Every monetary crisis in US history has given rise to a movement of money crankism, which is this strange combination of good and often accurate descriptions of the problem with the money and banking system, with only small but very critical inaccuracies, combined with a populist resentment against bankers complete with phony quotes from the usual suspects, a below-the-surface anti-semitism, followed by a head-long plunge into the full-scale wackiness of advocating government-printed “debt-free” money – a system guaranteed to remove every check on credit expansion and one far worse than the system the cranks claim to deplore.
In the 19th century, we saw these tendencies in the free silver movement. We saw it during the Great Depression. And we will see it again today. Just this morning someone sent me this video, which is good in places and even vaguely Rothbardian until it plunges wholesale into full-scale money crankism. Again, on the good side, the people are opposed to the Fed; on the bad side, they favor something even worse.
If someone sends you the above video, send that person this one back as a better alternative.
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http://www.monetary.org/
This lot are presumably the main source of crankery. Instead of borrowing $700bn they want the US government to issue it:
http://www.monetary.org/700billionscam.html
What constitutes ‘crankiness’ or ‘wackiness’ does, of course, depend on your position on the issues.
The thing about monetary reform is that there is no silver bullet — every known approach has pros and cons.
The Libertarian Party of the UK (of which I’m Treasurer) has adopted a three pronged approach to reform, partly as an acknowledgement of this fact:
http://lpuk.org/pages/manifesto/economy/monetary-reform.php
If you look at debt-free government issue, there is the obvious potential problem of over supply. Then again, the electorate do exercise some power over those in office, which they don’t over private banks.
For a commodity-backed currency (we’ve gone for gold, natch) over supply shouldn’t be an issue. But such a currency does rely to an extent on an honest international gold market existing. Look at recent price movement (or lack thereof), and ask if that’s the case?
True free banking ought to be a panacea. But can we really expect cartels not to arise, especially as those who will be drawn to found such banks are likely to be the same as those running the current banking cartels?
As I say, there are pros and cons to all approaches, which is why we’re suggesting all three. Let’s let the market decide what works, rather than foisting a single ‘solution’ upon it. The most important thing is to get rid of the current system, which is, without doubt, cranky in the extreme.
“But can we really expect cartels not to arise, especially as those who will be drawn to found such banks are likely to be the same as those running the current banking cartels?”
The problem is not cartels in free banking. IF the State grants no special privileges to the bankers, then their would be cartel will be unstable. Without protection from the State such a cartel would be impossible to maintain.
The root of the problem is the State. Complete separation of state and money is the only real solution, as it is the only solution that gets to the root of the problem.
Patrick, fromyour manifesto:
“Where an increase in the money supply is required to maintain monetary value—because of a growth in the underlying economy—government will spend the newly created debt-free money into the economy in the form of financing capital works, paying the salaries of public sector workers and so on.”
The problem is that this increase in the money supply will have the effects described by the Austrians – those who first receive the new money will be unfairly advantaged and, even worse, it will distort the structure of production and kick off the business cycle.
Good to see you’re familiar with the Mises Institute though. As a Briton I’m glad there is now a UK party which subscribes, albeit partially, to Austrian School economics.
Then again, the electorate do exercise some power over those in office, which they don’t over private banks.
Very little power, indeed, over those in office. I don’t know about the UK, but our election cycles are every two years, though some offices have four or even six year terms. You’re going to have limited electoral candidates to start with, and you’re going to select them on the basis of many issues, not one particular issue. This leaves a whole lot of wriggle room for politicians to work with. As long as they don’t do too many things wrong, and as long as their opponents are worse, you have no real choice. Even worse, if an appointed bureacrat is in charge, the chance of an election affecting them is even slighter.
Whereas, with free banking, you can choose not to do business with a particular bank any day of the week, just as you can choose not to shop at any particular store any day of the week.
I’ll take private banks without government privilege any day of the week, instead of politicians and bureaucrats that I have little control over, with my one little, limited vote.
“For a commodity-backed currency (we’ve gone for gold, natch) over supply shouldn’t be an issue. But such a currency does rely to an extent on an honest international gold market existing. Look at recent price movement (or lack thereof), and ask if that’s the case?”
Patrick,
I understand what your getting at, but you have to seperate gold price movements that are denominated in paper fiat currencies and the “what ifs” of what other countries might do from the case for a gold standard in your own country. It would work well for people in your country so long as your government didn’t interfere with it, which is what you should really be concerned about.
Austrian economists have their share of monetary cranks–people who claim to support ‘free banking’, but who oppose fractional reserve banking, who think central banks issue paper money ‘out of thin air’, or who deny the proposition that the value of money is equal to the value of its backing.
@RichardJ
“The problem is that this increase in the money supply will have the effects described by the Austrians – those who first receive the new money will be unfairly advantaged and, even worse, it will distort the structure of production and kick off the business cycle.”
But _somebody_ has to receive ‘new money’ first under any scheme (even free banking). The only way to remove any potential first-mover advantage would be to get into nastiness like (social) credit to everyone’s bank accounts at some fixed date/time. Even here, whoever accessed and used that ‘new money’ first would receive an advantage…
@Michael
Monetary policy is obviously incredibly important. We’ve not suggested it in our manifesto, but it would be perfectly feasible to have additional monetary ballots, on top of ordinary elections. Either way, sadly, you wouldn’t get rid of the tyranny of the majority. Nonetheless, I’d still rather have our policy; not least from a visibility/educational point of view. Politicians and the media would be forced to explain monetary basics to the electorate, which I can only see as a huge positive — the current system exists largely due to the ignorance of those using it on a daily basis.
Mike,
I’m confused. Where does the Fed get the hundreds of billions of dollars that it uses to “inject liquidity” into the markets?
Mike_Sproul: The Fed quite clearly does not increase its assets in line with the new dollars it creates. You should be well aware that it turns over its interest payments to the government as free money, thus causing inflation by the theory you advocate. It is perfectly proper for Austrians referring to this as creating money out of thin air.
It is therefore crankish of you to carry on as if the Fed “doesn’t cause inflation” because of the RBD, when the Fed has *never* adhered to its predicates, and there quite clearly has been general price inflation since the Fed’s founding. Quite a lot of it.
This is why I wrote the “Mike_Sproul: The College Years” skit a while back. For those who missed it, it goes like this:
*phone rings, Mike_Sproul picks up*
Mike_Sproul’s dad: Mike, it’s your father. Have you cut back on your partying to make sure you pass your tests?
Young Mike_Sproul: No dad, I’ve been going to all these rockin’ parties!
MSD: Mike, if you keep that up, you’re going to fail out of college!
YMS: Not at all, Dad! The best evidence we have indicates that partying has *no* impact on grades, so long as the partier increases his studying efforts by an equal amount. One’s grades are determined by the student knowledge that is backing it, not the raw number of non-party hours.
MSD: Oh, so you’ve also been studying more?
YMS: No, of course not, Dad!
MSD: Then why did you bring that up?
YMS: Because you’re perpetuating the discredited idea that partying hurts grades!
“But _somebody_ has to receive ‘new money’ first under any scheme (even free banking).”
If new money is to enter the system it should be via an increase in gold production. Under a gold standard the increase in the money supply would be negligible most of the time. Furthermore, to quote Rothbard from his history of the Great Depression: “One crucial distinction between a credit expansion and entry of new gold onto the loan market is that bank credit expansion distorts the market’s reflection of the pattern of voluntary time preferences; the gold inflow embodies changes in the structure of voluntary time preferences.”
“Austrian economists have their share of monetary cranks–people who claim to support ‘free banking’, but who oppose fractional reserve banking”
I think de Soto sets out a pretty good legalistic case against fractional reserve banking under free banking.
I’ve seen that first video before, and I have to say that it did give me a moral twinge when they brought up usury. Not having an interlinear Bible–or having even a basic understanding of Hebrew, Aramaic, or Greek–I wasn’t sure how the word would be properly translated. Are we to not charge people “interest”, or is it “excessive interest” that’s the problem?
Seeing the second video offered up a better answer to how we ought to get out of this mess. (It is a bit dated, which is okay–and it was fun to see Congressman Paul with a little less snow on the roof!) I think if we want some mass-appeal to counter the “Money as Debt” video, we ought to produce an updated version. Combining, perhaps, some of the explanations of the Fed from both videos, using the wonderful olde tyme footage and music from the second video, and creating newer and cleaner animations as visual guides. Perhaps even updated interviews a’ la the second video. One thing that was nice about the first video was their use of animation. Not that it was great animation, obviously–just the fact that they used it to tell the story.
Furthermore, I’d recommend making a long and short version so that we might be able to reach and teach our friends with (shall we say) shorter attention spans.
Regarding the video “Money, Banking and the Federal Reserve”
It claims that 90% of checkbook money is backed by “nothing”. I don’t think this is generally true.
Later, when explaining the FED pyramid the video claims that banks have created $10000 of “inflated paper money” on top of the $1000 issued by the FED. This is also a lie. There is $10000 in demand deposits, checkbook money, which is backed by the loans given out. Only FED prints paper money.
Finally, I don’t get how the gold standard would provide “relative price stability”? As the economy grows, but the amount of gold doesn’t, all prices, including the salaries, would need to decline all the time? How stable is that?
To the person who wrote as “Why I will not send out the video link recommended”:
With a gold standard, our currency would need to be defined as a certain weight of gold. (For example: 1 dollar = 1 gold grain.) It seems that a common issue is “How would that system allow for increases in productivity?” and “How could our nation’s net assets increase?” These questions are very much related to the desire for “relative price stability”, but why would we want that? I am not convinced that wages would decrease under the gold standard, but the cost of goods certainly would… but let’s put the wages question aside for the moment.
I think the answer, in all honesty, is deflation. Deflation of prices (compared to gold) means an increased purchasing power for the same measure of money.
Let’s look at productivity and deflation this way: If Ludwig makes 10 of his widgets a day, but Murray has discovered a way to make 100 comparable widgets a day for the same price as good ol’ Ludwig… Murray could sell his widgets for a far lower price and make a good profit from it. Everyone benefits from this “deflation” of the price of widgets because they can now not only buy a widget, but they have left-over money to go buy something else. (Maybe they’d buy whatever Ludwig is selling these days–he’s obviously had to find a different line of work after Murray’s discovery!)
What we’re concerned with under a commodity standard is not the actual numbers on paper (“I made $50k this year vs. $45k last year,” for example.). We’re concerned with answering “How much can I buy with what I earn?” I’d much rather make the same amount of money yet be able to buy more year-after-year than the current system of losing my savings and my “improved” salary to governmental inflation.
Back to your question on wages, let’s assume that wages do indeed drop along with the prices of everything else. What does that do to savings? Anything in your bank will remain the same, so you’ll be able to buy more next year than you did today! Wouldn’t this be a great benefit to retirees? It’s certainly much better than the current erosion of your savings account.
I wish I had time to touch on your other points, but I can say that 90% of your checkbook is NOT backed by “nothing”. It is backed by the good name and character of your federal government, through the FDIC. The Federal Deposit Insurance Corportion has to keep on hand about 1.5% of all the monies that it is protecting. (That’s why it’s been in trouble lately–too many people needing that money as banks go belly up.)
“Prepare for the Rise of Money Crankism”
Jeffrey
I don’t think you do the reform effort any good at all by referring to these guys as ‘cranks’…that simply plays into the hands of the establishment.
You seemingly agree with their starting point that our money system is a sham. Why not work constructively from there. Perhaps their proposed solution is not workable or logical or whatever other complaint you may feel is appropriate, but wouldn’t it be more helpful if you explained your views and made counter-proposals rather than simply attack them?
Just a thought.
@Joshua Park,
Your explanation makes sense, but I don’t think it fully answers the question posed, and I think it’s the same as a question I have, so allow me to pose it a different way.
It seems to me that for a commodity backed currency to function over multiple generations without causing significant price/wage disruptions it would need to increase in supply as a direct function of the increase of population at a minimum, and probably even as a function of productivity. Else you wind up with an issue of not enough money to facilitate exchange. A grain of gold can only be divided so much before it loses it’s value because it is no longer functional for exchange.
With money ever increasing in purchasing power, and ever decreasing in supply relative to demand how can a meaningful equilibrium be struck between the value of the commodity and goods/services it is to be traded for?
Brian Drum:
You’re asking the wrong question. The right question to ask is “What backs the paper dollars issued by the Fed?” The right answer is that the fed’s dollars are backed by the fed’s assets (gold and bonds). In the same way, shares of corporate stock are backed by the assets of the corporation, even though some might see shares of stock coming out of a printing press and think that those shares are coming out of thin air.
The real bills doctrine says that the value of money is equal to the value of the assets backing it. No assets, no value.
Richard:
“I think de Soto sets out a pretty good legalistic case against fractional reserve banking under free banking.”
Except that he fails to answer one simple question: If my bank and I both agree that the bank will issue me 100 checking account dollars, against which the bank will hold 10 paper dollars plus bonds worth $90, why should anyone forbid it?
If my bank and I both agree that the bank will issue me 100 checking account dollars, against which the bank will hold 10 paper dollars plus bonds worth $90, why should anyone forbid it?
Because you are not the last person to negotiate that bank note for value.
The bank note (if it is like every other bank note issued in the era of government-sponsored fractional reserve banking) fails to disclose on its face the extent to which it is absolutely redeemable on demand (i,e., the minimum fraction the bank holds in reserve). It therefore also fails to disclose the extent to which there may be no reserve for redemption.
That lack of disclosure is fraudulent to all downstream holders of the note.
Magnus:
“That lack of disclosure is fraudulent to all downstream holders of the note.”
That’s it? Then just print a disclosure of fractional reserves on the money. Or maybe a 300+ year tradition of virtually every bank operating on fractional reserves would make the disclosure statement unnecessary.
I really wish that the LvMI had taken on the money cranks earlier, when all the Ron Paul stuff was abuzz. If folks here had just devoted a little bit of time to debunking the money/Fed documentaries that were constantly floating around in that community there would’ve been people far better educated in the money issue.
Instead now we’ve got people citing “Zeitgeist”, “The Money Masters”, “America: From Freedom to Fascism”, “Secrets of the Temple” and others, as if they were sound economic sources.
If suggestions work, and I know that they sometimes do, I’d recommend bringing back the movie review just for these documentaries (easily found online), to hopefully set people on the right path, and to separate yourselves from the money cranks.
This is the latest video: Zeitgeist Addendum. The link to the clip is in the beginning of the criteque: http://tinyurl.com/44drf6
I cannot find any fault with the first half of “Money as Debt.” A little over halfway through, though, the film’s producer seems to perceive, “I’ve just told people their situation is hopeless and that there is no way out that is practical! I cannot do that or else I will be branded as a crank!” So, at this point, the producer switches over to the pseudo-problem of how the world’s resources are about to run out. (Maybe at some point they would BE about to run out given the exponentially-increasing economic growth which the Fed is designed to pursue (Who knows?), but the fear that the Fed might succeed is ludicrous). The film then proceeds, dutifully, to offer a soothing, unworkable, familiar “solution” to the problem it has described so convincingly. I’ve read MANY treatises on marriage that are similar to the film. The author suddenly realises that everything he has said about marriage would convince anyone that marriage is a wholly stupid and obsolete institution. So he quickly switches over to recitation of tired, meaningless, soothing bromides in favor of marriage–I guess to placate any married or religious persons who may be reading his material.
Then just print a disclosure of fractional reserves on the money.
Yes, please.
Or maybe a 300+ year tradition of virtually every bank operating on fractional reserves would make the disclosure statement unnecessary
Disclosure is necessary because not every note is (or needs to be) equally redeemable. Like the bonds you mentioned, there are all kinds of terms and interest rates. Bonds disclose their terms as to time and rate. So should notes.
In fact, such variation among banks, or even within classes of notes issued by the same bank, would create a market for the different types. They don’t all have to be redeemable for the same thing. It could be gold, silver, tires, pig iron, chickens, platinum, or chocolate.
Also, notes that are 100% redeemable in the stated commodity would trade at a premium over notes that were only guaranteed to be redeemable on demand at a rate of, say, 10%.
All notes are, of course, redeemable in theory over time, but it is the “on demand” reserve that matters, especially in a time of crisis or rapid change. Different market value for different levels of risk.
Banks have hidden this reserve rate on notes for 300+ years because the issuers of such notes benefit from the fraud of pretending that they are all redeemable on demand. Until there’s a run, of course.
By all means, let’s have fractional reserve money with full disclosure, and then let’s see how many actually want to use fractional reserve dollars, when given the choice. 100% reserves means that even if there were a bank run, everybody would get their money back. Better yet, if everyone knows that there are 100% reserves, then there’s no need for a bank run to occur–their money is safe in a trustworthy bank.
Magnus:
“Disclosure is necessary because not every note is (or needs to be) equally redeemable. Like the bonds you mentioned, there are all kinds of terms and interest rates. Bonds disclose their terms as to time and rate. So should notes.”
And what if a bank doesn’t want to print your disclosure on its notes, and its customers don’t want it either? Are you going to arrest them? Do you have a checking account? Have you checked its terms lately?
“Also, notes that are 100% redeemable in the stated commodity would trade at a premium over notes that were only guaranteed to be redeemable on demand at a rate of, say, 10%.”
And you have evidence for that? About the only major bank that ever operated on 100% reserves was the bank of Amsterdam, which ran into a little trouble when its employees started stealing from the vault. (And a little more trouble when the French invaded.) Depositors paid storage fees, rather than earning interest, as they do at fractional reserve banks.
“Banks have hidden this reserve rate on notes for 300+ years because the issuers of such notes benefit from the fraud of pretending that they are all redeemable on demand. Until there’s a run, of course.”
If a bank backs 100 checking account dollars with 10 paper dollars and a $90 bond, then in case of a run it can sell the $90 bond for its own checking account dollars, and then redeem the remaining 10 checking account dollars for 10 paper dollars. I, the customer, understand this perfectly well. I don’t fear a bank that doesn’t have enough reserves on hand to always maintain convertibilty. What I fear is an institution that doesn’t have sufficient ASSETS to buy back the money it has issued.
Michael Clem:
“if everyone knows that there are 100% reserves, then there’s no need for a bank run to occur–their money is safe in a trustworthy bank.”
See my comments on the Bank of Amsterdam.
And what if a bank doesn’t want to print your disclosure on its notes, and its customers don’t want it either?
As I mentioned before, the bank and the customer are not the only people involved. Notes are made with the understanding, intention and purpose that they be passed to an indefinite number of other parties. The bank and the customer both expect and know that this will happen. Therefore, the nature of the agreement between the bank and customer is not dispositive of the issue. They cannot make a valid agreement to defraud others.
Many if not most of these other people have no means of knowing the information available to the bank and its customer, and thus are entitled to disclosure as to the extent to which the note is backed by reserves and therefore guaranteed to be redeemable on demand.
Are you going to arrest them?
I consider notes without such disclosure to be fraudulent. The remedy is a separate issue.
Do you have a checking account? Have you checked its terms lately?
My own experience is irrelevant to the issue.
And you have evidence for [the assertion that 100% reserve notes would trade at a premium in the economy]?
No. It is my belief, based on the idea that I would find 100% reserve note (guaranteed to be 100% redeemable on demand) to be more secure and thus more valuable than a 10% reserve note. I believe that others would feel the same way.
About the only major bank that ever operated on 100% reserves was the bank of Amsterdam, which ran into a little trouble when its employees started stealing from the vault. (And a little more trouble when the French invaded.) Depositors paid storage fees, rather than earning interest, as they do at fractional reserve banks.
The fact that banks can be robbed has nothing to do with whether the manner of issuing notes is fraudulent. Besides, fractional reserves can be robbed as easily as full reserves.
The rest of what you said has no bearing on the disclosure issue.
to joshua park:
the video was highly effective because of its simple animation. maybe the south park crew need to be brought into the mises tent to spread the austrian view.
to mike sproul:
as i understand it, the bank of amsterdam’s demise wasn’t due to embezzlement by staff, but to breaching its charter as a 100% reserve bank. apparently it had allowed certain customers to overdraw as early as 1657, some fifty years after its birth. by 1790, even the public had cottoned on to the racket, meaning the end was near. nationalization in 1791 was followed by closure in 1819.
Magnus:
So you would prohibit a voluntary transaction between two people based on whether some downstream trader would approve? I think a libertarian blog might be the wrong place for you. Anyway, what if the downstream traders DO approve of accepting checking account dollars based on fractional reserves? Apparently, 99% of the US population accepts such things every day.
Newson:
Yes. Bank employees (directors) secretly lent money to the city of Amsterdam, the East India Company, etc. It would have been more accurate to say that they stole from the bank on behalf of those borrowers.
There is nothing un-libertarian about objecting to ostensibly voluntary transactions between two parties that are fraudulent as to third parties.
The agreement between the first two parties may be perfectly acceptable to them, but the matter simply does not end there. In my very first post I explained this — the problem arises when you engage in later transactions with these fraudulent notes — with people who are not parties to the first one.
It is, of course, decidedly unlibertarian for you to proclaim that you speak for 99% of the population. It is also clear that this idea of 99% agreement is a fantasy and nowhere near true, since the very nature of the banknote fraud is to conceal itself. Frauds are not excused merely because they are successfully concealed.
In any event, it is patently unlibertarian for you to dismiss the legitimacy of the grievance about crimes that are committed against even 1% of the population, on no more of a sound basis than the alleged agreement of the other 99%. That’s your basic majoritarian philosophy, only using a 99% cutoff instead of 51%. They are equally arbitrary, and equally unjustifiable morally.
Whoa, hold on – let’s not misunderstand the problem here. The problem with Fractional Reserve banking is that due to it’s inherent instability, at some point, without the myriad of schemes erected by government to prop it up, it will fail – wiping out the savings of depositors and the people who trade with that bank. It is inevitable, it has been shown time and again throughout history and should not be up for much debate.
The only thing the government has to do is to remove the rickety scaffolding holding the scheme up and it will collapse under it’s own weight, and no further prohibitions of transactions between private parties are necessary. This is Rothbard’s stance – I don’t believe anywhere in his writing he advocates a government regulation prohibiting fractional reserve banking. He simply wants the exceptions granted to banks from basic commerical laws to end. That is 100% in keeping with libertarian principles. I will admit sometimes in his writing this distinction gets blurred or abreviated down to “FRB should be abolished”. But the crux of the matter is to simply enforce the basic laws of contractual obligation with regards to banking without exceptions. If you can’t meet your obligations your business gets liquidated and you are ruined.
This simply means that banks would no longer be allowed to repudiate their obligations to pay depositors and counter-parties on demand, no Federal Reserve acting as lender of last resort, no FDIC or other myriad of devices for holding an unstable structure up, and allowing it to build to the sky.
Could some form of Fractional Reserve Banking exist in that environment? Probably, but not at anywhere near the reserve ratios banks use today (artificially inflated by the government scaffolding) – but there would probably some safe, free-market level of reserve ratios that would produce a stable banking business. I will not speculate on what that reserve ratio would be because that would up the free market at that point, and would probably fluctuate over time.
And the last point:
“Or maybe a 300+ year tradition of virtually every bank operating on fractional reserves would make the disclosure statement unnecessary”
Go talk to average people on the street, your average bank customer with a checking and savings account. How many of them understand how fractional reserve banking works and it’s ramifications for their money? If 1% understand it I would be shocked. If you asked that question 100 years ago you might get a higher percentage, but the goverment “guarnatees” and assurances have made the vast majority of people cease to care. Which is precisely the way the bankers want it.
“Fractional Reserve banking … will fail – wiping out the savings of depositors and the people who trade with that bank. It is inevitable, it has been shown time and again throughout history and should not be up for much debate.”
So what? It’s also inevitable that businesses and governments will fail, but we still use them while they last. I might choose to keep $2000 in a checking account, knowing that the bank will fail some day, but figuring that the convenience of the checking account outweighs the risk of loss.
I remember Rothbard saying in a seminar that private FRB’s are counterfeiters, and the fed is the head counterfeiter. I expect that he would have outlawed FRB, though after listening to him I never bothered to read his work on money, for the same reason I don’t read astrology.
I agree on the bad effects of the FDIC.
“If 1% understand it I would be shocked.”
If a bank has issued 100 checking account dollars, backed by 10 paper dollars and nothing else, then that is fraud, and the knowledgeable 1% would arbitrage the bank out of business. But that’s not what FRB is. An FRB would hold 10 paper dollars PLUS $90 of other assets. That is not fraud, and there is no chance for the knowledgeable 1% to arbitrage this bank.
The bank’s keeping of sufficient non-cash assets to cover all of its outstanding notes is what keeps the bank from being insolvent.
However, these non-cash assets do not remedy or prevent the fraud of issuing 10 times as many notes, each promised to be redeemable ON DEMAND in cash, as the bank actually has in cash reserves.
The lack of sufficient cash reserves is a problem, as the ugly history of bank runs prove. Our entire quasi-nationalized, cartelized banking system was sold, politically, using the fear of bank runs. It was needed, the criminal-politicians said, to prevent those pesky runs, to shore up the system, to restore confidence, blah blah blah.
(Actually, the lack of actual, material substance to what is today called ‘cash’ is itself a problem, along with the artificial, governmental mandates to pay and accept this paper they declare to be money, but those are beyond the scope of this fraudulent note issue.)
A simpler solution has been available all along — disclosure. The solution to solving fraud problems is always disclosure. Each note should state on its face what the issuer’s minimum cash reserve for that note is. A bank could have different classes of notes, each payable ON DEMAND in different percentages.
I think you would find 100% reserve notes being preferred in the marketplace, which is precisely the reason that banks DO NOT WANT such disclosures on their notes. Fractional reserves is how they make all their money, and would resent having to go back to being fee-based vault-service providers.
Magnus:
Why should the disclosure be on the paper money itself, rather than listed on a signed contract with the bank? And of course private banks today issue checking account dollars, not paper notes.
You might also look up some of David Hillary’s past posts on the legal issues of money being payable on demand. You’ll find that this is not what modern banks promise. In fact, the promise made by a modern bank is more like “We promise to either pay the face amount on demand, or if we can’t, we’ll give you a legal claim to whatever assets we have left.”
“(Actually, the lack of actual, material substance to what is today called ‘cash’ is itself a problem, along with the artificial, governmental mandates to pay and accept this paper they declare to be money, but those are beyond the scope of this fraudulent note issue.)”
Read my paper, “There’s No Such Thing as Fiat Money”, which you can google, or else click on my name above.
to magnus:
i have difficulty following your reasoning about printing the backing on the issuers’ notes.
the solution to fraud is not disclosure, it’s prosecution. audits of banks could reveal whether demand deposits were fully covered. if demand deposits are treated as loans to the bank, there’s a fraud afoot. that the wiser are aware of this is no defense.
also, your scheme would run into difficulties where the bank’s backing changed over time (in a free frb system, reserves would vary amongst bank, and presumably over time as well).
As I have said repeatedly, the “signed contract” between the bank and the customer has no bearing on the issue of fraud committed against EVERYONE ELSE in the economy who is handed those banknotes for value.
newson:
Of course disclosure is a solution to the problem of fraud! Fraud is a crime of information, of knowingly making a false representation of fact, or other variants of deception or withholding information that ought to be disclosed.
I prefer a regime of disclosure to one with a blanket rule requiring 100% reserves all the time. As Mr. Sproul frequently points out, two parties can agree to just about anything, and a libertarian ought to be fine with that so long as no one else gets hurt.
Here, lots of others get hurt, and end up taking (at the very least) a risk they did not knowingly and voluntarily agree to take. At worst, the fractional-reserve fraud is revealed when there is a run on the bank, and only then it is the truth discovered — the bank’s promise to pay cash ON DEMAND as to EACH AND EVERY NOTE cannot possibly be fulfilled. It cannot be fulfilled, because there are insufficient reserves for redemption.
Fractional reserve banks gamble with other people’s money. They play the age-old shell game of assuming that not everyone will want cash at the same time. Of course, the banks do not have control over the timing of cash redemptions of all their note-holders, so every now and then, there is a situation where too many note-holders want to trade in the paper for the coin. (Or, today, the credits for the paper.)
Whoops! Sudden insolvency. The shell game is revealed.
Disclosing the fact on the notes that any bearer could not be assured of cash redemption ON DEMAND of more than the minimum reserves would dispel this particular form of fraud. No run would be possible (assuming the bank actually held the minimum reserve it promised).
The level of reserves could also fluctuate over time, very easily. There is no requirement that the bank always keep the bare minimum reserve stated on the notes. As long as it kept its reserves above the stated minimum, there is no fraud.
to magnus:
i get your point about disclosure being a defense in respect of fraud (i should say moral fraud), but i have reservations about your printing the cash-reserves on each privately-issued banknote. saying merely that every fractional note has “x” in cash behind it gives the impression that in the worst case, everyone will recoup at least that amount. this is obviously not the case, and the actual payouts in a liquidation are completely unpredictable, and may be even less than “x”, depending on who gets in first.
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