The Case for Natural Money
Studying Jörg Guido Hülsmann's latest book, The Ethics of Money Production, is a vastly enriching experience, writes George Smith. After building his case for natural money on the inviolability of an individual's right to his own property, he then shows us how the state has spent the last 400 years usurping this right for the benefit of a privileged few through its protection of fractional-reserve banking. FULL ARTICLE
Comments (39)
joebhed
central government planner here
Says George Smith:
""We need to sweep aside privileged money and let the market work.""
Says Abe Lincoln:
""The government should create issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of consumers.""
""The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity.""
It would be nice to occasionally stray a maypole's distance from the rhetoric that ALL government is bad, and that there is a natural omnipotence to all private property, extending through the money-creation powers of individuals.
There is never a distinction between the private debt-money, fractional reserve banking system and a system of debt-free government issue, for example.
The most inflationary aspect of expanding the debt-money system is its failure to provide that part of the deal calling for the creation of interest payments.
Yes, the government allows that to happen and it is wrong.
That's why the FED should be abolished, as we agree.
I never hear the matter of debt-money addressed here on this blog, or almost anywhere I follow the Austro-economic school of thought.
It's always the cursed government-created fiat money, as if THAT is the problem.
If Lincoln is right, and if we are to continue occupying this planet as an organized collective of either nations or individuals, then that which is truly the natural money will have to be determined by a greater claim than laid out here by Mr. Smith or the book by Mr. Hulsmann.
Published: February 24, 2009 11:11 AM
Michael A. Clem
That which is truly the natural money was determined by a comparatively free market of voluntary trades. In other words by millions of people other than Smith or Hulsmann. There is no such thing as debt-money with natural money, only with government-created or government-privileged money.
Published: February 24, 2009 11:40 AM
Mike
Appealing to Abe Lincoln is probably the best way to change Austrians' minds. Good call.
Published: February 24, 2009 11:41 AM
billwald
Austrians can't get over the fact that the only reason gold was used as natural money is that men are naturally liars. If our word was as good as our bond then a personal IOU woud suffice.
Austrians can't get over the fact that 90% of the "money" in circulation is electronic transfer, not paper money. In the bad old days it could be argued that paper money represented the existence of gold - someplace. This is no longer true. "Money" functions only as government backed IOUs. I can't trust your personal IOU because I don't know you but if you give me a government backed IOU I know that I can trade it for goods and services. Young people can apparently equate money to credit but not Austrians.
The primary problem with government money as IOUs is that our government, probably no government, has ever kept an honest set of books. The solution to a dishonest government is to insist upon a double entry book keeping and all government accounts (including black accounts) published on the web. Also a new law that anyone who cooks the books be hanged on a lamp post outside the Treasury Building.
Published: February 24, 2009 11:47 AM
Mike
So, what exactly is owed in this paper IOU, billwald?
Published: February 24, 2009 11:49 AM
billwald
As my gold fans tell me, the market will set the value, establish what is owed.
One way to slow the sheisters is to eliminate the money changers. If the world adapted a "euro" world wide unit of "money" system then each country would compete on a basis of labor costs and efficiency, not on the basis of the honesty on one's national government.
(please excuse not having a spell checker on this computer to catch typos)
The best explanation of the existing world wide money system is that the exchange rate between currencies is established by the aggrigate functioning of the commodities market.
For example, crude oil and wheat. The unit cost is very low and the ship's capapcity very large so that unit transportation cost is immaterial. The owner of a tanker full of crude in Saudi Arabia doesn't care if his crude is sold in London or New York because the pragmatic economic value is the same in both ports. He doesn't care if he is paid in pounds or dollars because the money changers will set the exchange rate so that it will a wash in the long run.
If there was only one currency then there can't be a manipulation by the money changers.
Published: February 24, 2009 12:08 PM
Inquisitor
"If Lincoln is right, and if we are to continue occupying this planet as an organized collective of either nations or individuals, then that which is truly the natural money will have to be determined by a greater claim than laid out here by Mr. Smith or the book by Mr. Hulsmann. "
Was there meant to be an argument in there somewhere?
Billwald,
#
"Austrians can't get over the fact that the only reason gold was used as natural money is that men are naturally liars. If our word was as good as our bond then a personal IOU woud suffice."
Ipse dixit/meaningless assertion.
"Austrians can't get over the fact that 90% of the "money" in circulation is electronic transfer, not paper money. In the bad old days it could be argued that paper money represented the existence of gold - someplace. This is no longer true. "Money" functions only as government backed IOUs. I can't trust your personal IOU because I don't know you but if you give me a government backed IOU I know that I can trade it for goods and services. Young people can apparently equate money to credit but not Austrians."
IOW, I can trust it to steal as much as it can from its vassals. Again, why should I be forced in dealing with government money? Why should I not be able to deal with money of my own choosing, through institutions of my own choice? Why must I rely on some stupid faith-based organization? Answer me and put an end to your pathetic circumlocutions. Again this is merely another assertion. If I will not accept the money outside of government force, it is not really an acceptable medium of exchange to me. Get over it.
"The primary problem with government money as IOUs is that our government, probably no government, has ever kept an honest set of books. The solution to a dishonest government is to insist upon a double entry book keeping and all government accounts (including black accounts) published on the web. Also a new law that anyone who cooks the books be hanged on a lamp post outside the Treasury Building."
Yes, new and better regulations (TM) will do the trick! Why don't you stop forcing your irrational, whimsical, fear-driven prejudices on the rest of us? Let the market decide and stop pretending you have either the authority or know-how to supercede it. The solution to a dishonest government is to end it, and to dismiss the claims by apologists like yourself as quackery.
Published: February 24, 2009 12:14 PM
Inquisitor
"One way to slow the sheisters is to eliminate the money changers. If the world adapted a "euro" world wide unit of "money" system then each country would compete on a basis of labor costs and efficiency, not on the basis of the honesty on one's national government."
What if the "world" doesn't want to, at least not on your grounds?
Published: February 24, 2009 12:17 PM
Michael A. Clem
It's just amazing that non-Austrians can admit the dishonesty of government, and then propose that the solution is more laws by the same government! The solution for dishonest government is for people to stop pretending that it has any legitimacy, and recognize it for the evil (not just dishonest) organization that it is. Sure, sure, I realize how radical that must be to many people, and how it jars one's own cognitive dissonance that one has probably maintained since childhood, but at some point, you stopped believing in Santa Claus and the Tooth Fairy, didn't you?
Published: February 24, 2009 12:26 PM
David Hillary
Not only commodities can be used for indirect exchange, debt also can be.
When goods are sold on credit, the credit is facilitating the exchange in lieu of money. And a good deal of commerce is carried on this kind of credit, even though this relies on the credit of the customer.
When goods are sold in exchange for a cheque, the cheque is a form of credit: an undertaking that one's banker will pay, and that if the bank doesn't, he is liable to pay. A good deal of commerce is carried on on this kind of credit, too, even though this also relies on the credit of the customer.
When goods are sold in exchange EFTPOS, this replaces the customer's credit with the banks' (the customer's and the merchant's). The customer's bank undertakes to pay the sums approved to the merchant's bank, and the merchant's bank undertakes to pay to the merchant the sums processed through EFTPOS, and the merchant relies on this.
When goods are sold for bank notes, the merchant relies on theissuing bank's credit, and a lot of commerce is carries on relying on this.
So, in this way, a metallic money operates only to a limited extent as a means of exchange, and instead primarily as a standard of payment, against which credit is measured as honoured/discharged or dishonoured/breached.
Anti FRBers are really against the natural order of credit contracting, preferring to ban some forms of credit that facilitate indirect exchange, in order to prefer holdings of metallic money for this purpose instead. True freedom and naturalism in money provide for freedom for all forms of credit, as well as freedom to manufacture and use metallic coins.
Published: February 24, 2009 1:17 PM
Inquisitor
I think we need to delineate between a free market in money, and some government-imposed replica thereof. Austrians want the former. It is then up to consumers whom to patronize, what priorities to set and so on. I need to give Huerta's treatise a read on this topic, to give the anti-FRB case a hearing, but either way government provision of money is about as justified/efficient as it is anywhere else... not at all.
Published: February 24, 2009 1:29 PM
Michael A. Clem
True freedom and naturalism in money provide for freedom for all forms of credit, as well as freedom to manufacture and use metallic coins.
Okay, perhaps I went overboard in saying that there is no such thing as debt-money in natural money. However, in a free market in money, one would be free to accept or refuse such money, instead of having it coerced on them by legal tender laws. Also, since credit is dependent upon a delayed payment of actual money, credit is a money-substitute, not money itself.
Published: February 24, 2009 1:36 PM
greg
If we go back to the gold standard, I have to assume that Austrians would allow the free market set the price of gold. And as I have stated before, gold today has very little uses and the value is held up by the demand of gold bugs. As more gold bugs are drawn in by the countless infomercials today, the price rises. If the price of gold really is heading to $2000 as the guy on TV says, why is he wanting to sell you those coins? The answer is that he wants those high margins you will pay to own that coin!
With just one country adopting a gold standard, there would be an increased demand as they try to build reserves. The price of gold would easily double. This would allow the country on the gold standard to increase the money supply to meet this increased value.
Now, what if a country decides to base their currency on oil which again is set by the market. Does it make their currency any less valuable than the gold standard? What if the country sets its currency on its ability to produce steel? Basically, why gold? Because it is what my daddy did and his daddy did before him! That is the same old response I get from people that are set in the past.
For me, gold is just a commodity that prices fluctuate on nothing more than speculation and it is easy to play because it moves with the movement of the sheep playing this market.
Published: February 24, 2009 2:12 PM
Michael A. Clem
Greg, you're not making sense. Gold has fewer uses today than it did one hundred years ago? It's still used for jewelry, industry, and other odds and ends. Also, we wouldn't "go back to the gold standard", especially not as a country--we would go to free banking, and gold would be used if that became once again the commodity of choice for money, which would only happen if people valued its use as money as they did before, including its stability. Oil production is intense and variable, much more so than gold production, so while oil *could* be used as money, it lacks some of the qualities that gold has as money, such as relatively stable supply, and wouldn't be as convenient to use or store as money. Also, the mere fact that gold was once again being used for money would change the gold market and make it much harder to manipulate by speculators, since they would be relegated to only controlling a small portion of the gold supply.
But once again, if it hasn't been made clear, the choice of commodity for money would be voluntarily chosen by economic actors, not forced upon them. When you go shopping, do you choose ill-fitting, uncomfortable clothes, or buy foods that you don't like to eat?
Published: February 24, 2009 2:27 PM
David Hillary
Michael A. Clem
'Okay, perhaps I went overboard in saying that there is no such thing as debt-money in natural money. However, in a free market in money, one would be free to accept or refuse such money, instead of having it coerced on them by legal tender laws. Also, since credit is dependent upon a delayed payment of actual money, credit is a money-substitute, not money itself.'
I guess it depends on the definition of 'money.' If 'money' means metallic money, then credit money is not money, by definition. However that is not the most accepted definition of money: the traditional definition is a generally accepted means of indirect exchange.
Published: February 24, 2009 2:43 PM
Michael A. Clem
Credit would only be money if it was exchanged for its own sake, without expectation of eventual payment of that credit. Otherwise it's not money, but a money-substitute. When I use a credit card for payment, the credit card company is paying money to the seller on my behalf, with the expectation that I will eventually pay the money back to the credit card company.
Published: February 24, 2009 3:10 PM
David Hillary
Michael A. Clem,
I think what some anti-FRB people object to is not that credit can be used to facilitate trade, but that it can be used at the expense of standard/metallic money. I.e. they are concerned that, if aggregate holdings of notes and account entries payable on demand provides additional quantity of transactional media over and above the stock of metallic money, then 'inflation' (their definition) has occured. If johnny overpays his power account and uses the credit balance to pay for the groceries, the grocer having a debit balance with the same company, Mr anti-FRB is concerned not because book debts are being used to facilitate commerce, but because Johnny held a credit balance instead of metal, and he thinks that the metal he would have/should have used is driving up prices somewhere else.
Published: February 24, 2009 3:31 PM
joebhed
Michael - 'There is no such thing as debt-money with natural money, only with government-created or government-privileged money.'
Only, but not always.
There was no debt-money stigma to Lincoln's Greenbacks.
No repayment and no interest due.
Greenbacks provided a means of exchange between the government and the people.
There was no debt-money in the Chicago Plan proposals for monetary reform.
There was none with Friedman's proposal, along with Simons and Fisher, for 100 percent reserve banking.
The arguments made against the government run money system relate to its debt-money qualities that stem from the fractional reserve banking system creating all new money as a debt, and not related to the fiat nature of a government money system.
Inq. -
'Was there meant to be an argument in there somewhere?'
Only that we the people may agree with Lincoln, are not likely to give up our right to be a sovereign nation and within that structure the right to have a sovereign money system.
I don't feel we need a government monopoly on credit, but any parallel universe of whatever other than public money that is out there cannot infringe our right to our money system.
Published: February 24, 2009 3:56 PM
pbergn
I agree with other posters arguing that the Gold Standard will NOT really stem the inflation or make things significantly better in this respect. As "greg" and other posters are rightly arguing - the Gold is just like any other commodity which is currently limited in its readily available quantity.
The increase of money supply is political in nature, and is driven by the desire of power wielders to meet their over-inflated obligations. As long as there is the State that wields the monopoly of coercive power there is NO way to stop the increase in money supply. It is trivial knowledge that increase in quantity leads to decrease of its value. There is no need to write volumes and volumes of books and articles about it...
Unfortunately, the state is a necessary evil designed to protect the collective property rights of its citizens... It is when the State is abusing its powers given to it by the Constitution, its existence becomes a manace to the freedoms of its subjects...
The only advantage of Gold Standard is that it significantly slows down the inflation, makes it politically much unsavory to advocate for...
Also disagree with the author who makes a case against fractional banking. I believe non-fractional banking is an oxymoron...
The only purpose of banks besides facilitating the business transactions is to serve as aggregators of excess capital for the purpose of maximally increasing its quantity through investments. Now, if we were to require 100% reserves availability from banks, how on earth would they invest?! What exactly would they invest?!
In other words, if we were to require banks to hold enough gold to meet their obligations at any given time when everyone decides to withdraw their money with interest, what exactly would be left for the banks to invest? Non-fractional banking and the very existence of the banks are diametrically opposed.
And besides, if it is free market, why should anyone dictate how much risk a certain financial institution is willing to take? Is it not the anti-thesis of free market? Why not let the free market decide whom to reward and how much for taking higher risks?!
Many supporters of free market economy do not realize that there is nothing really wrong with fractional banking or even fiat money itself. The danger is when the government decides to "bailout" the failed private entities by creating more money to socialize the losses of a few members of the business elite which de facto own it...
Published: February 24, 2009 5:14 PM
Pat
"When the United States suspended payment of gold, it converted the world's banknotes to paper money. It also created the horror of fluctuating exchange rates that weakened the international division of labor and brought "misery and death" to millions."
This sounds close to one thought I had when considering poverty in the world. It seems to me that since governments accept only one type of money for tax payment and exchanges, those people (e.g.: farmers) cannot sell or buy goods and services by exchanging things they could produce (e.g.: goats for school tuition) as much as they could, leading a number of people impoverished as they cannot participate in the economy. If true (Which I suspect it is), then the solution would be more like what George Will would suggest. Am I wrong?
Published: February 24, 2009 5:37 PM
Pat
"George Will would suggest. Am I wrong?"
I meant George Smith. I apologize for the mistake.
Published: February 24, 2009 5:44 PM
pbergn
TO: Pat
Pat,
the points you are making are valid. To my knowledge there are no prohibitions for using barter as a form of payment.
For example, a farmer can pay two goats to send his/her child to school, if the school is willing to accept goats as a method of payment; a private school that is. I am not aware of any laws prohibiting such exchange...
The only reason why a common form of money exists in a certain geo-political entity is to standardize the means of exchange which leads to the increase of efficiency...
Remember, that the money itself has arisen from the necessity to store wealth in the face of future uncertainty of the demand...
I am advocating for common currency in a certain geopolitical entity, such as state, as a mechanism to facilitate the free market exchanges.
If we were to allow private entities to mint their own money (which the corporate bonds are essentially are), this could have lead to an increased state of chaos, and would be detrimental to the integrity of that geo-political entity.
As a disclosure, please note, that I am NO Globalist, as many Austrians are. I am a staunch supporter of a national affiliation and country as means of self-determination of a group of individuals sharing the same locale. I would not want to live under one global state, or many tiny ones, based on some much narrower affiliation... I believe in one's country, nation and tribe one belongs to... I don't believe in a generic man with no specific country, morals or principles, who is only motivated by spontaneous exchanges in a global market... Pardon me for my views...
Published: February 24, 2009 6:29 PM
Pat
To Pbergn:
"As a disclosure, please note, that I am NO Globalist, as many Austrians are."
Point noted. I don't know if the vast majority of Austrains would qualify as globalist. At least, my assumption of the Austrian school of economics' position is that freedom of association includes what you call national affiliation. A group of individual wanting to associate under a common nation, that is perfectly consistent with the freedom of association. But then, that also includes the right to secession (I doubt you would be in favor of secession).
One world government is not something that the school would be advocating for as far as I know. In fact, Austrians as you say would be concerned about a one-world state if it is forced upon the populace. In fact, there is a large group of global political institutions (e.g.: IMF, World Bank) that the Austrian school of economics criticize. If people want to isolate themselves from the rest of the world, the school is not against it. There are several books that articulate the Austrian school of economics' position regarding international relations (e.g.: Liberalism, Human Action). If by globalism, you mean free trade through voluntary exchange, then you would be correct.
As for your views, no need for apologies. That is what free speech is for, remember.
Published: February 24, 2009 8:18 PM
pbergn
TO: Pat
Thanks, Pat.
I am in favor of secession, if the majority of a certain locale approves of it. This goes along the principles of freedom and self-determination. But I am strictly against the destruction of national borders and merging of the cultures in the name of freedom and free trade. I am against outsourcing of jobs and against huge trade imbalance in the name of free trade. I am for safety mechanisms which, unfortunately, go against free market principles, to prevent gradual economic takeover of American enterprises by Multinational Corporations, who exploit the labor where it is the cheapest, and sell the products of that cheap and coerced labor in the places where the buying capacity is the highest, such as in the United States of America...
I was and still am against such aggregate geo-political constructs like USSR or European Union, since the member nations do not want to live in one country, but they are forced to - in the name of free markets and free trade, security, or whatever...
I believe in national identity and freedom of the individuals to choose such identity... I am against measuring all humans with the same tape - we are all different, and our power is in our diversity...
By the term "globalist" I mean a person who does not recognize the idea of the State built on national affiliation. The globalists don't care who you are, where you are, and what is your cultural and ethnic background - they care only whether they can sell you something or use you as a workforce, and they play on differential of cheaper production means and higher realization capacity, regardless whether it destroys the standard of living in both the entities participating in the "free" trade relationship - by exploiting the former, and using the wealth of the latter... In other words, they do not believe in national markets - all the world is one big market for them, which generally goes against national interests of particular countries, and particular nations...
Don't get me wrong - I am FOR balanced international trade - free trade, you can call it, but, with the safety mechanisms in place to prevent explosive equalization of economic potentials...
Published: February 24, 2009 9:22 PM
Nathan
"First, as Hülsmann notes, in no period of human history has paper money spontaneously emerged on the free market. "Whenever and wherever it came into being, it existed only because the courts and the police suppressed the natural alternatives.""
What about the free banking period of the United States? This diatribe against paper money doesn't recognize the valid uses as a representation of some other commodity or service. In short, paper money can be a miniaturized contract of some more tangible exchange and most certainly can naturally arise in a free market. FIAT MONEY on the other hand is not so useful except to the governments of the world and is a recent development in the scope of the American experiment.
Published: February 25, 2009 12:10 AM
charles
pbergn:
"I believe non-fractional banking is an oxymoron... Now, if we were to require 100% reserves availability from banks, how on earth would they invest?! "
Pbergn, it's obvious you don't know what fractional reserve banking is.
If you store 100 gold bars at a bank, and they write 100 notes redeemable for one gold bar each, that is full reserve banking. 100 notes = 100 bars.
But if the bank takes those 100 bars and writes 1,000 notes, this is fractional reserve banking. 1,000 notes should equal 1,000 gold bars, but they don't - they only equal 100.
Fractional reserve banking is the creation of money out of thin air. It is legalized counterfeiting, and has nothing to do with allowing banks to lend money or not.
Does now knowing the facts change your opinion of fractional reserve banking?
Published: February 25, 2009 1:53 AM
David Hillary
charles,
what is a 'note'? is it a promissory note? Which part of negotiable instrument law requires makers of promissory notes to hold any particular assets? 'I promise to pay the bearer X dollars' is a promise to pay, a debt, not connected to any particular assets. A debt is a claim on a debtor, and not the debtor's assets. Bank notes typically offer no security of any assets either.
Of course banks of issue do have assets, it is just that they are primarily in the form of interest bearing loans and advances, and debt securities, rather than metallic/standard money. And it is this that anti-FRB people have a problem with, although this is fundamental to the business of banking as known to law and commerce today.
Published: February 25, 2009 2:14 AM
Peter Surda
I would recommend people arguing here to read the book, because it clarifies some things that are being discussed here.
For example, the reasons for gold (or precious metals in general) being used as money are not purely historical. Precious metals are homogenous (which means there is a constant relationship between value and volume/weight), are quite easy to divide, are difficult to counterfeit, have relatively high value per weight/volume unit, do not have special storage/transport requirements, have limited supply, can be used as an actual commodity, are not perishable, just to name a few. If we look at crude oil for example, it does not have all those features. This means it is less suitable as money. Of course it doesn't mean it can't function as money in certain cases, but precious metals would have a larger scope of use on a free market.
According to my understanding of the book, the problem with fiat money and FRB is not the increase of supply per se. Commodity money can also feature a long term supply increase. Rather, the problem is the decoupling of the production of money from market forces. Dr. Hülsmann also argues that fiat money can't be produced by market and requires a monopoly, and fiat money and FRB are related to a large extent, because fiat money, if used "correctly", effectively prevents fractional reserve banks from going bankrupt, a risk they would have been exposed to if money was produced by the market.
Published: February 25, 2009 5:29 AM
David Ch
the FRB debate goes round and round and millions of words are written in it on this forum.
I hate central banks, but I have no problem with private banks fractionally reserving their inflows of funding - they are free to do what they want, just as their depositors are also free to do what they want, and the sort of restriction many austrians propose are inconsistent with the principle of liberty. imho. .
the root of th eproblem lies in definitions.
Rothbard himself ( In the mystery of banking) declares that a bank taking a loan and then lending most of the proceeds out is an eminently healthy activity. the point he balks at is where money entrusted to a bank for safe keeping is lent out instead of being held against redemption. This sort of deposit is still done by banks but it is little remarked - it is as simple as hiring a safe deposit box and sticking your cash into it. If that bank fails, your ownership of the cash in the box is not legally affected and the curator of th ebank is obliged to return the entire content of th ebox to you. The depositor pays a FEE for this sort of security. and any bank lending it out is properly guilty of fraud.
But most bank deposits for th elast century or more take the legal form of LOANS TO the banks by the depositors , who are only too happy to recieve the interest on those deposits. I see no problem with banks lending those monies out on a fractional reserve basis as they see fit - the depositor accepts the risk of bank failure to manage its liquidity effectively as a quid pro quo for the interest earnings. You can't have it both ways.
Published: February 25, 2009 6:20 AM
Mark
This is more a theoretical question…wondering if it would be possible for a small country/economy adopt a metallic monetary standard and eliminate fractional-reserve banking in a world where every other country/economy follows a fiat currency and practices fractional reserve banking? Or do you have to have a global concerted effort, or at least a US effort, to adopt a metallic monetary standard… And if you thought a smaller (in relation to the global economy) economy could do this independently, what it would look like…
Do you have or know of any writings along these lines?
Thanks.
Published: February 25, 2009 11:59 AM
David Hillary
Mark,
It is easy for a large or small open economy to adopt of metallic monetary standard. All that is required is to define the existing monetary unit, e.g. dollars, as a mass of gold coin, and then require redemption of debts denominated in dollars in metallic money. (It may be desirable to enable wholesale redemption in bullion for a time while bullion is being manufactured into coin). Debtors would be able to acquire metal to pay their debts by selling assets, or avoid the need to acquire metal by rolling over or re-financing their debts. In this way the metal acts as a standard of payment and anchor of value, without necessarily being a, or the primary means of exchange. This would imply de-control of interest rates, although central banking could continue, monetary policy being to maintain redemption in metal at the option of note holders. If central banking was ended, private commercial banks would issue their own notes and the central bank would be liquidated or privatised.
Restricting fractional reserve banking, however, would be fairly problematic in an open economy, large or small. If the restriction was narrowly defined in terms of bank demand deposits, banks and their customers would, if given adequate notice, easily replace demand deposits with analagous financial instruments going by a different name, without the need to acquire or hold metal or interests in metal. For example, banks could replace their 'demand deposit' products with 'demand loan account' products, and the change would be entirely semantic. If the restriction applies to analagous financial products, e.g. all accounts, loans and securities that are payable or redeemable at par on demand or within 1 month notice or period, then financial intermediation could be significantly disrupted, and the threat of offshore free banking would become significant.
Published: February 25, 2009 12:26 PM
pbergn
TO: charles
Thanks, Charles. I see your point.
In other words, under fractional banking you understand the phenomenon of banks lending more money than they have in possession...
But how's that possible?! Let us say I want to lend you $100 and I have only $50. How am I going to achieve that, unless you are a complete simpleton?
I agree with you that the fractional banking if defined as you did - "the lending of money that you do not have" is a very BAD thing. But I don't think that people mean that under that term - generally they mean that you do NOT have enough money readily available to meet the debt obligations when all the debtors/creditors decide to withdraw at the same time...
While your definition is valid, I seriously doubt that it is practical, since no private financial institution can lend more than they have (of course, this does NOT apply to Federal Reserve and Treasury, since they can print all they want, or increase their balance sheets by issuing some bonds or other obligations)...
Published: February 25, 2009 1:59 PM
R.P. McCosker
I see that Smith/Hülsmann, like Rothbard and some other Austrians, seems to take an un-libertarian stance when it comes to fractional banking. For purposes here, though, I'll restrict myself to Smith: He makes several statements that run counter, not only to anarcho-capitalism, but to propertarian minarchism, IMHO.
Here are some Smith quotes, with my comment after each:
"In an ethical society, laws would punish counterfeiting as an instance of fraud and theft, and, once the false certificates were discovered, market participants would abandon their use and switch to alternatives."
Apparently Smith (and presumably Hülsmann too) want the government to act as a watchdog against bankers who print more notes than they have in stored assets.
Sorry, I don't see any proper function in government seeking to ensure against this kind of fraud. (Indeed, as a practical matter government intrusion in the long run is apt to reinforce this kind of fraud, given the political influence of concentrated banking interests.) Rather, it's in a bank's long-term interest to be sure its notes are sufficiently backed up, lest it lose its customers to the competition. And it's the responsibility of the banks customers to do business with trustworthy banks, not that of the taxpayers to underwrite the policing of the bank's practices.
"But governments can legalize certain kinds of counterfeiting. This can be accomplished in several ways. One method is for government to spin language in such a manner that certificate imprints can take on any contractually binding meaning. For example, the courts might see nothing wrong with a gold coin marked 'one ounce of gold' that in fact has less gold or no gold at all. Legalization here means that the government refuses to enforce the laws against bank counterfeiting. Legalizing false money certificates is the foundation of all other monetary privileges, such as legal monopolies and legal-tender laws."
There's no good reason for the government to be intervening in the language at all, spin or not. Indeed, that's what we shouldn't want: The government acting as arbiter of the language of business relations and contracts.
Again, people will do business with those who are fair and reliable. Private certifying organizations can be voluntarily utilised to ensure consumer-preferred practices.
Published: February 25, 2009 3:22 PM
ehmoran
FYI:
Central banking's main purpose now is market suppression
Submitted by cpowell on Wed, 2007-10-03 05:54. Section: Daily Dispatches
1:45a ET Wednesday, October 3, 2007
Dear Friend of GATA and Gold:
The Financial Times story, appended here, about the eurozone's alarm at its strengthening currency suggests a few things:
1) Worldwide currency devaluations are ahead -- competitive devaluations if cooperative ones cannot be arranged.
2) Eurozone central bankers are getting awfully sarcastic about the U.S. government's supposed "strong dollar policy," but sarcasm is not likely to get them anywhere. The Europeans remain the craven stooges of the American empire even as it starts to fall of its own weight.
3) The most important developments in the world economy now are plainly currency market manipulations by governments, increasingly undertaken shamelessly, in the open. That is, when the central banks work together in the name of preventing "exchange rate volatility," as the FT reports here, they are actually undertaking to rig all sorts of markets everywhere. Indeed, the primary purpose of international central banking now is to prevent markets from breaking out and thereby undoing the venality of the central bankers themselves.
4) Notice in the FT's reporting here and in nearly all financial market reporting how it is simply taken for granted that everything the central banks do in the name of stabilizing markets is done in secret -- from the G7 meetings cited in the FT story to the distribution lately of ever-more-fantastic amounts of public credit to private financial houses. The central bankers are conjuring up and passing out all the money in the world to a financial aristocracy whose only claim on the money is that it has taken the rest of the world hostage. Yet the proletariat, which does the actual work of the world, is not to inquire into the particulars. And how would the proletariat even know to do so when the press itself doesn't try?
All this is simply ruthless expropriation on a planetary scale -- and yet it is portrayed as the natural order of things.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
Published: February 25, 2009 8:25 PM
billwald
>If you store 100 gold bars at a bank, and they write 100 notes redeemable for one gold bar each, that is full reserve banking. 100 notes = 100 bars.
If I store 100 gold bars and the bank issues me a certificate for 100 gold bars the bank has no money (certificates) to invest. The bank can only make a profit by charge me a storage fee for storing my gold. How do they do this . . . how do I pay them if the 100 gold bars is my entire estate and I have already invested my gold certificates with a 3rd party? The bank can't confiscate any part of my gold bars because they have issued certificates against the gold.
Published: February 25, 2009 8:59 PM
ehmoran
billwald,
Interesting isn't it!
But if they give you credit for 100 bars of gold, then you owe them 100 bars of gold. Now they can reissue another 100 bars of gold because they know you'll pay them 101 bars of gold (1 bar of gold interest). If they figure that 10% of their issued credit will default, then they can issue 90 bars of gold to someone else. They now receive 90.9 bars of gold. And if you want to store your newly mined 100 gold bars with them, they will give you 0.1 bars of gold for your trouble.
But in reality, do they need any physical gold at all???
Although the bank HAS no gold, they have your promissory note. See you don't need to issue fiat money or gold. Just redeem Promissory Notes (or Federal Reserve Notes; in GOD we Trust).
You know, the more sinister game of "Life".
Published: February 25, 2009 9:29 PM
AC
Instead of thinking of banks and gold. Think of it as a Warehouse storing farmer's grain. The warehouse has the grain, the farmer has a piece of paper saying he has the right to X bushels of grain. The warehouse charges a storage fee to the farmer. The X bushels of grain turns into X - 2%X or whatever the storage fee happens to be. The total number of bushels in the warehouse remains the same, however, part of the bushels become the property of the warehouse (the storage fee) over time or the farmer can deposit funds with the warehouse to offset the storage fees. This is one way in which the warehouse earns revenue.
A similar chain of events would happen in free market banking. Now, another item would also occur. The depositors would determine how much risk they want to take and would allow the bank to speculate, i.e. loan out more than it can redeem at any one time. In exchange, the depositors receive some interest or lower storage fees.
So in billwald's example, the bank could ask the depositer of the 100 bars of gold if they could loan out say 10 of his bars to someone else of their choosing. And inexchange they'll give him 1 extra bar at the end of 1 year (yielding a 10% interest rate).
In fact, different types of accounts would emerge, ones in which the depositor allowed no loaning of his funds, which would incur holding fees, and accounts of varying risk (i.e. we loan out 100% of your funds, or 25%, or 50%, etc.) The higher the % of the held depositor's funds lent out, the higher his interest given to him. There would probably also arise, additional variables, such as the number of days in which you had to wait for redemption. If you want instant redemption, you'll be getting less interest earnings and may even have to pay a storage fee. If you want a longer term before redemption, it would be a smaller fee and/or higher interest earnings.
Also, if the gov't allowed free market money, people could also choose to take gov't issued money, if various individuals believed in gov't more than the market. This would work as long as the gov't didn't try to cheat on the money by outlawing its competition for money production and confiscate the hard currency assets. Oh wait, they already did that.
Why should I be forced by a gov't against my will to use a cartel's money supply? I can buy treasuries or I can buy private debt/equities. But I can't buy private money. Well, I can use private money, but legal tender laws effectively limit what I can do with it.
Now if the gov't spent say 1% of GDP, we wouldn't be having this discussion, because no one would care. But because gov't spending is so extreme, Austrian types would like to see a monetary system where the gov't couldn't so easily rob its people.
Published: February 26, 2009 11:51 AM
ehmoran
But I believe the total of all money in today's World is based on total Debt. The more people borrow allows Central Banks to print more money. Because now they can predict how much wealth the World will have at a certain date based on promissory notes.
Fiat money now becomes Cyber money.
Published: February 26, 2009 12:24 PM
gene
I have always thought it is the FDIC that enables bank fraud. Why else would depositors put up with paltry interest rates when the exact dollars they turn over to the banks are being invested in higher risk investments and producing big returns for the banks who invest nothing? remove the insurance and depositors would demand either true safety [storage] or the actual return minus a small fee. besides, like the depositors money the FDIC money isn't there anyway.
Published: February 28, 2009 2:05 PM