amount up to 80% of the entire deposit on demand, with the entirety available on demand 5 years after the date of the deposit. I don't think this would expand the money supply, and allows a portion of savings to be used for investment.
Whether contracts like these would be commonplace is unkown to me, but would they at least be legit?
but would they at least be legit?
I don't see why not. That would be some combination of a term loan and a call loan.
Yea, I posted that way before the recent posts were displayed.
Minarchist:What if a bank takes call loans?
Then 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.
Minarchist: Is or is that not legitimate?
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.
@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.
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.
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?
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.
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.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
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?
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.
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).
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.
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.
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.
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.
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.
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.
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.
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:
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!
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