Good Money: A Revelation in Austrian-style History
This is the true and remarkable story of private coinage and banking in Britain in the early years of the Industrial Revolution (1775-1850). Making money was a business in demand. The needs of business for small denominations were changing. Merchants needed small denomination coins in copper and silver.
The Royal Mint couldn't be bothered. It made coins to serve the elites, not the new and burgeoning working class. Free enterprise stepped in with a new industry that truly saved the day--before the Crown cruelly stamped it out and ended one of the most beautiful experiences with private money in world history.
It is very likely you have never heard of this episode. You can read dozens of histories of the early years of capitalism and know nothing of this spectacular industry - to say nothing of its lessons for today.
What is going on here? George Selgin, professor at the University of Georgia, has discovered the monetary equivalent of the lost city of Atlantis. He has written a full-scale historical narrative--one that is deeply interesting and engaging--that has been largely unknown, even to scholars of the Industrial Revolution.
It is not only the first full-scale history of this episode ever written. It is likely to maintain a place as the definitive work for many decades. It is 400 pages, but always and everywhere very interesting. It includes 20 pages of color photos. The prose is elegant, and the method of analysis is thoroughly Rothbardian: this is flesh-and-blood history of real human beings.
Selgin tells of the stories of the merchants, the button makers who turned into coin makers, the way the system worked, its wonderful innovations and its evolution, and reveals the cruelty and destructiveness behind the government's suppression of the industry.
The industry developed to the point at which 20 independent mints were involved in making coins. The private coins served the merchants and the workers, while the government's currency served the landed rich. The new industry was like capitalism itself: it was designed for everyone to the benefit of everyone.
The private coins tended to be better quality than the government's coins. Why? Because private merchants could refuse them, and consumers could too. There was competitive control over them and an inexorable tendency for currency to improve in every way. That's why the book is called "good money."
And what of Gresham's Law, the tendency of "bad money" to drive out good money? Selgin's account demonstrates something striking: it only holds under government system of money which overvalue bad money. In a private system, good money--like good products and services in a free markets--outcompetes the low-quality money. In a market-based money system, there is an inexorable tendency for good money to win out.
The story is riveting in its own right, not only as monetary history but as business history. He has highlighted a fantastic industry that has long gone unnoticed. But beyond that, there is a massively important economic point. What Selgin has done here is help us to understand something critically important: were it not for the state, a wholly private money system would emerge from market exchange. That means private coinage, private weights and measures, market-driven exchange rates between different kinds of monies, and a fully private banking system to go along it with it.
In fact, this is precisely how money originates: from the within the market. Why does the state intervene? The British case is typical. The state wants to control the economy, tax the economy, and control the people. If a fully private system comes about, the state finds its job all-but impossible. That is why the state takes over at the expense of private enterprise.
In other words, the state is not responding here to a market failure but a market success. It is not a "public goods" rationale that leads to state intervention but old-fashioned jealousy over power and wealth. Selgin's book shows this not through polemics but through a completely new telling of real-life events about which we've previously known next to nothing.
The story alone is engaging and entertaining. But readers will have to brace themselves for the conclusion: "The episode compels one to ask, first of all, whether modern governments should be in the coin-making business at all." He is right that "economists tend to take governments' monetary prerogative fro granted." This spectacular book by Selgin could change that forever.
The impact of this book, one of the most important historical narratives ever written by an Austrian economist, will be felt for many years. He has shown us the real history behind what has been largely theory in previous works. Think of this as a historical application of Mises's Theory of Money and Credit or Rothbard's What Has Government Done to Our Money.
Selgin was the first Mises Institute scholarship student, and the publication of this book by the University of Michigan Press was made possible in part by the Mises Institute.
Comments (54)
"What Selgin has done here is help us to understand something critically important: were it not for the state, a wholly private money system would emerge from market exchange. That means private coinage, private weights and measures, market-driven exchange rates between different kinds of monies, and a fully private banking system to go along it with it."
Selgin would go on to say this also means a fractional reserve banking system would be free to emerge (see The Theory of Free Banking). This system would be stable, even desirable.
Hoppe, Block and Hulsmann would disagree with him and say that the voluntary transactions that would lead to such a system's emergence must be prohibited. After all such system would not be stable. Another tack they sometimes take is that in a free society, no one would make such foolish trades to begin with and 100% banking would spontaneously emerge.
I'm going to assume Good Money doesn't get into these theoretical differences since it tells the story of commodity money, not paper money. If it dealt with the latter to any degree, they probably wouldn't be selling it here. Well, at least commodity money is something all Austrians can agree on. Kudos to the Mises Institute for selling Selgin's book. I'll probably pick this one up.
Published: July 21, 2008 11:28 AM
Re fractional reserve banking: If it had emerged, it would be dealt with, just as ordinary theft is properly rewarded by the free society wherever and whenever it shows up. Because that's what fractional banking is. Theft, a bit disguised here and a bit clouded there, but theft nonetheless.
As new money is created from thin air, it is used to steal from the pool of goods and services at the original prices, at the expense of those who saved up these goods and services by postponing their consumption, only to find their claim on goods and services has been deprived of part of its value by the stealing fractional banker and his friends.
In a free society people should be free to come up with fractional banking. And there would be some of us who would refuse to take part in these schemes, just as we refuse all the other Ponzi schemes operating in the world today.
Published: July 21, 2008 2:08 PM
If, for example, a dollar equaled an ounce of gold, and then a bank decided to engage in fractional reserve banking, then to have full disclosure, they would have to print on their dollars something like this: this certificate represents an ounce of gold, but can be redeemed at our bank for 1/10 of an ounce of gold. Truthful and voluntary? Yes. But who would want such a certificate to use as money?
Published: July 21, 2008 3:09 PM
Ireland:
"As new money is created from thin air, it is used to steal from the pool of goods and services at the original prices, at the expense of those who saved up these goods and services by postponing their consumption, only to find their claim on goods and services has been deprived of part of its value by the stealing fractional banker and his friends."
So if I pay for a loaf of bread by writing "IOU 1 oz of silver", and the grocer, who knows me, accepts that IOU (and even uses it to pay his bills), then you see no difference between me and a counterfeiter who does not put his name on the IOU, does not recognize the IOU as his liability, and does not stand ready to buy back the IOU.
It's ironic that when libertarian ideas about free markets are put into practice, (Think Thatcher or Argentina), they are accompanied by anti-libertarian tight money policies. The good done by free markets is cancelled by the recessionary tight money policies, and libertarianism gets an undeserved black eye. If Austrians would take the time to understand the real bills doctrine, they might be able to apply libertarianism consistently to both free markets and free banking, and they'd have a few more success stories to brag about.
Published: July 21, 2008 4:10 PM
So if I pay for a loaf of bread by writing "IOU 1 oz of silver", and the grocer, who knows me, accepts that IOU (and even uses it to pay his bills)
The same thing over and over again. The grocer is giving you credit for the payment--it's not money, he expects you to pay him money at a later date. The real howler is who ELSE will accept your IOU, so that he can pay his bills? Even if he finds someone who accepts it, then they, too, will eventually expect to receive the money.
If nobody ever expects you to pay money for the IOU, then you ended up getting goods from the grocer for free, while the costs of those groceries were spread out through the economy as the IOU makes the rounds. No, I wouldn't call that counterfeiting, but it IS inflationary.
Published: July 21, 2008 4:23 PM
Both Mikes (Clem and Sproul):
There's nothing inflationary about the use of the IOU circulating as money as long as the guy who wrote it continually maintains an ounce ready to convert for whomever might wish.
In many cases, the piece of paper seems more desirable to some simply because it possesses a widespread acceptance and has a certain ease of handling. The guy who wrote the IOU has not been specifically advantaged because, if honest, he cannot turn that same (pledged) metal to another use and cannot draw interest on it (that would be initiating a fractional-reserve set-up).
As a matter of fact, the IOU writer would be in the position of a bank who'd accept a storage account and issue a receipt for it without charging for the liability incurred (the cost of storing it safely).
Published: July 21, 2008 5:45 PM
But who would want such a certificate to use as money?
I would. You misrepresent for the sake of effect what would probably be written on those notes. Scottish banks in the 18th century inserted option clauses giving them the ability to delay redemption for six months (see Lawrence White, History of Free Banking). People still accepted these notes as a medium exchange.
The same applies to demand deposits. I like them as a banking product because I no longer have to keep all my cash under my pillow. Unlike a time deposit, I can withdraw my cash without a penalty. And unlike a safety deposit box I don't have to pay a storage fee.
I am fully aware that the reserves are not large enough to accomodate everyone's desire for withrawal at the same time. But I am confident that a good bank will have enough quality assets to sell were a bank run to occur. I wouldn't use the demand deposit product of any bank holding questionable assets and practicing risky lending policies.
Now you may think I'm an idiot for taking that trade, but that's not going to stop me. You could also try sueing me for complicity in theft. But I doubt the charges will hold since it would be next to impossible for your lawyers to link the effect of my small transaction to any observable changes in the economy.
Do you have a checking account too?
Published: July 21, 2008 6:03 PM
There's nothing inflationary about the use of the IOU circulating as money as long as the guy who wrote it continually maintains an ounce ready to convert for whomever might wish.
Why not? Even IF that ounce exists, and Mr. Sproul said nothing about about its existence, only the IOU itself, the amount of "money" in circulation has increased by the amount denominated on the IOU.
Published: July 21, 2008 6:10 PM
Note that the recently published by Larry Sechrest, "Free Banking", argues in favor of fractional reserve free banking. This book is published by Mises Institute, so they are in fact willing to consider alternative points of view.
Published: July 21, 2008 6:26 PM
Michael Clem:
"The grocer is giving you credit for the payment--it's not money, he expects you to pay him money at a later date."
And when I pay the grocer with a checking account dollar, he expects to get a paper dollar at a later date. In the old days when paper dollars were convertible into bullion, the grocer would have expected to get a coin at a later date. As one paper dollar or checking account dollar is paid off, another is issued, and there is a permanent float of dollars that are never really paid off. That permanent float is an addition to the money supply, but it's not inflationary because every dollar is backed by the assets of its issuer.
" I wouldn't call that counterfeiting, but it IS inflationary."
If it's inflationary, someone was robbed, which should be illegal. The quantity theory wrongly leads you to believe that issuing an IOU is inflationary. You see that issuing an IOU is not the same as counterfeiting, but you don't see that counterfeiting is inflationary, while issuing an IOU is not.
Gene Berman:
"There's nothing inflationary about the use of the IOU circulating as money as long as the guy who wrote it continually maintains an ounce ready to convert for whomever might wish. "
So why not take the next step and allow the writer to hold resources worth at least one ounce instead of the ounce itself? Especially if both parties agree to it? If you won't take that step, you should cancel your libertarian card.
Published: July 21, 2008 7:39 PM
JP, there's nothing wrong with a "hold" on demand deposits--the bank is taking your money and loaning it out to other people, and the hold is to make you wait until they get the loan back--it has nothing to do with new money creation, and that loaned-out money is still fully-backed and only being used at one place at a time.
Fractional reserve banking is specifically tied into new money creation, and creating more money than are backed by assets. Fraud occurs if such money is issued and represented as fully backed when it is not. This is the sense in which banks "counterfeit" money, by issuing money that is supposedly worth an ounce of gold, when it's really only backed by 3/4 ounce, or half an ounce, or less.
This charge of fraud is easily avoided by indicating the true value of the money somehow, if not explicitly, then at least by indicating the source of the money with the bank's name or something. If the money from one bank is distinguishable from another bank's, then people are free to accept or refuse the money, and fraud is not present.
In a free banking system, without monopoly money or legal tender laws, you would need a pretty strong incentive to choose a fractional reserve note over a more strongly backed note. But as long as no fraud was present, as mentioned above, you would certainly be free to do so, and more power to you and your finances.
Published: July 21, 2008 8:30 PM
T'was funny to read about 'free market money' and how the 'market' would freely choose the currency with smugness that metal coinage was used. It's tricky if all people around the world choose metals and precious metals as currency. It's tricky to if people chose metal coinage when in reality the small pockets of those who didn't had to make the change because the big financial groups used metal coinage. It's a bit like buying a CRT monitor over a LCD monitor - ordinary CRT monitors were discontinued in 2005 so people don't really have choice in some respects.
Published: July 21, 2008 8:43 PM
Mike Sproul, according to Austrian economics, an increase in the money supply IS inflation, it doesn't cause inflation. Higher nominal prices may or may not occur after inflation, that depends upon other factors, including productivity, although there is certainly a tendency for prices to increase after inflation.
The IOU isn't counterfeit because it doesn't purport to be something other than it is (I'm assuming it clearly states who the IOU is from, and how much it is good for). Nonetheless, if the IOU starts to be traded around and accepted like money, then an increase in the money supply has occurred. It hasn't occurred if the grocer simply holds onto the IOU until he's paid for it, because it's not being used as money.
Published: July 21, 2008 8:49 PM
The argument above makes me think of factoring AR. It is a very common practice to sell goods or services on short-term credit. Often, the selling business then turns around and sells those ARs at a discount to another firm which, in turn, sells it to another firm as the collection date nears. The forgoing argument is more about whether consumer credit would grow in a free market environment. I think the conclusion is yes.
Published: July 21, 2008 9:17 PM
In a sense there is nothing wrong with inflation if it occurs because more money enters the system (for example if a new gold or silver deposit is found and mined and enters into the system as money). And, of course the ones using the new money first, before the prices go up, will gain - As they should! Their skill is what brought it to the market.
That is vastly different from counterfeiting money and channeling it into the system. Those who receive it first are stealing outright not only the difference between pre-inflation value and the diminished purchasing power at the end of the inflationary chain of events but also the entire value of the monetary unit.
For nothing productive they extract wealth for themselves and their co-conspirators. Those who benefit have done nothing to deserve it but rather they are counterfeiting thieves.
Published: July 21, 2008 9:49 PM
I want to congratulate George Selgin for his new book which sounds like a gem. It was interesting to hear that he was the first Mises scholarship student.
That generation is now becoming very influential and will be quickly followed by waves of 'Austrians' in the future.
Like Ron Paul said "the genie is out of the bottle!"
Published: July 21, 2008 9:59 PM
TLWP, I am not sure your point, but the LCD dominating the CRT for consumer computers has to do with the fact it's so much better. An CRT requires more energy, and has health risks like the scary radiation it emits and headaches since the image isn't static. Plus, it's more cosmetic pleasant. Maybe your retailer doesn't carry CRTs, but you can easily order them. They have an edge on color contrast, so they are still very much being produced: the price should be very similar to a LCD. What I would love to see is the OLED (an organic version of the LED, which is the stuff used e.g. by calculators) improving their lifetime to make them competitive. These babies are years ahead of anything we have; plus, they are malleable, so you could actually make clothes out of them (well, at least parts). ;D
Published: July 21, 2008 10:00 PM
Michael Clem:
"Fraud occurs if such money is issued and represented as fully backed when it is not. This is the sense in which banks "counterfeit" money, by issuing money that is supposedly worth an ounce of gold, when it's really only backed by 3/4 ounce, or half an ounce, or less."
If the bank holds 3/4 oz, plus other assets worth 1/4 oz., and if both parties agree to it, then there's no fraud. This is the normal case with fractional reserve banking.
"Nonetheless, if the IOU starts to be traded around and accepted like money, then an increase in the money supply has occurred. It hasn't occurred if the grocer simply holds onto the IOU until he's paid for it, because it's not being used as money."
My IOU is money from the time I buy bread until the time I redeem it, just as a paper dollar is money from the time it is issued until it is redeemed. But only quantity theorists care about these hairsplitting questions of what is money and what is not, because only they believe that the issue of adequately backed money causes prices to rise. To a real bills'er, it doesn't matter what you call money. The only thing that matters is what backs the money.
Published: July 21, 2008 10:47 PM
I viewed your comment BlackSheep on a LCD monitor :o. I could say the LCD monitor doesn't have the lovely contrast of a CRT TV but then the previous CRT monitor I had didn't the have contrast quality of a CRT TV either. :/
Published: July 22, 2008 12:40 AM
I wonder if Selgin's book also contain records of private services related to the hard monies of the period, e.g. were there any silver coin depository services? any private protection agencies that escorted movements of large quantities of specie monies etc.
I can't wait to find out; this is a MUST BUY for me.
Published: July 22, 2008 1:00 AM
To a real bills'er, it doesn't matter what you call money. The only thing that matters is what backs the money.
To most people, including Austrians, the only thing that really matters is what and how much that money can buy. ;-)
Published: July 22, 2008 9:05 AM
michael clem says:
"Nonetheless, if the IOU starts to be traded around and accepted like money, then an increase in the money supply has occurred. It hasn't occurred if the grocer simply holds onto the IOU until he's paid for it, because it's not being used as money."
well mises' regression theorem would have it that money can only originate from a real commodity, so i don't think the iou can ever be more than a promissory note.
granting iou's has no effect on the money supply, nor is it inflationary. the grantor has had to sacrifice present goods in return for a future payoff. one person economizes that another may spend, with the roles to be reversed on the bills redemption.
Published: July 22, 2008 10:10 AM
Along with Michael Clem I think it makes sense to attach some sort of disclaimer to FRB notes. But the "FRB is fraud" crowd want to push their claims further and say any one who issues new notes creates a negative externality, the burden of which is placed on existing holders of notes.
Ok. Then in an economy in which gold serves as money, I should be able to sue the gold miner and anyone he transacts with using his newly mined gold. After all, he's driving up prices at my expense, effectively reducing the value of the gold in my pocket. And they are letting him do it. Shame on them for committing this fraud!
If you see why this is silly, you'll see why it's silly to call FRB fraud. And before you go on and say it's costless to print notes, realize that banks have to build and maintain a chain of branches, fully staffing them from 9-5. They have to build systems to ensure excellent lending standards and credit quality. Their assets must be constantly monitored. They must spend money on advertising, always building their brand in order to compete with other note issuers. It's not easy to be a note issuer, just try doing it yourself.
Published: July 22, 2008 11:06 AM
JP said: 'Hoppe, Block and Hulsmann would disagree with him and say that the voluntary transactions that would lead to such a system's emergence must be prohibited. After all such system would not be stable. Another tack they sometimes take is that in a free society, no one would make such foolish trades to begin with and 100% banking would spontaneously emerge.'
And Ireland got really wound up about the same point, even using the word 'ponzi' and 'theft'.
I must disagree. For the life of me, I cant understand how some Austrolibertarians start frothing at the mouth at the very mention of fractional reserve banking, even wishing to prohibit ( How, for gods sake? with guns?) its emergence in an otherwise free market.
I'll say this slowly. The only wrong in fractional reserve banking lies in 2 problems:
1. Central banking, and
2. Central banking.
Absent a central bank to hold itself out as a lender of last resort, and hence to break its arbitary hold on the market price of money, some form of fractional reserving will inevitably emerge in a free market. The more so where a commodity money emerges as a generally-accepted measure of value, opening the demand for greater transactional convenience than lugging around heavy bags of metal.
If any bank issues reciepts against deposits of gold with an undertaking to redeem them, the reciept is a claim against that bank, nothing more nothing less. Whether banks prudently hold full reserves against those reciepts, or whether they lend on the expectation that not all their depositors will come to redeem at once, is a decision they are free to take, just as the deposit is a decision the depositor is free to take. This is no different in principle to any other economic transaction. Banks in such a situation will inevitably regard their reputation as their most important asset, and they will also be targeting profits - same as everybody else. So they will endeavour to strike the most appropriate balance between prudence in assuring sufficient liquidity to redeem deposits as they are presented, and meeting the opportunity to lend depositors' money to the most apparently viable business proposals. they won't always get it right, but the failures will be swiftly eliminated from the pool, and those who dont are those who will do it very well indeed.
And as for whether its fraud/counterfeiting/insert emotive insult of choice here, why is it that the creed of self-reliance and acceptance of the consequences of ones actions, so fundamental to the Libertarian ethos, evaporates as soon as it comes to banks taking deposits and suddenly being obliged by law to behave in certain ways, and not to seek to maximisze profitability? whatever happened to the spirit of 'caveat emptor'?
Different banks with different levels of prudence all operating in a free money market will naturally find their paper discounted in the (free) market in direct proportion to their reputation for prudence. And within that spectrum, there is a range of risk/reward balances that would suit every borrower's needs and depositors taste and appetite for risk. For the life of me, I cannot see what is so wrong or immoral about that
IN such a ( non) regime, multiplied money supply through the free interaction between borrowers and lenders is free to respond, to reflect growth changes in the real economy, as these banks collectively provide the liquidity and the additional money supply to match and lubricate that growth, deploying funding to those projects that are demanded most. As will naturally eventuate in a money market free of the market distortions that central banks impose.
sorry, but the Hoppes and Blocks and Irelands of this world who would outlaw it with such grim piety, have it all wrong: for whatever shape of institution that emerges out of the voluntary interactions between buyers and sellers, or borrowers and lenders, cannot possibly be wrong. Trading bits of paper whose market pricing is a function of the percieved reputation of the issuer, is not only a natural outcome of a free market, it is a wholesomely Good Thing, And if those bits of paper happen to assume the status of money through common acceptance and convention, who is anyone to pronounce on its morality and demand its banning? for it is but one one of th emany elements of market interaction that ultimately assures real productive effort is deployed where it is needed most.
Published: July 22, 2008 11:21 AM
David Ch
"For the life of me, I cant understand how some Austrolibertarians start frothing at the mouth at the very mention of fractional reserve banking"
Amen! Of course, the froth results from their (wrong) belief that fractional reserve banking causes inflation. It boils down to the quantity theory versus the real bills doctrine. 200+ years ago, libertarian economists accepted the quantity theory, which led them to advocate some very unlibertarian restrictions on banking. The real bills doctrine is the natural monetary theory for libertarians, but instead of advocating it, most of them fight it.
Published: July 22, 2008 2:30 PM
Gentlemen,
thank you for a nice debate. It seems we have come up with some misunderstandings. This forum is about the right place for Austrolibertarian talk, so let's discuss it a bit more.
Let me first address the easy one: I don't know about Hoppes, Blocks, and others, but _this_ one "Ireland" will fight for the freedom of people to do FRB if they wish so, as well as for his own freedom to just stand and watch, and never take part in it. Maybe it wasn't said explicit enough, sorry, but never ever there was any suggestion of using force against FRB or, for that matter, any mention of force at all.
I also beg your pardon if the language used to describe something, that I consider to be a bad thing, was above the limit here. At no point it was meant as frothing (whatever that would be), I'm just used to name things for what they're worth. Now come to think of it, the image of myself the way you describe is quite funny. For the sake of general amusement, we can keep it for now.
Published: July 22, 2008 4:20 PM
Now that we addressed the libertarian part (people should be free to FRB if they want), let's get back to the Austro thing.
Fractional Reserve Banking. Some here say that this technique is worthy and needed by the society. Well, I'm still missing the kicker pro-FRB argument. On the other hand, I'd suggest against FRB on the grounds of Austrian economics:
What really matters, is the pool of goods and services available, plus a sensible means for the people to draw from this pool according to their entitlement (call it justice if you will). In an unhampered market people choose that medium of exchange, by ascribing monetary value to those goods and services which they think most fitting for such job. None of these are perfect, for example gold, as pointed above, is still being mined and new quantities of it are brought to market. Under certain conditions there can be severe monetary inflation in gold and silver (medeival Spain). But these deficiencies are mostly known, and are calculated into the market price of such money.
The main issue with FRB is the pretention that they both ate the cake and still have it too. The very definition of FRB rests on the fact that the bank doesn't disclose how much it dilutes the money. If they did, their money would get discounted relative to the other currencies, and at that moment the original depositors, who exchanged the notes at par and now would be able to exchange them for goods at discounted value, would be quite, err, nonplused.
So FRB banker chooses to NOT disclose it ... Which doesn't change anything substantial on the analysis above, the notes still should be discounted, only the market doesn't know it yet. And it allows present holders to pass the FRBed notes to unsuspecting fellows. If it's inappropriate to call it fraud, theft, or ponzi scheme, please suggest some other, better fitting word.
Published: July 22, 2008 4:27 PM
Ireland:
"The main issue with FRB is the pretention that they both ate the cake and still have it too. The very definition of FRB rests on the fact that the bank doesn't disclose how much it dilutes the money. If they did, their money would get discounted relative to the other currencies, and at that moment the original depositors, who exchanged the notes at par and now would be able to exchange them for goods at discounted value, would be quite, err, nonplused."
You've hit on the point of dispute. On real bills principles (click my name above for explanation) fractional reserve banking does not reduce the value of money. If a bank issues one hundred 1 oz. silver certificates in exchange for 100 oz. of silver, then obviously each of those certificates will trade for 1 oz. If the bank then printed 200 new certificates and lent them to a farmer, who in turn gave the bank his IOU (backed by his farm), then the value of each certificate can't fall below 1 oz. After all, the banker could easily sell the farmer's IOU for 200 oz, and then he'd have 300 oz backing 300 certificates. Or the banker could sell the IOU directly for 200 of his own certificates. Then the bank would have 100 oz backing 100 certificates. Either way, each certificate remains worth 1 oz. as long as the bank has adequate assets to back them.
Published: July 22, 2008 5:05 PM
TLWP, the CRT caused headaches to a lot of folks, forcing them to apply an ugly filter to the monitor, losing all the "marvelous" color contrast. As far as I know, the Plasma should be a great alternative for your particular complain, though I'm not comfortable about those (I think e.g. they're still not price competitive).
The LCD should be more than good enough though for other than very special ends like for some medicine or artistic purposes. The main problem with the LCD is configuration: it uses a fixed matrix of pixels, so the thing is more brittle to a bad setup (make sure you tell Windows to use the recommended screen size, and select Reset in the display's commands). It's very easy to see something is wrong with this one though. Now what you should make sure is set properly is the refresh rate. Set it to 60Hz to reduce eye strain. The opposite advice was given to the CRT, so people still operate in such basis sometimes. It seems some Linux systems still try to maximize the rate, so some tools aren't necessarily smarter. You can check the refresh rate during usage through the display's information button.
Published: July 22, 2008 7:07 PM
In a free market Fractional Reserve Banking Notes will quickly become worthless as there is no limit to quickly increasing their supply to non scarce infinity. It would be as if everybody sang the Barney the Purple Dinosaur song,
"I owe you, You owe me,
we're a banking family
with a great big hug and a loan from me to you
won't you play you loan me too"
There's no disclosure or quantity production requirements of IOU notes. None of those notes will ever be accepted in any transaction unless what is given away in exchange is by definition valued less than the IOU notes received. Sure, it's theoretically possible that IOU notes could be subjectively valued *more* (by definition of them being *PREFERRED*) than the actual things the IOU supposedly represents being received *instead*, just as it's theoretically possible I can walk into a grocery store with a Parker Brother Monopoly money bank roll stash and exchange those notes for food products.
FRB, real bills, and all monetary theory whatsoever is fundamentally fatally flawed in that it assumes an *equation* of valuation between IOU promises and other real goods. This by definition assumes a removal of all doubt, assume perfect omniscient information about the outstanding supply of IOUs in relation to the ever changing subjective valuations of all the various pledged promises of forthcoming assets, whatever various forms they may be. But in the real world, debt and credit do not maintain perfect relative equation value to all other goods. Any default, accidental or intentionally fraudulent, will by definition effect the marginal subjective valuation of all other remaining outstanding IOU notes.
And nor are these IOU notes being independently subjectively valued in a free market. The contract promises are being backed by and enforced by government enforcement of contracts interference and *costs* of that interference and enforcement. In a pure free market, there is absolutely no recourse at all for debt repayment failure. The lender by definition of trade preferred the IOU promise to the goods given away (risks of default included).
All these various monetary theory systems are socialist, are using market interference government enforcement in one form or another. Debt and credit cannot exist in any non extremely small widespread form except by socialism. It by definition assumes that uncertainty is preferred to certainty when the opposite is true. This is why positive interest must be charged, the present value of which must be *greater* than the underlying commodity exchanged. Of course the value of money ebbs and flows with every single transaction exchange whatsoever, by definition of trade. This is of course inflationary, by definition. The supply of all non money goods remains the same, the supply of all previous existing money remains the same, and IOU debt/credit promises are added into the economy. Those savers who forsake debt will be outbid at the margin for the ceteris paribus remaining goods. That isn't at all "bad" however, as positive subjectively valued wealth is by definition created from debt/credit trade transactions. It is however, fraud, if any of those debt/credit trade transactions occur from the savings of deposit creditors without the explicit permission of savings depositors.
But nevertheless the subjectively valued present supply of gold will immediately change to incorporate the synthetic additional supply of future promised gold. Nonetheless, the market accounts for this *perfectly* as it does for all changing supplies of all things and all changing demands of all things by definition of expressed trade transactions.
By definition of preference and uncertainty, everybody who accepts an IOU note will require the interest payment incorporated into its promise, possibly less, possibly the same, possibly more, depending of the differing subjective valuations differing actors must by definition assign backwards to the credit worthiness of the original borrower.
This would seem to violate fundamental Misean theorems on economic calculation, requiring each new possessor of the IOU to have to replicate his own subjective valuation of the original borrower's credit worthiness, or in exchange demand a higher interest payment for greater further removed uncertainty.
These fatally flawed money created out of thin air theories all seem to assume that the subjective valuation of any IOU will have *equal* subjective valuation for all possible possessor's of the IOU as it is exchanged. Now add in changing interest rates, and locked in low interest rates for the original borrower will immediately devalue that IOU for the person who is holding it, so each additional exchange would likely have to incorporate further hedging promises, greater uncertainty, and hence ever diminishing subjective valuation of a single IOU, merely as it is exchanged with more frequency, completely independent of any massive inflation of any further supply increases of IOUs. Thus IOUs won't ever be able to compete against free market real money which does not have the problem of calculating the credit worthiness of the original borrower.
Even a good empirical experiment might be able to demonstrate this phenomenon in a controlled study, similar to one of those "track_this_dollar_bill" websites which exist with some substitute original promise. The further the trade chain extended, if the last person possessing were to offer an exchange back to the first person creating, the last person possessing would want less in exchange than the first person creating would voluntarily offer for the IOU back. It would create additional pure arbitrage profit for the first creator, hence pure additional arbitrage loss for each successive person accepting the IOU. The IOU will trade with less frequency, less certainty, and greater cost than a non IOU money. Thus a non IOU money will evolve in the free market as the main most widely used money on pure KISS (keep it simple stupid) grounds. IOUs are complicated and vary with the credit worthiness of each debtor. Thus the IOU units will not ever be part of a marginal supply of money, but each note itself a completely separately subjectively valued good, by definition a non-money.
Published: July 22, 2008 8:54 PM
Whatever, BlackSheep. All I had to do was set a CRT monitor 85Hz to eliminate visual flicker. Apparently some have the eyes of Hummingbirds or something like that. On the other hand, changing the resolution of my LCD monitor doesn't create any horrid blotches or whatever due to having the viewing resolution different from the native resolution. Similarly t'is interesting to hear some places actually voluntarily discontinuing incandescent bulb production and focusing on CFL production. Fortunately the appearance of powerful LED bulbs to replace incandescent and CFLs have started to appear:
http://www.earthled.com/evolux-led-light-bulb.html
Then again - muhwahwahahaha! I agree with you jp - more gold and silver mined will just inflate the supply according to quantity theorists. Not to mention the local miners are going to spend their gold and silver locally than spread it out evenly to the economy and tell everyone about it thereby creating local hyperinflation and sudden price rises hurting locals with normal personal supply of money. But apparently some here would call this an inevitable risk - yes, more precious metal entering the system is going to be hurtful to some but gold and silver are ultimately the true money, yet any other form of money is 'false money' it is unacceptable for any increase/change/wealth shift in 'false money'.
Published: July 22, 2008 10:19 PM
TLWP Sam:
Interesting story. Just it's unclear in which galaxy it's happening.
Why, mining more precious metals inflates their supply, yes. With all the ever mined stuff still in use, the considerable effort needed to get at the new ore, and the scarcity - that's where "precious" comes from - the rate of influx of new metal is limited to a small fraction of the total. It's this natural limitation that makes them good candidate for being choosed by the people for money. "How much can be the max inflation in precious metals" that's the question.
Compare that with what FRB and credit expansion can do to fiat money, whenever the controlling government decides to go in debt to wage another war or bribe the voters via another "public interest" scheme with unfunded liabilities.
As much as they'd like to conceal it, there are signals that give away this new money creation (M3, or, preferably, TMS). The USD position shows that market has woken up to these signal and is discounting the FRBed currency as needed.
Back to mining, the image of local miners hyperinflating and hurting locals is based on what exactly? There's definite difference between raw metal and money (nowadays they're able to etch holograms directly to a piece of gold), so the mined stuff needs to be sold at global market prices first. Next, there's very little one can spend metals on in the place of mining, so if weren't for the global market, people would not mine at all, and would go on hunting or whatever. Last but not least, the easily accessible supplies (of any metal) are long used up, and very little "local miners" exist, maybe as many as "local, individual or close-family oil-drillers".
So I wouldn't call this "inevitable risk" and "hurtfull", I'd call this "made up imaginary stuff", based on wrong assertion of the situation.
I'd have to dismiss also the follow-up accusation that any other money is unacceptable - that's a gross misunderstanding. Neither of us can decide what money is acceptable, only the people themselves can accept some stuff to be used as means of indirect exchange (that's what money is, by definition), thus creating the best money they can get, just as described in the book. Yes this blog was about a nice book originally.
Spelling out the consequences of FRB in the plain, for all to see, and letting them decide themselves if they want to use such money or not, is all an Austrolibertarian wants.
It is also possible there is some error in the argument that market will discount FRBed money relative to other currencies, that it will do so as soon as it gets a clue about how much it was diluted, and that concealing FRB practices in attempt to profit from postponing this correction is thus fradulent. If so, please bring the counterarguments on.
Published: July 23, 2008 2:42 AM
Stop the presses! RTR admits that fraud is possible in a subjectively-valued situation! ;-)
But good point about IOU's being unable to compete effectively against free market money.
Published: July 23, 2008 10:27 AM
There's a good article on bills of exchange emerging freely as a medium of exchange in medieval times:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=151849
Bills of exchange competed effectively with gold and later notes as a means of exchange. Enforcement of the IOUs was through merchant courts, not government civil courts. Check it out, it's a good read.
Published: July 23, 2008 11:06 AM
jp says:
"in an economy in which gold serves as money, I should be able to sue the gold miner and anyone he transacts with using his newly mined gold. After all, he's driving up prices at my expense, effectively reducing the value of the gold in my pocket. And they are letting him do it. Shame on them for committing this fraud!"
what about if the miner sold gold bars to the public, with only some of them being bullion, and the rest plated lead? if there were an exclusion clause in the fine print of the sales receipt, would that make it legitimate? assume that the two bars look identical and cannot be assayed.
the inflationary aspect of the frb is deleterious and shifts purhasing power as well as originating the business cycle, but it's not fraud. fraud is where i go to withdraw on my check account and find the bank closed this morning, and only early-birds got to withdraw. i didn't buy a lottery ticket, i placed my capital in the bank for purposes of preservation, not for investment returns.
Published: July 23, 2008 11:12 AM
jp: "Bills of exchange competed effectively with gold and later notes as a means of exchange."
Thanks for the link. I'm anxious to read the paper. I doesn't cover the 18th century, but I have read that the Dutch had several major financial crises in that century that were caused by an expansion of the bills of exchange. As in FRB, the total outstanding value of the bills of exchange was about 20 times that of total currency in the country. They caused credit expansion in the same way that FRB does. All it took to cause the credit pyramid to collapse was one default and the financial crises followed.
Published: July 23, 2008 1:49 PM
Ever heard of the saying a bird in the hand is worth two in the bush?
http://www.phrases.org.uk/meanings/64950.html
"Referring to the phrase as proverbial suggests an earlier coinage. By how much the current version predates 1801 isn't clear, but variations of the phrase have been known for centuries. The earliest English version of the proverb is from the Bible and was translated into English in Wycliffe's version in 1382, although Latin texts have it from the 13th century:
Ecclesiastes IX - A living dog is better than a dead lion.
John Heywood, the 16th century collector of proverbs, recorded another version in his ambitiously titled A dialogue conteinyng the nomber in effect of all the prouerbes in the Englishe tongue, 1546:
"Better one byrde in hande than ten in the wood"."
Bills of exchange are overly complicating simple trade. They may have a couple short term advantages but the long-term disadvantages are severe. Fire doesn't destroy gold; it certainly does destroy paper bills (hooray, somebody's lucky day!). Gold doesn't have credit risks. Gold is gold. IOUs differ by borrower/lender. In a credit crisis (or a war or natural disaster crisis) such IOU notes become highly illiquid. See a perfect example of this currently with subprime and Alt-A mortgage notes.
Such bills and IOUs simply are not money. They may work for a time between big merchant and banking institutions, but why would anyone else want to assume such credit risks without being paid the interest and uncertainty for assuming those credit risks? That's why bills of exchange and IOUs are a dumping of risk onto others if any unknowingly assume they are "as good as gold" and trade other things for those IOU notes as if those IOU notes were subjectively valued "as good as gold". At that point, the market will be flooded with such notes and IOUs, and once again an economic earthquake will bring such notes and IOUs into the dumpster. Hello mortgage meltdown crisis.
Has gold ever stopped being valuable? No. But history is full of fiat moneys, IOUs, and paper bills of exchange ending up in the dust bin. We have multi million dollar excavations today to recover ship wrecks containing real money gold coins, but none to recover any of the hundreds of failed synthetic money currencies. The gold is still there even though many institutions and promises are long dead.
Shipping bullion is no less a burden, cost, or risk, than shipping any of the other goods which would be traded for that bullion. Pirates were just as happy to loot cargoes of non bullion as they were to loot cargoes of bullion. Rough seas didn't discriminate either. There's no escaping long-distance shipping of what was the other side of trade transactions, unless a long distance trader wants it stored where the bullion would originate. But that then begs the question of what was being traded by the long distance trader to acquire what he was trading for to ship back home.
One sentence from the paper jp linked to exposes it's fundamental flawed monetary theory as pure garbage: "In the absence of bills of exchange, Lucca balanced its exports to Champagne by shipping bullion home and balanced its imports from Genoa by shipping bullion there" p. 14. "African gold flowed from Spain to Italy not only because of Spain's trade deficit with Italy, but also because of its deficit with Flanders" p.15. This is pure garbage. There is never, ever, not anywhere, before, now, or in the future, any such thing as a "trade deficit". All trade only occurs because that which is received is valued more than that which is given away in exchange.
"Consequently, it was generally in multilateral trade that the use of bills of exchange was the most extensive" p. 15. What a fool. Trade is trade which generates positive mutual wealth profit in every instance. There's no "balance of payments" "multilateral" confusion. It's hard to finish reading as the author continues with more "trade deficit" nonsense.
He goes on to explain overly complicated gobbledygook credit (receivables)/debt (payables)/overdraft transactions. It's the beginning of the construction of fraudulent scams to sucker people into giving up something for nothing in return.
But the author unknowingly stumbles upon the real reason for the impetus of the trade of bills of exchange and IOUs. "For example, suppose A owes money to B, and writes him a letter obligatory to acknowledge the debt. The instrument is assignable if B can, before maturity, assign the right to collect the debt to a third party, C, without giving notice to A." Bingo. This is how usury begets violence. Some really nice dude will loan you the money as a favor, and some really mean dude will collect and be paid penalties for his collection efforts.
Now as to the problem of transferring credit risk to further and further parties the author claims, "The eventual solution was found in the practice of endorsement. Each ASSignor signed the back of the instrument" p. 25. Oh, well that *solves* it. Just like everybody has to sign the back of any ounce of gold that is traded, to know that it's of good quality, and similarly for absolutely every single other good which is also traded.
That's hardly what jp called "bills of exchange emerging freely as a medium of exchange in medieval times". The first party creditor refused to take the loss for defaults, so others, and eventually society as a whole, were forced and deceived into having to make good on those losses.
These things aren't in the slightest, "money", except by pure sleight of hand. Each bill, each individual IOU is an independent good of it's own, not a marginal unit of the total supply of all outstanding IOUs. People, unfortunately, do get suckered into pyramid scams. It was only the transference of the right to violently collect that enabled the emergence of debt and usury. Otherwise, Person Bs wouldn't be financing Person As into debt with nothing traded in return, and having to eat the default losses. The whole mortgage meltdown is a perfect case example of all the fraud, debt, inflation, speculation, and criminal elements attracted to such IOU schemes. For IOUs and bills of exchange ever to become "money" every mortgage must be assumed to have been measured to the strictest standard and all of the highest grade Prime quality. And as we know now, that's laughable.
Published: July 23, 2008 4:22 PM
Thanks rtr for the comments. Y'know, for the moment they got me thinking, could there be something to the FRB? Which is good, healthy dose of doubt is always needed. But in the end the FRB stands to deserve all the names it got in the first comment - which is good to know. So long, gents, and thanks for all the fish.
Published: July 23, 2008 5:36 PM
Actually using the 'rtr method', which is to say 'all trade is valid because there was something more for the trade to occur than for the trade not to occur', the merchants valued the paper more than the gold because they circulated the paper rather than the gold. Why should merchant care if the IOUs are valueless in a century to two? If the paper allowed them to trade in a way that gold couldn't then the paper did it's job for that time. It's akin to asking 'why is the Mona Lisa valuable at all'? It just oil paints on canvas and up until around 1900 or so it wasn't considered valuable. It's has no intrinsic value in it just like paper money. But then who cares what the value of gold might be in 2000 years time? Unless you intend on living that long or are going to bequeath a chest of gold to someone 2000 years hence? Assuming true space flight can be achieved within the next 1000 years then the value of all metals will probably be same - a pittance an ounce - if the value of any metal rises, space miners will produce more. Likewise should society and technology go belly up and everyone's goes the way of the Amish then there's no point speculating of what gold will buy you - it's akin to asking 'how many gold coins can I use to buy a 1080HD plasma screen today versus how I needed in Ancient Rome versus how many I'll need in Future Amishia?'. I mean come on.
Published: July 23, 2008 7:39 PM
But TLWP Sam you have to ask why did the very first credit/debt IOU originate? Solely because positive interest was added and promised in the future. Why would anybody else then take that IOU without also taking over the interest payments due? The moment the bank trades away the IOU they trade away the promised interest payments. But why would non bank regular consumer folk want to go into the banking business of accepting IOUs, being responsible for collection, and subject to default risks? That's not very division of laborie. They would by definition be becoming synthetic banks by holding IOU notes (no doubt the crappiest ones at that). And why would the banks trade away the IOU notes they so value? Only if they can find suckers to take them off their hands. Banks only trade IOUs to dump risk. Since when did everyone in the population wish to by definition become a bank by holding IOU notes?
Joe Schmoe is not a credit calculating expert. Why would he accept the banks bread and butter IOU business not possessing the expertise the bank does of valuing credit risks? He wouldn't unless the bank were to by definition pure arbitrage lose money from the original granting of credit by paying more interest than it was originally promised to the new non expert Joe Schmoe possessor of the IOU note. The bank counts on Joe Schmoe being an idiot, so they can scalp him. The bank says "this note is as good as gold" and Joe Schmoe naively believes them, and thus the credit risk is dumped off onto Joe Schmoe Sucker. Works just like a pyramid scheme until there is so much bad credit that it implodes and blows up suddenly losing massive amounts of its previous subjective value.
That's why socialism government interference with the market is demanded so that debts can be collected and the costs of guaranteeing and enforcing collection (and promising pittance FDIC "insurance") can be socialized. There is no such burden at all from pure trade of one good for another good. It's far easier to keep an eye on the economic calculation measuring stick of commodity gold than it is to keep an expert watchful eye on the changing credit risks of default of original borrowers you haven't even the slightest clue of what their legal names are. The note just says "IOU". Who exactly owes? Who cares!
And hey, if there are suckers who believe IOU promises are "as good as gold", then the bank is going to seek an explosion in its profits by initiating and dumping as many loan IOU promises as it can. But where the hell are its profits coming from if they are dumping their IOU interest generating profit loans means for pure arbitrage losses? Why didn't the original borrower just go to you instead of the bank to get the loan? Because you would have charged a higher interest rate. But the bank scalped you by profiting off the difference in the interest rate you accepted (ZERO lmao -- by definition of it being "as good as gold" aka "money") and the interest rate it hedged in from the original borrower. So the bank is earning its 5% interest, you are earning 0% interest and have the default risks dumped upon you, and the original borrower is paying 5% as long as he doesn't default. That's precisely why people couldn't get enough of those subprime mortgage notes. "Sell em to the Chinese. They're dumb enough to buy 'em."
Published: July 23, 2008 9:17 PM
"what about if the miner sold gold bars to the public, with only some of them being bullion, and the rest plated lead? if there were an exclusion clause in the fine print of the sales receipt, would that make it legitimate? assume that the two bars look identical and cannot be assayed."
That's not a very good analogy to FRB. Bank assets and liabilities are made public, so FRB notes are assayable.
In a way, FRB banks do issue something like the gold-covered lead bars in your analogy, in that notes are backed by gold and other assets. But they wouldn't deny this - just look at their balance sheet. Furthermore, your example assumes that the other assets are worth far less than the gold. Thus your decision to use lead. But the assets the FRB banks use to "fill their gold bar" ie. back their notes, are equal in value to gold, even if they aren't gold. It would be like your miner selling gold covered platinum bars, not lead ones.
It would not be legitimate for a bank manager to steal the gold or any other asset in an FRB bank and substitute it for an asset worth less, like lead. This would be discovered by the market and the bank punished. By pretending to sell gold, your miner is doing the same thing as the bank manager.
"fraud is where i go to withdraw on my check account and find the bank closed this morning, and only early-birds got to withdraw. i didn't buy a lottery ticket, i placed my capital in the bank for purposes of preservation, not for investment returns."
Then you shouldn't use chequing accounts. In a free banking system you'd be able to choose 100% gold backed certificates issued by a bullion bank. You could deposit those in a security box if you wanted and withdraw on demand. You could put them into a term savings account of a non-FRB bank if you wanted to take some more risk. No one would be forcing you to choose a chequing account.
Such a product would be convenient to consumers who like the idea of having their money at a bank but don't want it locked in for a period of time, nor relish the idea of paying for storage. They are comfortable with the idea that their notes are backed by say 10% in reserves, but if these reserves are depleted the bank may delay redemption because it has to sell other assets.
Published: July 24, 2008 8:54 AM
If this is true, why doesn't the bank exchange the assets for gold right away and remove all doubt? I suspect the truth is that the assets are equal in value to gold as long as not too many people try to get gold for them simultaneously. In other words, the "backing" will fail precisely when it is needed most.
Published: July 24, 2008 9:48 AM
jp says:
"That's not a very good analogy to FRB. Bank assets and liabilities are made public, so FRB notes are assayable."
just look at how the banks stocks have collapsed over the last year. chances are the balances sheets were massively distorted in the first place, and yet they passed audit. who knows what the real value of some of the complex securities that remain on balance sheets? seems most bankers weren't even able to gauge value, let alone the layman. you presume too much.
in a bank run, some will be lucky and withdraw, others will act too late and either lose capital outright, or be locked in for years. the argentine frb banks collapsed; the well-connected got out in time, the poorer depositors got screwed. i can't see how this isn't a fraud on the check account holders who were blocked.
i'd have less trouble if your bank wasn't called a bank, rather an "investment house", and your checking account were called by its real name - "no-capital-guarantee account". i'm assuming that misrepresentation still constitutes fraud in this future scenario, so words have meanings and consequences.
Published: July 24, 2008 10:07 AM
PR:
"I suspect the truth is that the assets are equal in value to gold as long as not too many people try to get gold for them simultaneously. In other words, the "backing" will fail precisely when it is needed most."
If the non-gold assets weren't at least equal in value to gold, people wouldn't put their money in such a bank in the first place. I choose to put my money in a fractional reserve bank because the non-gold assets earn interest, while a 100% reserve bank would charge me fees. During a bank run, if the bank's gold reserves run out, then I still have a claim on the non-gold assets. This presents a known risk that the non-gold assets might have lost value, but of course a 100% reserve bank has a known risk of being robbed.
Published: July 24, 2008 10:42 AM
Mike,
The value of the non-gold assets is not fixed for all time. It depends heavily on how much gold is available to purchase them. Under bank run conditions, the assets will not fetch their full balance sheet value if for no other reason than they will all be dumped on the market at the same time.
I'm not sure why you bring up the issue of robbery. Of course 100% reserve banks can be robbed, but so can fractional-reserve banks. Banks are robbed today after all.
The only thing that is guaranteed to be worth an ounce of gold is an ounce of gold. Anything else adds a risk. If an FRB gives a higher return, it is only because of this higher risk. This is fine if people choose to accept the additional risk, but call the arrangement what it really is: an investment account, not a demand deposit.
Published: July 24, 2008 11:18 AM
Newson: A lot of this year's collapses were caused by depositors asking for their money back ie. Northern Rock. This was the market disciplining the banks for the poor quality of their assets. It may take time, but FRB liabilities are assayable, even by laymen.
Yes, the poorly informed will suffer at the expense of the informed in FRB bank runs. But this is true for anything in life. The person who doesn't do enough research before buying a stock or a futures contract will probably not do as well as someone who has done their research. Same with cars, fruit, education, and entrepreneurs competing with each other to grow businesses. People can protect themselves by not buying stocks though.
The way for the layman to protect himself from the complexities of FR banking would be to not participate: keep money under a pillow, hold it in a safety deposit box, or if he wants some income, lend it to a trustworthy relative at interest.
Or he could get financial advice from a professional on which FRB institutions are the safest in which to deposit, kind of like a stock broker. Sometimes I wonder if the profession of FRB deposit advisor has never emerged because government domination of note issuance and deposit insurance on checking accounts prevents anyone from caring.
Published: July 24, 2008 11:22 AM
PR
"I'm not sure why you bring up the issue of robbery. Of course 100% reserve banks can be robbed, but so can fractional-reserve banks."
I brought it up to point out that 100% reserve banks are not necessarily safer than fractional reserve banks. Both are vulnerable to robbery, but the 100% reserve bank is the more vulnerable of the two.
Also, I already understand that my 'demand deposit' is something of an investment account, so there's no need to change its name, and certainly no need for any third party to force banks to call checking accounts 'investment accounts'
Published: July 24, 2008 7:09 PM
jp says:
"A lot of this year's collapses were caused by depositors asking for their money back ie. Northern Rock. This was the market disciplining the banks for the poor quality of their assets. It may take time, but FRB liabilities are assayable, even by laymen."
yes, the assay is the bank run (ie after the fact). prior to the event, even the "experts" were deluded into believing the value posted to the balance sheet items. auditors signed off the books.
when people put money into a "check account" they expect a particular product with a particular risk profile (ie that the money deposited is always there).
when i buy a tomato, i want it to be a tomato and not some other similar-looking fruit (maybe i'm allergic to tomatoes). misrepresenting products should still be fraud.
my point is more semantic - "checking account" has a very specific meaning. if i buy a plane ticket, i don't want to arrive and find it's actually a hydrofoil.
Published: July 24, 2008 7:37 PM
I agree with you newson. Using the term "bank" to advertise demand deposit checking accounts is at best a severe deception if not outright fraud. It's exactly as if high risk *hedge funds* changed their named to "bank" to sucker people into accepting risk they didn't know existed.
This stuff isn't gold, it isn't money, for the simple fact that we can see that the IOU notes pretend "bank assets" can't be traded. Gold has no such problem of ill-liquidity. And if people really wanted those "investment loans" banks undertook with their money, why wasn't the bank explicitly advertising and selling that? Why wouldn't customers just bypass the banks and get higher returns (without the bank commission interest rate cut) independently on their own? I mean hell, the banks were paying lower interest rates than AAA treasury bonds while investing in high risk venture, all along *pretending* those ventures were "real assets as good as gold".
I won't be surprised if we see total losses from FRB fraud surpass $10 TRILLION. How many illegal aliens got mortgages with no proof of income or identity? 5 million? 10 million? That's a couple "trill" lost right there. Who thinks they are synthetically investing in speculative condominium projects in far flung cities when they get their paycheck direct deposited? There is no upfront disclosure (maybe some fine small print in the 10-K and annual reports) because the "bank" is counting on an erroneous misperception of the general public equating banks with "Fort Knox security".
Published: July 24, 2008 9:18 PM
If as rtr says "gold is money, period" then PR calls a spade a spade with "The only thing that is guaranteed to be worth an ounce of gold is an ounce of gold." Then why bother talking of currencies and gold standards? Money then should be denominated in ounce weights of gold and silver coinage, period.
Published: July 24, 2008 10:27 PM
I see no reason why this should be the case. Unless of course the FRB's assets aren't really worth as much as the gold they claim to represent, which is my point. In addition to robbery, FRB is vulnerable to lots of other things. If, say, a farm is used as backing, then the bank is also vulnerable to wildfire, locusts, a sudden widespread dislike of asparagus, and any number of other things. Again, there is nothing wrong with this as an investment, but that is what it is.
No, words have meanings. What you are describing is not "something of an investment," it is an investment.
You pop into nearly every thread having remotely anything to do with money touting your pet "theory," which, when pressed, you admit is nothing more than a redefinition of terms, then claim that anyone who doesn't accept your private definitions is uneducated/narrow-minded/tyrranical. Yes, we get it! Store your life savings in a mutual fund if you want! Just don't expect any sympathy when the bottom drops out and your share of the "backing" turns out to be two-thirds of a chicken and a few dusty grains of wheat swept off the bottom of the vault.
Published: July 25, 2008 8:43 AM
"I won't be surprised if we see total losses from FRB fraud surpass $10 TRILLION. How many illegal aliens got mortgages with no proof of income or identity?"
Yes, but I think we can agree that there is a difference between FRB in a free banking world and FRB in a world dominated by the Fed, Fannie, Freddie, Ginnie, FHA, FHLBanks, FDIC, etc. Gold standards too can be coopted by central banks (say the Bank of England in the 18th and 19th c) making them more prone boom bust cycles.
It is not FRB at fault but government interference with FRB.
Going on an internet-less holiday, folks. Enjoyed the conversation!
Published: July 25, 2008 9:28 AM
Mike,
I don't think any Austrian would be opposed to trading with money that is not convertible into gold on demand. What they may object to is your version of RBD.
All Austrians (and I think mainstream economists) agree that "dollar" at one point in time was a name of a unit weight of silver. They all agree also, that silver and gold became standard money for various reasons (homogonous, divisible, high unit value, durable etc)
Let's drop the term "dollar" and use "oz of silver"
If I deposit 100 oz silver in my "bank", he must give me a receipt that says "pay bearer on demand 100 oz silver". If another customer deposits a truck worth 100 oz, why should the banker be allowed to give him a receipt that says "pay bearer on demand 100 oz silver"?
A receipt that read "pay bearer on demand 1 x 2004 Ford z1" could serve as money if all parties agreed to it.
Yet you insist on allowing the bank to write a receipt for something the banker doesn't have.
Published: July 25, 2008 10:32 AM
Yet you insist on allowing the bank to write a receipt for something the banker doesn't have.
Good point, Nathan! Let me see if I can anticipate Mike Sproul's response. He would say that financial convertibility still exists, because the truck could be sold to obtain the 100 ounces of silver. Of course, this is only true if the truck, can, in fact, be sold for 100 ounces of silver, and hasn't lost value at that point. It's like me borrowing a dollar from a friend, and when he wants it back, I give him a dvd worth a dollar instead of a dollar. He might be agreeable to the dvd, but he expected to get a dollar back, and the dollar, as money, is generally more useful to him than the dvd. Likewise, 100 ounces of silver is general more useful to people than the truck.
Published: July 25, 2008 1:20 PM