Will The Federal Reserve Create The New Socialist Man?
Karen De Coster and Eric Englund explain the devastating cultural effects of fiat money and central banking. Americans are stepping up to mainline a new kind of drug known as debt. Instant money, after all, is something that provides on-the-spot gratification and pacifies their anxieties about their status in the social order. Indeed, one can have it all, at the drop of a (fiat) coin, and without the standard save-and-wait period which earlier generations experienced. FULL ARTICLE
Comments (90)
I doubt it. The issue here is that markets are unforgiving. That is they tend to correct themselves through inflation. Even an inflation believer like our current Fed chairman is actively fighting inflation. That does not mean they do a good job of it but it does mean that that the market has realized that the inflation of the past 6 years is over and now the pain and social adjustments have started.
Maybe the Fed will just stop creating money altogher? I doubt that as well.
Besides, if it was not for inflation, how could Bush and his buddies possibly pay for 2 wars, prescription drugs and eleven percent growth in government.
Published: June 26, 2006 9:03 AM
I have long thought this: monetary inflation is an agent of social and cultural decay. I'm glad to see the thesis get some airing out here.
One thing that's always struck me is the durability of goods built in times past as compared to the plastic throwaways of present times. Perhaps producers back then built goods better and more durable to convince consumers to part with their money in the present than in the future.
Published: June 26, 2006 9:36 AM
Interesting chain of reasoning - linking government-induced fiscal instability with an incentive not to grow up. It implies that the bulk of truly mature people are to be found among those who are (self-)insulated from the vagaries of the business cycle.
Published: June 26, 2006 9:45 AM
Even the so-called "low" inflation of the past decade has many damaging effects. I believe one of the worst is that on the poor. Wealthier people can take measures to protect against inflation, but the poor rely solely on wages, which don't keep up with even low inflation rates. This makes the Fed the worst predator upon poor people in the country.
Published: June 26, 2006 10:54 AM
RogerM,
I have read many leftists claim that inflation benefits the poor. A very sad commentary.
Published: June 26, 2006 11:03 AM
Monetary inflation has resulted in a huge and unjustified transfer of wealth to Wall Street. I'd venture to say that without inflation and federal tax laws, most fund managers and corporate officers would be lucky to get work as appliance salesmen.
I think a related phenomenon is the fact that upper management is almost exclusively staffed by specialists in accounting and finance rather than engineers or (God forbid) non-degreed men with hands on knowledge of their industry.
Published: June 26, 2006 11:23 AM
Wall Street, hedge fund managers, corporate types are the first to receive the freshly created dollars from the Fed. If the Fed bought oranges from Florida instead of treasury bonds people would be complaining about the gap between Orange growers and the rest of the country.
PS That is why I am going into finance...
Published: June 26, 2006 11:29 AM
Roger M's comments add the final touch to a poignant esay: Tahnks to all!
Published: June 26, 2006 11:37 AM
Nice article!
In a way, modern man in a democratic society is someone living in the Matrix. You're all cabled up, and the whole point of your existence is to serve as the battery - the motor - of government. Exist to feed, to fulfill that central plan. All your life, everything you own, is only rented.
Socialists always claim they're fighting exploitation, but in the end that's just what the current system promotes: don't save wealth, but live in a state of permanent exploitation by government. Want to keep your rented life standard? Better do whatever it takes to keep it.
The solution: take the Roth(bard) pill.
Published: June 26, 2006 11:53 AM
I THINK YOU GUYS ARE GETTING THINGS MIXED UP. MONEY HAS ALWAYS BEING PAPER BACKED BY COMMODITIES LIKE GOLD OR SILVER. IT IS THIS BACKING THAT THE FED. HAD REMOVED LEAVING THE PAPER MONEY FLOATING AND PRODUCING AS MUCH QUANTITY AS THEY WOULD WANT AT ANY TIME. INFLATION NEEDS A NEW DEFINITION SO DOES BANKING TOO.THE VARIABLES USED TO DEFINE MONEY SUPPLY HAVE CHANGED. NEW TYPE OF ECONOMICS TO REFLECT THE FIAT MONEY SCENARIO NEEDS TO BE DEVELOPED EXCEPT IF THE MAITAINANCE OF THE OLD ORDER IS PART OF THE GRAND DECEPTION.
Published: June 26, 2006 12:09 PM
Rufus, there is a button on the left side of your keyboard, somewhere between shift and tab. Press it once.
The practice of saving necessarily involves postponing instant gratification, while consumer debt teaches exactly the opposite. Is it any wonder that an inflationary system which rewards instant gratification will eventually produce people more prone to chasing after it?
Published: June 26, 2006 12:48 PM
As one who has borrowed dollars to buy a house, I can state confidently that if dollars were 100% gold-backed, I would have borrowed just as much, and my "absolute moral and financial collapse" would have proceeded apace under either system.
Oh yes, and as anyone willing to read the link below can see, there is no such thing as fiat money.
www.geocities.com/sproulmike/nofiatmoney.doc
Published: June 26, 2006 12:54 PM
***I think a related phenomenon is the fact that upper management is almost exclusively staffed by specialists in accounting and finance rather than engineers or (God forbid) non-degreed men with hands on knowledge of their industry.***
There is no problem that upper management be staffed by accountants, at least those not fully in the fold of the "socialist man" described here. Most CEO's come up from the finance/accounting arm for a reason - they are the only ones who understand the breadth of the company, and typically have to have enough depth of understanding to make overall financial decisions for a company. Producing is one thing, producing profitably is another. Cash flow, whether its real or fiat money, is the most important aspect to a company period.
Having said all that, accountants used to be the calculators of real wealth, the real net income, the net productive output that is retained within the company, and then finding the best way to liquidate part of that wealth back to shareholders. Now many accountants are a product the explosion of statism, needing more accountants to blandly implement the ever expanding rules, and many have forgotten how to calculate real wealth. It is just another indicator of the rot that has set in in the culture as a whole. Unfortunately, unless these accountants wake up, they are going to find themselves held responsible when the sand is washed out from under.
Published: June 26, 2006 12:55 PM
***As one who has borrowed dollars to buy a house, I can state confidently that if dollars were 100% gold-backed, I would have borrowed just as much, and my "absolute moral and financial collapse" would have proceeded apace under either system.***
There is a big difference between using debt to leverage an asset that likely has as much or more value than the debt itself, than having little or no savings and massive UNSECURED debt. Also, one of the identifying features described in the article are those who buy much more of a house than they can afford, likely based on that social stature attribute. Sure deflation could always occur, turning those who have sensibly bought a reasonable house "upside down" but that is rare. And leveraging always carries a risk that the circumstances in place when the leveraging took place change for the worse. Having one's labor devalued is an inherent risk in life.
Lastly, a reasonable purchased asset that retains value with borrowed money from a private third party is a lot different than a quasi-socialist monetary policy that breeds indiscretion both by borrowers and lenders, the rot described here. Perhaps there are those who think that loaning money with less than 20% is indiscreet, others may disgree. But one thing is for sure, that with the policies we have today, consumption is stimulated by the government itself, creating an explosion of over buying secured type assets, and and non-equity consumption with unsecured debt.
And the real risk lies with us who have endeavored to build wealth and live sensibly, becuase the $47 Trillion accrual basis debt we all are burdened with is going to come due, and those without any real equity are going to turn to those who do and use force to take it. So it will eventually turn into one class who will "have its cake and eat it too" and those who place a time preference into the future only to have it taken by the spendthrift. That is what passes for sound economic/domestic policy.
Published: June 26, 2006 1:42 PM
Mike,
“there is no such thing as fiat money.�
I recommend “Human Action� by Mises, especially the discussion on the money regression and money substitutes. I don’t think one can have a more radically divergent view on money from the Austrians than yours, nor a view that is more incorrect.
As you read, study carefully how money emerges from a barter economy, that it is the most marketable commodity that emerges as money, and then follow the argument that paper money originates merely as warehouse receipts to real commodity money and that it originates really just as a money substitute. That is, paper money originates, essentially as a title to ownership in real money, which was often held in a safe in a bank or warehouse.
Historically, money has most typically been in the form of gold or silver, but in general takes the form of the most marketable and durable commodity established through the process of barter. Honest money has never been “backed� by other commodities, but in fact is itself a commodity; the most marketable commodity used for indirect exchange.
What we have today is entirely fiat money which can be and is printed or else is deposited on a whim, from thin air, to an account of a borrower. This money goes from non-existent to ready to spend in the blink of a fractional reserve bank loan. And the fed expands bank reserves similarly by writing checks against itself with money that did not exist before that check is deposited in a bank.
There is not only such a thing as fiat money, but the US is swimming in it and has been since either 1971, 1933, or 1913, depending on how one prefers to view it.
Published: June 26, 2006 1:43 PM
I was blown away by “Hyperinflation and Hyperreality: Thomas Mann in Light of Austrian Economics� by Paul A Cantor, the link to which appeared in this blog. The insight is incredible! Austrians may find it frustrating, but articles like this are why Austrian economics is capturing more and more conservative Christians within its gravitational field. We share similar vocabularies. As paper money must represent real money, gold, to have meaning, purpose and value, conservative Christians see that mankind must represent someone of a greater reality and permanence, God, in order for us to have meaning, purpose and value. Fiat money detached from gold causes inflation, so the detachment of man from God causes inflation of egos, hubris, arrogance and a devaluing of human life.
It’s probably not coincidence that the stability of the world under the gold standard of the 19th century went together with the greatest growth of Protestant Christianity and the greatest advancement in private and public morality in the West, most of which the 20th century destroyed. However, I might quibble over which came first, monetary inflation or human inflation. It could be that German “higher criticism� of the late 19th century, which dethroned Christ as God and began the serious inflation/devaluation of mankind, made monetary inflation morally acceptable, even as it momentarily retained the gold standard for money.
Published: June 26, 2006 1:51 PM
Mike,
There may indeed be "backing" for Federal Reserve Notes. Unfortunately, the assets that are used to "back" those notes are; 1) The product of the misallocation of resources; 2) having their economic value stripped by unproductive factors in the economy (bankers), and; 3)Inherently inflationary, especially vs. gold and other hard assets.
I have no problems with people who want to take risks with their money, which is what fractional-reserve banking rides on. But I object to having my wealth and productivity stolen by bankers who add no value.
Published: June 26, 2006 2:03 PM
Paul:
I read Mises' "Theory of Money and Credit" around 1990. It was enough to convince me that there was nothing to be gained by reading any more of what Mises had to say about money.
So I take it you're OK with gold and silver money. At which point in the evolution of money would you object?
1) When a private bank issues a piece of paper saying "IOU one ounce of silver", and it actually holds one ounce of silver?
2) When that same bank issues that same note, but instead of an ounce of silver it holds the equivalent value of gold?
3) Same as (2), but the bank holds the equivalent value of land?
4) same as (2) but the bank holds the equivalent value of financial securities?
And finally, what if a private citizen issues an IOU saying "IOU one banker's IOU", and the private citizen holds no banker's IOU's, but his assets are enough to back the IOU?
The real bills view is that none of the above are fraudulent or inflationary, but that for the government to prohibit any of them would be "a violation of that natural liberty, which it is the proper business of government not to infringe, but to support" (Adam Smith, quoted more-or-less".
Published: June 26, 2006 3:01 PM
1
Upon unfounded money they enlarge
The government and greater taxes charge.
2
Upon unfounded money Washington
Would dissipate restraint, desiring none.
3
Upon unfounded money values can
Not stand, erelong inflatedly diluvian.
4
Upon unfounded money they expose
Their credit to the world, which doubtful grows.
5
Upon unfounded money they forget
That elemental gold would credit get.
6
Upon unfounded money they expand
The trillions of expense by sleight of hand.
©2006 F L Light
Published: June 26, 2006 3:16 PM
If it was not for government fiat, i.e., legal tender laws, pieces of paper would not be the generally accepted medium of exchange. The current world-wide fiat money system only exists because governments use their monopoly on the legal use of violence to force individuals to accept fiat paper money. Absent legal tender laws and government acceptance of certain instruments as payment for the discharge of tax obligations, the free market would undoubtedly choose a commodity other than paper as money. Most likely, this commodity would be gold (and possibly silver in a subsidiary role). Finally, even government violence has its limits, as hyperinflations throughout history have shown when the demand for "money" literally drops to zero.
Published: June 26, 2006 3:25 PM
Mike Sproul: nice article, but I don't think it diverges that badly from the Misesian view (but I should add that I haven't read a lot of Mises's stuff).
You say that money is backed: yes. But that doesn't change the fact that the money supply is increasing, and there is a visible effect of "inflation", rising prices for everything, as well as bubbles in many markets.
An additional problem is that you say there could be competing currencies, but in our legal system I think there really can't be any. It's prohibited, or at least any business is required to accept the "legal tender", the official state-"backed" currency.
Also, if government (or the Fed)--as the organisation both backing the money (to a small degree, which is constantly getting smaller), and as the organisation able to collect taxes--broke down, there wouldn't be any more value to the money. So while it - kind of - works for now, it's not a really stable arrangement.
Published: June 26, 2006 3:39 PM
Mike,
You may want to read Mises again, and perhaps throw in a dose of Rothbard as well (What Has Government Done to Our Money seems like a good place for one to start).
You seem like a nice enough fellow, and I understand your desire to equate general bank holdings with real money, i.e. commodity money, but no; financial securities are NOT real money, not even if you really, really, really want them to be! They are ultimately backed by nothing but the same false promises we are offered for our modern FIAT currency.
Take this test - I hire you to write a proposal for me that will use the logic of Gresham's Law to strike down the construction a newly-proposed, publicly-funded bingo parlor in my neighborhood. I offer to pay you in gold, or in an IOU which you can never redeem for anything else (e.g. anything of real value!) from me, although you would certainly be free to 'trade' that IOU to some other poor sap who has 'faith' in my 'pledge'. Which do you choose?
Published: June 26, 2006 4:08 PM
Mike,
“I read Mises' "Theory of Money and Credit" around 1990. It was enough to convince me that there was nothing to be gained by reading any more of what Mises had to say about money.�
I know the feeling. But in my case the response was to Keynes.
“So I take it you're OK with gold and silver money.�
Yup.
“At which point in the evolution of money would you object?
“1) When a private bank issues a piece of paper saying "IOU one ounce of silver", and it actually holds one ounce of silver?�
Immediately you introduce the concept of the IOU. An IOU is a loan. It is an exchange of the current money good for a money good in the future with interest. This is not the same thing as a warehouse receipt, which is what a monetary deposit and paper money originally was. It was redeemable on demand, it was not a loan and the specie could not be loaned out, and it therefore did not legitimately pay interest.
“2) When that same bank issues that same note, but instead of an ounce of silver it holds the equivalent value of gold?�
The failure to see a bank note as a warehouse receipt leads you down a steep slope of confusion very quickly indeed. If you issue a warehouse receipt for an ounce of silver, you are not at liberty to dispense with your customer’s silver and force him to accept gold in its place. This is similar to a warehouse storing your table lamp, and when you come to redeem it, he offers you a very nice flashlight in its place. You didn’t bargain for that, and you have been defrauded.
“3) Same as (2), but the bank holds the equivalent value of land?�
Same answer only now it is worse because the bank is now offering in place of the money you deposited, land which is more difficult to unload than gold and worse, is not what you contracted to redeem your receipt in, which is what you initially deposited in this scenario: silver.
“4) same as (2) but the bank holds the equivalent value of financial securities?�
Same answer only now it is yet worse again because now what you are possibly offering him is something of little value at all to him or anyone else. All he wanted was what he had the right to ask for: his silver back. Instead he gets dubious securities and lame excuses as to why a warehouse didn’t keep his silver as it had contracted to do.
“And finally, what if a private citizen issues an IOU saying "IOU one banker's IOU", and the private citizen holds no banker's IOU's, but his assets are enough to back the IOU?�
You’ve got to first understand that money is not an IOU. Loans are entirely different from money. Secondly, you aren’t suggesting that in today’s hampered market, individuals issue their own money are you?
“The real bills view is that none of the above are fraudulent or inflationary, but that for the government to prohibit any of them would be "a violation of that natural liberty, which it is the proper business of government not to infringe, but to support" (Adam Smith, quoted more-or-less".�
And the Austrian view is that all of the above banking actions are fraudulent and inflationary and that it is government legislation and its intervention in the free market of law that makes these criminal acts of the bank immune to prosecution from a victimized public seeking damages.
Published: June 26, 2006 4:33 PM
Paul, outstanding... very well said and to the point. Even forced a few chuckles. Though I do hope I get an answer from Mike regarding my hypothetical offer.
Published: June 26, 2006 4:41 PM
Wow, just one monetary crank sure drew a lot of attention. It should be interesting if he decides to come back and actually defend his position.
Published: June 26, 2006 5:41 PM
As a compare and contrast to the "Be patriotic, Go shopping~"-ethos : Ludwig von Mises: "Now nobody ever contended that one could produce without working. But neither is it possible to produce without capital goods, the previously produced factors of further production." - Planning for Freedom
Published: June 26, 2006 9:08 PM
Ulrich:
The real bills view is that inflation is caused by a loss of backing per unit of paper money. For example, money increases faster than backing, backing is lost or stolen, etc.
It is a little weird to think of other currencies competing against the dollar, since we don't see, for example, pesos being widely used in the US. On the other hand, dollars are used in Mexico, and the peso is (wrongly) called fiat money. So on the quantity theory view the peso would lose value as dollars invade mexico. On the real bills view the invasion of dollars would not have any effect on the Mexican Central Bank's ratio of assets to money, so it would cause no mexican inflation.
Certainly, if the Fed lost its assets, the dollar would lose its value. The same would be true of a 100% reserve bank that lost its gold.
Published: June 26, 2006 11:11 PM
James:
I hope we don't drift off into arguing semantics, but I'd say that when you use a financial security to buy something, that financial security is money. For example, 100+ years ago it was common for people to buy things with "bills of exchange", which were created when a customer bought something from a merchant. The bill basically said "IOU 1 shilling payable in 30 days". They were commonly used as money, but of course they would only circulate when the credit of the person who wrote it was good.
"I offer to pay you in gold, or in an IOU which you can never redeem for anything else"
You're arguing my point. I say that nobody would accept an IOU that will never be paid--i.e., nobody will accept fiat money. It doesn't exist.
Published: June 26, 2006 11:20 PM
Paul:
I don't see any difference between what I call an IOU with 100% silver backing and what you call a warehouse receipt, but that's probably a minor point.
A major point is this: What if customers agree to accept an IOU issued on fractional reserve principles? That is, the IOU is redeemable for 1 ounce of silver most of the time, but everyone understands that for every IOU issued, the bank actually holds half an ounce of silver and an equivalent value of financial securities? Customers would agree to this because they understand that the bank can earn interest on the securities, and therefore be better able to stay in business. Historically this is the way that money-issuing banks have operated. Their customers understand that fractional reserves carry risk that the bank won't always be able to pay a full ounce for each IOU, but they also understand that 100% reserve banks have also sometimes failed in their obligations. Where is the fraud when both parties understand the deal and agree to it?
"Loans are entirely different from money. Secondly, you aren’t suggesting that in today’s hampered market, individuals issue their own money are you?"
Example: I buy a loaf of bread at the corner market in a small town. I write the grocer an IOU for $1. The grocer uses the IOU to buy an apple from a local farmer. One day I sell some fertilizer to the farmer. He pays me with my own IOU, which I tear up. I have created (and ultimately retired) paper money--even in today's hampered economy.
Published: June 26, 2006 11:37 PM
Hi Mike,
“I don't see any difference between what I call an IOU with 100% silver backing and what you call a warehouse receipt, but that's probably a minor point.�
An IOU has a specified term such as a month or a year, will pay interest, and for that duration the money is loaned not deposited and is therefore not only in the possession of the borrower, but is owned by the borrower to do what he wishes with it including lend it out again over that period. A warehouse receipt is redeemable immediately on demand at face value and although it is in the possession of the warehouse, it remains owned by the depositor at all times. The warehouse has no right to lend out this money as it is not owned by the warehouse. There is already a demand claim on this money and to issue another demand claim on it is fraud.
“A major point is this: What if customers agree to accept an IOU issued on fractional reserve principles?�
If the customers agree to accept counterfeit warehouse receipts to non-existent goods, then the customers have agreed to a fraudulent arrangement. It is a physical impossibility to have two claims on the same good and so doing so is fraudulent counterfeiting. Issuing or agreeing to attempt to pass on such counterfeit claims is participating in fraud.
“That is, the IOU is redeemable for 1 ounce of silver most of the time, but everyone understands that for every IOU issued, the bank actually holds half an ounce of silver and an equivalent value of financial securities?�
This is impermissible for the reasons I state above. The situation depends on the confidence of both holders of the multiple receipts of the single real good, that no one will exercise his right to redeem. As I indicated, issuing valid multiple claims on the same good is a physical impossibility, and is fraudulent.
“Customers would agree to this because they understand that the bank can earn interest on the securities, and therefore be better able to stay in business.�
To honestly achieve this, the bank must explicitly borrow and customers must explicitly lend money. There is no way for a warehouse to legitimately lend money to customer B that is deposited for safe keeping at this warehouse by customer A.
“Historically this is the way that money-issuing banks have operated.�
It depends on what point in time you start studying history. The fact is, if you look far enough back, you’ll see it was once widely recognized that dishonest bankers had a tendency to lend out money that was not theirs but was deposited for safe keeping by a customer. It was recognized as the fraud that it is and it was done very quietly because everyone understood its criminal and immoral implications. Today people are much foggier on it, but the essence of the action has not changed a bit.
“Their customers understand that fractional reserves carry risk that the bank won't always be able to pay a full ounce for each IOU, but they also understand that 100% reserve banks have also sometimes failed in their obligations. Where is the fraud when both parties understand the deal and agree to it?�
The fraud is that it is a contractual misrepresentation of a hard fact of life. Two claims to the same single good are impossible. One might ask similarly, if a private counterfeiting ring agrees to print counterfeit bills, and the stores they buy things with these bills agree to trade goods for them, where is the fraud when both parties understand and agree to it. Fraud can be carried out by consenting conspirators. Consent is not the entire issue.
PE: "Loans are entirely different from money. Secondly, you aren’t suggesting that in today’s hampered market, individuals issue their own money are you?"
“Example: I buy a loaf of bread at the corner market in a small town. I write the grocer an IOU for $1. The grocer uses the IOU to buy an apple from a local farmer. One day I sell some fertilizer to the farmer. He pays me with my own IOU, which I tear up. I have created (and ultimately retired) paper money--even in today's hampered economy.�
But the grocer has made you a loan. Subsequently the farmer took over the loan to you by taking your IOU. Then the debt is repaid via the fertilizer by you. This is fine, but the IOU is not money, because it does not have wide-spread marketability and could not. It is a debt security that some people have agreed to take. Money would remain the $1.
Published: June 27, 2006 12:37 AM
Brad Dexter,
CEOs from financial backgrounds may have a general sense of the cash flow, but from what I've seen in my own jobs they have very little sense of the kinds of stuff that would actually improve the efficiency of production and reduce costs. Their general approach to cutting costs is not to restructure the process, despite all the ISO-9000 and Six Sigma jargon on the bulletin boards. Rather, perplexed by the absence of any obvious line-item for "waste, fraud and abuse" in the budget, they simply eliminate or slash entire categories of productive workers, in effect inflating the next quarterly earnings statement by living off their capital.
Published: June 27, 2006 12:39 AM
First a couple of legal points:
The Constitution of the United States states that no State can have anything other than gold or silver coin as legal tender.
Also the Constitution of the United States gives the Congress the power to coin money (there is no power to set up a Fed or to have this "private" enity print money) not to print it - this is becuase of the fiasco of "Continental" fiat money during the War of Independence.
However, liberals (as collectivists now call themselves) do not tend to care what the Constitution says (and Supreme Court judges are appointed by the very government whose activties they are supposed to limit) so I will turn to economics.
Mike said that he would have borrowed just as much money if it had been "backed" with gold or silver.
This "backing" notion is his first error.
The gold or silver (or whatever commodity people choose to use) is the money - it is not the "backing" for it.
It is possible that people would choose to accept bits of paper (or computer entries that do not even represent bits of paper) as a medium of exchance - but, in fact, that is not what the people in the United States choose to do. The fiat money system was FORCED upon them by the threat of violence - as recently as 1933 the Federal Government voided the gold clauses in private contracts (something it had no Constitutional power to do).
Now for fractional reserve banking.
A basic principle of sound finance is that borrowing should be financed by real savings.
In short if Mike wishes to borrow X thousand Dollars, a bank (or other money lender) must find people who are prepared to save (rather than spend) some of there income in order to fully cover this loan.
If a bank (or other money lender) "lends out" money it does not have this is fraud (whatever the government's statutes say).
Mike will complain that if he had to find (or have financial institutions find for him) people prepared to not spend some of their income (in order that it be lent to Mike so that he can buy a house) he would have to pay a higher rate of interest.
That might be so Mike.
And if you are unable or unwilling to pay this higher rate of interest this proves that you should not be loaned the money.
The "prosperity" of a credit-money bubble always ends in a bust. As Mike will discover.
Published: June 27, 2006 8:56 AM
Thanks for reminding me of the Capslock but what have you got to say of todays economists running about in old garbs that have nothing to do with today's realities. Against what is today's M1 being measured? The reams of papers being used to print them? Who account for the counterfeits in circulation and the drug monies entering into all economies?Economics and banking need new definitions to fit today's realities.
Published: June 27, 2006 11:01 AM
Thanks James. Cheers!
Published: June 27, 2006 12:31 PM
Paul:
"The fraud is that it is a contractual misrepresentation of a hard fact of life. Two claims to the same single good are impossible. "
But the paper dollars I just described are not "two claims to the same good". For example, a bank might have issued two paper dollars--one for an ounce of silver and another for the deed to a square foot of farmland that has a fair market value equal to one ounce. The banker earns rent on the farmland, which allows him to operate, but the silver earns no interest. Customers fully understand this, but as a convenience to both parties, everyone agrees that in normal times the paper dollars will be redeemable at the bank for one ounce, while in abnormal times each dollar will be redeemable for half an ounce plus half a square foot. If everyone agrees to this--and historically this arrangement has been common, there is no fraud.
"But the grocer has made you a loan. Subsequently the farmer took over the loan to you by taking your IOU. Then the debt is repaid via the fertilizer by you. This is fine, but the IOU is not money, because it does not have wide-spread marketability and could not."
Clearly the IOU serves as money. That is what bills of exchange were, and they were commonly called money and circulated iwdely.
Published: June 27, 2006 12:34 PM
This article is one of the best I've read on Mises.org recently. I appreciate the authors' conceptual link between the gradual destruction of money by the State and the erosion of moral values among its subjects.
Another manifestation of this erosion of values and standards inspired by the last 100 years of State central banking is warped investment values. Most Americans are confused about the nature and purpose of productive investment, which is the production of net income. Decades of inflation have mesmerized people into believing that the pursuit of income is hopelssly outdated and naive, and that the name of the game is "appreciation". People also believe that rising investment prices are a law of nature, with literally zero long-term downside risk, provided only that one can hang on during temporary downturns.
One result of this culture of inflation is hugely distorted investment values. The prices of stocks, real estate, and bonds are extraordinarily high compared with their productive returns and the investment risks perculiar to each class of asset.
Take, for example, the price of pasture land in the remote river breaks of the northern Great Plains. This pasture is remote, devoid of stock water except for frontage on a pretty but muddy river, costly to fence, extremely labor intensive to utilize, and unsuited for future building or recreational developement. The area is pretty, in a rugged bleak way; but it offers no crystal clear trout streams, nor pine trees, nor shining mountains, nor elk. It gets hotter than blazes in the summer from the oven effect on the river breaks. The price of this acreage has increased by a factor of 12 since 1987.
Anyone who wants to ranch is forced to lease pasture for cows, because land prices are simply divorced from the reality of productive enterprise. This is one small example of how central bank inflating destroys productive enterprise even as it erodes moral values.
Published: June 27, 2006 12:44 PM
A private bank is pretty much the same thing as a fixed income mutual fund. The exception is that as a depositor (investor) you have the right to redeem your deposit (investment) at anytime. If the bank goes bust you lose your deposit (investment). Boohoo :..(
As long as the government does not bail out banks then there is no problem.
Published: June 27, 2006 12:55 PM
Mark,
The fact that people used to invest for dividend payments seems like ancient history, does it not?
banker,
I've heard it said that one purpose of the FRB system is to protect short bankers from being hung from tall trees.
Which reminds me, Bernanke recently expressed concern about banks operating beyond their capital requirements. I learned recently that a portion of the "capital" that banks lend out is nothing more than a naked promise from the bank's shareholders to provide cash if needed.
Published: June 27, 2006 1:36 PM
On a somewhat related note, what is the best way to actually hold wealth in gold? I've looked at Goldmoney, but the fees are pretty high for a small-time investor like myself and I'd like to physically have the gold in my possession. Should I just purchase coins? Thanks!
Published: June 27, 2006 1:51 PM
Easiest way is to just buy a gold etf using a brokerage account like Scottrade.
Published: June 27, 2006 1:55 PM
Mercury,
I would guess that there are two different answers to this question based on what you are trying to do. If you want to hold wealth in gold and trust the financial system to continue indefinitely, then I would agree with banker and buy an ETF like GLD or buy a fund like CEF. If I wanted to hold wealth in gold and thought the financial system at risk of collapse, then you want discreet, physical possession of your gold and coins are OK for this, but you will pay a bit of a premium.
Published: June 27, 2006 3:03 PM
Mike,
Let's look at another scenario for a second. Let's assume that a bank wanted to work on a 100% reserve rate. They also want to be able to make loans so they get investors who have money to lend out for a certain rate. That bank is still going to require some backing for that loan in order to safeguard, to a certain extent, it's investors money. Are you saying that the money that bank lends out should now be worth double since, according to your argument, that money is now 'backed' twice?
Published: June 27, 2006 3:13 PM
banker and Yancey,
Thanks for the advice. The ETF route looks promising, although what happens if the government decides that owning gold is tantamount to trading with the enemy again? In the case that the financial system does collapse I'd prefer to have physical possesion of the gold.
For purposes of tax avoidance, would it not be easier to use a service like Ebay to buy and sell gold? I assume any gains made through buying ETFs or gols stock through a broker are tougher to hide from the state (not like anyone here would dare promote such behavior!). Isn't it wonderful that you could store wealth in your home to avoid Fed caused inflation and then be hit with a tax bill from the authorities!
Maybe I'll make a trip up north and come back with some Gold Maple Leafs.
Published: June 27, 2006 3:35 PM
I've looked at Goldmoney, but the fees are pretty high for a small-time investor like myself
What do you mean? GoldMoney's fee is 0.1 grams of gold per month - about $2. My bank charges me more than that. Plus 3.5% or something to buy gold. That's far cheaper than you'll ever buy coins or anything. 1MDC has no charges, and you can buy for 2% (e.g., from IceGold.com - and it's fully interoperable with e-gold, the only DGC that's actually currency; GoldMoney stores more gold, but nobody uses it as a medium of exchange).
I'd like to physically have the gold in my possession
In that case, buy coins. Actually, I'd recommend silver rather than gold - silver will climb in value faster (currently, you can buy 55 ounces of silver for an ounce of gold; the historical average is about 15-20 ounces of silver for an ounce of gold - expect it to close that gap)
ETFs are suspect. They're paper gold, not physical gold.
Published: June 27, 2006 8:45 PM
Or a mix of silver and gold. A cheap way to get into silver is with bags of junk silver dimes and quarters. But if your safe is limited in space, and you want to put a few bucks into coins, you'll need to consider gold too.
Published: June 27, 2006 9:32 PM
Paul Marks:
"In short if Mike wishes to borrow X thousand Dollars, a bank (or other money lender) must find people who are prepared to save (rather than spend) some of there income in order to fully cover this loan.
If a bank (or other money lender) "lends out" money it does not have this is fraud (whatever the government's statutes say)."
Show me a banker who lends money without taking adequate collateral, and I'll give him all the business he can handle. Normal loans made by normal banks create new money (usually checking account dollars) at the same time that the bank acquires adequate backing (collateral) to cover the money. This is not fraud.
Published: June 27, 2006 10:30 PM
Philanthropic Patriot:
"Let's assume that a bank wanted to work on a 100% reserve rate. They also want to be able to make loans so they get investors who have money to lend out for a certain rate. That bank is still going to require some backing for that loan in order to safeguard, to a certain extent, it's investors money. Are you saying that the money that bank lends out should now be worth double since, according to your argument, that money is now 'backed' twice?"
No. The scenario you described looks like this on a T-account
...ASSETS...................LIABILITIES
1).100 oz silver deposited..$100 paper
2).200oz deposited..........stockholders' equity worth 200 oz.
3).-200 oz silver
4).+IOU worth 200 oz,
backed by collateral
The only money this bank has created is $100 in line 1. The IOU in line (4) is backed by collateral, but the IOU is not backing the bank's paper dollars.
Published: June 27, 2006 10:41 PM
"Show me a banker who lends money without taking adequate collateral, and I'll give him all the business he can handle. Normal loans made by normal banks create new money (usually checking account dollars) at the same time that the bank acquires adequate backing (collateral) to cover the money. This is not fraud." - Mike
It most certainly is fraud. When I give my money to a bank, I expect to be able to get my money back when I want it, not one of my neighbors chickens, or whatever the hell he used as collateral.
There is a reason that a medium of exchange needs to be durable. Using any consumer good as the backing of new money is stupid because consumer goods don't always last very long and their value declines rapidly in any case. If a bank uses a new car as collateral for issuing $20,000, what do they do when the value of the car drops by half as I drive it off the lot? Do they have any way of tracking this? No, it's just a system of currency backed by consumer goods that are neither durable enough nor stable enough in value to serve as the restraining factor of the money supply. The Real Bills Doctrine is worthless and the people who support it are cranks, one and all.
Published: June 28, 2006 5:34 AM
"It most certainly is fraud. When I give my money to a bank, I expect to be able to get my money back when I want it, not one of my neighbors chickens, or whatever the hell he used as collateral."
If you want your money in a vault and are willing to forgo interest income then you should not be depositing money in a bank. Banks promise to deliver money, but may not be able to. The riskier the bank the higher the interest they pay on your deposit. Basically, a bank is no different from a fixed income mutual fund.
If you want to store your money you should just bury it underneath your house in a safe.
Published: June 28, 2006 10:25 AM
Why are you using silver as the investors portion. Assuming they use federal reserve notes then those notes were already created out of a loan with collateral. You are claiming that the value of those federal reserve notes get their value because there is collateral backing them so when the bank loans out federal reserve notes that already exist, by your logic they are 'backing' that money twice so that money should gain the value of the collateral on the second loan. That should cause deflation.
Published: June 28, 2006 12:36 PM
banker,
"If you want your money in a vault and are willing to forgo interest income then you should not be depositing money in a bank."
Why. This is what a bank deposit is. If, on the other hand, a bank wants to borrow money at interest, it must borrow money with a term with interest and the lender must forgo instant demand access to it and must undertake the risk involved in lending. One should not be depositing money in a demand account for the purpose of lending it. This is fraudulent.
"Banks promise to deliver money, but may not be able to."
They may not be able to because they have fraudulently made fulfilling their legal short-term obligations impossible by creating and loaning out a second and counterfeit demand claim to this money which they are obligated to keep available on demand to its real owner.
"The riskier the bank the higher the interest they pay on your deposit. Basically, a bank is no different from a fixed income mutual fund."
A demand deposit is not a mutual fund. With the demand deposit, the bank issues a warehouse receipt that is a promise to redeem on demand at par. The value of the mutual fund is what it is that day, or at a discount or else it is not available on demand.
"If you want to store your money you should just bury it underneath your house in a safe."
If banks want to offer demand deposit services, it must do it non-fraudulently. It can charge for this service, but it cannot honestly issue duplicate warehouse receipts on the same money. If it wants to borrow money from its customers, it must explicitly borrow it.
Published: June 28, 2006 1:29 PM
banker said;
"If you want your money in a vault and are willing to forgo interest income then you should not be depositing money in a bank."
That definition reveals just what is wrong with the system - in the bank, money is supposed to be secure (Thats what the FDIC guarantee implies, and what we have culturally come to expect, not very libertarian I know, but bear with me).
However, even if banks WERE 100% reserve banks, under the current system, you would STILL LOSE MONEY by putting it in a bank, because inflation drains the money of value.
If you had deposited $1000 in a no-interest bank in 1913, it would still be $1000. Except that $1000 deposit would have lost 95% of its purchasing power.
If, instead, you had placed $1000 worth of gold (at, say, $25/oz - 40 ounces) in a 100% bank, it would have also earned no interest, yet its buying power would have increased (40 oz x $580 = $23,000 and change at today's price).
Published: June 28, 2006 1:40 PM
Your arguing over semantics. It is obvious that banks lend out deposits; that is why deposits earn interest. I am not talking about the increase in dollars in the system (inflation). All I am saying is that banks are in the same business as hedge funds, mutual funds, insurance companies, etc. The current phrase now is financial services firms; this is because the lines between different lines of businesses are very blurred.
If someone does not know that their deposits are being lended out and that the bank could possibly fail then that is simply gross negligence. FDIC insurance is not a private bank problem, but a government problem. The FED is a government problem, not a private bank problem. As long as banks are allowed to go bust instead of being bailed out with taxpayer money, then it is okay. As long as everything is voluntary, I don't really see the problem, aside from terminology.
Published: June 28, 2006 2:01 PM
Going back to the original topic.
Ultimately, the ONLY solution is the abolition of the Federal Reserve and the dismantling of the central banking system. Outlaw fractional reserve banking with provisions for liquidating any banks that cannot meet their requirements to redeem in specie. Demand deposits and bank notes must be fully and immediately redeemable in specie. Banks would be able to issue their own bank notes, no central bank of issue. Eliminate FDIC, again, liquidation for insolvent banks. Interest rates would again resume their Rothbardian defined function.
The Federal Reserve is a cancer and only its complete destruction will allow any hope at all for return to a completely free market.
Published: June 28, 2006 2:33 PM
Philanthropic patriot
"You are claiming that the value of those federal reserve notes get their value because there is collateral backing them so when the bank loans out federal reserve notes that already exist, by your logic they are 'backing' that money twice so that money should gain the value of the collateral on the second loan. That should cause deflation."
No; If the investors hand $200 in FR notes to the bank, and receive $200 of stock in exchange, then when those $200 are lent the entries on the T-account would be -$200 cash on the asset side, offset by a +$200 IOU on the asset side. The $200 of FR notes do not appear on the liability side of the banker's balance sheet, and therefore are not backed by the banker's assets. The $200 FR notes do appear on the liability side of the Fed's balance sheet, since they are the Fed's liability.
Published: June 28, 2006 2:50 PM
Paul:
A banker could issue green paper notes that are 100% backed by silver in the vault, and each redeemable for one ounce. The same banker could then issue blue notes that are 100% backed and redeemable for a certain weight of gold. For convenience, the weight of gold could be chosen to be equivalent in (today's) value to one ounce of silver, so that the green and blue notes would initially trade 1-1 on the market, though any changes in value of gold & silver would change that ratio accordingly. Having done this, the bank could issue purple notes 100% backed and convertible into copper (initially worth 1 oz. of silver), red notes convertible into iron, brown notes convertible into wheat, yellow notes convertible into land, etc.
Assuming all these notes are backed by commodities actually owned by the bank, and convertible into those commodities during normal business hours, they would satisfy your idea of non-fraudulently issued money, correct?
Published: June 28, 2006 3:05 PM
banker said;
"As long as banks are allowed to go bust instead of being bailed out with taxpayer money, then it is okay. As long as everything is voluntary, I don't really see the problem, aside from terminology."
Then we agree. I was trying to illustrate that monetary inflation and fractional-reserve banking are two distinct, if interrelated government problems. I agree with you - as long as the banks are explicit that they are lending out your money (and in multiples) the real risk is then apparent, and the banks will have to pay the corresponding amount of interest necessary to attract investors.
As it is now, however, the entire thing is a sham from top to bottom. The only things that allow it to operate the way it does is the FDIC guarantee and the Fed.
Published: June 28, 2006 4:09 PM
Hi Mike,
“Assuming all these notes are backed by commodities actually owned by the bank, and convertible into those commodities during normal business hours, they would satisfy your idea of non-fraudulently issued money, correct?�
In this scenario, what are you thinking of as being money? If silver is money, then yes, the silver certificates, to function as honest money substitutes, must be truly redeemable on demand at par at face value in terms of ounces of silver and the silver must be available during normal business hours and hence not loaned out. But if silver is money, then gold and copper are not money, and so the gold and copper certificates are simple warehouse receipts for those commodities, presumably deposited for safe-keeping by the customer, just as would be the case for grain elevator warehouses for grain. These should also remain safely in storage and not loaned out. However, just as very few people would accept a warehouse receipt for a ton of grain in payment for groceries, neither would they be likely to take warehouse receipts for other non-monetary commodities such as copper as payment.
Published: June 28, 2006 5:15 PM
It just occurred to me to mention that it is slightly misleading from an ethical perspective, although handy for discussion, to view bank deposits on an asset and liability sheet. A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank. The cash from a bank deposit remains owned by the depositor. The warehouse receipt is not a debt security, it is claim of ownership.
This is just like any other warehouse situation. If you put your dining room table in storage, it does not become an asset of the storage company; nor does the fact that you will claim it make that claim a liability on the books of this company. The fact that money is fungible does not change this.
Published: June 28, 2006 5:35 PM
Hi Paul:
I'm not trying to draw a line between what is "money" and what is not. I don't have a problem with two people agreeing that a loaf of bread will be traded for a silver certificate, while another two people agree that a loaf of bread will be traded for a copper certificate, etc. For the moment I'd just like to confirm that you see no reason to prohibit the issue of any of these certificates, or to prevent people from trading them for a loaf of bread.
"A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank. The cash from a bank deposit remains owned by the depositor. The warehouse receipt is not a debt security, it is claim of ownership."
I'm no accountant, but I think accountants in practice actually do consider these things as assets and liabilities.
Published: June 28, 2006 7:21 PM
"This is just like any other warehouse situation."-
Maybe 200 years ago banks were considered warehouses. Today, though, banks are financial services, not warehouses to store your goods. Banks are all about the balance sheet. They are highly levered entities. Deposits are zero maturity liabilities, while the loan portfolios (asset side) are considerably longer durations.
Published: June 28, 2006 7:56 PM
banker, well put. How is it possible that, on this site, there is confusion over the basic operation of banks and the banking system?
Published: June 28, 2006 8:06 PM
A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank.
It shouldn't be, but of course that is what it is today. Places that accept "deposits" that continue in the ownership of the depositor call that "bailment" to legally distinguish it from a "deposit" which changes ownership.
Published: June 28, 2006 8:44 PM
How is it possible that, on this site, there is confusion over the basic operation of banks and the banking system?
There isn't. Banker is describing what is, today; Paul Edwards is describing what should be. I'm sure Paul knows that what should be isn't what is. I'm not sure banker knows that what isn't isn't what should be. But nobody's confused. (And I'm certain Mike Sproul doesn't know that he's describing crackpottery)
Published: June 28, 2006 8:47 PM
LMAO! Thank-you all for a sequence of very huge laughs! This subject is thick with irony and other funny things; Peter’s “I'm not sure banker knows that what isn't isn't what should be.� was great. And thanks, Peter we see eye to eye.
Anyways, I guess I have some questions to answer:
Mike, I have no objection to using titles to ownership in commodities in barter transactions, so strictly speaking, I have no objection to your scenario. The problem I have is that I suspect you are on the verge of, or have already misconstrued what the bank does when it expands credit to lend for the purchase of any given commodity. The bank does not take into its possession copper, for instance, and then issue a receipt for this copper, and then people make barter transactions with these receipts, or titles to ownership in the copper. What rather, you are really trying to slip by is that with a deposit of a certain amount of silver, presuming silver is the unit of money in our theoretical economy, that the bank can issue duplicate claims to this same deposit of silver and lend these claims out, and then put on its books as owning the copper (the alleged collateral backing) that was bought with this loan of this duplicate receipt for this silver.
The person who sold the copper to the borrower of the counterfeit duplicate demand claim to the silver now has this claim to silver, and at the same time, the original depositor continues to also have a very same demand claim on the very same silver. When the seller of the copper redeems his claim to silver at the bank, which it is his apparent legal right to do (although it is counterfeit claim), it turns out that the original depositor of the silver to his demand deposit account no longer can collect back his silver.
What you are proposing is that all is well, regardless of this minor inconvenience to the silver depositor, because the bank has in its possession copper (collateral of the counterfeit loan) with which to pay the hapless silver depositor. But alas, this is not the case at all. For starters, the term of the loan for the copper is not a day or a month but a year or perhaps more, and the term of the loan is not up and so it is very far from being in default, not that the copper would likely be anywhere to be found if the loan were in default. But the upshot is, the bank contracted to hold silver on demand for the depositor, and then proceeded immediately to render itself entirely unable to fulfill all of its short term contractual obligations in redeeming receipts on this silver. This is not bad luck, or bad management, but plain and simply fraudulent embezzlement.
I guess Peter answered the other questions. I’ll just add on M E’s question on how there can be so much confusion on the subject of banking. It stems from the long and infamous history of the nature of banking, its tendency to be abused by criminally minded bankers, and the state’s opportunistic tendency to collude with the banking industry to form a mutually profitable if criminal conspiracy to defraud the public through unnatural banking legislation. This benefits the bankers by being able to collect interest on money that the banks create out of thin air, historically labeled counterfeiting of claims to money, or generally fraud, and the governments benefited by often being the first recipients of these loans of counterfeited claims to money and by being able to defraud their creditors through a devaluation of the currency.
After a few generations of state, intellectual and media propaganda, (it was as recent as 1913 when the general public had a healthy and well founded suspicion and disrespect for the ethics of the banking industry), the public has become well indoctrinated that modern banking practices are on the up and up and nothing to be suspicious of at all. However, a thorough reading of Mises, Rothbard, Hoppe, Huerta de Soto, and many others of mises.org, will dissolve this confusion quite completely. It’s just that we have a long way to go in spreading the word. But all in due time.
Published: June 29, 2006 1:41 AM
Yes, Money, Bank Credit, and Economic Cycles is required reading.
This made me laugh: on February 13, 1300 it was established that any banker who went bankrupt would be vilified by a public spokesman and forced to live on a strict diet of bread and water until he returned to his depositors the full amount of their deposits [...] on August 14, 1321 the regulations pertaining to bank failures were modified. It was established that bankers who did not immediately fulfil their commitments would be declared bankrupt, and if they did not pay their debts within one year, they would fall into public disgrace, which would be proclaimed throughout Catalonia by a town crier. Immediately afterward, the banker would be beheaded directly in front of his counter, and his property sold locally to pay his creditors.
Now that's what I call deposit insurance!
Published: June 29, 2006 7:05 AM
This entire discussion is analogous to the one I had with Kevin Carson the other day about the mutualist credit house. The essence of the problem seems to be this: the monetary cranks are attempting equate barter transactions with fractional reserve banking. For example, the mutualist credit house is to create monetary units using the property of "borrowers" as collateral with the theory being that such a transaction is not really a loan and, thus, should have a zero rate of interest rate. Carson described this as "monetizing" the property of the mutualists which would allow them to purchase capital equipment. Of course, in order to truly monetize the property, the mutualist should either sell the property for commodity money, or actually trade the house for the goods he desires in a real barter transaction.
Published: June 29, 2006 8:54 AM
Hi Paul:
Glad to hear you're OK with trading ownership claims. In particular, how about ownership claims to land? Unlike an ounce of silver or copper, a square foot of land can't be carried in your pocket or held in your vault, but the deed to a square foot of land can be, and it can be traded for commodities. Unlike silver and copper, the land can continue in productive use while the deed to the land is being held in a pocket or vault. So just to be sure, you have no objection to the issue of paper claims to a square foot of land? or to people using those claims to buy groceries?
Published: June 29, 2006 8:57 AM
To me why would someone accept an IOU from a bank for some unit currency? A bank could only loan out 100% of its deposits and now more. I would think that a third party would be responsible for actually routing the money order between owners. Something like Paypal or e-gold would be the custodian of the gold and not the bank. I don't think banks in their current form would be in the business of making currency.
Published: June 29, 2006 9:22 AM
Mike,
“So just to be sure, you have no objection to the issue of paper claims to a square foot of land? or to people using those claims to buy groceries?�
You are correct. I have no objection to barter of any resource, including land for any other resource. But again, I will add that people aren’t going to view a deed to land as money, and so it is just a whole lot less likely that you will be able to efficiently trade land in this way. Money is the best way to buy and sell land, and other commodities. This is why money exists in the first place.
Published: June 29, 2006 12:05 PM
Banker:
"To me why would someone accept an IOU from a bank for some unit currency? A bank could only loan out 100% of its deposits and now more. "
Example: A bank has $100 FR notes on deposit and it has issued 100 checking account dollars in exchange. A borrower then asks for a loan of 200 checking account dollars, and offers his house, worth maybe $400, as collateral. The banker can issue the extra money, and the bank has, in a sense, lent more than 100% of its deposits, if you count only the $100 FR notes as deposits. But in fact the collateral could be considered as a "deposit" at the bank, so in that sense the bank has only lent as much as it had in deposits.
Published: June 29, 2006 12:12 PM
Peter, "Now that's what I call deposit insurance!"
HA! Amen to that.
Yancey, I agree. The common theme is to create money from nothing and justify it via the monetization of other assets and simple debt itself. I think it stems from a very fundamental misunderstanding of the nature of money.
banker, "I don't think banks in their current form would be in the business of making currency."
Each FR loan any bank makes out represents the expansion of the money supply, which corresponds in your terminology to the "making of currency". Was there $100 cash in someone's pocket today? Let him deposit it to his checking account and his bank will quickly turn this into $190 of checking deposits: $100 in the depositor’s name, and $90 in the name of a new borrower. That's $190 worth of demand claims against only $100 worth of real cash. That's effectively making currency.
Published: June 29, 2006 12:21 PM
Paul:
"You are correct. I have no objection to barter of any resource, including land for any other resource. "
OK. How about if a bank accepts 1 oz. of silver and issues a paper receipt promising to pay (say) 1.05 oz. to the bearer in 1 year. Over the year, banker and depositor agree that the silver will be lent out by the banker. Meanwhile the customer has a piece of paper that will start the year worth 1 oz. and gradually rise to 1.05 oz. at year-end. Furthermore, both understand that there is some risk of default, but are willing to proceed. Any objection to the issue or subsequent barter of those pieces of paper?
Published: June 29, 2006 12:21 PM
Mike,
“OK. How about if a bank accepts 1 oz. of silver and issues a paper receipt promising to pay (say) 1.05 oz. to the bearer in 1 year.�
Excellent. I like it. This sounds like a bond or a certificate of deposit. These are great debt instruments and are completely valid. The customer lends 1 oz of silver for a year to the bank.
“Over the year, banker and depositor agree that the silver will be lent out by the banker.�
The LENDER has agreed that this silver is now the banks. All the lender owns is a claim to silver in the future (1 year) with interest. The bank owns the present silver and can and should do what he wants with it, which will be lend it out again. This should show up on the bank’s balance sheet by the way. Perfect!
“Meanwhile the customer has a piece of paper that will start the year worth 1 oz. and gradually rise to 1.05 oz. at year-end.�
God bless the banker for identifying and providing such a fine and honest manner to do business. :)
“Furthermore, both understand that there is some risk of default, but are willing to proceed.�
Yes, they would understand this; LENDERS understand there is risk when they lend money.
“Any objection to the issue or subsequent barter of those pieces of paper?�
As long as this customer who has loaned his money to the bank has been given no legal demand claim on this loan, then all is on the up and up. I have no objections. But did you intend to omit this small caveat, or were you intending for me to understand this as a simple one year term loan by the customer to the bank. This scenario has nothing to do with FR banking.
Published: June 29, 2006 12:45 PM
Mike,
I think I see where you are going with this last question. Though Paul will answer your question, I would gather that he would have no problem with this scenario. The barter transaction you proposed would involve the initial saver, the holder of the bank's IOU, transferring his abstention from consumption to another party.
Published: June 29, 2006 12:47 PM
Paul,
You are just too quick! :~)
Though, you do make a good additional point about the potential omission in Mike's scenario. That one had not occurred to me.
Published: June 29, 2006 12:57 PM
The scenario in which I was referring to was the absence of the Federal Reserve system; this is just speculation on my part. Assuming there is no Fed I would guess people would use gold as the primary currency. Paypal type companies would hold the physical gold and act as a custodian/trust for clients. Banks would pretty much accept deposits (investment), pay out interest cost, and loan out deposits to make money.
The currency would basically be e-gold and private banks in this case would be unable loan out more than 100% of deposits. Cash in = Cash out.
Published: June 29, 2006 1:18 PM
I don't care for the catagorical characterization of Wall St. (as a "moral sewer". While there are plenty of cretons on Wall St., there are also many brilliant businessmen who provide the critical function of allocating capital among and within businesses, and many of them are honest and ethical people. Furthermore, many of these men have created ever more efficient innovations for businesses and individuals to manage risk. I know a few of these men and women and find that kind of categorical disparagement to be offensive.
Published: June 30, 2006 1:03 AM
banker: do you have in mind something like CyberGoldBank, perhaps?
Published: June 30, 2006 2:07 AM
Paul:
I lend the bank one ounce of silver for 1 year. I get the bank's interest-bearing IOU, while the bank lends the silver at interest. The guy who borrowed the silver can use it to buy a loaf of bread, while I can also use the bank's IOU to buy a loaf of bread. Furthermore, the bank's IOU can be deposited in a second bank and lent, while the depositor receives the second bank's IOU, which he can also use to buy a loaf of bread. This is fractional reserve banking. Still no objections?
Also: In my previous example of notes backed by gold, silver, copper, land, etc., do you suppose that as new notes redeemable in copper are issued, there would be no effect on the value of notes redeemable for silver?
Are you feeling like a real bills adherent yet?
Published: June 30, 2006 10:08 AM
Mike,
But money is a present good, not an IOU.
When I accept money, I am not accepting a contract for future performance - I have the present good in hand. That good may increase or decrease in value, but it is in fact a present good.
An IOU, on the other hand, is a promise of future performance. When I accept an IOU, I know that I am accepting a risk of default, that I do not currently have title to the underlying good, and that in fact, I may never have title to it, because the debtor may default. These are not the considerations people think of when they accept money - they think they have title to a present good.
Only in the current distorted market created by the Fed can people mistake IOUs for money. They are not the same thing. Someone can pay money for an IOU (obviously garnering a discount in the process), but that does not make them an identity, anymore than the fact that you buy a car with money makes a car money.
The problem with RBD is that people do expect that they can pull their money out entirely, on demand. It is not a loan. If banks were forced to tell customers that their deposits were loans that couldn't be called for a year, I think banks would have a lot less business. Instead, they call them deposits, and have the government provide insurance and excess liquidity to cover for the fact that they are fraudulently using the deposits to make loans.
Published: June 30, 2006 10:39 AM
quasibill sez;
"But money is a present good, not an IOU."
Right on, Bill.
Look - I put money into my investments knowing that there is both some increase in risk and decrease in liquidity from doing so. I accept that in exchange for a return.
But all I want when I put money in a bank is a low rate of interest and the ability to get at it, with a minimal risk to the principal.
Two different things.
Published: June 30, 2006 11:17 AM
Mike,
“I lend the bank one ounce of silver for 1 year. I get the bank's interest-bearing IOU, while the bank lends the silver at interest. The guy who borrowed the silver can use it to buy a loaf of bread,�
So far so good, but…
“while I can also use the bank's IOU to buy a loaf of bread.�
Not at the grocers I do business with. There, they intend to take only money. This is the point where you introduce massive confusion into your argument. You can’t take 1-year bond to the local store and exchange it for goods. People want M O N E Y not someone’s loan! Now, you can fraudulently misrepresent a piece of paper as clear and exclusive title to present money, but people will only accept it if they fall for it. Your premise depends on that people will fall for it, which thanks to legal tender laws, FDIC, the fed, and various establishment lies and propaganda, they do, or at least they must.
“Furthermore, the bank's IOU can be deposited in a second bank and lent, while the depositor receives the second bank's IOU, which he can also use to buy a loaf of bread. This is fractional reserve banking. Still no objections?�
Mike, if I didn’t know better, I’d think you are just trying to be funny by concocting this bizarre addition to the very sensible scenario you laid out in your previous post. You are proposing to loan out a loan? I suppose we could loan out a lone on a lone of a lone? A person can sell his bond to someone for money, but it must be for real money, not some counterfeit duplicate claim to someone else’s money.
“Also: In my previous example of notes backed by gold, silver, copper, land, etc., do you suppose that as new notes redeemable in copper are issued, there would be no effect on the value of notes redeemable for silver?�
I don’t get the question.
“Are you feeling like a real bills adherent yet?�
Less so than ever.
Published: June 30, 2006 1:08 PM
Vince,
"But all I want when I put money in a bank is a low rate of interest and the ability to get at it, with a minimal risk to the principal."
I would have to call that an investment/loan as well, and not a deposit account. A deposit account would likely generate no interest, as it would not be available to be loaned out (of course, I won't discount the possibility of some entrepreneur finding a non-fraudulent way to make money off a bailment, but I can't think of it myself right now :)). The only risk in a deposit would be that of theft, or loss of value in the money itself. In fact, for a true deposit situation, one would likely pay money to the bank for the service of holding the money in a secure place.
The fraud comes in where you claim to have present title to the money you deposit, while at the same time, the bank is lending out the same money to another person. Only if you agree to forgo present title for a time period (i.e., a loan) can the bank then non-fraudulently lend out your money during that time period.
I'm not as strong a critic of fractional reserve banking as some here. I believe there is nothing wrong with it as long as the customer is made aware of what is being done and can choose to avoid it - then it's just an investment. But I agree that currently, it's a fraud, as present title to a single piece of money can be in the hands of several different people.
Published: June 30, 2006 1:23 PM
Paul, Vince, and Quasibill:
Paul said in his previous post that he had no objection to the issue and subsequent barter of those silver-based IOU's. So if I take that silver IOU, which has a fair market value of one ounce at the start of the year, and I trade it for one loaf of bread, he's OK with that. But let someone try to call that silver IOU money, and suddenly all three of you would call it fraud. Simple solution: stop calling the IOU's money, but let people continue to barter them as they please.
Now, if the original ounce of silver and the IOU are both in the hands of the public, and both being bartered, spent, or whatever, in exchange for loaves of bread, you cannot deny that the fractional reserve process is in operation. So you either have to call it fraud and prohibit people from bartering their IOU's, or you have to recognize that it is not fraud as long as both the borrower and lender agree to the issue of the IOU.
As for the silver and copper notes: My point is that on real bills principles, copper notes could proliferate without affecting the value of the silver notes, and likewise for any other kind of notes.
Published: June 30, 2006 7:19 PM
Mike,
“Paul said in his previous post that he had no objection to the issue and subsequent barter of those silver-based IOU's. So if I take that silver IOU, which has a fair market value of one ounce at the start of the year, and I trade it for one loaf of bread, he's OK with that. But let someone try to call that silver IOU money, and suddenly all three of you would call it fraud. Simple solution: stop calling the IOU's money, but let people continue to barter them as they please.�
Mike, first of all, we live in a monetary economy not a barter economy, so people expect to be paid with money, not bartered with in financial securities. Therefore, in general, to the extent that people are aware that you are offering them a financial security rather than money in exchange for a present good, they will not be willing to trade with you. To the extent that they are willing to trade with you, they have been fraudulently misled to believe that you are offering money and not a security. I say generally, because the odd person is actually looking for a security. But not your grocer or car dealer or employee, or.... etc. etc.
Published: June 30, 2006 8:38 PM
Paul:
But supposing for the sake of argument that we are in a time or place where people do in fact trade using things with varying degrees of 'moneyness', those silver certificates could and in fact would be used to buy things. So if you say on the one hand that people should be allowed to issue and trade with those certificates, while on the other hand you oppose letting the certificates be issued on fractional reserve principles, then you are caught in a contradiction.
Published: July 1, 2006 2:33 PM
There's no contradiction here; there's no fractional reserve - the silver is not available on demand, on presentation of the IOU at the issuing bank; you have to wait a year, or however long the IOU has to run. Your idea that the IOUs can be deposited at another bank for other IOUs is just nuts - why would anyone do that? The bank wouldn't accept it unless the interest paid on the deposited IOU was more than on their own IOU, and the customer wouldn't accept it unless it was the other way around. I.e., it would never happen.
Published: July 1, 2006 9:15 PM
Peter:
The ounce of silver is in the hands of the person who borrowed it from the bank, and it can be used to buy things. The silver note is in the hands of the person who deposited the silver, and the note, worth 1 ounce, can also be used to buy things. That is fractional reserves in a nutshell.
The IOU, which starts the year at 1 ounce and ends the year at 1.05 oz, is a thing of value, and like any thing of value, it can be lent. A borrower borrows it at the start of the year when it is worth 1 oz, and repays it at the end of the year when it is worth 1.05 oz, paying 5% interest like anyone else. Not a common transaction of course, but no reason it couldn't happen.
Published: July 2, 2006 1:06 AM
That is fractional reserves in a nutshell.
No, it isn't.
The IOU, which starts the year at 1 ounce and ends the year at 1.05 oz, is a thing of value, and like any thing of value, it can be lent. A borrower borrows it at the start of the year when it is worth 1 oz, and repays it at the end of the year when it is worth 1.05 oz, paying 5% interest like anyone else. Not a common transaction of course, but no reason it couldn't happen.
I explained above why it couldn't happen.
Published: July 2, 2006 2:29 AM