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Source link: http://archive.mises.org/12713/white-contra-mises-on-fiduciary-media/

White contra Mises on Fiduciary Media

May 14, 2010 by

Lawrence White’s mistake is attributable to his failure to fully come to terms with one of Mises’s most famous contributions to economic theory: his demonstration of the causal link between the creation of fiduciary media and the business cycle. FULL ARTICLE by Joseph Salerno

{ 876 comments }

David Pierce June 2, 2010 at 2:19 am

Joe Salerno: “Whether this result was best achieved by “free banking” or a legally mandated marginal 100-percent rule, Mises considered a secondary question of policy technique.”

Joe, you should consider the possibility it is the other way around. “Free banking” requires a legal intervention, say, by declaring that a deposit is a credit transaction. In the spontaneously developed legal system, loan contracts and deposit contracts would be distinguished, much like Huerta de Soto explains in his book.

Ludwig June 2, 2010 at 2:44 am

OK, Joe, this was by me. Ludwig

newson June 2, 2010 at 7:55 pm

nobody in the free-banking fraternity seems to have addressed hülsmann’s article in the hoppe festschrift “the demand for money and the time-structure of production”. it argues the case for a pure commodity money regime.

ludwig June 3, 2010 at 2:19 am

Anybody is free to send a copy of this paper to my email address.

Stephen Grossman June 2, 2010 at 12:40 pm

>David Pierce: Your [Stephen Grossman] memory is wrong [about Mises denying that FR causes the
business cycle].

Evidence? The Salerno comment at this page’s top agrees w/my memory, not that I’m appealing to authority because hes an authority.

David Pierce June 2, 2010 at 3:01 pm

In economics, even authorities sometimes make mistakes, or at least, do not always express themselves with sufficient nuance. Instead of quoting over and over again certain passages from Mises, I think it is better to outline the logically possible positions and then situate Mises´ views relative to that. I don´t think Larry White categorically denies the existence of the link mentioned by Salerno. If I remember well he believes it makes a difference whether or not changes in the supply of bank-issued money are accompanied by changes in the demand to hold. Now I think this is a questionable distinction but the question was rather about the correct interpretation of Mises´ view. The question to which I referred concerned in particular whether Mises was a 100% reserve banker or a fractional-reserve free banker and the answer to that question is clear enough. Mises indeed says, if I remember well, that credit expansion always and everywhere has the same effects but that under free banking these effects would remain severely limited and restricted. The business cycle as we know it comes only with the institution of central banking. He explicitly differentiates the different configurations. I cannot remember Mises talking about free banking under a “legally mandated” 100% reserve rule. The 100% reserve rule does not have to be legally mandated since it is the rule mandated by traditional spontaneously-evolved law. One could perhaps question the latter point but it takes expertise in the history of law to do this. The best work I am aware of in this respect is that by Huerta de Soto. The free-banking criteria Mises mentions are “coexistence” and “independence” of a multiplicity of banks. Being no legal theorist, he apparently accepted the positive-law rule that a deposit is considered by the law to be a loan. So he accepted that there may be a certain tension between the “juristic” approach and the approach of the economist and that apparently we can hope for no better than that. Now all this is from memory; I am working on other topics at this moment. If Joe or anyone else thinks all this is mistaken, he (they) is (are) free to react.

ludwig June 3, 2010 at 4:05 am

In fact the problem with Salerno´s question — the causal link between the creation of fiduciary media and the effects thereof (in Salerno´s words: business cycles) — is the way in which it is phrased: it is insufficiently specific. We all suspect there is some kind of link. But one should ask: within what kind of institutional context takes this link the form of business cycles, recurring recessions etc. The precise form this causal link takes depends upon the institutional context and Mises is rather precise on this.

ludwig June 3, 2010 at 5:21 am

So the way in which I would phrase the question would be rather something like: “how the effects of credit expansion depend upon institutional context” etc. I know most folks here don´t like Law-and-Economics but much could be learned by trying to reframe some of the arguments in that framework.

Stephen Grossman June 3, 2010 at 9:53 am

The notion of “normal” credit expansion is absurd. Issuance of additional
fiduciary media, no matter what its quantity may be, always sets in motion those
changes in the price structure the description of which is the task of the theory
of the trade cycle. Of course, if the additional amount issued is not large, neither
are the inevitable effects of the expansion. [HA, online, Scholar's Ed., 442, n.17]

Free banking is the only method available for the prevention of the
dangers inherent in credit expansion. It would, it is true, not hinder a slow
credit expansion, kept within very narrow limits, on the part of cautious
banks which provide the public with all information required about their
financial status. But under free banking it would have been impossible for
credit expansion with all its inevitable consequences to have developed into
a regular—one is tempted to say normal—feature of the economic system.
Only free banking would have rendered the market economy secure against
crises and depressions. [HA, 443, para. 1]

It seems you were right. I’m unclear on those nuances, however, which confused me when I
twice read “Indirect Exchange” in _HA_ and they still confuse me. My background is philosophy and so I’m paranoid about the context of these ideas we discuss. A small error in a definition will produce large confusion, like a poorly designed telescope mount focused on a star. Mises seems uncharacteristically uncertain on what we call fractional reserve (a term not in _HA_). I think
that de Soto has validly developed Mises’ thought.

Ludwig June 5, 2010 at 2:53 am

OK, see also _The Theory of Money and Credit_ p. 300: “It is usual to reckon the acceptance of a deposit which can be drawn upon at any time by means of notes or checks as a type of credit transaction and juristically this view is, of course, justified; (…)”

Stephen Grossman June 5, 2010 at 12:03 pm

Juristically! Then, at least in his 1912(?) _TMC_, Mises does not claim that deposits are credits, ie, loans to banks. Is that your understanding?

Ludwig June 5, 2010 at 2:02 pm

No, “juristically” is here opposed to “economically” or “from an economist´s viewpoint”. So you could indeed maintain that from the standpoint of positive economic analysis deposits are not to be considered credits, but when the question is “Did Mises oppose fractional-reserve free banking” or “Which are the permissible forms of free banking from a normative viewpoint?”, the answer is nevertheless “no”, since MIses does not oppose the positive-law definition of free banking from a normative viewpoint.

Stephen Grossman June 2, 2010 at 12:49 pm

“Fed chief sees delicate dance ahead-
Waiting too long [to tighten Fed credit] could risk unleashing inflation and sparking a dangerous new wave of speculation like the one that powered the housing boom and its devastating bust.”
Commentary, not a quote, from an AP story in the (New Bedford, MA, June 1) Standard-Times

Bernanke agrees with Mises! Quick, the smelling salts! This won’t, of course, change the sleazy dishonesty of leftist and even conservative journalists who will continue to blame the tiny capitalism left in banking and money. “Speculation” caused by govt! Whooda thunk it?!

Stephen Grossman June 3, 2010 at 2:36 pm

I want to read Rothbard’s books on money and banking in chronological order re the original, presumably, print publication date to follow the development of his research. Online versions have only the Mises Institute date. Does anyone know the dates of original publication?

•What Has Government Done to Our Money 1963?
•The Case for the 100 Percent Gold Dollar
•The Mystery of Banking 1983?
•The Case Against the Fed 1994?

Stephen Grossman June 3, 2010 at 5:02 pm

Do you recall “The Producers,” a comedy about Broadway theatre producers Max Bialystock and Leo Bloom who sell more than 100% of the rights to “Springtime For Hitler” in the expectation that it will flop and investors will assume that the money is gone? Is that fractional theatre investing and does it hold any lessons for Bernanke?

Stephen Grossman June 5, 2010 at 7:48 pm

>Ludwig: No, “juristically” is here opposed to “economically” or “from an economist´s viewpoint”. So you could indeed maintain that from the standpoint of positive economic analysis deposits are not to be considered credits, but when the question is “Did Mises oppose fractional-reserve free banking” or “Which are the permissible forms of free banking from a normative viewpoint?”, the answer is nevertheless “no”, since MIses does not oppose the positive-law definition of free banking from a normative viewpoint.

I poorly expressed my view. I also meant that Mises economically rejected deposits as loans. But I didn’t know or recall that he accepted it legally. It’s odd, tho, that he accepted that law since he knew its justification was false. As one example among many, his _Omnipotent Govt_ is a detailed attack on the growth of the German govt over many decades of interventionism (and socialism?). Maybe his moral subjectivism came home to roost. If so, Rand’s _Capitalism: The Unknown Ideal_ provides the necessary, objective moral defense of capitalism. In fact, it often seem to me that some of what Rand wrote was in response to Mises. While she rejected his praxeological rationalism and his philosophical subjectivism in general, I believe that Rand respected Mises as a systematic, long-range thinker.

Current June 5, 2010 at 9:05 pm

I don’t think you understand Ludvig’s point. Mises never said that the legal justification for fractional reserve banking was false, it was Rothbard who made that argument.

Mises arguments against fractional reserve banking are consequentialist. In some of his works he argued that it brought about the business cycle. He never argued that fractional reserve banking is immoral, that’s Rothbard’s argument.

Temporarily strike the memory of Rothbard from your mind, then read Chapter 15 of “The Theory of Money and Credit”.

Note also the stuff from p.361-374, especially page 362 where Mises writes:
“Consequently the chief rule to be observed in the business of a credit-issuing bank is quite clear and simple: it must never issue more fiduciary media than will meet the requirements of its customers for their business with each other. But it must be admitted that there are unusually big difficulties in the practical application of this maxim
for there is no way of determining the extent of these requirements on the part of customers. In the absence of any exact knowledge on this point the bank has to rely upon an uncertain empirical procedure which may easily lead to mistakes. Nevertheless, prudent and experienced bank directors – and most bank directors are prudent and experienced – usually manage pretty well with it.”

Graeme Bird June 6, 2010 at 4:10 am

It hardly matters who made the argument Current. Its pretty clear that MIses did not like the practice of fractional reserve. So what if he didn’t at that stage realize it had to be banned outright? He wasn’t living in the computer age, so the obviousness of the necessity for a blanket ban may not have been so clear as it ought to be to people today.

I cannot think of a valid excuse for this practice. I really cannot. It baffles me why people feel the need to defend the practice. If it was to economize on gold, well that makes no sense. Since while we have government we can still have some of the money supply taken up by unbacked government paper, made valuable because of the tax liability. And if we are serious about a blanket ban we can have several, and not just two monetary commodities. So the defenders of fractional reserve are completely short on justifications.

Beefcake the Mighty June 6, 2010 at 8:21 am

One thing I don’t understand here is, if issuance of fiduciary media in response to increased demand for such media (expressed very crankishly by Mises here in terms of “needs of business”) WON’T set in motion the business cycle, why does it matter if such issues (again, in response to “demand” for them) come from free (independent) banks or a central bank?

Current June 6, 2010 at 9:01 am

> why does it matter if such issues (again, in response to “demand” for them)
> come from free (independent) banks or a central bank?

It doesn’t per se. However, free banks are likely to create a much more well behaved price level to than central banks can.

Firstly, free banks would be much more separate from politics. Secondly, a free bank has an interest in not over-issuing fiduciary media or under-issuing it. Over-issue puts the banks finances at risk, while under-issue means forsaken profits.

Central banks have effectively abolished the market information that comes from redemptions that could provide information on the demand for money.

By the way, I’ll answer your question in the other thread soon, I’m a bit busy at present.

Beefcake the Mighty June 6, 2010 at 9:33 am

Thanks Current, I look forward to your response in the other thread.

But here, you’re invoking standard Hayekian knowledge problem arguments. That’s fine, but of course the point there is that decentralized institutions do a *better* job than centralized institutions, there’s no claim to optimality here (some Horwitz stresses in his Hayekian defenses of the market order). So, I don’t think it can be denied that business cycles *could* occur under free banking (just that they’re in some sense less severe than under central banking).

Current June 6, 2010 at 9:48 am

Yes, that’s right, business cycles could occur.

I don’t see how this can be much different for the 100% reserve argument though. Surely the main point with that too is that disturbances to business would be less severe, not completely non-existent?

I know Rothbard sometimes said that business cycles would disappear, but do you really think that they would?

Beefcake the Mighty June 6, 2010 at 9:53 am

No, I do not believe business cycles could occur under 100% reserve banking.

Current June 6, 2010 at 9:58 am

>No, I do not believe business cycles could occur under 100% reserve banking.

Why not?

Consider this example…. An economy uses gold coinage and all debts are timed. Now, a new clever sort of debt contract is invented – it’s not money, maybe something like 19th century commercial bills. The invention of this debt contract reduces the demand for money because it allows more transactions to occur by cancellation.

Or, what about if people became worried that a war was imminent? Wouldn’t that increase their demand for money?

Beefcake the Mighty June 6, 2010 at 1:38 pm

Current writes:

“Or, what about if people became worried that a war was imminent? Wouldn’t that increase their demand for money?”

Why do you believe that increased demand for money will set off a business cycle? Rare events or sudden discoveries of new stock can create economic shocks, whether we’re talking about money or any other good. The question is whether such events lead to a clustering of errors like we see with the boom-bust cycle. Entrepreneurs CAN anticipate such events like you’re talking about, and induce changes to the structure of production to successfully weather such events (that’s what entrepreneurs are good at, after all). The defining characteristic of the boom-bust is entrepreneurial failure on a mass scale. Why should that happen with production of a commodity money, when it doesn’t seem to happen with production of any other good?

BTW, I thought most parties here agreed that it was fiduciary media that engender the cycle? With the debate being whether such issuance always sets off the cycle (the Rothbardian position) or whether such issuance in response to increased demand for such media does not necessarily set off the cycle (the ME position)?

Current June 6, 2010 at 2:33 pm

> Rare events or sudden discoveries of new stock can create economic
> shocks, whether we’re talking about money or any other good. The question
> is whether such events lead to a clustering of errors like we see with the
> boom-bust cycle. Entrepreneurs CAN anticipate such events like you’re
> talking about, and induce changes to the structure of production to
> successfully weather such events (that’s what entrepreneurs are good
> at, after all).

I generally agree with you here. But, I don’t think that entrepreneurial processes are quite as perfect. I think that even if monetary disturbances were eliminated then there would still be some disturbances, I think they’ll be much less frequent and less severe.

> The defining characteristic of the boom-bust is entrepreneurial failure on
> a mass scale. Why should that happen with production of a commodity
> money, when it doesn’t seem to happen with production of any other good?

But, you’re presuming the answer here by discussing commodity money only. It’s essential to the evolution of effective markets that entrepreneurs can choose *how* they serve customers.

Let’s suppose that the only legal form of currency was 100% commodity money. (I know many 100% reservists don’t support an outright ban). That requires entrepreneurs respond will proscribing their tools. It’s like, for example, requiring that farmers only plough their fields with Bulls.

Some 100% reservists look at it the other way. They say that no ban is needed, and that a free market will pick 100% reserved commodity money. Surely that is pre-empting entrepreneurship? These folks are saying, they’ll be a free market but products that have X,Y & Z characteristics will probably win.

> BTW, I thought most parties here agreed that it was fiduciary media that
> engender the cycle? With the debate being whether such issuance always
> sets off the cycle (the Rothbardian position) or whether such issuance in
> response to increased demand for such media does not necessarily set
> off the cycle (the ME position)?

It mostly is. However, to most Austrian Economists, on both sides of the debate, the ABCT type of recession is only one possible type, although the most common. Mises said in one of his books that identifying this type was very important for help distinguishing it from others.

In one of his recent articles Salerno discusses the possibility of a fall in demand for money due to better payment systems http://mises.org/daily/3874 . Incidentally Selgin sees this as a problem with his productivity norm. As Salerno says it’s a GDP based norm and therefore can’t take into account changes in payment systems like this. That’s why Selgin says it’s a second or third best to free banking.

Beefcake the Mighty June 6, 2010 at 2:45 pm

“But, you’re presuming the answer here by discussing commodity money only. ”

Yes, that’s right, that was my assumption, I thought it was yours as well. If you mean to consider a fiat money system without FRB, then I would generally agree that you could see cycles in that system as well. But then we’re clearly not talking about a market system anymore.

Current June 6, 2010 at 3:18 pm

Sorry, that should have read: “But, you’re presuming the answer here by discussing 100% reserved commodity money only. ”

newson June 6, 2010 at 9:38 am

it’s always intrigued me that free-bankers do not acknowledge any third-party damage flowing from the banker-client relationship. in an imaginary counterfeit scenario if i knowingly agree to accept fake money from a forger in exchange for something (our relationship is candid and mutually beneficial) would free-bankers deny that this exchange is a conspiracy to rob all holders of bona fide notes?

n.b.: i’m not saying that issuance of fiduciary media is counterfeiting.

Current June 6, 2010 at 9:43 am

Yes. Of course assisting in counterfeiting is wrong.

Free bankers don’t oppose the principle that two parties can mutually agree something that unfairly disadvantages a third party. It’s just we don’t think that happens with free banking.

newson June 6, 2010 at 7:35 pm

to the extent that frb are accepted as money, members of the public who are not banking customers receive devalued money.

Current June 7, 2010 at 9:44 am

If that were true about FRB then surely it would also be true about the land banks I suggest below. The land banks can do all the same things as FRB.

I don’t believe that third parties receive devalued money in a fractional reserve free banking system.

Peter Surda June 7, 2010 at 4:27 am

I’m not a free banker but so far I don’t see a reason why FRB should be illegal, so I’ll try to answer. Yes, I agree that FRB has a negative effect on all the holders of the currency being inflated. However, since I do not see a violation of property rights or contracts (there is no right in the value of property), I consider this a negative externality. The reaction of the market to this is a decrease of the value of the unit of the currency (in other words, loss of purchasing power). If there were no legal tender laws, in my opinion this wouldn’t be such an issue.

newson June 7, 2010 at 5:25 am

what about real counterfeiting – is that just a negative externality?

Peter Surda June 7, 2010 at 11:41 am

Counterfeiting is merely a subset of fraud. Either way, my point is that only the opinion of the parties involved in the transaction is relevant for the determination of whether fraud occurred. If both parties agree with the contract as is, a third parties dislike of the underlying object does not make it fraud. You cannot defraud a third party, you can only violate their property (e.g. steal from them). But you do not own the purchasing power of your money, therefore no property violation either.

Current June 7, 2010 at 11:53 am

The dishonest part of counterfeiting is that a certificate is made that claims to be something that it isn’t.

If the banknote contract is sufficiently clear on a fractional-reserve note then this isn’t the case. (I agree that in some historical circumstances it hasn’t been that clear).

Current June 6, 2010 at 9:42 am

How would you guys on the 100% reserve side feel about equity/capital based money?

Let’s say I start up a free bank based on farming. I buy up lots of wheat fields and issue wheat based money. Each certificate entitles the holder to a proportion of the wheat output from a particular area of land. E.g., a certificate may entitle the holder to 70% of the wheat output from an acre of land. Let’s suppose all these certificates come due at harvest time where the holder has to either gather his wheat or lose, and at the same time new certificates are printed.

A way could be found to account for the varying outputs from different places, and a way could be found to account for varying crop yields between years.

If I were successful in making this into a form of money then would that cause business cycles? Would it be immoral?

Stephen Grossman June 6, 2010 at 10:37 am

Its based on real production so whats the problem?

Current June 6, 2010 at 1:51 pm

>Its based on real production so whats the problem?

That’s interesting…

You see, there are several different views about why fractional reserves are undesirable. I’ll describe them below and how they relate to the example I gave.

#1
Some people think that it’s immoral full stop, they aren’t so concerned about business cycles.

#2
Some worry about bank runs mostly. They worry that fractional reserve banking is intrinsically unsafe.

#3
There are two forms of the argument for ABCT starting. The Fractional Reserve Free bankers say that it when money supply exceeds demand that triggers ABCT. Others though think that any rise in money supply causes ABCT, unless it’s very slight. They would oppose my proposed land money just as they oppose fractional-reserves.

#4
Some argue that the problem occurs when all banks work together to cause the money supply to rise. The agree with the free-banking idea that banks can’t overissue, but they make an exception for cartels, which they consider to be likely.

#5
At least a couple of folks argue that *knowledge* is the important part. The argue that a money holding isn’t an investment because it can be spent of saved. I’m thinking of DD5 in particular here. The worry that a holding of money can’t validly also be an investment or ABCT would result. They would oppose this plan too.

Stephen Grossman June 6, 2010 at 4:14 pm

You’ve not addressed the issue of real production, directly anyway.
Theres no logical link between my question and your answer.

Current June 6, 2010 at 4:38 pm

Well, FRB notes are similarly based on real production. It’s based partly on reserves and partly on debt. (Central bank notes, of course, are not).

Beefcake the Mighty June 6, 2010 at 7:39 pm

“Well, FRB notes are similarly based on real production. It’s based partly on reserves and partly on debt.”

Well, you can only say this (issuance being based partly on debt) if you view a deposit as “demand” for bank liabilities. Again, such demand is not independent of supply.

Current June 7, 2010 at 10:20 am

> Well, you can only say this (issuance being based partly on debt) if you view
> a deposit as “demand” for bank liabilities

Yes, it depends upon the account holders knowing that they are deal with a debt.

> Again, such demand is not independent of supply.

No, it isn’t entirely. I think we agree that if there is a monopolist issuer of fiduciary media then they can artificially reduce the rate of interest. Where we differ is that you also think that it could happen otherwise too.

I think this theory treats the banks as being too uniform. Let’s suppose that the general performance of computers has been reduced because of a recession. During the recession computer buyers decided to buy cheaper models. What then happens afterwards? Would all the computer companies continue only offering only the low performance models? Does the situation create a defacto cartel? Probably not, because, one manufacturer would “defect” and start offering higher performance models. The situation is similar for free bank, suppose the banks have issued more fiduciary media to respond to a change in demand for money. In that case when the demand reverses some banks will have the incentive to “defect” and reduce their circulation of fiduciary media.

Beefcake the Mighty June 7, 2010 at 10:49 am

Current writes:

“I think we agree that if there is a monopolist issuer of fiduciary media then they can artificially reduce the rate of interest. Where we differ is that you also think that it could happen otherwise too.”

I would probably phrase it as, how could it NOT happen? Human nature being what it is, I would be surprised if ostensibly independent banks did not eventually collude to expand their issues in concert.

But that’s actually not the point I’m driving at. Whether the banks are truly independent or under monopoly control does not matter. In either case they are uniquely situated among all other businesses in the economy to influence demand for their product, because they do not have to bid real factors of production away from other entrepeneurs. By will alone they can reduce the prices they offer for their product and thereby stimulate demand. You can argue (as Steve did, fallaciously I believe) that the risk of overissue is a cost of production. I think that’s incorrect, but also beside the point. There is no change in demand for fiduciary media apart from the actions of the suppliers themselves (the banks).

Current June 7, 2010 at 12:28 pm

> I would probably phrase it as, how could it NOT happen? Human nature being
> what it is, I would be surprised if ostensibly independent banks did not
> eventually collude to expand their issues in concert.

How is the situation different to supply in any other industry. This is like saying “all the car companies could collude to increase prices in concert”. If that were generally true then the free market could not work.

I think the truth is that different banks face different trade-offs. They would not all have the incentive to join a cartel, as in other businesses.

> In either case they are uniquely situated among all other businesses in
> the economy to influence demand for their product, because they do not
> have to bid real factors of production away from other entrepeneurs. By
> will alone they can reduce the prices they offer for their product and
> thereby stimulate demand. You can argue (as Steve did, fallaciously I
> believe) that the risk of overissue is a cost of production.

Compare FRB banks to the land banks I described. All the land banks have to do to create more money is to buy more land to grow wheat on. The only difference between the land banks and FRB banks is that the cost the former face is more “real”.

But, how much more “real” is it? How do landowners price their land? Certainly they use calculations in money to aide them, but it is also subjective. If a set of landowners are “not too concerned about their future solvency” (to use DeSoto’s words from the paper you quote) then they may sell their land very cheaply and cause a rise in the supply of money.

> I think that’s incorrect, but also beside the point. There is no change in
> demand for fiduciary media apart from the actions of the suppliers
> themselves (the banks).

I don’t agree. Even in the paper you mentioned earlier DeSoto gives the example of wars and “exceptional catastrophes”.

What DeSoto is really opposing in his paper is monetary systems that have the flexibility to respond to changes in demand for money-in-the-broader sense. If he is consistent he must also oppose my land money proposal, because, though it isn’t FRB it is flexible.

Beefcake the Mighty June 7, 2010 at 12:52 pm

“How is the situation different to supply in any other industry. This is like saying “all the car companies could collude to increase prices in concert”. If that were generally true then the free market could not work.

I think the truth is that different banks face different trade-offs. They would not all have the incentive to join a cartel, as in other businesses.”

Well, car companies have to acquire real factors of production. To the extent that their collusion precludes markets in these factors, they will confront the same problems a socialist central planner would (this is Rothbard’s extension of Mises’ argument, to the case of one big firm). Hence their ability to collude is very limited. This is not the case for FRB.

Also, there is an incentive for collusion under FRB, because if one fails, they are all at risk. Hence incentive to cooperate to avoid this kind of thing (historically this manifested itself in the reality of bankers seeking the establishment of a central bank).

Beefcake the Mighty June 6, 2010 at 2:02 pm

Current, I’m not sure I understand your example. You issue certificates representing claims to real output of some production process. Maybe these certificates could function as a medium of exchange, sure. But where exactly are you doing what happens under FRB, namely issuing claims to the certificates, in excess of actual certificates?

Current June 6, 2010 at 3:13 pm

> I’m not sure I understand your example. You issue certificates representing
> claims to real output of some production process.

Yes.

> Maybe these certificates could function as a medium of exchange, sure.
> But where exactly are you doing what happens under FRB, namely issuing
> claims to the certificates, in excess of actual certificates?

No, it’s not really the same as FRB. But, what I’m trying to understand exactly what other folks think.

Some folks, like DD5 and the folks at the British Cobden centre are quite worried about the “unconscious investment” aspect. That is, they are concerned that if money is also a form of investment then that will adversely affect the interest rate. People will hold money in their accounts without realising that they are saving. I don’t think this argument is right, but some 100% reserve folks are making it.

Others, are more worried about currency flexibility, they think it’s undesirable if the currency could respond quickly to changes in the money demand. The system I mention could respond very quickly. If more money were required now in june then a free land bank could buy lots more fields from other farmers that contain maturing wheat. They could then issue many more tickets for it. Similarly, if the demand for money fell then land banks would sell their land back to normal farmers.

I think you’re more worried about the fiduciary media side of it. My point here is – how would the macroeconomic impact of such banks be different from those of FRBs? The banking side is different certainly, but if the system worked then the same flexibility to create and destroy money would be there.

Also see my reply to Steve Grossman.

Incidentally there have been places where land based money was tried, though I don’t know much about it’s success.

Stephen Grossman June 6, 2010 at 4:30 pm

>Incidentally there have been places where land based money was tried, though I don’t know much about it’s success.

Yes, you do. Recall the market’s selection, after millenia, of gold, an extremely convenient money. BTW, would land-based money require us to carry dirt in our
pockets for daily purchases? You’re concerned with arbitrary hypotheses instead of
the real world of real, extremely successful production.

Current June 6, 2010 at 4:44 pm

Yes, the market did select gold, but in an environment which included fractional-reserve banking.

I do think that land may be a useful for money, though maybe it isn’t ideal. But, here I’m also trying to discuss exactly what part of the fractional-reserve free-banker’s argument folks disagree with both.

newson June 6, 2010 at 7:52 pm

bad example. how would you feel if your baking business had stored some grain in a depository, having contracted to make a certain quantity of bread for a client. you’re finally ready to bake, turn up to get your grain, and find a queue of bakers outside the door waving their receipts, and angrily insisting that they want their grain back. the grain spoken for by the receipts is greater than the grain in the silo.

bakers, thinking they actually have title to their grain, have made commitments that will not be able to be met. hello error cycle.

of course, no one (save mike sproul) can make money, being the generally-accepted means of exchange. it’s only possible to recognize it’s existence.

newson June 6, 2010 at 7:58 pm

free bankers don’t create money, they piggy-back off existing money by convincing people that their notes are essentially the same as the underlying money, but more convenient, cheaper, safer, whatever.

Beefcake the Mighty June 6, 2010 at 9:33 pm

Exactly. They fabricate monetary imposters (fiduciary media). As you’ve noted here before, the free bankers assume there exists a demand for their product (and quarrel over the means of providing that product), but in fact it is the bankers that create this demand by their willingness to create liabilities in excess of reserves (ie engage in FRB).

Current June 7, 2010 at 9:15 am

As we’ve discussed before this depends on whether the public understand that their note is a debt. If they do then the free bank isn’t tricking anyone.

Why do you think creating liabilities in excess of reserves necessarily create a demand for the fiduciary media of a bank?

Beefcake the Mighty June 7, 2010 at 9:41 am

“Why do you think creating liabilities in excess of reserves necessarily create a demand for the fiduciary media of a bank?”

Not just me, but Mises and de Soto as well. See de Soto’s article here:

http://mises.org/journals/qjae/pdf/qjae1_4_2.pdf

specifically the discussion of p. 29. (This article is a convenient overview of the longer chapter on free banking in his book). De Soto echoes statements made even in TMC where Mises’ critiques Fullarton and RBD.

Stephen Grossman June 7, 2010 at 9:42 am

Free bankers counterfeit money. And their “free” is the free of thieves.

Current June 7, 2010 at 11:41 am

Steve Grossman, I don’t agree with you. But, if that’s your view then why not argue with me? Tell me where I’m wrong.

Beefcake the Mighty June 6, 2010 at 9:26 pm

If I read Current’s example right, his certificates don’t entitle the holder to a specific amount of wheat, only 70% of the output on some acre, which could be bountiful or could be crap (like any stock certificate). Dubious that such a contract could circulate as a means of exchange, but apart from that I don’t think it compares at all to the situation under FRB (which I think you’ve described accurately). I’m still not seeing what relevance Current’s example has.

Current June 7, 2010 at 10:47 am

With a more sophisticated contract most of the variations could be taken into account.

Firstly, let’s suppose a “weighted acre” were used, the weighting is according to the normal output. Account could also be taken of year to year variations in yield. For example the minimum yield in 10 years could be calculated, lets say that’s 70% of the normal yield. The bank could then issue certificates for that proportion and take the more variable remaining 30% itself. So, the certificates would be similar to preference shares (preferred stock).

The point of my example was to show that there are two sides to the discussion here. On the one side there is the debate over the practices of banking. On the other side there is the wider debate about the macroeconomic consequences of those practices. My example of land banking was intended to show that the two are quite separate. Land banks would have the same sort of ability to satisfy the demand for money that fractional reserve free banks do, but they don’t use fractional reserves or maturity mismatching.

Is it “money based on debt” that you object to? Or is it “money based on debt but contracted in terms of gold” that you object to?

Beefcake the Mighty June 7, 2010 at 10:52 am

“Is it “money based on debt” that you object to? Or is it “money based on debt but contracted in terms of gold” that you object to?”

Not sure if you’re addressing me or newson, but I don’t object to these things as such, it’s just simply that I’m not grasping the significance of your example.

Current June 7, 2010 at 11:24 am

> “Is it “money based on debt” that you object to? Or is it “money based on
> debt but contracted in terms of gold” that you object to?”
>
> Not sure if you’re addressing me or newson, but I don’t object to these
> things as such, it’s just simply that I’m not grasping the significance of your
> example.

Fiduciary media is “money based on debt contracted in terms of gold”. That is, it is a debt to pay a particular amount of gold. So, surely you object to that?

Beefcake the Mighty June 7, 2010 at 11:26 am

“Fiduciary media is “money based on debt contracted in terms of gold”. That is, it is a debt to pay a particular amount of gold. So, surely you object to that?”

I object to the characterization of fiduciary media as debt, THAT’S what I object to.

Current June 7, 2010 at 9:41 am

But, in your baking example the customers of the grain warehouse have agreed to a warehouse contract.

What Rothbard tends to imply is that only commodities or certificates for commodities can be satisfactory money. He thinks that debts, such as fiduciary media, can’t be. I don’t believe this is true. The point of my land example was to suggest the possibility of money backed by a productive asset.

The situation of bakers buying grain is completely different to that of people holding and exchanging money. A person doesn’t want money so it can be used for it’s commodity purpose. They want money because it is something valuable that can be exchanged for other goods.

Beefcake the Mighty June 7, 2010 at 9:44 am

“What Rothbard tends to imply is that only commodities or certificates for commodities can be satisfactory money. He thinks that debts, such as fiduciary media, can’t be.”

Whoa, hold on a second. Rothbard would of course concur that whatever the market selects as a medium of exchange is money; these could of course be debt instruments. What he denies of course is that fiduciary media are debt.

Current June 7, 2010 at 11:40 am

I see your point there. Let’s break fiduciary media into two types:
#1 is debt but the public think it’s a money certificate.
#2 is debt and the public know it’s debt.

What’s wrong with type #2?

Beefcake the Mighty June 7, 2010 at 11:44 am

“#2 is debt and the public know it’s debt.

What’s wrong with type #2?”

Because I think what this “debt” is based on, namely “demand” for bank liabilities, is phony or false demand, and depends wholly on the existence of a system practicing FRB. If this system is rejected or suppressed (eg, because it is fraudulent or economically harmful), then this demand will not exist.

Current June 7, 2010 at 11:59 am

How can demand for #2 type of fiduciary media be a “phony or false” demand? Certainly I could see the argument for that in situation #1.

And, of course situation #2 depends on practicing FRB, but how is that dishonest if everyone knows about it?

If you argue that there’s an externality cost to FRB that comes in the form of business cycles, then that’s OK. But, it doesn’t mean that the demand for money-in-the-broader sense is any different from an other sort of demand.

Stephen Grossman June 7, 2010 at 4:14 pm

Fiduciary media (FM) is counterfeit money, not debt. If I photocopied a gold money-certificate, would you accept it as payment for a good? If I deposited the photocopy in a bank, would you accept my check?

The purchasing power of debt, and thus debt-money, is conditional upon the potential for payment of the debt. Thus, eg, the increasing price of borrowing by inflationary govts and the valid worry that China will wake up to the danger of financing America’s increasing debt and decreasing productivity.

Current June 7, 2010 at 6:25 pm

Steve Grossman,

I don’t think you really understand fiduciary media. I’ll combine a few things you said in various places here:

> Fiduciary media (FM) is counterfeit money, not debt. If I photocopied a
> gold money-certificate, would you accept it as payment for a good? If I
> deposited the photocopy in a bank, would you accept my check?

> “If the money reserve kept by the debtor against the money-substitutes
> issued is less than the total amount of such substitutes, we call that amount
> of such substitutes which exceeds the reserve fiduciary media.” [Mises,
> HA, print, 1949, 430, para. 2]
>
> Arguing from authority is a logical fallacy but often a good place to start.
> I have some fiduciary media that I want to trade for gold money-substitutes.
> Let’s make a deal. Will you accept 10T mark German postage stamps? Or
> a $100T Zimbabwe check?

Think about the balance sheet of a free bank, for simplicity I’ll assume the bank doesn’t deal in timed savings. On the one side we have the liabilities of the bank these are the money-substitutes that it issues. On the other side we have the assets column. This consists of two parts, the reserves and the other assets. The other assets are the loans and so on that the bank has made.

For the bank to be solvent the assets must be greater than the liabilities. Let’s suppose that the bank has issued banknotes for 100 kilos of gold. Let’s say it’s reserve ratio is 10:1, in that case it will hold 10 kilos of gold. That means that the bank must hold assets worth at least 90 kilos of gold.

So, the banks money substitutes are backed by a combination of gold reserves and debt.

Gerry Flaychy June 7, 2010 at 7:47 pm

Thus, in this case, the fiduciary media amount to banknotes for 90 kilos of gold.

Current June 7, 2010 at 8:51 pm

Gerry, not 90 kilos of gold, but the same value of assets.

Certainly if all of the banks customers go to redeem at once then the bank can’t satisfy them. But, the customers would have little reason to start a run on a solvent bank. That could only happen if the bank made a major misjudgement in the size of it’s redemption fund, which isn’t likely since the right size can be predicted reasonably well.

If option clauses were legal then even a run would be of no consequence so long as the bank has sufficient assets to cover them.

Gerry Flaychy June 7, 2010 at 9:27 pm

In the Mises theory, fiduciary media are money substitutes, in the case here: banknotes, but not all of the banknotes, only the part in excess of the reserve.

This excess here are banknotes redeemable in gold for an amount of 90 kilos of gold.

Beefcake the Mighty June 7, 2010 at 10:04 pm

I think Gerry Flachy is right:

“Fiduciary media. Money-substitutes freely accepted at face value which consist in claims to payment on demand of specified sums of money in excess of the monetary reserves held for their redemption. Fiduciary money includes token money, bank or treasury notes and demand deposits (deposit currency or checkbook money) which exceed the amount of cash reserves immediately available for their conversion into money proper. Fiduciary media are money-substitutes (q.v.) and “Money in the broader senses (q.v.) but not “money in the narrower sense” (q.v.).

HA. 432-44; M. 52-54, 133; and Part III, particularly 263-97 and 319-39, 482-83.”

at

http://mises.org/easier/F.asp

Current June 8, 2010 at 8:11 am

I don’t think I’ve described my example well…

Earlier I wrote:

> For the bank to be solvent the assets must be greater than the liabilities.
> Let’s suppose that the bank has issued banknotes for 100 kilos of gold.
> Let’s say it’s reserve ratio is 10:1, in that case it will hold 10 kilos of gold.
> That means that the bank must hold assets worth at least 90 kilos of gold.

I should have said “the reserves are 10%”. So, if we use Mises terms there are 100 kilos of “money substitutes”, 10 kilos worth of “money certificates” and 90 kilos worth of “fiduciary media”.

The 90 kilos worth of fiduciary media is reflected on the other side of the balance sheet by assets worth the same or more.

Some define fiduciary media as all money-substitutes that are issued from a fractional reserve bank (that was the definition I was using earlier). By that definition there are 100kilos worth of money-substitutes/fiduciary media which is backed by 10kilos of gold and 90kilos worth of assets.

Beefcake the Mighty June 8, 2010 at 8:28 am

“The 90 kilos worth of fiduciary media is reflected on the other side of the balance sheet by assets worth the same or more.”

I would take issue with this characterization in terms of “worth.” What you have is an amount of FM *denominated* in 90 kilo of base money. Saying they’re “worth” that much is question-begging.

Beefcake the Mighty June 8, 2010 at 8:33 am

Current, please don’t take this personally, but your last few examples here sound like something an advocate of the Real Bills Doctrine would say.

Gerry Flaychy June 8, 2010 at 9:14 am

Current, that’s much better, more comprehensible.

For the assets, the expression ‘face value’ could also be used.

cret June 11, 2010 at 12:36 am

How would you guys on the 100% reserve side feel about equity/capital based money?

is that 100 percent reserve??

does 100 precent reserve mean redeemable or fully backed realized from words on a note???

Stephen Grossman June 6, 2010 at 6:34 pm

>Current: Yes, the market did select gold, but in an environment which included fractional-reserve banking.

Coincidence. Statistics can mask economic law. Why would the lack of FR cause the market to not select gold? Gold has properties which dont change with economics.

I do think that land may be a useful for money, though maybe it isn’t ideal.

I can’t predict that. Many things may be secondary money, maybe land in certain contexts.
maybe old Babe Ruth baseball cards. In WW2 ciggies and nylons were money.
Let a thousand monies bloom! What kind of ideal? In economics, the market is ideal.

Why are people ignoring gold given its superb performance in the 19th century? What right now
would YOU accept in place of gold in a real market transaction? Oil re gold has been stable for 50 yrs. What more can you ask?

Current June 7, 2010 at 9:26 am

> Why would the lack of FR cause the market to not select gold?

Because the fractional reserve system enabled a large degree of monetary flexibility. It allows the banks to expand and contract the money supply according to demand. Also, if a bank issues gold certificates and in a 100%-reserve bank it would have to charge warehousing fees.

The point of the land example I gave was to present a possible monetary system that is based on investment, but:
* Without fractional reserves.
* With flexibility.
* Without the need for warehousing fees.

Notice that in the scheme I propose a land bank could create money, just as a fractional reserve bank does. To create extra money an FRB must only obtain new assets. Similarly, a land bank must only buy new land.

Stephen Grossman June 7, 2010 at 9:47 am

>> Why would the lack of FR cause the market to not select gold?

>Because the fractional reserve system enabled a large degree of monetary flexibility. It allows the banks to expand and contract the money supply according to demand.

Demand from supply or FR counterfeiting?

Current June 7, 2010 at 11:15 am

In the 19th century banks were backed partially by gold and partially by other assets. They were not fully reserved.

Satisfying demand was managed by expanding and contracting the amount of gold held, but also, more importantly by expanding and contracting the amount of assets held. It did not matter particularly much that the supply of gold itself was quite inflexible.

My point is, if a law were passed banning FRB then the inflexibility of the supply of gold would become a major problem.

Stephen Grossman June 7, 2010 at 4:58 pm

Technology drives the economy, including gold production. Thus gold production increases and decreases roughly as does the economy. The last few centuries of gold production saw a 1-3% yearly increase. Other commodities, eg, silver and platinum, would also be used if gold was insufficient. FR could not help regardless of the circumstances because it’s counterfeit, doesnt increase production, and merely shifts resources to unsustainable investments. Shell games dont become honest because of the complexity of the shell. A con artist with a Ph.D is a con artist. Call the Bunco Squad (a poorly made 1977 TV pilot w/Tom Selleck, Robert Urich and Donna Mills)! Bernanke is in the building.

Beefcake the Mighty June 7, 2010 at 9:54 am

“Because the fractional reserve system enabled a large degree of monetary flexibility. It allows the banks to expand and contract the money supply according to demand. ”

Current, I know you plan to respond to this point on the other thread, but here you are not making a distinction between money proper and fiduciary media. The banks can only increase the supply of the latter, not the former. Thus the system you advocate depends on the inability (for whatever reason: ignorance, fraud, delusion, etc) of the economic actors to distinguish between these two entities.

Current June 7, 2010 at 11:08 am

> Thus the system you advocate depends on the inability (for whatever reason:
> ignorance, fraud, delusion, etc) of the economic actors to distinguish between
> these two entities.

You’re again presuming that money must be a commodity. People may, quite reasonably, accept certificates of debt from others and use them as money. It need not rely on “ignorance, fraud or delusion”.

Beefcake the Mighty June 7, 2010 at 11:15 am

“You’re again presuming that money must be a commodity.”

How? I am simply pointing out that you speak of increased demand for money, and then speak of FRB as being able to better meet that demand than a 100% system. Since everyone here (or so I thought) distinguished between money proper and fiduciary media (eg, “outside” and “inside” money), it needs to be pointed out that you can’t simply speak of banks meeting demand for money without noting that banks can only supply fiduciary media. You, I think, are making some question-begging assumptions (which I raised on the other thread) here by not recognizing this distinction.

Current June 7, 2010 at 11:46 am

Ok, let me put it in another way. I think that you are presuming that fiduciary media can only be of type #1 I described above. That is, you are presuming that the public don’t know that they’re dealing with a debt.

But, if they do know they’re dealing with fiduciary media then surely they can demand more of it without “ignorance, fraud or delusion” being involved?

Beefcake the Mighty June 7, 2010 at 12:13 pm

Current, I think we’re starting to talk past each other here, so if I don’t respond to each of your counterpoints, don’t take it as a sign of disrespect, I’m just stepping back for a while. Let me just recap the main points you and I are debating here.

1. I’ve argued (and pointed to references in deSoto and Mises) that demand for fiduciary media depends on supply, quite unlike any other good in the economy, so comparing demand for FM to demand for future goods (ie, a debt instrument) is very problematic. So I think, yes, if the public is fine with that then they’re operating under a serious misunderstanding (I’ll leave aside the fraud issue here).

2. This relates to the other thread, but if demand for money increases, then the argument that supplying more fiduciary media (which is the only thing that FRB can do) is the proper response assumes that the original demand was either (a) for fiduciary media and NOT money proper (as under 100% reserves) OR (b) this distinction is irrelevant from the point of view of market participants (ie, they don’t care whether they have more base money or more FM, which is questionable and certainly not true, say, during bank runs).

Stephen Grossman June 7, 2010 at 2:33 pm

>Current: Steve Grossman, I don’t agree with you. But, if that’s your view then why not argue with me? Tell me where I’m wrong.

Why don’t you agree? But I am arguing w/you and telling you where youre wrong. Why do you think Im not? It helps to briefly summarize our points in each post. Im confused now about exactly what point you think Ive made and avoided.

Stephen Grossman June 7, 2010 at 2:45 pm

>Current: With a more sophisticated contract most of the variations could be taken into account.I think that Austrians accept that sophisticated, very complex, abstract forms of money certificates (correct category?) aid production in a highly developed, division-of-labor market by increasing the efficiency of investments. But these all do and must be based, however indirectly, on real market, commodity money. To the extent that I understand your land commodity money, it seems to be a commodity and so valid. But then why claim its essentially similar to FR, which is not based on a valuable commodity? FR increases titles to money and production which have not increased.

Stephen Grossman June 7, 2010 at 4:59 pm

REFORMATTED FOR CLARITY
====================================
>Current: With a more sophisticated contract most of the variations could be taken into account.

I think that Austrians accept that sophisticated, very complex, abstract forms of money certificates (correct category?) aid production in a highly developed, division-of-labor market by increasing the efficiency of investments. But these all do and must be based, however indirectly, on real market, commodity money. To the extent that I understand your land commodity money, it seems to be a commodity and so valid. But then why claim its essentially similar to FR, which is not based on a valuable commodity? FR increases titles to money and production which have not increased.

Current June 7, 2010 at 6:44 pm

Yes, I’m proposing money based on a commodity – land.

I’m trying to tease out the most important reason why FRB is opposed by yourself, Beefcake and Newson.

Is it principally because of the issues at the banking side, that fiduciary media are thought to be fraudulent or make banks prone to runs? Or is it because of the elasticity of the FRB system?

If it’s about the elasticity then land money would be just as objectionable as FRB. If free banking and FRB can cause ABCT to occur, then so can free banking with land money.

Suppose an FRB free bank wishes expands the amount of money-substitutes it’s providing by 1 kilo of gold. It must obtain assets worth at least 1 kilo of gold to keep it’s current balance sheet position, and if it’s to maintain it’s current reserve ratio it must buy a small quantity of gold. Now, DeSoto and co would say that this creates a Cantillon effect and helps induce ABCT.

On the other hand, let’s consider a free land bank that wishes to expand the amount of money-substitutes it’d providing by 10 acres. It must obtain at least 10 acres of new land. If the FRB case causes Cantillon effects and ABCT then why doesn’t this case?

Beefcake the Mighty June 7, 2010 at 10:17 pm

“Suppose an FRB free bank wishes expands the amount of money-substitutes it’s providing by 1 kilo of gold. It must obtain assets worth at least 1 kilo of gold to keep it’s current balance sheet position, and if it’s to maintain it’s current reserve ratio it must buy a small quantity of gold. ”

But, the banks under FRB can affect the value of their assets through their issuance of notes by lowering or raising the interest they charge on loans. (During the boom part of the cycle everything looks rosy, but it’s illusory.) This can’t happen under your land money example.

If you want to know my single biggest objection to FRB, it is this: the belief that fiduciary media are money is an illusion. (I also happen to believe that the only way such media could infiltrate a market is through fraud, but that’s a different point.)

newson June 8, 2010 at 2:02 am

…not to mention that the freebankers’ notes are heterogeneous, offering different (and unpredictable) levels of reserves, different non-convertibility clauses, etc.

the beauty of money is in its homogeneity, fostering the broadest possible division of labour. freebankers’ notes reduce this beneficial effect.

i see freebankers work backwards from the proposition that banknotes are convenient and worthwhile, and having accepted that, then trying to find a way to defray the costs of printing and maintenance of the notes, which, surprise, surprise, only fractional reserving can seem to provide.

newson June 8, 2010 at 2:12 am

hülsmann covers this problem of money-substitute heterogeneity in “has fractional reserve banking really passed the market test?”

http://www.independent.org/pdf/tir/tir_07_3_hulsmann.pdf

Current June 10, 2010 at 8:39 am

> not to mention that the freebankers’ notes are heterogeneous, offering
> different (and unpredictable) levels of reserves, different non-convertibility
> clauses, etc.
>
> the beauty of money is in its homogeneity, fostering the broadest possible
> division of labour. freebankers’ notes reduce this beneficial effect.

However, the market forces a discipline on the banks. If the amount of reserves is considered too low then knowledgeable agents, such as other banks will not accept them. Similarly, if the bank’s assets are too poor, or if the terms of the option clause is too odd.

FR money substitutes can still have homogeneous characteristics to the user while the debt which underpins them is heterogeneous.

Current June 8, 2010 at 12:58 pm

Beefcake, several of the things you’ve said are connected, so I’ll reply to them in one place…

> 1. I’ve argued (and pointed to references in deSoto and
> Mises) that demand for fiduciary media depends on supply,
> quite unlike any other good in the economy, so comparing
> demand for FM to demand for future goods (ie, a debt
> instrument) is very problematic. So I think, yes, if the
> public is fine with that then they’re operating under a
> serious misunderstanding (I’ll leave aside the fraud
> issue here).

I’ll discuss the supply/demand bit in a minute. First though the question of “future goods”. I’ve read quite a few discussions about what sort of good money is.

Let’s look at the case of gold coin money under a system of free minting. In that case a coin can be used as money for indirect exchange. Holding coins is valuable to the individual for the reasons Mises and Hutt explained. Also, the coin can be melted down and used as a supply of gold.

Now, consider my land money. It is redeemable in wheat at harvest time, obviously redeeming it this way isn’t something the normal person would do. However, wheat traders would do it. A system could be setup whereby the normal person need never actually deal in wheat.

The same is true of stock and bonds. They pay dividends and coupon only at particular times. However, because of those payments there is a liquid and deep market in them at all times.

Now, I’m not saying that stocks and bonds could be money. I doubt land money could exist without government intervention. However, these cases are similar to gold in that there are two separate markets that the good or asset can be sold into.

With that in mind consider the Scottish banknotes with option clauses. These gave the bank the option of issuing a debt title (a bill) for the note, rather than redeeming in gold. However, even though that possibility was there people were quite happy to use them. The state did not demand that option clauses be used either.

>> “Suppose an FRB free bank wishes expands the amount of
>> money-substitutes it’s providing by 1 kilo of gold. It
>> must obtain assets worth at least 1 kilo of gold to keep
>> it’s current balance sheet position, and if it’s to
>> maintain it’s current reserve ratio it must buy a small
>> quantity of gold.”
>
> But, the banks under FRB can affect the value of their
> assets through their issuance of notes by lowering or
> raising the interest they charge on loans. (During the boom
> part of the cycle everything looks rosy, but it’s
> illusory.) This can’t happen under your land money
> example.

>> “The 90 kilos worth of fiduciary media is reflected on the
>> other side of the balance sheet by assets worth the same
>> or more.”
>
> I would take issue with this characterization in terms of
> “worth.” What you have is an amount of FM *denominated* in
> 90 kilo of base money. Saying they’re “worth” that much is
> question-begging.

I agree that this is the case in the central banking scenario.

Mises and DeSoto talk about all of the bank acting together. About “extending the circulation of them[money substitutes] according to common principles”. I don’t think this could happen in a Free Banking system.

I assume that you generally accept the principles of reflux applied to a single bank that Mises gives in the “Theory of Money and Credit” on p.362 (note, not the “Banking School” law of reflux mentioned on p.340).

The problem is about banks acting in concert. Now, the first issue with this theory is external drain. Let’s suppose Britain, France and Germany have fractional-reserve free-banking using gold and free trade. A cartel is formed in Germany to increase the issue of fiduciary media. The banks there succeed in doing this. What would happen then? If the interest rate fell in Germany then investors would seek funds from Germany to use in Britain and France. The banking cartel would see increased redemptions as funds are moved abroad. That would force them to reduce their circulation of fiduciary media.

Secondly, and more importantly, the various financial institutions all face different production-possibilities frontiers, which means they have different interests. To put it another way – the situation between banks within a country is similar to that between countries but writ small. Consider a simple model there are two different sorts of banks, those that face frequent redemptions (eg those involved in foreign trade, or that serve volatile businesses) and those that face few. If the two get together then why should they form a cartel to reduce the rate of interest? The latter would gain by such a cartel, but the former would lose.

I’ve being thinking about your comparison between FRB and my land money scenario. The real point of difference isn’t that the land’s valuation is “real” and the debt’s valuation is “subjective”. The real difference is that the issue of FRB money-substitutes could strongly affect the interest rate paid on the debt. But, the issue of land money could not affect the output of land and the price of grain. That’s interesting and it’s helped me understand your argument better.

> Current, please don’t take this personally, but your last
> few examples here sound like something an advocate of the
> Real Bills Doctrine would say.

Remember, I’m applying what I say above to *free banking*, not generally. The Banking School thought that it applied generally and that banks play only a passive role in determining the outstanding quantity of money-substitutes.

Beefcake the Mighty June 8, 2010 at 10:09 pm

A quick response on your point re. banks acting in concert or independently: True, a single bank is not likely to distort the market price structure any more than a single buyer or seller is likely to affect overall market allocations. However, since a single bank increasing its issue of notes will gain market share at the expense of its competitors, and since those competitors do not need to bid away factors of production from the larger economy to similarly increase their note issue, there seems to be here a very strong incentive for the banks to expand together, even if they are not doing so under any kind of central direction or explicit cartelization (although I think these are also likely to happen). So I don’t think your objection that the distortionary effects I bring up are confined to central banking is a very strong one. Even if the banks are formally independent, there still exist factors that will tend to manifest themselves in joint expansion of FM. And then my point holds: the banks are uniquely situated to distort the market by affecting the value of the assets underlying their balance sheets (ie, the boom).

newson June 8, 2010 at 1:40 am

current, unless you can show the logical flaw in mises’ regression theory, it’s pointless discussing you “inventing” a money.

if you’re suggesting land as a money, and the “current notes” as a money substitute, i’d have to say the money fails the portability and divisibility test.

Current June 10, 2010 at 8:55 am

What I’m suggesting is using certificates for areas of land as money. There can be certificates for small areas that would pass the portability and divisibility tests.

I’m not suggesting that this kind of money could evolve naturally. Suppose that the government initially enforced a law that said that money had to work in this way. It may be crazy but it’s not as crazy as fiat money.

Now, ask yourself what would happen next? How would it operate? As I said above consider the flexibility issue. Salerno makes a big deal out of the idea that entrepreneurial price decisions are a sunk cost, in order to justify why deflation is not damaging. But, what the land money example demonstrates is that 100% reserves have nothing to do with flexibility. So, 100% reservists don’t really have to worship deflation as they sometimes do.

In fact, the same may be true of gold. Some have suggested that in a long term 100% reserve standard the market would become flexible so that when a rise in demand for money occurs some gold holders put up their holdings for minting.

Stephen Grossman June 7, 2010 at 2:59 pm

>Fiduciary media is “money based on debt contracted in terms of gold”.

“If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of such substitutes which exceeds the reserve fiduciary media.” [Mises, HA, print, 1949, 430, para. 2]

Arguing from authority is a logical fallacy but often a good place to start. I have some fiduciary media that I want to trade for gold money-substitutes. Let’s make a deal. Will you accept 10T mark German postage stamps? Or a $100T Zimbabwe check?

cret June 7, 2010 at 9:19 pm

“…as of December 2007, the total money supply of the United States, i.e., currency plus bank deposits of all kinds that are subject to the writing of checks, including the making of payments by debit card, was $6901.9 billion;[3] at the same time, the monetary base was $836.4 billion. Accordingly, the amount of fiduciary media in the United States was equal to the difference, which was $6065.5 billion. This was the sum of money representing transferable claims to standard money, payable on demand by the various banks that issued them, accepted in commerce as the equivalent of standard money, but for which no standard money actually existed.”
http://mises.org/daily/3556

so as of dec 2007, standard money exists and fiduciary media exists?? can someone explain what the standard money of 2007 is…as spoken of in the excerpt?
and what fiduciary media looks like that back the standard money of dec 2007???
does the fiduciary media spoken of in the above excerpt a claim to paper currency and coins and something else???

Stephen Grossman June 9, 2010 at 1:20 pm

Standard money is meaningless outside of a context. Gold standard money or govt counterfeited standard money?

cret June 10, 2010 at 3:41 am

there was a link to an article…is that insufficent context for you???

what was reisaman referring to when he said as of 2007??? gold???

cret June 10, 2010 at 3:43 am

so as of dec 2007, standard money exists and fiduciary media exists?? can someone explain what the standard money of 2007 is…as spoken of in the excerpt?
and what fiduciary media looks like that back the standard money of dec 2007???
does the fiduciary media spoken of in the above excerpt a claim to paper currency and coins and something else???

from http://mises.org/daily/3556

Current June 10, 2010 at 8:32 am

“Standard money” in present-day monetary systems means fiat currency. That includes notes and coins, and to most economists also reserve dollars from the central bank.

cret June 10, 2010 at 2:33 pm

“….the monetary base was $836.4 billion. Accordingly, the amount of fiduciary media in the United States was equal to the difference, which was $6065.5 billion. This was the sum of money representing transferable claims to standard money, payable on demand by the various banks that issued them, accepted in commerce as the equivalent of standard money, but for which no standard money actually existed.”
http://mises.org/daily/3556

are reserve dollars at a cetnral bank notes (dollar bills) and couins too??? or are the some type of stored data but not notes and coins???

Current June 10, 2010 at 2:47 pm

> are reserve dollars at a cetnral bank notes (dollar bills) and couins too??? or
> are the some type of stored data but not notes and coins???

The Federal reserve have a computer system that controls reserves. Movements of reserves are tracked with that system. When banks put cash (notes & coins) in their vaults at branches that it also counted as reserves. All of this is fiat money.

Read “The Theory of Money and Credit” Mises explains it quite well there.

cret June 11, 2010 at 12:29 am

are the reserve dollars at a central bank solely notes (dollar bills) and coins? or
are they some type of stored data but not notes and coins or a mixture of both???

the mises stuff is old and i dont know how well it applies to current currency schemes.

Current June 11, 2010 at 8:08 am

When Mises wrote that book there was the international gold standard, so reserves were gold bullion in most places.

The switch to fiat currency came later. As I said there are two components to the reserves of a bank:
1) Notes and coins in the vaults
2) Electronic entries that banks have in Fed accounts operated by the Fed’s computer systems

Now, I should mention that some people consider the Fed’s assets to be backed. That’s because the fed own an amount of treasury debt that supposedly backs them. This is a distraction. The treasury have created that debt and handed it to the Fed, it’s a paper transaction between two government departments.

cret June 7, 2010 at 9:10 pm

“For the bank to be solvent the assets must be greater than the liabilities. Let’s suppose that the bank has issued banknotes for 100 kilos of gold. Let’s say it’s reserve ratio is 10:1, in that case it will hold 10 kilos of gold. That means that the bank must hold assets worth at least 90 kilos of gold.

So, the banks money substitutes are backed by a combination of gold reserves and debt.”

if 1 note is for 1 kilo of gold how can another asset back that note?? would the note then be false to some degree?? if thats true would false note have an affect on economic goods in a negative that true notes wouldnt??

so did the bank create 100 bank notes for 100 kilos of gold that it had???

did the bank give 100 banknotes to someone and then actually lend out 90 kilos of its deposited gold??? so the depositor, if they wanted there gold back wouldnt be able to get it from the bank??

so rather than 100 kilos of gold being held and the 100 gold notes circulating in lieu of the gold there is 100 goldnotes circulating and 90 kilos of gold from the deposit now circulatinng too???

Clive Ricketts June 10, 2010 at 6:55 am

I’m having trouble following this debate. If you have free marketing banking then who knows how the banking system would evolve. There could be both fractional reserve and well as full reserve banking. They could be demand depositors as well as non-demand depositors. Different investors have different risk tolerances so they would naturally support different forms of banking systems based on their risk tolerance level. Additionally, there could be both asset based backed and non-asset backed currency. As for the asset backed currency, the asset would probably in the form of gold or silver. However when you have the currency and money supply based on the market you will have a variety of assess backing the currency. It could be gold, silver, copper, platinum, cars, homes, just to name a few. Now obivously, the competitive forces of the market place will allow for the most efficient mediums of exchange to survive. But as society evolves, other mediums of exchanges could arise like energy, human capital, …etc.

And you can use similar reasoning for non-asset back currency and it’s function in the marketplace. So as long as there is no interface with the banking system, the market place will sort of all these issues and the competitive forces of the marketplace will yield to most efficient banking systems and the most efficient monetary systems.

Current June 10, 2010 at 8:28 am

I largely agree. However, the risk profiles of various different banks that provide banknotes and accounts could not be too different or people would not be willing to exchange their notes. There would have to be some agreement at least of a unit-of-account that all the banks could work in. Competition would cause both of those things to happen.

cret June 10, 2010 at 2:38 pm

well..i guess there is a free market in coffee so to speak. i drink instant others brew it.

and this sort of exists with a governement. but thre isnt a fiat coffee.

“I’m having trouble following this debate. If you have free marketing banking then who knows how the banking system would evolve. There could be both fractional reserve and well as full reserve banking.”

now would a govt take a fractional reserve free market note for its taxes?? i dont know. probably not though.

i was trying to find out what specifically comprises fiduciary media curently fom a previous linked article.

cret June 11, 2010 at 12:24 am

“…the market place will sort of all these issues and the competitive forces of the marketplace will yield to most efficient banking systems and the most efficient monetary systems.”

well..i guess the plague eventually stopped killiing people.

“But as society evolves, other mediums of exchanges could arise like energy, human capital, …etc.”
have these issues existed before and if so did the market revert more to gold and silver???
trees have been an energy source for thousands of years…is that just reverting to barter??

was non-govt insured ‘banking’ for the most part born in fraud?? ie, having more notes for gold/silver than they actually had in gold/silver???

Current June 11, 2010 at 7:59 am

> was non-govt insured ‘banking’ for the most part born in fraud?? ie, having
> more notes for gold/silver than they actually had in gold/silver???

For the most part the users of notes and banking services were rich, and they knew that the banks they dealt with used fractional reserves. They knew and they used them anyway.

Stephen Grossman June 11, 2010 at 12:34 pm

>If you have free marketing banking then who knows how the banking system would evolve. There could be both fractional reserve and well as full reserve banking.

Free mkts are of producers, not counterfeiters.

Current June 11, 2010 at 1:02 pm

I suggest reading something about Austrian Economics that is not by Rothbard.

FRB is not counterfeiting, it’s just a form of debt.

Stephen Grossman June 11, 2010 at 2:22 pm

FRB debt: I steal your money. I’ll pay you…whenever.
What’s the diff/between socialism and FRB? FRB is like
California marriage. Both have community property.
(RIM SHOT!) And if a bank lent the contents of safe-deposit (there’s that word
again) boxes, what would that be? Or if a lawyer used the money
in a client’s account to buy stocks, what’s that?

Current June 11, 2010 at 2:34 pm

Let’s say I we have a free market monetary system as Clive Ricketts suggests.

So, if a customer has a sum of gold then they may place it in a 100% reserve bank or a fractional reserve bank. Now, why should a customer use a 100% reserve bank? By investing a portion of the customers funds a fractional reserve bank would be able to offer more services and possibly interest.

Your objection here is if a bank claims to be a 100% reserved bank, but actually uses fractional reserves. I agree with you that this is criminal.

Stephen Grossman June 11, 2010 at 8:47 pm

>Your objection here is if a bank claims to be a 100% reserved bank, but actually uses fractional reserves.

Theres no logical link between my comments and your criticism. Youre emotionally associating.

Current June 11, 2010 at 9:05 pm

What you wrote above was:

“And if a bank lent the contents of safe-deposit (there’s that word
again) boxes, what would that be? Or if a lawyer used the money
in a client’s account to buy stocks, what’s that?”

Your implication here is that the depositor thinks he has agreed to a contract whereby his possessions are stored as-if in a deposit box.

Stephen Grossman June 11, 2010 at 9:19 pm

>By investing a portion of the customers funds a fractional reserve bank would be able to offer more services and possibly interest.

If I steal your money I may win big at the horses and give some of my winning to you. FR is theft. Its immorality is the cause of its inflationary, economic destructiveness. I know a lawyer disbarred for secretly investing the money from a client account in the stock mkt. The mkt crashed. He acted as if it was his money. But it wasnt. And neither are deposits the property of the money warehouses called banks.

As for services and interest, FR inflation causes unsustainable investments, not based on savings, which cause depressions which decrease production, decreasing the possibility and value of those services and that interest. And bank failures which make impossible those services and interest.

Current June 12, 2010 at 9:47 am

> I know a lawyer disbarred for secretly investing the money from a client
> account in the stock mkt. The mkt crashed. He acted as if it was his
> money. But it wasnt.

What this lawyer did is wrong because of what he saying to his client, because he did it “secretly”. If he’d said “I’m just off to invest your money on the stockmarket, is that ok with you?” and the client had said “fine” then there would have been no crime. That latter case is what happens in FRB, the client agrees to it.

> And neither are deposits the property of the money warehouses
> called banks.

Who calls banks “money warehouses”? That’s Rothbard, not the banks. If you live in the US have a look at the terms & conditions that comes with your bank account. I expect it will says somewhere that your account is a debt the bank owes you.

> As for services and interest, FR inflation causes unsustainable investments,
> not based on savings, which cause depressions which decrease
> production, decreasing the possibility and value of those services and that
> interest. And bank failures which make impossible those services and
> interest.

Central banking may, but let’s not punish commercial banks for the crimes of central banks.

How can anyone believe that their bank account is a stack of notes somewhere if it pays interest? The fact it pays interest demonstrates that it’s a debt.

Beefcake the Mighty June 12, 2010 at 8:51 pm

Current writes:

“How can anyone believe that their bank account is a stack of notes somewhere if it pays interest? The fact it pays interest demonstrates that it’s a debt.”

Well, isn’t part of this debate over what, exactly, IS paid by the banks? It’s called interest, of course, but is it REALLY interest? I don’t think you can appeal to the fact that the banks pay their depositors something (that they happen to call interest) and conclude that it’s really debt.

Current June 13, 2010 at 9:17 pm

Beefcake,

This is part of the problem. Let’s say a bank offers interest on a normal “current” account, and it also offers interest on a “notice” account that is timed, you ask for withdrawal and the bank has 30 days to respond. This is how many British building societies work. Some 100% reservists would say that notice account holders know that their money is a debt. But current account holders don’t know their money is a debt. How does this follow? Hints have been given to both that they hold a debt.

In reality, if there is an information campaign about the legal underpinnings of bank accounts it must target both groups. I don’t believe that notice account holders are in reality any more educated than those who have on-demand accounts.

If there were such a campaign I would also like people to be informed about the underpinnings of fiat money at the same time.

Peter Surda June 11, 2010 at 3:39 pm

You cannot steal value, only metaphorically. To insist this is actually a property rights violation invalidates the concept of property rights as we know it. You can’t have at the same time a right to the physical integrity of property and value thereof, these are mutually exclusive.

Stephen Grossman June 11, 2010 at 8:55 pm

Rights are based on values. Because man, with his free will, faces life and death, he needs to value his life to live. And because society is potentially a source of the initiation of force against a person’s choices, man needs protection against that. That is rights. Rights protect the basic value of one’s life. See appendix in Rand’s _Capitalism_ for fuller discussion.

Peter Surda June 12, 2010 at 7:55 am

You are using the word “value” in a meaning unrelated to the my argument. You also do not address the argument.

Let me rephrase, maybe then you’ll be able to react better. You cannot at the same time have a right to the market exchange rate of your property and the physical integrity thereof, these two concepts are mutually exclusive. You have to choose one of them. No matter which one you choose, a change in the other one alone logically cannot be theft.

Pardon me for not addressing Rand. I like Atlas Shrugged very much but that does not mean her theoretical arguments are infallible and her followers are not prone to cultism.

Gerry Flaychy June 11, 2010 at 6:38 pm

When I deposit at a bank a $100 fed note to be payable back to me at anytime, this bank gives me a promissory note, an ‘IOU’, in the form of checkbook money in the amount of $100. It is an exchange: $100 bill for $100 of checkbook money.

I cannot own the bill and the checkbook money in the same time, because if there was the case, own both, then I could use both of them and buy $200 of merchandise instead of $100: but it is evidently not the case !

Or I own the bill, or I own the checkbook money.

Stephen Grossman June 12, 2010 at 11:14 am

>Current: How can anyone believe that their bank account is a stack of notes somewhere if it pays interest? The fact it pays interest demonstrates that it’s a debt.

The fact that economists, including Austrians, debate this is proof that the average depositor does not understand FRB. Banks, which use the word, deposit, for a loan, contribute to the confusion and fraud.

Stephen Grossman June 12, 2010 at 3:17 pm

Here is a revealing, Wikipedia discussion of “deposit account.” Bold-face is mine
======== The banking terms “deposit” and “withdrawal” tend to obscure the economic substance and legal essence of transactions in a deposit account. From a legal and financial accounting standpoint, the term “deposit” is used by the banking industry in financial statements to describe the liability owed by the bank to its depositor, and not the funds (whether cash or checks) themselves, which are shown an asset of the bank. For example, a depositor opening a checking account at a bank in the United States with $100 in currency surrenders legal title to the $100 in cash, which becomes an asset of the bank. On the bank’s books, the bank debits its currency and coin on hand account for the $100 in cash, and credits a liability account (called a demand deposit account, checking account, etc.) for an equal amount. (See double-entry bookkeeping system.) In the audited financial statements of the bank, on the balance sheet, the $100 in currency would be shown as an asset of the bank on the left side of the balance sheet, and the deposit account would be shown as a liability owed by the bank to its customer, on the right side of the balance sheet. The bank’s financial statement reflects the economic substance of the transaction — which is the bank has actually borrowed $100 from its depositor and has contractually obliged itself to repay the customer according to the terms of the demand deposit account agreement. To offset this deposit liability, the bank now owns the actual, physical funds deposited, and shows those funds as an asset of the bank.Typically, an account provider will not hold the entire sum in reserve, but will loan the money at interest to other clients, in a process known as fractional-reserve banking. It is this process which allows providers to pay out interest on deposits.By transferring the ownership of deposits from one party to another, they can replace physical cash as a method of payment. In fact, deposits account for most of the money supply in use today. For example, if a bank in the United States makes a loan to a customer by depositing the loan proceeds in the customer’s checking account, the bank typically records this event by debiting an asset account on the bank’s books (called loans receivable or some similar name) and credits the deposit liability or checking account of the customer on the bank’s books. From an economic standpoint, the bank has essentially created economic money (although obviously not legal tender). The customer’s checking account balance has no dollar bills in it, as a demand deposit account is simply a liability owed by the bank to its customer. In this way, commercial banks are allowed to increase the money supply (without printing currency, or legal tender).

george t morgan June 14, 2010 at 6:53 pm

“Typically, an account provider will not hold the entire sum in reserve…”

does this describe what occurs in todays banking system??

if so, are you referring to a ‘sum’ of paper cash?

is there much of a difference between the paper cash and ‘deposit money’ mentioned above so that the banks arent really fractional reserve banks where the paper cash is the reserve?

george t morgan June 15, 2010 at 4:01 pm

commercial banks are allowed to increase the money supply (without printing currency, or legal tender).

would paying a debt via a debit card be paying in legal tender an owned liability or somethign else??

george t morgan June 15, 2010 at 4:05 pm

the economic substance of the transaction — which is the bank has actually borrowed $100 from its depositor…

when the bank loan the $100 do they loan out cash or is it almost always a check??

if its a check what or where is the $100 that was deposited??

george t morgan June 15, 2010 at 4:11 pm

is the economic money that you speak of legal?? is the amount of economic money regulated by a legal bosy…the govt??

Stephen Grossman June 12, 2010 at 3:38 pm

I read an online bank statement of the nature of its deposits. Its a mundane description of what depositors can and can’t do, and (some) of the bank’s obligations. Eg, checks for more than the account, and contains no claims that are relevant to FR. So most depositors dont know what has happened to their (ha, ha) money. Ancient Roman banks were forbidden to treat deposits as loans, ie, to steal and counterfeit. Its a dirty business. Why dont banks make deposits-to-loans and FR clear to depositors? Are they afraid of moral judgment?

Current June 15, 2010 at 2:29 pm

It’s a reasonable point. However, just because some FR banks have obscured the relationship between themselves and their customers doesn’t mean the FR banking per se is a bad idea. I think that banks should make the contract more clear, and I’d support legislation to force them to do so.

It should be noted that in some free-banking situations the free banks have made the situation more clear. Scottish banks had “option clauses” on their notes which allowed the bank to delay payment of specie for six months. But, the bank had to pay a penalty interest rate if it took that option. Notes of this sort circulated on par with specie.

Stephen Grossman June 15, 2010 at 9:38 pm

Current:

My comments about the lack of depositor’s knowledge of the nature and effect of FR banking should be understood in the context of the Wikipedia comments on deposits that I posted above. A deposit is not a loan. Either a depositor owns his deposit or the bank does. Both cannot. If a business wants money for loaning then its a loan company and must tell its investors that they have not deposited but, instead, invested in a business venture and that the loaned money is now the property of the loan company and that investors may or may not get their principal back. A bank is a warehouse for property ,whether in money or non-money deposits (ie, safe-deposit boxes for valuable papers, jewelry, etc) that does not belong to the warehouse. This is clear re safe-deposit boxes. Im sure you would condemn a bank which opened those boxes and invested the contents regardless of the success or failure of the investment. A money deposit is essentially similar. But, of course, its easier to hide because of the abstract nature of money and because few people, including economists, recognize the destructiveness of FR. And im sure you condemn conventional counterfeiting. FR and conventional counterfeiting both get goods and services without providing any in return. And so for a gang which counterfeited bank accounts. A bank which loans deposits to others is stealing, perhaps embezzling. It is a morally destructive situation which will spread with unsustainable investments not based on savings and the resulting depression (which endangers deposits or lowers their value with inflation). It also will spread with govt legalizing FR theft in return for some of the counterfeit bank credit which it uses to shift the economy’s decreasing resources from the most productive people to the least. Govt will then create or use existing central banks (ie, the national govt bank agency) to further counterfeit bank credit and also money to stop FR banks from bankruptcy and to steal the economy’s decreasing wealth to pay its bills and supporters. This socialist inflation cycle is a necessary tendency of FR regardless of any countertrends which may exist in concrete situations. Ie, America’s prosperity exists despite intervention and would be larger without it. Statistics can mask economic law. FR is not freedom of contract. Its theft with a tendency toward bankruptcy and depression. Its hugely clear since the Gr. Depress. and especially now. I dont understand how pro-capitalists support it.

Current June 16, 2010 at 9:53 am

> My comments about the lack of depositor’s knowledge of the nature and effect
> of FR banking should be understood in the context of the Wikipedia comments
> on deposits that I posted above.

Yes, I understand that.

> A deposit is not a loan.

In normal language a deposit means a bailment. However, a “deposit account” at a bank is a loan. I agree that this is confusing.

> Either a depositor owns his deposit or the bank does. Both cannot.

Legally speaking the bank owns it, because the contract is a loan.

> If a business wants money for loaning then its a loan company and must tell
> its investors that they have not deposited but, instead, invested in a business
> venture and that the loaned money is now the property of the loan company
> and that investors may or may not get their principal back.

I agree. The vague language surrounding bank account contracts should be sorted out.

> A bank is a warehouse for property ,whether in money or non-money deposits
> (ie, safe-deposit boxes for valuable papers, jewelry, etc) that does not belong to
> the warehouse.

Historically speaking banks have been much more than that. They have also being organizations that make and receive loans. This is true throughout history, not just in modern times.

> This is clear re safe-deposit boxes. Im sure you would condemn a bank which
> opened those boxes and invested the contents regardless of the success or
> failure of the investment.

Yes.

> A money deposit is essentially similar.

That depends on the situation. If it has been made clear to the customer that the account is a debt then no wrongdoing has occurred.

> And im sure you condemn conventional counterfeiting. FR and conventional
> counterfeiting both get goods and services without providing any in return.

What a counterfeiter does it to forge the title to a property or debt, or forge fiat money. This is not what a fractional reserve bank does. It hands out it’s own titles, which is perfectly morally acceptable.

Let’s suppose the Bank of Scotland writes out a note saying “I promise to pay the bearer on demand the sum of £10″. And, a forger writes out a similar note. The note that the bank writes is *the banks* liability, the bank owes that sum. The note that the forger writes *appears to be* the banks liability. If the forger wrote out notes that stated that they were his own liability then that wouldn’t be forgery.

> A bank which loans deposits to others is stealing, perhaps embezzling.

No it isn’t, the account holders have agreed that their money be lent. Certainly the account holders may be confused about this, but ignorance of the law is no defence. Though I agree that the law could make things much clearer in this regard.

As Steve Horwitz wrote on Coordination problem recently:

“The empirical information is helpful, but what the public believes about their money is a distinct question from the nature of the contract they’ve actually signed. It’s quite possible that they don’t understand that contract, but that hardly means that banks are somehow up to something nefarious. How many folks read the User Agreements on software? If you clicked “agree” and then violated it, do you think the court wouldn’t uphold it because you said you didn’t really understand it? And does the fact that people don’t understand it somehow mean the software companies are up to no good? Not really.”

> It is a morally destructive situation which will spread with unsustainable
> investments not based on savings

What is “saving”? It’s deferral of satisfaction. If I place £100 in a bond then I defer spending it until the bond has matured. The situation is similar with bank accounts. If I place £100 in an on-demand bank account then I defer from spending that amount until the moment I spend it.

The Rothbardian idea that money-substitutes cannot be savings is wrong. Read my posts above about “land money” for an example that demonstrates the problem.

I agree with you about government intervention into banking. But, that doesn’t affect the argument over private fractional reserve banking.

Stephen Grossman June 16, 2010 at 8:10 pm

>a “deposit account” at a bank is a loan.

There are no contradictions in reality, regardless of what people think or how they name things. A is A. A deposit is a deposit. A loan is a loan. Your acceptance of contradiction destroys science. Two people cannot each own all of the same money. FR banking is theft, counterfeit, inflation, unsustainable investments, bankruptcy and depression. Statists progressively regulate more of the effects of FR (splitting gold and “money,” deposit insurance, investment regs, splitting types of banking from each other, etc, etc. but, like a pinched balloon, the bubble will pop out somewhere. None of this would happen if FR was stopped. This is economic law and concrete, historical reality.

>“saving”? It’s deferral of satisfaction

Definition by non-essentials. Saving is not consuming production.

You seem to confuse man-made law with economic law or, perhaps, you need more precision in your claims.

Stephen Grossman June 17, 2010 at 1:19 pm

I will study your claims more closely, most especially for whether they are a concern with the essentials of FR or only with non-essentials. Modern philosophy provides no guidance to defining one’s concepts and staying on topic, claiming that definitions and logic are arbitrary and conventional. Ie, details are important but they must be the details of the essentials of the thing studied. If your boat is leaking, an expert in music wont save you. Especially for abstract, complex issues ,its all too easy to define by non-essentials and to stray from the original issue. The various examples for and against FR in this blog are sufficiently complex and abstract and controversial to warrant an explicit concern with definitions and logic.

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