The Principle of Sound Money
Ludwig von Mises wrote: Whoever dares to hint at the possibility that nations may return to a domestic gold standard is cried down as a lunatic. The proinflationist propaganda emphasizes the alleged fact that the gold standard collapsed and that it will never be tried again. First of all, there is need to remember that the gold standard did not collapse. Governments abolished it in order to pave the way for inflation. Second, whatever compliant government economists may have said, inflationism is not a monetary policy that can be considered as an alternative to a sound-money policy. It is at best a temporary expedient. FULL ARTICLE
Comments (55)
Mark Brabson
Gold is indeed the way to go. Your preaching to the choir here. Unfortunately, I don't see much chance of destroying the demons of Central Banking and inflation in the near future. I think it may be a matter of waiting for the collapse of the fiat system.
Published: September 1, 2006 5:40 PM
KY Leong
Right, Mark. My engineering professor used to say there are always two choices in such human affairs - the smart way and the dumb way. Most of history has shown that we'll take the latter - govn fiat money, that is, and pay the price.
Published: September 1, 2006 11:07 PM
Gary Stevens
In the article Mises states,"There is only one efficacious way toward a rise in real wage rates and an improvement of the standard of living of wage earners: to increase the per head quota of capital invested." Does this mean increasing the per head value of the productivity of each person?
Could someone help me out with clearly understanding this phrase?
Isn't inflation based on a desire to borrow. If we as individuals do not borrow, won't this have an effect on the inflation rate?
Published: September 2, 2006 10:46 AM
Ken Zahringer
Bravo, Mises!! This should be required reading in every high school in the country, with a test before the students can graduate!
Gary, you are right on both counts. Increasing per capita investment of capital increases productivity. Increased productivity is the only means to increased earnings, as any self-employed person knows all too well. Inflation has two sources, central bank money creation and credit expansion. Credit expansion (banks lending money they don't have) is driven by consumer debt, which is at astronomical, world-record levels in America today. That is part of the siren song of inflation Mises was talking about - buy now, pay later. If Americans en masse decided to get out of debt, our economic landscape would change radically. But that requires discipline, so don't hold your breath.
Published: September 2, 2006 1:14 PM
Paul Marks
If indivduals do not borrow credit expansion money then governments and corporations will.
Of course (government backed) bank credit expansion is just one way to increase the money supply - there are others.
For example, one could simply print more fiat money ("increase the monetary base" - MB or M0 to give to measures of something that is basically [with a few things added] notes and coin).
Of course if the new fiat money was never used (if it just sat there by printing press) it is possible that it would not cause prices to rise (which is what the layman thinks of when he hears the word "inflation").
But then what would be the point of this increase in the money supply? Money that was never used would nt have any of the good effects that monetary cranks down the centuries have claimed for a monetary expansion.
Of course, normally, "monetary expansion" people do not say "let us print more money", they say "we want lower interest rates" - but the way they want to get these "lower interest rates" is to expand the supply (in various ways) of credit money.
One of the basic principles of economics is (or at least should be) that all borrowing must be financed by real savings (i.e. people choosing to not spend all their income but to lend out, via the banks or whatever, part of it).
Any financial system where there is more borrowing (by individuals, levels of government, and private organizations - put together) than there is real saving (I stress "real" saving - not "savings" or "bank deposits" that are just book keeping tricks) is a financial system that is basically unsound.
Yes that is correct - all the nations of the modern world have unsound financial systems.
Some are worse than others, but none are sound - sad, but there we are.
As for what money should be ("based on" is a classic credit expansion trick) - I agree it should be a commodity (efforts to create money via an "index" or whatever are mistaken).
But what commodity should be should be up to people themselves.
If someone wants to be paid in gold (of a certain purity) and someone else wants to be paid in silver (of a certain purity) it is up to buyer and seller - a matter of contract (voluntary agreement).
Over time certain commodities will become the most used, and it may well be that gold will the most often used commodity money.
But that is really up to people - after all all "market forces" are is the choices of millions of people.
Some commodities have advantages that others do not (for example gold does not rust), but it should be up to people to decide in the web of civil interactions that are what society really is.
On the point about wages.
Well, yes, if better ways were found to work (say lots of companies were managed better - perhaps because unions were defeated in them) then it is possible that output (and real wages over the economy as a whole) might increase without much new investment of physical capital.
However, normally it is new investment (in more or better kit) that is the basis for a rise in real output and real wages (by "real wages" I mean what people can buy with their money).
Although (of course) how a company is run will and should influence how much money is invested in it.
For example, it would seem foolish to invest a lot of one's own money in a company that was unionized. As this would be putting one's money in an organzation that one did not control.
"Now with my money we are going to change the company in such-and-such a way" says the investor, "no you are not, try that and we will strike - and if you fire us for not turning up to work all hell will break lose on you" says the union.
Of course if one would not invest one's own money in a company it is not ethical to invest the money of someone else in that company.
"But without more investment the company will die" says the union, "that is just tossing good money after bad" says anyone sensible in charge of investment funds.
Published: September 2, 2006 1:23 PM
Leigh Jacobs
I am just beginning what will no doubt be a long journey toward understanding economic systems. In fact, I just ordered 'The Creature From Jekyll Island' (which is about the Federal Reserve) and 'For a New Liberty: The Libertarian Manifesto' by Murray Rothbard.
As someone with no background in economics, it seems obvious to me that fractional-reserve banking is inherently flawed, for three reasons: (1) It inflates the economy, which as Mises pointed out drives up prices on commodities, in most cases faster than it drives up wages. (2) It is possible/probable/inevitable that at some point there will be a run on the banks, leaving two opions available for the central bank, either declare its insolvency or print enough money to cover its debt, at which point inflation would skyrocket. (3) It puts an unfathomable amount of power in the direct control of the central bank. In effect, it enslaves all of us to the central bank, of course because they lend us money that doesn't exist, and we pay it back with interest. That is, as long as the charade lasts.
Clearly, if we as people value our freedom, we need to get rid of the central banking system (possibly a revolution is the only chance at this point, although I think a revolution is not going to happen, because the American people are totally demoralized and lazy), and we need to adopt a gold standard, and open up the banking market to private competitors.
Published: September 3, 2006 2:04 PM
Roberta Kelly
G. Edward Griffin, author of “Creature from Jekyll Island� has a website, http://www.freedomforceinternational.org, and he is going to be open for business in the sale of silver. His silver dollar he feels is a better deal than the Liberty Dollar. I don’t know why silver over gold but it does seem to me that it levels the playing field somewhat more effectively than gold.
John Ruiz-Dempsey has filed a class action lawsuit in Canada against the banks for fiat lending. He is also the attorney representing the Natives in their fight to stop the ruling elite from stealing their lands in Canada to create the North American Union.
The ruling elite "fraudulently induce" and then they enjoy the fruits of their labor by allowing the entrepreneurial and middle classes to produce the asset base for them with the inflationary “transference of wealth.�
It's a system they have cleverly put into place to assure their "free lunches."
Why fix it if it's not broken? Yet is the operative word and February 2007 could be a very scary month from what I've been told.
Not much time to stop these morons from stealing America's real estate to pay for more wars. Iran will be a very expensive venture and the whole thought of it causes me to weep.
Let's get a US class action lawsuit to stop this madness before we’re another Russia during the 1990s..
http://www.theclassactionsuit.com/johndempsey.htm
Published: September 4, 2006 8:31 AM
BK Marcus
Leigh Jacobs, Creature from Jekyll Island relies heavily on Rothbard's writing, both economics and history. I'd suggest you start with the source: What Has Government Done to Our Money (which is combined with his essay "The Case for the 100 Percent Gold Dollar" in the latest print edition).
Published: September 4, 2006 12:04 PM
Mike Sproul
Why have a gold standard, or any standard, at all? On libertarian principles, there should be no restrictions on the ability of anyone to issue a paper IOU promising delivery of an ounce of silver, a bushel of wheat, a square foot of land, or whatever. Furthermore, an IOU promising an ounce of silver could be convertible now or 100 years from now, and could be backed with 100% silver or a mixture of silver and other assets. As long as the issuers and receivers of these IOU's understand and agree it is just voluntary trade.
Published: September 4, 2006 12:05 PM
Mark Brabson
Mike Sproul:
I agree with you fully. While I cannot speak for anybody else, when I use the term "gold standard", I am referring to the free use of gold as a commodity money. But of course, any suitable commodity that the market wishes to use should be acceptable. Obviously, gold and silver, or warehouse receipts therefor, would be the ones generally embraced by the market.
I fully and emphatically support the separation of government and monetary system. The market alone should determine the medium of exchange. The only proviso I would insist on is that banks be required to hold 100% reserves on all banknotes issued and demand deposits held.
Again, I cannot speak for anyone else in using the term "gold standard" and perhaps it is not the best term to use when speaking of gold as a free market commodity money.
Published: September 4, 2006 12:15 PM
adi
Free Banking is the only banking system compatible with the libertarian principles. Its not good that only one institution has a right to inflate as much it wants. If ordinary people could print their own notes that would be good since no one would then take fiat currency as a payment and 100% commodity packed currencies would became a norm.
Published: September 4, 2006 1:31 PM
Mike Sproul
"The only proviso I would insist on is that banks be required to hold 100% reserves on all banknotes issued and demand deposits held."
If I've been issuing notes in exchange for an ounce of silver, and calling them dollars, and if someone comes in wanting a dollar, but instead of offering me one ounce of silver he offers me something else (gold, wheat, land) that is worth at least 1 ounce of silver, then why should the government prohibit a voluntary exchange between two people who have their eyes open?
Published: September 4, 2006 4:47 PM
Leigh Jacobs
Obviously we need privately run, competitive banks that are required to keep 100% reserves. The frustrating thing is, liberals (as in, the "left"), and probably to an extent the "Right," think that its just a fabulous idea that anybody can go in and get a loan and go out and buy a house, a car, etc, due, of course, to credit expansion. Of course, at the end of the day, inflation will drive prices up, and wages will not proprtionately increase, which will cause a decrease in real wages.
Does anybody have any projection how big the inflation "bubble" can grow before it bursts? And what will be the result of the bursting?
Published: September 4, 2006 5:41 PM
Mark Brabson
Mike Sproul:
I am not seeking to impede free exchange in any way. That would be the last thing I want. My goal with 100% reserve banking is to prevent the fraudulant inflation. Issuing of warehouse receipts (banknotes, etc.) for a commodity that isn't actually IN the warehouse is fraud. It is also inflationary. It reduces the value of warehouse receipts for those folks who actually do have the commodity stored in the bank. If somebody wants to store wheat in a bank, they may. But the banknote better say this.
"Bank of Florida promises to redeem this note for 10 bushels of wheat, payable on demand."
NOT
"Bank of Florida promises to redeem this note for 10 ounces of gold, payable on demand."
I have no problem with alternate commodities being used, but the banknote better be backed by a commodity and it must accurately state the type and weight of the commodity being stored.
And if people want to use alternate commodities as mediums of exchange, go right ahead.
Published: September 4, 2006 6:55 PM
Mike Sproul
Leigh Jacobs:
"its just a fabulous idea that anybody can go in and get a loan and go out and buy a house, a car, etc, due, of course, to credit expansion. Of course, at the end of the day, inflation will drive prices up,"
That assumes the correctness of the quantity theory. The real bills view, which I favor, says that as long as newly-issued money is backed by assets of adequate value, there will be no inflation. This is explained at
www.geocities.com/sproulmike/nofiatmoney.doc
Published: September 4, 2006 9:49 PM
Mike Sproul
Mark Brabson:
"But the banknote better say this.
"Bank of Florida promises to redeem this note for 10 bushels of wheat, payable on demand."
NOT
"Bank of Florida promises to redeem this note for 10 ounces of gold, payable on demand.""
What if the banknote says
"Payable for one ounce of silver in normal times, except that sometimes we won't have silver on hand, so we'll pay you an equal value of gold or wheat or whatever"
AND both parties agree to the condition. Would you prohibit that voluntary trade? If so, would you still consider yourself a libertarian?
Published: September 4, 2006 9:55 PM
Peter
"The real bills view, which I favor, says that as long as newly-issued money is backed by assets of adequate value, there will be no inflation."
That assumes the correctness of the real bills views. The purple bills view, which I favor, says that as long as the newly-issued money is printed with purple ink, there will be no inflation. This is explained at www.netkook.com/crank/nonsense.pqd
Published: September 4, 2006 10:03 PM
Mark Brabson
Mike Sproul:
I would not be opposed to what you suggest, as long as there is sufficient stock of one of the listed commodities to cover the banknote. It does not violate the 100% reserve principle, so I could support it. There are some difficulties that would need to be addressed, such as fluctation in the relative value of commodities, but, as long as care is taken, that system could work.
Published: September 4, 2006 10:37 PM
David Spellman
Gary Stevens,
You asked for clarification of what Mises meant by increasing the per head quota of capital invested. What this means is that the amount (quota) of productivity per unit of capital invested must be increased. Basically it means that if a worker wants to become wealthier, he must be more productive compared to the amount of money invested in him. This can be accomplished by becoming more skilled, working longer hours, or using more efficient tools or methods.
For example, a ditch digger can earn more money using a backhoe than a shovel. His tools, skills, and efficiency increase. Of course, fewer ditch diggers will be needed (although it is possible that new uses for ditches will be found due to increased supply/lower costs, too). Those that continue digging ditches will be more prosperous, and those displaced will need to find other employment.
Displaced workers are inconvenienced in the short run, but in the long run the economy grows and the workers enjoy a higher standard of living in most cases. The exception is for the few who cannot or will not do something productive. Fortunately, the cannots are quite few. The will nots suffer just consequences.
Published: September 5, 2006 2:13 PM
Vince Daliessio
Peter wrote, after Mike Sproul;
"The real bills view, which I favor, says that as long as newly-issued money is backed by assets of adequate value, there will be no inflation."
That assumes the correctness of the real bills views. The purple bills view, which I favor, says that as long as the newly-issued money is printed with purple ink, there will be no inflation. This is explained at www.netkook.com/crank/nonsense.pqd"
LOLOL. Funny as this is, it gets at the edges of the real "Real Bills" debate, which is "Cui Bono?" or "who benefits from the creation of new money?"
Under the current system, the creators (US Government) and the facilitators (Federal Reserve)of inflation are its greatest beneficiaries, along with their contractors, military, banking, and otherwise.
Under the "Real Bills" doctrine, this benefit will accrue principally to the generators of the bills, an improvement, probably, but still patently unfair to the average rube who holds these bills for savings, the value of which will always shrink over time in a free-issue regime.
Published: September 5, 2006 3:06 PM
Yancey Ward
Mike Sproul touches on it indirectly, but it is an important point: Libertarians should not be advocating the illegality of fractional reserve banking. The type of bank one deals with should be a matter of personal choice, with all contracts binding. If I wish to "deposit" 100 silver coins with Mike Sproul Banking, and I understand that next week I may have to accept 2 donkeys rather than my silver when I present the receipt, then that is up to me, not the government, not anyone else.
Published: September 5, 2006 4:21 PM
Mark Brabson
Libertarians should not advocate fraud either. Which, essentially, true fractional reserve banking is. Issuing out banknotes in excess of reserves actually on hand. It fraudulently damages me. My deposit at the bank decreases in value because the unit of the deposit is devalued by the fractional reserve inflation. It is no affront to Libertarian's to fight fraud. In fact, combatting fraud is one of government's few proper functions.
If someone accepts a banknote that allows redemption in either silver or donkeys, that is perfectly okay. But there just better damn well be silver or donkeys in the bank to meet that obligation at all times. If there is not, then that is FRAUD.
Published: September 5, 2006 4:43 PM
Mike Sproul
"My deposit at the bank decreases in value because the unit of the deposit is devalued by the fractional reserve inflation."
On real bills principles, fractional reserve banking does not cause inflation. As new money is issued, the assets of the issuer move in step with the quantity of money, so the value of money is unchanged. The failure of Austrians to recognize this is the reason why they fall into obvious errors, such as equating legitimate money-issuing banks with counterfeiters.
(Right on Yancey! Your insight won't win you any friends among Austrians, but at least some of them might start asking the right questions.)
Published: September 5, 2006 5:22 PM
Mark Brabson
Setting aside my objections to fractional reserve banking as fraud for a moment.
Without the central bank to bail out, and with the bank issuing notes for which it has no backing, you are faced with the problem of a bank run. Things downturn, people decide to call in their notes, and suddenly find out, there ain't enough assets at the bank to cover them. So you have the possibility of massive bank failure.
Another point is, why the need to inflate at all. Essentially, it can only serve the government, banks and a few priviledged elites at society's expense. Why not stick with a steady commodity money stock and witness either a steady price index or possibly even a mild deflationary trend. This would reinforce peoples savings, make the average worker's economic position FAR stronger and would provide a TRUE investment basis for business, not one artificially expanded by inflation.
Published: September 5, 2006 11:05 PM
Mike Sproul
Mark B:
"with the bank issuing notes for which it has no backing, you are faced with the problem of a bank run. Things downturn, people decide to call in their notes, and suddenly find out, there ain't enough assets at the bank to cover them."
I'm saying the bank should issue new money ONLY in exchange for assets of ADEQUATE VALUE. In a bank run there might not be enough silver to redeem all notes, but customers can be paid in other assets of equivalent value, as long as the bank acquired new assets as it issued new money. As long as this is done, there will be no inflation.
Published: September 6, 2006 10:09 PM
Peter
How do you determine what "equivalent value" is? If you determine that a donkey is worth 2 oz of silver today, and some guy comes in with a donkey, you issue him with a note claiming to be worth 2 oz of silver; what happens when someone else arrives with the note a month later demanding his silver, and you only have a donkey - and today a donkey is only worth 1 oz of silver? What you're advocating makes no sense, Mike!
Published: September 6, 2006 11:56 PM
Paul Edwards
"What you're advocating makes no sense, Mike!"
Peter,
This is because Mike has failed, in a most spectacular fashion, to grasp Mises's explanation of the nature of money as the economy’s most marketable commodity, and how title to such money acts as a money substitute. Without this foundation of understanding, it seems one can overlook the difficulties associated with the fraudulent issuing of duplicate titles to money, and therefore one can buy into the most amazing and flawed monetary views. This remains Mike's unhappy fate.
Published: September 7, 2006 4:38 AM
Paul Edwards
“Mike Sproul touches on it indirectly, but it is an important point: Libertarians should not be advocating the illegality of fractional reserve banking. The type of bank one deals with should be a matter of personal choice, with all contracts binding. If I wish to "deposit" 100 silver coins with Mike Sproul Banking, and I understand that next week I may have to accept 2 donkeys rather than my silver when I present the receipt, then that is up to me, not the government, not anyone else.�
Yancey,
Let me put your point in parallel terms, but using a Ferrari as an example instead:
“If I wish to pay 10,000 silver coins to Mike Sproul Car Company, for title to a Ferrari, and I understand that next week I may have to accept 2 donkeys rather than Ferrari when I present the title to the vehicle, then that is up to me, not the government, not anyone else.�
Now, on the surface, this statement is also true and no libertarian should object to this either. However, the a priori fact of human action is that people, being self-interested as they are, are not willing to pay the price for a Ferrari, with the implicit understanding that what they may get instead are two donkeys. Therefore, the entire arrangement MUST be fraudulent to have any HOPE of succeeding.
It is similar with fractional reserve banking. The depositor of money to the bank is necessarily intending to deposit his money and therefore is expecting to maintain title to his money and immediate access to the value of it, if not the specific fungible coins themselves. If he did not have this expectation, he would be making a loan to the bank, and in that case, it is not a deposit, and this is NOT fractional reserve banking. Without explicit notification to the “depositor� that he is in fact making a loan to the bank, there are two possibilities:
One possibility is that the depositor knows that his “deposit�, which he believes he maintains title to, is being loaned out to another bank client simultaneously and that he may not ever get his bank deposit back before the bank goes bankrupt. Self-interested, acting individuals will necessarily not voluntarily acquiesce to such a detrimental contract. The second possibility is that the depositor remains oblivious to the true nature of the deposit: i.e. that although he deems it a deposit such that he maintains title to the value of the money, the bank in fact, is treating the deposit as a loan to it, complete with transfer of title to the money to the bank.
This second possibility is the only true and practicable form of fractional reserve banking. And it is clearly and necessarily fraudulent. It is not necessary to advocate the illegality of any functional form of fractional reserve banking. It simply is fraudulent. And this we can deduce via praxeological reasoning.
Published: September 7, 2006 5:09 AM
Peter
BTW, I came across this speech a few days ago, defending central banks, which I thought was quite interesting. [He's right and wrong, of course - the alternative he imagines is as unworkable as he says, but is not an alternative anyone around here - pace Mike Sproul - would consider anyway]
Published: September 7, 2006 6:20 AM
Peter
Oops; apologies for the lack of end tag (I thought I typed it!) -- the URL is OK, anyway.
Published: September 7, 2006 6:23 AM
adi
Mike Sproul tried to con us earlier with his examples, since there was implicit postulate that there is enough commodity money to redeem all notes which bank had issued.
But if a bank has to redeem all its notes and tries to sell assets in its portfolio for commodity money there would be a deflation. There is no problem if customers know that they will have sometimes accept other things than this commodity money. Only certain thing about your monetary system for me is that if text in your notes say that "we redeem this bill for a 50 oz of silver OR equivalent value of other assets" then necesserily after some financial disaster happens your bills wouldnt be worth of 50 oz silver. Bank would probably have a very diverse portfolio of assets as a collateral for its paper money and how you can you then say that farm offered as a collateral is worth of 50 oz silver ?
Mike's monetary system would work only as long there is sufficient commodity money backing and notes are not backed by IOU's which values have been artificially increased by monetary expansion.
Published: September 7, 2006 6:45 AM
Mark Brabson
As clarification:
Somebody had referenced it above. I do recognize and observe Rothbard's distinction between "Deposit" banking and "loan" banking as being correct. I have of course have been referencing "deposit" banking in my above arguments.
The silver and donkey's argument actually doesn't work too well. Suppose you deposit 100 silver coins and are issued a bank note, redeemable in either 100 silver coins or two donkeys. If donkeys depreciate in value, the bank can redeem in donkeys and you are screwed. So multiple redemption banknotes, while fine for banks, probably would suck for customers. It would fit in the "letter" of 100% reserve banking, but it would be to the benefit of banks, since banks would simply redeem in the depreciated commodity and retain appreciated commodities.
Published: September 7, 2006 10:29 AM
Mark Brabson
Mike Sproul:
If the banks are issuing notes only as they gain new assets, well that is 100% reserve banking. As long as all notes are 100% covered by reserve assets.
Published: September 7, 2006 10:31 AM
Mike Sproul
Mark, adi, Peter, & Paul:
A bank accepts 100 oz. of silver and issues 100 "dollar" notes in exchange. The bank then issues another $200 for a farmer's promise to pay 200 oz. plus interest in 1 year. The farmer posts his farm, currently worth 300 oz, as collateral. At the end of the year the farmer might not be able to repay the silver, but everyone understands that the world is a risky place, and they agree to it. Only by the most tortured reasoning can this entirely voluntary set of trades be called fraud. I suppose that a sufficiently rabid austrian could even claim that the farmer's IOU is fraudulent, since the farmer won't always keep enough silver on hand to repay the loan, and he might fail in repayment when the loan is due. Then what? Outlaw all loans?
Furthermore, the issue of the new $200 will not be inflationary as long as it is adequately backed by new assets--i.e., the farmer's IOU. This is simple accounting--not a fraud, and not a con job, but completely at odds with the Austrian view of money.
Published: September 7, 2006 5:58 PM
Paul Edwards
Mike,
Your confusion begins with this statement “A bank accepts 100 oz. of silver and issues 100 "dollar" notes in exchange� and snow-balls from there.
A person who deposits 100 oz of money (silver) with a bank expects in exchange for this deposit a warehouse receipt, or title to exactly 100 oz of money (silver), not some nebulous and semi-meaningless “dollar�.
When the bank issues this money title to the depositor, it means that title to that money, that silver, remains with the depositor. The depositor continues to own the money; the bank merely contracts to keep it safe on behalf of the depositor. For the bank to lend out this money, which it does not own, but rather the depositor owns, is fraud or misappropriation (theft). It is that simple.
All variations on FR Banking that attempt to overcome the unethical nature of FR Banking renders such scenarios as now either actual loan contracts, which are not unethical, but are also not under consideration, or else they involve notices that make FR banking so obviously unfavorable to the depositor that it necessarily could never get off the ground because of what we know of human nature. Any workable form of a truly fractional reserve banking system is necessarily fraudulent.
Published: September 7, 2006 7:10 PM
Mike Sproul
Paul:
Four words: THEY AGREE TO IT.
When I put my paper dollars in a bank, and get checking account dollars in exchange, I know full well that the bank operates on fractional reserves, and I agree to take my chances. I also understand that if the bank operates on 100% reserves, and if they are robbed, then there is a chance I'll never see my dollars again, so I wisely put my dollars in fractional reserve banks that are not so vulnerable to robbery.
Published: September 7, 2006 10:12 PM
banker
For those who are anal retentive about using the word "deposit" for fractional reserve banks, I suggest you supplant the word "loan" in place of deposit.
A deposit in a fractional reserve bank is simply a loan that can be called at any time. The bank then takes this money, pays deposit interest on it, and loans ~80% of it out to clients. The bank is a middle man. The assets are the loans plus what ever cash is at hand. The liabilities are the deposits against the bank. The left over stuff (A-L) is the equity of the bank.
I don't understand what is so difficult about this concept, especially if it voluntary. Think "bank = fixed income mutual fund".
Published: September 8, 2006 12:08 AM
Paul Edwards
Mike,
“I know full well that the bank operates on fractional reserves, and I agree to take my chances.�
Yes you are very daring , or would be, if not for this banking practice’s reliance on state intervention in the banking industry: legal tender laws, insured deposits by the FDIC, and the FED’s role as lender of last resort. Try considering your proposition under some semblance of a free market and imagine then just how daring you would be with handing your money that you cannot afford to loose and certainly would loose through some crackpot scheme that proposes you can have your money, and the bank can have it too to lend out at the same time.
Mike, this is getting really out there: “so I wisely put my dollars in fractional reserve banks that are not so vulnerable to robbery.� The banks have already misappropriated your funds and you are relieved because this preempts the possibility of some non-banker from ripping you off since the money is already gone! I think FDIC and the FED have distorted your idea of what are and what are not wise ways to store your funds for safekeeping.
Banker,
“For those who are anal retentive about using the word "deposit" for fractional reserve banks, I suggest you supplant the word "loan" in place of deposit.�
The reasons why some people prefer to use the word deposit rather than loan when talking about fractional reserve banking is because 1) the banks refer to these deposits as a deposit, 2) the depositors refer to AND THINK of these deposits as a deposit 3) these deposits are a frickin deposit and finally 4) loans are NOT deposits. To some I suppose, these observations might seem like neurotic nit picking. To many others, who care about and understand the issue, it is just common sense.
“A deposit in a fractional reserve bank is simply a loan that can be called at any time.�
No. It is not. For two reasons: the first reason is the banker calls it a deposit (for a specific reason) and does not call it a loan (again for a specific reason). The banks are very finicky about NOT being up front and plain about this thing they present to the depositor as a deposit, that what they are doing is in fact not depositing, but loaning their money. The second reason is that the customer is not intending to loan his money when he deposits his money. If he wanted to loan his money he would look for a bank plainly offering to borrow his money, not take his money on deposit such that the funds are available essentially all the time on demand and on par.
“The bank then takes this money, pays deposit interest on it, and loans ~80% of it out to clients. The bank is a middle man. The assets are the loans plus what ever cash is at hand. The liabilities are the deposits against the bank. The left over stuff (A-L) is the equity of the bank.�
Yes, the BANK and THE STATE sees it as a loan such that the banker treats these funds as if it possesses title to them. In the meantime, the depositor is under the very distinct impression that he retains title to his money, that he deposited his money rather than loaned it to the bank. The two contractors have a fundamentally incompatible view of the contract, which is a bad thing from a juridical perspective. And it is mainly by far, the bank and the state, which insures this fraud, which benefits financially from this deception.
“I don't understand what is so difficult about this concept�
If you don’t understand the difficulty and if you are a banker yourself, then you have been deceived by your own industry’s intentionally misleading language. Fractional reserve banking is fraudulent and cannot be justified. This does not make you a bad person even though you are a banker. But as some great mind once said or should have said: "it is easier to commit fractional reserve banking than to justify it". LOL!
“, especially if it voluntary. Think "bank = fixed income mutual fund".�
There is nothing voluntary about people being forced to live with business cycles and economic distortions and a currency that year after year is devalued by the sporadic, yet generally increasing credit expansion based on fraudulent FR banking, produced by a criminal banking cartel, which is enforced by the state sponsored central bank.
When the banking industry is free of central bankers as lenders of last resort, legal tender laws, federal DEPOSIT insurance, and other state enforced legislation, which favors the banker at the expense of the consumer, we would all soon see it to be quite an impossible scheme except with the aid of fraud and deception and/or aggressive state intervention.
Published: September 8, 2006 3:07 AM
Mike Sproul
Paul:
People put their money in fractional reserve banks long before there was an FDIC. If the bank had adequate assets then the money it issued held its value, and if not the money lost its value. Some bankers were honest and some were not, but that's not a reason to ban fractional reserve banking.
Banker:
You're right. The concept is not difficult. Getting Paul to admit he's wrong about fractional reserve banking--now THAT'S DIFFUCULT.
Published: September 8, 2006 1:33 PM
Yancey Ward
Paul Edwards,
In no way do I really accept Sproul's arguments about RBD, however, I do have problems understanding libertarian's desire to outlaw fractional reserve banks- it seems oxymoronic to me.
Your silver, donkey, and Ferrari example again fails because people who would pay for a Ferrari for future delivery, with the understanding that a donkey may be substituted by the other party, are free to do so. This is not fraud, it is stupidity.
The problem I have with Mike's system is that it attempts to equate barter with RBD. To monetize an asset, one has to actually sell it. To simply create bank notes using the asset as collateral does create inflation, and when the run comes, as others have pointed out above, then comes the deflation to balance it out.
Fractional reserve banking should be a freedom depositors/loaners have, however, all users of it should be forced to accept the dangers and all of the losses. The system practiced today socializes the losses. This is fraud, or something very close to it.
Published: September 8, 2006 2:04 PM
Mike Sproul
Yancey:
A bank might accept land deeds on deposit, and it might issue "dollar" notes redeemable on demand for the deed to 1 square foot of farm land. I don't think anyone could deny that as long as the bank gets a square foot of land for every dollar issued, each dollar will always be worth a square foot no matter how many are issued (Up until all land is pledged to the bank, that is). If you can accept this idea, then it's not a very big step to accept the idea that issuing dollars for ANY asset of adequate value (i.e., worth a square foot of land) is not inflationary.
Published: September 8, 2006 3:14 PM
Paul Edwards
Yancey,
“In no way do I really accept Sproul's arguments about RBD, however, I do have problems understanding libertarian's desire to outlaw fractional reserve banks- it seems oxymoronic to me.�
I know. There’s a good reason why in this case, seeming isn’t being.
“Your silver, donkey, and Ferrari example again fails because people who would pay for a Ferrari for future delivery, with the understanding that a donkey may be substituted by the other party, are free to do so. This is not fraud, it is stupidity.�
The FR bank advocates continue to bamboozle by equating bank deposits with loans and title to future goods. Your interpretation of my Ferrari analogy confirms their success. I am not speaking of an agreement to a future delivery of a Ferrari. I am talking about immediate ownership subject to walking down to the car lot and picking up the vehicle. The confusion arises when people suppose that if people will accept donkeys in lieu of the Ferrari thy hold title to it is not for us to outlaw such foolishness. My objection to this is that my example is designed to show that when the matter is made clear, no one, certainly in general, is foolish enough to pay for title to a present good that they know in fact does not exist at all and will never exist. The ONLY way to accomplish selling title to a present good which in fact does not exist is through fraud. We have to remain realistic. People are foolish in a lot of ways, but if you explain to them they are buying title to a present good that in fact does not exist, MOST people will think you are just joking. If you go to the trouble to assure them that you are most certainly not joking, then they may jokingly offer to pay you with their own form of non-existent money, but beyond that they will tell you what you can do with your title to a non-existent present good. This fact of human nature is not rocket science. People act, which means people are self-interested, which means, they are not willing to knowingly accept title to a non-existent present good.
Back to how this ties into FR banking. The depositor acts as if he holds exclusive title to his deposit at the bank, and the bank loans out also exclusive title to the same deposit at the bank to someone else. There are now two titles issued to the same money. Ergo, there has been created title to non-existent present goods. Fraud dude.
Published: September 8, 2006 5:47 PM
Paul Edwards
"People put their money in fractional reserve banks long before there was an FDIC."
And to the extent that people remained oblivious to the situation, it could persist tenuously for a while. But bank runs were always waiting to happen and when they did, banks went bankrupt, and people lost their money.
Depositing funds in an FR bank in a free market literally amounts to buying a lottery ticket on recovering your deposit. You are betting that others won't withdraw your funds before you do. You're betting you'll be first in line when the bank run occurs rather than in the middle or end of the line when the money is long since gone.
Published: September 8, 2006 5:58 PM
Mike Sproul
"The depositor acts as if he holds exclusive title to his deposit at the bank, and the bank loans out also exclusive title to the same deposit at the bank to someone else. There are now two titles issued to the same money. Ergo, there has been created title to non-existent present goods. Fraud dude."
No. The banks lends the deposit to someone who offers COLLATERAL of equal value in exchange. Where there used to be one dollar backed by a dollar's worth of stuff, there are now two dollars backed by 2 dollar's worth of stuff.
No fraud.
Published: September 8, 2006 7:10 PM
Todd Marshall
"... subjects the entrepreneurs and the owners of the means of production, namely, the capitalists and the landowners, to the sovereignty of the buying public."
Unfortunately, the owners of the means of production typically have no clue to how they actually produce. It's the people who they have been lucky enough to employ who have this skill. And given a chance (like comining into money) these skilled, but capital impoverished, individuals could easily best these existing owners.
Some do come into money, and they beat their former employers about the head and shoulders in the marketplace. This is a problem with capitalism. It puts power in the hands of the clueless ... and tends to keep it there.
Published: September 21, 2006 10:25 AM
Vince Daliessio
Mike Sproul;
"No. The banks lends the deposit to someone who offers COLLATERAL of equal value in exchange. Where there used to be one dollar backed by a dollar's worth of stuff, there are now two dollars backed by 2 dollar's worth of stuff."
Now we are getting somewhere. The bank gets collateral that it hopes it will not have to take posession of and sell for what it will then hope is something like the value lent. These are often vain hopes, but businessmen have the right to dream, don't they?
"No fraud".
Ah, here's the rub. There is "no fraud" IF AND ONLY IF the speculative nature and risk of such a deposit are disclosed to the depositor. Otherwise, it reverts to a simple Ponzi Scheme, and one with a poor return, if that.
Published: September 21, 2006 11:04 AM
Yancey Ward
Wow, this thread came back to life, and resurrected by an anarcho-socialist!
Paul Edwards,
I mostly agree with you, but I think we differ in our interpretations of what fraud is. I just think that if a "depositor" knows he may not get his gold coins back, but rather may have to accept partial title to a piece of land, then I don't see that the depositor has been defrauded by the fractional reserve bank. Now, the case is less clear in regards to the merchants that accept the checks of the "depositor", but if the checks clearly state that they may not be fully redeemable for monetary metals alone, then, again, I don't see that this is fraud. I don't deny that the RBD creates inflation in the near term, but the bank runs balance this with the corresponding deflations. One can argue that the inflation itself, the distortions it causes, and the following deflations are fraud, but I question how anarcho-capitalists can outlaw it in any way that is not an internal contradiction.
Published: September 21, 2006 1:09 PM
Paul Edwards
Yancey,
“I mostly agree with you, but I think we differ in our interpretations of what fraud is.�
Thanks. Maybe, but perhaps not though.
“I just think that if a "depositor" knows he may not get his gold coins back, but rather may have to accept partial title to a piece of land, then I don't see that the depositor has been defrauded by the fractional reserve bank.�
I agree. The deception of the FR bank argument is in suggesting that the depositor would be interested in buying a loan/equity position in some third party venture. He would not. How do I know? Because he is a depositor. If here wanted to invest his money, rather than deposit it for safe-keeping, he would explicitly seek out to do this. I am not arguing against banks borrowing and selling equity positions to their customers. What I object to is pretending to provide deposit services and taking these deposits, which are not loans and are not traded for equity or any risk situation, and going ahead and lending or investing them in other ventures on the bank’s behalf. This is really what we are talking about. The entire idea of “disclosure�, if done honestly, transforms the entire question from FR banking, to bank borrowing. The two are entirely different. There is nothing wrong with banks explicitly borrowing money, but FR banking is not this.
“Now, the case is less clear in regards to the merchants that accept the checks of the "depositor", but if the checks clearly state that they may not be fully redeemable for monetary metals alone, then, again, I don't see that this is fraud.�
First: neither debt nor lottery tickets are money. No one who wants payment in money, which is practically everyone, is willing to take either a lottery ticket or a debt instrument in its place. If they do, they have most likely been duped. But they won’t if all is on the up and up. So again, FR banking must either be impossible, or it must rely on fraud.
“I don't deny that the RBD creates inflation in the near term, but the bank runs balance this with the corresponding deflations. One can argue that the inflation itself, the distortions it causes, and the following deflations are fraud, but I question how anarcho-capitalists can outlaw it in any way that is not an internal contradiction.�
I think the fraud happens when a second title to the depositor’s money is issued to a borrower.
Published: September 21, 2006 1:48 PM
Mike Sproul
Yancey, Paul, and Vince:
Suppose a bank accepts silver on deposit and issues paper "silver dollars" in return. Then it begins accepting bushels of wheat and issuing "wheat dollars"; then it starts issuing "land dollars" to anyone who deposits the deed to a square foot of land, etc. Every dollar is 100% backed by silver, wheat, land, or whatever, so Paul's (fallacious) concept of "fraud" is avoided. Each type of dollar has its own value, determined by the value of silver, wheat, land, etc. In this system there can be no inflation, since every new dollar is adequately backed, and no "fraud", since the bank holds 100% reserves. Note two things:
1) the RBD is perfectly correct--the issue of new dollars in exchange for adequately-valued assets does not cause inflation.
2) The only significant difference between this case and ordinary fractional reserve banking is that depositors are always able to redeem their "dollars" for a specific good, rather than the value-equivalent of some other good. And that is not a very significant difference.
Published: September 21, 2006 4:18 PM
Paul Edwards
Mike,
“Suppose a bank accepts silver on deposit and issues paper "silver dollars" in return.�
You mean warehouse receipts for the given amount of silver in terms of ounces? OK, I follow.
“Then it begins accepting bushels of wheat and issuing "wheat dollars";�
I think, again what you mean, or rather what you should mean, is it issues warehouse receipts for the given amount of wheat deposited in the storage. By the way, even our corrupt legal system recognizes the loaning of duplicate warehouse receipts of wheat as illegal. Isn’t that curious? I guess the wheat boards didn’t have the influence with Washington that the bankers had.
“then it starts issuing "land dollars" to anyone who deposits the deed to a square foot of land, etc.�
Someone deposits a deed to land? Deeds such as these are not at all fungible and so therefore, the only logical way to interpret this situation is the bank takes the deed into a customer’s safety deposit box for safe keeping. It makes absolutely no sense to characterize the receipt for this document in terms of dollars or money, and certainly not ounces of silver.
“Every dollar is 100% backed by silver, wheat, land, or whatever, so Paul's (fallacious) concept of "fraud" is avoided.�
This analysis is completely void of any recognition or understanding of the nature of money. In this hypothetical economy, as is the case of any economy, there must only be one single commodity that acts as money. I am assuming here that this commodity is silver. It certainly is not likely to be grain or land. So, what can be used as money is silver and the paper titles to silver which are money substitutes. It is incorrect to suggest that titles to land or warehouse receipts to grain could function as money along side receipts of the real money, in this case silver ounces.
“Each type of dollar has its own value, determined by the value of silver, wheat, land, etc.�
Each type of dollar. In your economy everything can be money all at the same time. Your bank can issue dollars in shoe-shines. This is pure fantasy.
“In this system there can be no inflation, since every new dollar is adequately backed, and no "fraud", since the bank holds 100% reserves. Note two things:
1) the RBD is perfectly correct--the issue of new dollars in exchange for adequately-valued assets does not cause inflation.�
You have defined money as any and all commodities and even services. Dude! I’ll take inflation over that degree of chaos any day.
“2) The only significant difference between this case and ordinary fractional reserve banking is that depositors are always able to redeem their "dollars" for a specific good, rather than the value-equivalent of some other good. And that is not a very significant difference.�
This is a scheme that can definitely make you go “hmmmmm�. LOL.
Published: September 21, 2006 7:10 PM
Mike Sproul
Paul:
You didn't deny that issuing "warehouse receipts" for silver, wheat, and land is not fraudulent, as long as the goods are held by the bank, so I take it you agree: No fraud.
You also didn't deny that the value of these warehouse receipt will be equal to the value of the commodity backing it, so I'll take our agreement further: No inflation.
You do deny that those warehouse receipts are money, and you deny that there can be more than one type of money. Those are transparent errors. People can, and have, and do, use all sorts of things for money--often side-by-side with other moneys.
Published: September 21, 2006 7:45 PM
Paul Edwards
Hi Mike,
“You didn't deny that issuing "warehouse receipts" for silver, wheat, and land is not fraudulent, as long as the goods are held by the bank, so I take it you agree: No fraud.�
Issuing warehouse receipts for commodities held is valid. Issuing tickets that appear to be title to money where no money exists is fraud. The problem is that your scenario is so counter to the realities of economics, ethics and money, that it is hard to disentangle what is pure confusion and chaotic mangling of concepts and terms from what should be considered intentional misrepresentation of the essence of a fractional reserve banking technique.
“You also didn't deny that the value of these warehouse receipt will be equal to the value of the commodity backing it, so I'll take our agreement further: No inflation.�
This is like wondering how hard it is raining when you are 10 feet under the surface of the lake. You can’t get any wetter, anyways, and as long as you remain in the lake, rain just doesn’t matter. Your theory of money is so outstandingly incorrect that if ever one were unfortunate enough to live under some system resembling it, inflation would be the least of one’s worries.
“You do deny that those warehouse receipts are money, and you deny that there can be more than one type of money. Those are transparent errors. People can, and have, and do, use all sorts of things for money--often side-by-side with other moneys.�
Yes, I deny that any and all commodities can function equally as money at the same time. I guess I’ll just have to stick to my transparent errors on the theory of money. LOL.
I’ll give you this much, Mike, you have picked the toughest crowd - mises.org - to put forth your money theories, and I admire that kind of boldness, persistence and tenacity. I would not have the patience to find a Keynesian site and try to persuade Keynesians of the errors in their ways. And this is true even though I know they are entirely mistaken on practically every economic view they hold.
Published: September 22, 2006 12:14 AM
Mike Sproul
Paul:
So if someone issues one kind of paper receipt every time someone deposits one ounce of silver, and another kind when someone deposits (say) 1/16 oz of gold, and another type when someone deposits one pound of copper, then you have no problem with that until someone buys groceries with one of those receipts? Then would you prohibit such a purchase? You either have to renounce libertarianism or the quantity theory. They are incompatible.
Published: September 23, 2006 9:51 AM
Peter
Don't be silly, Mike. Where did he say he'd prohibit anything? If you go to your local supermarket and offer to pay for your purchases with a pile of shoes, there's nothing wrong with that. Chances are, they won't accept your offer, though. Same thing whether you offer shoes or warehouse receipts for shoes. Or warehouse receipts for pounds of copper, etc. Those things are not money. But I'm 100% certain Paul doesn't have a problem with them.
[The problem comes when you offer a "warehouse receipt" for pounds of copper which _are not actually in the warehouse_!]
Published: September 23, 2006 8:49 PM
Mike Sproul
Peter & Paul:
If you have no objection to the issue of warehouse receipts for various commodities that are actually in the warehouse, and if you don't object to people buying groceries with those receipts, then I take it you also agree that any amount of those warehouse receipts can be issued without causing their value to fall. That already sounds a lot like the real bills doctrine.
(BTW Paul: I wouldn't have the patience to argue with Keynesians either. My only serious disagreement with Austrians is over the real bills doctrine.)
Published: September 23, 2006 9:49 PM