A Pro-Free-Market Program for Economic Recovery
The most important single step on the road to economic recovery is the establishment of a 100-percent reserve system against checking deposits. Ideally, the 100-percent reserve would be in gold. FULL ARTICLE by George Reisman
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Comments (368)
Comments (368)
Joe Stoutenburg
I do intend to read and digest the entire article, but I get here and have to object:
This analysis ignores the security that Mr. Y places in exchange for his loan. While I continue to rely upon important aspects of Austrian theories for understanding economics, this is a fundamental reason why I have gone elsewhere to understand banking.
I think that the Austrian business cycle theory has some merit. Accounting for the collateral behind loans does not entirely discredit that theory as even well secured lending might inflate bubbles in the collateral assets. But the continued insistence of writers here at mises.org that loans such as those to Mr. Y are "out of thin air" strikes me as disingenuous. I think that you are too intelligent to not understand the mechanisms of lending, so I have to assume that you intentionally neglect to discuss the collateral behind most loans. Perhaps you are uncomfortable that a discussion of collateral would cast doubt about your theories.
Recognizing collateral backing for loans would require you to acknowledge the difference between the following situations:
1) The federal government declares that it is issuing $1 trillion of new bonds. Those bonds quickly find their way onto the balance sheet of the Federal Reserve.
2) Banks consistently assume that real estate values always go up and so issue loans for more than the value of the properties. They refuse to hold excess capital against the possibility that real estate values actually go down.
3) Banks issue loans for much less than the value of the collateral or else hold capital against the possibility of loss for poorly secured or unsecured lending.
Distinguishing the collateral behind lending leads me to conclude that #1 is the only case of creating something "out of thin air". #2 is foolish business practice and should allow lenders to be wiped out along with debtors. That regulators are allowing those lenders to defer the recognition of insolvency while the debtors suffer is, to me, one of the principle injustices of our day and the potential for the greatest economic instability.
Meanwhile, I am willing to look more favorably upon #3. To be sure, we can still have a reasoned debate about the merits of lending that is well-secured by something other than base money. But I strongly criticize this analysis for completely ignoring the security behind lending!
Published: November 20, 2009 9:07 AM
Jonathan Finegold Catalán
Mr. Stoutenburg,
I'm not sure what collateral has to do with the fact that the money has been virtually created "out of thin air". The collateral did not need the new money to represent it, and so the money supply has still been inflated.
The most important consequence of monetary inflation is the distortion in the price of capital-goods which it causes. Whether there is collateral involved or not is ultimately irrelevant. Furthermore, whether or not the loan is repaid the money supply has still grown by that amount, because it was that new money which was used to invest or spend. When the money for the loan is repaid the bank does not "destroy" it. It simply adds it to its balance.
In any case, I'm not sure what you are trying to get at.
Published: November 20, 2009 9:23 AM
Joe Stoutenburg
If productive work must be employed to create the assets placed as collateral and if money is only issued in exchange for placing those assets as security, can that money be said to have been "created out of thin air"?
Published: November 20, 2009 9:28 AM
BM
This article is laughably out of date and totally irrelevant.
Banks' ability to extend credit depends on their capital adequacy. If you jacked up required reserve ratios to 100% this would make bank capital extremely expensive. Anyone with a mortgage would face skyrocketing repayments as credit supply dried up.
Published: November 20, 2009 9:42 AM
Joe Stoutenburg
I have read through the article though I will certainly welcome any reactions from people who want to argue that I have not understood it.
The failure to account for collateral can be illustrated in this section:
The problem arises by considering that ten dollars of cash reserve as the only valid reserve. Truly, ten dollars of cash, when measures in terms of cash, will always be ten dollars of cash. But the bank also holds additional reserves in the form of other assets that can be exchanged for cash. [Remember exchange? I think that Austrians have a lot of good things to say about it.]
The difficulty with those non-cash reserves is that the amount of cash for which they can be exchanged varies with the subjective valuations of individuals in the market. Initially, the bank could exchange them sufficient cash to redeem all liabilities with $5 left over. After the drop in the market value of its non-cash assets, it finds itself insolvent.
Now, Mr. Reisman wants to instantly turn an insolvent bank into a well-capitalized one. Not only does this bring me to want to get out my pitchfork, but it also fails to accomplish what I think he wants. Stated differently, the goal appears to be to have base money (initially FRNs but eventually gold) be the only asset on a bank's balance sheet. After infusing the additional $90 onto the bank's balance sheet, it has $100 of cash equal to the deposits but it also have an additional assets that can currently be exchanged for cash. Previously, the bank had the cash buying power equal to $85. After the generous capital infusion (or dare I say bail out? only on seroids!), the bank now has the cash buying power of $175 with $100 of it being no-risk cash and $75 being in risky assets. Reisman tries to wriggle out of this obvious injustice by suggesting that part of the windfall be returned to depositors. But he can not reconcile the fact that he saved the hides of bankers who should have been held accountable for their failure (fraud?).
Seriously? And no one called you on this during or after your speach, Mr. Reisman?
Someone might try to argue that the goal is something different than what I have interpreted. Regardless, I can illustrate how to accomplish this base money only goal that, I hope, will help you understand the role of collateral and better reveal where the article went wrong. His target equality was wrong in bringing base money equal to deposits. If you want to achieve a 100% reserve standard, you should exchange the current market value of non-cash assets for newly created cash.
Taking this approach, the bank would remain insolvent, as it should, after exchanging its non-cash assets for only $75. Deflation would be instantly recognized in the amount of $15. Going forward though, I agree with the article that further monetary inflation would not be possible as long as 100% reserves were enforced. The question of the moment would be to decide whose money disappears. My vote would be to make depositors whole , as much as possible, out of the personal cash holdings of the irresponsible (fraudulent?) bank managers.
You may notice that I am not rejecting 100% reserve standards out of hand. I think that market dynamics would definitely change with interest rates being much higher in exchange for price levels that tend to decrease. I don't care to expand upon that hypothesis at present. But regardless, I don't see the end result necessarily being much different than a credit banking system that is allowed to respond to market forces.
Presently, banks create credit in exchange for collateral. If the value of that collateral falls below the total amount of deposits, the loss must be recognized between the bank's officers, depositors and whatever third parties step in. Presently, third parties are forced to share these losses while regulators allow banks to push off the reality of their insolvency until it can no longer be denied. That is the principle problem in banking today, as I see it.
In a 100% reserve system, rather than issuing credit, some of the bank's depositors would explicitly agree to allow their cash to be transfered to another entity. Usually, they would require collateral to posted, not as credit backing new money but with the right to possess it in the event that the debtor failed to pay the contractually required amount of existing cash. It is possible that the market value of collateral could fall below the value of the loan once again leading to the decision of who suffers the loss among the bank managers, depositors and third parties.
Notice also that claims upon those collateral assets could certainly be made transferable for cash. This leaves me wondering whether you can even eliminate the practice of credit creation.
Okay... I have written enough. I trust that most readers here have the attention to follow though I admit that my lengthy post may make it challenging to focus on particular points. I end only with one last admission. Clearly, various systems of banking would have different benefits and drawbacks. We could debate them, and I want to make clear that I am not defending our current systems, especially in regard to the political interventions placed upon them. But I find that we can not even begin those discussions unless we recognize the role of collateral on bank balance sheets.
Published: November 20, 2009 11:12 AM
Allen Weingarten
Mr. Stoutenburg provides what appears to be a sound reason as to why when bankers loan money, it is not created out of thin air. He points out that the loaner has collateral to back it up. The problem is that the argument is too good.
The banker could then loan out the $900 to many borrowers, all of whom provide collateral. So the bank can then collect interest on many loans. Nor is there a need for anyone to have deposited the money to begin with. As long as the bank has notes that are accepted by the public, it can earn fortunes. Stoutenburg’s argument also implies that there was never a problem with bank runs, because all of the money that depositors requested was backed by the collateral of those it was loaned to. All it would take is some time for them to pay it back (or turn in the collateral, which could become cash).
Similarly, this would solve the problem of embezzlement, since the embezzler, in time could return what he ‘borrowed’.
The fact that in principle all could be redeemed in time, does not refute the reality that financial activities commit fraud by pretending that funds are immediately redeemable. If banks had the lender’s acceptance that it might take time to return his funds, there would be no problem in loaning them out. They would simply have to pay him the interest accordingly.
Published: November 20, 2009 11:22 AM
christopher
Joe Stoutenburg,
The value of the collateral is for the most part meaningless because it fluctuates. It's the ability to repay that is the primary deciding factor as to whether a borrower is approved.
BM,
You comment regarding mortgage repayments may be true but then again you should know by now that not everyone is worthy of owning a home. A rebalancing of wages and asset prices would occur. Of course right now the Gov't is doing all it can to prevent asset prices from dropping.
Published: November 20, 2009 11:28 AM
Jonathan Finegold Catalán
Mr. Stoutenburg,
The capital which provides the collateral existed before the loan came into effect. There is still inflation.
Published: November 20, 2009 11:40 AM
redshirt
Collateral is not money. It is not available on demand. (He is talking about 100% reserves for demand deposits this rules out collateral.) Risk in other transactions is assumed and the time preference is built in-- interest rate and loan period.
I guess I am agreeing with christopher and jonathan.
Nevertheless, I don't think one can simply print up the reserve and call it a day. There are a whole lot of excess dollars out there already. Maybe there's a better way.
Published: November 20, 2009 12:14 PM
Zach Bush
Joe,
In either "The Case Against the Fed" or "Mystery of Banking" Rothbard developed a similar scheme to achieve 100% reserves and he admitted that it was a bailing out of insolvent banks. If I remember correctly he said that it was the lesser of two evils. The other being massive deflation and liquidation. Clearly Rothbard was no friend of bankers, so I think he was being honest with his reasoning. I would also think that Reisman had the same reasoning.
Bush and Obama took the absolute worst (and most unjust) option; bail out the insolvent banks while not even fixing the system.
You bring up an interesting point about collateral being used as backing for the bank credit loans.
I am teaching myself about banking by reading articles and books from Rothbard and Gary North, but I will take a shot at answering you.
If I am wrong then I hope someone more knowledgeable than me will respond.
I think it has to do with the difference between deposit banking and loan banking.
Austrians do not blame the business cycle on credit from loan banking. They blame it on increases in the money supply brought about by fake expansions in deposit banking.
In a legitimate loan, the bank must raise cash or capital to loan out. This is accomplished either by saving or finding entrepreneurs to borrow money from at fixed terms. This type of action does not generate business cycles because its loans are a product of previous savings.
A fractional-reserve deposit bank, however, does not do any of the above. The bank simply loans out as much as the reserve-requirement will allow. The original depositor, believing all his money is in the bank, will act as if this is so. The receiver of the new loan will do the same. This will drive up prices and increase spending. There have been no genuine savings. This is cycle generating.
Notice in a loan bank, the bank is using money that is saved with the intention of using for investment. Savings has taken place on both sides of the deal.
A deposit bank, on the other hand, is using money that is being stored with the intention of using for consumption. Savings has only taken place on one side of the deal.
Published: November 20, 2009 12:21 PM
Zach Bush
I also think that another problem with most visitors to this site is that most only read the daily articles and then find holes or gaps and attack them.
This is obviously understandable.
But the articles are short. They cannot possibly contain every explanation and response to every criticism.
The key is to read the books. This is what the articles are based on. The books go into much further detail and usually answer the criticisms found in the comments.
Published: November 20, 2009 12:26 PM
Fed Up
There cannot really be a free-market "program" for recovery because all you need to do to have recovery is stay out of the way and laissez-faire.
How much of a "program" is that ?
Unless by "program" you mean cancel the already existing programs.
My "program" for a total recovery would simply be to get out of the way, lower taxes, sell government land and use that money to repay debt, bring back our troops, end the war on drugs etc.
But every libertarian already knows that.
Published: November 20, 2009 12:51 PM
Joe Stoutenburg
To all:
Thanks for your reasoned responses. On the whole, I consider myself a devotee to the Austrian school. I have spent a number of years studying its theories, and yes Zach Bush, I have read some of the books. I hardly consider myself a mere visitor.
However, if I were, your implicit exertion that I need to read some lengthy book to make the apparent holes go away would be very much of a put off. If a person has incorrectly perceived a flaw, it is better to carefully help him to see his error (which we're going to do from opposite perspectives). Don't tell him that he just hasn't read enough of the dogma.
Indeed, an opposite charge could be made. It may be that devoted readers to this site could benefit from exposing themselves to alternative sources. As excellent as Mises, Rothbard and their like are, if you only read them, you may be less likely to perceive their errors.
Individual responses will follow...
Published: November 20, 2009 1:13 PM
hayeksheroes
It will be a cold day in hell before our statists adopt any of these policies. They are stuck on Cloward Piven. Statists want to collapse the system and start over with a Marxist system.
Published: November 20, 2009 1:32 PM
Recovery Program
1. Let GM and (fractional reserve) banks fail.
2. Let the housing market fail.
3. Abolish the Federal Reserve and all "legal tender" laws.
4. Abolish all income taxes.
5. Abolish all property taxes.
6. Abolish all sales taxes.
7. Abolish all tariffs.
8. Abolish all subsidies like "cash for clunkers" and "paying farmers to destroy and/or not grow food".
9. Deregulate everything.
10. Sell all government assets.
Published: November 20, 2009 1:36 PM
Matt Stiles
This is similar to the program I outlined earlier this week:
http://futronomics.blogspot.com/2009/11/missing-forest-for-trees.html
In it, I suggest that instead of 100% reserves on existing institutions, we forcibly separate the banking industry into i) depositary istitutions ii) lending intermediaries and iii) investment firms.
This way it can be assured that no unbacked credit is created. No institution is permitted under law to lend money prior to first matching the borrower to a willing lender.
Comments appreciated,
Published: November 20, 2009 1:42 PM
T. Ralph Kays
Joe Stoutenburg
Collateral for loans may be a good business practise for a bank and will make a bank more secure, but it has nothing to do with the creation of money through credit expansion. If a bank uses my checking deposits to make a loan to someone else, thus creating money through credit expansion, that act alone creates money. That they demand collateral only protects them from not being able to honor my checks and suffering a run on the bank, it has no bearing on the creation of the new money. This confusion of what it means to back money is precisely the problem.
Published: November 20, 2009 1:42 PM
Joe Stoutenburg
Allen Weingarten:
Your thinking follows directly from the flawed premise that I am trying to refute. Because you do not completely address collateral (though you at least acknowledge that borrowers post it), you begin at the assumption that lending is based upon the prior lending. In fact, outside of the Austrian school, it is considered in exactly reverse. And believe me, the credibility of Austrian economics is attacked on this point. Even if you reject the view, you should try to understand it.
Bankers do not think of issuing loans as churning the previous loans to the limit of the geometric progression following from the reserve limit. In fact, there is a natural limit to the churning based upon the extent to which property is posted as collateral. I concede, though, the required reserves near zero encourage a great deal of churning. Did I mention that I'm not defending our banking systems? I'm talking principles that we need to master in order to communicate with the rest of the world.
Once posted as collateral, to repost it a second time would be fraudulent since two parties might lay claim to the same property. By the way, you'll find Austrians frequently arguing that fractional reserving necessarily introduces multiple claims to the same property since they are only thinking about the base money held on reserve. However, the banking world looks at the collateral backing the deposits and clearly sees distinct properties. They have ample experience that, when a bank is unwound, the underlying properties can be sold and and the proceeds distributed to depositors without conflicting property claims. The only losses arise from any overall deficiency in the collateral value. Can you see why this view causes a loss of credibility outside of Austrian dogmas?
No, bankers are not looking backward when issuing loans. They are looking at the collateral on the prospective loan and at their overall excess reserve level and risk tolerance. Excess reserves exist to provide a cushion in the event that the collateral loses value. If banking were governed only by market forces, it would be between the banks, its depositors and investors how close to the sun it flies, so to speak. In our politically managed banking system of mandated (low) reserves coupled with FDIC insurance, bankers have incentive to fly as close to the sun as the rules will allow since any losses are sure to be socialized. Did I mention that I oppose the politically managed systems that we have? In my opinion, this area of Austrian thought confuses the unfortunate results of political management with elements of banking that would work differently in a free market.
Of course, we could still debate whether one system is better than another. In fact, I am quite open to 100% reserves and gold backed banking. I'd like to see a free market in the provision of money in which those options are available. But you can not debate those options with bankers as long as you completely ignore the role of collateral. They just are not going to take you seriously otherwise.
You wrote:
I don't see how you can see that implication in my arguments. Bank runs will be a problem for any bank whose assets are of insufficient value to meet its obligations. It is for those banks that word of their insolvency gets out, causing bank runs. Only with the advent of the FDIC and its socialization of losses have old fashioned runs been done away. Of course, that only builds to a point at which the entire system is insolvent - a point that I argue we are approaching if not already there.
Further, you state:
But this is not a fact at all. Though bankers, with the help of their political allies, try to avoid reality, eventually the cash flows actually fail to materialize. When they are finally forced to admit default, they must access what value they can from the collateral. When that happens, many of the banks today pretending to be solvent will be shown lacking.
Market forces would almost certainly more smoothly sniff out these deficiencies. It is political management that puts them off until a crisis level.
Published: November 20, 2009 1:57 PM
Joe Stoutenburg
christopher:
I agree actually. Since I already perhaps write too much, I didn't want to risk obscuring my primary points by evaluating this. In fact, a great deal of debt is completely unsecured, or if you will, secured only by the promise that the borrowers will perform productive work that can provide an income for repaying the obligation. In my opinion, even though many people perform tasks for which they receive wages, the productivity of their tasks is sometimes questionable. I think that is part of the stress that is on the system as a whole.
I suspect that in a market governed banking system that such loans would probably evolve toward requiring something at least approaching a 100% reserve. We wouldn't need to mandate it or to abolish forms of credit that do provide hard asset collateral.
Published: November 20, 2009 2:04 PM
Zach Bush
Joe,
Sorry, that was not a directed comment towards you in particular. Just my general observation from many of the commentators at this site.
Published: November 20, 2009 2:04 PM
Joe Stoutenburg
Zach:
As you can see, I am spending a fair amount of time on these posts and so am crossing messages with you. No offense was taken, and you do have a point. I think that some people do come to the site in the way that you describe. I argue that I'm not such a person but welcome attempts to correct me if you're convinced I haven't understood certain principles -- just as I'm trying to do with you.
At the same time, my caution stands. I think that some Austrians are somewhat insulated from other points of view. Considering the wealth of valuable insights in the school, this is understandable. But it's worthwhile stepping outside occassionally.
Published: November 20, 2009 2:07 PM
Zach Bush
Joe,
I agree. I do try to step outside and read other literature, but it is so dominated by Keynesian and Marxist nonsense that it is almost a waste of time.
I do appreciate when someone knowledgeable, such as yourself, adds thoughtful criticism and encourages thoughtful debate.
Published: November 20, 2009 2:18 PM
Joe Stoutenburg
Jonathan Finegold Catalán:
I haven't argued that there isn't inflation. Or more precisely, I haven't argued against inflation relative to a system that denies the expansion of the money supply through credit. Prices would fall given an expanding economy with fixed money supply. Given a system of credit that is well-secured, it is reasonable to expect that prices would be relatively stable, neither dropping nor rising. However, actual money supply (and corresponding prices) would depend upon the extent to which market participants decided to conduct business via credit and collateral versus other forms of raising capital. The point that is frequently missed here, though, is that as long as lending is well secured, the extent of money growth is checked by the production of assets to be placed as collateral.
Finally, an economy that allows persistent lending with insufficient collateral will see inflation followed by potential deflationary collapses (or hyperinflation if the authorities are determined to defend the price increases). We live in such an economy, and I blame political management of credit systems, not those systems themselves.
On a side note, you repeat an implicit conclusion that is often shared at this site. Inflation is always bad and always akin to a crime. I agree that politically mandated inflation does fall in that category. I reiterate an earlier point made in passing - it is government bonds that are created out of thin air. These bonds have value based upon the power to tax of the entity issuing them. Anyway, inflation preceding from natural market activity, though it admittedly harms some people, is not necessarily a crime.
A person recently asked me if Austrians believe in "negative externalities" resulting from market transactions. I dug out a paper that applies in the current context:
Source
It is not enough to prove that someone else was harmed by your actions. Consider that, for a given product, if you buy up sufficient quantities of it that you may drive up the price beyond the ability of some people to pay. Have you harmed the person now priced out of that good? Yes. Does this harm call for a third party to step in to stop you from engaging in your transaction. Neoclassical theory says 'yes'. Virtually every Austrian says 'no' but changes his tune when it comes to the voluntary exchange of legitimately owned property in exchange for the monetary substitute of credit.
This is another angle about which I am critical of the position of many Austrians. It is one thing to oppose political interventions that distort the market for willing market participants. It is another to forbide those participants to employ their property in voluntary transactions as they see fit.
If you complain that those transactions cause inflation. I say 'so what?' Do they, or do they not have the right to employ their property in that manner?
Published: November 20, 2009 2:29 PM
T. Ralph Kays
Joe Stoutenburg
Re. your response to Mr. Catalán
Thank you for explaining your position so clearly. You have no understanding of the Austrian position
however.
"Given a system of credit that is well-secured, it is reasonable to expect that prices would be relatively stable, neither dropping nor rising." That is an entirely unsupported claim and is patently false.
Published: November 20, 2009 2:39 PM
Joe Stoutenburg
redshirt:
No, collateral is not money. If what you want is immediate access to cash, you hold cash. Or if you want, you can store it at a bank in a safe deposit box (essentially what some of you seem to want banking to be) for a small fee. You'll notice that you can access your entire balance if you are writing checks, making electronic transfers and so forth. Why? It's because the assets backing the bank's deposits can be sold at the click of a button, allowing the bank to process large amounts of outflows even if they exceed the physical cash on hand. The problem with bank runs arises not when they exceed the cash in the bank's vault. They occur when the bank's collateral is of insufficient value and when excess capital is insufficient to cushion the deficiency.
On the other hand, every bank places restrictions to how much currency you can redeem at one time without prior notice. Why? While the sale of assets can be done instantly, physical settlement usually takes a few days.
I agree. If you don't place your money in a safe deposit box or bury it somewhere safe, there is risk. [Technically, there is risk in every action -- even burying cash. You can't get compensated for burying money though since doing so benefits no one else. No exchange...] The FDIC has made us think that risk is absent from bank deposits by socializing it. The promise of bank regulation has lulled society to sleep so that we do not take account for the ridiculous inadequacy of bank reserves (both collateral and excess reserves). Have I mentioned recently that I oppose the political management of banking?
Again, none of the disasters stemming from the political management of banking are tied to the practices of credit issuance generally.
Published: November 20, 2009 2:43 PM
T. Ralph Kays
Joe Stoutenburg
"Again, none of the disasters stemming from the political management of banking are tied to the practices of credit issuance generally."
What an absurd statement. You started on this blog by claiming a good understanding of Austrian economics and a number of people politely answered you. Don't come here and lie to us, you know nothing about Austrian economics.
Published: November 20, 2009 2:55 PM
Joe Stoutenburg
Zach Bush:
Regarding Rothbard's scheme to bail out the banks, if you must centrally plan a program toward 100% reserves (Austrians aren't usually fans of central planning - ugh!), what's wrong with my plan? Don't top off the reserves. Just replace non-cash bank assets with cash. I acknowledge that this would result in a one-time deflation and liquidation. But you could also force bank executives (especially if their actions can be deemed fraudulent) to suffer the first losses. After that, there are any number of ways to considering spreading the effects of the liquidation, keeping in mind that many banks have lent responsibly and would suffer no ill effects at all from such a plan.
I agree that Bush and Obama have taken the most unjust option.
I don't buy this distinction, and yes I have read de Soto's "Money, Bank Credit, and Economic Cycles" though I admit that I skipped around a bit. This may be an opportunity for someone to refute me. But rather than anticipating their objections, I'll just leave it as an objection. I'll be attentive if anyone wants to defend this point.
Regarding your points about saving, saving must also occur if sufficiently valued assets must be presented as collateral. The only case of circumventing saving is when the government declares a bond issuance that subsequently is monetized by placing it on reserve at the Fed. And even this will fail absent sufficient saving once servicing the federal debt exceeds the ability or willingness of society to pay it.
Published: November 20, 2009 2:59 PM
Joe Stoutenburg
Fed Up:
Hear, hear! Enough with the central planning aspirations of the Austrians!
Published: November 20, 2009 3:00 PM
Joe Stoutenburg
Matt Stiles:
Though you are not engaging the points that most interest me, I will comment. While good intentioned and almost certainly well-reasoned, why do you need a plan? Once you allow our federal government to "forcibly" do anything, I guarantee it'll get turned in a direction you didn't intend.
I'm more of the minds of Fed Up and also Recovery Program. The solution, though, must first come by fostering a fundamental change in societal attitudes about government. I hope that we all recognize that, whatever the merits of our individuals ideas, we are theorizing on proposals that stand little chance of popular support in the near term. I'd rather stand apart, try to educate about the dangers of political central planning and let them hang themselves (while taking prudent precautions to protect myself).
Any "program" that we could think of that could be remotely palatable in current political thinking would be quickly subverted.
Published: November 20, 2009 3:07 PM
Zach Bush
Joe,
Again, I do not believe you understand the Austrian position on credit and business cycles.
Austrians are not against legitimate credit. Legitimate credit, as you outline above, meaning credit being fully backed by collateral.
Credit from loan banking is not cycle generating and not fraud.
Credit based off of fractional reserve deposit banking, however, is cycle generating. This is because the deposit bank does not have adequate collateral to back it with. This is cycle generating and also fraud.
A genuine loan (non cycle-generating, not fraud) is backed by collateral from the loanee as well as the loaner.
A fractional-reserve loan (cycle generating, fraud) is backed by collateral only by the loanee.
Published: November 20, 2009 3:10 PM
Joe Stoutenburg
T. Ralph Kays:
I agree that a bank creates money when it issues credit. But I'm telling you that you lose credibility when you say that the bank used your deposit to issue a new loan. The consideration for the new loan is based upon the quality of collateral (if any) and the excess reserves that the bank possesses.
You wrote:
It also protects you as a depositor as you suffer financial harm if you checks are not honored. Also, what are you talking that the demand for collateral has no bear on the creation of new money??? If the market demanded that new credit only be extended upon conditions of sufficient collateral or (in the case of unsecured lending) sufficient reserve (i.e. something at least approaching 100%), then the creation of new money would have everything to do with the demand for collateral.
The problem in our banking system is that the market has been lulled to sleep by the socialization of losses arising from unsound credit issuance. Despite the protests of monetary officials to the contrary, they can not mandate sound credit (especially in light of the contradictory programs of lawmakers) nor can they forever avoid the consequences of unsound banking.
Published: November 20, 2009 3:16 PM
Zach Bush
Joe,
Here is the trap Austrians are put into. First, people criticize the laissez-faire solution for government to do nothing because that isn't really a solution.
Then when someone does come up with a plan to return to a system of laissez-faire, they are accused of central planning.
Published: November 20, 2009 3:22 PM
Joe Stoutenburg
T. Ralph Kays:
I am quite familiar with the Austrian dogmas and even accept most of them as truth. I reject the one that proposes that any system of credit is inevitably instable.
The debate over this point may be hypothetical since I don't believe that banking has ever been entirely free from political manipulations. Let's face it. Bankers can make more money if they are allowed to relax lending standards, speculate and then get bailed out when their speculation blows up.
This is not the primary matter that I would hope to debate though, if it is the only one that you can pick on, I'm willing to. So far, you have only chided me for not understanding the Austrian position (maybe I don't though it would not be for a lack of effort). If my position is patently false, I would think that it would be readily refuted and that you would do so.
Though I doubt that it is readily refuted, it may still be false. But I would still expect your courtesy to provide reasoned arguments that might benefit my understanding.
Published: November 20, 2009 3:24 PM
Joe Stoutenburg
T. Ralph Kays:
You really think that I would put this much effort into a lie??? How insulting! Really, you take the cake there sir.
Again, if I commit any errors, I'll welcome correction. Here though, since this objection is much more central to my primary concerns, I'll suggest the manner by which I think your analysis would have to proceed.
You tell me exactly how to separate the impacts of political management from an institution that has been politically dominated for many generations? For my part, I have spent considerable effort hypothesizing how credit legitimately works. It is for you to refute my arguments or present your own counter-arguments.
So far, I am inclined to continue discussion with the likes of Zach. If the quality of your posts does not improve, this will be my last response to you in this thread.
On that note, I need to scoot. I may not have another opportunity to contribute to this thread until next week. I appreciate anyone willing to engage me on this topic. Austrian economics has truly altered my world view. I have issue with this one topic and am concerned that people knowledgable about banking disregard Austrian economics when they encounter this area.
Published: November 20, 2009 3:33 PM
T. Ralph Kays
Joe Stoutenburg
"I reject the one that proposes that any system of credit is inevitably instable."
Where in the world did you ever get the idea that Austrians have ever said this? That statement alone makes the sentence before it a complete lie.
Published: November 20, 2009 3:40 PM
mouser98
Its not really free market if the government imposes full reserve banking.
Plus I cannot wrap my brain around printing up another few trillion FRNs and giving them to the banks. Why not let the banks come up with the cash themselves, they are, after all, the ones who created it.
The more I think about the Fed the more it seems to me that its essentially a mechanism by which the banks "print" money for which they can earn interest while its loaned out and then call their own once its paid back, which would be counterfeit except that Congress has pledged that the US Taxpayer will "make it good" if and when necessary.
Published: November 20, 2009 4:13 PM
T. Ralph Kays
mouser98
There is some disagreement in the Austrian school about achieving full reserve banking. Some argue that the pressure of a truly free market absent government support for fractional reserves would result in full reserve banking without any legal requirement for such. Rothbard argued that in a free market fraud is prohibited and thus fractional reserve banking would be illegal. A genuinely honest government (is there such a thing?) would outlaw fractional reserve banking according to Rothbard.
Published: November 20, 2009 4:26 PM
JP Koning
Way to go Joe!
The whole "out of thin air" mantra is a very deceiving idea.
For instance, think of all those companies that issue shares out of thin air. How could they be so immoral to create a paper claim out of nothing! Same with all those devious issuers of bonds. More paper out of nothing!
If we ban all things created out of thin air, we ban not only fractionally backed notes, but shares, bonds, and most other financial assets. What a great way to build a free society!
Published: November 20, 2009 6:25 PM
Allen Weingarten
Mr. Stoutenburg: I appreciate your trying to explain my error. Perhaps I simply do not follow your thought.
Let us say that I have a gold coin, which I loan to a bank, in return for an IOU. Then the bank uses that coin to loan to another (who has collateral), while I use the IOU for other business. Then whereas there was originally one gold coin as currency, there is now that coin and the IOU in circulation. Has this not created currency out of thin air? It is true that if the IOU is turned into the bank for the gold coin, then the bank must return it. However, until that point has there not been two items of currency?
My point is simply that under a barter system, no dislocations occur, because in principle there is nothing that cannot be quickly redeemed. So if currency meets the requirement that it can all be quickly redeemed, this similarly precludes dislocations, since each item of currency represents some good or service.
As to your argument that “Bank runs will be a problem for any bank whose assets are of insufficient value to meet its obligations” by your assumption of adequate collateral, the value is there, it just takes time to collect it. The same holds for embezzled funds.
Published: November 20, 2009 6:43 PM
T. Ralph Kays
JP Koning
Just want to make sure, you are joking aren't you?
Published: November 20, 2009 8:19 PM
Mike Sproul
Allen Weingarten
When you lend your coin in exchange for an IOU, it is true that there are now two items of currency, but the issuer of the IOU is obliged to grant you a lien on 1 oz. worth of his property. Nobody's net worth changes from this transaction.
The relevant principle is the Law of the Reflux. You have to ask why that IOU was issued in the first place. Suppose the market was already well-stocked with IOU's. In that case, if you wanted to trade your gold coin for an IOU you could find an existing one already on the market, without having to ask someone to issue a new IOU. Trading your coin for an IOU would not create any new currency units. But if IOU's are in short supply, you would lend your coin to someone who would issue a new IOU. That creates 1 new currency unit, but since the economy was presumably lacking 1 currency unit to begin with, there is no upward pressure on prices.
In summary, the newly-issued IOU:
1) is backed by 1 ounce worth of collateral, so it must be worth 1 ounce
2) does not change anyone's net worth, so there is no addition to the demand for goods
3) was only issued because the market was previously lacking IOU's for monetary purposes.
The easiest way to understand the Law of the Reflux, by the way, is to think of an old fashioned mint. If an economy is lacking in coins, people will bring silver bullion to the mint to be stamped into coins. If the coins become superfluous, people will melt them and the coins will 'reflux' to bullion. Likewise, note-issuing banks have always found that if they issue too many bank notes (IOU's), the notes reflux to them as fast as they can be issued.
PS: Great job Joe!
Published: November 20, 2009 8:57 PM
T. Ralph Kays
A great many people have been confusing collateral with bank reserves, they are entirely different things and serve entirely different functions.
Published: November 20, 2009 9:19 PM
Zach Bush
Mike Sproul,
When you deposit your gold coin in a bank you are not lending it!
The process you outline above is perfectly valid for a loan institution. There is no new money issued.
It is not valid when you deposit your gold coin into a deposit bank. Because in a deposit bank, you expect that gold coin to be immediately available to you on demand.
You are confusing deposits with lending.
Published: November 20, 2009 9:29 PM
Inflation
So in Mike Sproul's world, price inflation cannot have a monetary cause because all Federal Reserve Notes are backed by government bonds.
Published: November 20, 2009 9:39 PM
T. Ralph Kays
Zach Bush
You will find that Mike Sproul confuses the meaning of most words.
Published: November 20, 2009 9:39 PM
Pömmelhorse Pümmelfister
"But if IOU's are in short supply, you would lend your coin to someone who would issue a new IOU. That creates 1 new currency unit, but since the economy was presumably lacking 1 currency unit to begin with, there is no upward pressure on prices. "
Even if this claim (about no upward pressure on prices) is true, that's exactly the problem. It is meaningless to talk about IOUs being in short supply without reference to the price at which they're in short supply. In the situation you describe, IOU prices must be bid up, and hence prices of other goods must come down; it's precisely this market adjustment mechanism that your policies prevent. As Rothbard noted in his discussion of the Great Depression, price stability and monetary inflation can definitely coexist.
Published: November 20, 2009 9:41 PM
Fiat Money
"fiat money would self-destruct by the attraction of rival moneys".
Those rival moneys do not exist because of LEGAL TENDER LAWS, i.e. the government declares certain money to be legal tender by fiat, making it fiat money.
Published: November 20, 2009 9:45 PM
Backing
"the issue of money is not inflationary as long as it is backed"
Yeah, but then you go on to use a perverted definition of "backed". If future earnings are "backing", then there is an infinite amount of backing, so you should be able to print an infinite amount of money without causing price inflation.
Published: November 20, 2009 9:50 PM
Backing
Hey Mike Sproul, will you give me a loan? I'll give a promise to pay the future returns of myself and all my descendants until the end of the universe as collateral. That's a lot of backing. So how much can I get?
Published: November 20, 2009 10:08 PM
Robby
Joe Stoutenburg,
You hit the nail on the head, but no one jumped in to point it out. You said: "No, collateral is not money. If what you want is immediate access to cash, you hold cash. Or if you want, you can store it at a bank in a safe deposit box (essentially what some of you seem to want banking to be) for a small fee."
That is precisely the point.
There is (OK, should be) a marked difference between a deposit institution and a lending institution. That we refer to the whole process as one big scheme called "banking" is where the trouble creeps in.
A deposit institution is a place where you can keep real savings. This often has taken the form of precious metal bullion and/or coins because of those items tendency to become money in a free market for money. You use such a "bank" because it provides a secure place to hold your savings (it has a vault, maybe some armed guards). However, you don't earn interest; you pay for the service. Hence, your comment about a safe deposit box is nearly exactly on point. (The "nearly" equivocation there come from the fact that money stored in a bank is fungible and the contents of a safe deposit box are not. It does not matter which money you get back from the bank, just that you get the right amount from the pile. It usually does matter, however, that you get your own contents from a safe deposit box.)
The existence of a depository bank is where paper money comes from in a free market for money. If the bank isn't inflating (i.e. printing paper without the commodity to back it) its notes will be accepted just like the commodity would be. After all, why would the first party go to the bank to exchange a note for the metal, then take the metal to a trading partner, just to have the trading partner go back to the bank and deposit the metal for safekeeping in exchange for a note? Just exchange the notes. However, a necessary part of this method is that the notes are always exchangeable for the commodity that backs them. If there are more notes than money, the bank will not be able to fulfill its obligations. The logical end to this is a run on the insolvent bank, and the inability to finish capital projects reliant on bank notes (fake savings) not backed up by real money (the result of real savings). But the extreme need not necessarily be reached to damage depository banking. If there are more banks than one, the flow of the commodity money out of a bank which inflates to non-inflating banks will provide a check on the tendency to inflate. But even if there is only one bank, if it inflates, people will tend to find the prospect of keeping up with their own real money more and more attractive, thus causing a tendency not to inflate. (If you're asking why this hasn't gone on in the U.S. in the face of constant inflation since 1913, look no further than legal tender laws. Ultimately, the government will enforce its fake currency at the point of a gun.)
So far, loans haven't come up. That's because we've only been dealing with deposits (and I should have included earlier that deposits are redeemable on demand). Loans are a different beast. The idea behind a loan is this: investor(s) saves up money (real savings, that is, as in the leftover supply after subtracting what the saver uses from what he makes) and then gives the money to someone without sufficient savings. The loan is to be repaid over time, with interest. The interest rate is determined by the time preference of consumption of the original saver mixed with his evaluation of the risk of nonpayment. If the saver wants to spend his savings now, but is nearly ambivalent about doing so, he may lend it for a low rate. However, if he really really wants to spend now, he may still lend instead, but only at a high rate. Likewise, is the prospect of repayment is very good, he will tend to lend at a lower rate than if the prospects are not so good.
But in all these cases, lending is predicated by previous savings. Total lending cannot exceed total savings when money is a commodity and not fiat paper unless a lender inflates. The lending is done for profit - from interest - but there is a risk that the money will not be repaid. Thus, lent money cannot be considered payable on demand to the lender. If a lending bank is created by several savers pooling their savings to make loans, the savers cannot expect to "cash out" of the bank all of a sudden and all at once. The money's not there; it has been lent out. This is the difference between a lending institution and a deposit institution.
There is risk involved in lending and in saving. If you lend your money, you risk not getting paid back. However, if lending is done only from savings, you don't lose any "stuff" because all the stuff is paid for before savings can occur. If you save, you risk the destruction of your savings. So, how are these risks dealt with? In lending, you require the loan to be paid back with interest, the amount of interest increasing as the risk of nonpayment increases. In savings, by contrast, you pay to mitigate the risk of loss. This payment could be zero - you could just carry your money around in your pocket all the time and keep it safe, from theft or your own negligence, through your own efforts. The payment is likely to be to a deposit institution however, if for no other reason than that smaller, more convenient denominations of money may be available. (Take the current price of gold, for example. It costs around $1000US per ounce. It would therefore cost around 1/1000 of an ounce of gold to by a Coke. But you can't carry 1/1000 of an ounce of anything very well. Imperfect example, but the point is there.) However, instead of getting a payment for savings, you make a payment. It is like you have invested at a negative interest rate in order to secure the immediate availability of your money (you very much prefer money now over money later).
So Joe, you have pointed out exactly what Mr. Reisman is getting at. It is indeed that Austrians see banks as safe deposit boxes. Lending is a legitimate, useful activity, but it isn't the same thing as depository banking. Hope this helps.
Published: November 21, 2009 1:11 AM
Zach Bush
Robby,
Thank you for expanding upon the previous points I had made in such a thorough and detailed manner.
I could not have put it any better myself.
Published: November 21, 2009 1:18 AM
newson
to zach bush:
bagus does a good job pointing out inconsistencies in many of the great austrians views on the thorny topic of deflation.
http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf
jorg guido hülsmann's "the ethics of money production" is also required reading. in fact, anything hülsmann writes is a good read; especially his paper on error cycles, which corrects and refines the austrian business cycle theorem.
http://mises.org/journals/qjae/pdf/qjae1_4_1.pdf
Published: November 21, 2009 4:38 AM
T. Ralph Kays
To those who were following the general discussion with Joe Stoutenburg:
Besides misrepresenting his understanding of Austrian economics, Joe made ridiculous claims regarding banking, most of which can be summed up by this quote from him:
" The point that is frequently missed here, though, is that as long as lending is well secured, the extent of money growth is checked by the production of assets to be placed as collateral."
He consistently confuses the effect of collateral requirements with reserve requirements. High reserve requirements limit the creation of new money through credit expansion, but do strict collateral requirements do the same? He is claiming that money growth will be limited if there are strict collateral requirements for creating loans, ie they are well secured. He says this will happen because people will run short of collateral to secure new loans thus preventing further money creation. There are two very obvious problems with this theory.
The first problem is that approaching this limit would mean that people had no more equity in the things they owned, that they had borrowed close to 100% of their net worth. My questions are: what did they do with the money they borrowed? Wouldn't the things they bought with the borrowed money have value? Couldn't they then be used as further collateral? What about the people who borrowed money to invest in productive activities? Wouldn't the things they produced have value and be suitable as collateral for further loans?
The second problem is that Joe says "I agree that a bank creates money when it issues credit." We all know that if the money supply increases, all other things being equal, that prices must rise. So as we approach this imagined limit of Joes where people are running out of equity in their possessions, they will have gotten there by taking out loans, which he admits increases the money supply. So that means that, all other things being equal, prices will rise. But if prices rise then people will have more equity in the things they own, which means they will be able to borrow more, which will create more money, which will cause prices to rise further. Doesn't that sound familiar? Can you say "housing bubble" Joe?
In conclusion, it is clear that strict collateral requirements do absolutely nothing to stem the creation of new money by way of credit expansion in a fractional reserve system, and that they have no power to prevent or limit inflation in such a system.
Published: November 21, 2009 5:29 AM
Allen Weingarten
Mike Sproul writes “When you lend your coin in exchange for an IOU, it is true that there are now two items of currency, but the issuer of the IOU is obliged to grant you a lien on 1 oz. worth of his property. Nobody's net worth changes from this transaction.” On this basis, he seems to conclude that there has not been any currency created out of thin air. Perhaps his reasoning is based on treating my hypothetical example, by entering real factors, such as “the Law of the Reflux”.
So let me use a more realistic example. A private savings bank has $3,000,000 in deposits, and holds all of it on site, so there cannot be a bank run. Then a banker (or embezzler) notices that although the deposits vary from week to week, they never go down below $2,500,000. So he loans out $2,000,000 and collects interest. Hasn’t he thereby created currency out of thin air? Isn’t there now the possibility of a bank run?
Published: November 21, 2009 7:52 AM
John M
Joe,
Excellent post and we should welcome challenges. I am a business owner and I have a $50k line of credit at US Bank. Although I have never used it I, like many other business owners, may use the line of credit in a manner that does not have collateral backing. For instance, suppose I use it for marketing efforts next year to attend conferences and trade shows, buy more marketing material, etc. and I don't gain any new revenue. Thus, no backing for that loan. We still had monetary expansion in this instance and I believe many small businesses that recieve these loans do not have collateral backing.
I appreciate your thoughts.
Published: November 21, 2009 10:19 AM
fundamentalist
Anyone wanting to learn about the consequences of the real bills doctrine, also known as the banking school, which Mike Sproul is promoting, should read "The Economics of Inflation: A Study of Currency Depreciation in Post-War Germany"
by Constantino Bresciani-Turroni available in the literature section of this web site. Mike will tell you that they didn't strictly follow the RBD, but all of the bankers, economists and politicians thought they were, as did Mises and Bresciani-Turroni.
Published: November 21, 2009 10:57 AM
Mike Sproul
Allen Weingarten:
Your bank issues $3,000,000 checking account dollars, which it backs with $500,000 paper dollars plus IOU's worth $2,500,000. If the bonds fall in value, or if the bank is robbed of cash, then the bank is vulnerable to a run. But of course a bank that has lost 10% of its assets would avoid a run by devaluing its checking account dollars by 10%. That's life, and if the banker and his customers agree to it, it is nobody else's business. It should especially not be the business of Austrian economists who profess libertarianism.
Fundamentalist:
The backing theory, aka the real bills doctrine, says that if a bank issues $100 in exchange for assets worth $1, there will be inflation. That is what the German central bankers were doing, all the while claiming they were following the real bills doctrine. So a good theory got discredited by bad bankers and bad economists.
Published: November 21, 2009 11:13 AM
Thomas
Great discussion! The "thin air" part puzzles me too.
If a loan is backed by collateral, the money you receive is basically a claim on that collateral and is not created out of thin air at all.
Problems arise if banks generally overvalue the collateral as they don't bear the consequences due to central banks as lenders of last resort. Combine this with legal tender laws that force people to accept this unstable money and you get our current problems.
Still, I have to admit, that while I have read a great deal on the 100% gold standard, I would love to read some quality material on free banking or even a comparison. So if anyone has a suggestion I would really appreciate it.
Published: November 21, 2009 12:01 PM
Allen Weingarten
Mike Sproul writes "if the banker and his customers agree to it, it is nobody else's business." He has changed the example I gave, where the customer expects his money to be fully redeemable on demand.
I agree that if a customer agrees to get back less, or to be returned at a later date, that is acceptable (as I had mentioned in an earlier post). The fraud occurs in the example I gave, and not in the one Mr. Sproul replaced it by.
Published: November 21, 2009 12:31 PM
T. Ralph Kays
Thomas
"If a loan is backed by collateral, the money you receive is basically a claim on that collateral and is not created out of thin air at all."
That is simply not true, my home mortgage won't be paid off for another 28 years, I very carefully make my payments on time, the bank cannot come and take my home whenever it wants to use to back their issue of notes. Collateral only makes the loan secure, the bank does not, by definition, own the collateral. The bank will only own the collateral if the borrower defaults on the loan. The money is still created out of thin air no matter what is done with it afterward. If it wasn't created out of thin air, then where was it the day before?
Published: November 21, 2009 12:35 PM
Backing
"Your bank issues $3,000,000 checking account dollars, which it backs with $500,000 paper dollars plus IOU's worth $2,500,000."
That's where the bank commits the fraud. IOU's are only worth their paper value unless they are backed themselves.
Published: November 21, 2009 12:48 PM
Backing
An IOU for $2,500,000 is not itself worth $2,500,000. It is only worth the paper it's printed on unless it's backed.
Published: November 21, 2009 12:50 PM
T. Ralph Kays
If everyone in the U.S. decided to become a banker and loan money to their neighbor on the equity in the neighbors home through the issue of new notes, and their neighbor did the same for them, you claim that this would not result in the creation of any money at all?
Published: November 21, 2009 12:56 PM
Backing
There is an infinite amount of future income. So if you can use it as backing, you can back an infinite amount of money without causing price inflation.
But there is only a finite amount of present goods and services.
An infinite demand chasing a finite supply drives the price to infinity. But that is price inflation.
Therefore, future income cannot be backing.
Money can only be backed by present goods and services.
Published: November 21, 2009 12:57 PM
Backing
That's no different than everybody writing their own IOU's. Why do you need your neighbor to loan you money that they printed out of thin air.
Published: November 21, 2009 12:59 PM
Thomas
T. Ralph Kays
"If it wasn't created out of thin air, then where was it the day before?"
It was tied up in the collateral. And it doesn't really matter if you pay off your loan for 28 years. It's the business of the bank to make sure they have enough reserves to meet the demand at any given time. If I don't think they do, I just don't accept their "money". Just as I would not do business with any other company I don't trust. And just like in any other industry, competition will weed out banks that are bad at being banks. There is no way to tell, if in the end we would arrive at a 100% reserve or at a 25% reserve. Let the market decide.
Published: November 21, 2009 1:10 PM
Thomas
Backing
"There is an infinite amount of future income. So if you can use it as backing, you can back an infinite amount of money without causing price inflation."
You can just use "future income" as backing as long as you find somebody who accepts a money backed by "future income". I doubt you will without the force of legal tender laws.
Published: November 21, 2009 1:15 PM
T. Ralph Kays
If we all become bankers and issue money then loan that money to the neighbor across the street and he does the same for us what happens? Say the amount is $100,000 for each of us and we secure the loans with a note on each others property. If any problems arose we could simply exchange the notes on the property. If one of us tried to call in the note on the other, that other one could call in the note on the first. But meanwhile we are both out there spending a collective $200,000. Both loans are adequately secured, each loan can be negated by the other, we each have $100,000 and you still claim that no money was created out of thin air?
Published: November 21, 2009 1:17 PM
Backing
Why is person A's "$" the same as person B's "$".
Published: November 21, 2009 1:22 PM
Thomas
T. Ralph Kays
Why make it so complicated? You could just as well issue your own money secured by your own property without a neighbour. If you find somebody who accepts your money in exchange for something else I don't see the problem. Do you?
Published: November 21, 2009 1:24 PM
Backing
Is an IOU for 1000000000000000000000000000000000000oz silver worth its face value of 1000000000000000000000000000000000000oz silver.
Published: November 21, 2009 1:27 PM
Lord Buzungulus, Bringer of the Purple Light
The real bills doctrine is monetary crankism at its finest. I seriously question the mental soundness of its proponents, so obviously absurd it is.
Published: November 21, 2009 1:33 PM
Backing
"The backing theory, aka the real bills doctrine, says that if a bank issues $100 in exchange for assets worth $1, there will be inflation. That is what the German central bankers were doing, all the while claiming they were following the real bills doctrine. So a good theory got discredited by bad bankers and bad economists."
But they were following it. They printed $100000000000000000000000 in exchange for assets worth $1 and caused inflation. They followed it.
And that doesn't discredit it. That only reaffirms it.
Published: November 21, 2009 1:37 PM
T. Ralph Kays
Why thank you Thomas, I am glad that you have conceded the argument. If I issue money backed by property I own, that is by definition 100% backing of the currency. Your claim was exactly the opposite, that property I did not own could somehow back my currency.
Published: November 21, 2009 1:54 PM
T. Ralph Kays
I ask again, are you claiming that in the scenario I described previously that no money was created out of thin air?
Published: November 21, 2009 1:56 PM
htran
Wow, a lot of activity. I'd just like to add some comments:
In regards to "creation of money out of thin air" from credit in exchange for collateral question, we cannot really answer without first separating what banking is and is not, namely is the deposit for checking or lending purposes. The current system confuses the two, so there's little point in arguing who is right. Let us first get the government out of socializing bank losses, and let the free market decide if a sound money system/100% reserve is preferable to the hybridized banking we currently have. I trust that true Austrians will have no objections to this route, since it applies market failure testing to channel economic learning.
I am also sympathetic to Reisman's (and apparently Rothbard's) plan, as it is probably the lesser of evils. The new reserves cannot be lent out, so they would only sit there, reflecting the assets that are already created by malinvestment. There will certainly be unrest as individuals will have to adjust to the change, but this plan will take the first step in implementing a sound money policy, which is to fix the money supply equal to current assets, and then have the market decide which asset prices will rise and fall.
It's not the fairest option, which is to let everyone in possession of toxic assets face market devaluation. However, many participated in these bubbles ignorantly, and the few who saved and were responsible in recent times should outweigh their losses with the benefit of implementing sound money. As long as there is a guarantee that a rock-solid gold standard be the ultimate end, I would be willing to swallow this pill.
Published: November 21, 2009 2:21 PM
Thomas
T. Ralph Kays
"If I issue money backed by property I own, that is by definition 100% backing of the currency. Your claim was exactly the opposite, that property I did not own could somehow back my currency."
As I said, you could issue your own currency. I just doubt that many people would accept this currency since the risk of your one asset losing value is pretty high, you probably don't have the reputation that is needed and you could spend your scarce time more productive in another field of work.
But there is a business that specializes in issuing currency. Banks. You get their currency backed by your own property in exchange for a fee (that would be the interest).
Their currency is stable because they pool different kinds of property claims and they have the reputation needed for other people to accept the currency.
Plain division of labour, just as you wouldn't grow everything you eat yourself.
Published: November 21, 2009 2:35 PM
T. Ralph Kays
Quit talking in circles and answer the question. I am not the one who suggested that I issue currency backed by my own property, you did that and now you are saying that what you suggested won't work.
Published: November 21, 2009 2:50 PM
Thomas
Regarding the "thin air":
If the federal government issues new bonds, these bonds are backed by the promise of forthcoming taxes. It's not so much "thin air" as it is a special form of forced servitude inflicted on our children and obviously reprehensible as the recipient of the money and the person paying it back is not the same.
If I receive a loan backed by my own property as collateral on the other hand, there is nothing wrong with it. I receive a loan, I pay it back.
Published: November 21, 2009 2:57 PM
T. Ralph Kays
Why won't you answer my question? That last post was nothing but evasion.
Published: November 21, 2009 3:00 PM
Thomas
Ok Ralph, I will try it one last time. Not sure what question you're referring to, but I guess you mean this one:
"I ask again, are you claiming that in the scenario I described previously that no money was created out of thin air?"
The only answer I have is: It doesn't matter at all as long as nobody is forced to accept the money.
Let's say I paint a picture and sell it for 100k$. Did I just create that value out of thin air? I guess so. Does it matter? No.
So where is the difference if I print out a slip of paper and sell it for 100k$? As long as there are no legal tender laws forcing people to accept it I don't see a problem. If there are people who buy it they must think it's worth it.
I'm not really sure if you think I like our current system. I don't. Not at all. And I'm not saying that a 100% gold standard wouldn't evolve in a free market. It probably would.
I'm just saying that as long as there is free entry to the "money issue industry" and people are free to choose what kind of money to adopt, I'm ok with it.
Hope that helps. Last post for tonight, it's pretty late around here. Nice discussion though.
Published: November 21, 2009 3:29 PM
T. Ralph Kays
Did you just admit that under the scenario I described that money was created out of thin air, but qualified your answer by saying that it doesn't matter?
Published: November 21, 2009 3:35 PM
Shay
Thomas, your example of painting a picture and selling it for $100K reminds me of J. S. G. Boggs, a man who draws very detailed monetary notes, including US notes, and trades them at face value for goods and services.
Published: November 21, 2009 3:55 PM
Mike Sproul
Allen Weingarten:
"I agree that if a customer agrees to get back less, or to be returned at a later date, that is acceptable (as I had mentioned in an earlier post). The fraud occurs in the example I gave, and not in the one Mr. Sproul replaced it by."
You might look up some of David Hillary's old posts on this subject. He does a thorough job of explaining the legalities of bank notes, but basically makes the point that legally, bank notes do not promise absolute redemption into base money (gold) at all times. Legally they are simply a 'first lien' against the bank's assets, and the banks and customers who have used fractional reserve banking for centuries have a well-established, non-fraudulent legal tradition that recognizes this.
Thomas:
Good job! And welcome to the club!
Published: November 21, 2009 5:07 PM
hutch583
On one side of the debates here you have people the "gold standard" people. Their opposition here are the people who are claiming that free market banking wold allow banks to issue notes representing property they are holding as collateral to back up these notes. The problem debate thus far is the lack of a significant thought experiment to assist in better exposing the substance of what the two sides of this argument are really saying. I'll attack the collateral side here only, because the attacks against the gold standard side rely on the assumption that the gold standard would require government force to put into effect, and I'm not intellectually prepared to argue against such an assertion.
However, before I do attack the collateral-backed-note-granting side, I need to point out that in a society where only gold was generally accepted as money, people would not likely carry bullion around to use in an exchange. More likely, they would deposit this gold with an entity generally well esteemed for trustworthyness, who would issue a note representing that presentation of such note at the entitie' facility would entitle the presenter to redeem the gold the note represents. The value expressed on the note would undoubtedly be the physical quantity of gold that the note-holder is entitled to. The note would not express its objective "worth" in terms of its relative value to some arbitrary fiat currency, since after all there would be no need to represent the golds "value" in anything other than the gold's weight because the gold itself is the money, and the gold is the money because people trust it as a store of value and thus as a place holder in between transactions above all other possible placeholders. In this way the substance "gold" effectively earns itself a natural monopoly as currency for the time period of however long the people engaging in trade generally deem gold to be worthy of such respect. Here, then, gold is used as the "money", even though such money is exchanged in the form of some type of depositor's slip because the slip is the placeholder for the amount of gold, and the gold is the store of value most widely respected as such that it is generally accepted as the sole medium of exchange such that the price of all other things in is expressed in terms of how much gold the market seller is requesting in an exchange for his good. Remember here that the market seller doesn't give a rat's you know what about the note itself, but only the the thing that the note represent's...the amount of gold he was demanding in exchange for the good(s).
The people arguing for the legitimacy of bank credit issued, backed by collateral, miss the point that in a free market such a note would be worthless as a medium of exchange. If it expressed its value as "one painting", why would I accept such a note in trade? I want to sell my goods in exchange for that good which has earned the position of "money", so that I know I can then go and buy with that "money" something that I want. Why would I want a note entitling me to a painting in this situation? An assertion that such a note would have value as money is preposterous in light of the Misesean explanation of the historical development of money, or more pertinantly, the Misesean explanation fo WHAT MONEY IS! Of course, the note backed by the painting as collateral could say "X pounds of gold". However, that would be a lie, wouldn't it? The gold that the note represents is respected as a medium of exchange because of its preferred status as a medium of exchange, a status gained because of the limited possibility for increasing its supply and the associated affect that that limitation has allowing gold serve as a respected store of value. The issuance of a bank notes representing a painting masquerading as bank notes representing gold creates a paradox of value, as the bank note pretending to represent gold is now part of the pool of things that represent money that could potentially be used to bid for that painting, thus increasing the amount of money chasing after that painting.
Now, the collateral people have been contending that this is fine, because the banks that do it too much will go under. However, one must recognize that in a developed free market system where a specific commodity has earned the title of money, printing a bank note that falsely claims to represent the entity respected as money necessarily has any such value because of that fraudulent representation, and the effect of this fraudulent representation is to temporarily distort the value of the pool of money available.
Published: November 21, 2009 5:12 PM
T. Ralph Kays
hutch583
Excellent post!
One small point though, what you are describing as collateral backed money is not really collateral backed, it is backed by things that the bank actually owns. Anyone who did accept a note backed by "one painting" would have a legal claim on that painting, but only if the bank actually owned the painting. Any form of money supposedly backed by loan collateral does not have that distinction, the people who accept that money do not have any legal claim to the collateral. Collateral is not ever backing for any kind of money.
Published: November 21, 2009 5:30 PM
Backing
"The only answer I have is: It doesn't matter at all as long as nobody is forced to accept the money."
Yes it does matter, because you defraud all the previous holders of your money whenever you print money out of thin air. If you print more money and "back" it with an "IOU for silver" but say it's backed by silver, that's fraud.
Published: November 21, 2009 6:14 PM
Backing
"So where is the difference if I print out a slip of paper and sell it for 100k$?"
You previously traded $100 of your paper money for 100 oz of silver. So you can say that "every $1 of my paper money is backed by 1 oz of silver." Let's say you crank out another $100 without getting more silver, but you tell everyone it's fully backed anyway. That's called FRAUD.
Fractional reserve banking = Fraudulent reserve banking
Published: November 21, 2009 6:23 PM
hutch583
T. Ralph Kays,
First, that is a necessary implication of what I was trying to say. The "painting as only collateral" for a bank note can only arise where the bank is lending "money" already in its possession to a lendee. The collateral serves as a means of the bank having the opportunity to regain the "money" that it previously lent back into its possession. But it must be stressed that in this case the "money" that the bank lent was necessarily already in its possession, and thus the "money" that the bank lent was not merely the bank note itself but the "thing" represented by the bank note.
The examples provided by others above regarding situations where the art enters the asset side of the banks balance sheet and serve to protect against insolvency seems to me to require that the bank have at some point issued notes representing money in such a way as to have led to a situation where its instantly redeemable obligations exceed the amount of "money" that is actually on hand. This can only occur where done one of the two following situations:
1.with the ascent of the entity to whom it owes the obligation that such a situation may occur, or
2.through fraud.
Published: November 21, 2009 6:48 PM
fundamentalist
Mike Sproul: "if a bank issues $100 in exchange for assets worth $1, there will be inflation. That is what the German central bankers were doing..."
No they weren't. Read Bresciani-Turroni's book and learn the sad truth about the real bills doctrine. It has been a disaster everywhere anyone has tried it, just like socialism.
Published: November 21, 2009 8:47 PM
fundamentalist
PS, Read Rothbard's history of the Fed and you'll discover that it has attempted to implement the RBD for almost a century, and the result has always been disastrous inflation. But they always blame greedy speculators for it.
Published: November 21, 2009 8:51 PM
Mike Sproul
Fundamentalist:
"learn the sad truth about the real bills doctrine. It has been a disaster everywhere anyone has tried it"
The real bills doctrine says that banks should only issue new money in exchange for assets of adequate value. That's the process that any bank naturally follows, so of course it has been tried in many times and places. Sometimes the banks manage to maintain adequate assets, and the money holds its value, and sometimes the bank fails to maintain adequate assets, and the money loses its value. Of course, a doctrine that has been around as long as the real bills doctrine has been stated and mis-stated in many ways. That's why I prefer to use the term 'backing theory' to distinguish it from the misunderstood caricature that RBD critics have constructed.
Published: November 21, 2009 10:44 PM
scott t
"This article is laughably out of date and totally irrelevant. Banks' ability to extend credit depends on their capital adequacy." (i dont know if this is true)
in a previous article the reisman states "The Depository Institutions Deregulation and Monetary Control Act of 1980 had begun phasing out interest-rate ceilings on deposits and modified reserve requirements in complex ways....these changes left all the financial liabilities that M2 adds to M1 — savings deposits, small time deposits, money market deposit accounts, and retail money market mutual fund shares — utterly free of reserve requirements and allowed banks to reclassify many M1 checking accounts as M2 savings deposits. M2 and the broader measures became quasi-deregulated aggregates with no legal link (except that the legal part was committed by congress, the could always legally change it back i assume) to the size of the monetary base..."
http://mises.org/daily/3556
does the above posting essentially describe a capital adequacy function? is capital adequacy function ant better or worse than older reserve requirements?
as for collateral..if i have 100 ounces (but i keep the gold vaulted and exchange gold certificates) of gold to lend and someone needs 100 ounces of gold (or the one for one gold certificates)...but only has a cumbersome 100 acres that cant be spent like money (that i would actually buy for 100 ounces of gold)..if the owner of the 100 acres made 100 certificates good for 1 ounce of gold each...that would not be inflation??
Published: November 22, 2009 12:14 AM
scott t
"The current plight of the economic system is the result of credit expansion and the malinvestment it engenders."
has malinvestment resulted in this "when prices are adjusted for inflation, Americans today spend '40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car than they did during the early 1970s. Over that same period, Census Bureau tables show, US median household income rose by at least 18% in constant dollars . . ." if true???
http://blog.mises.org/archives/010741.asp#c604991
or is this true about malinvestment "There was economic growth, but it was not spectacular after 1973, when real wages grew stagnant for two decades. The stock market did not outperform general economic growth..."
http://www.lewrockwell.com/north/north555.html
Published: November 22, 2009 12:28 AM
Mike C.
At the end of the day 2+2 will always equal 4.
Published: November 22, 2009 12:44 AM
T. Ralph Kays
My Lord Buzungulus, you told me:"The real bills doctrine is monetary crankism at its finest. I seriously question the mental soundness of its proponents, so obviously absurd it is."
I did not understand, now I am enlightened.
Published: November 22, 2009 1:05 AM
Allen Weingarten
George Reisman had written “The most important single step on the road to economic recovery is the establishment of a 100-percent reserve system against checking deposits.” I thought that Mr. Stoutenburg held the view that because our fractional reserve system required collateral, it did not create currency out of thin air. So perhaps mistakenly, I presumed that by his lights, if tomorrow everyone in America had a run on all the banks, by the end of the day, they would receive their currency, some of which would be in the form of collateral.
Now Mr. Sproul writes “bank notes do not promise absolute redemption into base money (gold) at all times. Legally they are simply a 'first lien' against the bank's assets, and the banks and customers who have used fractional reserve banking for centuries have a well-established, non-fraudulent legal tradition that recognizes this.” It appears to me he is conceding that the currency has been created out of thin air, in the sense that it cannot in principle be fully redeemed.
So my ‘Yes’ or ‘No’ question to Messrs. Stoutenburg and Sproul is whether our currency can be fully redeemed, in the sense that a 100-percent reserve system would do so. If either of them could then show that our deposits were fully redeemable, I would concede their point. Conversely, if their answer was ‘No’ I would conclude that our currency was created out of thin air.
Published: November 22, 2009 8:09 AM
fundamentalist
Mike Sproul: "Of course, a doctrine that has been around as long as the real bills doctrine has been stated and mis-stated in many ways."
Can you give me an example of a historical period in which you think the RBD was successfully implemented? I can give you dozens in which it caused massive inflation. Essentially, you're saying that the RBD is too complex for mere human beings to implement successfully.
Published: November 22, 2009 8:16 AM
Mike Sproul
Fundamentalist:
The Free Banking period of 1836-61 in the US would be a starting point of places where the RBD was implemented successfully. But your assertion that the RBD usually ends in disaster is like saying that business usually end up going broke, governments usually end up collapsing, and buildings usually end up falling apart. So businesses, governments and buildings are too complex for mere human beings to implement successfully.
Everyone operates on real bills principles when they lend money. If I want to buy a loaf of bread from you, and I offer to pay with my own IOU, which says "IOU 1 ounce of silver", then the only way you will accept that IOU is if you have reasonable assurance that I will pay it, either in silver or something of equal value. One way to assure payment is for you to take possession of my TV set, like a pawn shop does. Another way to assure payment is for you to get a lien on my house, like a lending bank does. You obviously won't accept the IOU of a bum, because he has no collateral to offer.
The IOU's issued for the TV and the house could circulate as money, and they will hold their value because they were issued on sound real-bills principles. The bum's IOU will have no value, because it was not issued on RBD principles. Now of course, even the most prudent lenders sometimes see their loans go bad. That's life. The RBD does not deny this. It only says that if the backing holds its value, the IOU will hold its value. If the backing loses its value, so will the IOU. Nothing complex about it.
Published: November 22, 2009 11:16 AM
T. Ralph Kays
Mike Sproul
"The IOU's issued for the TV and the house could circulate as money, and they will hold their value because they were issued on sound real-bills principles."
Look carefully at your latest post, do you notice anything? You keep using the word collateral improperly. Collateral is something you pledge other than what you promise to repay your IOU with. Its purpose is to guarentee that if you don't keep your word and provide the promised payment that the person you borrowed from will get something in return. If the IOUs you describe above are issued for the tv and house then the tv and house are not collateral, they are by definition direct backing for the notes. If the IOUs are written promising payment in some other form, say silver, then the tv and house could be collateral to guarentee the loans, but the backing for the notes is still whatever was promised as payment. This ignorant attempt to equate the meanings of two very different words is at the heart of the RBD farce.
Published: November 22, 2009 1:01 PM
Gerry Flaychy
«Out of thin air» and «inflation».
Let say I have a bill of 100 $ in my pocket that I can spend in the market. At this stage the money supply is 100 $ (or 1 000 000 000 100 $ if you prefer).
I decide to deposit it in a demand deposit account (checking account), which operation doesn't change the level of the money supply. Now there is 100 $ (or … chose your number) in cash in the reserve of the bank and 100 $ in my account.
The bank then lend 90 $ of this 100 $ to somebody else. Usually the bank will open a checking account in the name of the borrower and write 90 $ in his account. At this stage, there is 100 $ in paper money (cash) in the reserve of the bank and 190 $ in the checking accounts.
While the borrower may spend his 90 $ checking account money in market transactions, I may also, in the same time, spend my 100 $ of checking account money in market transactions, for a total of 190 $ to spend.
At this stage, there is still 100 $ in cash in the reserve of the bank, but there is now 190 $ in money supply in the market while there was only 100 $ before the loan: an increase of 90 $ in the money supply, but no increase in the cash in the reserve of the bank. There is then a monetary inflation of 90 $.
Where this supplementary money comes from ?
It doesn't comes from the reserve of the bank, because there is not 190 $ in cash (or 190 $ more) but only 100 $ in cash (or 100 $ more). It doesn't come either from the IOU of the borrower because it is not cash, and his IOU is not accepted in the market, thus it is not either money. So, that's why austrians say that this supplementary money comes out of thin air (or we may also say 'created by magic').
.
Now suppose the loan is for 1 week and reimbursed in time with 90 $ in cash. Then the level of money supply will be decreasing to the precedent level of 100 $, thus suppressing the monetary inflation cause by the loan.
If no other loan is made, then there will be no other monetary inflation (or additional ...), and general price inflation (or additional ...) would not happen.
If, instead, the loan is replaced by another loan each time it is reimbursed, and this continue for a certain period of time, then general price inflation (or additional ...) could begin to appear.
Published: November 22, 2009 3:08 PM
Mike Sproul
Gerry Flaychy:
"At this stage, there is 100 $ in paper money (cash) in the reserve of the bank and 190 $ in the checking accounts."
You are forgetting the $90 IOU received by the bank as it lent the $90. That IOU would have been backed by valuable property posted by the borrower as collateral. The bank will have $190 in assets ($100 paper +the $90 IOU) backing $190 in checking account money.
You are also ignoring the Law of the Reflux. As one bank issues a new $90, another bank will experience a reflux of $90. The new money only stays in circulation if it is wanted. So:
1) There will normally be no new money created.
2) Nobody's net worth is affected, so there is no additional demand for goods.
3) Each checking account dollar issued is backed by $1 worth of assets owned by the issuing bank.
Published: November 22, 2009 4:44 PM
T. Ralph Kays
Mike Sproul
What a crock!
Published: November 22, 2009 4:56 PM
newson
another way of looking at t. ralph kays' point is that when a bank loan goes into default, it impacts only on the bank shareholders' equity, and doesn't reduce the money supply.
of course, when banks lose vast amounts of their equity, they are likely to not renew expiring loans, and go easy on making new loans, so future money supply growth may very well be constrained.
Published: November 22, 2009 7:04 PM
Gerry Flaychy
Mike Sproul wrote:
"You are forgetting the $90 IOU received by the bank as it lent the $90. That IOU would have been backed by valuable property posted by the borrower as collateral. The bank will have $190 in assets ($100 paper +the $90 IOU) backing $190 in checking account money. "
I did not forget at all. I wrote this about it:"It doesn't come either from the IOU of the borrower because it is not cash, and his IOU is not accepted in the market, thus it is not either money. " This IOU is not cash, it is even not money. So it cannot be count as cash in the bank. The bank will have 190 $ in assets but not 190 $ in cash.
Whatsoever, the important here was to show that before the loan we have 100 $ in money supply, and after the loan, we have 190 $ in money supply. I also show that after the reimbursement of the loan, the money supply comes back to the 100 $ level.
.
Mike Sproul also wrote:
"You are also ignoring the Law of the Reflux. As one bank issues a new $90, another bank will experience a reflux of $90."
If you look here, you can see by yourself that there is not much reflux in the money supply in our present system ! In the present system, each time that there is a '90 $' loan, instead of reflux, we get an 'afflux'!, because another bank will loan a part of this '90 $' when it will receive it as a deposit, and so on many times with the part of the part of the part … .
Published: November 22, 2009 7:17 PM
T. Ralph Kays
Gerry Flaychy
Great posts, you have proven the RBD crowd wrong (RBD= Real Bills Dorks), as have numerous other people on this thread. Don't expect them to abandon their delusion however, it is all they have to sustain their fantasy world.
Published: November 22, 2009 7:32 PM
Lord Buzungulus, Bringer of the Purple Light
T. Ralph:
"(RBD= Real Bills Dorks)"
Outstanding! At this stage, I have to agree that the RBDers are in a fanstasy world. This latest statement from Sproul-bag pretty much confirms it:
"You are forgetting the $90 IOU received by the bank as it lent the $90. That IOU would have been backed by valuable property posted by the borrower as collateral. The bank will have $190 in assets ($100 paper +the $90 IOU) backing $190 in checking account money."
Probably half a dozen posters here have stressed that, in fact, the worth of the IOU is NOT face value, it's MARKET value (and that's probably close to zero, otherwise the issuer would have sold it there rather than turning to a bank). From a monetary standpoint, the collateral used to secure the loan is completely distinct from the exchange rate the promise to pay will fetch on the market. Yet, Sproul-bag just keeps on regurgitating this claim, seemingly oblivious to counter-arguments. I have to say, hard as it is to believe, I'm finding him more obnoxious than Silas Barta.
Published: November 22, 2009 7:50 PM
IOU
Mike Sproul is an idiot.
An IOU for all the silver in the universe is not worth all the silver in the universe. If it was, then why do you even need a freaking bank.
Published: November 22, 2009 8:13 PM
IOU
If you back $1 with "an IOU for 1 oz of silver", then it does not follow that $1 is worth "1 oz of silver". It is only worth "an IOU for 1 oz of silver".
If you back $100000000000 with "an IOU for 100000000000 oz of silver", then $100000000000 is not worth "100000000000 oz of silver". It is only worth the IOU. The IOU is actually what backs it, but it is worthless.
Published: November 22, 2009 8:17 PM
T. Ralph Kays
Lord Buzungulus
Dealing with idiots can be a way to sharpen our own understanding of Austrian economics, but at a certain point you have to tell them to get lost and get back to the real world.
Published: November 22, 2009 8:18 PM
IOU
Mike Sproul, why does anybody need money if IOU's are as good as gold? Next time you need to pay someone for something, just write an IOU. Next time you sell something, tell them to pay you an IOU.
Published: November 22, 2009 8:19 PM
IOU
Madoff is Mike Sproul's hero.
Madoff never actually lost any money. Madoff has $50 billion in IOU's!
Published: November 22, 2009 8:21 PM
Dumb and Dumber
"Where's all the money?"
Mike Sproul: "That's as good as money sir, those are IOUs."
Published: November 22, 2009 8:25 PM
IOU
Mike Sproul, why can't the person just spend the $90 IOU if it's actually worth $90? Why does that person need a bank?
Published: November 22, 2009 9:01 PM
fundamentalist
Mike Sproul: “The Free Banking period of 1836-61 in the US would be a starting point of places where the RBD was implemented successfully.”
Yeah, that was a great period of peace and prosperity. The Panic of 1837 was the second-longest American depression, with effects lasting roughly six years, until 1843. The depression caused the collapse of real estate prices. The price of food also collapsed, which was ruinous to farmers and planters who couldn’t get a decent price for their crops. People who lived through the depression following 1837 told stories that would be echoed a century later during The Great Depression. In the Panic of 1857 stock prices plummeted, and more than 900 mercantile firms in New York had to cease operation. By the end of the year the American economy was a shambles.
Mike: “But your assertion that the RBD usually ends in disaster is like saying that business usually end up going broke, governments usually end up collapsing, and buildings usually end up falling apart.”
False analogies all. You claim that RBD will not cause inflation or business cycles if done properly. Yet you can cite just one short period of success from almost two centuries ago, which wasn’t very successful after all. For your analogies to business, government and buildings to apply, businesses, governments and buildings would have to fail most of the time and succeed only very rarely. Most businesses succeed and often for very long time periods. Most governments last centuries. And many buildings last centuries.
Published: November 22, 2009 11:53 PM
T. Ralph Kays
fundamentalist
Great job!
Published: November 23, 2009 1:26 AM
GaryH
I've just read most of the comments and I would like to hear your opinion on something.
Let's say I go public with my company. I own 1000 shares with a market value of 100$ each. I decide to buy a car for 10000$. But instead of paying cash I agree with the salesman to give him 100 of my shares.
True, the shares are not money in the strict sense of the word, but they serve the same purpose. Wouldn't that pretty much be the RBD?
On what grounds could anybody be opposed to that transaction?
Published: November 23, 2009 3:46 AM
Shay
All these "Mike Sproul is an idiot" posts have caused me to look more closely at Mr. Sproul's comments and website. If Mr. Sproul's comments are really misguided, I would like to read objective rebuttals, not name-calling. I am interested in civil discussion of what he's talking about, but I'm apparently going to have to contact him via email. Assuming those name-calling really do have a good point, they have forfeited it by their behavior.
Published: November 23, 2009 5:16 AM
Gil
"The price of food also collapsed, which was ruinous to farmers and planters who couldn’t get a decent price for their crops."
But wouldn't that have meant food was more affordable to the poor?
Published: November 23, 2009 5:34 AM
Joe Stoutenburg
Coming back from the weekend, I have a lot of catching up to do in the thread. I haven't read all of the new comments, but I want to immediately address the closing comment from Robby (with thanks for his thoughtful post - I basically agree with it):
I have seen this statement in the past. Does this come to that, for some of you, the problem is mere semantics. If only we didn't call "lending" by the term "banking" that everything would be okay? If I must, I could go along. But then what are we debating? The economy would function pretty much as it's going to despite the terminology we use to describe it. From such a thoughtful post, you must mean more than a semantic argument, Robby.
Anyway, clearly some Austrian writers do intend fundamental reform as demonstrated by Reisman's call to print and distribute new money while simultaneously instituting a 100% reserve requirement. But then, if you grant the creation of credit by lending, and if that credit trades as money; you've simply pushed the activity out of credit creation out of banking into institutions of a different name. What have you changed?
It is for this reason that I highlight the collateral behind lending. In my opinion, articifical booms occur on the back of lending issued on insufficient collateral. Busts occur when the underlying economimc reality forces the liquidation of bad debts.
Unless you outlaw credit entirely, this is going to be an issue. The question is how to manage the issuance of credit so that it remains sound. I argue (and most of you will agree on this point) that the solution is not to be found politically.
Published: November 23, 2009 8:44 AM
Allen Weingarten
Joe Stoutenburg writes “the problem is mere semantics. If only we didn't call "lending" by the term "banking" that everything would be okay? If I must, I could go along. But then what are we debating?”
If I place $20 in a savings bank, with 100% reserve, then at any time I could receive all of it, and put it to use. However, if it is such that I cannot get all of it immediately (even if in principle I could receive it later), that is a different situation, which is not a matter of semantics. Now I have no objection to a CD, which penalizes early withdrawal, or to purchasing a stock whose value can differ at the time of withdrawal. But that is a different business arrangement.
Why am I not content to simply place my $20 in a safety deposit box, or keep it under my mattress? It is because credit expansion causes a loss in purchasing power. Thus, had I done so in 1950, its worth today would be $1 in terms of what it could purchase then. Note that without credit expansion (as in many decades of our history) the value of the dollar increased over time, since the same amount of currency chased a larger amount of goods & services.
Published: November 23, 2009 9:53 AM
Joe Stoutenburg
Finally caught up! Whew! Allen, it seems that we may be crossing posts, but I will respond to your most recent post (dated 11/23 @ 9:53 AM) before backtracking to respond to some of the other posts.
I agree that credit expansion, as it has been implemented, would have destroyed the value of cash holders. However, as soon as you allow that credit issuance is valid at all, you introduce the possibility for the issuance to be unsound. When the new credit trades as money (and it will), you are back to where we started.
Making a distinction between deposits and lending don't really help, in my opinion.
Published: November 23, 2009 10:19 AM
Joe Stoutenburg
John M:
Thanks for making contact from the real world! :)
There would only be monetary expansion following the use of your credit line if the lender held less than 100% reserve for the amount that you borrowed. I actually lean toward the position that such unsecured credit should post a dollar for capital for every dollar loaned. However, I would rather let a market process, free from either the well-intentioned programs of the current gang of central planners or the well-intentioned programs of would-be Austrian central planners.
Anyone not paying especially close attention to my posts (and since I've written alot and, as far as I know, perhaps not well; I wouldn't blame them) may think that this is an about face for me. It's not. My distinction has always been between secured and unsecured lending and to take an actual look at the security [hint, it often isn't much security at all].
Published: November 23, 2009 10:28 AM
Joe Stoutenburg
My comment about "would-be Austrian central planners" raises a good time to respond to the complaint by Zach Bush:
The trap, meaning no disrespect, is one that you have fallen into yourself, along with other Austrians. That trap is to believe that reform can only come about by some kind of program promoted by a central political organization. It's kind of the same old canard (though not as egregious) that to oppose the welfare state means that want poor people to die.
To step outside of the trap, just insist that our task is to educate society on sound economic principles. Once so educated, society will take the necessary steps to reform (or even abolish if you are of the ancap mentality) the political institutions as needed.
I guarantee that, were any of us successful to impose an Austrian "plan" on an ill-prepared society, it would backfire with very bad unintended consequences.
Published: November 23, 2009 10:34 AM
Joe Stoutenburg
newson:
Your linked articles (in post dated 11/21 @ 4:38 AM - is that timestamp wrong? or are you in a far off time zone? don't sleep much?) look promising from skimming their introductions. I'll try to dig up some time to read them between this very engaging discussion and my actual productive work.
Thanks for posting them.
Published: November 23, 2009 10:38 AM
Joe Stoutenburg
From here, I hope that a simplified illustration will help. Let's consider an economy with a pristine 100% reserve gold standard. Assume further that there is $1000 worth of gold in circulation. I hope that you'll agree that the units don't really matter. We could have just as easily assumed 1000 oz or, equivalently stated the amount of gold per dollar and stated the number of dollars.
Let's further assume that there are three assets in this economy. Presently, each asset has a market value of $500. You should hopefully note immediately that, were transactions to simultaneously be attempted, there is not enough hard money to cover all three assets.
This need not necessarily be an economy that is out of balance. It may be that only one of the assets is available for sale. When it does sell for $500, the other two owners take note and record $500 on their balance sheets for the asset value. Note, this is a well-known challenge for accounting. There can not really be a market value unless you can match a willing buyer with a willing seller. But I digress...
Now, we'll make it interesting. Let's suppose that two of the assets are placed as collateral for loans totalling $1000. [In practice, a responsible lender would typically require much less than 100% LTV. Assuming some greater level of security would not materially affect the outcome of this thought experiment.] The currency could have begun owned outright by the banks, or they could have been held in trust for depositors who chose to allow the banks to lend the funds out. You may note that I have not made provision for interest here. It should already be obvious to market participants that prices are out of line. But of course, this is only to illustrate. I want to send the situation even further off the edge.
Even if the gold were physically given to the borrowers, let's assume that, through normal commerce, it ends up back at the banks in the form of deposits. Now, the third asset is also placed as collateral for a $500 loan. The proceeds for this third loan also return to the bank as deposits.
Now, the banks have a total of $2500 in deposits (some of which could belong to the bank's manager's if they personally owned the funds initially) despite a total supply of currency equal to only $1000. There may be some question of which depositors have demand deposits and which have time deposits. That is mostly a matter of contract betweeen the bank and its depositors. Clearly though, however the contract terms are arranged, if most of the money sits on deposits within circulating, this game will come to a stop much faster.
If this were a single bank or even a small number of banks, we might think that they should detect the imbalance. However, if you make the situation more complex, covering many banks, an imbalance persist. The only question would be how large the imbalance could become before being detected and whether the market would have the tools for handling it smoothly or if external forces (i.e. political intervention) would allow it to grow to a point at which it is resolved in a disorderly manner.
Continuing the example, the debts might be able to service the time deposits for awhile as long as enough money is circulating. You would find principle and interest flowing into the time deposits and into the banks' own accounts. However, the situation would end if anything occured to impede the ability of the debtors to service their loans. Perhaps interest rates would spike (assuming the loans are rolled over or the rates set variably). Or the asset prices may continue to rise. Either way, once the loan payments are a substantial enough amount of the debtors' incomes that they choose to feed themselves rather than pay their loans, the day of reckoning comes.
When the debts default, the banks take possession of the collateral. If all creditors are happy taking possession of the collteral assets, they can have them. More likely, they prefer hard currency. The assets must all be liquidated at once. Of course, the actual currency does not exist to purchase them. And probably not all of the currency will go toward the purchases. Let's say that the assets fall in value to $200. Whether the creditors accept the collateral or liquidate them for cash, they have suffered a loss of $300 per asset.
Another way for this collapse to occur would be if time deposits had a provision for early redemption. If those depositors all ran on the bank at the same time, the banks would be forced to attempt to unload the liens on the market at the same time. The same result would occur. Those liens would not have been able to fetch their stated values. They would have fallen in value, possibly requiring the banks to access the underlying collateral and recognizing a $300 loss per asset.
Notice that this is a gold standard with an allowance for credit expansion. Every demand deposit may be backed 100% by hard money. Every loan involves the physical transfer of hard money with an asset pledged as collateral. Correct me if I am wrong about this being legitimate credit issuance. Yet this economy suffered a deflationary collapse.
You have no credibility in the eyes of people who understand this process if you offer a gold standard as a cure to credit cycles. As long as any credit is allowed (and how would you outlaw it?), there is the potential for bubbles to form. The question is to determine what mechanisms are allowed to respond. Political forces, under a gold standard, often allowed banks to suspend redemption or even to devalue their money (so stealing even from demand deposits). As we are seeing currently, they also try to pump more credit to avoid the reckoning. Of course, once debt service exceeds income, you are done. No more credit expansion games may be played.
It is for reasons such as this that my primary monetary stance is to allow for a free market in banking. I'd like to turn off the Treasury's printing press as much as anyone. But when it comes down to it, our primary problems come from the issuance of credit. Most deposits are time deposits but with loose restrictions on how you can access the funds. If you wish to test me on this, go to your bank and request $100K on the spot. They'll impose a waiting period upon you. Insisting upon distinguishing our ubiquitous time deposits from demand deposits (which really are to be found in safe deposit boxes, Robby's fungible depository institutions not existing as far as I know) changes nothing.
We are where we are because of the unchallenged ability of the Treasury to issue bonds out of thin air at will. We have gotten here because credit issuance standards were severely compromised for political gains. We continue down the path to deflationary collapse (in my opinion) because politicians continue to defend the interests of bankers rather than allowing the system to correct itself.
If you want to require 100% reserves on unsecured lending, I can go along with that though I think a free market would naturally require it. But you miss the deeper problems of credit quality. Even if you could transition to a pure gold standard, you might solve little if nothing.
Published: November 23, 2009 12:28 PM
JP Koning
John M's question is a good one.
I think the people posting here misunderstand the difference between a secured loan and an unsecured loan.
A secured loan is one that is collateralized by a specific asset. For instance, an airline my issue secured debt with a certain percent of its airplanes as security.
Because a loan is labeled "unsecured" DOES NOT mean it is not collateralized. While secured debt is a claim on a specific asset a firm holds, unsecured debt is a claim on the general assets of a firm. Unsecured debt, therefore, is indeed backed by some sort of collateral. The main difference between the secured debt holder and the unsecured debt holder is that in a bankruptcy situation, the former is guaranteed to have the keys to the plane turned over to them, while the latter must share in the general assets left over after the secured debtor has made their claim.
Therefore, John M., while your line of credit is not secured by a specific collateral asset, it is indeed secured by your firm's general assets, and is therefore backed by collateral-in-general. In other words, were you to go bankrupt, your unsecured lender would pursue you for any asset you might own, but not a specific asset. Furthermore, the bank would never have lent money to you without collateralization, ie without some sort of claim on your assets.
To sum up, unsecured debt is always backed. And there is no such thing as a loan that doesn't have some claim to underlying assets. Bankers don't give money out for free. All dollars created via credit, even unsecured credit, are therefore backed. Hope that helps.
By the way, GaryH makes a very good point too.
Published: November 23, 2009 12:30 PM
JP Koning
Joe: "If you want to require 100% reserves on unsecured lending, I can go along with that though I think a free market would naturally require it."
While I agree with pretty much everything you say, your points about unsecured lending are the one way we depart. See above.
Published: November 23, 2009 12:35 PM
Joe Stoutenburg
JP Koning:
You make a good distinction between security and collateral. I may have been casual in my posts, using one term when I meant the other. Though I don't care to review my posts to see if I made this mistake, I'll exercise caution in the future.
I softened a bit on my comment about 100% reserves. How about more of a middle ground? By the very meaning of the word, unsecured lending has the least sure collateral. People who go bankrupt often begin at a highly leveraged position. So once the bankruptcy is revealed, general creditors may be scrambling for pennies on the dollar. And I'm no bankruptcy law authority to say the least, but I gather that there can also be uncertainty about what assets are shielded in bankruptcy.
At the least, unsecured lending calls for more prudent levels of reserves. I don't really believe that certain levels of reserves should be mandated despite my caving that you pointed out. Rather, I think that the management of credit should be returned to the market.
Credit markets have so long been in the hands of regulation that not one person in a thousand has the first clue about what is on their bank's balance sheet. Being lulled to sleep, banks have ratcheted up their leverage. Most people, if they knew the difference, believe that they have demand deposits at the bank. In reality, they have time deposits with credit risk; albeit with loose restrictions on redemption.
It'd be interesting to see how rapidly banking would change if government regulation were abolished and (most critically) bailouts ended (including the FDIC). Sadly, in the almost certain ensuing initial chaos most people would despair at the "failure of free markets" rather than recognize the corrective steps toward sound credit markets. So we are left with ill-considered attempts, even by the people who should know best, to reform political control.
Thanks for calling me on a bit of an inconsistency. I want to build consensus that unsecured lending does call for more prudent reserving. But I shouldn't allow my wish for consensus to impugn my central principles on the matter.
Published: November 23, 2009 1:30 PM
fundamentalist
Joe: "Let's consider an economy with a pristine 100% reserve gold standard....
"Notice that this is a gold standard with an allowance for credit expansion. Every demand deposit may be backed 100% by hard money."
It appears that you may be confusing 100% reserve with 100% backing. I may have read your post wrong, though. However, the two are very different. With a 100% reserve requirement, currency plus credit can never exceed the total money stock. If your economcy has a total of $1,000 in money stock, then the only way someone could borrow $1,000 from the bank we be for all of the money stock to be in the bank on time deposit. In other words, there would be no money in circulation at all.
Let's suppose instead that $500 is circulating and $500 is on time deposit in the bank. Someone wants to borrow $1,000 and has collateral the bank believes to be worth $5,000, so the bank is certain to get its money back if the borrower defaults. The bank cannot make the loan because it has just $500 on deposit. In order to make the loan, the bank would have to raise the rate it pays on time deposits to a level that would motivate the holders of $500 in cash to deposit it in the bank. And the bank would have to increase the interest it charged the borrower to pay for the deposits plus profit.
In your example, the bank holds no deposits at all. All $1,000 of the money stock is circulating, but the bank makes the loan anyway by creating deposits worth $1,500, so that the money stock grows to $2,500. The bank had nothing to loan, so it created the extra $1,500 out of thin air. Reserves were less than 1%, far from a 100% standard.
If you want to distinquish credit from loans, then you could say that loans would still exist under a 100% reserve system, but not credit which expands the money stock.
But you're right that a gold standard without 100% reserve requirements is just as inflationary as paper money or credit. That truth has been known since Venetian bankers started fractional reserve banking back in the middle ages.
Published: November 23, 2009 1:46 PM
T. Ralph Kays
Joe said:
"From here, I hope that a simplified illustration will help. Let's consider an economy with a pristine 100% reserve gold standard. Assume further that there is $1000 worth of gold in circulation. I hope that you'll agree that the units don't really matter. We could have just as easily assumed 1000 oz or, equivalently stated the amount of gold per dollar and stated the number of dollars."
"Let's further assume that there are three assets in this economy. Presently, each asset has a market value of $500. You should hopefully note immediately that, were transactions to simultaneously be attempted, there is not enough hard money to cover all three assets."
No wonder you sound so stupid, this situation cannot exist in a free market. The free market always adjusts to clear the market. If all three transactions were desired at the same time the market would adjust prices and the value of the money such that the market cleared. Any amount of money is always adequate to clear the market in a free market setting. As I said before, try studying Austrian economics before claiming to understand it.
Published: November 23, 2009 1:48 PM
T. Ralph Kays
Joe said:
"Notice that this is a gold standard with an allowance for credit expansion. Every demand deposit may be backed 100% by hard money. Every loan involves the physical transfer of hard money with an asset pledged as collateral. Correct me if I am wrong about this being legitimate credit issuance. Yet this economy suffered a deflationary collapse."
Ok, here it is, you are wrong, this is not legitimate credit issuance. This is not a 100% gold standard, this is what Austrians call a partial gold standard.
Try studying Austrian economics why don't you.
Published: November 23, 2009 1:57 PM
JP Koning
"At the least, unsecured lending calls for more prudent levels of reserves."
Here we agree. In a free market, a note-issuing bank that lends unsecured will have to provide note holders with some sort of carrot, whereas a note-issuing bank that lends secured will not. This carrot could indeed be the security afforded by a higher reserve on notes, as advertised in said banks promotional material.
"No wonder you sound so stupid..."
Tut tut. The first sign of a dying argument is the resort to ad hominems.
None of you have responded yet to GaryH's interesting comment.
Published: November 23, 2009 2:03 PM
T. Ralph Kays
JP Koning
My rudeness has nothing to do with the validity of my points. I think the first sign of a dying argument is to dismiss someones points simply because you don't like the way they present them.
Published: November 23, 2009 2:10 PM
scott t
"When you lend your coin in exchange for an IOU, it is true that there are now two items of currency, (is the iou currency or a promissory note?) but the issuer of the IOU is obliged to grant you a lien on 1 oz. worth of his property."
"In summary, the newly-issued IOU:
1) is backed by 1 ounce worth of collateral, so it must be worth 1 ounce"...is it actually backed by 1oz of collateral or 1oz of a hoped for repayment of property?
if i have one acre of land and you have one silver coin and we agree that 1 silver coin would be an appropriate purchase amount for 1 acre of land but i want to keep my land and put a building on it. but to do that i need 1oz of silver for materials....my 1 acre would be collateral for the silver you loan me?
i give you an iou for 1oz of silver (with 1 acre of land as collateral for non-pay of 1 silver ounce) you give me a 1oz silver coin.
if 1oz-of-silver lender trades iou-for-1oz silver(with 1 acre land as collateral) for other goods and another party has iou for 1oz of silver(with 1 acre as collateral)....isnt that backing? if the silver isnt repaid the land then goes to the iou holder?
is this just an (unlikely) issue of the land getting destroyed in some way making the collateral of les value that originally hoped for?
is there anything here that would bid up prices or promote harmful inflation?
was sproul or others describing a different phenomena?
Published: November 23, 2009 2:26 PM
Lord Buzungulus, Bringer of the Purple Light
I assume this is GaryH's comment that a few of you find interesting:
"Let's say I go public with my company. I own 1000 shares with a market value of 100$ each. I decide to buy a car for 10000$. But instead of paying cash I agree with the salesman to give him 100 of my shares.
True, the shares are not money in the strict sense of the word, but they serve the same purpose. Wouldn't that pretty much be the RBD?
On what grounds could anybody be opposed to that transaction?"
All that occurs here is that an existing asset (a car) has been exchanged for another existing asset (some securities).
Nothing unusal is taking place here; it's akin to direct exchange, although we may allow that the shares might be fairly
liquid and can roughly serve as money *substitutes* (which are not money, BTW, a critical point which must stressed
again and again, it seems).
RBD, on the other hand, would say something like the following: I plan to take my company public in 30 days (the usual
arbitrary time horizon employed in RBD). To acquire money right now, I issue an IOU to my bankster buddy who obligingly
prints up some notes with face value 10,000. There is no asset or collateral behind this loan, just my promise
to pay back 10,000 in 30 days time. It's not even a short-term loan, certainly not worth par value, as it involves no
exchange of a present good for a future good, just a promise to pay assuming I successfully take my company public. It can
only be passed off as a money substitute worth the 10,000 if there is no full disclosure, ie, only if it is issued fradulently. The note is not akin to the stocks in the example, as it does not represent any kind of existing asset, apart from a bet on my future company.
Published: November 23, 2009 2:35 PM
T. Ralph Kays
Lord B
Very clearly stated, nice job.
Published: November 23, 2009 2:40 PM
Lord Buzungulus, Bringer of the Purple Light
Thanks, T. Ralph, let me just add:
To clarify that last sentence; all financial assets are bets, essentially, on future performance. The point is,
in the example under consideration, there is an *existing* market for the stocks, ie, it is convertible into cash and
hence can be used in trade. This is clearly not the case under RBD, where I have to rely on the banker's printing press
to "create" a market for my financial "asset" (IOU).
Published: November 23, 2009 2:43 PM
Joe Stoutenburg
fundamentalist:
You're pressing on the right area. I'll be glad to admit error if I can discover a fallacy in the logic of my example. I hope that I can obtain the same from you though we both know there's a good chance we'll eventually tire without agreement. I enjoy the intellectual debate regardless.
In simplified form, here are the steps to the loans. In my example, I made some allowance for gold to circulate outside of the bank's vault. Here, we'll assume that the physical gold soon returns to the bank in subsequent deposits.
1) Individuals make time deposits to the banks with the understanding that the funds will be loaned out. Total of these deposits is $1000 (i.e. the total currency in the economy).
2) The banks loan out all $1000. They secure the loans by claims to the first two assets worth a total of $1000. At this instant, the bank vaults are empty.
3) The loanees spend the proceeds of their loans. The people with whom they exchanged the gold return the money to the banks in the form of new time deposits. There is now a total of $2000 in the banking system. This will be the critical point. More below.
4) The bank is able to lend out another $500 backed with the third asset. Presumably, the way that I formed the illustration, the remaining $500 is either as a demand deposit or the bank fails to place it as a loan. Either way, it remains in the vault.
5) As before, the loanee spends the $500 loan. After circulating, it returns to the bank as a deposit. Total deposits are now $2500.
The total amount of money circulating in this economy is "backed" by $1000 of hard money and another $1500 of financial assets (claims to the three assets that have not actually transacted at that price).
Now of course, this is a simplified example. If this were a closed banking system with close communication about the balance of hard money in the system along with total loans, it would be clear that the money returned to the bank was the proceeds of the first loans. In practice, with a great deal more loans and time deposits, it would be impossible for a bank to determine whether a deposit was ultimately the proceeds of a previous loan.
Anyway, the lynch point is obviously in #3. What mechanism would stop the proceeds of prior loans from entering back into the system? Be specific.
Published: November 23, 2009 2:43 PM
scott t
"An IOU for all the silver in the universe is not worth all the silver in the universe. If it was, then why do you even need a freaking bank."
has mike sproul said this?
additionally, has the banking system now gotten to the point where backing the paper dollar (a very cheap exchange media) is only as difficult as doing a pumping up a bookkeeping entry or printing of some very inexpensive paper to meet a 'backing' need should it arise?
is this banking and money security?
or would the risk involved with investing in newly mined gold (using existing gold as money) provide greater monetary security and wealth?
Published: November 23, 2009 2:49 PM
Lord Buzungulus, Bringer of the Purple Light
One last comment: even in this example, the stocks don't have 10,000 written on them, that's simply the current
market value that allows them to be traded for the car in this example. Keep in mind that the car owner probably won't
accept the quoted market, as he has to take the additional step of selling them for cash (assuming he doesn't want to
hold the stock). Hence he'll demand a premium. Likewise, the bank slapping the number 10,000 on paper in return for
my IOU doesn't render that exchangeable in the market for 10,000 worth of goods, that paper is gonna sell at likely a
steep discount (unless, again, fraud is employed).
Published: November 23, 2009 2:52 PM
Mike Sproul
Fundamentalist:
"Yeah, that was a great period of peace and prosperity. The Panic of 1837 was the second-longest American depression, with effects lasting roughly six years, until 1843."
The free banking period 1836-61 was, overall, one of high economic growth. So was the Scottish free banking period. But your assertion that the RBD always fails is the real point at issue. The RBD says that if a bank creates and lends money in exchange for sufficiently valuable assets, that money will hold its value. If the bank fails to take assets of adequate value, that money will lose its value. What bank has ever operated on any other principle than this? Every example of a successful bank is an example of the successful application of the RBD. Every failed bank is an example of the failure of a banker to maintain adequate assets in accordance with the RBD. But what else would you have bankers do? Issue money for inadequate assets? Operate on 100% reserves? Issuing for inadequate assets is a certain recipe for failure, and 100% reserves has been tried, notably by the Bank of Amsterdam. That bank failed, by the way.
Published: November 23, 2009 2:53 PM
Lord Buzungulus, Bringer of the Purple Light
One last comment: even in this example, the stocks don't have 10,000 written on them, that's simply the current
market value that allows them to be traded for the car in this example. Keep in mind that the car owner probably won't
accept the quoted market, as he has to take the additional step of selling them for cash (assuming he doesn't want to
hold the stock). Hence he'll demand a premium. Likewise, the bank slapping the number 10,000 on paper in return for
my IOU doesn't render that exchangeable in the market for 10,000 worth of goods, that paper is gonna sell at likely a
steep discount (unless, again, fraud is employed).
Published: November 23, 2009 2:53 PM
T. Ralph Kays
Joe
Wow
"1) Individuals make time deposits to the banks with the understanding that the funds will be loaned out. Total of these deposits is $1000 (i.e. the total currency in the economy).
2) The banks loan out all $1000. They secure the loans by claims to the first two assets worth a total of $1000. At this instant, the bank vaults are empty.
3) The loanees spend the proceeds of their loans. The people with whom they exchanged the gold return the money to the banks in the form of new time deposits. There is now a total of $2000 in the banking system. This will be the critical point. More below."
Your math is faulty, at the end of step 2 the bank vaults are empty, in step 3 $1000 goes back into the bank, $0+$1,000 is not $2,000
Published: November 23, 2009 3:00 PM
JP Koning
LBBOTPL
Let me streamline the two examples for clarity's sake:
Option 1: I create share certificates out of thin air and issue them to a car dealer in exchange for a car. He accepts them. Like all shares, these ones are a claim on my assets.
Option 2: I create paper money out of thin air and issue them to the car dealer in exchange for a car. He accepts them. This paper money is also a claim on my assets should I go bankrupt.
Why is Option 1 legitimate but not 2?
The way I see it, many of you want to declare option 2 illegitimate because of the "out of thin air" criticism. But logic dictates you should therefore declare option 1 illegitimate too. Shares, like money, are being issued "out of thin air."
Keep in mind that Option 1 is a very common transaction in today's world - it occurs whenever a company issues shares to buy another company.
Published: November 23, 2009 3:03 PM
Joe Stoutenburg
T. Ralph Kays:
I informed you previously that I would not respond if the quality of your posts did not improve. Though a few of your comments may have been worthy of discussion, I have economized my remarks toward people who I felt were more capable of intelligent and civil discourse than you appear.
I'm breaking my previous word now because I'm really interested. Why the venom? What skin do you have in proving Austrian economic principles? Are you a lifetime student? A professor? Have you donated your life savings to LvMI?
Note that I do not take exception with the fact that you disagree with me. It's just that, when faced with discourse that so thoroughly fails to be civil, I admit that I tend to assume that it is masking an inability to be intelligent. Though I have erred on the side of politeness to now, if you must know, I have felt the same about some of your arguments as you say you feel about mine.
It would probably be better for us to stick to the "intelligent and civil" instruction that you see above us even if one or both of us is too stupid to be convinced of any erroneous thinking. And let's face it, if one of us is really that stupid, will we be smart enough to know it? Really, this is my second request. Raise the level of your debate, dude!
Since I have bothered to post a response, I'll do one more than just reprimand your level of you debate. You wrote:
I agree. A free market would quickly adjust prices to clear. When you find a place where you think there is a free market, let me know. If I'm convinced it's actually free, I might move there. As I'm sure you'll agree, there are all kinds of interventions that are aimed directly at prolonging market imbalances. Many of my comments have been focused upon discussing their nature.
Published: November 23, 2009 3:05 PM
Joe Stoutenburg
T. Ralph Kays:
Though I can feel the sneer through your monitor, your last post mostly stuck to something worth commenting on:
Focused as ever on the shiny pieces of metal, I see. Yes, there is always only $1000 of it. The base money is a fixed amount.
At the end of step 3, there are two sets of claims:
* The initial depositors from #1 have claims to be repaid their money over time.
* The new depositors in #3 also have claims to their money.
Are you really going to argue that the total amount of deposits by #3 is not $2000?
Published: November 23, 2009 3:15 PM
T. Ralph Kays
The venom is due to the fact that you began on this thread by claiming to be very familiar with Austrian economics and then proved by your own comments that that was not true. I greatly resent being lied to. Many people politely tried to point out to you that what you described as the Austrian position was not in fact the Austrian position, that the usage of terms and concepts in your posts was not how we define them in Austrian economics. You very arrogantly and rudely ignored them. You very "politely" behaved in an outrageously rude manner.
Published: November 23, 2009 3:23 PM
Joe Stoutenburg
To all:
Following from that last post, to sway me from my position, someone must convincingly explain what the banks did wrong in #3. [Raph Kays: as satisfying as insults may appear to you, I'm afraid that I don't find them convincing.]
If I can discover no convincing arguments in answer to my request, my conclusion remains that credit-induced bubbles are possible even with a gold standard. The task then seems to be to study the conditions that allow prices to get out of whack such that collateral, when forced to be liquidated, can not be sold at high enough values to satisfy depositors.
Please take note that I do think that the boom-bust cycle is primarily a monetary phenomenon. However, based upon the reasoning that I have presented, I am not convinced that establishing a gold standard is sufficient alone to avert the business cycle or even soften it. In my opinion, our problems relate to problems with credit that could exist even under a gold standard.
Published: November 23, 2009 3:26 PM
T. Ralph Kays
Yes Joe, I am, under a 100% reserve system the claims of the initial depositers are only claims, not money, they have surrendered the money for a set amount of time, and only have a future claim to it. Over and over people have tried to point out to you that what you are talking about is not a 100% reserve or "gold standard" system. When Austrians talk about these things they mean something entirely different from what you mean.
Published: November 23, 2009 3:32 PM
T. Ralph Kays
Austrians distinguish between a gold standard and a partial gold standard, you insist on equating the two, what you call a gold standard is not really a gold standard.
Published: November 23, 2009 3:36 PM
fundamentalist
Mike: "The RBD says that if a bank creates and lends money in exchange for sufficiently valuable assets, that money will hold its value."
Then the obvious conclusion is that banks never have and never can exchange money for sufficiently valuable assets. Recurrent booms and busts prove it.
Joe: "3) The loanees spend the proceeds of their loans. The people with whom they exchanged the gold return the money to the banks in the form of new time deposits. There is now a total of $2000 in the banking system."
Yes, there is now $2,000 in the system, but still just $1,000 in cash. Here's the reason: The $1,000 loaned out on time is no longer money; it's an investment, that is, it becomes capital.
Remember: "1) Individuals make time deposits to the banks with the understanding that the funds will be loaned out. Total of these deposits is $1000 (i.e. the total currency in the economy)." At this point, there is no money in the economy. Money is cash or demand deposits, not time deposits. At least that's how Austrians define money. So when the $1,000 goes into time deposits, the money stock falls to zero. Then as people borrow the money to purchase capital goods, it becomes circulating cash again as they spend it. Thus, circulating capital rises again to $1,000. Those who receive the cash may choose to deposit it in demand deposits, where it will remain as cash, or they may choose to re-invest it in time deposits where it will disappear as money until it gets loaned out again.
Published: November 23, 2009 3:41 PM
Joe Stoutenburg
T. Ralph Kays:
How many other people feel like I lied to them?
How many people believe that my understanding is mistaken?
My expectation is that a good number of people will answer affirmatively to the second. That's okay. I enjoy the debate that follows from that disagreement.
Yes, they did. And in fact you're right that they did so politely. I believe that I do understand the Austrian arguments but that I just don't agree with them. Of course, it might be that I actually don't understand them. It's happened before that I have failed to understand argument posed at this forum. Through their patient explanation, I have materially changed my views.
I'm telling you that your level of discourse will always fail to be convincing. Many of your posts here have essentially quoted me and stated something like "That just proves you don't understand!" Can you see why that fails to convince?
Ignored them? You see my extensive responses here as ignoring them? Sigh! Anyway, I certainly admit that some of my posts have been very challenging. I have come here telling you that you're wrong. I'm telling you that you lose credibility for some of the things that you say. I admit that there is an arrogance to do that. While you might be more happy with people posting about how awesome Austrian economics is (and it is though I disagree on the points I have outlined here), I consider this a scholarly site where disagreement can be politely discussed.
Published: November 23, 2009 3:44 PM
fundamentalist
PS, Point #3 above would be correct if the original $1,000 in cash were deposited in demand accounts instead of time deposits. In that case, the banks starts with 100% reserves and then when it loans out the money the reserves drop to zero.
The distinction between demand and time deposits may seem subtle, but it's crucial in that funds tied up in a time deposit account don't have access to the money until the investment period is up, so it's not money. It's savings which become tied up in investments. Whereas money loaned from a demand deposit results in two people claiming ownership to the same money. The depositor has $1,000 at his command to spend immediately, as does the person who borrowed it. Therefore you have $2,000 in circulation.
Published: November 23, 2009 3:47 PM
Joe Stoutenburg
fundamentalist:
So if I call the time deposits "investments", then everything else works in my example? Does that mean that credit contraction is possible in a gold standard?
Published: November 23, 2009 3:52 PM
scott t
my understanding of augtrians information on gold standards was that governments and banks would issue paper claims for amounts of gold in excess of the amount of gold they had. sometimes paper claims to gold could not be redeemed in gold.
an austrian view that i read was that if paper claims to gold were used the gold represented by the paper was held (vaulted) and not circulated directly like the paper claims to the gold. if some of the paper claims to gold were 'retired' a corresponding amount of gold could then reenter circulation.
and there woulndt be paper claims for gold in excess of gold.
i dont know if that ever took place or not.
Published: November 23, 2009 4:16 PM
Lord Buzungulus, Bringer of the Purple Light
JP Koning,
I wouldn't grant that your Option 1 is any more legitimate than your Option 2. In fact, your Option 1 has little to
do with the example under consideration, where an *existing* market permits my shares to be used as something similar
to money substitutes; there is nothing "created out of thin air" (a term I never used, FYI), there is just an
exchange of one good against another. (This is exactly why you are
wrong to characterize world stock markets as falling under your Option 1 category.)
The point is, you can create as much paper as you want; what they will exchange for (if anything) on the market is a very
different question. Both of your Options beg the question of why the car owner would accept these pieces of paper in the
first place. It's pretty clear you have something in mind that's different from borrowing against future (prospective)
earnings; you wouldn't need any kind of controversial banking doctrine to justify that kind of market action.
Published: November 23, 2009 4:49 PM
Allen Weingarten
To Joe Stoutenburg: I wrote “If I place $20 in a savings bank, with 100% reserve, then at any time I could receive all of it, and put it to use.” You responded “I agree that credit expansion, as it has been implemented, would have destroyed the value of cash holders.”
Are you not agreeing that 100% reserve precludes destroying the value of cash holders?
Published: November 23, 2009 4:51 PM
Lord Buzungulus, Bringer of the Purple Light
Just to clarify, and IOU can certainly be an economic good; the question, however, is whether it can be considered a money substitute, to say nothing of money proper. A promise to pay 100$ next month might trade *now* at 95$, it might trade at 10$. The point being, IOUs are of limited fungibility. They therefore *cannot* be money substitutes, which by definition are substitutes for the most marketable of goods, namely money. The problem with RBD is the belief that such promises-to-pay can serve as money substitutes (and hence that monetary expansion based on such promises cannot be inflationary).
Published: November 23, 2009 5:26 PM
newson
to joe stoutenburg:
australian time-zone.
i'd recommend you read the hülsmann paper i cited on error cycles, which i speaks to your queries on the abct.
Published: November 23, 2009 5:45 PM
Bala
Joe,
Here's my (clearly limited) understanding on display...
You said
" The loanees spend the proceeds of their loans. The people with whom they exchanged the gold return the money to the banks in the form of new time deposits. There is now a total of $2000 in the banking system. This will be the critical point. More below. "
Actually, the issue is understanding the legitimate claims on the money at a particular point in time.
I presume that by time deposits, you mean that I cannot redeem my time deposit till the date on which it matures. In that case, till that date is reached, my time deposit cannot be a part of the money supply. The bank may ask me to take a walk rather than redeem it. So, as on any date prior to maturity, the bank is quite safe because the only claim to the $1000 is of the demand deposit holders who circulated the $1000 back into the system.
On the date of maturity of the time deposit, the bank should have already ensured that the loans it has made have been repaid with interest and that it is therefore ready to repay the $1000 (to the holders of time deposits), in gold if necessary, and still retain a surplus through interest income.
Please note that when the loans are repaid, there are 2 possibilities for repayment
1. Out of physical Gold held by the people who borrowed - In this case, the total Gold stock of the bank increases to the extent required to repay all $2000 of claims. However, if we start with the assumption that there are only $1000 in the system, this is clearly not possible.
2. Drawing down of demand deposits of borrowers - Someone somewhere is reducing his claims on the system in order to repay his loans. This reduction in demand offsets the increase in demand due to the claims of the new demand deposit holders.
The reasons a bank can fail to be ready to repay the time deposit holders are
1. Defaults - a normal risk in lending
2. Poor lending - Lending for a time-frame far in excess of the period of the time deposit
While the former is supposed to be priced in at a systemic level (through risk premium), the latter is clearly a failure of the bank, a failure for which it deserves to be driven out of business by the holders of the demand and time deposits.
By bringing itself to a position where it has $1000 of money to back $2000 of claims, the bank would have been very imprudent indeed and would deserve being taken to the cleaners.
I hope I have been correct and clear. Thanks (in advance) for taking me seriously.
Published: November 23, 2009 6:11 PM
Bala
Joe,
" So if I call the time deposits "investments", then everything else works in my example? Does that mean that credit contraction is possible in a gold standard? "
I think you are guilty of assuming that credit expansion is possible in the first place. That in itself would make it a false gold standard. If we remove that assumption and say that credit expansion beyond actual available physical savings were not possible, why would a credit contraction even be a possibility beyond what can be caused by widespread default?
Published: November 23, 2009 6:17 PM
T. Ralph Kays
Joe
You remind me of the guy who came to my farm the other day. As we were talking over the fence he pointed into my field and said "that is one sorry looking horse". I looked where he was pointing and replied quietly "that is a cow". Without missing a beat he said "look at those short legs and all that stuff between its hind legs, that horse could never win a race". I am sure you can figure out the rest of the story.
You keep doing the same, you point to a fractional reserve system or a partial gold standard in all of your examples and arguments, then conclude that these are failures in a 100% reserve or true gold standard system. Once again Joe, that is a cow, not a horse.
You have not engaged in a discussion just because you keep talking. In a discussion people listen to each other and actually consider the other persons meaning. They don't keep repeating "that is one sorry looking horse".
Published: November 23, 2009 6:45 PM
newson
one thing that the freebankers do have right, in my opinion, is the difficulty of financing banknotes under 100% reserving. that is, how are note issues and replacements to be financed? freebankers maintain the importance of frb in offsetting these costs.
in a 100% reserved system, people without deposit accounts who use bank notes, would be subsidized by bank account holders.
i think that banknotes are an optional, and in no way justification for frb.
it'd be nice to hear more thoughts on this matter.
Published: November 23, 2009 7:00 PM
Lord Buzungulus, Bringer of the Purple Light
newson,
Can you clarify a bit, please? I don't quite follow the issue you're describing here.
Published: November 23, 2009 7:22 PM
Lord Buzungulus, Bringer of the Purple Light
"Focused as ever on the shiny pieces of metal, I see. Yes, there is always only $1000 of it. The base money is a fixed amount.
At the end of step 3, there are two sets of claims:
* The initial depositors from #1 have claims to be repaid their money over time.
* The new depositors in #3 also have claims to their money.
Are you really going to argue that the total amount of deposits by #3 is not $2000?"
The focus is not on shiny metal, but rather on money proper. As I understand the meaning of "time deposit," the original depositers have no claim to that 1000$ until some *future* time. In other words, they cannot *now* use the 1000$ as *money*, although presumably they could try to sell their claims (bonds, essentially) on the market at some discount. Only the new recipients can use those funds as *money*, ie, *now*. Hence the total amount of money here remains 1000$. There may be any amount of financial assets spun off from this initial (time) deposit, but those aren't money.
Published: November 23, 2009 8:00 PM
Gerry Flaychy
«Out of thin air».
Joe Stoutenburg wrote:''This analysis ignores the security that Mr. Y places in exchange for his loan.''
Let say I have a bill of 100 $ in my pocket that I can spend in the market. At this stage the money supply is 100 $ (or 1 000 000 000 100 $ if you prefer).
I decide to deposit it in a demand deposit account (checking account), which operation doesn't change the level of the money supply. Now there is 100 $ (or … chose your number) in cash in the reserve of the bank and 100 $ in my account.
The bank then lend 90 $ of this 100 $ to somebody else. Usually the bank will open a checking account in the name of the borrower and write 90 $ in his account. At this stage, there is 100 $ in paper money (cash) in the reserve of the bank and 190 $ in the checking accounts.
While the borrower may spend his 90 $ checking account money in market transactions, I may also, in the same time, spend my 100 $ of checking account money in market transactions, for a total of 190 $ to spend.
At this stage, there is still 100 $ in cash in the reserve of the bank, but there is now 190 $ in money supply in the market while there was only 100 $ before the loan: an increase of 90 $ in the money supply, but no increase in the cash in the reserve of the bank. There is then a monetary inflation of 90 $.
Where this supplementary money comes from ?
It doesn't comes from the reserve of the bank, because there is not 190 $ in cash (or 190 $ more) but only 100 $ in cash (or 100 $ more).
It doesn't come either from the IOU of the borrower because it is not cash, and his IOU is not accepted in the market, thus it is not either money.
So, that's why austrians say that this supplementary money comes out of thin air (or we may also say 'created by magic').
Moreover, even if the loan is made without collateral, and even without an IOU, we will still have 100 $ in money supply before the loan, and 190 $ in money supply after the loan.
The collateral changes nothing in this processus.
The IOU and the guarantee are only there to permit the banker to sleep better at night !
Published: November 23, 2009 8:43 PM
newson
to buzungulus:
i'm probably talking out of my [unreamed] arse, but i'm imaging a world of true deposit banks. i deposit my 100oz silver and get a deposit receipt. this money substitute could conceivably circulate if the public accepts the warehouse as sound. but what happens if i don't pay the warehousing costs, and yet my money substitute is still out there? how does the warehouse call in this note, or what happens if i've got 100oz of value from someone trading my warehouse certificate, and yet haven't paid my holding costs for the bullion. does the new holder of my note bear my cost? how does this new holder get to know whether there are accumulated storage costs?
from hülsmann's "ethics of money production", p.41 i read:
In short, the potential abuse of substitutes is a very considerable disadvantage. One may therefore justly doubt that on a free market they could have gained any larger circulation. Even David Ricardo, the great champion of paper currency, admitted that it was unlikely that such substitutes could withstand the competition of coins. The only sure way to bring paper notes into circulation was to impose them on the citizenry: “If those who use one and two, and even five pound notes, should have the option of using guineas, there can be little doubt which they would prefer.”8
so i'm thinking money substitutes would be very problematic in note form.
Published: November 23, 2009 11:45 PM
T. Ralph Kays
newson
"how does the warehouse call in this note,"
What are you talking about? The warehouse doesn't have a note, the warehouse has the silver, you have a deposit reciept. If you don't pay your warehouse costs the warehouse will just deduct what you owe from the silver you stored with them.
Published: November 24, 2009 12:18 AM
T. Ralph Kays
newson
I understand the rest of your post, but I can't tell if you are agreeing with Lord Buzungulus or disagreeing with him.
Published: November 24, 2009 12:24 AM
T. Ralph Kays
This thread has gone really sour and for the most part I think it is because of the confusion over what a gold standard or 100% reserve system is as opposed to what the different varieties of fractional reserve banking are. Some people correctly describe scenarios that are completely correct in a fractional reserve system, others correctly describe how a gold standard or 100% reserve system works. The problem seems to me to lie in those cases where people describe one system but say or imply that it applies to the other system. There are also some people who refuse to see the difference in the two systems.
So long as the debate is dominated by people who can't differentiate between a 'cow' and a 'horse' this thread is a waste of time.
Published: November 24, 2009 12:41 AM
newson
to t. ralph kays:
the point i'm trying to make is that if i have sold my deposit receipt for goods, then the note holder may have my accumulated holding costs deducted from his silver when he collects. but how will he know the amount of unpaid storage costs? and won't that uncertainty make these money substitutes fairly unattractive?
Published: November 24, 2009 12:58 AM
scott t
"As explained, if checking deposits were $3 trillion, the Fed would give the banks new and additional reserves that when added to their existing reserves would bring them up to $3 trillion. If this had been done in September of 2008, bringing reserves up to $3 trillion would have required adding $2.955 trillion of new and additional reserves to the $45 billion or so of reserves the banks already had. This vast addition on the asset side of the banks' balance sheets would have implied an equivalent addition to the banks' capital on the liabilities side. No matter how bad the banks' assets were, I think it's virtually certain that an additional sum of this size would have been far more than sufficient to cover all the losses that the banks had incurred in their bad loans and investments. "
so "did" several banks go under and many nearly went under because the federal reserve required only a small fraction of banks total deposits to be kept at the federal reserve?
if 100 percent of the failing banks deposits (from federal reserve/treasury creation) were suddenly accounted for in 'dollars' would the bank still likely go under (due to their revenue source dying) but depositors deposits would be 'safe'?
Published: November 24, 2009 1:18 AM
scott t
"and won't that uncertainty make these money substitutes fairly unattractive?"
is a debit card currently a money substitute of sorts?
taking moneyor money claim and transferring to another place (account?)
could a technology exist that could create and extinguish various money claims and money substitutes?
Published: November 24, 2009 1:27 AM
scott t
"....and, equally important, all declines in the money supply."
should the author be referring to rapid declines in credit?
i
f i had 1000 dollars and just before i die i destroy my 1000 dollars...what would that matter? wouldnt the remaining money in the economy just have a small amount more of purchasing power?
Published: November 24, 2009 1:47 AM
Lord Buzungulus, Bringer of the Purple Light
newson,
I'll have to think about it. Presumably, the warehouse receipts would have some kind of time-stamp on them, indicating their inception, and hence indicating how much warehousing cost has accumulated over time. So these receipts would decay in (face) value and trade at a discount as time goes on (since the bank will have to charge for the warehousing cost upon redemption). Again, I'll have to think about it some more.
Published: November 24, 2009 7:01 AM
JP Koning
LBBOTPL
By rejecting options 1 and 2 not only do you reject fractional reserve banking, but you also reject the creation and transferral of shares to pay for goods and services between consenting adults. Well, at least you're consistent. Unlibertarian, but consistent.
Let me list the capitalist transactions you reject:
1. A private business (shares have no market price) which chooses to create and issue shares to buy another business, the target business accepting said shares as payment.
2. A silicon valley startup (shares have no market price) that chooses to create and issue shares to pay employees, these employees accepting said shares as payment.
I had a friend who ran his internet startup for the first 2 years paying employees with stock. I can give you a list of thousands of private companies that have bought other firms with stock. But you would reject all these transactions.
Published: November 24, 2009 8:29 AM
fundamentalist
Joe: “So if I call the time deposits "investments", then everything else works in my example? Does that mean that credit contraction is possible in a gold standard?”
Yes, I think it works. And yes, credit expansion and contraction have happened on pure gold standards for over a millenium, at least. The reserve requirements are the issue, not what you use as money. A 100% reserve requirement will keep banks from loaning more than what people save and deposit.
But keep in mind that all loans don’t come from banks. As de Soto demonstrated in his book, life insurance companies and mutual funds often engage in a type of fractional reserve banking that has similar effects. And individual companies can do the same thing. In Europe during the 18th century, individual businesses issued bills of exchange far in excess of their ability to pay on them, causing the value of the bills to reach about 20 times the stock of gold. Like every credit bubble before and after, it crashed and caused disaster. Like Hayek, I don’t believe it’s possible to eliminate all fraction reserve lending. It’s too easy for everyone to do, not just banks, and it’s too lucrative, like the drug trade.
Published: November 24, 2009 8:37 AM
Gerry Flaychy
newson, if you deposit 100oz of silver and you have a fee of 1oz of silver, you will not get a deposit receipt of 100oz but of 99oz: so your problem do not exist. Sleep in peace.
Published: November 24, 2009 8:43 AM
Lord Buzungulus, Bringer of the Purple Light
JP Koning,
That's right, I'm opposed to fractional reserve banking. I follow Rothbard (aka Mr Libertarian) on this point, BTW. Apart from that, you should know that there is a pretty spirited (often bitter) debate within libertarian circles over whether FRB is legitimate or not, so you should probably be a bit hesitant in identifying someone as unlibertarian for opposing FRB (not that I give two shits about who does or doesn't think I'm a libertarian).
Anyway, suffice to say that you don't really address my points about the distinction between money and money substitutes, or my point that financial securities as such cannot function as money substitutes, regardless of their ability to fetch income on the market. There is a HUGE difference between issuing stocks in a company, and FRB where a promise to pay is presented as a money substitute, rather than some kind of bond.
Published: November 24, 2009 8:59 AM
Lord Buzungulus, Bringer of the Purple Light
To clarify, JP, I don't have any problem with trying to raise cash through the issue of stock certificates, I just don't see what that has to do with the operation of FRB. I want to raise cash, so I issue shares; I'll collect some amount of money depending on what kind of market exists for my company. I'm basically just selling a piece of my company, or at least a future claim to my company. What does that have to do with the situation in FRB, where someone deposits money, receives certificates of claim to that (amount of) money, and then someone *else* is given certificates of claim to that *same* (amount of) money? There are clearly dual claims to the same amount of property, something that never happens when company stock is issued (where one and one person only has a particular claim).
Published: November 24, 2009 9:13 AM
newson
to buzungulus:
but the problem with the time-stamping idea is that it turn the notes into heterogeneous goods, each having a different discount. i can't see that facilitating calculation.
i think fully-reserved banking poses big practical problems for bearer instruments like deposit receipts acting as a money substitute.
cheques don't present a problem, nor would electronic gold transfers between depository institutions, which probably would be the dominant payment mode. coin would look after small transactions.
Published: November 24, 2009 9:43 AM
Lord Buzungulus, Bringer of the Purple Light
Those are very good points, newson; I don't have a good answer at this point.
Published: November 24, 2009 9:50 AM
T. Ralph Kays
fundamentalist
you said:
"And yes, credit expansion and contraction have happened on pure gold standards for over a millenium, at least. The reserve requirements are the issue, not what you use as money."
This perfectly illustrates my point about people not understanding the terms they use. A pure gold standard is defined as a 100% reserve system where gold is the money. None of the systems you describe in this quote were "pure" gold standards, they were partial or hybrid gold systems without exception. Don't refer to a cow as a horse.
Published: November 24, 2009 11:18 AM
T. Ralph Kays
newson
Your points about deposit reciepts are very valid, they are somewhat cumbersome which is why they mostly have importance only as a historical waypoint in the development of a true fully backed currency.
Published: November 24, 2009 11:24 AM
Joe Stoutenburg
Allen Weingarten:
I'll have to check with T. Ralph who is convinced that I don't know what is 100% reserves. Wherever that discussion goes (and I'm not sure how far I'll pursue it), the question really does center on what is actually meant by 100% reserves.
In any case, I will try to respond in a roundabout way to your question shortly. Just so that I have provided you a direct response here though, it is a logical fallacy to assume, because I have admitted the failings of one system that another would avoid those failings. In fact, I will argue that credit expansion will occur naturally unless some draconian measures are taken to forbid it. [More on that later]
Published: November 24, 2009 11:56 AM
Joe Stoutenburg
fundamentalist:
Really? If they were demand deposits, then by what right could the banks lend them out? No, I think that they have to be time deposits.
Anyway, you have previously stated that, though by step #3 there are a total of $2000 in deposits, there is only $1000 of money circulating. I agree with that as long as the time deposits remain on account with the bank.
A person with funds tied up in a time deposit can obtain access to money if he exchanges the right to the proceeds of the deposit with another person for money. Alternatively, he could even bypass obtaining hard money entirely if he can exchange the right to the time deposit directly for the goods he wishes to acquire. More on this later.
Published: November 24, 2009 1:03 PM
Joe Stoutenburg
T. Ralph:
You conveniently chop off the first part of fundamentalist's post in which he states assent that my example works. At the risk of placing words in the mouth of fundamentalist (and I trust he will correct me if I'm wrong), he believes that my example works up to that point, at least, as a pure 100% reserve gold standard. In what way do you disagree with him? How have my examples been "partial or hybrid gold systems"?
Published: November 24, 2009 1:25 PM
JP Koning
LBBOTPL
Great, you're not one of those folks who mindlessly repeats the "out of thin air" phrase.
So you have no problem with a firm issuing shares for the truck but would jail a firm issuing FR notes for said truck. Now imagine that the firm issues the truck seller puttable shares - these are shares convertible on demand into cash at the option of the shareholder. The company maintains a partial reserve of cash as a service to the shareholder. The truck seller likes these securities and accepts them.
The FR note and puttable share are similiar in all respects. If you are opposed to FR notes, then you must be opposed to puttable shares too, for they are "fractionally backed" by the money assets in which they are redeemable upon demand. At the same time, you'll also have to ban puttable bonds, retractable bonds, sight bills of exchange, and sight drafts, for they have all the same features.
My point: the inevitable logic of an anti-FRB stance is to simultaneously deny a whole range of legitimate transactions between consenting adults.
Published: November 24, 2009 1:45 PM
Lord Buzungulus, Bringer of the Purple Light
JP,
What exactly is the bank issuing in this case? They're issuing promises to maybe pay some amount of money proper upon demand. Maybe they'll pay, maybe they won't. Depends if they have the cash in their vaults. Isn't it obvious that this note WON'T trade at face value? It will have to trade at a discount to par because it isn't a money substitute, it's only convertible to money contingent on the bank making good (which by assumption they're not obligated to do). Could such a note trade on the market at some exchange rate and be used for purchases? Sure, just like any other security. But, again, it will trade at some discount to par and hence is NOT a money substitute, and at any rate this is not how FRB works in practice. In practice, this aspect of the note is suppressed, it is portrayed as having par value. This is the aspect that I object to. People like free bankers like to pretend that such notes are legitimate money substitutes, but there's no way that's the case. There is deception and fraud in practice, and in the theoretical defense of that practice.
This is the point I think you're missing. Financial securities and money substitutes are not the same thing. The fact that the former can be used to secure purchases does not make them equivalent to the latter.
Published: November 24, 2009 2:08 PM
scott t
"Your points about deposit reciepts are very valid, they are somewhat cumbersome which is why they mostly have importance only as a historical waypoint in the development of a true fully backed currency."
would it be all that much more cumbersome than the historical (and current to some extent) check writing witihin banks.
i used to work for a bank...the had an entire building devoted to processing little pieces of paper...huge machines with nasty ink printing on them .. in three shifts i believe.
i also used to pick up deposit slips from branches. dozens and dozens of little trucks going around to branches driving hundreds of miles per day to get big bags of deposit slips and checks to take back to various operations centers for processing late into the evening and early morning.
Published: November 24, 2009 2:49 PM
scott t
below are some excerpts from a pdf called 'myster of banking" where 100 percent reserves are spoken about..i think the information pages say it was written in the 1960's...i wasnt there.
"The bank was and still is pursuing a 100 percent reserve policy; all of its demand liabilities Deposit Banking are still covered or backed 100 percent by cash in its vaults. There is no fraud and no inflation."
"The amount of cash kept in the bank’s vaults ready for instant redemption is called its reserves. Hence, this form of honest, noninflationary deposit banking is called “100 percent reserve banking,” because the bank keeps all of its receipts backed fully by
gold or cash. The fraction to be considered is
Reserves/Warehouse Receipts."
"Note, too, that regardless of how much gold is
deposited in the banks, the total money supply remains precisely the same so long as each bank observes the 100 percent rule. Only the form of the money will change, not its total amount or its significance."
"Thus, suppose that the total money supply of a
country is $100,000,000 in gold coin and bullion, of which
$70,000,000 is deposited in banks, the warehouse receipts being
fully backed by gold and used as a substitute for gold in making
monetary exchanges. The total money supply of the country (that is, money actually used in making exchanges) would be: $30,000,000 (gold) + $70,000,000 (warehouse receipts for gold) The total amount of money would remain the same at $100,000,000; its form would be changed to mainly warehouse receipts for gold rather than gold itself."
"The bank was and still is pursuing a 100 percent reserve policy; all of its demand liabilities are still covered or backed 100 percent by cash in its vaults. There is no fraud and no inflation."
Published: November 24, 2009 3:17 PM
T. Ralph Kays
Joe
"A person with funds tied up in a time deposit can obtain access to money if he exchanges the right to the proceeds of the deposit with another person for money. Alternatively, he could even bypass obtaining hard money entirely if he can exchange the right to the time deposit directly for the goods he wishes to acquire. More on this later."
If this person does exchange the right to the proceeds of the time deposit then they do recieve cash, but doesn't the person who buys it from them give up the same amount of cash? Another meaningless point .
As has been pointed out many times, time deposits are not money, they are claims to money in the future. That people might see those claims as valuable and buy and sell them as investments does not make them money, any more than the fact that people buy and sell apples makes them money.
"The issue of money creation through credit is not, in my opinion, through the fraudulent double issuance of notes on the same money. I agree that a bank commits fraud if it holds demand deposits in storage and tells two parties that they each have a right to claim that money." But this is exactly how fractional reserve systems work, even when they use convoluted arguments to claim some form of backing.
"Do time deposit holders or do they not legitimately own the rights to their deposits? Do they or do they not have the right to exchange those deposits with willing sellers? If the answer to both of those questions is 'yes', then the money supply effectively expands upon the back of credit expansion even under a 100% reserve gold standard." The money supply would only expand if the person who purchased the time deposit could immediately spend it, but they can't, they only have a claim to future money the same as the original owner. Since the buyer gives up the same money that the seller receives where is the new money generated?
Published: November 24, 2009 3:21 PM
Joe Stoutenburg
newson:
I read through your first link:
This paper does not address the more fundamental issues that I take with Austrian views on banking. For people who may view my issues as a distraction (despite my best efforts), I think that Bagus does a great job dissembling the arguments, especially of Rothbard and Reisman, from a more Austrian perspective. That is one in which he treats all forms of "FRB" as fraud.
More generally, I'm puzzled why people feel a need to either demonize deflation as "evil" as did Reisman (not in the paper to which this thread is attached, but quoted in Bagus' paper) or to praise it as "a fast, smooth, direct, and ethical way to a sound financial system" as does Bagus himself.
I am more of the mind of Sennholz who wants to remove “government from all monetary affairs”. If allowed to occur without intervention, deflation via the write-off of bad debts is a natural way toward the "sound financial system" that Bagus envisions. It may not be "smooth" or "direct" though. When the bad debts are written off, the underlying collateral must be liquidated. That almost certainly means downward adjustments to the market prices of those collateral assets.
That downward adjustment to market prices may harm people not involved in the bad debts if they own the assets which lost value during the deflation. But then again, few economists (in general, let alone Austrian economists) will argue that people should be generally shielded from the risk of their possessions changing in value.
Deflation can also harm society generally if it is so disorderly as to hamper the normal exchange of goods. Many markets rely upon credit to facilitate exchange. If a deflationary collapse also brought down significant portions of credit systems, those markets would have to adapt to new ways of carrying out exchange or re-establish new credit systems. Some writers like to theorize that a free market could quickly overcome that problem. But as I have pointed out before, we hardly live in a free market. Much of society has become accustomed to the political management of credit, and I wonder how well we could adapt if (when?) it fails.
Lastly, deflation is almost certain to not be "ethical" if it is politically managed. Clearly, the previous inflation via the political regulation of credit was unethical. It's not difficult to see how it occurs. The people most harmed by deflation are those who own the most assets (which would be devalued in a deflationary collapse). These people, by the very definition of owning many assets, are wealthy and so able to buy undue influence over political outcomes.
Once deflation is allowed to occur (or can no longer be averted), if it is allowed to be managed politically, expect the blow to be softened by those who wield influence over politicians. Indeed, you might say that we have been going through such a politically orchestrated collapse. Check out Mish's flow of funds summary from June:
Credit has been evaporating in the broader economy while the government swoops in to bail out Wall Street. I know that this is hardly the kind of orchestrated deflation that some hope for and certainly not with the hoped for objective (100% reserves or a gold standard). But I hope that it serves as a warning for anyone looking for political monetary reform.
Published: November 24, 2009 3:32 PM
T. Ralph Kays
There has been lots of talk about time deposits, one point should be made clear, a time deposit is nothing more than a loan made to the bank. Under 100% reserves the only way loans can be made is when one person gives up money so someone else can receive money. That the note might be sold changes nothing, the seller of the note does receive money, but the buyer gives up the same money, there is no net change in money available. That is always the case under a 100% reserve system, no possible credit expansion. All credit must arise from someone giving up present money for a claim to future money. That those claims might be sold is irrelevant, those sales result only in one person giving up money so someone else can receive it, no net change.
Published: November 24, 2009 3:58 PM
Joe Stoutenburg
T. Ralph:
I appreciate the objective post.
You wrote:
You might exchange a time deposit for cash and then exchange the cash for the good that you want. Or you could just bypass exchanging it for cash if the seller agreed to accept your time deposit as payment. The later effectively introduces a money substitute into the economy and increases the supply of money.
This really serves as the lynchpin for my arguments and is the right place to focus our debate. If time deposits can be made fungible and easily transferable, what moral right is there to ban their exchange in lieu of gold coins or notes for the immediate redemption of gold coins?
Indeed, even if you try to ban such exchange, JP has been trying very hard to demonstrate that similar exchanges are widely had within society. Could you or should you outlaw those practices that are effectively the same thing. Some people here have insisted upon calling time deposits investments. Fine. If we ban their exchange for goods, should we also ban the exchange of stock for goods (which is extremely common in M&A)?
Even fundamentalist agrees that banning such transactions is not realistic. The difference between his view and mine is that he seems to consider all such transactions fraudulent. I am open to taking the opinion that, though often (but not always, especially consider when politically implemented) the legitimate employment of personal property, it may not be wise to encourage such widespread transactions.
It is quite one thing to ban fraudulent behavior but another thing to discourage unwise behavior. If we could get over the fraud canard (as I see it), we might be more inclined to be of similar minds over the wisdom of how far to rely upon credit to facilitate exchange. But as I have stated in the past, I believe that matter will be mostly resolved if we can remove credit from political manipulation.
Published: November 24, 2009 3:58 PM
T. Ralph Kays
So it comes down to your insistance that a claim to future money is actually present money. That you believe that future money can be spent in the present.
Published: November 24, 2009 4:02 PM
Joe Stoutenburg
To all:
I will be making preparations for Thanksgiving and so will not be in front of a computer much until the following week. I expect during that time that the thread may wind down. I appreciate those of you who have engaged me in this debate. Hopefully we can discover a common ground in the future. Regardless, no hard feelings will be had for as long as we disagree agreeably.
newson, I do intend to return to read your second paper though.
Published: November 24, 2009 4:02 PM
T. Ralph Kays
Joe
Really now, when a time deposit is made one person gives up money so that someone else can receive that same money, no change in the money supply. If the claim to the time deposit is sold once or a million times it always involves one person giving up the same money someone else receives, no net change. I guess that you are talking about someone exchanging the claim to future money directly for goods, that is simply barter, it doesn't make the claim money. I have heard of loan securities being exchanged as investments, but I have never heard of anyone using them to buy groceries.
Published: November 24, 2009 4:11 PM
T. Ralph Kays
This is such a funny claim, that IOUs can become money. Imagine that, going to the grocery store and buying food with an IOU from some third party. That would have to become routine for IOUs to qualify as money. I don't think I have ever seen that. Money is by definition something anyone will take, not because they necessarily want whatever the money is, but because they have confidence that they can exchange it again for what they really want. Just because you can occasionally trade something directly for the things you really want doesn't make it money. Money is the generally accepted medium of exchange, having value is essential to money, but lots of things have value, that is not enough to make them money.
Published: November 24, 2009 4:31 PM
Lord Buzungulus, Bringer of the Purple Light
"If time deposits can be made fungible and easily transferable, what moral right is there to ban their exchange in lieu of gold coins or notes for the immediate redemption of gold coins?"
Who here takes that position? What has been argued is that such instruments, however liquid, are NOT money, and that monetary theories that try to portray them as such are flawed. What should be banned is not trade in securities, but trade in securities portrayed as money (ie, fraud).
Seriously, it's not that hard a distinction. As T Ralph nicely noted, I can exchange apples for other goods, that doesn't make apples money. It is critically important in this debate to get the concepts and associated terminology straight, otherwise misleading analogies get employed (eg, I can trade an IOU, I can trade money, therefore IOUs are as good as money).
Published: November 24, 2009 4:37 PM
Gerry Flaychy
Time deposit
«When you put money into a bank or savings and loan account with a fixed term, such as a certificate of deposit (CD), you are making a time deposit. Time deposits may pay interest at a higher rate than demand deposit accounts, such as checking or money market accounts, from which you can withdraw at any time.
But if you withdraw from a time deposit account before the term ends, you may have to pay a penalty-sometimes as much as all the interest that has been credited to your account. Some other time deposits require you to give advance notice if you plan to withdraw money.»
http://www.morganstanleyindividual.com/customerservice/dictionary/Default.asp?letter=T
There are many kinds of time deposit. If we don't specify which one we are using, that leads to confusion.
Published: November 24, 2009 4:46 PM
T. Ralph Kays
Another quality of money is that it must necessarily be fungible, one unit of it must be valued the same as any other unit. Does anyone here really think my IOU for $100,000 is the same as Warren Buffetts IOU for $100,000? If you do I would like to set up a meeting to discuss terms.
Published: November 24, 2009 4:46 PM
newson
to joe stoutenburg:
i'd recommend hülsmann's book "the ethics of money production".
also, jesús huerta de soto's "money, bank credit and economic cycles", especially the first three chapters, which deal with the legal and historical aspects of frb.
Published: November 24, 2009 4:47 PM
T. Ralph Kays
Lord Buzungulus
Great post, thanks for the comments.
Published: November 24, 2009 4:52 PM
Gerry Flaychy
Term Deposit
«A deposit held at a financial institution that has a fixed term. These are generally short-term with maturities ranging anywhere from a month to a few years. When a term deposit is purchased, the lender (the customer) understands that the money can only be withdrawn after the term has ended or by giving a predetermined number of days notice.
Investopedia Says
Term deposits are an extremely safe investment and are therefore very appealing to conservative, low-risk investors. By having the money tied up you'll generally get a higher rate with a term deposit compared with a demand deposit.»
http://www.investopedia.com/terms/t/termdeposit.asp
Time deposit is also called term deposit in some countries.
Published: November 24, 2009 5:00 PM
fundamentalist
Joe, I wrote a long post, but it didn't seem to make it and I don't have time to rethink it. But to sum up, I think you're example violate the 100% reserve banking principle, but I don't have any opinion on whether it's fraudulent or not. I don't have a dog in that fight. Better minds than mine have worn themselves out over it and not reached an agreement.
Published: November 24, 2009 5:12 PM
newson
i raised the problems with money substitutes in bearer form, because that's often used by freebankers to hit anti-frb proponents (me) over the head.
their arguments tend to start with the presumption that banknotes are desirable, and then work back to how they can be financed in a practical fashion (frb). a case of question-begging.
Published: November 24, 2009 5:12 PM
T. Ralph Kays
All of these blogs and various threads have really confused me in regards to supporting Mises.org. I became a contributor because I thought they were advancing economic knowledge and pushing the understanding of genuine freedom. My experience on the blogs at this site makes me doubt that assumption. I have encountered a few people who value freedom enough to make themselves familiar with Austrian economics and libertarian philosophy and even when I disagree with them I find that the discussion enhances my own understanding of these subjects. The problem is that these blogs are overrun by horses asses who claim to know all about Austrian economics when in truth their understanding is limited to being able to spell "austrian". We are swamped by people who don't believe in the concept of property at all, or advocates of all sorts of discredited economic systems, others that refuse to define the terms that they use or accept the definitions of words as we use them. We don't come together as a community to support our fellows or to constrain the discussion to a reasonable thread. We spend the vast majority of our time fending off the same idiotic attacks and arguments over and over. The truth I fear is that we are simply encouraging the spreading of lies, half-truths and mistaken ideas on these blogs by not coming together as a community to demand at least a reasonable command of the basics of Austrian economics and libertarian philosophy before we will engage these people in discussion. I have no problem with people who disagree with me, I just think we are making a mistake conceding legitimacy to people who don't know or care about the scholarship behind this site.
Published: November 24, 2009 5:41 PM
Gerry Flaychy
For the bank standpoint, a withdraw from a time deposit account by a lender, is simply a replacement of a lender by another lender, a replacement of the money of a lender by the money of another lender, while the borrower stay the same.
Only the borrower can spend the money. The new lender ('depositor') cannot spend the same amount of money in the same time that it is spended by the borrower, no more than the first lender was able to do it, contrary to the case where the money is deposit in a checking account (demand deposit account).
So, in this special case of time deposit, or term deposit, there cannot be a 'credit expansion'.
Published: November 24, 2009 7:57 PM
T. Ralph Kays
Gerry
Good point, right on target.
Published: November 24, 2009 8:00 PM
JP Koning
"Isn't it obvious that this note WON'T trade at face value? It will have to trade at a discount to par because it isn't a money substitute, it's only convertible to money contingent on the bank making good (which by assumption they're not obligated to do). Could such a note trade on the market at some exchange rate and be used for purchases? Sure, just like any other security."
Maybe it would trade at a discount, maybe it wouldn't. Totally different issue. Besides, that's for the market to decide, not you.
But as you can see by now, if it's legal to issue "fractionally reserved" shares/bonds/debentures/etc that are redeemable upon demand and backed by a firm's assets, then its legal to issue "fractionally reserved" notes redeemable upon demand and backed by the firm's assets. No difference. Tough finger trap to get out of, that one.
Published: November 24, 2009 9:08 PM
T. Ralph Kays
JP
" if it's legal to issue "fractionally reserved" shares/bonds/debentures/etc that are redeemable upon demand and backed by a firm's assets,"
This is illegal you chump.
Published: November 24, 2009 9:13 PM
newson
to t. ralph kays:
perhaps a more practical approach is to ignore those whom don't merit a response.
Published: November 24, 2009 9:30 PM
T. Ralph Kays
newson
Good advice, if everyone did it, kind of like when you are at a party and someone says something inapropriate and everyone ignores it. Gives the person who says it a chance to back off without losing face and keeps the conversation going.
Published: November 24, 2009 9:36 PM
Lord Buzungulus, Bringer of the Purple Light
I'm sorry to say but I've lost patience with JP's "gotcha"-type method of discourse, and I won't be responding anymore, at least until after the holiday. Note the following (already anticipated by T Ralph):
""fractionally reserved" notes redeemable upon demand and backed by the firm's assets."
If they're redeemable *upon demand* then they can't be fractionally reserved, they have to be 100% reserved. To portray the notes otherwise is fraudulent and hence (as T Ralph notes) illegal. To make statements like this suggests that JP is unfamiliar with some basic writings here by Rothbard or Block, to mention just two. Hopefully the holiday will allow him the chance to acquaint himself with that work.
Published: November 24, 2009 9:38 PM
T. Ralph Kays
Right on Lord Buzungulus, enjoy the holidays!
Published: November 24, 2009 9:43 PM
Lord Buzungulus, Bringer of the Purple Light
Likewise, T Ralph.
Published: November 24, 2009 9:45 PM
T. Ralph Kays
JP
To expand on what Lord Buzungulus said about shares/bonds/ etc. That they be "redeemable upon demand and backed by a firm's assets" would violate the rights of other people who bought shares/bonds/ etc, because their claims are equal with yours, the company must be liquidated before you can make your claim, and the proceeds must be divided equally.
Under no circumstances is there an "on demand" claim.
Published: November 24, 2009 10:05 PM
T. Ralph Kays
About Joe Stoutenburg
by T. Ralph Kays
His very first post, and the very first post on this thread is this:
" I do intend to read and digest the entire article, but I get here and have to object:"
That sounds like a reasonable person, right? He hasn't even read the whole article, but he knows the author is wrong.
Shortly after in this same post he says:"I think that you are too intelligent to not understand the mechanisms of lending, so I have to assume that you intentionally neglect to discuss the collateral behind most loans. Perhaps you are uncomfortable that a discussion of collateral would cast doubt about your theories."
He is here saying that Austrians have knowingly and deliberately mis-represented our position on these issues. Isn't he calling us liars right here?
He then proceeds to claim that the collateral or security behind loans is the same as backing or banking reserves.
In his next post he claims that because collateral for loans requires productive work to produce it that placing these resources in a reserve position does not cause credit expansion, or in other words "create it out of thin air". Of course he is assuming that collateral is the same as bank reserves, a totally unsupported claim at this point.
In his next post he says:"But the bank also holds additional reserves in the form of other assets that can be exchanged for cash. [Remember exchange? I think that Austrians have a lot of good things to say about it.]". What he is getting at here is that any credit system can cause credit expansion or in other words increase the money supply. But if the bank sells these assets, then the bank receives money, but whoever buys the assets gives up money, no net change there.
Then he says:" I agree with the article that further monetary inflation would not be possible as long as 100% reserves were enforced."
But then he says later:'If the answer to both of those questions is 'yes', then the money supply effectively expands upon the back of credit expansion even under a 100% reserve gold standard."
So which is it Joe?
A number of people then answer Joe, pointing out the fallacies in his argument. I draw particular attention to 'redshirt' a particularly clear and concise criticism of Joes posts thus far.
In Joes next post he says: "On the whole, I consider myself a devotee to the Austrian school. I have spent a number of years studying its theories, and yes Zach Bush, I have read some of the books. I hardly consider myself a mere visitor."
Then, amazingly he says:"However, if I were, your implicit exertion that I need to read some lengthy book to make the apparent holes go away would be very much of a put off. If a person has incorrectly perceived a flaw, it is better to carefully help him to see his error (which we're going to do from opposite perspectives). Don't tell him that he just hasn't read enough of the dogma."
First observation is that Austrian economics is in his view only "dogma", that certainly isn't INSULTING. But I am astounded at his assertion that he has no obligation to educate himself, that no matter what crazy theory he comes up with it is OUR obligation to carefully educate him. What an EGO!
He then says:"They have ample experience that, when a bank is unwound, the underlying properties can be sold and and the proceeds distributed to depositors without conflicting property claims." To give context, he is here talking about collateral to loans the bank holds. I have a mortgage, if my bank was under stress or even failing, they have no right to claim my home and sell it to save themselves. At best they could try to sell the note, which simply replaces one owner of my note with another, no credit expansion there.
Then he says:"Given a system of credit that is well-secured, it is reasonable to expect that prices would be relatively stable, neither dropping nor rising."
But later he says:" As long as any credit is allowed (and how would you outlaw it?), there is the potential for bubbles to form."
So, which is it Joe?
Then joe says:" The point that is frequently missed here, though, is that as long as lending is well secured, the extent of money growth is checked by the production of assets to be placed as collateral."
I replied thusly and he never responded to my points:"He consistently confuses the effect of collateral requirements with reserve requirements. High reserve requirements limit the creation of new money through credit expansion, but do strict collateral requirements do the same? He is claiming that money growth will be limited if there are strict collateral requirements for creating loans, ie they are well secured. He says this will happen because people will run short of collateral to secure new loans thus preventing further money creation. There are two very obvious problems with this theory.
The first problem is that approaching this limit would mean that people had no more equity in the things they owned, that they had borrowed close to 100% of their net worth. My questions are: what did they do with the money they borrowed? Wouldn't the things they bought with the borrowed money have value? Couldn't they then be used as further collateral? What about the people who borrowed money to invest in productive activities? Wouldn't the things they produced have value and be suitable as collateral for further loans?
The second problem is that Joe says "I agree that a bank creates money when it issues credit." We all know that if the money supply increases, all other things being equal, that prices must rise. So as we approach this imagined limit of Joes where people are running out of equity in their possessions, they will have gotten there by taking out loans, which he admits increases the money supply. So that means that, all other things being equal, prices will rise. But if prices rise then people will have more equity in the things they own, which means they will be able to borrow more, which will create more money, which will cause prices to rise further. Doesn't that sound familiar? Can you say "housing bubble" Joe?
In conclusion, it is clear that strict collateral requirements do absolutely nothing to stem the creation of new money by way of credit expansion in a fractional reserve system, and that they have no power to prevent or limit inflation in such a system."
Then Joe says: "It's because the assets backing the bank's deposits can be sold at the click of a button, allowing the bank to process large amounts of outflows even if they exceed the physical cash on hand. " What an outrageous statement, I honestly don't know what else to say, it is obviously false. So far he has consistently described these assets as 'collateral', certainly not available "at the click of a button".
Now what is probably the most incredible statement of all:"Again, none of the disasters stemming from the political management of banking are tied to the practices of credit issuance generally." How big an idiot is this guy?
Then he says:"I agree that a bank creates money when it issues credit."
How does that jive with:"Given a system of credit that is well-secured, it is reasonable to expect that prices would be relatively stable, neither dropping nor rising."
If creating money doesn't cause inflation and make prices rise what does?
Then this gem:"I am quite familiar with the Austrian dogmas and even accept most of them as truth. I reject the one that proposes that any system of credit is inevitably instable."
Here is my unanswered response from Joe Stoutenburg:
"I reject the one that proposes that any system of credit is inevitably instable."
Where in the world did you ever get the idea that Austrians have ever said this? That statement alone makes the sentence before it a complete lie.
I can't think of a better response. (By the way, the sentence before was:"I am quite familiar with the Austrian dogmas and even accept most of them as truth.")
Then he proposes a banking scenario and says:"Notice that this is a gold standard with an allowance for credit expansion." By definition that is a fractional reserve system partially backed by gold, which has been the point of many peoples responses to Joe. This is not a 100% reserve system or a true gold standard, he just admitted that.
At this point I would like to repeat one of my posts (by the way the points I raise were never answered):"From here, I hope that a simplified illustration will help. Let's consider an economy with a pristine 100% reserve gold standard. Assume further that there is $1000 worth of gold in circulation. I hope that you'll agree that the units don't really matter. We could have just as easily assumed 1000 oz or, equivalently stated the amount of gold per dollar and stated the number of dollars."
"Let's further assume that there are three assets in this economy. Presently, each asset has a market value of $500. You should hopefully note immediately that, were transactions to simultaneously be attempted, there is not enough hard money to cover all three assets."
No wonder you sound so stupid, this situation cannot exist in a free market. The free market always adjusts to clear the market. If all three transactions were desired at the same time the market would adjust prices and the value of the money such that the market cleared. Any amount of money is always adequate to clear the market in a free market setting. As I said before, try studying Austrian economics before claiming to understand it.
Now Joe presents a scenario involving 5 steps in which his addition is faulty which I point out in this post: "Joe
Wow
"1) Individuals make time deposits to the banks with the understanding that the funds will be loaned out. Total of these deposits is $1000 (i.e. the total currency in the economy).
2) The banks loan out all $1000. They secure the loans by claims to the first two assets worth a total of $1000. At this instant, the bank vaults are empty.
3) The loanees spend the proceeds of their loans. The people with whom they exchanged the gold return the money to the banks in the form of new time deposits. There is now a total of $2000 in the banking system. This will be the critical point. More below."
Your math is faulty, at the end of step 2 the bank vaults are empty, in step 3 $1000 goes back into the bank, $0+$1,000 is not $2,000"
Next he avoids my previous point where I said:"No wonder you sound so stupid, this situation cannot exist in a free market. The free market always adjusts to clear the market. If all three transactions were desired at the same time the market would adjust prices and the value of the money such that the market cleared. Any amount of money is always adequate to clear the market in a free market setting." by saying:" I agree. A free market would quickly adjust prices to clear. When you find a place where you think there is a free market, let me know. If I'm convinced it's actually free, I might move there." Doesn't really address the issue does it?
Finally in a post directed at 'fundamentalist' Joe suddenly switches his position from talking about 'well secured loans' to 'time deposits'.
This part of the thread is summed up well here: me :"If this person does exchange the right to the proceeds of the time deposit then they do recieve cash, but doesn't the person who buys it from them give up the same amount of cash?"
Joe:"You might exchange a time deposit for cash and then exchange the cash for the good that you want. Or you could just bypass exchanging it for cash if the seller agreed to accept your time deposit as payment. The later effectively introduces a money substitute into the economy and increases the supply of money."
At this point Joe is claiming that a claim to future money is in fact present money. Several of us destroy this claim in short order.
More details can be found on the blog.
Published: November 25, 2009 2:42 AM
Lord Buzungulus, Bringer of the Purple Light
Actually JP's getting off too easy here. A stock is not "backed" in any sense, either fully or fractionally. Stock shares are claims to participate in future earnings, nothing more, nothing less. (That's why when a company goes bankrupt equity holders typically get little or nothing.)
JP's analogy fails.
Last post for now; happy holidays everyone.
Published: November 25, 2009 7:49 AM
Gerry Flaychy
There is were your BIGGEST problem reside: you are asking this same government to do what it is not interested at all to do !How will you overcome this problem ?
Published: November 25, 2009 1:56 PM
Joe Stoutenburg
Back after break, I see that T. Ralph has been doing homework in his best effort to discredit my arguments. To the say the least, I have not been impressed with Mr. Kay while obviously he has had the same opinion of me. I have a great deal of respect for some of the thoughtful contributors here such as fundamentalist and newson. Mr. Kay is a discredit to the school he fashions himself supporting.
Obviously, T. Ralph issued his last post with the intention that there be no reasonable answer. To people inclined to that conclusion, I'm sure that it will serve as intended. Truly, he charges me with contradictions repeatedly. I would be glad to discover them though his loose and cherry-picked quotation easily invites the counter-argument that he has failed to understand my arguments. A reader must wade through this thread himself if he is interested enough to suffer through our debate. I will not attempt to rehash it in its entirety here.
Though I could be accused of cherry picking myself, here is an example that demonstrates the shallowness of his argumentation:
The reconciliation of those statements is that my first statement is on the basis of credit being well-secured while the second is not. Credit arises spontaneously from market exchange. I agree with the Austrian argument that bubbles form on the back of credit expansion. When poorly secured credit is widely allowed (as is the case in our politically managed systems), the boom-bust cycle can be especially pronounced. If credit is maintained soundly, as I argue would be more frequently the case if regulated by economic means rather than politically, then prices would be more stable.
To be sure, not all of T. Ralph's arguments are so easily refuted. I would even be eager to discover the need to change my stance. I admit that my EGO is an impediment to such a recognition as is true of all of us, very notably including T. Ralph himself. In any case, I would not like his refutations (some of which, pardon my ego, are rediculous) to stand entirely without answer.
There were a few points that T. Ralph claimed that I had not answered. Though in some points, I think that they have been, I will respond to a few here:
Regarding the difference between collateral and reserves: Collateral is the property pledged as security in the event that the borrower fails to service the loan. As JP pointed out, collateral may be the general assets of the borrower in the case of an unsecured loan. On the other hand, reserves are the extra money set aside in the event that the collateral loses value. They protect the lending institution from the threat of insolvency.
T. Ralph has obviously not sat in front of a Bloomberg terminal. I have. Yes, financial assets can be transferred at a click of a button. It may appear to be "obviously false" to T. Ralph. But it simply isn't, as anyone who has worked in finance could attest. In the context of the post from which he drew my quote, physical settlement requires a few days.
Austrian proposals suggest that prices should drop over time if the money supply is constant while production increases. Obviously true. Now, if the money supply grows at about the same rate as production through the responsible management of credit, prices may generally remain stable. Furthermore, if credit expansion is unstable, allowing money growth to exceed production increases, inflationary/deflation cycles are likely.
Is that really so hard to understand?
At one point, fundamentalist seemed to disagree with him though his subsequently lost post may have altered his position. In any case, I won't burden fundamentalist with being an authority on this. I should not have used the word "expansion" at that point in my thought experiment. To that point, credit could be extended. It had not yet entered the money supply.
As long as only one of the assets is for sale, $500 is an attainable price within an economy with a total money supply of $1000. Obviously, if all three assets go on sale at once, the market price must drop. Try comprehending my argument, T. Ralph, before telling me to go study.
A key point in my thought experiment to that point was to note that nothing within the gold standard (as long as credit could be extended via time deposits) precludes the total of time deposits from exceeding the money supply. At this point, do not consider time deposits to be exchangable. I extended the analysis by being caught in my own thoughts but did not take the care to bring your comprehension along. At what point is overall debt unservicable? What will happen to the value of collateral when it is all forced onto the market to liquidate bad debts? And most importantly, to that point, had there been any violation of a 100% reserve gold standard?
I have tried to explain how, even in a free market, prices can exceed the total money supply since not all assets are for sale. If enough of the assets enter the market, the price will necessarily drop, especially if the total money supply is insufficient to transact. Simple supply and demand there. Here, I argued that our markets are far from free and so allow for such imbalances to be greater and to persist.
By the way, I wonder why I am seriously responding to posts that begin with "No wonder you sound so stupid..." The advice from newson is probably good for me too. Yet I admit that your charge of my ego is true even though it is ridiculous that you ignore your own obvious ego. Quite simply, I have a hard time allowing such arguments as yours' to stand unanswered.
Published: November 30, 2009 8:58 AM
Joe Stoutenburg
There comes a point at which few others, if anyone, is paying attention. I will not forever debate with T. Ralph. So I want to summarize my objections in case anyone ever skims to the bottom of this thread.
1) fundamentalist, at one point, punted on the question of the moral legitimacy of credit based money. I don't think that we can do that if we ever seriously consider proposals such as what George Reisman offers in the referenced article. It can not be denied that the actions of some individuals have negative consequences on others. We have been busy debating the mechanisms of those consequences with regard to money based upon credit. But at some point, the moral question must come to the forefront. Do people have the right to employ their property in such a way that results in credit based money?
2) I am completely in opposition to allowing the federal government to declare that it is issuing bonds and to service the debt on those bonds with confiscatory taxes. I am supportive of the right of individuals to employ their justly acquired property in ways that results in credit circulating as money. Were government officials to service their bonds through wealth acquired through legitimate market activity, I would not oppose the issuance of such bonds.
3) If we are convinced that a different monetary arrangement would function better, we must offer it as a market choice. We should note that legal tender laws prohibit our ability to do this. I contend that this, along with the federal government's ability to monetize its debt and service it from taxation, is at the base of our monetary problems. I further argue that loose credit policies would plague us even if we switched to a gold standard.
4) I contend that many Austrian authors and commentators give insufficient attention to collateral. Ignoring collateral, they view reserves as fraudulently offering a "fractional reserve" against demand deposits. In fact, though monetary authorities classify many deposits as "demand", I contend that there are few true demand deposits besides safe deposit boxes. Most deposits today function as time deposits, though I admit that they are far from what Austrian authors (de Soto, for instance) argue what time deposits should be. To whit, they have perpetual maturity and allow for early redemption without penalty (only requiring a few days notice if redeeming in base money - which today is an FRN note). Such features have rendered these time deposits fungible. Hence, they trade as money.
There can be no argument that this can have potentially bad consequences, but again, the question is one of rights. Do people have a right to enter into agreements on such deposits? If we dispense with the fractional reserves on demand deposits by considering checking deposits as perpetual, fungible time deposits, in my opinion we do away with the fraud question. Reserves, rather than fractionally backing demand deposits, serve to cushion the threat that the collateral assets behind the time deposits lose value.
I realize that this specification of bank deposits as time deposits is unconventional and debatable. In light of the other arguments that I wanted to make, it may have been unwise to introduce. But it plays a vital role to resolve the fraud question in my mind. If banks are holding fractional reserves on demand deposits, they are guilty of fraud. If they are reserves against the possibility of the loss of value of collateral backing time deposits, then they are not.
5) I also argued for how the extension of credit, even in a fully backed 100% reserve gold standard, could lead to asset price bubbles and credit contraction. I got one civil, intelligent commentator to admit that I have not violated the rules of 100% reserves in my thought example to that point. However, he left open later the possibility that he had either changed his mind or that I had subsequently introduced transactions that violated those rules. This would be a place for continued debate.
I then argued for how those time deposits could be made fungible and then trade as money themselves. At that point, even though we began with a legitimate 100% reserve gold standard, we come to the place where we stand today. A critical point that has not been answered is whether that evolution is the result of banking reserve policies or whether it is the result of the voluntary exchanges of individuals. It is one thing to mandate certain reserve requirements though I prefer to open up market competition. It is entirely another thing to mandate the behavior of individuals.
I admit that the thought experiment was probably a bit much to engage given the on-going debates that I was also entertaining. I thank those of you who engaged me civilly on those points. I should also apologize for engaging a person who took offense to my arguments and chose to launch personal attacks. I admit that some of my response were thinly veiled counter attacks (and you never saw the responses that I began to type but thought better). As that person correctly charged, I do have an ego. Those of us inclined to think deeply about such matters of this also tend to vigorously defend our ideas.
Published: November 30, 2009 9:45 AM
fundamentalist
Joe: "I don't think that we can do that if we ever seriously consider proposals such as what George Reisman offers in the referenced article."
I don't think Dr. Reisman was making a moral argument. He was simply stating a fact that 100% reserve banking would reduce business cycles. That's probably true theoretically, but as I wrote before, it'll never happen in a million years. As Hayek wrote, fractional banking has been going on for at least a millenium. It's too ingrained in society to change. And even if you stopped banks from doing it, everyone else on the planet would do it because it's very lucrative.
The moral arguments for and against fractional banking depend on specific assumptions about property and contract. The two sides will never agree because they start from different assumptions. They even have different definitions of some terms. The whole moral debate over banking is very boring.
The best solution to the problem of fractional banking is to educate the public. Once enough people are aware of the consequences, they will not be so easily fooled and they will automatically dampen the business cycle. Mises thought that was happening before the Keynesian devolution. The best way to educate the masses is to make a lot of money off of the Fed's manipulation of the money supply. People respect wealth and will listen to how you earned it. If you tell them you took advantage of the Feds' ignorance about banking and money, they'll get the message.
Published: November 30, 2009 11:45 AM
T. Ralph Kays
Joe
You have demonstrated a total lack of even the basics of Austrian economics, you demonstrated ably that you didn't understand what a 100% reserve monetary system was, or in fact what money is and is not. Your argument is just another form of the 'Real Bills Doctrine' which has been destroyed here and by Austrians in general. Your misconceptions have consistently been dealt with by a number of people here, and it has been suggested by others as well as me that you learn at least the basics before you claim to be familiar with Austrian economics. We frequently deal with people who raise the same points you brought up, and have no problem with doing so, but you are the first who began by claiming to be well versed in Austrian economics, even to considering himself an Austrian. You have consistently talked down to people who have demonstrated real knowledge of Austrian economics and been dismissive of the knowledge that they have worked so hard for. In short you lied to us, arrogantly lectured us on issues you know precious little about and got offended when people suggested that you had some obligation to educate yourself. Apparantly among the things you don't understand is the definition of the word rude.
Published: November 30, 2009 12:03 PM
Gerry Flaychy
Joe Stoutenburg, the banks do not ask collateral from their depositors but from their borrowers. So what do you mean by "the collateral assets behind the time deposits " ?
Your post of November 30, 2009 9:45 AM at the end of 4).
Published: November 30, 2009 2:33 PM
Gerry Flaychy
Your post of November 30, 2009 9:45 AM at the end of 4).
Published: November 30, 2009 2:39 PM
Joe Stoutenburg
fundamentalist:
I don't know. It seemed like Dr. Reisman made a very specific policy recommendation to achieve his vision of a 100% reserve. Of course, he must have been well aware that it is entirely hypothetical right now. So he could be granted to just musing if he wanted to make that claim. In any case, he can clarify for himself what he meant if he ever wants to. It's plain to me though, that while you seem to have not commited yourself one way or another, many Austrians do unequivocably consider credit based banking (what they call fractional reserves) to be fraud.
I respect that position. We both know that one way or another, the primary task is to convince the public to do away with the Federal Reserve. The question, once having abolished the centralized control of money, would be to determine what forms of banking are permissible.
As you say, education is key. While I frequently argue for credit based money on the basis of the right to enter contracts (my opinion being that such a contract is typically a valid use of property). The right to contract does not include guarantees against loss arising from that contract. A better system would distribute losses more equitably, with both lender and debtor suffering from write downs. Unfortunately, the public is not well-educated enough to perceive that some of the institutions, though stated with the intention of protecting them, actually shield the lenders from the consequences of bad credit policies and socialize those losses. Until they become informed, they typically take the results to be some kind of intrinsic default in free markets.
I hope that these are primarily statements with which you can agree. As our dialog has been respectful and informative, I want to wrap up with emphasis on our shared values.
The only request I have (that might prolong our discussion) is in what part of my thought experiment you believe that the rules of 100% reserving were violated. I realize that opinion was lost in a lengthy message that you don't care to recreate. If you'd prefer to wrap up this thread, I won't complain.
If I may speculate on where disagreement could lie, is it in my jump to render time deposits fungible? I realize that you are accustomed to a time deposit being of a definite period with sharp restrictions on redemption - something like a CD. Even if we back up to that point (and we might still debate whether banks and their customers have the right to specify a contract that would become fungible), I still argue that a 100% reserve does not preclude excessive leverage and the potential for market disruption when that leverage unwinds.
If your exception was earlier, well... I guess we'd have to back up.
Published: November 30, 2009 3:09 PM
Joe Stoutenburg
Gerry Flaychy:
Thanks for the question. In order to credit interest on a time deposit, the bank must first turn around and lend the money to a borrower. In exchange for providing the service of matching up borrowers and lenders (or more precisely, arranging a pool from which people can borrow), the bank typically takes a spread by crediting less interest than the borrowers pay. Ideally, all parties would be well-informed of the credit risks and how collateral would be disposed in the event of default.
You may recall my initial criticism from Dr. Reisman's speech:
You'll note that there is no discussion within this section or subsequently of the collateral involved when $900 of the original deposit is lent. I am open to debate on this, but I have a hard time proceeding if we can not differentiate between the two situations:
1) The lender accepts collateral deemed worth, say, $5000. In the event of default, the lender could seize the collateral. Even if it proves to be worth only 20% of what it was originally thought to be worth, it can make good on the deposit.
2) The lender accepts collateral currently worth only $800 on the assumption that the value of this particular asset always goes up.
In this example, the lender is holding $100 of reserves? Is that adequate? By some arguments, it is totally inadequate. In fact, the lender should not have lent out any of the deposit in the first case and held all $1000 on reserve. I argue that as long as both the lender and the depositor agree to the transaction and the terms for redemption, it is a valid transaction. In fact, if the lender is following the first case above, $100 may actually be excessive. On the other hand, if the collateral was currently valued at exactly $900, $100 may be about right or maybe even too little. But that should be a matter of contract betweeen the bank and its depositors.
To adopt fundamentalists point about educating the public, if society were not shielded (for a time at least) from the consequences of loose credit, we would soon learn to demand responsible credit issuance.
Published: November 30, 2009 3:57 PM
fundamentalist
Joe: "is it in my jump to render time deposits fungible?"
I think that was it. But keep in mind that a single bank may not be guilty of fractional banking while the system as a whole might. Hayek covers that scenario in "Monetary Theory and the Trade Cycle."
I realize that a lot of Austrians take the morality of fractional banking very seriously and will dwell on it for ever. But I think a lot of their hang-ups could be solved by simply informing customers of the dangers of depositing their money in a bank that practices fractional reserves.
And I don't think that we have to abolish the Fed to get results very similar to those of free banking. The great investor Benjamin Graham invented a scheme based on commodity prices that Hayek like so much he wrote an essay on it. I think the Fed could so something similar by targeting the prices of a basket of commodities, or even gold.
I'm not a big fan of free banking because the experience with it the US had in the 19th century wasn't all that great. As you can tell, I don't think there is a perfect system that has a reasonable chance of being implemented. That's why I favor educating people over trying to reach a consensus on changing the system.
Published: November 30, 2009 4:13 PM
T. Ralph Kays
Gerry
Joe is in full 'Real Bills Doctrine' mode now, you might as well be dealing with Mike Sproul. He has completely ignored your very valid point in your last post. Collateral is 'magical' in RBD, it is everywhere and nowhere at the same time.
For example, instead of dealing with my criticism here: [Then Joe says: "It's because the assets backing the bank's deposits can be sold at the click of a button, allowing the bank to process large amounts of outflows even if they exceed the physical cash on hand. " What an outrageous statement, I honestly don't know what else to say, it is obviously false. So far he has consistently described these assets as 'collateral', certainly not available "at the click of a button".
T. Ralph has obviously not sat in front of a Bloomberg terminal. I have. Yes, financial assets can be transferred at a click of a button. It may appear to be "obviously false" to T. Ralph. But it simply isn't, as anyone who has worked in finance could attest. In the context of the post from which he drew my quote, physical settlement requires a few days.] Notice how he changed what he was talking about here, from collateral to assets to financial assets. The entire question under discussion was that of collateral and how it 'backs' the 'assets' or 'financial assets' of a bank. Nobody ever said that 'assets' or 'financial assets' couldn't be sold at the click of a button, the discussion was of collateral. Collateral can never be sold at the click of a button, it has to be foreclosed on first, and then only if the person posting the collateral defaults, not at the whim of the bank. Joe is just like all of the RBD nuts, they meld collateral into the loans it protects, and meld those loans into all financial assets. Until they learn to see the divisions among these very different things it is impossible to deal with them. When you make any point they just slip sideways into a different definition.
Maybe Joe is so adamant about his circular logic because he does use a Bloomberg terminal, and he is part of an industry that routinely robs widows and orphans. He is just trying to whitewash his black soul.
Published: November 30, 2009 6:24 PM
Gerry Flaychy
Joe Stoutenburg, I think that what you wanted to say, is that the collateral assets are behind the loan made with the money coming from a time deposit, not behind the deposit itself. There is no need of a collateral when we make a deposit, be it a demand deposit, a term deposit, or a time deposit whatever which kind.
Is it that or else ?
Published: November 30, 2009 6:59 PM
Gerry Flaychy
T. Ralph Kays, thank you for your amical support, but I want to say this:
Firstly, I am perfectly aware that there is a problem, but for me it is a problem of communication and also a problem of conceptions: everybody do not have necessarily and automatically the same ideas or views in regard to a situation X. That's why discussion exist !
Secondly, I think that Joe Stoutenburg, and many others here, until proof to the contrary, are seriously trying to understand how economy, monetary and banking system are working.
So let's be patient !
Published: November 30, 2009 7:29 PM
T. Ralph Kays
Gerry
Good luck!
Published: November 30, 2009 7:50 PM
Joe Stoutenburg
T. Ralph:
Collateral provides security for the loan, allowing the lender to sell it when needed. I don't know why you insisting that the underlying property need to be sold. The financial asset representing a lien on the property can be sold. For instance, if a bank has a mortgage on its books with a balance of $50K that creates a lien on a property worth $200K, it can easily sell the paper at the click of a button. As long as the mortgagee makes payments, those payments will now go to the entity that purchased the paper. If, for some odd reason, the home owner defaults on the loan despite the excess equity, the owner of the financial asset can foreclose on the property and sell it to recoup the remaining balance on the loan. Really, are you going to continue to press this issue?
Published: November 30, 2009 9:13 PM
Joe Stoutenburg
Gerry:
First, thanks for your classy response to T. Ralph. To the credit of his criticism of me, I admit that to come here with the arguments that I bring can come off as arrogant. And to be sure, I readily admit to having an ego. I do think I'm right and and am willing to press the issue. However, I am interested in getting a deeper perspective on the subject and will try to remain open to correction if warranted. Of course, it's tough to admit that you're wrong, especially when you spend as much time reflecting on your opinion as I think we all do.
Going on to your statements relevant to the debate:
You're right. Collateral is required of the borrower. My assumption, though, is that time deposits will always entail the matching of deposited funds with loans. Otherwise, the bank can not credit interest to the depositors; they would be better off placing the funds in some kind of demand deposit with the money available on request.
I think that it is reasonable though to speak of collateral with regard to time deposits. Time depositors, in essence, are the lenders while the banks serve as intermediaries. In the event of default by the borrowing counterparties, they would be made whole out of the sale of the collateral. The bank would typically just suffer the loss of future spread revenue and, possibly, some of its reserves if the value of the collateral drops below the value of the loan.
So far, this description of collateral is, I believe, applicable to a 100% gold standard which allows for the extension of credit in time deposits.
Published: November 30, 2009 9:49 PM
Joe Stoutenburg
fundamentalist:
When I have time, I'll try to look up that reference. Thanks.
A central contention of mine is that this situation could arise from a 100% reserve gold standard. The departure from the standard would not arise from a failure to hold 100% reserves on demand deposits. Rather, it would consist in the change to common time deposit contract standards. If I am right that these practices arise from spontaneous market transactions without the intention to defraud, my first reaction is how you could possibly enforce its abolition even if you wanted to (i.e. if you deemed in immoral). You respond immediately though:
As stated previously, I respect that approach. Still, I insist that there is a great deal of difference between how a true free credit market might perform and how our politically managed market does perform.
You have been critical of the 19th century "free banking" era. I question how truly free it was. I don't doubt that bankers engaged in fraud with impunity. Why wouldn't they? My understanding is that they were often shielded from the consequences of their bad acts. As it seems that you have studied this era more than I, I welcome any sources.
As I see it, central banks seem to attempt to relieve both bankers and their customers from the consequences of bad credit policies. It can't be done. Furthermore, politically connected bankers inevitably influence banking rules to impose the consequences of bad credit on society while again shielding them from prosecution. This time though, the shield is insidious. Since the losses are often broadly socialized, their source is not so evident, leading some to brand the "free market" responsible.
You're right that education is key. I think that, in order to educate the public on sound banking, we must discover a way to cease sweeping the issues of corrupt banking under the rug.
Published: November 30, 2009 10:06 PM
Gerry Flaychy
I think that what should be said here, is that the loan contract can be sold but not the collateral itself (house, car, or else), unless the borrower becomes in default. Usually, in case of default, there is also a procedure to follow before being able to sell the collateral, but not always. For example, a pawnbroker can sell the collateral as soon as the borrower is in default. It is also depending on the terms of the contract and on the laws of the country.
I think there is a problem of terminology here.
Published: November 30, 2009 10:09 PM
newson
to joe stoutenburg:
my advice to you is first to listen to block and barnett on time deposits and the abct:
http://mises.org/media/3052
or read their paper:
Barnett, W: II and W. Block: 2009, ‘Time Deposits, Dimensions and Fraud’, Journal of Business Ethics.
and then read why bagus denies their claims:
http://www.springerlink.com/content/pn81764318674wv0/
i side with bagus: duration mismatch is risky but not an abuse of property titles (unlike frb).
Published: November 30, 2009 11:24 PM
scott t
" In the event of default by the borrowing counterparties, they would be made whole out of the sale of the collateral. The bank would typically just suffer the loss of future spread revenue and, possibly, some of its reserves if the value of the collateral drops below the value of the loan.
So far, this description of collateral is, I believe, applicable to a 100% gold standard which allows for the extension of credit in time deposits."
does the current system of demand deposits operate in a way vastly differerent than this??
is it simply the time-depositor relinquishing money for a set period (hoping for interest return) of time while the demand depositor relinquishes money (hoping for an interest return), but also gets a corresponding credit amount that spends like the money they deposited?
Published: December 1, 2009 12:07 AM
scott t
"In summation, my pro-free-market program for economic recovery is a provisional 100-percent-paper-money-reserve system applied to checking deposits, accompanied by a demonstrable commitment to ultimately achieving a 100-percent-gold reserve system. The 100-percent reserve in paper would put an end to all further credit expansion....."
also, if the description of credit that i mentioned above is true and the above article excerpt is true....is an end to credit expansion a bad thing if
http://blog.mises.org/archives/010741.asp#c604991
"when prices are adjusted for inflation, Americans today spend '40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car'than they did during the early 1970s. Over that same period, Census Bureau tables show, US median household income rose by at least 18% in constant dollars . . ."
i assume these price reductions occurred during a similar banking scheme as we have today.
or are these quotes more accurate :
" There was economic growth, but it was not spectacular after 1973, when real wages grew stagnant for two decades. The stock market did not outperform general economic growth. After taxes, it did not match economic growth."
http://www.lewrockwell.com/north/north555.html
and
"During the 23 years from 1947 to 1970, the median income of American families increased by an average of 2.8% per year. But from 1970 to 1998, the median income grew by only 0.4% per year.
The difference is considerable. If the previous growth rate had continued, the median income in 1995 would have been 90% greater than it was."
http://www.harrybrowne.org/GLO/FreeTrade.htm
one comment seems to indicate significant price reductions adjusted for inflation yet the other quotes seem to speak about poopoo wages for 20 some years.
would the gold 'backing' provide the lower prices mentioned above or stagnant real wages??
Published: December 1, 2009 1:30 AM
Joe Stoutenburg
Gerry:
I agree that I need to clean up my terminology. I'm not sure whether it introduces a problem though.
To recap, collateral consists of the actual underlying property. The bank's asset is actually a financial instrument consistuting in a promise of the borrower to pay back the principle with interest. The instrument also includes provisions (perhaps implicitly in the case of an unsecured loan) on what collateral may be seized in the case of default. Under no circumstances may the lender force the liquidation of the collateral unless the borrower defaults. Indeed though, the lender need not liquidate the underlying collateral since it can simply sell the financial asset.
There is a link between the value of the financial asset and the value of the collateral. As long as the collateral is believed to be of sufficiently greater value than the balance of the loan, the only discount for nonperformance will be for the potential loss of future interest payments. Indeed, the discount is identical to that employed to value the risk of pre-payment. However, if the collateral value drops below the balance of the loan, the market must discount the recovery of principle. Therefore, a drop in value of the underlying collateral may lead directly to the bank's loss without requiring collateral sale.
If you agree that I am appropriately using the terminology, I have some discussion points that I can enter. However, if you have another direction in mind, I'll be glad to entertain it.
Published: December 1, 2009 10:10 AM
Gerry Flaychy
Joe Stoutenburg, I did not mean that you need to clean up all your terminology ! But, yes, terminology may cause problems. Much problems in a discussion often come from terminology or the way we say what we want to say.
For example, two economists speaking with one another could have no problem with the terms they use, but if they use the same terms with somebody who don't know nothing, or not very much, about economy, then there's come the troubles !
Another example is with the word 'energy': this word has not the same meaning for a physicist and for the common man (and woman!).
For a third example, see the first phrase of this post !!
Published: December 1, 2009 11:28 AM
Gerry Flaychy
To Joe Stoutenburg.
It is possible, depending on the kind of loan with collateral, and on the clauses of the loan contract and the laws of the country in cause, to sue personally a borrower who defaults on his loan,
if his collateral is sold and do not give back enough money to pay the totality of the loan, principal and interest and expenses,
for the amount remaining due (+ expenses to recover it).
In this case, there would be no loss for the lender, original or subsequent, except if the borrower is totally bankrupted.
But better check with a lawyer before signing this kind of contract if you are the borrower or a private lender not familiar with those kind of contracts. Watch out too if the bank ask for a caution to sign in !
Published: December 1, 2009 12:41 PM
Joe Stoutenburg
Gerry:
I don't think that "cleaning up my terminology" is necessarily a knock against my arguments, nor would I take offense if you did suggest that my terminology was flawed or needed "cleaning". If nothing else, it's worthwhile to be precise when communicating such technical topics. And even when inconsistent or imprecise terms do not invalidate an argument, they may impede communication as you suggest.
So far, I have not seen a suggestion from you that my terminology has introduced any problems in my argument. If you do discover any such problems, I will be glad to entertain that discussion.
Published: December 1, 2009 2:24 PM
Joe Stoutenburg
I'd like to comment on newson's link to Bartlett and Block's speech. I admit that I only read the abstract to Bagus' rebuttal. It seems like he would be echoing my reaction though I'm sure that I could learn from reading the article. I'm just not going to devote the time (nor expense to buy the article) at the moment.
First, I must crassly wonder whether T. Ralph would excoriate Bartlett and Block if they showed up here under a different alias. They suggest something very similar to what I was asserting: that the trade (business) cycle can be generated without inflating the money supply and without engaging fractional reserves (trading credit as money). Obviously, their ideas are open for debate (indeed, I take issue with some of their assertions as do others - Bagus for instance). Yet I am quite certain that they would be accorded with civility if their identities were known or shouted down if they posted anonymously.
Like Bagus (though perhaps for different reasons), I don't view maturity mismatching as illicit. The banks are acting as intermediaries to exchange one product for another. When the products vary by being loans of different maturities, they must account for the residual costs that remain with them as dealers. To be precise, they must fund the longer term lending with new deposits. This cost introduces risks that interest rates could rise and make the longer term loans unprofitable.
When that occurs, the banks should suffer financial loss due to their entrepreneurial error. The problems are magnified when political intervention allows the banks to avoid the consequences of their errors. They are allowed to continue extending unsustainable loans and the business cycle is deepened.
I am of the opinion that cycles are inevitable at some level in human action. Even absent political intervention, we tend to move in herds. Optimism breeds new projects. As optimism turns to greed, the projects become get-rich-quick schemes. When those schemes eventually fail, a cycle of pessimism ensues. Though I am not a fan of Buffett in everything he does or says, he investment dictum is on target to be fearful when the market is greedy and greedy when the market is fearful.
Political intervention, in my opinion, deepens and prolongs the cycle. I am open to the thesis that allowing credit to trade as money further destabilizes economic activity. However, I remain convinces of my stance that it fails the test of fraud. If it is a poor idea, the best policy, in my opinion, is to allow the market to discover the best ways to form banking institutions. Education is superior to dictate.
Now, I view credit's contribution to the trade cycle more broadly than do Block and Bartlett. Even assuming a 100% reserve and time matched loans with depositors, bubbles are possible. I think that we have to look at how the borrowed funds are spent. If they are concentrated on a particular asset, the value of that asset will rise with the increased demand. From my prior example, I illustrated how the total amount of time deposits could exceed the money supply. The mechanism is simple. The borrower spends the money on goods. The goods producer places some or all of the money on time deposit (with the borrower perhaps placing a similar asset - which may be inflated due to the spike in demand - as collateral). That borrower goes and repeats the process.
This process will stop at least by the time that circulating money and demand deposits are so low relative to debt that they must choose whether to purchase food or to pay their debts. It will probably end before that point. When it does, the defaults will trigger liquidation of the collateral which will tend their prices back down. Boom/bust without either a fractional reserve or even duration mismatch on loans.
Obviously, this could be developed much further. And I won't promise that holes in my analysis could be found if we poke it long enough. To be sure, you may argue that there are natural circuit breakers that would keep the imbalance from persisting too long. For instance, what would interest rates do?
Countering this, I contend that similar circuit breakers would exist for alternative monetary systems as long as market prices were allowed to operate without interference. The only remaining question is to decide on what constitutes fraud and to enforce it. I have come down with my opinion on the matter. While most Austrians do take the opposite view, mine is hardly unique among Austrians.
My contention that credit is at the base of the business cycle is even further outside of the mainstream of Austrian thought. I am pleased to learn that it is not unheard of though. Prominent economists (Block especially) have shared my view though we differ on some aspects. Incidentally, I would take no offense if they are granted more of a benefit of a doubt than me. I only reserve the right to defend my position without rancor.
My assertion that so-called demand deposits actually function more as time deposits is, as far as I know, unique. It may be unique because it has some fatal flaw. However, as I read it, I am only convinced that the flaw is only that it violates how Austrians insist that banking should. That insistence may be well-reasoned and insightful. There is nothing in my argument to state that the exchange of credit is superior to a system of strict demand deposits and definite time deposits. You do see that argument in the mainstream - some people insist that a 100% reserve gold standard would not be flexible enough to carry out commerce or that it would result in cascading deflation. I reject those arguments probably even more strongly than I reject the common Austrian implied assertion that all would be great if only we went back to the gold standard.
You may note that I started out criticizing the lack of consideration for collateral. Now, the discussion has come back to discussing how credit is actually the main driver of the trade cycle, this time with more credentialed backing than my private musing. Obviously, this can not serve as the conclusion to debate. But I admit to feeling a little vindicated.
Published: December 1, 2009 3:31 PM
Joe Stoutenburg
p.s. Thanks again to newson for offering objective reference to pertinent sources. I have been charged by my most obstinent critic for not actually knowing Austrian economics. I believe that criticism is unfair though I admit that, as economics is an interest rather than a profession, I am not as well read as some might be. newson's ready reference to scholarship is invaluable.
If I were publishing my ideas rather than musing about them on a blog, obviously the burden would be greater to be more familiar with the literature. Unconventional though my ideas may be, they are rooted in the notions of the subjective value of voluntary exchange and in the Austrian tradition of preferring market regulation over central planning.
Published: December 1, 2009 3:38 PM
newson
to joe stoutenburg:
i contacted bagus (search this site for one of his articles) and he kindly sent me a copy of the paper, gratis. just a thought...
Published: December 1, 2009 3:50 PM
newson
buffett proves (as does george soros) that you don't have to have sound economic philosophy to make out very well in the capital markets. his father was much better, or maybe buffett jr. is just lying and talking his book. probably both.
the business cycle is an objective reality, and people (a minority) can make money riding it, even without understanding its origins. conversely, there are plenty of lousy traders with degrees in economics.
if you do ok punting on the horses, then there's a trading screen that's just waiting for you.
Published: December 1, 2009 4:07 PM
scott t
"" In the event of default by the borrowing counterparties, they would be made whole out of the sale of the collateral. The bank would typically just suffer the loss of future spread revenue and, possibly, some of its reserves if the value of the collateral drops below the value of the loan.
So far, this description of collateral is, I believe, applicable to a 100% gold standard which allows for the extension of credit in time deposits."
does the current system of demand deposits operate in a way vastly differerent than this??
is it simply the time-depositor relinquishing money for a set period (hoping for interest return) of time while the demand depositor relinquishes money (hoping for an interest return), but also gets a corresponding credit amount that spends like the money they deposited?""
if one opens a time deposit, where money is given to a bank to loan (and no bank-credit is issued for money use) wouldnt the bank at the time of lending the time-deposit funds seek collateral (if they even do anymore) before lending the money from time-deposits??
isnt that significantly differerent than a demand-deposit where deposited money is lent (and i assume collateral still required by the bank??) and a simultaneous bank-credit in the amount lent is created and ready for economic use by the depositor? is that how the demand-deposit works in reality??
if the bank had to retrieve its collateral from a default loan...would the bank-credit that was issued still be circulating and purchasing goods?
Published: December 1, 2009 5:09 PM
Gerry Flaychy
With some time deposits, usually, the only thing you can 'withdraw' is cash money.With a demand deposit you can withdraw not only cash-money, but also account-money: that's what we do when using a check; or a debit card or our computer, to make an electronic transfer of funds.
That's make a big difference between the two (but not necessarily the only difference).
Published: December 2, 2009 1:01 PM
Joe Stoutenburg
The primary distinction that I'm making is to recognize what is base money. In our economy, base money consists of Federal Reserve Notes. It certainly is not equivalent to having a commodity based money, and this is by no means to suggest that I see no problem with paper money.
Writing checks and performing electronic transfers, by my unconventional terminology, is to exchange credit. You only get base money by going to the bank and requesting a withdrawal in cash. And that withdrawal comes with restrictions. Because bank deposits are not entirely redeemable for base money on demand, I argue that they are not demand deposits in the true sense of the word.
My next jump is that this same situation could arise from a previously pristine 100% gold standard if time deposit restrictions were relaxed and if they were allowed to exchange as money substitutes. From this, I conclude that it is credit issuance and the ability to exchange credit that is at issue, not the reserve standards.
I draw support from Barnett and Block. They also argue that credit is the important consideration. Of course, I readily admit that they look at it very differently than do I.
Published: December 3, 2009 8:17 AM
newson
joe stoutenburg says:
"My next jump is that this same situation could arise from a previously pristine 100% gold standard if time deposit restrictions were relaxed and if they were allowed to exchange as money substitutes."
if governments get out of the money production business, and merely enforce warehousing/deposit law, then gresham's law doesn't apply. now good money drives out bad, not vice versa. time deposit notes have different expiry dates, and being heterogeneous would be less liquid than coin, so unlikely to be considered a worthy substitute. even a paper-money fan like ricardo acknowledged that paper money required legal tender laws to survive against specie.
if you give me an email address, i'll send you the paper on term-deposits.
Published: December 3, 2009 8:50 AM
Joe Stoutenburg
newson wrote:
Relaxing the restriction on time deposits addresses just that issue. I agree as long as time deposits have different expiry dates that they would not be a ready money substitute. I am arguing that current bank accounts function like a sort of perpetual time deposit. Yes, I know that this violates one of the fundamental characteristics of the widely understood definition of time deposits. They aren't time deposits in the traditional sense. But since they can not be redeemed for base money (FRNs) immediately on demand, I argue that they aren't really demand deposits either.
I think that I agree with this. And in fact, I think that I would actually favor a system based upon specie. I've never been arguing for a paper standard. I have argued that a system similar to what we have today could evolve from a 100% gold standard. It's not important whether base money is gold, paper or something else. And it's not a matter of less than 100% reserve standards on demand deposits. It's that we have deposits that are nearly demand deposits (you can get all of your money with a few days notice) but function something like time deposits.
I'd appreciate seeing your paper on term deposits. My e-mail address is joestoutenburg@yahoo.com.
Published: December 3, 2009 1:52 PM
Gerry Flaychy
If by 'Reserves' you mean 100% reserves, than those reserves will have to be exclusively keeped for demand deposits and other checking accounts only: for purpose of redemption and of honouring checks. So they cannot serve as cushion for any loss encountered by the bank.If you mean fractional reserves, and all excess reserves has been lend out, than the bank cannot use the required reserves to cushion losses.
Only excess reserves can be used as a cushion, and this mean fractional reserve banking.
Published: December 3, 2009 6:23 PM
Gerry Flaychy
Base money consists of Federal Reserve Notes, but when those notes are deposited at the Federal reserve by the banks and added in the accounts of banks, this account-money is part of the monetary base as well as the Federal Reserve Notes keeped by the banks for every day business.This is these two parts that are called the «reserve(s)» of a bank: the cash 'in the hands' of the bank + the account-money of the bank in its account at the Federal reserve.
Published: December 3, 2009 9:45 PM
Gerry Flaychy
1- "You only get base money by going to the bank and requesting a withdrawal in cash."
We can easily get Federal Reserve Notes at any ATM, and also at numerous stores, not only at the bank itself.
2- "And that withdrawal comes with restrictions."
It is contrary to every day experience, that each and every time you want to withdraw cash, that the withdrawal comes with restrictions ! ?
3- "Because bank deposits are not entirely redeemable for base money on demand, I argue that they are not demand deposits in the true sense of the word."
Some kinds of bank deposits are not entirely, 100%, redeemable in cash, but there is one kind which is, and this is this one that is a demand deposit account, in the true sense of the word: the others are not.
Published: December 5, 2009 11:12 AM
Mike Sproul
Gerry and Joe:
A little historical perspective on the "What is money?" question:
In 1710, some economists held that paper money was not part of the money supply, because paper money was ultimately paid off in coin.
In 1840, some economists held that checking account money should not be counted as money, since checking account money was ultimately payable in paper or coin. Checks were counted as 'money substitutes' or 'economizing expedients'
Since 1950, most economists have held that credit cards are not part of the money supply, since every unit of credit card money is ultimately paid off with a check, a bill, or a coin.
I predict that in 2050, economists will finally count credit cards as part of the money supply, but there will be some new kind of money which they will insist is not money, but merely a money substitute or economizing expedient.
Some more historical perspective:
In 1685, the Governor of Quebec paid soldiers with cut-up playing cards, each promising 1 livre in coin when, and if, the payroll ship arrived from France with coins. The paper livres were popular as money. They don't fit very well into the categories of 'base money', 'derivative money', etc. That's because those categories are too fuzzy to define. The paper livres also confuse the 100% reserve folks, gold bugs, and quantity theorists of all stripes. Here was a paper money that was clearly valued according to the value of the assets backing it, and not according to the principles of the quantity theory.
Published: December 5, 2009 2:58 PM
Joe Stoutenburg
Gerry:
And in that case, you are limited to even smaller amounts - typically no more than $400. If you have $100K in a bank account, you must give them advanced notice before withdrawing your funds. The advanced notice allows the bank to assure that it has the physical currency to redeem your request. If necessary, it may need to sell some of its financial assets and take physical delivery of FRNs.
I don't know of any deposit besides a safe deposit box that allows unrestricted redemption in cash.
Published: December 7, 2009 7:44 AM
Joe Stoutenburg
Mike Sproul:
Thanks for the historical perspective. My basic position on money will always return to the assertion that individuals may subjectively perform exchange in any way that they choose as long as each party has legitimately obtained the goods to exchange. They may engage in barter or use any medium that they desire.
My arguments here have attempted to engage the debate from a different angle - that subtle changes to voluntary contracts can lead right back to where we are from the pristine conception 100% gold reserves. I don't know whether it has been helpful or just a distraction.
Published: December 7, 2009 7:51 AM
Gerry Flaychy
ATM is a supplementary service designed specifically for people who need only small withdrawals and are far from their bank, so they can have their cash more rapidly. They are not designed for the withdrawal of all the cash we want to withdraw. It is simply an amelioration of service.(And with ATM, we cannot withdraw any cash at all from a safe deposit box !)
Advanced notices are for deposit accounts wich are *not* a demand deposit account, like, for example, an account that pay interest, and also, more particularly, for term 'deposit', like, for example, certificat of 'deposit' (CD).
If you don't know of any deposit that allows unrestricted redemption in cash, it's because almost all the nunerous kinds of accounts, with as much numerous names if not more, offered by banks are *not* a demand deposit account (specially in the $100K case that you suggest !). You have to search very hard to find one !
(Good luck if you try !)
With all those non-demand accounts, bankers are protecting themselves against lawsuits wich could happen if they don't redeem all cash to somebody who has a demand deposit account, because they know that they not keep enough cash money in the bank. So they protecting themselves by all kinds of manners, including by offering all kinds of accounts wich are not demand deposit accounts, all bearing interest, service fees, and all kinds of restrictions.
If you accept any of these ones, then you accept an account that it is not a demand deposit account, and bankers are safe concerning withdrawals.
Published: December 7, 2009 9:53 AM
Gerry Flaychy
http://blog.mises.org/archives/011071.asp#c633286If by credit you mean money just lent by a bank and deposited directly into the borrower's account (account-money), you have to consider that there is also money which is not lent and deposited directly from the pockets of depositors, so not credit in the sense you give to this word, if it is this sense that you mean by 'credit'.
Published: December 8, 2009 6:40 PM
Lord Buzungulus, Bringer of the Purple Light
In his initial post, I think Joe Stoutenburg misses Reisman's
point. Mr X receives money *substitutes* denominated in the
amount $1000 (that he warehouses, NOT lends, to the bank;
under a loan, he would receive nothing as he then foregoes
claim to/use of the money for the period of the loan). Mr Y
receives, we may assume, *additional* money substitutes denominated
in the amount $900. However, there is still only $1000 of money (NOT
money substitutes) in this example. Reisman, it is true, should more
carefully distinguish between money and money substitutes here.
However, he's entirely right that we now have money substitutes
denominated in the amount $1900 but only $1000 of money (the actual
medium of exchange in the economy under consideration). THIS is what
the unfortunate term "created out of thin air" means. Mr Y can put up
collateral worth $1,000,000, that's completely irrelevant to the point
that, the bank has manufactured money substitutes without a
corresponding increase in money proper.
This distinction between money and money substitutes is critical to
these issues, and is often overlooked in these debates.
Published: December 9, 2009 8:51 AM
Gerry Flaychy
"This distinction between money and money substitutes is critical to these issues, and is often overlooked in these debates."
Right on, Lord Buzungulus, Bringer of the Purple Light !
Published: December 9, 2009 11:32 AM
Joe Stoutenburg
My attention to this thread had dwindled, but I came back today interested if there were any final posts. Lord Bunzungulus wrote:
The term is more than "unfortunate". It is misleading. I agree that the additional credit is a money substitute. In fact, I have referred to it as such and was the first to do so in this thread [see my post dated November 20, 2009 2:29 PM]. But saying that credit (with collateral backing it) was extended is quite another thing than to say that money was "created out of thin air".
I also agree with the Austrian argument of property rights in this context. If a contract simultaneously claims to grant title to the same property to more than one party, it is fraudulent. The central issue here is whether the depositing party has consented to his funds being lent.
If the depositor has been led to believe that his money is available on demand without restriction, then it may well be that the bank is guilty of fraud. [As an aside, it may be innocent if it can demonstrate that the contract was clear but that the depositor willfully failed to comprehend the terms.] However, I argue against the case for fraud if the depositor understands that redemption is contingent upon the bank being able to sell the financial asset backed by the collateral for the loan.
This takes us back to my original complaint. By arguing that money was created out of thin air, Reisman and others like him do not lead us to consider the actual transactions that take place in our financial system. As you state, money substitutes are introduced in the form of credit backed by collateral (sometimes the general assets of the borrowers). Money is not created out of thin air.
Truly, depositors in present-day society poorly comprehend, if at all, the nature of credit in our economy. Blame the FDIC (primarily) on that. However, we should not hold political failings over the legitimate workings of credit in a free market.
Published: December 16, 2009 1:52 PM
Mike Sproul
Joe Stoutenberg
Great post Joe! No doubt you will soon be pronounced insane by "thin air" camp.
Published: December 16, 2009 3:05 PM
Gerry Flaychy
There is money in the form of bank notes and coins, 'base money';
and money in the form of 'account money', money appearing in our bank account (money substitute).
Let say I deposit a bill of $100 in a demand deposit account in exchange of $100 in the form of 'account money', so that I have now $100 in 'account money' instead of $100 in 'based money'.
Just after this, the bank lend $90 of this $100 'based money' to somebody else in the form of 'account money'.
While the borrower is spending his $90 of 'account money' in market transactions, I can too, in the same time, spend also my $100 of 'account money' in market transactions.
Consequence: there is now $190 of money in the market instead of $100.
In brief: creation of money.
Published: December 16, 2009 3:17 PM
scott t
"Credit expansion is the lending out of money created virtually out of thin air."
is there a difference when say a time deposit is used...100 dollars to time deposit...100 dollars loaned to whomever has collateral for said loan and my money i snow on loan OR when i deposit 100 dollars into a demand deposit account (checking account?) and 90 dollars is loaned to someone who has some collateral and i keep 10 dollars and i instantly recieve 90 bank-credit dollars to spend as if i never loaned out any money?
does what i described actually take place with a checking account??
would there be different economic effects betweeen me being able to spend 90 bank-credit dollars and not being able too?
is it the bank-credit that is spoken of that is the money out of thin air??
is that what happens?
Published: December 16, 2009 3:21 PM
scott t
"Consequence: there is now $190 of money in the market instead of $100.
In brief: creation of money."
if collateral was required before a loan was made - i either make a loan and stipulate collateral and i dont have my money for a while or a make a loan and stipulate collateral and 'create credit' to operate like the money i just loaned out so i keep on truckin'?
is that what takes place with demand deposit accounts? nearly a doubling of money + credit that spends like money?
Published: December 16, 2009 3:29 PM
T. Ralph Kays
Lord Buzungulus
Your last post was brilliant, but the Real Bills Dorks still refuse to see such a simple point. First there was $1000, then because of nothing but bookkeeping entries there is $1900 dollars. Nothing else has changed, the collateral for the loan existed before the loan was made and continues to exist after the loan is paid off, it only makes the loan a good investment, nothing more. There is no functional difference between doing it this way and doing it by printing extra paper dollars and then lending those out. Only a complete moron can fail to understand this. The creation of the extra $900 whether you refer to it as "out of thin air" or not is stealing, the purchasing power that is derived by this act is absolutely and necessarily stolen from someone else, just as counterfeiting is stealing. Ultimately that is what these RBD advocates are defending, they like being able to steal from others with impunity, they are far too cowardly to steal from widows and orphans face to face.
Published: December 16, 2009 5:05 PM
Lord Buzungulus, Bringer of the Purple Light
Thanks T Ralph. It is indeed discouraging that this simple but critical point is repeatedly misapprehended in these debates. Mike Sproul of course is beyond help, but some of the others are reasonably intelligent, getting hung up on phrases like "thin air" is counterproductive.
Published: December 16, 2009 5:37 PM
T. Ralph Kays
Lord Buzungulus
You are far more generous than I, hopefully you are right and I am wrong. Being a bitter old man I tend to see bad motives and lack of intellect as more probable, but who knows?
Published: December 16, 2009 5:52 PM
Gerry Flaychy
Thing to think.
A banker of the old gold monetary system, prays every night that the bank notes issued by his bank, never return to his bank.
A banker of the present monetary system, prays every night that the 'account-money' issued by his bank, never leaves his bank, and that nobody asks for cash.
Published: December 16, 2009 7:48 PM
Joe Stoutenburg
Gerry:
No. The bank does not lend $90 of the original money to somebody else. It accepts collateral valued at least that much (and ideally much more) and creates a new money substitute of credit that now trades as money. As Buzungulus wrote (and you commended), "The distinction between money and money substitutes is critical to these issues, and is often overlooked in these debates." You're insisting that money was lent out when, in reality, a money substitute was introduced.
I agree. The money supply expanded in this instance due to the extension of credit. Though as we have discussed, the money supply now consists of the original $100 of base money plus an additional $90 of credit money.
A frequent criticism against this arrangement is that there is not enough base money to redeem all deposits if everyone simultaneously demanded them. True. But what does that mean? If everyone demanded base money, that means that they would have zero demand to own the collateral assets (or equivalently the financial assets with them backing) represented by the credit money. This is simple supply and demand. The demand for money goes up. The demand for the hard assets goes to zero. Ergo, the price of the collateral goes to zero.
It is certainly true that holders of credit money will be hurt in this situation. Since all bank depositors in the present economy essentially have claim to credit money (with a portion of their deposits backed by base money and the rest backed by the collateral assets), everyone is impacted by a credit contraction. The situation is further muddied, in my opinion, by the FDIC and other interventions. The impacts of irresponsible credit practices followed by the inevitable credit contraction can not be avoided. But the political handling of these situations distorts their source.
Published: December 17, 2009 8:36 AM
Joe Stoutenburg
Going back to Bunzungulus' recent post:
Ironically, I think that Reisman misses the point that you desire to see him make. I would have been less critical (or perhaps not critical at all) if he had discussed the introduction of a money substitute. Instead, he argues that the original base money was lent out.
Do you not see a difference?
Published: December 17, 2009 8:47 AM
Joe Stoutenburg
T. Ralph:
For all I know, perhaps there is a failure on my or others' part to see a "simple point", but you show nothing but bad manners by your continued insistence to see bad motives and lack of intelligence all while failing to address the points of debate. I attempted to acknowledge the point that Bunzungulus made (and yes, the "distinction between money and money substitutes is critical"). I then turned around the point. I argue that the Austrian position often fails to make that distinction. You have failed (refused?) to respond to that argument.
Nothing but bookkeeping entries? Prior to the extension of credit, a person has unencumbered assets. Upon accepting credit, a person must devote a portion of his production to satisfying the debt or else forfeit a portion of those assets.
Is this stealing? I don't see how you say that it is. By placing his assets for collateral in exchange for new money substitutes, a person is expressing an increased demand for the goods that he acquires with his credit. When credit is allowed to enter the money supply as a substitute, this expressed demand pushes up prices beyond what they would have been in a constricted money economy. If credit is not allowed to so circulate, his expressed demand pushes up interest rates.
In either case, third parties are accepted. It is axiomatic that market actions have impacts on others. That's the whole point. Market prices (whether interest rates or money prices) send signals to others regarding the general structure of production and demand.
The argument is weak that, just because a third party was adversely affected, theft has occured. I requote an article that I had referenced previously:
Of course, the situation is complicated due to the fact that much of what occurs in our economy is theft. Debtors are allowed to go bankrupt. But instead of forcing creditors to suffer the consequences with them, as they should, the government bails them out via the FDIC and other direct interventions. This socialization of losses/privatization of gains is truly deplorable. It also allows banks to loosen their credit practices since society will eat the costs when (not if) they go bad.
Published: December 17, 2009 9:53 AM
Gerry Flaychy
...… but instead "Lend $90"... " in the form of 'account money'" which is a "(money substitute)".
At the moment of the loan, before the borrower and the depositor spend any money, the money consist of $100 in account-money, for the depositor, + ,for the borrower, $90 in account-money. The original $100 stay in the hands of the bank.Please read again my post. Thank you.
This $100 is part of the M0 money supply, but it is not part of the other money supplies M1, M2 and others.
Published: December 17, 2009 11:53 AM
Lord Buzungulus, Bringer of the Purple Light
Joe Stoutenburg:
You're incorrectly characterizing credit money. Von Mises defines credit money as
claims to money not readily redeemable (see the entry for credit money and the
associated links at http://mises.org/easier/C.asp#69). The IOUs in your example are
in no way claims to money; the collateral is a red herring.
You write:
"The bank does not lend $90 of the original money to somebody else. It accepts collateral
valued at least that much (and ideally much more) and creates a new money substitute of
credit that now trades as money."
Of course, the note in question is NOT a money substitute; it's nothing at all, in fact, but a
piece of paper. Credit involves an exchange of a future good for a present good. It should be
obvious that nothing like this takes place in your example. What does the bank give up in
return for a promise to pay later? Once again, the issue of colatteral (which only comes into
play upon default of a loan, as T Ralph Kays has stressed numerous times here, and there's no
loan here) is being used to obfuscate things.
This begs the question; why should this note trade AS money, when it's not a substitute FOR
money? Calling it credit money, as you do, does not change this fundamental fact. The only
way the note could serve as a money substitute is if it's fraudulently portrayed as being a claim
on the original money, just as in Reisman's example.
Published: December 17, 2009 12:41 PM
T. Ralph Kays
Go Lord B., but be careful, you will get callouses on your head if you keep running into this particular brick wall.
Published: December 17, 2009 12:47 PM
Joe Stoutenburg
Buzungulus:
I'll respond to the rest of your post in turn, but a question comes to mind whose answer may be pertinent to my response. If the amounts in question are neither money nor money substitutes, why have you been stressing the distinction?
Published: December 17, 2009 12:51 PM
Lord Buzungulus, Bringer of the Purple Light
I honestly do not understand Joe Stoutenburgs question, and I am getting to the stage that T Ralph warns of.
Published: December 17, 2009 1:07 PM
Joe Stoutenburg
T. Ralph:
Seriously, do you have anything to add?
Published: December 17, 2009 1:13 PM
T. Ralph Kays
Lord Buzungul
I sympathise. There is not much point in a discussion with people who ignore your valid points. The RBD crowd is just taking fractional reserve banking and dressing it up with a bunch of banking industry jargon. I find it telling that one of them admitted that their policies involve stealing, but that the victims can be dismissed as "externalities".
Published: December 17, 2009 1:24 PM
Joe Stoutenburg
You've been stressing the importance of the distinction between money and money substitutes almost from the beginning. Fine. Then when we get to it, the distinction seems irrelevant since you do not term the items in question even as a money substitute (?!? - Mises will disagree with you, by the way - more on that momentarily).
Though I spend considerable time reading the other responses, including links, I have a habit of charging forward with my points. I acknowledge that I have to be careful to fully comprehend other points before answering. Well, I perceived that we were at a critical juncture and that asking a question without proceeding could be beneficial. Here, for once, I asked a question without expanding my own arguments. I had hoped for some clarity. I admit that I'm feeling a bit frustrated with you too.
Regarding Mises, here are a couple of relevant definitions from Mises Made Easier:
Fiduciary media.
Source
Money-substitutes.
Source
Clearly, the amounts that we are discussing fall in the category of fiduciary media. The notes qualify as money-substitutes by Mises definition. So what do you mean by "the note in question is NOT a money substitute?"
Listen, I have had to hone some of my terms as a result of this debate (example being my usage of the term "collateral"). This is educational to me, and I expect to come out of it with a somewhat altered understanding. I don't see how you can continue to stick to this recent assertion while defining the terms as intended by Mises. But perhaps you meant something else?
Published: December 17, 2009 1:33 PM
Joe Stoutenburg
T. Ralph:
I find your lack of reading comprehension skills stunning. Go back and point out for me where I have admitted that any policies outside of political interventions involve stealing. Go back and see if I "dismiss" anything as an externality. As a reminder, I don't deny the presence of externalities in this question. The pertinent point is whether actors have the right to employ.
And by the way, ignoring valid points goes both ways.
Published: December 17, 2009 1:39 PM
Joe Stoutenburg
Gerry:
I went back to re-read the post. You wrote:
I see the distinction that the depositor exchanges $100 of 'base money' for $100 of 'account money'. Upon making a loan of $90, there is now still only $100 of 'base money' and $190 of 'account money'. I agree with this. Let me know if you meant something different.
My disagreement is when you state that the bank lends $90 of the original 'base money'. To this, I draw attention to the collateral behind the new loan. Others (both T. Ralph and Buzungulus, at least) have downplayed the role of collateral in this situation. They claim that it only comes into play upon default. I disagree with this position.
The bank owns a financial asset whose value is supported by both the borrower's ability and willingness to repay and the value of assets standing as collateral behind the loan (whether specifically secured or by the general assets of the borrower that are eligible for repossession in the case of default). The notes in question do qualify as money-substitutes using Mises' terminology as long as the bank's financial assets can be sold for base money in time to honor the requirements of the deposit agreement.
If the borrower repays the debt, he will have repaid the loan out of future production (note to Buzungulus, this is exchanging present goods for future goods - the credit is an intermediary instrument). If he defaults, the collateral will be seized and make the lender whole to the extent that its value is sufficient. In this way, the borrower places his collateral assets as conditional goods of exchange in the event that he is unable to pay with money.
If this credit circulates as fiduciary media, it can not be denied that others will be affected by the rise of prices relative to where their levels would have been had it been kept as a non-traded loan. Nor should anyone deny that other parties will be affected by the rise of interest rates if the money supply is not allowed to include such fiduciary media.
T. Ralph thinks that this amounts to admitting to theft. He must similarly admit to wanting to steal from people who might have otherwise funded projects with lower rates. Yes, I know that some Austrians view this lowering of the interest rate as the vital key to the business cycle. However, we have seen from newson's reference to Block and Barnett that even that matter is not universally admitted by Austrians.
Anyway, the vital questions are (incorporating some of the more recently introduced terminology):
1) Whether money issued from lending should be allowed to circulate as fiduciary media.
2) Whether the collateral backing that lending should be of consideration in answering the first question.
Those who refuse the importance of collateral in the context of #2 will fall in the camp of T. Ralph, Bunzugulus and others. People who perceive it as having relevance may fall more in line with my understanding.
Published: December 17, 2009 2:00 PM
Joe Stoutenburg
Catch up clarification post:
My last post was admittedly written in a state of indignance and stunned disbelief. I didn't proof read it carefully and cut off a sentence.
The pertinent point is whether actors have the right to employ their property in the manner in question.
Bolded part was left out.
Published: December 17, 2009 2:08 PM
Lord Buzungulus, Bringer of the Purple Light
I have to say I am truly baffled that you think you find support from
Mises here, when he clearly speaks of things payable *on demand*
and *at face value.* Let's consider your example again. Forget about
the original depositor X; better yet, assume he does not exist so that
there is no $100 initially in the bank. Y brings colatteral to the bank.
The bank issues him a note that says $90. If this note is submitted for
redemption, can it be redeemed on demand for $90? Clearly not; there
is NO cash here to permit redemption. How then, can it exchange like
something that can be redeemed on demand at face value (because the
face value in cash resides with the bank)? I.e., how can it exchange
like money? Plainly, it cannot, and you beg the question by assuming
it can.
What role does the colatteral play in all of this? Clearly none. If the note
is submitted for redemption, the banker cannot simply sell the colatteral
because the bank does not own the colatteral (assuming we're using the
accepted definition here, maybe you're not). But even if he could, it should
be clear that the note is not redeemable on demand, as the colatteral must
first be sold. The note is also not redeemable at face value but rather at the
market price of the colatteral. Hence, it is not a money substitute.
Again, I'm baffled that you believe so. Clearly the note you are discussing
here can only persist on the market through fraud; i.e,. as being presented
as a valid money substitute, when in fact it is phony.
Published: December 17, 2009 2:35 PM
Lord Buzungulus, Bringer of the Purple Light
Joe Stoutenburg begs the question when he characterizes the banks note issue as a loan. The borrower future ability to repay is irrelevant; the question is, what is the PRESENT good being exchanged? There clearly is none.
Stoutenburg is playing word games here; my patience with him has expired.
Published: December 17, 2009 2:47 PM
T. Ralph Kays
Lord Buzungulus
Better to spend your time doing something productive, I am having a beer, why don't you join me.
Published: December 17, 2009 2:55 PM
Lord Buzungulus, Bringer of the Purple Light
T Ralph, good idea.
Published: December 17, 2009 3:19 PM
Joe Stoutenburg
Well, saying that I'm using Mises to support me would be a stretch. Clearly, my positions are at odds with at least those of Rothbard and others who followed Mises and, it seems, with Mises himself. On that last, I am re-reading Human Action, chapter 17. The last time I read it, I would have been arguing right along side you. I'm making some interesting observations that were not apparent in the first reading with my lack of experience. They will be interesting to get to if we can settle other matters first. But I risk digression...
As an aside, your reaction has the smell of charging me with heresy. I am surely an unwashed person in this discussion and so am out of place to quote Mises. However, I am only relying upon, what to me seem clear definitions, of terms that we have been using. Clearly, the notes in question qualify as fiduciary media according to his definitions and are also money-substitutes. He does speak of "*on demand* and *at face value*" though those references do not disqualify any bank note as long as they can actually be redeemed on demand and at face value.
I am puzzled by your assertion that bank notes issued from the extension are not money-substitutes. To me, it is clear that the transactions that I am describing generate fiduciary media - that is, notes for which the backing of "money proper" is less than 100%. He also termed fiduciary media as a money-substitute. Therefore, I am wondering what you meant by claiming that the notes in question are not money-substitutes. You have so far evaded my questioning on this line. But I'm not letting you off. If you are legitimately at odds with me and not evading the question, go back and carefully review the definitions to which I linked.
The rest of your first paragraph is a non-sequitor. We both agree that notes issued on the back of credit extension are, at most, money-substitutes. You then posit a situation in which there is no base money whatsoever. How can you have a "money-substitute" if there is no "money"? You'll protect your integrity in my opinion if you retract or at least attempt to modify your illustration without base money.
The banker does not need to sell the collateral. He has a financial asset whose value is the future payments from the borrower or, if the borrower defaults, the liquidation value of the collateral.
I think that I have reconciled the definition with others here, as I agree with you if you say that doing so is important to an effective debate. You can look back over the thread to find that reconciliation.
From experience, I can assure you that these financial assets can often be sold at the click of a button. "Money" (in the broader sense, as Mises defines it) is transfered electronically in an instant. To settle in physical base money requires a few days typically.
If a loan is taken for $1000 and secured against collateral whose value is estimated at $100K, I guarantee you that the market price of the loan will be face value. On the other hand, if the collateral is not adequate to cover the loan balance (in other words, the loan will only be good as long as the borrower continues to pay despite being "under water"), you are right that the market will very likely impair the value of the loan. It may trade at less than face value. This is the reason why banks hold excess reserves - the less cushion, the more reserves should be held, though banks are trying their best to avoid that necessity today.
I have addressed each of your points. In fact, I have attempted to practice this over the entire thread (I strongly deny T. Ralph's assertion that I ignore your points). If you wish to repeat your assertion that money issued by the extension of credit is not a money-substitute, I expect focused counter-arguments.
I'm baffled that you argue as you do. For this entire thread, you've argued about the importance for the distinction between money proper and money-substitutes. I agree with the importance of that distinction. But I'm a little confused at your curveball now that these notes do not even constitute money-substitutes. Even if you could make the argument that they are not (and in my opinion, your arguments fail just by an appeal to the definitions presented by Mises), it makes me wonder why you ever stressed the distinction.
Now, there certainly is fraud in the market for such financial assets. Banks are holding loans at face value that are seriously delinquent and whose collateral (mostly homes) would certainly sell for much below face value if they were forced to liquidate. As is often the case, regulators have been complicit by suspending fair-value accounting rules. We can only detect this fraud by evaluating the underlying collateral. But you say that collateral plays no role.
Published: December 17, 2009 3:34 PM
Joe Stoutenburg
Well, saying that I'm using Mises to support me would be a stretch. Clearly, my positions are at odds with at least those of Rothbard and others who followed Mises and, it seems, with Mises himself. On that last, I am re-reading Human Action, chapter 17. The last time I read it, I would have been arguing right along side you. I'm making some interesting observations that were not apparent in the first reading with my lack of experience. They will be interesting to get to if we can settle other matters first. But I risk digression...
As an aside, your reaction has the smell of charging me with heresy. I am surely an unwashed person in this discussion and so am out of place to quote Mises. However, I am only relying upon, what to me seem clear definitions, of terms that we have been using. Clearly, the notes in question qualify as fiduciary media according to his definitions and are also money-substitutes. He does speak of "*on demand* and *at face value*" though those references do not disqualify any bank note as long as they can actually be redeemed on demand and at face value.
I am puzzled by your assertion that bank notes issued from the extension are not money-substitutes. To me, it is clear that the transactions that I am describing generate fiduciary media - that is, notes for which the backing of "money proper" is less than 100%. He also termed fiduciary media as a money-substitute. Therefore, I am wondering what you meant by claiming that the notes in question are not money-substitutes. You have so far evaded my questioning on this line. But I'm not letting you off. If you are legitimately at odds with me and not evading the question, go back and carefully review the definitions to which I linked.
The rest of your first paragraph is a non-sequitor. We both agree that notes issued on the back of credit extension are, at most, money-substitutes. You then posit a situation in which there is no base money whatsoever. How can you have a "money-substitute" if there is no "money"? You'll protect your integrity in my opinion if you retract or at least attempt to modify your illustration without base money.
The banker does not need to sell the collateral. He has a financial asset whose value is the future payments from the borrower or, if the borrower defaults, the liquidation value of the collateral.
I think that I have reconciled the definition with others here, as I agree with you if you say that doing so is important to an effective debate. You can look back over the thread to find that reconciliation.
From experience, I can assure you that these financial assets can often be sold at the click of a button. "Money" (in the broader sense, as Mises defines it) is transfered electronically in an instant. To settle in physical base money requires a few days typically.
If a loan is taken for $1000 and secured against collateral whose value is estimated at $100K, I guarantee you that the market price of the loan will be face value. On the other hand, if the collateral is not adequate to cover the loan balance (in other words, the loan will only be good as long as the borrower continues to pay despite being "under water"), you are right that the market will very likely impair the value of the loan. It may trade at less than face value. This is the reason why banks hold excess reserves - the less cushion, the more reserves should be held, though banks are trying their best to avoid that necessity today.
I have addressed each of your points and argue that notes issued on the extension of credit clearly are money substitutes. In fact, I have attempted to practice this over the entire thread (I strongly deny T. Ralph's assertion that I ignore your points). If you wish to repeat your assertion that money issued by the extension of credit is not a money-substitute, I expect focused counter-arguments.
In any case, if these notes are not money-substitutes, please, which term would Mises place for them?
I'm baffled that you argue as you do. For this entire thread, you had argued about the importance for the distinction between money proper and money-substitutes. I agree with the importance of that distinction. But I'm a little confused at your curveball now that these notes do not even constitute money-substitutes. Even if you could make the argument that they are not (and in my opinion, your arguments fail just by an appeal to the definitions presented by Mises), it makes me wonder why you ever stressed the distinction.
Now, there certainly is fraud in the market for such financial assets. Banks are holding loans at face value that are seriously delinquent and whose collateral (mostly homes) would certainly sell for much below face value if they were forced to liquidate. As is often the case, regulators have been complicit by suspending fair-value accounting rules. We can only detect this fraud by evaluating the underlying collateral. But you say that collateral plays no role.
Published: December 17, 2009 3:37 PM
Joe Stoutenburg
[Sorry about the double post - the site informed me that the submission had failed]
Buzungulus:
My patience probably should expired a long time ago. However, I find this exercise educational for my own benefit - especially as I review supporting papers. But to respond (I'd say for the last time, but we keep returning), the present good(s) exchanged consist of those goods purchased by the borrower with the proceeds of the loan. Really, you hadn't considered that? And what are the future goods to be repaid? Well, they consist of those goods that may be purchased with the repayment or if default, they are the collateral assets.
On characterizing bank note issuance as loans, that's a little imprecise. I have erred if I have allowed that impression to remain. The bank has on its balance sheet assets consisting mostly of loans receivable and liabilities consisting mostly of deposits. It is able to make good on any notes that it issues as long as its assets are of sufficient value.
So back to your post, "The borrower(s) future ability to repay is irrelevant". Nope. The value of the assets (loans) is dependent upon a combination of the likelihood that the borrower will repay and on the value of collateral that stand to secure the loan. "The question is, what is the PRESENT good being exchanged?" Now here, I'm actually interested in why this is the question to you. Why would you ask the question? I mean, would the borrower engage in the transaction if he didn't anticipate acquiring a present good? Even cash holdings are a present good if does not intend to use the loan proceeds.
This argument really has dropped to a surprising level. And I would have said that you are the one playing word games. But if you must, yes. When you make an assertion, I do go back to the definition upon which I assume you will rely. Words have meaning, and it's a cheap cop out to argue that I'm "playing word games".
Okay, then. I guess that I'm displaying my loss of patience by calling you out. There may only be three people in the world who have read this and maybe should be fewer than that who care. Despite the occassional frustration at bashing people who have no intention of changing their tune, such debates are usually intellectually stimulating for me.
Go enjoy your beer.
Published: December 17, 2009 3:59 PM
Gerry Flaychy
The bank lend it but in the form of 'account money', not in the form of 'base money'.When a bank make us a loan, say $90, it doesn't give us $90 in 'cash', it just add $90 in our bank account, which $90 I call 'account-money', which 'account-money' is a 'money substitute'.
Published: December 17, 2009 4:27 PM
Lord Buzungulus, Bringer of the Purple Light
I had planned to post no more here, but I couldn't resist
comment on this gem from Stoutenburg:
""The question is, what is the PRESENT good being exchanged?" Now
here, I'm actually interested in why this is the question to you.
Why would you ask the question? I mean, would the borrower engage
in the transaction if he didn't anticipate acquiring a present good?"
In other words, the piece of paper issued by the bank is a present
good, not because it represents a claim to some existing money owned
by the banker (as a valid money substitute would), but rather
because the borrower WANTS it to be.
Words escape me. I am starting to wonder if Mike Sproul is really
the biggest monetary crank here.
Published: December 17, 2009 5:45 PM
T. Ralph Kays
Lord Buzungulus
Thank you very very much, I am still laughing.
Published: December 17, 2009 6:00 PM
Gerry Flaychy
Joe Stoutenburg, to what precisely are you refering when you speak about "The notes in question ..." ?
If you refer to bank notes, commercial banks nowadays do no more issue bank notes (bank promissory notes).
If you refer to collateral, they are not bank notes, neither money in any form.
So, where do you see 'notes' in my post, the one that you re-read ?
Published: December 17, 2009 8:38 PM
scott t
"Joe Stoutenburg, to what precisely are you refering when you speak about "The notes in question ..." ?
If you refer to bank notes, commercial banks nowadays do no more issue bank notes (bank promissory notes)."
i was curious here....when a bank nowdays is going or goes under...does it come down to bank-credit (denominated in dollars) or bad loans???
it woudl seem that with the federal reserve so quickly able to keep banks from failing, does bank-credit even have an effect and is bank-credit (current dollar counted check book money) considered the bank-note of sorts?
Published: December 17, 2009 11:05 PM
scott t
"On September 15, 2008, the holding company received a credit rating agency downgrade; from that date through September 24, 2008, customers withdrew $16.7 billion in deposits...."
http://en.wikipedia.org/wiki/Washington_Mutual
i dont know if this is true or not. if so...what exactly was withdrawn to equal $16.7 billion.
some cash and mostly checks??
were the checks that were issued, if they were, comprised of WaMu created bank-credit???
Published: December 18, 2009 1:37 AM
Joe Stoutenburg
Buzungulus:
Now, you're being obtuse. So are you saying that the borrower receives nothing from the transaction?
Published: December 18, 2009 7:29 AM
Joe Stoutenburg
Gerry:
The bank could issue a loan by creating new account money without relinquishing any money proper, or it could actually give the borrower cash. Obviously, the two cases are different since in the first case, the bank would still have $100 while in the second, it would have only $10 in the vault.
Anyway, I agree with your statement as far as it goes. More precisely, the bank has created $90 in fiduciary media. My disagreement comes in when I see people asserting that only the original $100 of money proper can stand to back the bank's deposits. Clearly, the borrower of the $90 puts some of his assets up in case he does not honor the loan. I stated again and again how easily that loan can be transfered (really, it can be done in seconds - no one has ever responded, probably because they have no experience in finance). The bank can stand ready to honor its deposits at a moments notice for money in the broader sense.
Published: December 18, 2009 7:38 AM
Joe Stoutenburg
Gerry:
You're right. I'm not sure how I began using the term in this context. But looking through the thread, the error appears to be mine. In the context of current banking systems, all of the money in question is account money.
In theory, a free market banking system could be based upon a commodity money and issue bank notes in excess of the money proper in its vaults. According to Mises' definitions, those notes would be 'fiduciary media'. It's from there that a discussion with the terminology of 'bank notes' could proceed.
It may be helpful for you to clarify what you mean by "bank-credit". But if I'm understanding the term correctly, it does seem that "bank-credit" is somewhat synonymous with "bank-notes" in the context of my earlier comments.
As for your question about the cause of bank failures, I think that the fundamental cause is bad loans. As an example of analysis that I deem relevant, read here. The "assets" in question in the three failed banks discussed in the link are primarily loans. Note that the banks (but the larger banks moreso) were holding them at much greater values than what they could actually get when sold in the market. Meanwhile, the smallest bank, the only one insolvent on paper, resulted in the least amount of losses to the FDIC in percentage terms.
Without the interventions of the federal government and the Federal Reserve, the bad loans would result directly in a contraction of bank credit. In other words, people with account money would lose a portion of their deposits. The interventions are replacing the bad credit with federal government debt. Currently, that debt is going mostly through the Federal Reserve and in direct bail out. But I wonder if it will eventually go through the FDIC by direct recapitalization. That'll be an interesting time as there are some who think that the feds will just close it down if the FDIC becomes insolvent.
Of course, the feds are only delaying the inevitable. Eventually, the debt service becomes such a large portion of national income that the monetary authorities will either cause hyperinflation trying to service it or allow it all to come crashing down in a deflationary collapse. In such a collapse, bank credit woulc contract suddenly in the way that it has gradually wanted to all along.
Truly, not all is well in our financial house. The analysis to understand our ails requires us to consider the bad loans with their collateral being part of the question. Of course, the elephant in the collateral room here is housing which the monetary authorities are committed to continued inflation.
We can have discussions about whether certain banking arrangements would be more or less likely to expose the broader economy to the effect of bad credit practices. Lost in all of this discussion is the fact that I am quite open (in fact, very much in favor) or restoring a hard commodity basis to our economy. I am simply frustrated that many Austrians seem to insist that a restoration of a gold standard would solve all of our problems. I strongly disagree. A gold standard would do little or nothing if the underlying problems in credit were not resolved.
Published: December 18, 2009 8:13 AM
Joe Stoutenburg
scott t:
Your answer is further on in the link:
Presumably, very few of the redmpetions were in cash. To use, Gerry's terminology, this was account money leaving the bank. The bank would have had to sell some of its loan assets to raise the funds. I don't know for sure if it suffered losses in these transactions. But keep in mind that it had previously suffered sub-prime losses which were the impetus to its troubles. If subsequent experience has been any guide, I woiuld guess that the write-downs were insufficient and that it realized additional losses in the sale.
In any case, there is a great amount of political controversy involving JP Morgan Chase (the eventual buyer). The run was taken as a sign by the FDIC and OTS that the bank might collapse. It's notable though that the FDIC didn't lose a dime on the deal but that the equity holders of WaMu were wiped out.
Published: December 18, 2009 8:32 AM
Lord Buzungulus, Bringer of the Purple Light
Let's review some basics here, since so many are clearly in need.
In Reisman's original example, X deposits $100 with the bank,
presumably because he prefers to hold his money in the form of
banknotes or checks (a service for which he must pay a fee,
obviously). These banknotes are *economically* no different
from cash, they just represent a different form in which X holds
his property. The banknotes are money substitutes, which as I've
been stressing, are different from money itself, even though in
this case the primary economic function they play (to facilitate
indirect exchange) is the same as money itself. They are different
in the sense that the secondary service they provide (convenience)
is tangential to the essential role of money as a medium of exchange.
Now, in Reisman's example, the bank loans Y $90. As I've noted,
Reisman should choose his words more carefully as it has allowed
people like Stoutenburg to harp on irrelevant issues. Of course,
the bank would likely not directly give Y $90 of X's cash sitting
in the vault; the bank would instead issue *money substitutes*
denominated in the amount of $90. Here is where I should have
employed better terminology originally, as these new substitutes
are in reality *false* substitutes. Why are they false substitutes?
They are false because *both* X and Y have claims to the same amount
of property ($90 of cash) in the bank's vault. Clearly, they cannot
both have a valid claim here; one of the parties is the rightful
owner, the other is not. There is no other alternative. Stoutenburg
is clearly not grasping this point. It is irrelevant whether the bank
can honor particular calls for redemption (because typically not
everyone seeks redemption at once), or whether it can come up with the
funds easily; fraud is being committed *right now* by portraying the
tickets issued to Y as valid money substitutes. People should be
allowed to do what they want with their property, *as long as* they do
not violate the property rights of others. Fraud clearly counts as
such a violation, and the practice of portraying Y's notes (whether or
not X, Y, and the bank are all in agreement on the arrangement) as
money substitutes should be banned (as critics of FRB believe).
Consider a second example, where now X *lends* his money to the bank;
that is, the cash he deposits he effectively renounces claim to for
some specified period of time. In this case, ownership *has* changed:
the bank is now the owner of the cash for the specified period of time,
and he is free to do what he wants (a service for which he must now
pay X, i.e., interest). Now, any certificates issued to Y are valid
money substitutes, as they do not represent dual claims to the same
piece of property. There is not much to analyze in this case, except
to stress that changing the form in which one holds cash is NOT the
same as saving, which is what X does in this case.
We can now ask: what does anything Stoutenburg has been talking about
have to do with all this? Not much, I would say. He is clearly
envisioning a situation Reisman describes, properly understood. That
is, he really sees no problem with the bank issuing notes to Y and
portraying them as money substitutes. He can call them credit money
all he wants, he is just abusing language. He invokes red herrings
like colatteral and the ability of the bank to raise cash in the event
of redemption. Colatteral of course, has nothing to do with note
redemption, as colatteral comes into play if the loan defaults, which
is completely separate from redemption. It is spurious to think
otherwise. If the bank is confronted with redemption of one of notes
he issued to Y, he cannot sell the colatteral if Y's loan is not in
default. The bank can only do one of three things: 1. Give out some
of X's cash; 2. Give out cash from the banker's own pocket; 3. Try
to sell off some of the bank's assets (which let me say again, does NOT
include colatteral).
The notes issued to Y *cannot* be portrayed as money substitutes; what
are they, then, given the three choices available to the bank above?
Stoutenburg seems to concur that 1 would be fraudulent; I guess we have
to take his word for it. So only 2 and 3 are available recourses. Case 2
is just an ordinary loan, where the bank is the saver AND the lender; not
sure why the bank would engage in this kind of business (as their primary
business is to serve as an intermediary between savers and borrowers,
not lend out their own funds), but it's at least theoretically possible.
Case 3, where the bank pledges to drum up the necessary funds somehow,
is also theoretically possible, but it also obvious that the note in this
case is NOT a money substitute; it's NOT redeemable on demand at face
value. It's a pledge to pay, and while this may be used for exchange on
the market, that doesn't make it a money substitute, any more than trading
apples for beer makes apples money or money substitutes. Definitions
matter here.
So there are only three ways to categorize the arrangement between the
bank and Y, in Reisman's example (where X is not engaged in saving, only
changing the form in which he holds his monetary property):
1. Fraud (the bank issues dual claims to the same monetary property).
2. A regular loan, with the bank taking on both roles of saver and lender.
3. A promise to drum up funds on request for redemption, where the bank
tries to sell off some of it's assets.
Only in case 2 are Y's notes legitimate money substitutes. I harbor
suspicions that Stoutenburg is advocating case 1 (fraud) without really
realizing it, but one thing is for sure, he is abusing terminology in
support of monetary crankism.
Published: December 18, 2009 10:52 AM
Mike Sproul
Joe Stoutenberg:
You were not mistaken in talking about bank notes, except for the fact that modern US banks don't issue them. It makes no difference if the dollars issued by a bank exist as printed pieces of paper or as checking account dollars. What matters is the assets and liabilities of the issuing bank, not the physical form of the dollars it issues.
But the term "money substitutes" is misleading. It's better to think of checking account dollars as 'derivative money' in the sense of being a claim to the delivery of one paper dollar.
Published: December 18, 2009 11:18 AM
T. Ralph Kays
Impressive, I would add that in both case 1 and 3, at the end of your post, there is a fraudulent increase in the supply of money available. This is the hallmark of fractional reserve banking and necessarily involves stealing in exactly the same way that counterfeiting is theft. It is not only because fractional reserve banking is at the root of the business cycle that austro-libertarians oppose it, there is also the issue of the theft inherent in FRB.
Published: December 18, 2009 11:26 AM
T. Ralph Kays
Sorry, meant to address my previous post to Lord Buzungulus.
Published: December 18, 2009 11:28 AM
Lord Buzungulus, Bringer of the Purple Light
Thanks T Ralph. I'm actually assuming in case 3 that the nots are honestly labeled, ie, as NOT being money substitutes (as they would be in case 1). Honest labeling, of course, completely undercuts FRB.
Published: December 18, 2009 11:54 AM
Lord Buzungulus, Bringer of the Purple Light
Actually T Ralph, you are right if in case 3 the notes are labeled as promises to pay; unless there are full reserves they can only be called promises to TRY to pay.
Published: December 18, 2009 12:06 PM
T. Ralph Kays
Lord B
Ah, yes, you are right of course. Very good job. The RBD crowd is so persistent that there really does need to be a clear concise explanation of its specific failings available here. Something we could refer people to when it is brought up so that we don't have to continually go over the same ground time after time. Austrian economics so completely exposes fractional reserve banking as fraud that it is a shame to have to go over the argument again just because it has been dressed up with new jargon.
Published: December 18, 2009 12:06 PM
Joe Stoutenburg
Buzungulus:
Mike Sproul, if he remembers, can tell you that I have argued from exactly the same place where you are. Now, you may choose to think that I never really understood or that I have since "lost my way", but your explanations are nothing new to me. Still, I thank you for taking the time to go through your viewpoint with only occassional jabs. Most of your post is accessible by plain logical debate.
Though I think that I have done so numerous times, I will again interject where your reasoning is faulty.
We shouldn't presume anything. I agree that a demand deposit in its purest form should require a fee and certainly would not pay interest. The fact that most people in society think that they have a demand deposit that pays interest is problematic. We'll both agree with that, I think. [In the interest of finding common ground, it would be cool for you to acknowledge this.] Our difference though is that you think that the problem is fundamental to the transaction while I think that it arises from political intervention.
As a counter to this snark, it is certainly your perrogative to place yourself in a position of superiority if that makes you feel good. However, issues may appear irrelevant to a person who does not understand them. Anyone though, I'll call a spade a spade and admit that neither of us are necessarily humble people. While I do push my point strongly, I always enter a debate with the realization that I could be wrong. In the past, I participated in this debate from exactly where you are (again, ask Mike Sproul). However, I knew that I could be wrong and know it now. Naturally, the fact that I changed my position does prove that my old one was wrong or that my new one is right (in fact, I hope to continue refining it and to admit errors whenever I find them). My point in this reasoning is to suggest that, in all of our blustering (yes, I bluster too), each of us has the potential to be wrong. You understand that, don't you?
Nice back pedal. It would suffice to call them fiduciary media with all of the import of that term as used by Mises. We both agree that there is only $100 of money proper to $190 of deposits. There is indeed a problem if all parties insist upon immediate redemption in cash and only cash. However, there are more assets at play here than just the money in the bank's vault. In exchange for receiving $90 of newly created account money, the borrower agrees to remit a portion of his future production back to the bank. In the event that he fails/refuses to honor that agreement, there is collateral that the bank can seize.
As long as all parties are aware of and consent to the arrangement, there is no fraud. The bank's liabilities consist of $190 of deposits. Its assets consist of $100 of money proper and loans currently valued at $90. All parties should also agree on the provisions for dealing with the risky loan asset. Typically, the bank has been required to hold extra capital to shield depositors from loss, but other arrangements could be considered in which depositors could share more directly in losses and maybe even in gains. While that would be an interesting tangent, I think that bank notes (or electronic deposits if we wish to differentiate) best serve the functions of money when they can reliable be redeemed at face value. To do so requires strong collateral standards and well-capitalized banks.
Anyway, there are $190 of liabilities to $190 of assets. Some of those assets are future goods. But the market allows for the exchange of future goods into present goods via interest rates. Really, this is basic economics. I have repeatedly stated that these future goods (encompassed in loans) are readily sold even allowing for the transfer of funds (though only electronically - physical transfer, if desired, takes a few days) in the blink of an eye. But you display both a lack of comprehension and, almost certainly (correct me if I'm wrong - though I'd be shocked), a lack of practical experience in finance with statements like this:
Let me repeat. Collateral is only one part of the value of a loan. The loan has value from the mere promise of the borrower to repay. A person transacting in a market for loans may note that a certain class of borrowers has only a 1% annual frequency of default. More precisely, loan markets reflect the market view on future default rates though, of course, those views are heavily informed by recent experience. Loan markets also look at the value of collateral. Even if a deal is expected to have high potential default, there may be very little discount for non-payment if the loan is well-secured. If that is the case, the only fluctuation in value for the loan will be the currently prevailing interest rates.
Since I just went through a good amount of discussion, let me repeat a central point for emphasis. It is not the collateral that is trading. It is the loan itself. The collateral is one element that gives value to the loan.
Take some real world examples. A California resident has a mortgage for $500K. He has stopped paying on the mortgage, and the home could probably be sold for no more than $200K. For how much could the loan be sold? [Bonus question: what is the value that many banks are today placing on that loan? If you know the answer to this, you know that not all is rosy in the world of credit today.] Now, suppose that we have a person elsewhere who has a $200K mortgage on a home that could be sold for $500K. He has never missed a payment and has a history of excellent credit. How much do you think this loan could be sold for?
But of course, these questions don't even matter to you since collateral is irrelevant.
At the risk of over-emphasis on the point, you state "if the bank is confronted with redemption of one of notes he issued to Y, he cannot sell the colatteral if Y's loan is not in default." The bank does not need to sell the collateral. It can sell the loan (which is a claim to future goods). Really, I have gone over this several times, but you keep insisting that it must sell the underlying collateral.
You don't know what you're talking about. And while I realize that calling you out in this manner may make you dig in your heels even deeper, you should take a moment to think about what you may not understand in finance despite what I am sure must amount to a great deal of study in economics. You destroy the value of any good points you may have (and I hope that I can pick them up if I've missed them) when you appear to claim that a bank's only valid assets consist of its cash holdings when considering the backing for its deposits. Most people familiar with bank operations will just roll their eyes and ignore you. Only gluttons for punishment like me, who am interested in this topic for academic reasons, will engage you. Others will disregard you (excuse me for turning your own smear against you) as a monetary crank.
You may insist as long as you want that collateral is not relevant. People familiar with bank failures know it has everything to do with meeting bank obligations. As I've said before, could there be better ways to organize banking? Perhaps. Compared with current management (which is ripe with politically motivated intervention), hell yes! But you exclude yourself from any discussions that will ever be considered with the position that you're taking.
Published: December 18, 2009 1:33 PM
Joe Stoutenburg
Here's an interesting topic of interest to anyone following this out of honest consideration and not just to prove themselves right at all costs:
How does the supply of base money restrain the expansion of the money supply via credit? From my perspective, I don't think that the answer matters much whether we're talking about a hard commodity standard or our current economy in which base money consists of FRNs and common metal coins.
The form of base money certainly influences how the supply of base money can change. Under a gold standard, a new mineral find can suddenly increase the supply. Under fiat money, it can be printed at whim though, in practice, the base money supply has increased at a stable rate. I linked to the relevant St. Louis reserve series elsewhere in this thread and won't take the time to find it again. Of course, who receives newly found/printed base money is a fair point for discussion.
Other factors influencing the expansion of the money supply through credit also include incomes and actual production. The distribution of credit also matters. When credit is being created for political ends, it has a way of going to non-productive activities. This clearly puts more strain on the productive part of the economy and will eventually put servicing the national debt beyond their productive ability.
Another interesting point of discussion could be to pick Mises apart more when he talks about "inflationary policies". I have noted in my review of the sections of Human Action that deal with money, that credit expansion always seems to be a political process for him. Now, I may subject myself to heretical charges for suggesting a short-coming in Mises, but this seems to reveal a blind spot for him that is very similar to the one that I charge against Buzungulus. I can not recall a place in which he discussed the non-political issuance of credit. Does he understand it? To read him, he seems to suggest that all credit expansion is politically motivated and so arbitrary. If someone can refer me to places in which Mises discusses such aspects (either to prove me right or wrong), I would find that to be of most value in where I would like to move this debate next.
Don't get me wrong. Mises was a brilliant economist, and his overall view on human action is unparalleled. But his view on banking (and especially as it was carried forward by students such as Rothbard - I find Mises much more reserved and objective) does leave much to be desired.
Published: December 18, 2009 1:51 PM
T. Ralph Kays
Lord Buzungulus
As you can see the RBD cranks think that talking about the business organisation of a bank and what are good banking practises from an individual banks perspective constitutes a study of economics. That what they describe is just another form of fractional reserve banking with all of the inherent flaws of such a system is beyond their comprehension, they are looking at the tree and not seeing the forest. Given a legal system that supports fractional reserve banking they are right from a strictly BUSINESS standpoint, but that has nothing to do with the economic questions involved. They are ignoring the economic analysis of money and credit and banking and are simply arguing in support of a particular business model.
Published: December 18, 2009 1:57 PM
Lord Buzungulus, Bringer of the Purple Light
T Ralph, exactly right, these guys are morons, they confuse business practices with economic concepts. I love how Stoutenburg switches between 90$ of "account money" and a "loan valued at 90$. The "account money," which he acknowledges exists ONLY due to the will of the banker ("newly created"), somehow becomes magically imbued with a value of 90$. What utter cluelessness.
Published: December 18, 2009 2:43 PM
Lord Buzungulus, Bringer of the Purple Light
I'll say it more clearly: Stoutenburg is either a liar or an idiot for claiming that 100$ of cash and 90$ of "account money" can be added under a common unit. The account money is nothing more than a piece of paper with the number 90 written on.
Oh, BTW, X and Y in my example certainly can agree to portray themselves as both having an exclusive claim on the money in question. They can also agree to contract in unicorns and elves. Fraud is fraud, regardless of agreement to commit it.
Published: December 18, 2009 3:01 PM
Joe Stoutenburg
T. Ralph:
A study of economics is a study of economics. Many subjects benefit from exposure to multiple disciplines. I find it ironic when I think how I would have participated in this discussion just a few years ago. You would have been singing my praises. Yet from where I sit now, my understanding back then was from a lack of perspective and deeper understanding of the monetary system. Interesting.
Anyway, you guys do a great job regurgitating the talking points that you surely read in the daily articles here and perhaps even within in-depth books. Your problem "getting through to me" is that I have also read much of that same material.
In my mind, I have taken many, many solid insights from the Austrian school. Nor do I imagine that there are none left that I could gain. Nor do I deny that there are probably errors in my thinking that could be corrected from studying knowledgable Austrian writers. However, in the matters that we have been debating, I believe that I have informed myself well but have simply reached different conclusions than those to which you cling.
Are my conclusions right? I guess everyone must judge for themselves. In you, I have seen someone who results with insults as soon as you are challenged. I see someone who has the position that I once had on the topic but that doesn't have the perspective that prompted me to move away from it. Can you see why, in combination of your incivility (which I discount as a crutch for lack of substance) with your lack of experience with the systems that you claim to "analyze" why I would not be inclined to be persuaded?
Buzungulus is slightly different but apparently reaches the same place as you. He brings quite a bit more substance to the table than do you. He appeared much more magnaminous from the time when he first began to engage me. Yet it's interesting how quickly he adopted your stance after we had only briefly crossed in debate. I was only reiterating many of the points that I had voluminously covered in this thread. So he received little new information about my views (unless, I admit, he simply was not reading my prior posts which I admit were usually lengthy). I can easily conclude that his change in stance was simply frustration at not being able to cross me. If it were on principle, I would have thought that he would already have formed that opinion of me.
While I have not always held to the highest level of civility myself, honest (and determined, I might add, given the length of our discourse) readers will have to judge for themselves which viewpoints are best represented. You, T. Ralph, have not represented yourself well. Even those inclined to your opinion have gently cautioned you in your responses.
While I admit that an unchallenged point of debate could lure me back (I'm a proud SOB, I'm afraid), we should probably call this quits. Though I have not backed down from responding to your jibes (and the more rare statements of substance), I gave you up as unreasonable almost from your first (second actually - I went and looked) post.
I wondered a little about Buzungulus. But really, I was responding to points of debate (kind of without regard to the disposition of the person making them), and he only engages in ad hominem at the margin, besides. But he seems to find it easier to mimic your attitude than to engage my points, evading or ignoring most of them.
Of course, you guys make similar charges against me - mostly that I ignore your most valid points. I think that I have responded to them, and that it is you who have ignored mine (or more to the point, failed to address them). In any case, as I stated, each must decide for himself if he cares to think one way or another.
While I could be drawn back to discussion by others, why don't we just stop going at each other? We've long reached a point of disagreement. I think that you guys are being obtuse, and you obviously have similar opinions of me. You may have your own last words, of course. But I'm going to do my best to not be tempted into letting you goad me back into this with you.
Published: December 18, 2009 3:15 PM