Money and Inflation: The Tendency to Deny Reality
Can the Phillips Curve be revived? Some mainstream economists are doing their best. They discuss price changes without acknowledging any role that money might have had in these changes. The entire framework is based on dubious black-box, time-series analysis. While the research paper mentions extensively the word "inflation," it never even attempts to define this term. Covering undefined terms with mathematical dressing cannot make the analysis more meaningful if the object of the analysis is not clearly identified. FULL ARTICLE
Comments (219)
Dear Sir,
I read all of your Mises submissions with great interest, and especially those that treat the subject of inflation. As simple as this subject appears even to a lay person such as me, I have to wonder about the mental capacity of the members of the central banks. Certainly they cannot be so obtuse as to not see exactly what your article details. Can they? Who is kidding who? Maybe this globalization game has much more far reaching implications than meets the eye.
Thank you for all your writings.
Published: March 27, 2007 2:06 PM
I very much enjoyed your article "Money and Inflation: The Tendency to Deny Reality" and had one question for clarification. It seems to me there are actually two ways more money can get into circulation. Debasement of the currency by the king is certainly the most common, but another is the discovery of more gold. Since we have from time immemorial found gold, it seems there is some natural and reasonable expansion of the money supply. Further, it seems that as productivity increases the buying power of the original gold coin that was the historical measure of exchange, we are forced to either find a new and finer division of the original coin, something we did see with the ha'penny and the farthing, or a new coinage to facilitate efficient exchange of money for goods and services. People in power being what they are, one should not be surprised to see the re-issuance of new coinage paired with debasement of the coinage. On the other hand, could it not be something analogous to the phenomenon of advertising, an irrational cost of trading happily borne by suppliers and consumers?
Published: March 27, 2007 2:29 PM
Excellent article! Especially this:
Please note we don't say as monetarists are saying that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.
Why do they have to make it so hard?
Published: March 27, 2007 2:41 PM
Dear Frank Shostak,
'But if the Fed were to acknowledge that inflation is actually printing money, then it would mean that the US central bank is not an inflation fighter but is itself the key source of inflation.'
I doubt the that the Fed will declare itself criminal but someday enough people will.
http://divineeconomyconsulting.blogspot.com/2007/03/divine-economy-theory-labels-inflation.html
With warm regards,
Bruce Koerber
Published: March 27, 2007 3:40 PM
Inflation? WHAT inflation?
http://www.csamerican.com/stuff.asp?k=25
Published: March 27, 2007 3:50 PM
Dear Mr. Shostak:
I am thoroughly enjoying your article, “Money and Inflation: The Tendency to Deny Reality.”
At one point you nudge up against the question of whether increases in production and increases in money supply resulting in constant prices are a condition of inflation. I am only an amateur economist myself, but would like to add this observation.
It seems to me that in an environment with a constant “value” to money, as in a true gold standard, the natural trend of prices of goods and services should be downward as producers, in competition with each other, find ever better ways to produce what they sell at lower costs. A perfect example is gasoline, which is virtually the same product today as it was in 1965-67, when I was at graduate school near here at U.C. Berkeley. At that time, gasoline sold for about $0.32 per gallon. If I use gold as a reference, that gasoline cost me, in 2007 terms, about $6.40 per gallon. Thus, the question the public should be asking is not “Why is gasoline up to $3.25 per gallon?” but rather “How can the oil companies sell me $6.40 gasoline for only $3.25?” Or, to look at it the other way, if we had had and maintained a true gold standard, the $0.32 gasoline would sell today for $0.18!
We are deceived because many of the goods and services we buy are not the same. A typical automobile today is much more complicated that a typical automobile of 1965.
Similarly, inflation allows us to receive “increases” in our pay rates that do not keep up with inflation and to fail to realize that we are actually losing purchasing power at the same time that our additional experience makes us more valuable.
So, I absolutely agree with you that inflation is simply the increase in money supply without increase in value. A true gold standard along with an end to government protection of banks against the risk of being caught out at fractional reserve banking would change our economies (in the world) for the better. The only losers would be the big spenders of government around the world.
Thank you for an excellent article.
Published: March 27, 2007 3:56 PM
A previous commenter asked about the creation of new money by production of more gold. It is a valid observation.
What we can imagine is that, in a free market, gold will be produced in accordance with demand. There is plenty of unmined gold, but it costs (uses resources) to mine and refine it. As with any other commodity, that will be done in accordance with the relative rewards. The money supply will thus increase naturally, which does not imply any particular price stability for any other commodity.
It is also true that the natural decrease in prices of goods and services as competition increases efficiency may require the development of smaller subordinate coinage. If we were to return to gold and set the rate for dollars arbitrarily and permanently at the old rate of $20 per ounce, prices would be very low, and cents would have a lot of purchasing power.
Mils, now a term used only in taxation, could be an answer to that problem for the United States. My daily newspaper, now at $0.25 would be at 7 mils. No wonder the papers are going out of business.
What a true gold standard will do for us is to take away the power of government to finance itself by stealing value from our money without the appearance of doing so.
Published: March 27, 2007 4:07 PM
While I'm all for a gold standard, we should keep in mind that the primary method for pumping the money supply is credit expansion via fractional banking. This happened extensively under the gold standards of the past and destroyed wealth as much as fiat money has.
As several people have mentioned, prices would decline at the rate of economic growth under a fixed money supply. So if production increased, either through population growth, increased savings, or technology at a 3% annual rate, then prices would fall by 3% annually. But as Dr. Reisman points out, gold production would probably increase at 2-3%/per year, thus increasing the money supply by that amount and eliminating the price reductions.
Greenspan's big mistake was think low price increases in the 1990's signaled that he could inflate the money supply at higher rates. Price indexes didn't rise much in the 1990's because of huge productivity increases. But the damage Greenspan did with his inflationary monetary policies caused the stock market bubble and crash and the recession of 2001.
It's strange that so few mainstream economists recognize the connection between the money supply and price inflation, because I have a mainstream macro text book from the mid-1980's with a lagged regression example showing that money supply increases result in price rises between 12 and 18 months after the increase in money.
Published: March 27, 2007 5:28 PM
There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.
counterfeiting ?
Published: March 27, 2007 7:21 PM
I don't think there are many (if any) economists who do not understand that long run increases in prices in general are caused ONLY by increases in the money supply. The central banks generally acknowledge this fact. I think the differences in opinion deal with the short run.
It appears, from what I read, that Austrians believe that there can be no short run increases in the CPI (or any other measure of a general price level) other than those caused by monetary expansions? Am I correct in this belief or not?
Published: March 28, 2007 1:46 PM
Alex: "It appears, from what I read, that Austrians believe that there can be no short run increases in the CPI (or any other measure of a general price level) other than those caused by monetary expansions?"
I think that's correct. Supply and demand changes with affect prices of individual products, but a general price rise across the board, such as would affect a price index, has to come about via monetary or credit expansion.
Published: March 28, 2007 8:57 PM
Consider for a moment that the quantity theory of money just might be wrong. No dollar is ever issued except in exchange for a dollar's worth of assets, so the issuing bank's assets must rise and fall in step with the quantity of money. This is the point of the real bills doctrine: as long as new money is only issued for equally valuable assets, the issue of new money will not increase the price level.
Published: March 28, 2007 10:57 PM
If the country reverted to a gold standard would credit cards be permitted and if so on what basis?
Published: March 28, 2007 11:09 PM
billwald:
If we went to a true commodity money AND a 100% reserve banking system, the whole credit structure as we know it would be fundamentally altered.
My view is that credit cards would essentially disappear. You would still have non-revolving charge cards for those with top notch credit. For most people, credit would be limited to mortgages and car loans and other large ticket loans. Total credit would have a finite limit and as with all scarce things, would have to be parcelled out most efficiently by banks.
This would be a good thing, as it would keep people out of the huge debt trap. It would also limit bad loans, since scarce credit means that those people actually getting the credit have the best risk profile. No subprime disasters in a scarce credit regime.
Published: March 28, 2007 11:28 PM
Mark,
I would also presume if fractional deposit reserve banking were outlawed, the creation of innovative instruments such as "demand debentures" (debentures repayable on demand with no fixed maturity date) would also have to be outlawed, since such instruments could be used to create credit out of thin air in a similar fashion to fractional reserve deposit banking. This brings up the question: Why? If people want to enter into free market transactions involving such things as demand debentures, why would libertarians seek to prohibit this?
If such things as demand debentures are outlawed, then bank financing would be by normal bond, debenture, and equity routes. I would think that the banks would have an incentive to have this money "parcelled out" most profitably rather than, in some other sense, "most efficiently". Therefore, wouldn't this mean that credit card finance certainly would exist?
Published: March 29, 2007 9:31 AM
RogerM:
Suppose the U.S. money supply is constant and there is no production growth, so that the price level is constant.
Next suppose the government, thinking that its current army of civil servants are all overworked, embarks upon a huge and immediate debt-financed spending program involving a salary increase across the board for all of its over worked civil servants. Would the explanation below roughly coincide with your logic as to why the price level would be unaffected by the government's action?
The increased government financing in the bond market would raise U.S. interest rates, reducing some domestic spending, while increasing foreign buying of U.S. debt securities. This would cause a boost to the value of the U.S. dollar and a resulting reduction in U.S. exports and increase in U.S. imports. The current account would fall. Supposing the increased government spending were $50 billion, the reduction in domestic private spending plus the reduction in the current account would total exactly $50 billion. Hence, there would be no net $ spending on U.S. goods and services from the government's action, and hence no U.S. price level effect.
Published: March 29, 2007 10:01 AM
Alex,
I think your reasoning makes sense, but the answer may be simpler: If consumers and businesses buy the bonds the gov sells, then real savings falls by that amount and interest rates go up because people aren't willing to save more. Higher interest rates reduce spending on durable goods, but also investment in business. Lower business investment means fewer people working and lower salaries, so consumption falls an amount equal to what the government spends on wages increases for its workers. So the government has merely transferred money from the wages of private industry workers to those of gov workers.
However, that's all hypothetical. In reality, with a fractional reserve banking, banks would purchase a lot of the gov's bonds through credit expansion, that is, with money created out of thin air. Also, some of the increased wages for the gov's workers would go into banks in checking and demand deposits which the banks would use to further expand the money supply. The increased money supply would then cause a general rise in prices. So the gov's spending by issuing bonds is quite harmful all the way around.
Published: March 29, 2007 11:51 AM
Alex: "I would also presume if fractional deposit reserve banking were outlawed, the creation of innovative instruments such as "demand debentures" (debentures repayable on demand with no fixed maturity date) would also have to be outlawed, since such instruments could be used to create credit out of thin air in a similar fashion to fractional reserve deposit banking."
I don't see why demand debentures would have to be outlawed. The problem with FR banking isn't that the money can be demanded at any time. The problem is with having two people claming and having the rights to the same money. If the money for the demand debenture came from the money deposited in a 1-yr CD, for example, it wouldn't increase the money supply, because the purchaser of the CD has given up clame to his money for 1 year while the borrower of money using the demand debenture has taken clame to it. The only twist is that the bank can call in the loan at any time. On the other hand, if the money loaned in the demand debenture came from checking or demand deposit accounts, then it would increase the money supply artificially.
Published: March 29, 2007 11:58 AM
Mike: "Consider for a moment that the quantity theory of money just might be wrong."
The first half of the 20th century was an experiment in the real bills doctrine and proof of its failure. The evidence for the quantity theory of money is just too great to dismiss.
Published: March 29, 2007 12:01 PM
billwald: "If the country reverted to a gold standard would credit cards be permitted and if so on what basis?"
I don't see why credit cards would be eliminated. The problems isn't the ease of credit, although lax credit standards can cause problems. The problem is with two people claming the same dollar bills in the bank. With gold and 100% reserve banking, the money loaned on credit cards would be the same thing as short term credit. All of the funds for those loans would come from timed deposit accounts so that the savers and the borrowers wouldn't both be claming the same dollars. Credit card loans increase the money supply only if the funds loaned out come from checking and bankd demand deposits. If the money comes from a deposit of savings with a time limit on withdrawal and a penalty for early withdrawal, then credit cards don't increase the money supply.
However, with the money in checking accounts and demand deposits withdrawn from lending, there would be a shortage of loanable funds and interest rates would rise.
Published: March 29, 2007 12:09 PM
RogerM:
Suppose the banking system's balance sheet shows $100 gold and $100 deposits in a 100% reserve system. The banks now sell $100 of demand debentures to people who write checks on the banks to pay for them. The banks now have a balance sheet with $100 gold (asset) and $100 demand debenture (liabil). The banks now make $100 in loans by crediting the borrowers' deposit accounts by $100. The banks' balance sheet now show $100 gold (asset)+$100 loans (asset) and $100 deposits (liabils) + $100 demand debentures (liabil). They have just created $100 of loans out of thin air. They, of course, could do this over and over again, and we're back in a system that is equivalent to fractional reserve banking.
Published: March 29, 2007 2:50 PM
Alex: "The banks now make $100 in loans by crediting the borrowers' deposit accounts by $100."
That's the definition of fractional reserve banking. For it to not be fractional, the bank would have to loan out the $100 in gold and thereby reduce its assets. In other words, someone has to give up use of money in a 100% reserve bank. The bank can only loan money that it has received from someone else as a timed deposit. The timed deposit is required so that the depositor gives up use of the money for a specific period of time. If the bank simply credits someone's account, then it is practicing fractional reserve banking and artificially expanding the money supply through credit creation out of nothing.
Published: March 29, 2007 9:43 PM
RogerM
"The first half of the 20th century was an experiment in the real bills doctrine and proof of its failure. The evidence for the quantity theory of money is just too great to dismiss."
The quantity theory says that when the quantity of money rises relative to the quantity of goods, inflation will result. The RBD says that when the quantity of money rises relative to the backing held by the issuing bank, inflation will result. The inflations you're referring to could be explained by either model. In "The Ends of 4 Big Inflations", Thomas Sargent observed that the European hyperinflations ended BEFORE the growth of money was restricted, but after fiscal reforms were enacted. That evidence favors the real bills view. See Thomas Cunningham "Some Real Evidence in Favor of the Real Bills Doctrine" for similar evidence from Taiwan.
Published: March 29, 2007 10:13 PM
Mike,
It's true that in the empirical economics there is often no way to identify underlying structure when just observing financial time series. Same data set can support different conclusions.
I have thought few times what you have often written here in Mises blog. Somehow I know that monetary theory in economics is very far from complete and different institutional arrangements affect that more than in any other field of economics.
Still I have many reservations concerning your theory. In your monetary theory there is an asset demand element, but we often hear that money is demanded because we plan to use it in the future for transactions (it's desired cash balance view of money demand).
Also very early many statisticians and economists found out that money supply leads prices, so that increase in the money supply will after some lag increase prices. And asset prices are also affected by these developments.
Do you think that central banks purchases of governments bonds are inflationary when money received is used to purchase goods and services for government?
Published: March 30, 2007 1:02 AM
Alex,
There is an error in your post concerning exchange rate reaction after government makes huge bond financed expenditure increases. Even if the nominal interest rate in US is increased it's not necessarily true that fxrate will appreciate since you must take Fisher equation into account. Returns on assets in foreign interest rate and US interest rate will move in line because interest rate differential is same as the expected depreciation of US fxrate with respect to foreign country.
In Mishkin's book it's said that only rise of real interest rate will appreciate fxrate. Rise of expected inflation rate will depreciate fxrate.
Published: March 30, 2007 5:14 AM
adi:
See my paper "There's No Such Thing as Fiat Money", for an explanation of how money demand can affect the value of backed money.
My earliest example of a statistician looking at money and prices is Thomas Tooke, (around 1820-1840) and he concluded that prices lead money, not the other way around. He was also an early real bills advocate, though for the wrong reasons.
As long as new money is issued for equally-valued government bonds, there will be no inflation. Of course if the government starts overspending, its bonds will drop, and since those bonds back the money, the money will drop too.
Published: March 30, 2007 9:59 AM
RogerM and adi: If in today's fractional reserve banking, every loan granted meant the same $ loss in bank reserves, you would effectively have 100% reserve banking. The point is that there is less than 100% leakage of reserves for each loan made. I assumed zero leakage for numerical simplicity, but you can choose any other percentage you like as long as it's less than 100% and, even with a system of 100% reserves against deposit liabilities, demand debentures such as I have described will lead to multiple loan expansion possibilities for the banking system. E.g. Suppose there is 50% gold leakage when the $100 loan is made. The second balance sheet of the banking system would be gold $50 (asset) + loans $100 (asset) = deposits $50 (liabil) + $100 demand debenture (liabil).
Adi: I don't believe the analysis I gave RogerM is necessarily correct short run analysis. I asked him if Austrians thought there would be no short run price level effect of any event other than an increase in the money supply. RogerM said, "yes" or at least he thought as much. So then I gave him a significant event (the large increase in government spending on civil servant salaries) and asked him if the resulting short run story (analysis) I wrote would by why he would think that there would be no effect on nominal spending in the short run and hence no short run price level effect. In that scenario, RogerM doesn't believe that my event would have any effect on the price level, and therefore he wouldn't think there would be any effect on inflationary expectations. Therefore, he would argue that any increase in nominal interest rates under my event would also mean an increase in real interest rates, which would therefore affect the exchange rate.
Published: March 30, 2007 1:50 PM
Mike,
My examples concerning relations of financial time series are from vector autoregressive models. It's often difficult to identify theoretical relations just by looking what kind of coefficients one finds in AR part when estimating these kind of models. Also impulse response functions of different variables on change of other variable are sometimes not easy to analyze (I could claim that positive monetary innovation causes permanent increase in the price level but it's equally valid to object that reason was just ordering of these variables). Your example about Tooke's findings are not very convincing since in those days econometrics was not known and lag relation of these variables might be very significant thing.
Now for the theoretical part of your paper: "There’s No Such Thing as Fiat Money". Your money demand explanation is very weird. As if money is just another asset which has no original/special role in economy. And even when I understood your call option analogy to position of second bank customers there was something wrong in that. Why on earth should customers put their money in the bank where their notes are just lottery tickets to first bank notes? Bank will get much higher rate of return on their loans to businesses and customers will get much less or not at all if bank goes bankrupt. And your GM stock analogy sounds incorrect too; company cannot sell extra shares in the same price if future expectations on return of these stock wont rise.
My conclusion is that even if I cant prove that you have wrong theory, I wont accept that since it's based on very strange foundation. Several years of mainstream economic schooling has already affected my ability to agree with heretical ideas...
Mike, you seem to work in some university in US. Could I ask how academic economists have reacted to your ideas? Perhaps in the same friendly way as we Austrians are welcomed... :)
Published: March 30, 2007 2:27 PM
Mike: "The inflations you're referring to could be explained by either model."
I wasn't talking about just the inflations, but the Great Depression as well. According to Rothbard and other historians, the gov's Fed were following real bills doctrine from the formation of the Fed until WWII with disastrous results.
Published: March 30, 2007 2:30 PM
Alex: "...even with a system of 100% reserves against deposit liabilities, demand debentures such as I have described will lead to multiple loan expansion possibilities for the banking system."
Other people may have different views of what honest banking (100% reserves) looks like, but I base my understanding on de Soto's book. In it, de Soto insists that for banking to be honest, someone must give up use of money, usually through a time deposit, before anyone else can use it by borrowing it. But the problem isn't with the instrument, demand debentures, it's with the choice of loaning money that doesn't exist. In your example, no one gives up the use of money so that someone else can use it; your banker just issues credit and that is the definition of fractional reserve banking.
Published: March 30, 2007 3:07 PM
RogerM:
Suppose I borrow $100 fiat money (or gold) by issuing a demand I.O.U. on the basis of my good name. Then suppose I turn around and lend this $100 to someone else, who, because of my good name is willing to take another $100 I.O.U., that he trades someone, who also knows my financial reputation, for produce. I'm sure you agree that that Austrian libertarians would not seek force to prevent the foregoing transactions. At this point, my balance sheet for this venture would show $100 fiat money or gold (asset)+ $100 loans = $200 demand I.O.U.s (liabils).
In fact, I can't see how Austrian libertarians would see anything wrong with these transactions, all being voluntary. But, you seem to be saying that if I go too far in this venture, at some point Austrian libertarians would seek to prevent my so doing. What would be a libertarian justification for that?
Published: March 30, 2007 3:56 PM
Nobel Prize #7: "Money" can be created at whim as promises in a free market. Let's say I discover an oil field buried underneath my land but I have no capital with which to extract that oil. I could go to a bank and borrow gold to pay for equipment and workers. Or I could issue stock grants to buy equipment and options to pay for workers. All money(s) (even fiat), all goods and services, are subjectively valued. My mere promise could be more subjectively valuable than your gold. That's why "money" is just like any other subjectively valued good or service. "Money" is just the most commonly exchanged good in trade. Nothing more.
This is a good thing. More subjective value than could otherwise be produced by a limited 100% reserve system is thus able to be produced.
You libertarians going to use State violence to enforce your "gold standard"?
Published: March 30, 2007 4:16 PM
Any libertarian: Do you have an answer for my previous question, which is is similar to rtr's last question?
Published: March 30, 2007 5:44 PM
The objections to fractional reserve banking are simply that of fraud. Nothing more. When additional fraudulent warehouse claims are issued, they dilute the value of real warehouse claims, robbing legitimate owners of value.
I have no opinions as to what the market should choose as its medium of exchange. The market would likely choose gold. It might choose marijuana. That is up to the market to determine. I am not out to enforce a gold standard or any other standard.
If people will loan you money on the basis of your good name, more power to you. That is not an instance of fraud, but of good credit building.
Remember, a bank can always accept your commodity on a NON DEMAND basis, i.e. timed deposit. No warehouse receipts would circulate against it, so no inflationary damage done.
If we MUST end up accepting free, fractional reserve banking, I would demand the caveat that if as so much as one demand draft is refused due to insufficient funds, that bank be instantly liquidated. That would at least provide a sword over bankers head of fear, to keep their inflationist ways to a minimum.
Published: March 30, 2007 6:01 PM
Mark:
"This would be a good thing, as it would keep people out of the huge debt trap."
Agree 100%. But are Libertarians supposed to have personal concern about ignorant people doing foolish things? Are not Libertarians supposed to profit from others trapping themselves in debt?
Published: March 30, 2007 9:52 PM
When I use a credit card does not the process generate an IOU that the bank posts as an asset? Is not an IOU an asset?
Published: March 30, 2007 9:57 PM
I'm sure there are more economically-savvy people than me who can answer your question. But it's not clear to me that in either example, rtr's or Alex's, that new money has been created. Money is not merely an IOU. I don't see anything particularly wrong with the examples otherwise, as long as the participants agree to it.
Like Mark, I have no particular desire for a gold standard, merely that currency is issued privately, not by the government. Let the market decide what are the best forms of money, and how it should be backed. I suspect that the market will tend to prefer gold- or silver-backing, but in a true free market for currency, there may be a variety of currencies, including some with limited or restricted uses that may well be fiat money.
If there's any question about fraud involving currency, well, that's what arbitration and mediation is for, since we'd be talking about private issuers, not government, along with any attendant publicity that may affect the issuer's reputation.
Published: March 30, 2007 10:14 PM
But are Libertarians supposed to have personal concern about ignorant people doing foolish things? Are not Libertarians supposed to profit from others trapping themselves in debt?
Last I checked, libertarianism was a political philosophy that specifically didn't tell people what their PERSONAL concerns should be, but left it up to the individual to decide. However, given that libertarians are people too, I imagine most of them would be concerned about people doing foolish things, especially if said people happened to be friends or relatives.
Furthermore, good sales and business sense tells me that "trapping" people into bad or foolish decisions is not necessarily a good business plan, the moreso if such people tend to do desperate things on top of foolish things. As I like to say, a good salesman isn't the one who can sell refrigerators to Eskimos, but the one who has truly helped someone buy what they need and want, at a price they can afford.
Published: March 30, 2007 10:30 PM
adi:
Tooke was an eminent economist in his time, and the fact that econometrics wasn't developed doesn't diminish my confidence in the simple statement that price changes tended to lead money supply changes. Thomas Sargent found the same thing in "The Ends of 4 Big Inflations", around 1982 or so.
My paper shows a downward-sloping demand for money, which results from peoples' demand for liquidity. Nothing weird so far.
As for money being a call option: People put paper dollars in banks all the time in exchange for checking account dollars, merely for conveniance. Nothing weird here either.
My point about GM stock was that if GM issues new stock in exchange for equal-valued assets then the stock will not change in value. That, of course, presupposes that GM can put those assets to good use, but then GM wouldn't have issued the new stock if it didn't have a good use for new capital. In any case, this is not a controversial point among economists.
Yes; I'm an American econ prof., and as you guessed, my colleaugues have mostly ignored the RBD. The prof's I have lunch with both say they can't find a flaw in the RBD but they still teach the QT anyway. My favorite journal rejection (from the JPE) was (paraphrasing) "Your defense of the RBD appears to be correct, but I don't care to re-open this controversy in the JPE."
As to the weirdness of the RBD: The RBD says that money has value because of backing--exactly the same as any other security. The QT says that money has value for reasons entirely different from any other security. I find the QT much more weird than the RBD.
Published: March 30, 2007 10:37 PM
"According to Rothbard and other historians, the gov's Fed were following real bills doctrine from the formation of the Fed until WWII with disastrous results."
They might have been following Rothbard's idea of the RBD, but they certainly weren't following the simple RBD rule of "issuing new money in exchange for assets of adequate value". If they had, the money supply would not have dropped in the depression, since tightness in the money market would have created lines of people at the Fed, eager to trade their securities for paper dollars.
Published: March 30, 2007 10:42 PM
RTR said:
You have a valid hope for these Nobel Prizes, since those fake Nobel Prizes in economics were mostly handed out to unintelligent individuals, with only few exceptions....Now back to your ridiculous statement. If you sell stocks of your company, you are selling part of your ownership, which is a real asset -- for some gold (asset as well). Nothing is created out of thin air there. If bank loans you the money, it loans you a real asset, holding you liable for that loan and some interest... So what does that have to do with printing money out of thin air????
Your "mere promise" cannot be valued, since legally you can break your mere promise (oh, I forgot you are also ignorant when it comes to basic law). Your contractual promise can be valued -- since it involves exchanges of property titles, or uses of some real property in exchange for some real assets... again, nothing there is "out of thin air."
RTR asks:
Where did you get that silly idea? We can use common law against people who use fraud in order to make money. If you are issuing mere promises your notes must have a syntagma "mere promise" written on those certificates. You can't issue some "mere promises" under false pretenses, and you must be strictly held accountable with all your property for any borrowing you ever make.
Published: March 30, 2007 10:44 PM
Alex: "At this point, my balance sheet for this venture would show $100 fiat money or gold (asset)+ $100 loans = $200 demand I.O.U.s (liabils)."
I don't follow your example. In the second sentence you wrote "Then suppose I turn around and lend this $100 to someone else,.." If you loaned the gold to someone, how does it show up in you balance sheet? My reading of your example has you finishing with an asset of a $100 loan and a liability of a $100 loan.
Your example doesn't appear to be one of fractional banking at all, just several people loaning each other money.
Published: March 30, 2007 10:45 PM
Alex said:
In fact, I can't see how Austrian libertarians would see anything wrong with these transactions, all being voluntary. But, you seem to be saying that if I go too far in this venture, at some point Austrian libertarians would seek to prevent my so doing. What would be a libertarian justification for that?
Actually, you are not aware that many Austrians (Mises included) are supporters of fiduciary media, while others would constrict it with formal contracts and full disclosure of Ponzi-scheme nature of such loans (I.O.U. is a joke in legal terms) - in order to fight boom-bust mechanisms, which clearly falsify market signals.
But I thought that you will get the fraud part when you mentioned "recording assets and liabilities"... If you issue certificates claiming they are $100 in your gold and you don't own that money -- you are fraudulently overstating your assets. As George Gaskell noted here once, the concern over the fraud of fractional reserve banking is not limited to the agreement between the bank and its customer, but between the customer and the person the customer pays with that bank's "money." And the person he pays with it. And so on.
Published: March 30, 2007 11:09 PM
Alex said:
Actually, you are not aware that many Austrians (Mises included) are supporters of fiduciary media, while others would constrict it with formal contracts and full disclosure of Ponzi-scheme nature of such loans (I.O.U. is a joke in legal terms) - in order to fight boom-bust mechanisms, which clearly falsify market signals.
But I thought that you will get the fraud part when you mentioned "recording assets and liabilities"... If you issue certificates claiming they are $100 in your gold and you don't own that money -- you are fraudulently overstating your assets. As George Gaskell noted here once, the concern over the fraud of fractional reserve banking is not limited to the agreement between the bank and its customer, but between the customer and the person the customer pays with that bank's "money." And the person he pays with it. And so on.
Published: March 30, 2007 11:11 PM
I managed to drop this part (still George):
“You can't legally sell junk bonds while claiming that they are AAA-rated. So, you shouldn't be able to pass 8%-backed banknotes as though they are deposit-backed money substitutes* (*or "warehouse receipts" on physically existing money).
In every other area of commercial life, disclosure of important facts concerning the risk of default is required to avoid fraud. Banks, for some reason, are allowed to pretend that their negotiable instruments are backs by "deposits," when in fact they are backed only by a shell game of loans from customers and to borrowers.”
Published: March 30, 2007 11:32 PM
Alex, As I think about it more, your example was one of the velocity of money, or how quickly money changes hands, not the creation of money from nothing. In times of high inflation, velocity increases and acts very much like money creation. Fortunately, velocity is pretty stable most of the time and nothing to worry about.
rtr: "Money" can be created at whim as promises in a free market." You example doesn't show money creation at all, just simple loans.
Let me give an example of real FR banking: Suppose I had $100 worth of gold and I had 10 friends who want to borrow it. Let's also assume that no other bank exists in my town. So I establish a bank where they can deposit the loans I give them and write checks on the accounts. I also know that since I have the only bank in town, any merchant that receives a check drawn on my bank will open an account with my bank and deposit the check. Knowing all of this, I will loan the $100 I have to all ten friends so each has $100 in his account to spend as he wishes when he wishes. I can do that because I know from reading about FR banking that in any given day, I need only $100 in cash to meet the town's demand for cash. I've taken $100 and turned it into $1100 with nothing more than a pen and paper. That's how FR banking works and why it should be illegal.
Now if someone else opens a bank, things get more complicated and I may need to hold more cash in reserves, but the principle is the same.
Published: March 30, 2007 11:48 PM
Mike:"They might have been following Rothbard's idea of the RBD, but they certainly weren't following the simple RBD rule of "issuing new money in exchange for assets of adequate value".
Now you sound like all socialists: "Stalin and Mao weren't true socialists; they didn't do it right." Only you're saying the Fed wasn't following the RBD correctly. Funny, they sure thought they were.
Published: March 30, 2007 11:59 PM
RogerM: "Your example doesn't show money creation at all, just simple loans."
What's being just "loaned"?
New subjective value is created in the discovery of oil underneath my land. I buy equipment to drill that oil by offering a percentage of future oil production. I pay workers to work the equipment by giving them stock options. There's nothing to pay back if the operation fails or it turns out the size of the oil deposit was vastly over estimated. I own the equipment and had labor traded to me. What's to prevent those workers from immediately trading all or some of those options for other goods? What's to prevent those equipment manufacturers from immediately trading all or some of those promised percentage of future oil production for other goods?
If someone trades a song for a dance how is that any different then digging up more gold in the hills, or any different then selling limited edition celebrity autographed paper bills with their pictures and numbers printed upon them?
Published: March 31, 2007 4:35 AM
Sashda and RogerM: When I lend out $100 and someone is willing to take the demand loan proceeds in the form of my note (my demand I.O.U., which has, written on the front, "Backed ONLY by Alex's good name"), this obviously involves no fraud of any kind. The borrower takes my note with the faith that he can buy produce with it. If he can't, I'm sure he'll be back on my doorstep and either simply pay off his loan with my note or demand fiat money, gold or what-have-you, instead of my I.O.U. When the borrower trades my note for produce, there is no fraud as the seller of the produce knows me and is willing to accept my note (my demand I.O.U.). If the seller of the produce wants to, he can come to me and demand that I give him fiat money, gold, or what-have-you. If I am short of gold or fiat money in my company to redeem my note, I can either borrow or demand that my borrower pay his demand loan. If my I.O.U.s will not circulate, then so be it, I have to shut down my banking venture. Otherwise, I can continue operating in the fashion I have described, with each borrower and seller of produce completely aware that they are accepting my notes (my demand I.O.U.s) purely on the basis of my promise to pay if someone wants to redeem them. There is no theft and no fraud of any kind here.
If my business grows and all holders of my demand I.O.U.s choose at the same time to try and redeem them for fiat money or gold, I shall have to call in all the demand loans that I have made. But I am very wealthy and very prudent and will redeem my I.O.U.s promptly with my own funds, while I wait to collect my demand loans. I may end up having to close my venture, but I doubt it because when people see my smiling face as I willingly redeem the first batch of my I.O.U.s the redemption flow will probably dry up. If it doesn't then I'll have to close my venture and I may take a loss on it. But I am very wealthy and very prudent, so I would never expand my venture to the point that the loss I may take from liquidating all my demand loans and redeeming my I.O.U.s would eat that much into my wealth.
I may have forgotten to mention this, but my I.O.U.s pay interest. This is one of the features that holders of my I.O.U.s like. In fact, some people prefer my I.O.U.s for this reason over fiat currency.
By the way, holders of my I.O.U.s can, if they wish, deposit them with me. In return, I give them credit and debit cards and checkbooks.
What's the Austrian libertarian argument for stopping all my borrowers, holders of my I.O.U.s, sellers of produce, acceptors of my credit cards, etc. from voluntarily so doing?
Published: March 31, 2007 10:03 AM
rtr: "New subjective value is created in the discovery of oil underneath my land."
That doesn't make any sense. No one can create subjective value. Subjective value means nothing more than that the value of a thing is determined by each individual's assessment of it. In your example, nothing has been created. You discovered oil; you didn't create it. Then you borrowed someone else's money with the oil as collateral. If you lied about the oil, and none really exists, you still will have to pay back the loan. I can't see how you get the creation of money out of that example. It simply doesn't exist!
Alex: "What's the Austrian libertarian argument for stopping all my borrowers, holders of my I.O.U.s, sellers of produce, acceptors of my credit cards, etc. from voluntarily so doing?"
Because you're committing fraud! No one would ever accept your IOU's as payment unless they believed that you had the ability to convert the IOU's into real money. If you actually have the money, fine. But if you just keep a fraction of it in reserve, as I described in my example, then you're lying to everyone you give an IOU to. In addition, each person who has one of your IOU's has a claim to the same small reserves you set aside. That's fraud in the most obvious case. Just try to go to several banks and borrow the full amount of your home equity from each one. You'll end up in jail because you're committing fraud.
If you don't understand this, then you don't understand the most basic message of Austrian economics: money loaned must come from savings which result from the reduction of consumption.
Published: March 31, 2007 11:06 AM
RogerM:
But I explained to you that I was very wealthy. I had lots of T-bills, stocks, real estate, you- name-it, besides the loan assets of my venture. Everyone knew that I was very wealthy. Please explain the very first transaction that I made that was fraudulent and why it was fraudulent. Whenever I gave out an I.O.U., I stated that it was backed by my good name. Everyone knew that I had much wealth in addition to my little banking venture so that no one would ever lose from my I.O.U.s. Where's the fraud? You seem to keep saying it's fraud because you wish it were so.
Published: March 31, 2007 11:27 AM
RogerM
"Now you sound like all socialists: "Stalin and Mao weren't true socialists; they didn't do it right." Only you're saying the Fed wasn't following the RBD correctly. Funny, they sure thought they were."
The difference is that I'm right and socialists are wrong. Critics of the RBD usually attack the idea that money must only be created in exchange for "productive" assets (e.g., a farmer's IOU which will be paid off when he sells his crops). The RBD advocates that I know of (Law, Clement, Bosanquet, Tooke, Fullarton) never phrased the RBD in that way. They only said that money must only be issued in exchange for "good security" (i.e., assets of adequate value). This misunderstanding was a major factor in the mistaken rejection of the RBD, and a major reason why people at the Fed made a mess of it.
Published: March 31, 2007 11:37 AM
Alex: "You seem to keep saying it's fraud because you wish it were so."
You're not reading my posts well. I said if you had the money to back up the loans, then there is no problem. Only if you don't have the funds to back up every dollar loaned are you practicing FR banking and fraud by creating money out of nothing.
If your wealth can cover all of the loans, then no one would care that you make such loans. However, you'll have to convert some of those assets to cash when the people you loan to quit loaning to each other and actually buy something. At some point, someone will bring one of your IOU's to you and demand cash, at which point you'll have to sell an asset to make the IOU good. I don't see anything wrong with that and I don't know of any Austrians who have condemned such activity.
Published: March 31, 2007 11:39 AM
Mike: "The difference is that I'm right and socialists are wrong."
I see no reason to think that you know more about RBD than did the Fed Board members.
Mike: "This misunderstanding was a major factor in the mistaken rejection of the RBD, and a major reason why people at the Fed made a mess of it."
I imagine the main reason for rejecting RBD is that it's nothing more than a defense of fractional reserve banking. If money should be created to satisfy every businessman who has sufficient collateral, without regard to savings, then there is almost no limit on the ability to inflate the money supply. But if the money available to loan to businessmen is limited by what others save, then the money supply won't grow.
Any money loaned to businessmen, regardless of the collateral, that doesn't come from savings due to reduced consumption, is money created out of nothing, in other words, countefeiting. It doesn't matter that you say the money is backed by an asset. The money loaned did not belong to someone else who decided to forego consumption and save it; it was simply printed.
Countefeit money, regardless of what asset backs it, inflates the money supply artificially and according to the quantity theory of money causes prices increases. If you don't accept the quantity theory of money, then there's nothing more to discuss. I'll just include you with other cranks like Al Gore and his global warming nuts.
In addition to the price increases caused by money inflation, Austrian econ shows that money inflatin also causes entrepreneurs to make serious mistakes in investments, which they would not have otherwise made, and the destruction of wealth as a result. History has shown the the RBD causes all of the above.
Published: March 31, 2007 12:21 PM
RogerM, your attack against Sproul was not very polite. And it was also wrong in it's substance since prof. Allen Dalton has also said something about Fed's policy in those times being at variance with the RBD theory. Mr Dalton has posted few times at this blog.
But why there ever should be a central bank in existence if the RBD is right monetary theory? RBD advocates have spoken about real bills being "self-liquidating" and that reflux principle should remove excess money if situation would be such that there is extra paper money circulating.
Specie convertibility has been suspended often when this principle has threatened whole monetary system (also during war times governments have done that).
Mike, why should anyone who receives notes from the second bank in your paper accept those in their nominal value since they are just options to lottery tickets (remember that notes from the first bank are not backed with 100% commodity money)? Option is usually valued very much less than the market price of underlying security, since it only gives chance to use it if profitable.
RogerM, I think that you have followed De Soto's definitions too closely since there exists alternative theories about what are deposits. De Soto thinks that deposit is same as warehousing contract. Selgin and White have challenged this view.
Many Austrians here have stated that they would accept FR banking if proper information is given to the customer concerning nature of this banking practise. So then there would not be fraud. I support this view.
Published: March 31, 2007 12:51 PM
RogerM: Accoring to Adi, "Many Austrians here have stated that they would accept FR banking if proper information is given to the customer concerning the nature of this banking practise. So then there would not be fraud."
If this is the case, then let's eliminate the ranting against fractional reserve banking per se. Of course, anyone would agree that information that is untrue that gives rise to a transaction is fraudulent. That's why I was careful that in my example that everyone knew that it was my good name and the fact that I had lots of equity that backed my I.O.U.s. I repeat: All my I.O.U.s were backed by demand loan assets that I had. On top of that I had lots of equity. A sound fractional reserve banking system would operate the same way, and there is no fraud in such a system.
Published: March 31, 2007 2:10 PM
My view is that fractional reserve banking should be considered fraudulent because of the reason that bankers cannot fulfil their obligations against all their depositors. This is a logical proof by itself.
It does not matter if bank depositors are well educated in fraudulent banking procedures or not. Reality and logic sets the limit and real laws should be in accordance with reality. Otherwise they are destructive and wrong. No contracts can invalidate reality and logics.
A true monetary loan is an exchange of present goods for future goods, whereby “the future” is defined as an agreed upon time between the parties when the loan expires.
If a “depositor” really wants to lend out his money, he should also comply with what a true loan is and “not try to eat his cake and still try to keep it.”
An Austrian economist has all the reason in the world to be against fractional reserve banking as he wants the economy to correspond to a true voluntarily saving ratio and not to a vague (and therefore fraudulent) one. Because of the fact that fractional reserve banking is relied upon this vagueness and therefore swindle, he also knows that this very vagueness and swindle are the really causes of horrible and anti social depressions and business cycles, which he therefore wants to end once and for all.
Apart from mentioned logical proof of why fractional reserve banking is fraudulent, another logical proof should also be mentioned and that is that the Austrian business cycle theory by itself proves that “savings” through fractional reserve banking does not harmonize with true voluntarily saving ratios of individuals as business cycles are still existent in a fractional reserve economy and are, also, the very cause of them. The Austrian business cycle theory teaches “that recessions and depressions are caused by initially lowering of the rate of interest which do not correspond to true saving ratios, but by increases of the money supply. When the economy adjusts to true saving ratios, malinvestments are liquidated.”
In other words the depositors have been deluded that is being exposed of fraudulent actions by the banks.
We could say that slave contracts should not, in a libertarian society, be allowed for the same reason i.e. they are contradictory and not in accordance with reality and logics as;
“A man cannot renounce his right to self-ownership, since a man in his very nature controls his own mind and body (natural disposition), that is, he is a natural self-owner of his own will and person (having a free will) and he will still be so even if he has “tried” o renounce his natural self-ownership to another person. He cannot renounce something which is a biological and physical fact of his very own life and which will never, as long as he lives, leave him.”
Björn Lundahl
Göteborg, Sweden
Published: March 31, 2007 3:23 PM
Recessions and The Great Depression were caused by Government Interventions!
In a purely free market (without Government intervention), the rate of interest is determined by people’s “willingness to save and invest” (which is called people’s time preferences) for future use, as compared to how much they are “willingly to consume now”. If people change their “willingness to save” (time preferences) and want to save more, the additional savings will cause the rate of interest to fall (increased supply of savings), and businesses will borrow and invest these additional savings. When the Central Bank (for example The Federal Reserve) increases the money supply and expands bank credit (which Central Banks does everywhere and all the time and always “out of thin air”), it initially lowers the rate of interest and thereby misleads businessmen to act in a manner as if true savings have increased, which in turn leads businessmen to invests those supposed savings in capital goods. New projects that were not profitable before, will now suddenly with this lower interest rate, be profitable. While this process is working, the economy is in an inflationary boom phase (expansion). Capital goods such as stocks, real estate etc, will be more demanded and invested in, and prices of those will rise faster and more intensely in relation to consumption goods. As these supposed savings have worked their way through the economy, prices of goods, services and wages have generally increased to a height which prices for them would have not reached without these supposed savings.
As mentioned, people’s “willingness to save and invest” have not changed (people’s time preferences have not changed) for it was only the Central Bank that increased, out of thin air, additional “savings”. When supposed savings have worked their way through the economy and are received, finally, in increased wages, people still spend their real wages in the same manner as before. They save/ consume in real terms and in same proportion to each other, as before mentioned increase in supposed savings. Because of this, a lack of savings will occur and the rate of interest will rise. Projects that businessmen have invested in and that seemed to be profitable when the rate of interest was lowered are now revealed to be unprofitable. All those investments are revealed to be malinvestments. Businessmen will stop investing in those projects and lay off workers. Prices of capital goods, real estate, stocks etc, will fall sharply and relatively to the fall in prices of consumer goods. The economy is in a depression phase. When those investments are liquidated, the economy is adjusted to people’s “willingness to save and invest” and to consume. The economic structure corresponds to the ratio which people want to save and consume. The economy is now healthy again.
Now then, in the 1920s the Federal Reserve, in the US, increased the money supply and bank credit, which in the 30s resulted in The Great Depression. The same story goes with Japan during the 1980s, which during the 90s, resulted in a depression, go to; http://en.wikipedia.org/wiki/Japanese_asset_price_bubble
In Sweden we had banks lending out heavily during the late 80s, which also, led to a depression in the 90s.
All business cycles are caused by the same phenomenon. Economic crisis can occur because of other factors such as wars, boycotts, oil prices etc, but pure business cycles have in common the same cause.
I have tried, in a very few words and in a easy manner, to explain Ludwig von Mises business cycle theory, which is also called the Austrian theory of the business cycle. All faults are mine. Friedrich August von Hayek elaborated this theory and received in 1974 the Nobel Prize* for this. Go to;
http://nobelprize.org/nobel_prizes/economics/laureates/1974/
If you want to know more about this theory, go to;
http://www.mises.org/rothbard/agd/contents.asp
And to;
http://www.mises.org/money.asp
Björn Lundahl
Göteborg Sweden
* Information about the Nobel Prize in Economics, go to;
http://cepa.newschool.edu/het/schools/nobel.htm
Published: March 31, 2007 3:59 PM
Any great and sudden change in the economy that is not anticipated such as increased or decreased savings, increased hoarding etc can cause crises and problems. Rothbard has also mentioned this.
But those are rather economic fluctuations, and are they anticipated, the business community can easily cope with them without causing any problems at all.
There is a time lag between increases of the supply of money and prices.
If monetary authorities anticipate that aggregate demand will fall in the future, and therefore increases the supply of money today, there is a time lag between those actions and their impact of aggregate demand.
Changes in aggregate demand can be anticipated by the market. Businessmen are trained specialists in their capability to anticipate changes in the market place and anticipated changes of market prices in the future cause immediate changes of prices today and the necessary adjustments.
If there is a fall in aggregate demand, monetary authorities cannot offset this by increasing the supply of money without causing a business cycle.
Increases of the money supply can not be neutralized even if they are anticipated because there is no way to distinguish them from real savings. They are borrowed funds and as they are borrowed, businessmen are deluded to act as if savings have increased.
Consumers can allocate their economic recourses in two ways: consumption versus savings.
The fact is that during recessions and depressions price falls are extremely much more severe in the capital goods markets than in consumer goods markets.
In Sweden during the early 90s we had an economic depression and only in one year we had an increase of the purchasing power of money of 1% while real estate prices decreased around 50%!
Stocks are titles of capital goods and prices of them fell extremely too.
The same story goes in the U.S. during the late 20s and early 30s and Japan during the very early 90s.
It is true that during depressions prices of some capital intensive consumer goods fall a lot too (durable consumer goods) but they are comparable to capital goods as they render services over a longer term of time and can be regarded as part of a economy’s fixed capital.
To put an end to business cycles fractional reserve banking must be rejected and a 100% commodity money reserve standard adopted (such as gold and silver).
Björn Lundahl
Göteborg, Sweden
Published: March 31, 2007 4:06 PM
Alex,
Please research a little bit about enforceability of I.O.U.s and you'll hopefully understand what kind of nationwide demand you'll have for those legally non-binding certificates. I.O.U.s cannot be promisary notes, but only acknowledgment of a debt, and taken as evidence thereof.
Anyway, your example is irrelevant since banks are not loaning any actual I.O.U.s, but they are actually overstating their assets, claiming they are borrowing non-existing money, and not disclosing true nature of their certificates (fraud).
Published: March 31, 2007 4:07 PM
Bjorn and Sasha have made excellent points and I don't have much else to add.
Alex, your last example, in which you are very rich and issue IOU's is not an example of fractional reserve banking. It's 100% reserve banking because all of your IOU's could be paid at once.
As for the Austrians who think FR banking is OK as long as everyone understands what's going on, I would say that might be fine if the banks made it clear to depositors that the bank would lend out their money and there was a good chance they would not get it back, and if the gov didn't guarantee deposits and if there were no central bank. But then, as de Soto argues, the temptation to counterfeit would be too great and depositors would be lulled into complacency after a few years. Eventually, credit would expand again and set off boom/bust cycles. Then citizens would require the government to step in a regulate banking. It's all happened multiple times in history. We can either learn from it or repeat it.
If all that matters to Austrians is liberty, then by all means, allow FR banking. But if we care about prosperity and honesty, we won't allow it.
adi, You thought I was rude to Mike in my last post responding to him. I assume you mean the part about him being a crank if denies the quantity theory of money, which he has already done and which RBD does. Do you think denying the quantity theory is good economics?
Published: March 31, 2007 5:01 PM
Sasha: O.K., Sasha, make them demand promissory notes then. The example remains as and there is not one iota of fraud in any of the transactions. Just to review the transactions briefly: (1) I give a loan of $100 to Ms. A, the proceeds of which are my personal demand promissory note. Ms. A knows how wealthy I am and knows my reputation as one who always pays his debts. She voluntarily enters into the transaction. Where's the fraud?
(2) Ms. A trades my demand promissory note to Mr. B for some goods. Mr. B also knows of me, of my wealth, of my debt payment record and so to make the sale of his goods readily accepts my demand promissory note as payment. Where's the fraud?
I keep a balance sheet for my loan venture. I call it Alexloanventure. Just to take it to the limit, I shall now assume I keep zero fiat money or gold in my venture (I could easily pay out of personal assets if anyone wanted to liquidate one of my promissory notes before I could call in sufficient demand loans).
So after transaction (1) and (2), the balance sheet of Alexloanventure is $100 loans (assets)= $100 demand promissory notes (liabilities). I have created credit out of thin air (actually out of my wealthy, honest and prudent reputation). Ms. A, my borrower is better off for having transacted with me; Mr. B is better off for Ms. A having transacted with me and then transacting with him. What true libertarian would dare prevent such voluntary transactions that benefit all parties involved?
Published: March 31, 2007 5:12 PM
Sasha: Oh, I forgot your last comment about my example being irrelevant "since banks are not loaning out any I.O.U.s, but they are actually overstating their assets, claiming they are borrowing non-existing money, and not disclosing the true nature of their certificates (fraud)."
A bank's balance sheet looks like this:
Assets: $10 cash in vaults & deps. at Fed., + $90 loans of various kinds from securities to direct business and personal loans
Liabilities: $85 deposits + $15 equity
These balance sheets are PUBLISHED so what is the nature of banking fraud. Just because some people are stupid enough not to think for a second or two, and who actually believe that for every dollar of deposit liabilities the bank will have a dollar on reserve, doesn't make it fraud. It makes the people who believe this stupid. Plenty of people do not understand all aspects of well published information on economic transactions. That does not in any way make those transactions fraudulent.
Published: March 31, 2007 5:28 PM
What Has Government Done to Our Money? By Murray Rothbard:
“Defenders of banks reply as follows: the banks are simply functioning like other businesses—they take risks. Admittedly, if all the depositors presented their claims, the banks would be bankrupt, since outstanding receipts exceed gold in the vaults. But, banks simply take the chance—usually justified—that not everyone will ask for his gold*. The great difference, however, between the "fractional reserve" bank and all other business is this: other businessmen use their own or borrowed capital in ventures, and if they borrow credit, they promise to pay at a future date, taking care to have enough money at hand on that date to meet their obligation. If Smith borrows 100 gold ounces for a year, he will arrange to have 100 gold ounces available on that future date. But the bank isn't borrowing from its depositors; it doesn't pledge to pay back gold at a certain date in the future. Instead, it pledges to pay the receipt in gold at any time, on demand. In short, the bank note or deposit is not an IOU, or debt; it is a warehouse receipt for other people's property. Further, when a businessman borrows or lends money, he does not add to the money supply. The loaned funds are saved funds, part of the existing money supply being transferred from saver to borrower. Bank issues, on the other hand, artificially increase the money supply since pseudo-receipts are injected into the market.
A bank, then, is not taking the usual business risk. It does not, like all businessmen, arrange the time pattern of its assets proportionately to the time pattern of liabilities, i.e., see to it that it will have enough money, on due dates, to pay its bills. Instead, most of its liabilities are instantaneous, but its assets are not.
The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate "bank runs." No other business experiences a phenomenon like a "run." No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.
The dire economic effects of fractional bank money will be explored in the next chapter. Here we conclude that, morally, such banking would have no more right to exist in a truly free market than any other form of implicit theft. It is true that the note or deposit does not actually say on its face that the warehouse guarantees to keep a full backing of gold on hand at all times. But the bank does promise to redeem on demand, and so when it issues any fake receipts, it is already committing fraud, since it immediately becomes impossible for the bank to keep its pledge and redeem all of its notes and deposits. [15] Fraud, therefore, is immediately being committed when the act of issuing pseudo-receipts takes place. Which particular receipts are fraudulent can only be discovered after a run on the bank has occurred (since all the receipts look alike), and the late coming claimants are left high and dry. [16]”
http://www.mises.org/money/2s12.asp
Björn Lundahl
Göteborg, Sweden
Published: March 31, 2007 6:00 PM
RogerM: Sorry Roger I forgot to respond to you. Look at my last example. I have no reserves at all in Alexloanventure. Because I am wealthy I can always eliminate any cash flow (liquidity) problem that might arise from people wanting their promissory notes cashed. Ultimately, if I have to liquidate my entire operation, I may take a loss.
In the case of a bank, as you know, being prudent would mean that the equity of the bank (owners' investment in the banking operation) should be large enough to provide for any cashflow problems that may arise from deposit liquidation. Published information about banks give the public enough tools to judge this or be told by others which banks are less risky than others.
You want to protect the public who are uniformed about bank risk. To be consistent, there must be other things then that you think the state should protect the public from? I'm not saying this is not good thinking; I'm just asking how it is libertarian?
Published: March 31, 2007 6:03 PM
We should also be aware of the fact that fractional reserve banking by itself causes business cycles and, therefore, during recessions or depressions this also causes bank runs as banks are in trouble during this phase of the business cycle.
Björn Lundahl
Published: March 31, 2007 6:33 PM
Milton Friedman blamed the Federal Reserve for not “doing their job properly” during the depression, but if his monetary “theory” was correct it was, really, the market that was to blame for the great depression as it was a need for a Federal Reserve “doing its job properly” in the first place.
Well, a pure free market would be a 100 percent gold reserve money standard:
I quote from America’s Great Depression, by Murray Rothbard:
Preventing Depressions
“Private banks, it is true, can themselves inflate the money supply by issuing more claims to standard money (whether gold or government paper) than they could possibly redeem. A bank deposit is equivalent to a warehouse receipt for cash, a receipt which the bank pledges to redeem at any time the customer wishes to take his money out of the bank's vaults. The whole system of "fractional-reserve banking" involves the issuance of receipts which cannot possibly be redeemed”.
And:
“But a 100 percent gold reserve requirement would not be just another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud. Everyone except absolute pacifists concedes that violence against person and property should be outlawed, and that agencies, operating under this general law, should defend person and property against attack. Libertarians, advocates of laissez-faire, believe that "governments" should confine themselves to being defense agencies only. Fraud is equivalent to theft, for fraud is committed when one part of an exchange contract is deliberately not fulfilled after the other's property has been taken. Banks that issue receipts to non-existent gold are really committing fraud, because it is then impossible for all property owners (of claims to gold) to claim their rightful property. Therefore, prohibition of such practices would not be an act of government intervention in the free market; it would be part of the general legal defense of property against attack which a free market requires.[28], [29] .”
http://www.mises.org/rothbard/agd/chapter1.asp#preventing_depressions
In other words, if there would be bank runs (which, naturally, would be extremely unlikely as the public knows that the gold is deposited in bank vaults under 100% gold reserve money standard), the banks could meet any claims of the depositors.
We should also be aware of the fact that fractional reserve banking by itself causes business cycles and, therefore, during recessions or depressions this also causes bank runs as banks are in trouble during this phase of the business cycle.
Some consequences of not having a 100% gold reserve money standard:
• Panic of 1819 http://www.answers.com/topic/panic-of-1819
• Panic of 1837 http://www.answers.com/topic/panic-of-1837
• Panic of 1857 http://www.answers.com/topic/panic-of-1857
• Panic of 1873 http://www.answers.com/topic/panic-of-1873
• Panic of 1884 http://www.answers.com/topic/panic-of-1884
• Panic of 1890 http://www.answers.com/topic/panic-of-1890
• Panic of 1893 http://www.answers.com/topic/panic-of-1893
• Panic of 1896 http://www.answers.com/topic/panic-of-1896
• Panic of 1901 http://www.answers.com/topic/panic-of-1901
• Panic of 1907 http://www.answers.com/topic/panic-of-1907
Why should we have central banks and fractional reserve banks that mess things up in the first place? Why should we have business cycles and malinvestments just for the sake to please some perversive lust for power and fraudulent money? Do we really want to have malinvestments? Is unemployment that good? What is the justification?
Björn Lundahl
Published: March 31, 2007 6:44 PM
Mr 007 (License to Steal)
“If I borrow money from you and pay you interest (or not) and agree that I shall repay you on demand, why should that be illegal? Do you believe all demand loans should be illegal? If so, why?”
I might claim my money the next second, minute, day, week, month, year etc.
All demand “loans” should be illegal as they are demand deposits, this because they are redeemable on demand and whenever the depositors claims their monies. The “borrowers” would not be able to use them as they must have the deposits available for any rightful claims of the depositors. This is also why they should not pay any interest and are a contradiction in terms.
A true loan has a maturity date.
If we fool each other greatly enough we shall pay through experiencing another great depression.
Björn Lundahl
Published: March 31, 2007 6:54 PM
adi:
"why should anyone who receives notes from the second bank in your paper accept those in their nominal value since they are just options to lottery tickets"
A dollar in a checking account is just an American style (i.e., convertible) call option on a paper dollar, and people accept checking account dollars in preference to paper dollars merely for convenience. Meanwhile, a paper dollar is a european style (i.e., inconvertible) call option on the Fed's gold, and people accept dollars instead of gold for convenience. Note that there are two kinds of convertibility: physical convertibility, where the issuing bank will pay a physical amount of gold for a dollar, and financial convertibility, where the issuing bank will pay a dollar's worth of its assets for a dollar that it issued. When a bank maintains financial convertibility (i.e., conducts ordinary open market operations to maintain the value of the dollar), physical convertibility is irrelevant. Furthermore, convertibility can be immediate or it can be delayed. It is too simplistic to say that the dollar is inconvertible. It might become physically convertible in the future, and it has always been financially convertible. Hence my claim that there is no such thing as fiat money.
Published: March 31, 2007 7:51 PM
The Ethics of Liberty, by Murray Rothbard:
“Unfortunately, many libertarians, devoted to the right to make contracts, hold the contract itself to be an absolute, and therefore maintain that any voluntary contract whatever must be legally enforceable in the free society. Their error is a failure to realize that the right to contract is strictly derivable from the right of private property, and therefore that the only enforceable contracts (i.e., those backed by the sanction of legal coercion) should be those where the failure of one party to abide by the contract implies the theft of property from the other party. In short, a contract should only be enforceable when the failure to fulfill it is an implicit theft of property. But this can only be true if we hold that validly enforceable contracts only exist where title to property has already been transferred, and therefore where the failure to abide by the contract means that the other party’s property is retained by the delinquent party, without the consent of the former (implicit theft). Hence, this proper libertarian theory of enforceable contracts has been termed the “title-transfer” theory of contracts.”
http://www.mises.org/rothbard/ethics/nineteen.asp#_ftn1
Björn Lundahl
Published: March 31, 2007 7:52 PM
Alex said:
Alex, your statement reminds me of those strange people who always blame rape victims. It seems that you learned your legal theory form RTR. I don't care what bank publishes and I'm not legally bound to research bank owners' assets before I take a simple loan - it should be other way around...
As far as law is concerned, the only thing that matters is the certificate that the bank issues to me. If that certificat states that bank is lending me $100 of their money, that must be the case, otherwise it is a fraud.
If bank is issuing a "mere promise" of $100 it needs to state that on a certificate! Customers should know that mere promises are not legally enforceable - only if bank loans actual, physically existing money, we can talk about exchanges in property titles and enforceable contracts. If someone masks a mere promise of a loan - by stating its actually loaning you (nonexistant) money, that contract is fraudulent and void.
Published: March 31, 2007 11:12 PM
Now check this out Alex -- I will assume something that was never the case in fractional reserve banking -- that banks are complying with contractual law:
People would be free to take someone's "promise" of a loan, and actually pay real money to pay back that promise (do you see how absurd that sounds) -- but they should know that mere promises of something that didn't actually occur are not legally enforceable and that bank can lawfully break a promise.
When a bank loans you a promise of a loan -- and you go and buy some capital with that promise, the only thing between the bank and that seller of capital is a mere promise. Since bank has not received any property from this seller -- there is no basis for enforceable contract. For example if I state here that I will give you a $1 million -- that is not an enforceable contract, since I didn't get any property in exchange from you and my default (change of heart) does not imply any theft.
If I promise you to give you $1 million(which I don't really have) you may be stupid enough to accept my promise and to start paying me for the satisfaction of having my empty promise. But if I change my mind and decide to break that promise, I will not owe a dime to sellers who accepted my promissory note from you.
Basically, sellers gave you their real goods and service in exchange for a promise, which I don't really have to keep. Basically, they relinquished their fortune for free -- and now it is in my discretion whether they will get a single dime. Do you now understand how absurd this scenario is when it comes to national economy -- and why fractional reserve banking must be based on fraud (which is the case right now)!?
Fractional reserve banking based on mere promises could only function in small villages and we would not have bank panics or recessions as its result. Life for most of us is very different. We just don't go into a supermarket and get anything we want based on a promise that our daddies will pick up the tab. That's why perfectly free market would always choose 100% reserve gold standard -- and that's not something that we would have to impose by law if we abolished the FED and government's monopoly in legal tenders.
I hope this makes the case for 100% reserve banking clear, once and for all.
Published: March 31, 2007 11:53 PM
Apart from the fact that a true monetary loan contract has a maturity date, the availability of the money is also transferred from the lender to the borrower (until the loan expires).
When someone deposits a sum of money in a demand deposit the depositor still has the full availability of an equal amount of money.
Björn Lundahl
Published: April 1, 2007 2:23 AM
Sasha: When a bank accepts a demand deposit, a legal and, hence, enforecable contract has been created. For its part, the bank agrees to repay its deposit liability on demand of the depositor. (Just as Alexloanventure contracts to repay its promissory notes with fiat money or gold on demand.) A prudent, well managed fractional reserve bank will always be able to repay its demand deposits on demand as well as its time deposits.
Consider VeryprudentBank. It has $25 fiat currency reserves (asset) + $50 demand loans (asset) + $50 fixed maturity loans (asset) = $45 demand deposits (liabil) + $50 time deposits (liabil) + $125 shareholders' equity. The fixed maturity loans are matched in terms of maturities to the time deposits.
Explain to me how VeryprudentBank will break any of its contracts. Suppose a most unlikely event occurs: the bank loses all its $45 demand deposits at once. It only has $25 of fiat reserves. So it's $20 short. VeryprudentBank calls in $20 of its demand loans. If they are slow in coming relative to the demand deposit withdrawals, VeryprudentBank borrows in the interim. Do you not think that VeryprudentBank could not borrow sufficient funds to manage even the most extreme cash flow problem that we have just imposed upon it? Of course, in practise, VeryprudentBank would not have such a demand deposit run.
If you argue that VeryprudentBank is not the typical fractional reserve bank in terms of its liquidity, I agree. But then we are talking about liquidity requirements for banks, not banning fractional reserve banking.
Published: April 1, 2007 8:04 AM
Whoops, too many "nots" in my sentence beginning: "Do you not think that..." Sorry.
Published: April 1, 2007 9:01 AM
RogerM, Quantity Theory in it's aggregate form is actually misleading theory. It depends on too many assumptions and actually to QT to work we must have situation where dichotomy of real and nominal variables is broken which is something that QT actually says cannot be true!
Look this: MV=PQ where M is nominal money supply (stock), V is velocity of money, P is general price level and Q is an index for real economic activity.
Now we can manipulate this definition in few ways;
M/P=1/V * Q = M/P = kQ which is Cambridge cash balance equation if k=1/V and V is supposed to be constant. Now we suppose that Q and V are constant. Then we can say that increase of money supply must increase price level. But actual transmission mechanism from the money supply to prices is difficult to describe. At least all relations which Friedman has postulated have been found faulty (no constant velocity or stable money demand form and no exogenous money).
Monetary theory must be build on some other foundation and not use QT. There are few attempts; Walras, Mises, Pigou & Keynes, Hicks, Patinkin, Clower, Leijonhufvud, Wallace and Lucas. In Austrian theory there is good thing that money demand is based on individual marginalistic foundation and not to any aggregative analysis.
Published: April 1, 2007 9:27 AM
Adi: It seems to me I remember Friedman saying something like, "Inflation is always and everywhere a monetary phenomenon." Now, I'm notorious for not remembering exact quotes, because I don't try. What's important to me is logic. It's either good or bad, and I don't care who originates it, though I understand that particular individual contributions to good logic may be very important, as are those of Friedman and others you mentioned are.
By "inflation", Friedman meant general increases in the prices of most goods and services. And he believed that such inflation wouldn't otherwise occur in the long run but for increases in the supply of money and credit. Now, I am learning that by "inflation" Austrians mean increases in the money supply. But Austrians, along with Friedman (and correct me if I'm wrong, as I'm sure you will) believe that increases in the money supply cause temporary decision errors and general price increases of goods and services. I don't think Friedman would argue with Austrians concerning the mechansims by which increases in the supply of money and credit cause increases in the prices of goods and services.
Friedman held that the velocity of money was not constant and that it would be difficult to predict how much prices would rise following a particular increase in the money supply.
Published: April 1, 2007 10:46 AM
“If all that matters to Austrians is liberty, then by all means, allow FR banking. But if we care about prosperity and honesty, we won't allow it.”
As I see it, this is based on a misunderstanding. The truth is instead that if it is only liberty that matters, fractional reserve banking should not be allowed. That is also why such libertarian “extremists” as Murray Rothbard and Hans-Hermann Hoppe are against it.
A pure free market (and a pure libertarian society) is based upon the axiomatic principle "that no man or group of men may aggress against the person or property of anyone else".
Well then, fraud is equivalent to theft so this is the reason why fractional reserve banking should not be allowed in a pure libertarian society.
Because of this, fractional reserve banking is based on a government privilege.
Contracts in a libertarian society that are interpreted to have terms that are totally contradictory should not be allowed. For how would it be possible to enforce such contracts? No one would know what to enforce. It is quite obvious.
I have already given several reasons why fractional reserve banking is based on fraud and there is no meaning to write about it again.
I also want to emphasize this: Liberty and Justice are only two labels of the same thing.
Austrian economics goes hand in hand with libertarian ethics.
As Hans-Hermann Hoppe wrote in his book “The Economics and Ethics of Private Property”, pages 234-235:
“Austrians have reason to believe, then, that the time has come when they may succeed in bringing about a fundamental change in public opinion, by reclaiming ethics and economics from the hands of the positivists and the engineering powerful and restoring public recognition of private property rights and free markets based on such rights as ultimate, absolute principles of ethics and economics.”
Björn Lundahl
Published: April 1, 2007 12:33 PM
” Friedman held that the velocity of money was not constant and that it would be difficult to predict how much prices would rise following a particular increase in the money supply.”
This is another misunderstanding. Friedman maintained that there is a close and stable link between inflation and the money supply and, therefore, the velocity of money was stable.
This is also why Friedman advocated a "constant monetary rule" whereby the nation's money supply would grow by a fixed percentage each year, thereby avoiding overexpansion and inflation.
http://www.answers.com/milton+friedman?gwp=11&ver=2.0.1.458&method=3
Björn Lundahl
Published: April 1, 2007 1:13 PM
Bjorn: You say that demand deposits not backed 100% by fiat money (or gold, if you like) are fraudulent. Demand deposits are a contractual arrangement that say (1) that if the depositor wishes his funds, at a moment's notice such funds will be paid out. That's the contract. The contract is not (2) that the funds will be paid out on a moment's notice and also for each dollar on deposit the bank shall have a dollar of fiat money on reserve. You and others keep saying demand deposits are contracts of type (2) when they are not. That's how you are able to claim fraud. If they are of type (1), which they in fact are, then they do not involve fraud.
You may argue that for various reasons (economic stability, etc.) fractional reserve banking should not be permitted, but you cannot validly say that bank demand deposits are anything but type (1) contracts.
Published: April 1, 2007 1:15 PM
Bjorn: Friedman knew that the velocity of money was anything but constant. He knew that technological changes in payment methods, interest rates, and inflationary expectations for example influenced the velocity of money. He also realized that one could not estimate the velocity of money function or, therefore, use it to predict how changes in the money supply would affect nominal spending. This is why he, instead, advocated simple monetary rules for a central bank, rather than having central banks fiddle around trying to influence the real economy in the short run.
Published: April 1, 2007 1:23 PM
Alex,
If sellers know that your wealthy “daddy” is actually a Mafioso who gives empty promises to the entire nation -- promises that by far exceed his current assets -- nobody in their right mind would relinquish the ownership over their real property in exchange for his legally non-binding promises.
Actually, you can’t even compare the state (a violent racketeer) to an individual with a “good name.” Anyway, what kind of wealthy person lives off of mere promises, without spending even a penny of his actual money? Any seller will say that a wealthy individual should not live at other people’s expense -- but actually spend more real money than an “average” person. Nobody in their right mind would accept promises of this “daddy,” who “pays” his debt by giving more empty promises, which he produces either by using a printing press, or by extorting old promises from other victims.
The facts that people would not voluntarily accept this crook’s notes is revealed by the fact that the government must force these legally non-binding promises upon us, as the only legal tender. Furthermore, the government changed the nature of its mere promises: they no longer promise a unit of gold in exchange for a unit of promissory notes. Now you will only get some undetermined amount of undetermined G&Ss (which depends on the amount of notes this crook decides to put into circulation).
More importantly, sales based on (fraudulently presented ad forcefully imposed) fiat currency imply that we live under a socialist regime. Aside from inefficient barter, no real trade takes place in America today. People who think they are trading for money today, actually hand-out their goods and services to other people, without getting anything but fraudulent notes that entitle them to some legally non-binding and nonspecific promises. An economy based on fiat currency is a socialist-communal arrangement, without the use of real money, in which the wealth redistribution is based on government’s implied claim on all goods and services traded within the country. The government injects its promissory notes as it pleases, giving the purchasing power to one group at the expense of another. At the same time, a private cartel that actually issues those promissory notes for the government (the FED) makes the privileged class even more wealthy by feeding it with the artificial credit (fraudulent promises of government promissory notes!), which causes boom-bust cycles that hut the poor the most.
It’s a matter of a simple tautology: The 100 percent gold standard is the logical consequence of the free market’s natural selection and any other system implies fraud and/or socialism.
Published: April 1, 2007 2:41 PM
Friedman believed that the velocity of money was "fairly stable" as he propagated that constant increases of the money supply in agreement with increases of total output would lead to a "stable price level" and unchanged purchasing power of money. This would only be possible if the velocity of money was "fairly stable".
I have a lot of economics books written by Milton Friedman and all of them include statistics which "proves" the relationship between increases of the money supply and decreases of the purchasing power of money.
I myself do believe that logic by itself prove the relationship as economics teaches us that if the supply of marketable commodities increases, the price of each unit will fall.
As this is true, it is also true that if the supply of money-commodities increases, the price of each unit will fall.
If the demand for money increases? Well that is another story.
Björn Lundahl
Published: April 1, 2007 2:41 PM
Alex,
Your VeryprudentBank. shows that you are not reading very carefully, and I can tell that by the fact that you actually posted something other than: "O.K. Sasha, I understand now."
I am forced to repeat this one more time (unfortunately):
"When a bank loans you a promise of a loan and not an actual money -- and you go and buy some capital with that promise, the only thing between the bank and that seller of capital is a mere promise. Since bank has not received any property from this seller -- there is no basis for enforceable contract. For example if I state here that I will give you a $1 million -- that is not an enforceable contract, since I didn't get any property in exchange from you and my default (change of heart) does not imply any theft."
That situation does not make any sense and banks know it. That's why they fraudulently claim they are loaning actual money to people (which really does not exist) -- instead of being straightforward with people and telling them they are actually receiving legally non-binding promises of a loan.
Don’t confuse yourself with numbers and trying to pretend you know anything about accounting. You showed you “knowledge” in our trade deficit discussion, when you showed that you don’t even know what is the “capital account.”
Published: April 1, 2007 2:50 PM
“You say that demand deposits not backed 100% by fiat money (or gold, if you like) are fraudulent. Demand deposits are a contractual arrangement that say (1) that if the depositor wishes his funds, at a moment's notice such funds will be paid out. That's the contract.”
Yes that is the contract and nothing else.
If you read my comments you can understand that there exist several reasons why fractional reserve banking is based on fraud. Each of them is good enough.
A summarization:
A/ Fractional reserve banking should be considered fraudulent because of the reason that bankers cannot fulfil their obligations against all their depositors. This is a logical proof by itself.
B/ Demand deposits are not true savings as Austrian business cycle theory by itself proves that “savings” through fractional reserve banking does not harmonize with true voluntarily saving ratios of individuals as business cycles are still existent in a fractional reserve economy and are, also, the very cause of them. Well, if they are not true savings they cannot be true loans.
C/ Fractional reserve banking by itself causes business cycles and, therefore, during recessions or depressions this also causes bank runs as banks are in trouble during this phase of the business cycle. This also means that during recessions or depression fractional reserve bank’s assets have plummeted in value.
This is also why history is full of bank failures such as these:
• Panic of 1819 http://www.answers.com/topic/panic-of-1819
• Panic of 1837 http://www.answers.com/topic/panic-of-1837
• Panic of 1857 http://www.answers.com/topic/panic-of-1857
• Panic of 1873 http://www.answers.com/topic/panic-of-1873
• Panic of 1884 http://www.answers.com/topic/panic-of-1884
• Panic of 1890 http://www.answers.com/topic/panic-of-1890
• Panic of 1893 http://www.answers.com/topic/panic-of-1893
• Panic of 1896 http://www.answers.com/topic/panic-of-1896
• Panic of 1901 http://www.answers.com/topic/panic-of-1901
• Panic of 1907 http://www.answers.com/topic/panic-of-1907
D/ Demand “loans” are demand deposits, this because they are redeemable on demand and whenever the depositors claims their monies.
E/ A true loan has a maturity date.
F/ Apart from the fact that a true monetary loan contract has a maturity date, the availability of the money is also transferred from the lender to the borrower (until the loan expires).
When someone deposits a sum of money in a demand deposit the depositor still has the full availability of an equal amount of money.
Björn Lundahl
Published: April 1, 2007 3:1