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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 }

Graeme Bird May 22, 2010 at 7:11 am

“And in no case did 100% reserve banking, which was perfectly legal, every make even the slightest dent in the market.”Right. Its like another variant of Gresham’s law. Bad money will drive out the good. In this case the tendency will be to either have all 100% backed money or all fractional reserve. Once fractional reserve is tolerated then the corrupted money will drive out the proper gear. Hot air is cheaper than silver. Shares that you don’t own are cheaper to lend for shorting purposes than shares that you do own, since you would previously have had to buy those shares. And so forth, all the way down the line, for all examples where people are allowed to set up phantom supply and substitute hot air for real value.

Peter Surda May 25, 2010 at 4:35 am

Its like another variant of Gresham’s law. Bad money will drive out the good.

You omitted the crucial condition: in the presence of legal tender laws.

Graeme Bird May 25, 2010 at 5:51 pm

In this case thats not correct. I know that was the Rothbardian emphasis. That Gresham’s law was really a subset of price controls and the effect of legal tender. But with pyramiding schemes, originating out of the supply-side, this ought to be seen as a valid case of Gresham’s law, made possible by lack of vigilance alone. A case of Gresham’s law somewhat outside of these two sets of causes already identified. We can see this from the recent evolution of broker-share-pyramiding (naked short-selling) and non-monetized gold and silver un-backed or partially backed paper-trading. (Supplier/Warehouser gold-pyramiding). The evolution of all these attacks on the price system are pretty spontaneous, and all of a piece. All of them come, without exception, from the supply-side, and are foisted on the clients without anything approaching full disclosure. And all of them corrupt the industry and either affect the formerly honest supplier to act accordingly or drive the tenaciously honest supplier out of that particular business. All that it requires is lack of vigilance for this one explosive category of fraud.

Greg Simmons June 3, 2010 at 8:18 am

I’m not sure if this issue has been resolved to your satisfaction, because I’m not going to sift through 700 comments, but I will attempt to show why FRB is inherently fraudulent. Imagine I acquire $1,000 of freshly-printed notes from the central bank. I decide to open my own bank, call it the 47th National Bank. Under FRB practice, I can “loan out” approximately ten times this amount to my customers as long as I have the $1,000 in “reserves”. My first customer wants to borrow $5,000 to buy a motorcycle. I create her account and credit it with $5,000, which she promises to repay. She then writes a check to purchase her motorcycle. The motorcycle store owner comes to 47th National Bank to cash the check in person. I offer to create an account for him and credit him $5,000. He senses something is up and demands $5,000 in CASH. Of course, I can’t supply it and the insolvency of my bank is immediately revealed. I created a $5,000 debt obligation, $4,000 of which was created out of thin air. I cannot meet the store owner’s rightful claim to $5,000 in cash, his only choice now is to pass the fraud on to someone else by agreeing to open an account with my bank and have it credited with $5,000.

Steve Horwitz June 3, 2010 at 9:01 am

Greg has fallen for fallacies that get disabused in the first day of a money and banking course.

First, fractional reserves depends upon the law of large numbers. No banker would created a $5000 loan to one customer and assume that $1000 in reserves would be sufficient to cover it. The whole reason FRB works is because there are enough depositors such that the demands on reserves on any given day are a small fraction of them. If you think you can show FRB is fraud by positing really, really stupid bankers, be my guest, but don’t blame fractional reserves.

Second, in the real world, the multiplier process applies to the system as a whole, not one bank. If an existing bank gets a deposit of $1000 in Federal reserve notes, it CANNOT lend out $10,000 in new loans *precisely because it knows those loans will come back to it when they are spent.* An individual bank can only lend up to its excess reserves, which in this case is $900 (if we assume a desired reserve ratio of 10%). $900 is what the bank can afford to LOSE in reserves if it wishes to have its desired reserve ratio against the new $1000 deposit that came in via the cash. Again, the bank multiplier applies to the banking system *as a whole* not to individual banks.

Once again, these arguments about fractional reserve banking would be more credible if people actually understood the basic principles of banking as discussed in every single textbook on the subject. If you’re going to criticize a system, you should really make a better attempt to understand it.

Beefcake the Mighty June 3, 2010 at 9:55 am

Steve, you’re aware that the law of large numbers assumes *independence* of the entities within the sample, yes? Precisely what is NOT true during a bank run, panic, etc.

Steve is right that Greg Simmons is in error about how the money supply increases based on a new injection of base money.

Peter Surda June 3, 2010 at 9:20 am

Well, the motorcycle store owner accepted the cheque voluntarily, didn’t he? Also, from practical point of view, what is preventing the bank from borrowing the missing cash from someone else? Some banks set a limit to withdrawals in any branch, and if you want to exceed the limit you need to announce it in advance (like a day or so). In the meantime, they can transport the cash from elsewhere. Where is the fraud?

All that your example demonstrates is that a bank made a stupid risky decision and as a consequence suffered a loss. The motorcycle store owner also made a risky decision when he accepted the cheque and also suffers. Stupid business decisions, yes. But I still have a hard time seeing fraud.

Gerry Flaychy June 3, 2010 at 11:01 am

What is ‘funny’ in this example, it is that the banker is losing its $1 000 and, moreover, he now owes $4 000 to somebody else who will sue him in court to get his $4 000 back. Plus, he probably will have to close his business.

And if in the mean time the borrower goes bankrupt, he will also lose the $4 000.

If it’s a fraud, than it is a fraud against himself.

Very ‘funny’ way to make a fraud !

Gerry Flaychy June 3, 2010 at 9:48 am

Under FRB practice, or not, this individual bank cannot loan more than the $1 000 it has. So this case is purely fiction.

But it is true that, with fiction, you can prove whatever you want !

http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

David Pierce May 22, 2010 at 10:10 am

Graeme Bird: “Right. Its like another variant of Gresham’s law.”

I am not sure this objection – that is, the argument based on historical prevalence, or the absence thereof – proves anything. Note that with the advent of electronic banking, and the elimination of any need for circulating certificates, most of the older impediments to 100% reserve banking may have disappeared. And if historical prevalence proves anything at all it can certainly be turned against the free bankers themselves. Free banking has disappeared everywhere, and where fractional-reserve banking exists it is accompanied by accommodating institutions (deposit insurance, lenders of last resort…) that facilitate its continued existence. What we need are good theoretical models rather than hasty generalizations from history, but models more satisfactory than those of the free bankers.

cret May 22, 2010 at 1:47 pm

“I am not sure this objection – that is, the argument based on historical prevalence, or the absence thereof – proves anything. ”

could it prove the prevalence of something?

David Pierce May 22, 2010 at 2:19 pm

cret: “could it prove the prevalence of something?”

I meant it does _not_ prove that: “In this case the tendency will be to either have all 100% backed money or all fractional reserve.”

I don´t believe fractional-reserve banking would really thrive for very long in a free environment.

History may perhaps prove the prevalence of something, but _not_ the _necessary_ prevalence of anything, and this is what we are really interested in. History is contingent, as is the evolution of the ideas that make history.

Graeme Bird May 22, 2010 at 6:03 pm

“I meant it does _not_ prove that: “In this case the tendency will be to either have all 100% backed money or all fractional reserve.””So thats what you were driving at. I would have thought that the Gresham’s law variant was obvious. I’d wonder how it could ever be otherwise.”I don´t believe fractional-reserve banking would really thrive for very long in a free environment.”Its the free environment that won’t last very long under fractional reserve. But you are correct. Fractional reserve wouldn’t last a long time in that make-believe environment. But still what I said would be right. What would happen is that fractional reserve would keel over all-at-once. And if you could maintain that “free environment” in the midst of total disaster …. then 100% backing could dominate for a very long time before it was corrupted again. This is how things seemed to work in the Middle Ages. With both the inflationary times and the periods of growth-deflation lasting for many decades at a time. There wasn’t the boom bust cycles of the formalized fractional reserve era. Rather you would have more than a century of slowly falling prices, and then more than a century of inflationary conditions. Separated by up to 20 years of “monetary famine” which I interpret to be fractional reserve unwinding. So it at least looks to hold true what one would expect. Greshams law won’t be denied in this situation.

David Pierce May 23, 2010 at 6:28 am

Graeme Bird: “I would have thought that the Gresham’s law variant was obvious.”

Well, maybe. But in order to gauge the evolution of free banking you have to look at the incentives and trade-offs faced by (1) the depositors of a particular fractional-reserve bank; (2) the shareholders of a particular fractional-reserve bank and (3) market participants more generally. The model of the fractional-reserve free bankers is extremely limited since it only examines how a free bank supposedly responds to changes in the demand to hold by (3). That (1) might trigger a bank run is ruled out by assumption. (2) is not considered at all since equity is assumed fixed. Now if you allow for endogeneous changes of the institutional context, say a lender of last resort is introduced in a previously purely free market, then I agree with your conclusion that you have the system evolving to “all fractional-reserve banking” though not “fractional-reserve free banking”.

Graeme Bird May 23, 2010 at 7:07 pm

“But in order to gauge the evolution of free banking……..”The evolution of all pyramiding practices start like this: People start cheating.

Its never happened that brokers involved with naked short sellers kicked off the process by going to the customer and saying that they will offer lower margins on trades if they can lend you hot air to sell in the market and distort share prices.

Its never happened that the trading of unbacked paper began in the first instance by gold sellers, buyers and safe-keepers …….. came clean and offered to sell hot air as gold, but at slimmer trading margins and a lower price.

They just start doing it, the behavior becomes locked into industry practice. Sooner or later it becomes a sort of knowing secret. Then an open secret. Then no secret at all.

This crazy idea that it kicks off with the banks offering interest on on-call deposits of gold and silver coins. Its never happened that way and never would. The customer never chooses it at the start.

They merely accept it when the entire industry has been corrupted to the extent that they no longer even try and keep it a secret.

Thats the evolution. Not some competitive “free banking” fantasy.

David Pierce May 24, 2010 at 1:09 pm

Graeme Bird: “The evolution of all pyramiding practices start like this: People start cheating.”

If this is true, then I take it to be an empirical generalization rather than a necessary a priori truth. Then you still have folks like Horwitz, Dowd etc. coming up with their historical, empirical evidence and being taken seriously by almost the entire academic world. If what you say is true, why haven´t they been refuted yet by the 100 percenters? I mean: formally refuted, according to all the official rules of academic practice, in refereed journals etc. It´s understandable that folks like Steve are getting nervous about that.

Graeme Bird May 24, 2010 at 6:09 pm

“If this is true, then I take it to be an empirical generalization rather than a necessary a priori truth.

“No way. Its a necessary A Priori truth. Supposing you have E-Gold. They stay 100% backed but start offering term loans. Then they get competitors. Some time later policy has phased out fractional reserve.

Now since, for a very long time, we have been in the growth-deflation pocket, few of us carry debts. And cash balances are high.You are not going to ask these guys to lend your stuff out, rather than give you the TERM-LOAN-OPPORTUNITY. Under 100% backing they cannot undertake the TERM-LOAN-OPPORTUNITY except as a broker.

You have high cash balances. You have low debts. With high cash balances why on earth would you ask these guys to rob you of your term-loan-opportunity and take all the winnings for themselves?

Do you want a IOU-plus-redemption-promise account? No of course not? Why would you want one? You already have high cash balances. Viewed from our perspective, real interest rates are high. But nominal interest rates are very very low. Really Juicy term-loan-opportunities may not come along all that often.

Why choose to give it away to the banker, when under 100% banking, the banker has to come to you?The pyramiding has always started from industry-corruption and its always going to start that way. But once it gets going sure! People just forget what they are missing out on.

Jonathan Bathgate May 25, 2010 at 7:35 am

Graeme Bird: “Its a necessary A Priori truth.”

I think you are pretty much confusing things.

Graeme Bird May 25, 2010 at 6:35 pm

“I think you are pretty much confusing things.”

Not at all. Thats how it always has started. Thats how it always will start. Thats the only way it can start. The corruption may be fast and explosive, and the acceptance of the new dispensation may sink in quickly upon the corruption of the market. But the corruption will always start the same way.

David Pierce May 31, 2010 at 12:44 pm

Graeme Bird: “Not at all. Thats how it always has started.”

How it started has little or no relevance to how it works or does not work afterwards.
Moreover, it does not follow from this that it is a necessary a priori truth; this is extremely bad philosophy. Take an introductory course “en philo”.

David Pierce May 31, 2010 at 7:39 pm

Graeme Bird: “This crazy idea that it kicks off with the banks offering interest on on-call deposits of gold and silver coins. Its never happened that way and never would. The customer never chooses it at the start.”

In my opinion you have not provided the beginning of a rigorous argument — or even an informal argument — that it never could. The customer is to be supposed to act and choose as any other investor, that is, he will weigh risk and return, and as any good financial analyst, he will look at the balance sheet of the fractional-reserve bank. In particular he will ask: how well is this bank capitalized (equity cushion), and in case of trouble can it sell its assets without too many losses etc… So the decision calculus of the customers depends upon more parameters than you suggest… And contrary to what you suggest it is the shareholders and not the customers who take the first shock in case of trouble… Very elementary point…

David Pierce May 23, 2010 at 6:35 am

Graeme Bird: “This is how things seemed to work in the Middle Ages. With both the inflationary times and the periods of growth-deflation lasting for many decades at a time. There wasn’t the boom bust cycles of the formalized fractional reserve era. Rather you would have more than a century of slowly falling prices, and then more than a century of inflationary conditions. Separated by up to 20 years of “monetary famine” which I interpret to be fractional reserve unwinding. So it at least looks to hold true what one would expect. Greshams law won’t be denied in this situation.”

OK, this is interesting information.

Graeme Bird May 23, 2010 at 7:55 am

You may interpret things differently but you want to look at the David Hackett Fischer book and cross-check it with the De-Soto book. The time periods and price data were for Europe. Its a little hard to know how matters worked on the local level where you had the growth in banking. Where banking was centered things may have worked more akin to how it did later on, with normal boom-bust cycles. I don’t think this can be sorted out from these two books alone.

In ‘The Great Wave’ Fischer studies periods in Western history where prices were rising over many decades. And other periods when they weren’t. When prices were generally dropping.

The specific time periods of inflation he looks at are:

1. The medieval price revolution 1180-1350
average inflation about .5%

2. The Price Revolution of the Sixteenth Century. And the crisis of the 17th. About 1470-1660

3. The Price Revolution of the 18th century: About 1720-1820

The time periods where the prices were generally falling were:

1. The Equilibrium of the Renaissance 1400-1470

2.The Equilibrium of the Enlightenment 1660-1730

3. The Victorian Equilibrium. 1820-1896

Now what we see is that it is the time periods of rising prices where you wind up with horrid social conditions, falling real wages, social unrest and relatively more violence. Whereas in the era’s of falling prices we get great cultural acheivements, less war and violence and after a time increasing real wages, and a more even distribution of wealth.

cret May 22, 2010 at 6:16 pm

does fractional reserve banking take place now…with the federal reserve system and fdic and other various govt schemes?? or is the current system fully backed…a 100 percent reserve system, iow??

did a rothbard write this years ago or was this added on by someone else ???

“It is also why it would be far better to suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves.”
http://mises.org/econsense/ch78.asp

if a rothbard wrote this many years ago what specific system of 100 percent reserves was he writing aboutgoing back to ??? if the sentence was added opn by someone else, who put false information there???

if you dont have 100 percent banking but banking still exists what other type of banking is there??? only fractional reserve??? not food banks or blood banks but with money.

Graeme Bird May 22, 2010 at 7:00 pm

What are you getting at cret? Do you not know what system we have going now? What is your point? Its hard to know if you are as ignorant as you are making yourself out to be.

cret May 22, 2010 at 10:44 pm

no point really except to find out how the currency system operates now, how it operted before and if it is the cause of all our financial woes as stated in a mises video.

the fed doesnt answer my questions anymore and when they did it didnt make much sense.
so i know very little ab out the current dollar/currency system now.

Graeme Bird May 23, 2010 at 12:32 am

Oh well sorry cret. I thought you might have been being facetious. Right now everything is based around subsidizing the bankers. They get the discount rate, thats a subsidy. They get quantitative easing …. thats a weak bailout. And now the politicians and Fed are stealing for them outright. You might call that a strong bailout.

Every new lot of cash or promises-to-deliver cash, on the part of the Fed. is something the big banks can pyramid on at at least 20 to 1 if they feel confident enough to do so. This gives them the overwhelming benefit of new money creation. Effectively this makes them like a legal and protected counterfeiting racket.

Now the conditions that applied prior to the global financial crash were not like in the textbooks. In the textbook view of fractional reserve the Fed releases the cash, or at least legal commitments to supply cash, and then the private banks pyramid on top of these new “cash” releases. The Fed releases this cash via buying and retiring government debt. That is to say outstanding government bonds traded freely in the market.

But this is not how things have prevailed for some time. Rather the way things are now we might call it “Chicken-banking.” I mean that in the sense of teenagers playing “chicken” hurtling towards each-other in cars on a long straight road. The bankers play chicken with the Fed and the public. By simply creating new money in advance of any new cash. In the expectation that they will be bailed out by quantitative easing if matters get hairy later on.

In effect the rest of us are in bondage to the banks. The most subsidised industry in world history. Now if they used to be junior partner in the counterfeiting racket, it looks like in the US at least, they have moved into the senior position. We see this with all the attempts to infiltrate government and with these massive bailouts. What we would worry about is a Fed/banking/spook-town collaboration. If fractional reserve racketeering, and covert operations get together, the level of power and resources would be such that we might never get this burden off our backs.

The only hope is a united front against fractional reserve per se. Which means not relying on gold alone to make up the money supply. But rather getting all four of the monetary metals to take up the slack. Gold can gain market share over the course of the century. But its too much to ask Gold to take over the entirety of the money supply in one hit. It will be too costly to do so.

Graeme Bird May 22, 2010 at 5:57 pm

You may not be sure, but I’m sure that it definitely does not prove anything. Before mass-murderer Ghengis Khan had any say in matters, hostage-taking for ransom was very prevalent. But this did not make hostage-taking for ransom something that was a good thing, or something that ought to have been tolerated or made legal. Nor ought it have been allowed to stay legal, should it ever have been legalized, and people become desensitized to it, and willing to see alleged advantages in the practice.

Prevalence is no argument at all. Government intervention is prevalent. Government mass-murder is prevalent. All sorts of rotten things are prevalent.

cret May 22, 2010 at 10:48 pm

doesnt it depend what you are arguing??

if inflation is an increase doesnt detecting any increase require empiricism???

Graeme Bird May 28, 2010 at 7:43 pm

Yeah I’ve thought about what I now take to be your honest exacerbation, with the excellent descriptions Stephen was giving you. What I would say is that the way schools of thought, in philosophy, name themselves, often appears to be a bait-and-switch.

Stephen is ably describing the excesses of the alleged “empiricist” school. But calling oneself an empiricist, does not mean that you are authentically interested in facts and evidence, as a personal tendency. Quite the contrary. I thought at first that you were taking a shot at people here. I now see your persistent questioning as quite productive.

cret May 22, 2010 at 1:22 pm

This is mere empiricism which says nothing about the economic laws involved.

is there a problem with empiricism??? if you stole a dollar you woyuld break a law but somone might not notice…if you steal 100 dollars somoene might very well notice. a real empirical difference.

maybe thats what they were getting at.

cret May 22, 2010 at 1:28 pm

“This is mere empiricism which says nothing about the economic laws involved.”

is there a problem with empiricism??? if you stole a dollar you would break a law but someone might not notice…if you steal 100 dollars someone might very well notice.

a noticable empirical difference. maybe thats what they were getting at.

Stephen Grossman May 22, 2010 at 4:47 pm

>cret:is there a problem with empiricism???

Empiricism is another word for intellectual chaos, for arbitrary fact selection, arrangement
and interpretation. See David Hume. Empiricism is not rationality nor realism nor science. But rationalism, ie, ideas or systems without facts, is also not rational. Coincidences are not causes and arbitrary descriptions are not scientific explanations. Post hoc is a logical fallacy, not part of scientific method. Science is facts rationally organized. Objectivity, ie, knowing reality by logic, is the third, proper alternative. See Aristotle, Rand.

Knowing that FR banking had a certain concrete history is not the same as knowing it had to have that concrete history. That depends on economic law and the other concretes of economic history. Ie, laws, eg, privileges and subsidies that allowed FR banking to seem profitable and productive but
which really, unproductively, drained wealth from other parts of economies. Or, because Im begging the question of the correct theory , if FR banking is economically productive, then its other coincidences with other concretes of economic history, also proves nothing in its favor. We need to first determine the necessary effects of FR banking, good or bad, before the statistics of FR banking can have a rational meaning. Coincidences are not causes. Eg, what causes FR banking to be good (or bad)? Then we can measure its goodness (or badness) in concrete, historical situations.

cret May 22, 2010 at 10:28 pm

Knowing that FR banking had a certain concrete history is not the same as knowing it had to have that concrete history.

did anyone ever say that??

cret May 25, 2010 at 3:27 am

Empiricism is another word for intellectual chaos,

is that an example

N June 2, 2010 at 11:06 am

“Empiricism is another word for intellectual chaos, for arbitrary fact selection, arrangement
and interpretation.”

It seems to me that you’re confusing Empiricism, with some empiricists. Empiricism is the basis for experimental science, and according to Aristotle(that you cite as a third way) is from the senses that comes the knowledge of forms (somewhere in books VII and VIII of the Metaphysics if I am not mistaken), also see Bacon, Russell. Hence Empiricism is not the blind acceptance of sense data that you seem to make of it.

Also most knowledge (the scientific kind) is to some extent based on interpretation of facts and in no way purely logical, no one have developed, and is by most believe as impossible, a non self referring theory of deductive logic and mathematics.

What Empiricism is absolutely not is thrown away “100% sure” predictions based on ill applied statistics made by ignorants, that “empiricism” is pure chaos not even slightly intellectual.

Stephen Grossman May 22, 2010 at 5:20 pm

>cret: is there a problem with empiricism??? did they have to say anything about the economic laws involved??

Empiricism is mere coincidences, facts without ideas to rationally organize them, as distinct from the counterpart error, rationalism, ideas without facts. Objectivity and science require logical inductions from observed concretes. Austrian principles, eg, action over time, preferring and setting aside, etc. are not subjective, ie, a priori but rational inductions. Statistics merely measure how economic law exists in concrete situations and do not validate or invalidate law. Unlike physical science, the human sciences involve choices as part of the causes. Electrons cannot choose to evade Ohm’s Law but govts can (A) subsidize attempts to evade a (B) market’s price coordination. The coincidence between A and B may be studied with sophisticated statistical methods but no knowledge of economic law will result, merely that a concrete coincidence occurred as a result of economic law unknowable to statistics.

Philosophically, empiricism is a type of metaphysical subjectivism in which there is only chaotic experience or consciousness without any reality. Nonsense on stilts. Epistemologically, its the modern, absurd concern, from Hume, with out-of-context statistics. Fact A. Then fact B. Then fact C. Etc. This is mere conceptual disintegration, not science.

cret May 22, 2010 at 10:32 pm

Empiricism is mere coincidences, facts without ideas to rationally organize them, as distinct from the counterpart error, rationalism, ideas without facts. Objectivity and science require logical inductions from observed concretes.

okay..so what if it is.

arent concretes often mixed aggregates.

cret May 22, 2010 at 10:33 pm

what on earth or what non-human mind does empiricism without any ideas????

Graeme Bird May 23, 2010 at 12:43 am

“what on earth or what non-human mind does empiricism without any ideas???

You would be surprised cret. Economics outside the Austrian and British Classical schools often fall into this absolute nuttiness. Of course they would seldom go quite as extreme as what your question implies. But we are assailed by this sort of unreasoning all the time.

cret May 22, 2010 at 10:40 pm

Philosophically, empiricism is a type of metaphysical subjectivism in which there is only chaotic experience or consciousness without any reality.

is counting empiricism??? can counting occur outside of reality?? does an increase in the money yupply require counting to determine an increase???

Graeme Bird May 23, 2010 at 12:47 am

“is counting empiricism??? ….”

Stephen is describing matters very well. But in practice you seldom see people taking such an extremist approach as what his descriptions would imply. Its pretty weird because these proud empiricists are never afraid of putting their own lame theories forward, if they are part of the bully-boy intellectual, status quo.

cret May 22, 2010 at 10:58 pm

Several recent blog posts indicate that the modern supporters of “free banking” continue to misconstrue the fundamental theoretical challenge posed by their critics. The main question is not about the ethical-legal issue of whether or not fractional-reserve banking is “fraud” under all circumstances. Nor, ultimately, is it even about fractional-reserve banking versus 100-percent reserve banking. It is about whether the creation of fiduciary media,[1] fraudulent or not, produces the sequence of phenomena we recognize as the business cycle.

a mises video states that all financial woes can be traced to the fed (an element in an fiduciary media system???) . that seems different than saying whether fiduciary media, if it actually exists at all, creates a business cycle…or just business activity with various levels of error.

have fiduciayr systems created long term, wide spread levels of prosperity???

cret May 25, 2010 at 3:13 am

i meant here have fiduciary bank systems tended to be in economies where there was more long term and wide spread growth levels….than the 100 percent reserve systems that a riothbard article says that we should go back too.

Graeme Bird May 23, 2010 at 12:57 am

“have fiduciayr systems created long term, wide spread levels of prosperity???”

No but they are strongly correlated with the growth of wealth. Since there is more parasitism to be had where there is more wealth around. If you looked at the situation mid-century-last, you might wrongly think that high income tax rates created wealth, since this form of parasitism was made possible in wealthier countries. Likewise with fractional reserve. It tends to appear along with new wealth creation. But there is no country so rich that it cannot be taken down by fractional reserve. Take Japan for example. It really had everything going for it. And it was slapped around by a fractional reserve led real estate boom and has never really recovered. This all despite high savings rates and export surpluses. Of course the Keynesianism it adopted after this real estate bubble burst also prevents Japan from powering ahead. But the fractional reserve and the government debt go together. Their relationship goes back to the Middle Ages. The times of the expansion of fractional reserve were also the time of growing government debts, local and international violence and impoverishment of real wages on the lower levels.

At least these are the conclusions I came to cross-checking the facts and dates between this book…….

http://www.amazon.com/Great-Wave-Revolutions-Rhythm-History/dp/019512121X

…. and the De Soto book on the history of fractional reserve. The two books ought to be seen as companion pieces.

Stephen Grossman May 23, 2010 at 9:03 am

>cret:a noticable empirical difference

Whats the difference between a difference and an empirical difference?
Does “empirical” add something important that’s not in an ordinary,
Joe Six Pack, mundane difference?

cret May 23, 2010 at 12:21 pm

well..a mises video says all our financial woes can be traced to the federal reserve.
i was told that it was part of a fractional reserve system.

now one dollar could be stolen and not cause a financial woe. one hundred dollars stolen could cause a woe. thats what i meant by empirical difference.

jm May 23, 2010 at 11:14 am

I posted this over at coordinationproblem.org but no’one wants to play with me. anyone got any comments?

**********************

To me, FRB just makes no sense, none whatsoever.

However, i can muster one argument against 100% reserves:

you’re building a hut complex on a desert island after being shipwrecked, 20 people total on the island say. You need to know if you have enough food to take 10 people from food gathering duty for 1 month, the estimated construction programme. The new daily amount of food being produced during the constructino will be half what it was, but of course the consumption is the same.

So say previously there was a large food surplus resulting in 280 man days of food (28 days * 10 people of food) being stored. as the project is about to start. So the amount stored is almost enough to get the 10 men through the 30 day construction time.

The original large daily food surplus with 20 men gathering food is now of course not possible. Let’s say with 10 men only gathering food (but 20 eating) that the daily surplus is S.

Then clearly if S is large enough to make up the 2 man days of food that the islanders are missing, they can carry out the project. That is, if when we get to the 29th day, and have eaten the stored food, the islanders accumulated more than 2 days * 10 men’s worth over the previous 28, then the project can be completed.

If S too small – if S is such that on the 29th day we look at our food storage and we have not over the previous 28 days accumulated 2 days worth of food (**) – then the project was not realisable ever.

But if you can only borrow existing funds (ie. we are in 100% reserves) then this means that there are some projects that are actually realisable which will not be undertaken, when they could have been undertaken with fractional reserves. that is, those occasions when S is small enough to mean that the full 30 days of food does not exist prior to starting the project but large enough so that the missing amount would be saved to be usable before it is required during the construction period.

I think that every single sensible argument for frb must ultimately boil down to this question – they must show that there are concrete cases when more desirable stuff gets made than does under 100% reserves.

Firstly, anyone got any complicating factors i have overlooked here?

Secondly, as it is, i don’t think this is a very good argument, it doesn’t convince me – frb is a joke and I want to say ban it outright. But this bugs me. I can think of ways to get round this argument eg. you could borrow in stages (ie. for periods shorter than 30 days); or you could say that this is all true but the ravaging of the price-system is not a price worth paying for slightly increasing the number of startable projects, and those projects will then just have to wait. But though the latter is absolutely true I’m sure, I’m not entirely happy with either of these rebuttals, they seem a bit weak.

Anyone have any thoughts.

(**) Smart alecs amongst you: I’m aware on the last (30th) day you can also consume what what gathered on the 29th day so this is not quite right but it only complicates things unnecessarily, the point is still the same.

Brian Gladish May 23, 2010 at 1:58 pm

In a free society no one will care about arguments for or against 100% reserves. If some consumers are better served, in their subjective evaluation, by FRB, it will exist. Consumers will make the choice between 100% reserves and FRB, not economists, and both might even exist side-by-side.

jm May 23, 2010 at 2:30 pm

Well, I’m not sure it’s that simple. Say enough people want to allow mugging (ie. make it “legal” in whatever sense that means in this free society), we can still state objectively that this will violate the property rights of the victims.

So one question I’m looking for opinions on is, would allowing frb on the very limited basis I outlined above violate property rights? Or to phrase that better, what could the market do to allow these projects to start as early as possible without violating property rights?

Graeme Bird May 23, 2010 at 4:39 pm

There won’t be a free society if fractional reserve is tolerated.

jm May 23, 2010 at 4:59 pm

I agree, but let’s say we’re in the early stages when things are similar to the pre-frb days, freeish – I don’t think this is relevant to my point. I have outlined a very specific scenario in which I believe the claims of free bankers than frb can increase productivity are true.

Graeme Bird May 23, 2010 at 5:17 pm

Things can go wrong with your food supply. High money balances are like insurance. The worst thing that can go wrong on your island economy is starvation. Your island bankers ought stay within the rules so as not to risk a sudden disruption to food supplies. If food was the money and fractional reserve was practiced, then you would risk famine, since you risk a period of the non-sale of food, by bankers who are running the risk of going bankrupt. You risk a breakdown in trade wherein everyone suddenly hoards food and someone misses out in this game of musical chairs. Immediately you play fractional reserve the level of compensation to the food gatherers will reduce since the price signals are saying that there is this phantom supply of food. You create a depression in food prices even as you create cost overuns in whatever else you are doing.Your capital goods producers will just have to go back to the drawing board. They will come up with creative plans to achieve their goals in this more constrained environment that has some insurance against unforeseen events, and in a way that doesn’t risk a sudden dearth of food or indeed a sudden food price spike, after fractional reserve has formerly reduced the incomes of the food producers. Living within constraints like this, allows a slow build of momentum in economic progress that doesn’t get a sudden red light to it. There is always a way around the problem, and its more important to keep building momentum in a way that takes into account the possibility of things going wrong, and doesn’t allow unexpected problems to throw matters into reverse, thus losing all momentum.

cret May 25, 2010 at 3:15 am

you cant eat your money unless it is food. so money woulndt insure much at all.

Graeme Bird May 25, 2010 at 3:52 pm

“It is you who does not have an argument. All you have is your beliefs, and beliefs do not defeat logic.”

No Peter you are just telling lies mate. Its you that has no argument. Whereas you can scroll back over the thread and you will see the myriad arguments I have from the start to the finish of it. Let us hope that you are in the banking industry Peter. Since the belly-crawling stance of those who stick up for the unearned expropriations, that fractional reserve represents …. well thats a pretty undignified point of view to be coming from.

Whereas many aspire to an honest fortune the bankers will have none of it. Honest pay for them would be a cut of the interest. Not even all the interest, only a cut. Rather, being corrupted, they aspire to take for themselves virtually the entire value of the principal, in what is effectively a license to counterfeit. Any libertarian who falls for this scam really isn’t that bright, and should not be foisting this parasitism on the rest of us. People are struggling for goodness sakes. We have no need to be subsidising bankers, and allowing to destroy the effectiveness of our capital markets. And for what reason? Simply because the scam is one of sufficient complexity that some libertarians cannot get their head around it.

Peter Surda May 25, 2010 at 4:32 pm

My argument is simple: there is no logical sequence of steps that lead to the conclusion that FRB is fraud. Or, in the opposite direction, if FRB is fraud, almost all actions whatsoever are fraud. Your argument is that you don’t like FRB and FRB has negative effects, which, as I demonstrated, does not refute my argument. Coincidentally, I agree with these claims, but they are irrelevant.

Your reaction is a typical cognitive dissonance. My arguments do not fit within your framework and you do not know how to logically counter them, so it makes you angry and you resort to emotions, which is what all that is left.

However, this will fail to achieve the expected effect. I have no personal interest in the legitimacy of FRB. I am completely indifferent to it. My only aim is to formulate logically correct arguments and expose fallacies. If FRB is fraud, all power to you mate. But you have yet to prove it.

Graeme Bird May 25, 2010 at 6:01 pm

“you cant eat your money unless it is food. so money woulndt insure much at all.”

In principle you have a point. In practice the hard money will insure against starvation. If that was not the case we could always monetize grain stores one supposes. But the monetization of grain stores won’t be a goer, since in practice it is not necessary.

Graeme Bird May 26, 2010 at 12:27 am

“My argument is simple: there is no logical sequence of steps that lead to the conclusion that FRB is fraud. ”

Yes there is. You just seem incapable of getting your head around it. There isn’t any type of counterfeiting that ISN’T fraud.

Peter Surda May 26, 2010 at 1:36 am

This is getting tiresome. You assert (!!!) that some arbitrary set of contracts with three people participating is fraud, because the leverage causes effects which some people dislike. I have shown that all contracts in this set are not fraud. Using mathematical induction, the set cannot be fraud either. Your emotions do not change that.

Counterfeiting requires that the seller (C) supplies to the buyer (B) something else than agreed upon. Whether the good or transaction meets a third person’s (A’s) approval, is irrelevant. You cannot defraud a third party, you can only make them angry.

Graeme Bird May 26, 2010 at 5:10 pm

“This is getting tiresome. You assert (!!!) that some arbitrary set of contracts with three people participating is fraud, because the leverage causes effects which some people dislike…..

“No you are lying. I didn’t assert that at all. You keep micronising the case because you have a tiny personal random-access-memory. You think if you’ve got one part of the argument in your head then thats the entire argument. But you keep excluding things.

Give me an example of when counterfeiting is not fraud? Give me an example wherein extorting REAL RESOURCES from the rest of the community, outside of the parties in the contractual arrangement, is not some sort of crime?

You see its you that are inadequate here. You are mentally inadequate to understand the situation. We give you one reason why it is fraud, suddenly all the other reasons disappear from that little mind of yours.

You cannot validly micronise the case, and then discard every micronised piece of it. Thats not valid thinking. Now you prove to me that this isn’t fraud. How is the banking industry, able to extort all that value off the community, and this not be theft/fraud/larceny/counterfeiting, or a unique hybrid crime relating to all three of the above?

For goodness sakes Peter. Don’t embarrass yourself. Its not even a particularly complicated scam. See for you it might be a hard rort to see through. I was briefly in corporate finance. I used to get the computer sheets every late afternoon to do with our balances with the other banks. That happened to be my portfolio. To me its no complicated racket at all.

Peter Surda May 26, 2010 at 5:40 pm

Dear Graeme,

in addition to your inability to use logic, you obviously are also unable to read. You cannot wiggle out of this by dragging discussion other way.

Graeme Bird May 26, 2010 at 8:12 pm

“in addition to your inability to use logic, you obviously are also unable to read.

No I can read, I’m faultlessly logical, and you are just being an idiot, as frank warned me you would.

Its not a hard racket for most people to comprehend. The fault is all your own.

Peter Surda May 27, 2010 at 2:09 am

So where did I claim that counterfeiting is not fraud, or even something that can be vaguely interpreted that way? Nowhere. You made that up because you are unable to counter my argument.

Graeme Bird May 27, 2010 at 2:28 am

“So where did I claim that counterfeiting is not fraud,…”

I never claimed you did. Thats the whole problem. You are too stupid to understand the nature of this scam. Imagine being so dense you cannot see this for the counterfeiting racket that it is.

Peter Surda May 27, 2010 at 3:37 am

Well then, what is this:

Give me an example of when counterfeiting is not fraud?

You are too stupid to understand the nature of this scam. Imagine being so dense you cannot see this for the counterfeiting racket that it is.

Back to the same fallacy. I agree with you that FRB has detrimental effects. Nevertheless, that is irrelevant, an insufficient condition for counterfeiting/scam/fraud. For those, a contract violation must be present, and I have demonstrated several times that it isn’t.

Brian Gladish May 23, 2010 at 8:52 pm

If I loan you $10 and you give me an IOU for that amount, I can then, if your reputation supports it, trade the IOU for goods and services (probably not $10 worth, but, say $8 worth). That is an analogy to bonds, and we have effectively created money. Will the trading of IOUs (bonds) be prohibited? If so, you call that a free society?

Graeme Bird May 23, 2010 at 10:25 pm

We aren’t talking any sort of any two-man micro situation. We aren’t talking about one fellow setting up an IOU and then trading it, and thats the end of the matter.

What we are talking about is the banks and other players, pyramiding on shares, gold, silver, cash and so forth, and creating titles to gold, silver, shares and so forth, that they do not have any sort of rightful possession of.

No-one is seriously going to trade little IOU’s. They wouldn’t trade it as you allege. Since I would say I owned the IOU to that person alone. But thats not really the point. The point is pyramiding. To stop the pyramiding, which is an attack on the price system, we have to have a clear distinction between the term loan and the on-call loan. We would need no such clear distinction if we knew that people would never practice this pyramiding. Bank-Cash-Pyramiding is not a two-step operation involving two legal entities. Its a three-step operation involving four legal entities. Its not the situation you describe.

When it comes to broker-share-pyramiding (naked short-selling) if we don’t want these scam-artists destroying our capital markets integrity, we need to have each share tagged in such a way as that its ownership is known, from one moment to the next, and so there is no prospect of pyramiding. That we don’t have that real-time ownership of shares is probably because the inside racketeers want to keep being able to make money as easily as they do.

If we want to have a viable gold and silver market, supposing we still have a fiat currency, we cannot mix up any sort of bookie-operation trading with the real gold and silver market. You can have true backed gold and silver paper, and you can have some sort of betting on gold and silver prices, perhaps based out of Las Vegas, but if you want your price system to function, you must keep such things separate.

This is fully in keeping with what any anarcho-capitalist enforcement agency would have to do supposing it wanted anarcho-capitalism to continue in existence and supposing it wanted itself to be profitable. Freedom does not mean freedom to get the government to enforce inherently bodgy contracts. If an anarcho-capitalist firm wanted to enforce and indemnify contracts at a profit, clearly it would only enforce and indemnify contracts that can be enforced and indemnified at a profit. What we have with all these pyramid schemes, is a method by which industry insiders are able to extort money off the general public by getting the government to enforce contracts that the government ought not enforce.

You can justify this outrage under the name of “freedom-of-contract” but that would be taking this postage-stamp view of libertarianism to a ridiculous extent. We are, or ought to be, able to learn the lessons of a thousand years of banking. We ought to be able to see things conceptually and to understand how these pyramiding practices will always and everywhere be a full-frontal attack on the resource-allocation function of the price mechanism, through the entirety of the structure of production.

We don’t need to act for all time like we were born yesterday in the face of what after-all is a transparent scam.

Brian Gladish May 23, 2010 at 11:26 pm

You propose business models. If they work, fine. If they don’t, fine. Positing a “libertarian enforcement agency” that “wanted anarcho-capitalism to continue” is enfusing values into a company that go beyond the profit motive – a big mistake in my view. Let the market work – laissez faire, laissez passer. Those who take big risks can suffer big losses, the teaching and learning never ends.

Graeme Bird May 23, 2010 at 11:38 pm

“enfusing values into a company that go beyond the profit motive – a big mistake in my view. ”

Thats not what I was doing. Fractional reserve contracts cannot be indemnified nor enforced. French slogans are not an argument. Freedom of contract is an over-rated concept, since many contracts, by their nature ought not be enforced, being as they are a way to rip off non-participants in the contract, and including the fact of their non-enforceability as contracts.

Brian Gladish May 24, 2010 at 12:38 am

“Fractional reserve contracts cannot be indemnified nor enforced.”

If they can’t be they won’t be. What’s the big deal?

You sound like a utopian. Take a lesson from Hayek and let competition discover whether or not FRB, 100% reserves, or both make sense in the marketplace. What contracts “ought not to be enforced” is not your call.

Brian Gladish May 24, 2010 at 12:45 am

So, how many people does it take to make a non-micro situation? I get 100 guys to put in a million each to lend to a new company. Then I use the note as collateral to buy an $80 million building with no money down. Have I crossed your imaginary line? Am I a fractional-reserve banker and destined to spend my life in “libertarian” prison?

Graeme Bird May 24, 2010 at 1:13 am

“So, how many people does it take to make a non-micro situation? I get 100 guys to put in a million each to lend to a new company. Then I use the note as collateral to buy an $80 million building with no money down.”

You cross the line when you sell the building to three different people simultaneously. For goodness sakes learn what the problem is. Fractional reserve is not borrowing. Its pyramiding. Its not financial risk its fraud. Its not entrepreurial activity, its setting up a phantom supply of goods that don’t exist.

“If they can’t be they won’t be. What’s the big dea”

Thats completely wrong. Glib ignorant statements like this won’t stop fractional reserve from going ahead any more than it stopped naked short-selling from going ahead.

Apply your claim to naked short-selling. This was foisted on the market by the banks. Its doubtful that we are free of it even now.

Its true that an anarcho-capitalist enforcement agency would not sanctify this behavior. You are not asking for that. You are asking the government to sanctify this fraudulent behavior. Try to come to grips with what the actual crime is.

cret May 25, 2010 at 3:19 am

To stop the pyramiding, which is an attack on the price system,

how do you attack a price system.

Peter Surda May 25, 2010 at 5:43 am

We aren’t talking any sort of any two-man micro situation. We aren’t talking about one fellow setting up an IOU and then trading it, and thats the end of the matter.

Ah yes, the old “dual rights make a wrong” fallacy, debunked by my favourite Walter Block. Two transactions which are both legal, combined, cannot constitute an illegal outcome. Well, at least not in a consistent ancap world. That’s why in an ancap world, there is no legal recourse against blackmail, prostitution, slander, libel and so on.

To summarise, the only argument you have is that FRB should be forbidden because you don’t like it. Well, tough luck.

Graeme Bird May 25, 2010 at 5:54 am

“Ah yes, the old “dual rights make a wrong” fallacy, debunked by my favourite Walter Block. Two transactions which are both legal, combined, cannot constitute an illegal outcome.”

Of course it can. You are just being idiotic. You don’t have an argument at all.

Peter Surda May 25, 2010 at 7:30 am

It is you who does not have an argument. All you have is your beliefs, and beliefs do not defeat logic.

frank May 25, 2010 at 7:39 am

Graeme – I’d think twice before getting into it with Surda. He doesn’t know what money is and refuses to find out. I quoted this passage from Rothbard

“..the superiority of butter—the reason there is extra demand for it beyond simple consumption— is its greater marketability. If one good is more marketable than another—if everyone is confident that it will be more readily sold—then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists…Now just as in nature there is a great variety. As they are more and more selected as media, the demand for them increases because of this
use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in
almost all exchanges—and these are called money. Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two
commodities, gold and silver, have emerged as money in the free competition of the market…”

And after interminable wrangling, he eventually said:

“Precisely my point. The argument is that by fulfilling the criteria of widespread usage, “something” gains new features and becomes money. Unfortunately, this is the step that is not explained.”

If you can “explain” this to him, please help me out, as he signed off by insulting me using polite language so he can pretend he isn’t, which is my pet hate.

frank May 25, 2010 at 7:40 am

And Surda has a pathological inability to stick to definitions. He insists on using the term “fiat money” differently to how every other person on this site does so.

Peter Surda May 25, 2010 at 8:22 am

Dear frank, despite the wealth of information you produced (and which I am grateful for), you are unable to completely avoid the dogmatic approach to argumentation. Once the argument backtracking reaches dogmas, people turn off logic and change into a broken record. Once you reach this level, the debate gets stuck. However, it is rare for people not to fall into this fallacy, it is human nature, I am not immune to it either, but at least I realise this weakness. To your credit, you seem to have a lower dogma-threshold than many of the people I debated, including on the topic of money.

Graeme Bird May 25, 2010 at 6:03 pm

“how do you attack a price system.”

By setting up a phantom-supply of anything. Fiat-cash. Monetized gold and silver. Non-monetized gold and silver. Shares. Anything at all. Where pyramiding gets going its an attack on the price system and therefore resource-allocation.

frank May 26, 2010 at 4:07 am

Well Peter, no doubt you’re right in part. But remember that patent offices now reject applicatations for machines which purport to perform perpetual motion – without any consideration. They could try but it is certainly not possible to “explain” to such an applicant why they are doing so. Are they being dogmatic by repeating the second law of thermodynamics? Maybe. Or maybe the only solution is for the applicant to pay more respect to the many clever people who have created the field of thermodynamics.

Peter Surda May 26, 2010 at 4:30 am

I don’t understand what patent office practices have to do with the topic. Patents (and IP in general) are arbitrary already (see my posts in other blog entries that discuss IP). My issue is different. Where you assert, I need a deductive step. I have provided many examples which do not fit into your framework. You refuse to deal with them, because your framework does not provide you with the tools to do so. Of course, it does not disprove your claims, but it shows the alleged proof is inconclusive.

I have a background in math (among other things). That might explain why I don’t accept shortcuts. You can’t fool logic, it will come crashing back.

frank May 26, 2010 at 6:50 am

You’re calling me dogmatic. I’m saying that when someone presents you with a claim that they have invented a perpetual motion machine, you don’t try to explain physics to them from scratch, you just repeat the second law of thermodynamics to them or ask them to show you how this law isn’t true. There is no productive “explaining” to be done – and the dogmatism on this is in my view generally justified.

I’ve been repeating The Regression Theorem and Rothbard’s words on money to you over and over. If you want to call that dogmatic, fine – I’m dogmatic. Regardless, either you need to either:

prove Mises/Rothbard wrong using their words. I asked you to do this already about three times, and I pointed out the exact words and section in HA where Mises specifically answers your claim that the reasoning in the Regression Theorem is not-dedutive – what more do you want? You ignored this information – all you can say is the Rothbard paragraph above is not “deductive”.

or

show that the “many examples” which you provided fit in with the Regression Theorems ie. show how these moneys like Ripple and Bitcoin arose spontaneously starting with barter on the market, and are regulated by the price system etc.

You choose not to do the second of these because it isn’t true, and so that leaves the first. You basiclly go on about “deductive” arguments without any specific criqiques of Mises Regression Theorem.

You think there is some third option? I don’t. Mises didn’t agree – if you disagree with the Regression Theorem, disprove it – or accept it and stop wasting everyone’s time.

PS. As for the possibility that you are a once in a generation economic genius and maybe can correct that idiot Mises on a few things, let’s not forget earlier in the thread that I said:

“IOUs cannot create any new G&S [goods and services], they can only redistribute existing ones.”

and you replied

“I need to think longer about this one, but I’ll admit now that you are at least partially right.”

If this information was news to you a mere 10 or so posts ago, I think you must have a very inflated opinion of yourself to be saying Mises is wrong ABOUT ANYTHING. Well, either that, or you digested 100 years of Austrian theory on money in 10 blog comments so completely that you can now see all the holes in it.

Peter Surda May 26, 2010 at 7:30 am

You simply don’t get it. The regression theorem does not invalidate my arguments. My questions (partially) cover areas which are outside of the framework of the theories you are using. The framework does not cater for phenomena I am talking about. That confuses you, you cannot provide an answer and resort to circular reasoning. That is the problem. Not that Mises or Rothbard were wrong, but that you are trying to apply their claims outside of the scope of their validity.

You yourself admit that the symptoms are not present in all cases but only when certain conditions are met. You do not explain how these conditions apply to each of the symptions, you just assert that they go together. It is akin to a physicist claiming that all four laws of thermodynamics are only valid if a significant proportion of the universe is “hot”.

Graeme Bird May 26, 2010 at 8:26 pm

“It is you who does not have an argument.”

Peter you are not a logical person. You aren’t. You think you are but you are not. Sorry you had to hear it from me. Its not THAT tricky a scam. Really it isn’t. Get Yo-Mamma to explain it to you. You are still living at home aren’t you?

Peter Surda May 27, 2010 at 2:11 am

Despite asserting you are logical, you fail to counter my argument and instead you appeal to emotions or drag the discussion away. You are a fraud.

Graeme Bird May 27, 2010 at 2:26 am

“you fail to counter my argument ….”

You didn’t have an argument. You never do. You are a dim bulb. A mentally little man. Its not a difficult scam to see through, this bank-cash-pyramding.

Peter Surda May 27, 2010 at 3:33 am

I repeated my argument several times. A set of contracts cannot be fraud if the individual contracts aren’t fraud. You retort that the set has effects disliked by others. However, that does not invalidate the argument, because any action has effects that are disliked by some. You call some of the effects “fraud” and “robbery”, however that would only be valid if you were forced to accept the currency (which absent legal tender laws you aren’t), or had a right to value (=market price) of the currency (you don’t). If you were an IP proponent, that would explain why you cling to some of these fallacies.

You randomly mention pyramid scheme (or more generally, leverage) and maturity mismatching. I showed that taken individually, they are practically omnipresent and non-fraudulent. But then you commit the same type of error as frank with the definition of money: relying on emergence. You claim that when combined, abrakadabra, fraud emerges. That’s all it is, a magic trick.

Graeme Bird May 27, 2010 at 4:04 am

“A set of contracts cannot be fraud if the individual contracts aren’t fraud.”

Not only wrong but idiotic. Where did you get this foolishness from? Its not possible to dismiss the totality of a crime by micronizing the crime, and establishing that each individual action that the crime involves, is not always and everywhere a crime.

You get a blockhead idea like this in your head and you never seem to want to let it go. The totality of the crime of fraud is only a crime of fraud, when all the actions that make up that fraud-crime, are completed. If they aren’t completed its not the crime of fraud. It may be some other crime. But not fraud.

Clearly then if you chop the completed fraud crime up into its individual actions, they are not themselves completed crimes. You would not expect the micronised actions of a crime to be crimes themselves. A crime is not completed until its finished. You are just such a blockhead mate. You have gotten the mental constipation bigtime.

“A set of contracts cannot be fraud if the individual contracts aren’t fraud.”

What a stupid idea. Wrong. An idea for suckers. Yet you’ve stuck with this wrong idea with furious faith. Tell your Mother that its happening again. She will understand.

Peter Surda May 27, 2010 at 4:22 am

Again, you appeal to the emergent nature of “fraud” and use faulty logic. See my other post which talks about the fallacy of division.

frank May 27, 2010 at 5:19 am

“The framework does not cater for phenomena I am talking about. That confuses you, you cannot provide an answer and resort to circular reasoning. That is the problem. Not that Mises or Rothbard were wrong, but that you are trying to apply their claims outside of the scope of their validity.”

Whatever, we could go on about this until one of us dies. It could only move on if you were to demonstrate where exactly The Regression Theorem is deficient using Mises words ie. why conditions nowadays mean that these so-called “moneys” you speak of lie outside of its domain, show us how that idiot Mises missed what you see so clearly. Until you do this clearly, then you are just a bluffer – one who keeps telling everyone he is logical rather than making logical arguments.

Apologies for not commenting on your last paragraph, I don’t actually understand most of it.

Peter Surda May 27, 2010 at 5:46 am

Well, I suggest you ask Graeme, as he seems to maintain that it only takes three (or four in some cases) people to create money, inflation and fraud (exactly as I claim the conclusion of your arguments should be).

The problem with your application of the regression theorem is that it does not answer these questions: what are non-commodity mediums of exchange, do they cause inflationary boom, are they fraud? You cannot answer this.

frank May 27, 2010 at 7:30 am

Please define “mediums of exchange”.

Peter Surda May 27, 2010 at 9:46 am

Aha! So we are making progress. First of all, apologies for wrong grammar, should have been media and not mediums. I define it as anything that you accept in an exchange with the intention of using it in another exchange instead of consuming it. It might seem overly broad and include unexpected phenomena, but I can’t see any reason for narrowing it down.

Graeme Bird May 27, 2010 at 4:09 pm

“Well, I suggest you ask Graeme, as he seems to maintain that it only takes three (or four in some cases) people to create money, inflation and fraud (exactly as I claim the conclusion of your arguments should be).”

See you are a blockhead Peter. Here you are attempting to apply this weak pre-teen-aspergers form of pseudo-logic. And its clear that you don’t have a clue about the process of bank-cash-pyramiding. Why dilute the thread with your nonsense when you haven’t bothered to wrap your little mind around how the scam is effected?

frank May 28, 2010 at 3:55 am

Firstly, Graeme is discussing frb and fraud with you. I am discussing whether or not your examples of “money” ie. Bitcoin, Ripple etc. are consistent with The Regression THeorem. For someone who goes on and on about how logical and deductive he is, and says he wants to rigorously apply definitions, you seem, rather bafflingly, to be literally unable to comprehend that definitions are not in themselves set in stone but can change according to the circumstances, so long as the people using them are clear what they are, and that therefore you should take extra care (at the very least) before pointing out differences between definitions of two people doing entirely different things. Please stop doing stupid things.

And please excuse me if I’m not as ecstatic as you about this “progress” – we’ve been over all this once, you seem to have just forgotten or were drunk at the time or something. As Graeme said, you can’t look at one bit of the problem, then another, then another all in isloation, it doesn’t work like that.

“I define it as anything that you accept in an exchange with the intention of using it in another exchange instead of consuming it.”

Ok. “Medium of exchange” is in the dictionary.

I propose the existence of another entiry – let’s call it, I don’t know, “money”. I’m gonig to define it now. Are you listening? Forget what you think you might know about this word. We’ve seen media of exchange already – but there is a sub-category of such media. Get that? I’m saying anything that I call “money” is a member of the set of “media of exchange”, but that all “media of exchange” are not members of the set of things which, in a particular area/economy/time, you could call “money”.

Do you or do you not accept this definition of “money” from Rothbard? If not, precisely where and precisely why not?

“..the superiority of butter—the reason there is extra demand for it beyond simple consumption— is its greater marketability. If one good is more marketable than another—if everyone is confident that it will be more readily sold—then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists…Now just as in nature there is a great variety. As they are more and more selected as media, the demand for them increases because of this
use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in
almost all exchanges—and these are called money. Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two
commodities, gold and silver, have emerged as money in the free competition of the market…”

Peter Surda May 28, 2010 at 4:34 am

A substantial part of the problem with the discussion is that some of my opponents (e.g. you and Graeme, although on different topics) are unable to comprehend my objections, and instead of countering my arguments, you talk about something completely different.

Maybe though now that we finally seem to narrow down the discussion, we might be able to get some resolution. Let us say that I accept your definition of money, and I agree that “money” is a subset of “media of exchange”. Let us call the rest of the superset, i.e. media of exchange that is not money, “fake money” (the exact name is irrelevant, I just want to avoid misunderstandings).

This alone however leaves most of my questions unswered, and that’s what I’ve been trying to get you to comprehend. Can fake money exist without government (so far, I see no reason why it shouldn’t)? How widespread would fake money be without government (I don’t know)? Does fake money cause inflation (so far everything indicates it does)? Does fake money violate property rights or require a breach of contract (again, I see no reason why it should)?

frank May 28, 2010 at 6:09 am

The reason I can’t “comprehend” your objections is that they are ill defined and are a moving target. Never mind wistful laments about the quality of your opponents – just answer the question. You are pathologically unable to stay on track.

We just boiled your problems down to this few posts ago:

“The problem with your application of the regression theorem is that it does not answer these questions: what are non-commodity mediums of exchange, do they cause inflationary boom, are they fraud? You cannot answer this.”

And, starting at the beginning, we were in the process of obtaining definitions in order to answer your first question ie. “what are non-commodity mediums of exchange” and how do these fit in with The Regression Theorem. You referred to this is “progress”.

Now, before I go on, your use of the word “fake” is stupid. Nails and sugar and cattle in this context aren’t pretending to be money in any way, they are what they are – media of exchange. Whilst we can define things how we like for the purposes of a discussion, it makes no sense to use pre-existing words in such a tortured fashion, like calling coffee “cold” and iced tea “hot”. There are cars and there are sports cars – calling a ford focus a “fake sports car” is not helpful in general, it is stupid. You say you want to define things and follow the definitions – but your use of this word “fake” shows exactly that you are not doing this, you have preconceived notions about “money” that I asked you to put aside. It seems you are unable to do what you keep asking me to do in patronizing language.

Well, with us having only just started this newly focused line of inquiry, you are now throwing your hands in the air again. You say:

“This alone however leaves most of my questions unswered, and that’s what I’ve been trying to get you to comprehend.”

I comprehend it fine – i’m answering your questions precisely, starting with the first one you listed. I know this does not answer the first question. These are definitions – your question was not q request for these definitions, so it is not an answer. Answering the questions means, well, answering the question.

But rather than proceed with what you say you have been pining for ie. a logical deductive consideration of your questions, you now abandon this one and list a whole load of new ones:

“Can fake money exist without government (so far, I see no reason why it shouldn’t)? How widespread would fake money be without government (I don’t know)? Does fake money cause inflation (so far everything indicates it does)? Does fake money violate property rights or require a breach of contract (again, I see no reason why it should)?

How can we ever resolve anything if you can’t even decide what your objections are? You are not making any sense or sticking to the point, despite your claims to the contrary.

I don’t think you are being intentionally evasive – I think you don’t know enough to know what “on topic” and “off topic” are. Yet you have the front to lecture me on what I can “comprehend”. I don’t care about you, to be blunt. I care about people who come to this site and read comments from people like you and Mike Sproul, self-proclaimed know-alls that write with a confident even arrogant tone but who in fact are fundamentally confused about the issues. I think it important to show people genuinely looking for information that your ilk are not to be taken seriously and that Austrian Economics is the only way to think.

I tried to proceed step by step and answer your first objection. You have already gone off on tangents and abandoned the specific question we were answering. I have therefore proved your constant requests for a structured discussion were in fact just ploys and not serious. The demonstration of this can now end our discussion.

Peter Surda May 28, 2010 at 10:56 am

Dear frank,

I’ll begin from the end again. Those are the questions that I have been asking from the beginning, only now after much ado we managed to clarify the terms. This happened despite your constant attempts to drag the discussion away from my questions. It is not me who is a moving target, I’ve been asking the same thing from the beginning. You are the one that is moving constantly and avoiding confrontation. Just like you say of me, I don’t think you do this on purpose, you merely do not understand the topic as much as you think. I on the other hand do not claim to have any special knowledge about the subject (which is why I am participating in the discussion in the frist place, in order to learn from people who know more than me), but I appear to have a better understanding of logic and the scientific method.

Please note that despite all what you said, you have not answered any of the questions that I consider important. You talk about anything else but the answers. You are not interested in them? Fine, but then I would appreciate if you didn’t pretend you were participating in a debate.

frank May 29, 2010 at 3:00 pm

Dear Peter

No Peter, what I said was right – you are pathologically unable to correctly formulate or stick to (or understand) the definitions, and I’m going to prove it for you below.

Those are BRAND NEW QUESTIONS, just right out of the blue. Let’s take the first one – you can prove me wrong easily by quoting where you have asked previously “Can fake money [using your definition the paragrah before] exist without government (so far, I see no reason why it shouldn’t)?”. You claim you’ve been you’ve “been asking the same thing from the beginning” and this is ludicrous in many many respects, but lets just take this one case. Show me where you have asked this question before? You can’t because you simply have not.

You are blinded by your “background in Math” and your self-promtion into thinking that everything you say therefore MUST be logical, like you are Dr Spock. People who are really logical don’t keep repeating that they are logical, they just say logical things. Get a grip of yourself. We have spent (and it now appears wasted) much time differentiating between various categories of money/media of exchange – commodity/non-commodity and government/free market being the two primary distinctions.

Your questions of late have been about whether non-commodity money (eg, bitcoin, Ripple) can operate/emerge in a free market. Whether this is consistent with the Regression theorem was the question which was first in your list abpve and for which I was establishing definitions that would allow us to proceed small step by small step to an answer.

But we can’t do this when you CAN’T EVEN REMEMBER/UNDERSTAND THE DEFINITIONS AND DISTINCTIONS THAT WE HAVE MADE. We established “media of exchange” and “money” very carefully. Then you very carefully defined “fake money” (leaving aside the stupid use of the word fake) and then asked if this can “exist without government”.

My definitions were all consistent and you accepted them. But your definition of “fake money” takes us into the land of obfuscation once more – IT DOES NOT DIFFERENTIATE BETWEEN COMMODITY MEDIA OF EXCHANGE AND NON-COMMODITY MEDIA OF EXCHANGE. If you were only talking about commodities, then it makes even less sense as it is obvious that commodities can be used for exchange purposes without the government. So the charitable interpretation is that you’re mixing up commodities and non-commodities in this definition. You even wrote this yourself earlier -

“My core question is: what is the “hard” differentiating factor between money backed by physical assets (e.g. by gold) and money backed by expected revenue (e.g. “fiat” money)?”

Putting aside your baffling insistence on using the term “fiat money” differently to everyone else in the English speaking world, this is indeed a good and sensible core question for you to ask. BUT YOU THEN TOTALLY IGNORE THIS DISTINCTION WHEN YOU DEFINE “FAKE MONEY” and then start to use the term “fake money”. How can we exchange information when you forget what has been established previously and force us to retread the same ground over and over? This is not word games, it is fundamental.

So, it is a different question than has been asked before – it is a brand new question, like I said. Prove me wrong by quoting where you asked it before. GO ON.

Of course the subset of your “fake money” [stupid name] which is a commodity used in exchange but has not undergone the “reinforcing spiral” to make it “money” can exist in a free market, this is surely not in dispute. But whether or not the subset of “fake money” which is a non-commodity “media of exchange” can do so is the question that you were asking originally. You should have defined “fake money” to ask what you were asking previously. you didn’t because you haven’t sorted these distinctions out in your head yet, and yet you want to lecture to me on this topic? Give me a break.

Peter Surda May 29, 2010 at 4:02 pm

Dear Frank,

I really don’t think that I can learn anything more from you. Instead I’ll read more papers (e.g. those written by Hüllsman). So just briefly. I asked several times, since the beginning: “If Bitcoin/Ripple are not money, what are they?”. You never answered this question, instead you wiggled out and kept talking about regression theorem and all kind of other stuff. Instead you navigated me to spend a huge amount of time explaining this trivial question and look for longer explanations, and then when I do this, you claim that that’s something new.

The core of your argument is that some important properties of a medium of exchange are only present after the regression has occurred. This is fine, but you never explain which properties belong to this category and which not. Again, you are avoiding this at all costs. Since the answers are not forthcoming, I’ll turn to studying.

frank May 29, 2010 at 6:24 pm

Well we agree on one thing then, I agree 100% that I’m at this point no longer trying to debate, i’m trying to ram your ridiculous words about how I was avoiding debate and how much more logical you are than me and how you understand the scientific method so much better than me back down your throat. And I’m going to carry on now.

You say I won’t answer thw question. Nonsense. Aside from many previous attempts to do so, above you asked:

“what are non-commodity mediums of exchange”

and from my comment

“Please define “mediums of exchange”.

onwards, i was clealy trying to move towards this question, as i in fact said above:

“Your questions of late have been about whether non-commodity money (eg, bitcoin, Ripple) can operate/emerge in a free market. Whether this is consistent with the Regression theorem was the question which was first in your list abpve and for which I was establishing definitions that would allow us to proceed small step by small step to an answer.”

You can’t answer the question about what Bitcoin and Ripple are until definitions of the various categories of “media of exchange” are agreed upon, starting with commodities and moving on from there. This is what I was trying to do in order to answer your question in an incremental fashion. I can’t help it if you are unable to remember distinctions you already made and what we have already agreed upon.

And note that you did NOT accept my challenge to prove me wrong by quoting where you asked that question. This is because you can’t.

Peter Surda May 31, 2010 at 3:48 am

Dear frank,

you are right, in haste I forgot a qualifier or two in my questions, please accept my apologies for that. However, your reaction proves that I was right all along. You know exactly what I’m talking about, but instead of answering, you divert the discussion elsewhere. All I am looking for is an answer like this (example):

Bitcoin/Ripple are a media of exchange, therefore they have features A, B and C. However, as they are not commodity-based, they do not have features D, E and F. Also, because they are not widespread and have not gone through the reinforcement spiral as described in Mises’ regression theorem, they do not have features G, H and I.

With much effort, I was able to establish that G is “we call them money”, and there is a high probability that D is “do not cause inflation” (you have not answered this directly, but at least Graeme seems to claim this and although my argument follows a different path than his, we arrive at the same conclusion here). But that is about all. Not much progress for a month-long debate.

Surely filling in the gaps is not a difficult task for someone of your knowledge of the topic. Is that too much to ask? Apparently so.

David Pierce May 31, 2010 at 1:51 pm

Frank: “But remember that patent offices now reject applicatations for machines which purport to perform perpetual motion – without any consideration.”

But I guess most of these applications are not introduced by Nobel prize winning physicists. It´s more like a business man trying to refute, say, the Ricardian Law of Association.

frank June 3, 2010 at 7:09 am

Once you insult me by saying I don’t understand logic and the scientific method (whilst talking incoherent nonsense yourself) then for as long as you continue to try to wriggle out of the situation, I’ll be here pointing out exactly how and where you are out of your depth. (And you say my action “proves” you were right all along? That doesn’t seem very ”deductive” Peter – surely you wouldn’t be using empirical/historical data to “prove” something?)

You lecture people about how logical you are and how wonderful you are at applying the scientific method, then you state something non-sensical (missing out an important distinction which we had already gone to pains to establish) and then say “You know exactly what I’m talking about, but instead of answering, you divert the discussion elsewhere.”

NO, I DON’T KNOW WHAT YOU’RE TALKING ABOUT, THAT’S THE POINT – that’s why I went to the trouble to establish definitions slowly and carefully. Your inability to go along with this is a direct consequence of your lack of reflection on the issues.
And your request for an answer as suggested sounds great – very sensible. An answer in this form would indeed be tremendous. However, the debate was about the terms which would enable the debate to framed in this simple fashion. To expand, you sayu you wanted me to just say an answer like,

“Bitcoin/Ripple are a media of exchange, therefore they have features A, B and C. However, as they are not commodity-based, they do not have features D, E and F. Also, because they are not widespread and have not gone through the reinforcement spiral as described in Mises’ regression theorem, they do not have features G, H and I.”

But (and if you deny this I will drag out all the quotes) we expended many, many words debating exactly what is meant by the terms you use in this answer:
- “media of exchange”. For example, you said first “First of all, in my opinion, if at least one person is willing to accept something as a medium of exchange, that becomes money. It does not mean universal acceptance. What if one person refuses to accept gold, does it then unbecome money? Of course not.” (so EVERYTHING ever swapped for anything else was one? A supremely useless definition if ever there was one). We had to clear that up.
- the difference between paper and commodity money. For example, you said “My core question is: what is the “hard” differentiating factor between money backed by physical assets (e.g. by gold) and money backed by expected revenue (e.g. “fiat” money)? I can’t find any, I only see quantitative differences. The only qualitative difference I see if the commodity itself is the money, only then there cannot be distortions related to problems with backing, because there is no such relationship.” You didn’t see a difference between paper and commodity money? Again, a statement which you now appear to disagree with – or if not, you should.
- what “widespread” means and whether Rothbard and his reinforcement spiral is “deductive” enough for your exacting mind. For example, you said in response to my ROthbard quote defining money “I do not ignore this category, but I am pointing out that it defines money by historical developments, rather than deductive reasoning. While it does not make the definition false, it merely makes it unusable for praxeological arguments. Saying that because of historical development in the past, future development will be the same is not what the austrian school of economics does.” And when I said “Rothbard describes how there will in general be one or two commodities which come to be one half of all or almost all exchanges and thereby become something we can call “money”, in contrast to something which is used sparingly in exchange which is not referred to as money”, you replied “Precisely my point. The argument is that by fulfilling the criteria of widespread usage, “something” gains new features and becomes money. Unfortunately, this is the step that is not explained.” It’s not that I didn’t explain, it’s that you didn’t accept my explanations. I’ve no problem with that, but I DO have a problem with you saying I’m avoiding debate when I clearly am not.

So, that answers which you say you craved so much were in fact given (though separately) which is why we had those debates in the first place, and so if I had phrased them in that simply and direct way, it would only have been begging the question, not providing an answer. So we had to BUILD UP to the succinct answer using defined terms. You should stop talking about logic and instead act logically.

So let’s not get too carried away with the “I’ve been asking the same thing since the start” argument. You most certainly have not.

PS. And regards inflation, we settled this (that IOUs cause inflation) at the start, which again you have forgotten – or you are too confused to reason about it correctly. Nothing I can do about that. And if you deny this, I’ll dig out the quotes.

frank June 3, 2010 at 7:14 am

David – I’m just suggesting that in some scenarios, dogmatism is justified. You’re right that if Feynman submitted a similar application, he would and should not be dismissed lightly.

frank June 3, 2010 at 7:18 am

Although he would give the pathologists something to think about.

Peter Surda June 3, 2010 at 8:55 am

Dear Frank,

apologies if I insulted you, that was not my intention. My intention was to get answers from you, which, by the way, you still haven’t provided.

Graeme Bird May 27, 2010 at 4:03 pm

“Again, you appeal to the emergent nature of “fraud” and use faulty logic. See my other post which talks about the fallacy of division.”

No Peter. You got it wrong. There is no such fallacy applicable. A crime (A) is only the crime of (A) when its completed. If its not completed it may not be a crime. Or it may be a conspiracy to commit crime (A). There is nothing to say that every individual constituent action in an uncompleted crime, is itself a crime. You are an irrational idiot.

cret May 23, 2010 at 12:26 pm

“But if you can only borrow existing funds (ie. we are in 100% reserves) then this means that there are some projects that are actually realisable which will not be undertaken, when they could have been undertaken with fractional reserves.”

if shells were the money are you saying that fractional reserves would be shell notes and create more overall more ‘money’ to trade for goods/services??

if there were 100 shells to use or 50 shells and 50 shell notes what would be the difference???

cret May 23, 2010 at 12:35 pm

If S too small….
so say previously there was a surplus….

arent these complicating factors built in????

a surplus was realisable under 100 percent reserves. storage, etc.

does your fractional scenario actuyally create more money overall???

cret May 23, 2010 at 1:33 pm

maybe if you expalined what your island project would be usign two scanarios.

for day one using a 100 percent reserve system of lending and then explain how a frctional reserve system would operate.

if actually more money would spring into existence and how that would happen.

cret May 23, 2010 at 12:36 pm

did a rothbard write this years ago or was this added on by someone else ???

“It is also why it would be far better to suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves.”
http://mises.org/econsense/ch78.asp

if a rothbard wrote this many years ago what specific system of 100 percent reserves was he writing aboutgoing back to ??? if the sentence was added opn by someone else, who put false information there???

Read more: White contra Mises on Fiduciary Media — Mises Economics Blog http://blog.mises.org/12713/white-contra-mises-on-fiduciary-media/comment-page-2/#comment-690316#ixzz0om7rggmq

Graeme Bird May 23, 2010 at 4:07 pm

“if a rothbard wrote this many years ago what specific system of 100 percent reserves was he writing aboutgoing back to ??? if the sentence was added opn by someone else, who put false information there???”

When you go to investigate the matter you can often get the wrong impression at first. The form that business cycles tended to take after the industrial revolution, combined by the contention that fractional reserve was virtually invented by a nationwide cabal of English goldsmiths, would tend to have one talking in this manner. Even though its reasonable to assume that the banks start cheating not long after they have gained the trust of the public.

cret May 24, 2010 at 4:04 am

“if a rothbard wrote this many years ago what specific system of 100 percent reserves was he writing aboutgoing back to ???

Graeme Bird May 25, 2010 at 6:04 pm

Okay. So you might have caught out the great man on a technicality.

jm May 23, 2010 at 12:39 pm

We don’t need shells, just say food is money.

If an entrepreneur wants to fund the project, he needs to pay his 10 men for 30 days in food, so needs 300 man days of food. There are only 280 man days of food saved up. But even if he borrows all of this, he can’t start unless he factors in what will also be added to the total savings (or the “pool of funding” as I believe Frank Shostak might refer to it) in the 28 days for which food is already available. It seems to me like free banking with some fraction reserves (only a little mind) and the natural market interest rate would solve this problem to allow these projects to start sooner than under 100% reserves.

Graeme Bird May 23, 2010 at 4:32 pm

Right but you wouldn’t really run a modern economy on that basis. Gold and silver are just such fantastic money. Mostly silver for retail shops one would think. Mostly gold for more substantial business. I think the evolution of changes to money is part of the progressing economy itself. Like if on some planet grain, then salt, then distilled grog, were used as money and each became the primary money for a time, its as though the community, by monetizing things, is engaging in impromptu venture capital. What would be good is if you could have locked in 100% backing and double entry book-keeping in the bronze age.Now when we are wanting to go back to sound money, or perhaps onto really really sound money for the very first time, its not necessary to suddenly go over to the money you know is the best one. I can see, what with the holdings that the Americans have, that they may wish to do so. The rest of us probably would be ill-advised to try this on. If the gold is brought to such a high cost up front, and then must drop in value, you miss out on gold as a producer good. You miss out on this process of the evolution of different monies aiding the development of the economy.With digitization, the divisibility and portability requirements of good money are still there. But they are not as critical, so long as the cultural and legal environment is such that there isn’t even the smell of fractional reserve. So you could have copper as well. Platinum is less distinctive and you could easily get ripped off with platinum coins. But once again, if there is not the smell of fractional reserve, platinum could take up much the slack.The Americans have their strategic oil reserve. A small country that had a more serious risk of being blockaded, particularly now that the Americans are scuttling themselves, and now that more righteous Americans are sick to death of sending their kids to bleed everywhere …… a small country might think, as part of its defense requirement, to have a government sponsored money in the form of some hydrocarbon, to encourage investment in the storage and production capacity of a more readily usable hydrocarbon.I can see the sense in a big bang changeover just to get everything done before the politics scuttles everything. Also the big bang change would give everyone one last chance of coping with their outrageous debts. It would allow them to pay off their debts, and encourage them to do so, given they know that a wall would soon be hit.But to win the argument against the fractional reservists and the 100% backed fiat crowd, we really need a few monies so that the process can be made more or less costless for most countries. For countries that don’t share the supposed (unaudited) gold reserves that the Americans have then starting off with a few monies would seem more sensible.If we start off with gold being worth (lets say) 20 000 USD an ounce it will have some fiat characteristics to it., We won’t be in the growth-deflation pocket for a very long time. We miss out on some of the benefits that a more natural evolution of market share would provide. But then each country has to find a transition process most natural to them. Such a sudden changeover may indeed be the right strategy for the Americans.In either case we want to get to 100% fiat backing as part of the transition process. The idea would simply be to remove any subsidy to the banks. Monetary policy then takes on only two levers. Cash injection via debt retirement, and raising the reserve asset ratio. If these are the only two policies the currency board can adopt, after the Fed is dissolved, then you will wind up with 100% backing pretty quickly.

jm May 23, 2010 at 5:15 pm

I’m aware that an economy would not use food as money. But I don’t see how this answers my question, the principle is identical. The amount of loanable funds available in the economy might be just too low to allow an entrepreneur to get enough up front to be able to fund his entire project, but close enough to the total he needs so that the bank will, while his project is underway, take in enough deposits to fund the last two days (or whatever) for which he previously had no funds. So he is preventing from starting a project which he can in fact complete by the 100% reserve rule.

I just thought of something – the money loaned to the entrepreneur but not yet paid to the employees could earn interest as he works on the projectin his bank if he is willing to structure the times in which he will extract it. Will this be important or is it incidental? I have to think about this. Maybe there’s some thermodynamics-like invisible pair od scales which makes the interest balance with something? Or maybe not.

Graeme Bird May 23, 2010 at 5:27 pm

“The amount of loanable funds available in the economy might be just too low to allow an entrepreneur to get enough up front to be able to fund his entire project…..”

This is not really possible. Since fractional reserve creates no new goods. So its existence will spill over into the cost of the producer goods necessary to complete his projects. In your example the effect of fractional reserve spills over into food stocks being driven dangerously low. In most examples we get trade balance blowouts, producer goods inflation, and other bad effects. Nowhere can make-believe supplies of something produce more factors of production, to be used in durable capital investment.

cret May 25, 2010 at 3:54 am

“Since fractional reserve creates no new goods. ”
do you mean fractional reserve creates no new goods or a money system that uses fractional reserves creates no new goods??
or do you mean that a money system that uses fractional reserves cant produce any new goods?? that doesnt make much sense.

when money enters a barter economy does it help facilitate more new goods?

if fractional reserves or the media created from them enter a money economy can it do the same as money entering a barter economy??

jm May 23, 2010 at 6:16 pm

“Since fractional reserve creates no new goods…”

I see what you mean but as this is the proposition being debated so you can’t just assert it as part of the argument. Ok, let’s say we have a 100% reserve system, no frb of any kind, for a time. No chance of any distortion of the price system, everything going along just fine, no chance of any “spill over”.

The entrepreneur wants to borrow gold from a goldsmith to pay for 30 days worth of food. But the goldsmith only has 28 days worth. He “knows” that he will be able redeem the last 2 days worth when that day arrives based on steady and reliable deposits he is receiving and will receive in those 28 days. So he fakes up two receipts and he vows to himself to destroy two other receipts on the 28th day (because he wants to arrange the loan now, before the entrepreneur changes his mind say).

This seems to me to be a situation where the project was started earlier than it would have been in a 100% reserve environment.

What price distortions has he introduced with this creation of fake receipts? There will be extra money bidding for some of the resources at some point during the project, raising their price. But this will disappear when he burns the two receipts at a later date. So is it just a trade-off – do we want to start projects earlier in exchange for price distortions or not?

The argument of free bankers advocating frb can be boiled down to this simple problem. They saying that they will exchange price distortions for earlier projects.

But if these price distortions are temporary (a few days in this example say), then I don’t think you can dismiss this without any thought, surely some argument has to be made that these temporary price distortions lower productivity more than starting the projects later.

jm May 23, 2010 at 6:24 pm

Although to be clear, I do think the case I’m making is wrong. I do think that price distortions and their associated malinvestments are worse (far far worse). I;ve just never read anything that convinced me why the MUST be worse.

jm May 23, 2010 at 6:43 pm

No, scratch that, I was right first time. There are no price distortions. The receipts for the two days worth of food aren’t spent until the 29th and 30th days – by which time, the goldsmith has the extra gold to which these receipts correspond. Someone has saved up 2 days worth of gold and deposited it with the goldsmith, as anticipated, and on days 29 and 30, they gold is spent. There are no price distortions.

If the entrepreneur could spend the money as he pleases (ie. before day 29 ie before the gold corresponding to the receipts is in the hands of the goldsmith), then there WOULD be price distortions.

So, allowing the goldsmith to temporarily fake receipts allowed the project to start earlier and did not cause any price distortions. My question is: is there a way of starting this project early which does not involve a property rights violation? How could the market start on the earlier date?

I guess the answer is a structured loan of some kind: eg. the goldsmith gives him the money in shorter (3 day or whatever) chunks, so no’one’s property right are violated as the gold is always ALREADY in the hands of the goldsmith when he hands the reciepts over to the entrepreneur, so even if he spends them immediately there is no problem. This would allow the project to start as early as possible and would not violate property rights.

I’ve gone from 99% to 100% convinced now. I really don;t see how the free bankers can argue for frb, it is ludicrous.

cret May 27, 2010 at 3:58 am

I’ve gone from 99% to 100% convinced now. I really don;t see how the free bankers can argue for frb, it is ludicrous.

is free banking just banking without a fdic and central bank??

did the free banking examples brought up by the selgin have some type of govt support making them sort-of unfree?? is that true??

would or did?? free banking (if it existed) produce notes that werent redeemable but were backed by unredeemable goods??? land or services, iow???

Graeme Bird May 27, 2010 at 5:54 pm

“did the free banking examples brought up by the selgin have some type of govt support making them sort-of unfree?? is that true??”

The bankers in Scotland would make it difficult for some people to pull their gold out when they wanted it. Now whether this was government looking the other way or not, the fact is that “free-banking” is usually described as a situation where you can get your property back right away. Hence its a bit rich to be calling this an example of free banking. What appears to have made this system somewhat functional, for the time that it lasted, is that anyone could start a bank. But in my view the situation could have keeled over at any time, if not for the ability of these guys to give you the runaround when it came to getting your property back off them.

We had a similar situation in Melbourne Australia in the late 19th century. Here solicitors and pretty much everyone could take deposits. Now if it had been at an earlier time (say before the California gold rush) then the system may well have survived for a long time, and may have seemed on the surface to work quite well.

But there was a gold rush there in Victoria Australia. Which meant that fractional reserve produced this massive real estate bubble. Free entry helps. But its no panacea to this inherently unstable practice. So with all this gold locally you had this real estate disaster. And many lives were wrecked. Many people were disgraced, who were just doing what everyone else was doing.

Had there been no fractional reserve, the gold rush would have only produced a few years, a very few years, with rising prices, and then we would likely have slipped back into the growth-deflation pocket. So no harm would have been done for the fact that the people in Victoria Australia were blessed with all these gold finds.

But the gold rush made the experience far different from the apparent stability and competitiveness of the earlier Scottish example. It was a real human tragedy. And it was just not necessary.

Its not only a sudden gold find that can cause things to go wrong if you allow fractional reserve. Anything that pushed up the nominal interest rate would have these bankers going wild and screwing things up.

But it must be understood, that bank-cash-pyramding is always distorting price signals. Always. Doesn’t matter whether the banking secto comes unstuck or not. Its always diverting huge resources to the financial sector, and therefore starving the rest of us of these resources. Its always setting up a phantom supply that corrupts resource-allocation through the entirety of the structure of production.

There is no need for it. Not benefit to it. Its the worm in the apple of capitalism. Its the original sin that lends weight to the Keynesians and the communists.

There is an apparent gain to be made in the sense of tying up less resources serving the money supply. But this apparent gain is only there, because of the very fact that fractional reserve is not made illegal, and the proscription vigilantly enforced. For if fractional reserve were impossible, then we could fill up the money supply with a cross-section of commodity-monies. And in this case there would be no cost to it, but a gain as far as amortizing the costs of other mined products, and catering for a sustained expansion, which would never have a red light to it.

If we had that cross-section of monies, then when the record-breaking skyscraper went up, it would defy Mark Thornton’s index. There would be no subsequent recession. No slowdown. Nothing to bring the progressing economy to some sort of debacle.

cret May 27, 2010 at 7:02 pm

“The bankers in Scotland would make it difficult for some people to pull their gold out when they wanted it.”

was this difficulty stated in a contract??? that would sound like free banking – contract terms but not so much of a demand deposit.

if the free bankers that you say existed didnt fullful contracts then they failed in some respects, though many economic conditions may have improved despite that, i dont know. but still the babnkers their gain at anothers loss. if the govts helped the free banks to suyspend contract fulfilment that woulndt seem like free bankibg really.

cret May 27, 2010 at 7:04 pm

would or did?? free banking (if it existed) produce notes that werent redeemable but were backed by unredeemable goods??? land or services, iow???

cret May 27, 2010 at 4:02 am

So, allowing the goldsmith to temporarily fake receipts….

is it true that the us govt did a similar thing by producing dollar bills that said to pay a specific amount of gold to a bearer when the govt didnt have enough gold to pay all the bearers???

ie, 1000 ounces of gold but dollar bills circulating claiming to be able to redeem 2000 ounces???

Graeme Bird May 27, 2010 at 4:15 am

Right. You don’t ever want to be having the government or anyone else issuing these bills of credit that are going to be used as money. The founders forbade the Feds to issue such bills. I don’t think anyone else was specifically excluded from the legal right to issue these bills. But you don’t want anything that can lead to pyramiding.

Graeme Bird May 23, 2010 at 6:46 pm

“I see what you mean but as this is the proposition being debated so you can’t just assert it as part of the argument. “No thats not true. No new factors of production are created. This is just because Samantha from bewitched it not there to wiggle her nose. Or the Green Lantern is not there to use his ring. Its just physical reality, that the conjuring of greater mathematical volumes of loanable funds, don’t increase the available producer goods that those loanable funds can be spent on.

That basic reality is mediated through price. It is price that rations available resources at every part of the production process and not just at the retail end.

Prices that might have fallen may now stay the same. Prices that may have otherwise risen, may now rise more quickly. The phantom supply of hot air and bluff, pretending to be gold or other monies, cannot increase the resources available, either for the production of consumer goods, or for the production of producer goods, that may lead to the production of more producer goods.

The level of goods available for an economy to progress can be more accurately understood and approximated, by the fraction of business-to-business-spending/Gross Domestic Revenue ….. Not by the nominal volume of bank lending.

We can at any time, on a fiat currency, vastly boost the amount of bank lending. This creates misuse of the way our limited resources are allocated. It does not add to our limited resources in the first instance, and actually reduces their availability longer term.

In fact the illusion that there is more capital available, then what there actually is, will pretty immediately reduce that availability. since everyone is enticed to consume more than otherwise.

Without bank loans the resources would be allocated on the basis of cash-flow. Now thats a pretty damn good allocation system right there. Pretty hard to improve upon that. By generating ponzi-loans there is almost no chance you can improve on what is already there. You are doomed to make resource allocation less and not more effective, given that the default position of no bank lending, is already a not bad resource allocation system.

cret May 25, 2010 at 3:56 am

Ok, let’s say we have a 100% reserve system, no frb of any kind, for a time. No chance of any distortion of the price system,….

does frb (fractional reserve banking) automatically create price distortions??? do you mean by distortions to mean a price change in general??

Graeme Bird May 25, 2010 at 6:38 pm

“..do you mean by distortions to mean a price change in general??…..”

Once you end pyramiding, and deal with any transitional issues, there ought to be no price distortions at all. Or else only really obvious ones like when the government starts setting prices.

cret May 23, 2010 at 1:49 pm

you just as easily dont need food as money…considering that it is consumed quickly. shells was used as an example.

you could use petrified guano as an example.

Gerry Flaychy May 23, 2010 at 7:52 pm

jm, your island analogy is about saving, and lending of that saving via term deposit, not via demand deposit.

With 100 % reserve you cannot loan any money at all from demand deposit. With 90% reserve you can loan 10% of the deposit, and have 110% to spend: in consumption or investment or both. With 10% reserve, you can spend 190%. The quantity of money in the market is increased.

With food you cannot do that ! To be able to do that is a particularity of ‘money’.

With term deposit, you have 100% of that saving to loan and spend. The quantity of money in the market is not increased: it is just transfered from A to B. Samething if A lend directly to B.

cret May 24, 2010 at 4:27 am

100 islanders with 100 ounce of gold and a primitive 100 percent reserve gold banking system on the island. 1 ounce of gold each.

an islander decides to get a loan of 10 ounces of gold to complete a project. bank gives loan so there is 10 less ounces in bank and 10 other people have no gold and one islander now has 11 ounces of gold for a project ….is that how a 100 percent reserve loan would work?????

how would a frb system be differnt from the above if i have described a 100 percent bank loan correctly, that is.
would those that gave up their gold to a loan still have a fiduciary gold to spend????

Graeme Bird May 24, 2010 at 6:05 am

I can certainly cook up an island example for you cret. But its probably better if you go and learn the basics first. You know. Just go and get pen and paper and learn the thing.

cret May 25, 2010 at 2:47 am

i know of a good place for the pen…but it isnt to paper. there is already an island example posted here. you know.

Graeme Bird May 24, 2010 at 6:19 am

Actually I’ll link an island example I made up right here. I could copy it out. But it may take up too much of the Mises blog space:

http://graemebird.wordpress.com/2007/08/20/condensed-money-creation-example/

cret May 25, 2010 at 2:48 am

go and think up places where a pen might do you some good.

Graeme Bird May 25, 2010 at 3:11 am

Cret what are you up to? I gave you the island example. Are you going to learn the difference between 100% backing and fractional reserve? Or are you just going to hang around diluting the thread? There really is no point to what you are doing if you are unwilling to learn the basics. So get your damn pen. Get that piece of paper. And learn the material you blockhead.

jm May 24, 2010 at 7:28 am

Graeme – I think maybe you’re answering a general claim that frb creates more resources. I know that in general it most certainly does not so you’re preaching to the choir. But I outlined a specific scenario in which I think there will be no price distortions and the project can start earlier with fake receipts than it would under a 100% reserve system. You are not explaining exactly what is wrong with my scenario, your claim is more general or perhaps you are in fact doing this and I have misunderstood. IF there was capital involved in this project then ok it is not this simple, but assume that this is a labour intensive project and so the costs of the entrepreneur are just labour costs. In this case, he isn’t bidding up the price of capital with IOUs because he isn’t buying any, he’s paying his employees at the end of every day. (I know this is contrived, but it’s not impossible – I repeat, frb is absurd and in general certainly does not create resources, but as I see it right now, there is one very narrow set of circumstances in which inventing warehouse receipts may increase productivity. And I am trying to determine if there is a 100% reserves solution which will accomplish the same early as possible start of the project which does not violate property rights, or whether I’m wrong about something. And I have no problems with being wrong, and in fact hope I am).

Gerry – I’m not sure I see your point. The gold which is funding the first 28 days of the project is already deposited with the goldsmith and the savers have relinquished ownership of it for a period of say 6 months. So in six months, the bank has to return their gold to them, but not before, and so the bank can do as they please with it in the meantime. And the entrepreneur is contract to repay what he borrows within,say, 6 months also. The gold deposited with the goldsmith during those 28 days and which will be used to fund the final 2 days of the project we can also assume is deposited for a period of six months also. There is not any time when two people have claims to the same gold so I don’t see the relevance of this, could you explain again please.

To be a little clearer, if he doesn’t spend the gold to which the fake receipts corresponds before the 29th day, then the entrepreneur is not acting as if there was extra money available at any point. He is at all times spending gold which exists as someone’s savings and which has been lent to him. Although the project can only be continued on the 29th and 30th days with savings that have appeared in the first 28 days of the project, the price system does not know this during those 28 days – for all the price system knows, the project is ending after 28 days. He is not bidding up the price of labour with fake receipts as he doesn’t spend them until the gold actually exists ie. until someone has sacrificed some consumption and deposited their savings.

If two people were spending the same gold at the same time, this would be a problem – this is not happening though. No’one is acting as if there is more capital and savings than there is. He is acting as if the first 28 days of the project will see the goldsmith take in enough gold to allow him to fund the last two days of his project, which in fact it will, so acting as if something will happen when that thing is fully expected to happen is ok.

I don’t see the price distortions from this. As I see it, the only way he can start the project on the earlier day without creating warehouse receipts is to have two loans, say one for the first 28 days, then another he can be granted when the additional gold has been deposited with the goldsmith to fund the last two days. But two loans versus one has an administrative cost. Again, although I think this is most certainly a cost worth paying to allow a blanket ban on fake warehouse receipts, is there something else I’m missing? Or an existing argument for this rather than what some random yahoo like me “thinks”?

Gerry Flaychy May 24, 2010 at 9:17 am

jm, at the beginning of your scenario you wrote

“To me, FRB just makes no sense, none whatsoever.

However, i can muster one argument against 100% reserves: “

‘Fractional reserve banking’ and ’100% reserves’ concern only ‘demand deposit’, not ‘term deposit’.

To lend money (gold or else) for 6 months is a ‘term deposit’ not a ‘demand deposit’.

So your island example is not about ‘fractional reserve banking’ and ’100% reserves’. That’s what I wanted to say.

jm May 24, 2010 at 9:46 am

I don’t really understand your point. 100% reserves is no two people ever having a title to the same gold at the same time, meaning the goldsmith has carefully monitor his term loans and watch for “maturity mismatching” or whatever this was being called earlier. Fractional reserve banking means he can lend out fake warehouse receipts by pyramiding on his reserves.

I’m describing a scenario in which there are 100% reserves, and so no’one has property titles to any of the gold at the same time, and the goldsmith sneaks in some fake warehouse receipts (ie. lends out the term deposits he has on a fractional reserve basis), an act which I’m suggesting does not distort the money supply but brings forward the project start date etc. and so may be a good thing. If any of these assumptions don’t apply to or are not consistent with the scenario I describe, then please tell me where.

it IS about whether or not a goldsmith should be allowed to give fake warehouse receipts to lenders.

Gerry Flaychy May 24, 2010 at 11:14 am

jm, the expressions ‘fractional reserves’ and ’100% reserves’ are used in relation with ‘on demand deposits’. They are not used at all in relation with ‘term deposits’.

The money of a term deposit is lend out at 100% by the bank: no money keeped in reserve at all, 0% reserve. The depositor receive a certificate that is not accepted as money in the market, as a medium of exchange that can go from A to B to C to etc.

The depositor of money in an demand deposit receives a promissory note payable on demand by the bank, which note can be used as money in the market, or, as today in USA, a checquing account money that can be used as money in the market. This checquing account money is also payable on demand.

The borrower of money at a bank, nowadays, receives too checquing account money, so that at this stage, if the money lent is taken from the ‘on demand’ depositors, we have two claims payable on demand for the same amount of money hold by the bank. If the money lent comes from the term depositor, than we have only one claim payable on demand and usable as money in the market: the other claim, the certificate, is payable at the end of the term and it is not usable as money in the market.

Beefcake the Mighty May 24, 2010 at 10:07 am

I agree with Gerry Flaychy, I do not see what this example has to do with
fractional reserves at all. Presumably what is being envisioned is that instead
of asking the workers to take a paycut of 1/15 (from spreading 28 days of food
reserves out over 30), you’re saying, give them the full amount, and take a bet
that food production over the 30 days along with additions to the stock of suplus
will compensate. In other words, it’s a question of maturity mismatching, risky
but not necessarily invalid.

Isn’t it obvious that the workers have to paid in real, actual food, not titles to food
(or “food producer liabilities” as the free bankers would say), as is the case under FRB?
These kinds of examples are interesting, but like other examples inspired by Garrison’s
production possibilities frontier (see a great article on capital consumption by Bob
Murphy on this site back in Dec09, I think), they really miss the point that the issue at
hand is inherently a *monetary* one, you can’t capture what’s going on by assuming
non-monetary goods (eg, food) can proxy for the phenomenon in question.

jm May 24, 2010 at 10:24 am

“Isn’t it obvious that the workers have to paid in real, actual food, not titles to food”

Yes it is obvious, so I’m not sure you can have read the scenario I described closely. If you want to quote my words and tell me where I’m confused, please do.

jm May 24, 2010 at 10:30 am

“In other words, it’s a question of maturity mismatching, risky but not necessarily invalid.”

What do you mean by invalid? The goldsmith (I went into a little more detail after my first post and used gold instead of food) “loaned” the entrepreneur gold that he didn’t have as he knew he would be able to honour the fake warehouse receipts he was creating by the 29th day, when they would be spent.

You’re saying it’s okay for goldsmiths to lend gold they don’t own? In what circumstances? If the entrepreneur “promises” not to spend it until the 29th day, I argued there would be no price distortions. If he spends it before, there will/could be.

cret May 25, 2010 at 3:06 am

does money get loaned from demand deposit accounts???

if it does is then the money loaned is lent at some term…yet someone is spending something still in the checking account for which no term was signed.

what i understood the earlier island scenario to say was that a deposit was made to a 100 percent reserve bank. what you deposit is what is at the bank. the depositor allows the bank to lend some of the deposit and teh depositor forgoes that money but still would have some left in an account. but the term may be unknown to the depositor. i guess tghe sceanario was 28 days or so.

i understood the fractional reserve method to be that a depositor would make a deposit of 100 shells, say….90 shells would be lent and the depositor would have ten shells plus ’90 shell certificates’ that spend like shells still leaving the depositor with 100 shell power spending and a bank customer with a loan of 90 shells.

the bank customer with the 90 shell loan goes to make a project and the depositor has 10 shells plus 90 shell certificates to spend. until the 90 shells get repaid. the shell certificates somehow circulate in the island buying goods until ….they dont circulate in some way.
maybe cocunut juice would go up in price because the customer with the loan needed cocunut juice for nourishment and the depositor still needed cocnut juice to feed his six kids and never had to go without any purchaing power.

Graeme Bird May 25, 2010 at 3:16 am

Cret. You have the example. Get that pen and piece of paper and learn it. There is such a thing as learning stuff you know. Even for you.

cret May 25, 2010 at 3:22 am

yeah…when so many arent lying or leaving out info when i ask questions.

cret May 25, 2010 at 3:25 am

why are you bring up pen and paper??? this is an electronic medium .

push that pen and paper on up there.. itll be good for you.

Graeme Bird May 25, 2010 at 6:08 am

Just learn the material cret. You wouldn’t believe how haunted this debate is by people who refuse point blank to learn the material.

Graeme Bird May 25, 2010 at 4:27 pm

“does money get loaned from demand deposit accounts???
if it does is then the money loaned is lent at some term…yet someone is spending something still in the checking account for which no term was signed.”

Thats exactly it Cret. And it all seems so innocent when its going on, on some small scale. And by the time its going on, on a larger scale, people have become desensitized to it, and they do not see the myriad changes that have overtaken their society as a result. The more influential, smarter and wealthier, may have already taken advantage of vast asset price appreciation. See this is why its so pernicious. Its doing damage right from the start, and yet the most influential people imagine that matters are going marvelously.

Even if you can fight the desensitization, and look at matters pretty objectively. Still there is no real cutoff to where the behavior is outright criminal, and to where it is just cutting corners a little.

Many libertarians think that a minarchist society ought to have next to no regulations. I believe that this contention is wrong. The pages of regulations, ought probably be less than 0.1% of what we have now. But still their ought to be fairly detailed regulations in each locality, making the matter of property titles utterly clear and unambiguous. No end of mischief can come from unclear property titles. Its clear property titles that puts the little guy on the same footing as the bigshot. Since clarity in property titles pre-empts the need to ever fight it out in court.

In the particular case of fractional reserve never happening again ever, you would need fairly detailed regulations, to cut the problem off before it starts, and to make sure that there is no chance of the bankers, schmoozing the politicians and the bigshots, if they cheat, and things start to go wrong.

Better still forget minarchism and go to near-anarcho-capitalism. Then the only regulation you need is to regulate a little bit the enforcement agency. Perhaps make them use non-lethal weaponry for dealing with the locals. Make sure no one of them can get too big and wind up spinning out of control into warlordism. Then it is the enforcement agencies that will sort out the natural law through competition. In which case the final regulations you would need are the regulations regulating the enforcement agencies, and thats it.

Graeme Bird May 24, 2010 at 4:02 pm

“Graeme – I think maybe you’re answering a general claim that frb creates more resources. I know that in general it most certainly does not so you’re preaching to the choir. But I outlined a specific scenario in which I think there will be no price distortions and the project can start earlier with fake receipts than it would under a 100% reserve system.”

Clearly it ought not start. You are running the risk of starving the islanders. You are forcing a project through, against the better judgement of the islanders. Cash balances are meant to cover unforseen contingencies. Did you imagine that economic development was about stripping the rest of the community of resources, for the purpose of this one project? Did you think that you complete one project successfully, the world is saved, and everyone lives happily ever after?

Thats not how things work. Sooner or later, you take that attitude, then you have a banking crisis. In your island example, a banking crisis means a food crisis, and everybody dies.

cret May 25, 2010 at 2:44 am

I think maybe you’re answering a general claim that frb creates more resources. I know that in general it most certainly does not

i dont know that anyone has ever said that.

does money entering barter economy help it grow???
when money is in an economy does more money do the same as money entering a barter economy??

Artisan May 24, 2010 at 9:27 am

I found this thread and the matter quite interesting.

Graeme, you mentioned the naked short selling scam. Can you elaborate why it is different than just a bet or a hedge? Is naked short selling toxic because of FRB or is it just per se a scam do you mean?

Does the following idea sound correct: an investor in Greek infrastructure projects (bridges…) can hedge his investment with shorting CDS on the Greek Govnmt Bonds which is useful in case the Greek govnmts defaults on its debt, because his investment in (Government-built) infrastructure would be thus protected?

If so, it sounds just like an insurance, which would be OK if the insurer has the appropriate capital.

Graeme Bird May 24, 2010 at 5:24 pm

“Graeme, you mentioned the naked short selling scam. Can you elaborate why it is different than just a bet or a hedge? Is naked short selling toxic because of FRB or is it just per se a scam do you mean?’

Have you ever considered the reason behind the sheer volume of these “bets” these “hedges” that is to say these DERIVATIVES?

Pyramiding isn’t the same thing as derivatives. Derivatives are there largely to cover the pyramid-artist.

Think about the role of the speculator in “Man Economy And State”. Here we might call the speculator a “positive inventories speculator.” See how in this scenario, speculation is the way that industries with inelastic supply and demand, are made into more functional industries. The REAL SUPPLY and REAL DEMAND that the speculators bring to such an industry, not only hedge for people who would use their services. But their behavior hedges for society in general. Speculators under capitalism (properly considered) are doing Gods work.

This is not what is happening now. It must be understood that functioning speculation, and good resource allocation more generally, rests on sound money. If we are usually-if-not-always, in the growth-deflation pocket, we will have speculators acting as any JUST God would have it, and as depicted in “Man Economy And State.” But prolonged periods of time,(now that we are in the computer-age), outside of that growth-deflation pocket, has brought to us this world where we have the speculator who works out of what may be termed “negative inventories.”

To pull this anti-social behavior off, without getting rolled, this type of speculator goes to our criminal government infiltrating friends, with initials like GS, and JPM, and they get themselves some options. That is to say some derivatives, to cover their inherently fraudulent position.

I wrote a massive explanation for you, but when I clicked submit, my computer said I wasn’t connected to the internet. So I lost the whole thing, and am sort of burnt out, insofar as attempting to rewrite it is concerned. Perhaps if you are still interested you could ask more questions, and I’ll explain further why these derivatives are a curse. Not so much in their own right. But they are a curse insofar as they help continue the ubiquity of the “negative-inventories-speculator.”

Artisan May 26, 2010 at 4:34 am

Thanks very much for answering my question and… yes, it really is too bad your explanation was lost! But I sort of sense where you are getting at now.

I’d like to understand better where FRB and derivatives connect since it’s so big in the news lately, and because I feel uncomfortable of course with the recent bold proposals of the German SEC equivalent… but maybe I’m wrong?

Graeme Bird May 26, 2010 at 5:41 pm

Well in my view, the massive demand for derivatives, indirectly comes from the following:

The derivatives allow for the pyramider to get away with it. So the pyramider demands derivatives. But from another point of view, the pyramider is a negative-inventories-speculator. Whether or not these guys are good people, taken as a whole, “negative inventories speculation” …..

(((aka pyramiding aka non-cash-fractional-reserve)))) …. is a deeply anti-social undertaking, creating massive inherent instability. What this does then is create opportunities for the full-time financial wizards to smooth things out. But the instability, generated by the pyramiding, also massively increases the demand for derivatives.

So its this vicious circle. The dysfunction of being outside the growth-deflation pocket, of fractional reserve proper, and of other forms of pyramiding, creating a massive demand for derivatives that are a negative sum game. Unlike old-fashioned positive-inventories-speculation, which was not only positive for the contractees, but was highly-positive from the wider social perspective.

Get rid of the fractional reserve. Get rid of any pyramiding at all. Get in a sustained position of growth-deflation ….. And the derivative providers will fade away, or show up in Vegas.

PITCH GOLDMAN SACHS TO VEGAS.

Actually I’m not saying any sort of gambling ought to be made illegal. But we have to ask under what statutes certain practices ought to be regulated. Its one thing to want to cut regulations at least 1000 times. But to me this is not the same as not wanting bookie-operations to be handled by the gaming commission and positive-inventories-speculation to be handled by the people who are supposed to police Wall Street. Which of course they don’t do.

Libertarians always get mixed up with this sort of thing. You can want negative inventories speculation to be pitched to gaming, and still want to liberalize both gaming and investing. I think its important to segregate one from the other for the time being. Being a libertarian doesn’t give one access to automatic knowledge, and as a practical matter all forms of pyramiding will be doing us immense damage.

If you see the Austrian view of the way Capital Markets work, thats a beautiful thing but the generalizations flowing from it, are invalidated by broker-share-pyramiding (naked short selling) By taxes on profits or at least retained earnings…… fractional reserve proper …. And so forth.

We had a chance to get rid of these clowns once and for all. They would have all been taken down in 2008. But then the lunatic Paulson steps in. The pity of it. They would have all gone down. It would have been beautiful.

Stephen Grossman May 24, 2010 at 9:48 am

>cret: now one dollar could be stolen and not cause a financial woe. one hundred dollars stolen could cause a woe. thats what i meant by empirical difference.

I asked for a definition of a concept and, instead, you provided an example of the concept. Another triumph for our liberal, anti-conceptual schools and their evasion (ignorance?) of Socrates’
discovery of universal definition. Logically isolated concretes are not scientific but the primitive mentality of one damned thing after another. Education is basically scientific method (and I don’t mean materialism). Graeme Bird is importantly correct in recognizing, “We ought to be able to see things conceptually.” One does not have to accept praxeology to respect Mises for his explicit, systematic concern with scientific method. De Soto also discusses it. See Ayn Rand’s _Intro to Objectivist Epistemology_ and Leonard Peikoff’s “Induction in Physics and Philosophy” and John McCaskey’s “Francis Bacon.” And, of course, Aristotle. Even Plato is important, for hierarchy. You wouldn’t have provided that hemlock, would you?! The debate here between fractional reserve as pyrimid vs. loan can only be resolved with definitions by contextual essences (based on observed similarities and differences). Fractional reserve is too important an issue to be studied with anything less than scientific method. An arbitrary description of a random flow of events is not scientific method. Science requires causes and systematic explanations.

>Graeme Bird: We ought to be able to see things conceptually

jm May 24, 2010 at 11:28 am

Ok, let me phrase this as baldly and concisely as possible, making it even more contrived.

Imagine an economy with a “pool of funding” of 100g of gold, with one goldsmith, an amount which rises slowly but consistently. If all the profitable projects available at a given time require 110g of gold to pay the workers to carry out the work (not a single businessman thinks there are any profitable projects costing less than this), then we have a problem. No’one can borrow enough to fund an entire project, therefore we have stagnation or someone has to agree to do a project in two stages ie. lend 100g now and then, when he gets to the last bit of his project (the last 1/11th of it), to apply for another loan to fund this last bit. And as the pool of funding is steadily added to, he and the goldsmith are pretty sure that there will be additional funding when this point arrives. But there is no guarantee he will be the one to get it and two loans impose an administrative cost higher than making. So we have stagnation or a small problem, but certainly no property rights violations.

If however the goldsmith is a fractional reserve goldsmith and pyramids on his existing 100g of gold by creating a fake warehouse receipt for 10g and gives it to the businessman, the businessman can go ahead and start the project while avoiding the cost of applying for a second loan at some later point. If he goes out the next day and spends these fake receipts, we get price distortions. However, if he only spends them every evening to pay his workforce, then when he gets to the final 1/11th of his project and he needs to use the fake receipts to pay his men, the goldsmith already has the gold to which they correspond (from additional depositors during the first 10/11th of the projects time), so there are no price distortions.

You’re saying that this is not fractional reserve banking at all but is just maturity matching and its risky but is ok. But there is no way of avoiding that the administrative cost of the second loan was avoided by the issuance of a fake warehouse receipt, and that if the businessman spent the receipts as he promised (in proportion once per day) then there will be no price distortions.

I think you’re saying, so what? He took a chance, it worked, everything is back to normal now, why are you banging on about this? I guess if the businessman can’t spend the fake ones until the last part of the project, then this is a loan with some weird temporal constraints, whereas frb means you get fake warehouse receipts to spend as you see fit whenever you want.

Ok, I think I see what you mean. To make sure I understand, do you agree that if the fake receipts can be spent immediately then you get price distortions but if they can’t be spent until they are required at the end of the project, when the gold for them now exists, then there are no price increases?

Beefcake the Mighty May 24, 2010 at 12:40 pm

One difference I see between your two scenarios is that in the first one, you seem to
be assuming that 110g of financing is required *through the term of the project,* such
that a business can borrow 100g now and take a bet that he can borrow the remaining
10g later to finish the project. In the second scenario, you seem to saying that the
profitable projects can only be undertaken with *all* of the financing up front, such
that the only way the project can appear to be undertaken is with (as you note)
fraudulent warehouse receipts representing the 10g of financing that really don’t exist.
The first scenario could probably be called maturity mismatching in some sense (risky
but not bogus), I would agree that the second scenario is fractional reserve banking (and
hence illegitimate).

Graeme Bird May 24, 2010 at 5:33 pm

“Imagine an economy with a “pool of funding” of 100g of gold, with one goldsmith, an amount which rises slowly but consistently. If all the profitable projects available at a given time require 110g of gold to pay the workers to carry out the work (not a single businessman thinks there are any profitable projects costing less than this), then we have a problem…..”

No we don’t. The workers hold high cash balances under capitalism. Perhaps because they had a potato famine, or some sort of other famine. Now things can go wrong. War can break out. High cash balances are an insurance that works on the individual as well as a societal level. As an individual if you keep getting about with low cash balances all your luck runs out. As a society, if you fake up these ponzi-receipts then the societies luck runs out too, and they have a recession.

Businessman are not locked in to a specific project. They need to creatively rework projects such that they conform to reality. One reality is that the people in the same society as that businessman, are going to cover themselves for unforeseen events. There is no use trying to second-guess the publics choices insofar as this righteous insurance that high-cash balances represent, wherein the individuals face, for the most part, growth-deflation.

Gerry Flaychy May 24, 2010 at 8:37 pm

“If however the goldsmith is a fractional reserve goldsmith” and the 100g. of gold has been deposited in ‘on demand account’, than the goldsmith has issued ‘receipts’ for a total amount of 100g. (These ‘receipts’ cannot be warehouse receipts because warehouse means 100% reserve.) If now he loans 100g. to some borrower by issuing a receipt of 100g. in exchange of a loan contract, he then has issued a total of 200g. of ‘receipts’ while he has still 100g. of gold in reserve. His fraction is now 100/200.

If he loans the 100g. in gold, the gold that he have in his reserves, than his ratio will be 0/100. I don’t think that he will choose this option !

And I don’t think that he will choose the first option either.

There will be no construction at all.

jm May 25, 2010 at 5:24 am

Ok thanks for answers everyone, I think I learned something from this exchange.

cret May 25, 2010 at 3:40 am

was there ever consensus on the island banking differences???

100 percent: depositor deposits 100 shells. the bank then loans 90 shells and the depositor has 10 and the bank customer has a 90 shell loan.??? is that correct??? still 100 shells.

fractional shell : deposiotr deposits 100 shells and the bank loans 90 shells. the depositor has 10 shells and 90 shell certificates in account for equivalent of 100 shell spending power. a bank customer has a 90 shell loan and there is now a total of 190 shell spending power.

are these distinctions correct between the two island bank systems mentioned earlier???

cret May 25, 2010 at 4:02 am

It is about whether the creation of fiduciary media,[1] fraudulent or not, produces the sequence of phenomena we recognize as the business cycle.

has fiduciary media produced a sequence(s) of boom and sustain rather than a bust??

specifically, fiduciary media that would be part of the current federal reserve system/us banking system??

Graeme Bird May 25, 2010 at 4:04 pm

“has fiduciary media produced a sequence(s) of boom and sustain rather than a bust??”

The last thing you want is boom and sustain. The recession is where the corrections are taking place, and the boom is where the situation is being corrupted. But if you want an example of pretty good fiat-fractional policy it would be the US during the Reagan era. Thats when people like me were shamefully suckered into thinking that fiat currency can work after all.

The nature of the expansion 83-90, or thereabouts, was very different than what we saw thereafter. There was a real small-entrepreneur emphasis to it. It was all start-ups of innovative businesses, doing excellent wealth-producing things. For companies like Apple Computer, they had started a few years earlier and were well-positioned to take advantage of the expansion phase in a culture and under monetary conditions that suited entrepreneurship.

Looking back the monetary expansion rates, under the early Greenspan years, do look excessively fast. But this is a little misleading, since the demand for cash balances would have been re-asserting itself bigtime at that stage. So Greenspan probably did pretty well in the early years. A little too fast yes. But not unforgivably so at that point.I would think that this period 83-90 or so, was the last time conditions were righteous, and in keeping with free market ideals.

Of course they could always have been a lot better. But people who missed out on witnessing that era, well it can be hard to reach them. It can be hard to explain to them that the free market can work really well. Because they have not experienced anything like a free market. Or anything like a private sector that is working particularly well.

cret May 27, 2010 at 3:48 am

The last thing you want is boom and sustain.

why not??

if a boom in crop harvesting technology took place, this over a short time allowed grain prices to fall (consumers spending less on food) and divert some previous crop land to other uses effectivly using less land to make the same amount of grain. wouldnt that be a boom that was sustainable and beneficial???

Graeme Bird May 27, 2010 at 3:53 am

The boom is where the resources aren’t being allocated as well as they might be. So for example, Australians have gotten themselves in more and more debt, bidding up the price of land underneath their feet. Meanwhile their relative position in manufacturing, for example, has deteriorated. Wealth creation through debt happens when you invest in something real thats going to improve your cash flow. Or at least the increase in cash flow, net of principle payments, will well-exceed the interest costs.

cret June 1, 2010 at 6:14 am

The boom is where the resources aren’t being allocated as well as they might be.

can that also just be a bad investment??? does boom signify something differnt than jsut bad entrepreneurship??

Wealth creation through debt happens when you invest in something real thats going to improve your cash flow. Or at least the increase in cash flow, net of principle payments, will well-exceed the interest costs.

could a financial scam do the same thing???

does wealth creation involve somethign additional???

Donald Rowe May 26, 2010 at 9:49 am

Dear Peter Surda,

Allow me to extend my congratulations on your logical victory. Seeing that logic is still alive gives me hope that we are not doomed.

Logic is a tool. When the tool is effectively used for its purpose, answering the question at hand, the results are not always what is expected. When the results of the logical process are less helpful than expected, it is certainly “logical” to carefully analyze the logic process to find any flaws. If there none to be found, it is “logical” to “question the question”.

I will leave it to you to assert what you have shown.

Perhaps we may now proceed to the next level.

Regards.
Don

Beefcake the Mighty May 26, 2010 at 12:44 pm

Current, are you still following this debate? I have a question for you.

Peter Surda May 27, 2010 at 5:03 pm

Dear Graeme,

your whole argumentation rests on a single assertion. You make up a crime and base all your arguments on that assumption. That is not an argument, that is dogmatism. I have painstakingly documented that there is no way to derive this “crime”. Instead of admitting that it is a dogma and not a conclusion, you go on a crusade, calling people names and pretending that ethics trumps logic (surprise, it doesn’t).

There is nothing more I can learn from you. I’m not interested in dogmas, I am interested in science.

Graeme Bird May 27, 2010 at 6:05 pm

Well its not a crime Peter. Its legal after all. Were it illegal then it would be a crime. And it ought to be illegal. Since its such a brazen scam, that many people can comprhend, but on the other hand many people don’t seem to be able to. Perhaps the human mind is capable of desensitization to any rotten behaviour , if it is legal, and practiced throughout their lifetime.

I met a fellow who was involved in the war when Yugoslavia fell apart. Some of the things that the soldiers were doing as normal accepted behaviour at that time, well it just made you sick what he told me. I cannot repeat these things here and don’t like to think about them. But it shows that the human mind normalizes to behaviour that isn’t punished, no matter how wrong that behaviour may be.

Peter Surda May 28, 2010 at 2:06 am

It is not sufficient to demonstrate that someone is appalled by an outcome. In order to deduce that the action is illegitimate (in the libertarian framework at least), there either needs to be a breach of contract or a violation of private property. Once again, I documented neither is present in the case of FRB. Therefore you need to make up another criterion. You confuse the problem by calling the effects of FRB “fraud” and “theft”, saying that “public” is the victim, although none of the criteria that define these are present, and no single person’s rights are violated.

I can do that too. I can make up a crime based on stupidity, claiming that practising stupidity is “fraud” and “theft” and “public suffers”. That would not be science though, that would be religion.

Graeme Bird May 28, 2010 at 6:24 am

“It is not sufficient to demonstrate that someone is appalled by an outcome. In order to deduce that the action is illegitimate ….”

As I’ve pointed out before. you appear to approach things on the basis of a tiny personal random access memory. And like a true idiot, when you are contemplating one part of the case against this fraudulent scam, you assume the rest of the case has disappeared. But the rest of the case isn’t going anywhere. Its only disappeared from your little mind and not from reality.

Peter Surda May 28, 2010 at 11:14 am

You are assuming your conclusion. That is not an argument, that is just circular reasoning. You need to conclude that FRB is fraud, not assume it. I have demonstrated that FRB does not contain any breach of contract or property violation. In order to prove me wrong, you can do, for example, some of the following:
- show what contract was breached
- show what property was violated
- redefine fraud as something that can happen without a breach of contract
- redefine theft as something that can happen without a property violation
- redefine what “contract” is
- redefine what “property” is

That would be a proper scientific retort. Based on your previous performance however, I doubt you will be able to comprehend the argument, let alone counter it. But maybe someone else following the discussion will think about it, and either expand on it or refute it. Then, human knowlege will make a tiny step forward.

Graeme Bird May 29, 2010 at 10:00 pm

You have a memory problem Peter. You are mentally incapable of keeping the whole case in your mind at any one time. You lost the plot when you repeatedly made claims that a point being made was the ONLY point being made. You are not up to this conversation. You are a confirmed sufferer of mental constipation.

cret June 1, 2010 at 6:51 am

but if someone accepts a bank note that is untrue, for which there is no gold at the bank to redeem it for ( i have read that that actually took place with and with out the govt)???? is there a property right violation????

who is violated???

Peter Surda June 1, 2010 at 7:34 am

Yes, that is the question. It depends on how the market participants interpret money. Far being it from me prescribing them which is the right one :-).

cret June 1, 2010 at 6:46 am

“In order to deduce that the action is illegitimate (in the libertarian framework at least), there either needs to be a breach of contract or a violation of private property. Once again, I documented neither is present in the case of FRB.”

IF the free baning stuff i have read about is true, there were some episodes of fractional reserve banking that occured without govt insurace and regulation???

i guess with gold/silver, gold/silver would go to a bank and a banker would lend a portion of deposited gold/silver. the banker would then generate notes for the amount of gold/silver lent. and this was known because of a contract that said , i the depositor, know someone else has the gold i deposited and i know have papers that say i know i dont have the gold and someone else does. is that correct???? did a similar banking scheme work this way??

how is that a scam or fraud??

if a third party outside the bank knew that the gold was outside the bank and accepted teh notes who would they contract with?? the note holderr themselves or the bank that issued them to the depositor??? what actually happend with that???
if that actually happend (one way or the other) was that a limiting force in itself on unbacked notes( or notes waiting for gold to be repaid to be true)??? were they cumbersome in trade BEYOND THe ISSUING BANK?

it would seem though that getting unbacked notes to not spend in any way wouldnt be banking. that would just be direct lending. getting an unbacked bank note to sit on for no reason doesnt make sense..(a loan contract in hand to verify teh loan took place) .i dont know if thats what you are describing here or not.

Peter Surda June 1, 2010 at 7:31 am

Well, I’m not an expert in banking history, so I don’t know if FRB existed without government intervention. I can only repeat what I said earlier: one accepts media of exchange voluntarily (absent legal tender laws) and opens accounts with FRB banks voluntarily, so who is the defrauded person? If you don’t like FRB, do not open accounts in FRB banks. The physical media of exchange is not issued by the FRB bank, but by the issuer (in the case of US, the FED), an FRB bank cannot increase the supply of the physical media of exchange it is not an issuer of. They can only expand credit, and without entering into a contract with that bank, you have no base for a contract breach. So, the way I see it, you are only affected by credit expansion by causality rather than ownership. All this points to FRB-induced inflation being neither fraud nor theft, but a negative externality.

I hope that someone can address this issue.

cret June 1, 2010 at 6:41 pm

“so I don’t know if FRB existed without government intervention.”

“Each bank in Scotland stood not on its own bottom, but on the very source of aid and comfort dear to its English cousins—the Bank of England. As Checkland declares: “the principal and ultimate source of liquidity [of the Scottish banks] lay in London,
and, in particular, in the Bank of England.”13″
http://mises.org/journals/rae/pdf/RAE2_1_15.pdf

Selgin April 30, 2009 at 8:36 am

“So many assertions, all made as if we were talking about a purely hypothetical arrangement for which empirical evidence is lacking. Good gracious: we have centuries of evidence concerning uninsired fractional-reserve banking systems, including plenty concerning relatively free systems, such as those of Scotland, Canada, Switzerland, and elsewhere…”
http://blog.mises.org/9873/interview-on-free-banking/comment-page-1/
i guess the selgin made a typo or meant uninsured frb. i have never heard of uninsired banking.
i guess there was centuries worth of evidence. the selgin describes the free banks of scotland as relativly free.

ever heard of uninsired fractional reserve banking??

i thought you had been in discussions with the selgin on free free-banking. maybe it was someone else. the selgin may be able to counter the rothbard (if true) notions of unfree banking in scotland bouyed by the bank of england.

cret June 1, 2010 at 6:53 pm

(Rothbard’s claim that Scottish banks relied on last-resort support from the Bank of England is simply false.)
http://blog.mises.org/9873/interview-on-free-banking/comment-page-1/#comment-692118
maybe noone here is an expert on free banking…maybe experts in falsehoods.
gee…simply false from the rothbard

Graeme Bird May 27, 2010 at 6:32 pm

Not enough is discussed by 100% backing advocates on the specifics of the mining industry. I think it would be a real productive thing for the Mises institute, to find someone who had looked into this industry, to make some sort of presentation to do with all the processes and costs involved. And to do with how when you are pulling up one metal, there are usually other metals too, making monetization of a few metals an essentially costless prospect.

Seldom do you have a silver producer, whose efforts aren’t bringing up other metals as well, just by way of one example. One outfit that may be looking for Gold, may well, in the process, find a magnificent stash of Cobalt, or Spodumene, or Uranium. So the immense costs involved in prospecting for gold, will have been amortized in the production of all this other gear.,

If the monetized metals aren’t carrying too high a premium, there could be no serious dead weight loss involved. I heard an American who was involved in this Chinese mining operation. He was saying that pulling out silver was costing his company negative nine dollars per ounce. That is to say that the other stuff they were pulling up was more than covering the cost of mining the silver. The silver being just money-for-jam. This is a point that I’m not seeing made.

Stephen Grossman May 31, 2010 at 9:39 am

>cret :Knowing that FR banking had a certain concrete history is not the same as knowing it had to have that concrete history.

did anyone ever say that??

Mises and Hayek warn against statistics except to know a concrete event. Statistics will not let us conceptualize an event. Bernanke is an expert in the statistics of the Great Depression but he evades economic law which alone give them meaning.

Stephen Grossman May 31, 2010 at 9:57 am

>Graeme Bird: Stephen is describing matters very well. But in practice you seldom see people taking such an extremist approach as what his descriptions would imply.

Agreed, modern thought is anti-system Pragmatism so they throw any theory into their pseudo-scientific gumbo at any time they feel like it. And a moment later contradict themselves. Eg, they value inflation but not the extreme inflation of 1923 Germany. The value of using extremist categories is to identify the long-range effects of a situation of basically similar characteristics. The alternative is excessive concern with isolated situations. Bernanke probably knows the exact amount of inflation on any given day of the Great Depression but it is as useful to him as a book to a
monkey.

Economics must provide induced principles to organize the concretes. Without that organization ,ie, science, we return to the pre-Greek mind of coincidences and supernatural causes.

Stephen Grossman May 31, 2010 at 10:33 am

>cret :is counting empiricism??? can counting occur outside of reality?? does an increase in the money yupply require counting to determine an increase???

Counting requires an orderly universe known by an orderly mind capable of knowing that order. If everything was a swirling gumbo without identity and causality, counting would be impossible. Even counting events inside consciousness requires the consciousness of reality as context. Knowing the amount of money supply increase is worthless unless one knows that all money supply increase (beyond market money) is destructive. Bernanke knows, presumably to the dollar, his current money supply increases. It does him (and us) no more good than knowing the pattern that chicken bones make when they fall to the ground after being tossed into the air by an advocate of I Ching. Patterns, without concepts, are worthless. I see the patterns of the wires in the circuit boards of my computer but I lack the concepts of computer design to know their conceptual meaning. Its Greek to me. Modern thought is an attack on conceptualizing. Keynsian economics is part of that attack. Modern thought is a reduction of man to the brute. Man needs to conceptualize economic events. Mainstream economics merely identifies coincidences, as did primitive man. Using statistics merely provides precise coincidences. The Fed has more statistics than me and thee. It doesnt provide any understanding other than that they are more confused today than yesterday.

cret June 1, 2010 at 5:45 am

Knowing the amount of money supply increase is worthless unless one knows that all money supply increase (beyond market money) is destructive.

well…you obviously have the time to be on a blog and not spending all day and night foraging…so it doesnt sound destructive. well fed??

it may not be worthless knowing the money supply increase.

patterns without concepts may be worthless.
is a pattern a concept??
but many pages at lrc and mises have said inflation is a negative…you have to count to know if something is inflating.

cret June 1, 2010 at 5:47 am

does an increase in the money supply require counting to determine an increase???

cret June 1, 2010 at 5:50 am

If everything was ….

does determining everything require counting??

cret June 1, 2010 at 6:06 am

The Fed has more statistics than me and thee. It doesnt provide any understanding other than that they are more confused today than yesterday.

does it show house prices in a given year? wheat sales in a given year (with some explanations of seasonal changes)? is that a level of understanding??? uh…a pattern.
does it show what many wages were in a given year and how much the wage could purchase??
with some accuracy?? if its accurate to some degree then that sounds like understanding….ah, wage went up appox this much and these goods went down this much.
thats comforting. nad my own experience confirms.

does a sunny mornign pattern day after day tell you you are in a sunny gumbo???

i guess since the govt took over the currency they in some way felt obligatged to let citizens know how much and they can use the data as they wish.

Stephen Grossman May 31, 2010 at 10:42 am

>Graeme: [fiduciary systems] are strongly correlated with the growth of wealth. Since there is more parasitism to be had where there is more wealth around.

Excellent rejection of coincidences for causes. Pehaps you know of _How To Lie With Statistics(?)_ in which is cited a positive correlation between the number of semicolons on the front page of the NYT and the number of deaths in India on that day. Statistics are valid within a carefully defined context. Eg, a surgeon who must make an immediate life-or-death decision based only upon statistical studies of particular procedures. He lacks the time to know the cause. Eg, insurance premiums for a particular class of risk. Insurance firms dont need to know that a specific individual will cause an accident.

Stephen Grossman May 31, 2010 at 10:48 am

>Graeme Bird: price signals are saying that there is this phantom supply of food

All in favor of tatooing this on Bernanke’s forehead, please step forward!

Do we have a phantom supply of economists? Hmmm…..

Stephen Grossman May 31, 2010 at 11:12 am

>Graeme Bird: You think if you’ve got one part of the argument in your head then thats the entire argument. But you keep excluding things.

In _Introduction To Objectivist Epistemology_ Ayn Rand discusses the Pragmatist evasion of a category of things for merely one example of them. She provides a method for constructing categories from observation-based similarities and differences. And then again using observation-based similarities and differences to categorize the categories into a hierarchical system, ie, science. Ive often asked, “What is x?” only to hear, in response, “Well, one of the things x is…” This culture is headed toward a cliff. Well, OK, past inflation was destructive but this time its different…” “Just one more shot of heroin and then I’ll quit.” The frog in slowly boiling water senses each moment’s heat but lacks a mind to conceptualize the whole process of heating. Modern thinkers have minds but dont use them. Jump out of the pot of slowly(?) increasing inflation!

Stephen Grossman May 31, 2010 at 11:24 am

To give you an example [of Pragmatism]: if a building were threatened with collapse and you declared that the crumbling foundation has to be rebuilt, a pragmatist would answer that your solution is too abstract, extreme, unprovable, and that immediate priority must be given to the need of putting ornaments on the balcony railings, because it would make the tenants feel better.

There was a time when a man would not utter arguments of this sort, for fear of being rightly considered a fool. Today, Pragmatism has not merely given him permission to do it and liberated him from the necessity of thought, but has elevated his mental default into an intellectual virtue, has given him the right to dismiss thinkers (or construction engineers) as naive, and has endowed him with that typically modern quality: the arrogance of the concrete-bound, who takes pride in not seeing the forest fire, or the forest, or the trees, while he is studying one inch of bark on a rotted tree stump.

[Ayn Rand, "Ayn Rand Letter"]

Stephen Grossman May 31, 2010 at 11:30 am

>Surda:for counterfeiting/scam/fraud….a contract violation must be present

De Soto says contract exists only in the context of property. And that property is evaded when depositor, bank and borrower have title to the deposit.

Peter Surda May 31, 2010 at 1:04 pm

Well, I have not read De Soto’s argument, but I consider “contract exists only in the context of property” to be false. I won’t bring up the example of IP, but I recall from past that you are an IP proponent. Therefore I will bring up different counterexamples.

If a child promises parents not to climb trees, it does not require the trees to belong to the parents (or anybody). If I promise you not to play football, that does not require that either of us own “football”. If an employee promises to come to work at 9, that does not mean that the employer owns “9 o’clock” or the number 9. In the last two examples, the underlying object of the contract is an abstract concept (actually, in the first one too, “climbing trees”). I know that IP proponents do not have problem with owning of abstract concepts per se, but I have yet to meet one who claims that all abstract concepts are own-able.

To apply this to the FRB context, the fraud would depend on whether one always owns a specific instance of money, or a transaction is valid without ownership of a specific instance of money, only with the abstract concept of money units. This is a more difficult question to answer if money is a commodity (because the concept of money has a corresponding physical equivalent), so I won’t address it. But if money is not based on a commodity, there is no reason per-se why a transaction should require ownership of specific instances. Even if we accept the premise of IP that abstract concepts can have owners (and therefore the issuer’s, rather than the debtor/creditor’s approval must be met), this would make the alleged fraud even less evident, as the opinion of the debtor and creditor would not matter at all.

As I have not read De Soto, it’s possible that he is not claiming what I am objecting to.

Stephen Grossman May 31, 2010 at 11:55 am

De Soto’s huge, _Money, Bank Credit and Economic Cycles_, is, in effect, summarized in
Hoppe’s “Against Fiduciary Media.”

David Pierce May 31, 2010 at 12:26 pm

Well, yes, but there are some flaws in that paper, as there were in the first edition of Huerta de Soto´s book. But, besides that, Hoppe´s paper does not add up to the massive amount of historical material in Huerta de Soto´s book.

newson May 31, 2010 at 7:45 pm

what are the specific flaws in the hoppe paper?

David Pierce June 1, 2010 at 3:06 am

I would have to reread the paper for the details, but there seem to be three major flaws:
(1) A tendency to confuse ehtical with economic arguments; the two types of arguments may point in the same direction but need not exactly coincide; it´s not because you transgress the ethical rule that the whole paraphernalia of business cycles, depressions, bank runs etc. will kick in. This is related to a second problem:
(2) An inadequate specification of the precise nature of the interaction configuration between independent banks in a free banking system; see in that sense also the paper by Ludwig van den Hauwe: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1129748
(3) Philosophical nonsense, in the sense that it is suggested that fractional-reserve free banking is like an impossible mathematical object, squaring the circle etc. This is sheer nonsense. Humans are not preprogrammed to follow rules, they can (and will) deviate from rules…

Huerta de Soto corrected some errors in the second English edition of his book, but did not display enough fair play to cite the paper by van den Hauwe.

Beefcake the Mighty June 1, 2010 at 7:58 am

Yes, Ludwig/David/Jonathan, you do need to reread the paper, as your rendition of point (3) is rubbish.

David Pierce June 1, 2010 at 9:41 am

OK, I will do that. Sorry if I don´t remember all the detials. I agree that point (3) is the most difficult/problematic philosophically. It´s really a big issue. It is also my intention to go back some day to Hoppe´s _Handeln und Erkennen_ (which, as far as I know, was never reviewed), in order to better understand how one can defend such a view. Note, however, that I do have two university degrees in philosophy. So don´t worry, when I concentrate on this, I will find the right answer. But why is your reaction to criticism so immature?

Stephen Grossman June 3, 2010 at 10:12 am

>it´s not because you transgress the ethical rule that the whole paraphernalia of business cycles, depressions, bank runs etc. will kick in.

One does not have to accept Plato’s mysticism to respect his profound discovery that reality’s causes requires hierarchical reasoning. Ethics is the context of politics, which, in turn, is the context for economics. Theft, from a street thief’s purse snatching to the abstract, sophisticated paper-shuffling of central banking, has definite effects. Why would some Austrians damn FR except that it, indirectly, reduces production? Theft has _some_ effect!

David Pierce May 31, 2010 at 12:35 pm

The Hoppe paper is also an instance of what I characterized before as the Rothbardian hidden agenda which consists in presenting a “coloured” interpretation of certain insights of Mises.

Stephen Grossman May 31, 2010 at 12:46 pm

>GB: Fractional reserve is not borrowing. Its pyramiding.

Do you mean borrowing money that’s owned by the bank/lender rather than borrowing
money owned by the depositor? The moral case against FR is that a deposit is
treated as a loan.

Stephen Grossman May 31, 2010 at 1:10 pm

>jm: “But if you can only borrow existing funds (ie. we are in 100% reserves) then this means that there are some projects that are actually realisable which will not be undertaken, when they could have been undertaken with fractional reserves.”

No, FR does not increase goods, thus no increased, sustainable projects. FR creates unsustainable projects because it raises prices beyond the expectation of investors and because consumers want
to consume, not save.

cret June 1, 2010 at 5:34 am

No, FR does not increase goods, thus no increased,

does applying fr (frctional reserve???) money/notes in trade have the potential to increase goods??

has such ever taken place???

Stephen Grossman June 1, 2010 at 10:03 am

Youre confusing coincidences w/causes. Statistics can mask economic law. Counterfeiting money and bank credit will decrease production in the long run despite any short-range increase. Any long-range increase is coincidental, an effect of another cause. Modern economies are a changing mix of market and state. Economics must identify the laws of production and know how the state
attempts to evade those laws. Mises predicted the Great Depression by knowing that prices stabilized despite the price-decreasing effect of technology. Thus, he reasoned, prices were really rising, ie, a boom which must cause a bust.

cret June 3, 2010 at 11:19 pm

no. im not confusing those things.

you said. “no, fr does not increase goods,…..”

has anyone said (and meant) that fr increases goods??? what does fr increase specifically – bank credit that wouldnt exist otherwise???

has fr (i guess you mean fractional reserve banking by fr???) facilitated greater greater instances of trade than a non-fr system???
has that been shown to have occurred?? more trade and goods with fr than without??

Stephen Grossman May 31, 2010 at 1:51 pm

>GB: That basic reality is mediated through price. It is price that rations available resources at every part of the production process and not just at the retail end.

I believe that the lack of a clear understanding of this is the context for thinking that FR increases production. FR takes prices out of the context of production, as if there were free-floating prices in
a Platonic world of Forms. The Form of Price is then intuited (perhaps by Bernanke sitting near a fissure in a rock formation from which psychedelic gases pour forth, as at the Oracle at Delphi) with an impressive econometric ritual by the Economist-Kings at the Fed. THE PRICE HAS BEEN REVEALED. BOW DOWN AND TREMBLE, YOU LOWLY WORKERS, MIRED IN MATTER AS YOU ARE. ADJUST PRODUCTION TO THE PRICE! ALL HAIL THE PRICE! RISE, GO FORTH AND SPEND! THE GUARDIANS WILL SEVERELY PUNISH SAVERS. DON’T FORGET TO LEAVE YOUR GOLD HERE IN RETURN FOR A KEYNES-CERTIFICATE. THE PRICE MUST NOT BE CORRUPTED BY MATTER. ALL HAIL THE PRICE!

Stephen Grossman May 31, 2010 at 2:06 pm

>GB: our limited resources

Blasphemy! You are a reactionary, a materialist, a running-dog of the doomed,
capitalist class. All enlightened people know that the Fed’s Infinite Credit
creates Unlimited Resources. We have secularized Manna From Heaven. We
may not turn water into wine but we do turn ink and paper into, well, money
(unless, of course, the Chinese lose faith).

Stephen Grossman May 31, 2010 at 2:40 pm

>jm: Imagine an economy with a “pool of funding” of 100g of gold, with one goldsmith, an amount which rises slowly but consistently. If all the profitable projects available at a given time require 110g of gold to pay the workers to carry out the work (not a single businessman thinks there are any profitable projects costing less than this), then we have a problem.

If 6 was 9 [Jimi Hendrix]

How, other than a market (which has supplied and demanded 100g gold), can one know this alleged need for 110g of gold? You drop the context of the market as allowing economic calculation.

Stephen Grossman May 31, 2010 at 2:55 pm

I’ve got it!

Fractional reserve Ph.Ds, based on nothing, create an unsustainable increase in economists. With 100% reserve Ph.Ds, based on knowledge, there would be increased demand for shoe salesmen (think Al Bundy from “Married With Children”), thus employing mainstream economists in jobs suitable for their (real market) skills. The Laws Of Economics triumph again.

Stephen Grossman May 31, 2010 at 6:52 pm

>Peter Surda:…De Soto’s argument….“contract exists only in the context of property”…false…. counterexamples….If a child promises parents not to climb trees, it does not require the trees to belong to the parents (or anybody).

I don’t know if de Soto would accept my application of the principle but the child owns his actions and thus can contract for them (ignoring the issue of minors unable to make valid contracts).
The larger point is that a contract is a promise to do something and thus is a valid contract only if the promiser has control over that something, whether its a physical thing or actions.

>To apply this to the FRB context, the fraud would depend on whether one always owns a specific instance of money, or a transaction is valid without ownership of a specific instance of money, only with the abstract concept of money units. This is a more difficult question to answer if money is a commodity (because the concept of money has a corresponding physical equivalent),

“Indeed, in the
irregular deposit there is always an immediate availability in
favor of the depositor, who at any moment can go to the grain
warehouse, oil tank, or bank safe and withdraw the equivalent
of the units he originally turned over. The goods withdrawn
will be the exact equivalent, in terms of quantity and
quality, of the ones handed over; or, as the Romans said, the
tantundem iusdem generis, qualitatis et bonetatis.
[de Soto, _Money, Bank Credit and Economic Cycles]

>the premise of IP that abstract concepts can have owners

No, its the application, in a physical thing, that can be owned.
Anyone can read a patent w/o permission from the inventor
but only the inventor owns the physical app. It would be impossible
for govt to prevent people from thinking of a concept.

Peter Surda June 1, 2010 at 1:57 am

the child owns his actions and thus can contract for them

I can accept this, but this does not invalidate my argument. If you apply this to the FRB, it would mean that a person owns his ability to repay debt and can contract for it, rather than owning a specific instance of money.

[De Soto's citation]
That is exactly what I had in mind when I was referring to commodity money. Of course, ownership cannot overlap.

The whole question depends on how market participants interpret money, if they see it as physical goods or as an abstract concept. The Austrians seem to favour the first one, but I see no necessity to draw that conclusion.

No, its the application, in a physical thing, that can be owned.

I don’t want to divert attention from the topic, I merely wanted to point out that applying concepts from IP does not solve the question of FRB.

cret June 1, 2010 at 5:25 am

an application in a physical thing…what is that??yeast rising??or a promise to pay back goods???is a promise ownable in the same way as a good?? if tuesday comes and the promise isnt fulfilled is that the same as loosing ones own gold coin??

cret June 1, 2010 at 5:29 am

perhaps you can own a record of an application in a thing but that doesnt seem to be the same as owning a thing.

Peter Surda June 1, 2010 at 5:50 am

Well, my point was that “money” can be interpreted in two ways, and if the market participants interpret it as a concept as opposed to a good, the argument of ownership overlap does not apply. It’s not up to me to say which interpretation is correct.

When you use words like “posess” or “lose” with regards abstract concepts, it is a metaphor rather than an empirical phenomenon. So you the same arguments do not necessarily apply.

Stephen Grossman June 2, 2010 at 10:37 am

Applying an idea in a physical thing is easy to understand. Eg, Ohm’s Law as applied in radios.
Why is the principle problematic for you?! There will probably be boundary disputes to this principle but that merely reinforces the principle itself. A promise is ownable in the familiar fact that debt can be sold and then traded on a market.

Peter Surda June 2, 2010 at 5:31 pm

The argument of exclusivity does not apply to abstract concepts, they do not have natural boundaries like physical goods. The boundaries need to be specified in contracts and have no applicability outside of them. That is why there is no problem per se to have overlapping ownership.

cret June 3, 2010 at 3:27 am

if ownership is full control and use of, then two people cannot share a couch in the same way. one person has to be at one end and the other person at the opposite end.

overlapping ownership (so not exactly ownership) would seem to me to be ‘competing usage attempts’ or contracted joint usage levels and attempts with a right/ability to exclude all others from couch usage.

Peter Surda June 3, 2010 at 8:03 am

Well, when you apply the word “use” to an abstract concept, the result is another abstract concept rather than an empirically observable phenomenon. There is no natural way to distinguish “use” of abstract concepts from “non-use” thereof, even if you are able to determine that there was a causal relationship between two instances thereof. Even to determine if two instances of an abstract concept in fact are instances of the same abstract concept, you need to make a subjective evaluation. Abstract concepts are not something that naturally “exists”. Causality exists (or at least for simplicity I’ll assume it does), but abstract concepts are merely a method to enable humans to think.

I think this is deviating too far from the topic though, I would prefer to debate ownership of abstract concepcts in threads about IP.

cret June 1, 2010 at 5:31 am

what is the question of frb???

Peter Surda June 1, 2010 at 5:53 am

There are actually at least two questions: does it cause inflation and is it fraud. Based on the helpful input from the discussion participants, I answer the first one in the affirmative, but I still cannot agree with the second one.

Stephen Grossman June 2, 2010 at 10:47 am

The second is the cause of the first. Increased money claims without a corresponding increase in money is (or causes) inflation. How can honest money or bank credit cause inflation? Why is traditional counterfeiting fraud but not bank creation of credit not fraud? Why is Bernanke, Fed chief, praised for doing what would land him in jail if he ran off some dollar bills in his basement or, as private individual, hacked a bank’s computers to credit himself with more money than he put in his banks account? As the Doors sang, “People are strange.”

Peter Surda June 2, 2010 at 5:47 pm

Well, I wrote about this several times in the thread. Even if credit expansion causes inflation, I still cannot see a contract that was violated. Admittedly, as long as there are legal tender laws, the argument I’m trying to make is more of academical than practical interest. I also wrote earlier that the interplay between legal tender laws and taxes has a similar effect as Gresham’s Law and unless the inflation is too high, currencies other than the legal tender are crowded out of the market.

cret June 3, 2010 at 3:38 am

is credit sort of an arcane belief that one person displays to another???

that has somehow been quantified or counted in a dollar amount??? can you counterfit credit??? isnt that somehting that one just extends to another??

cret June 3, 2010 at 3:39 am

i read a hayek quote on mises that called any increase in the supply of money inflation.

cret June 3, 2010 at 3:45 am

if a bank depositor convinced a merchant to accept bank notes for that only the deopositor had contracted with the bank for some level of partial reserves, would it be fraud if the merchant was unaware of teh fractional nature of the note??

if the merchant was aware but didnt contract with the bank actually would that just be taking a risk even though they didnt sign a contract with the bank???

is that how fractional banking began to grow in reality???

Peter Surda June 3, 2010 at 8:26 am

These are all very good questions. I don’t know the answer to them, I’m also only studying the topic. Nevertheless, if a party to a contract is lying to the other one regarding the nature of the contract, that is definitely fraud, I have no doubt about that. Actually, it’s a tautology, because that is how I define fraud.

cret June 3, 2010 at 3:20 am

do you mean does it cause price inflation??? woudl you say that any increase of any type of money would create price inflation???

has occurrences of frb been a fraud in the past??? was the us govt dollar bills saying pay to bearer a given amount of gold when there actually wasnt enough gold (so i was told) a fraud??

Peter Surda June 3, 2010 at 8:20 am

woudl you say that any increase of any type of money would create price inflation?

It would appear that any increase in supply of non-commodity media of exchange causes price inflation, although I am still investigating this. Certainly a lot of people here claim that.

I’m not an expert in the historical data for FRB, but “older” currencies tend have a text just like the one you mentioned, and to me that sounds like fraud, but the answer is distored by the existence of legal tender laws. If someone is pointing a gun at you and telling you “accept this for debt settlement” and “pay your taxes based on these exchange rates”, is it fraud? Difficult to say. On the other hand, euro notes (which became legal tender just in 2002) do not have this kind of text on them, they say neither “legal tender” nor “pay to bearer …”. I guess the ECB figured out the text makes no sense.

Stephen Grossman May 31, 2010 at 6:59 pm

>David Pierce: Well, yes, but there are some flaws in that paper, as there were in the first edition of Huerta de Soto´s book. But, besides that, Hoppe´s paper does not add up to the massive amount of historical material in Huerta de Soto´s book.

I know that the book was later in time than the paper but I thought that the presumably less complete
paper would be valid and useful here anyway. The excellent book should be required for an economics degree. I don’t recall the edition I read.

David Pierce May 31, 2010 at 7:27 pm

If I remember well the paper is also based on the idea that as soon as you abandon 100% reserves, you will have in-concert credit expansion, business cycles, bank runs etc. which is a completely un-Misesian idea. Huerta de Soto adopted the same view in the first English edition of his book, but changed his presentation rather radically in the second English edition, apparently after having read Ludwig van den Hauwe´s excellent paper _Credit Expansion, the Prisoner´s Dilemma, and Free Banking as Mechanism Design_ but without manifesting the honesty and fair-play of citing this paper in the second edition.

newson May 31, 2010 at 8:12 pm

thanks for the tip. i read edition #1, i guess i’ll have to look at edition # 2.

Beefcake the Mighty June 1, 2010 at 6:25 am

OK, it’s obvious now: David Pierce IS Ludwig van den Hauwe. You pulled this shit
over at the GMU blog last year. Steve was justifiably pissed.

David Pierce June 1, 2010 at 9:44 am

You are SLOW. But again, why is your reaction to criticism so immature? My qualifications are beyond dispute. I think Steve still copes better with criticism.

Beefcake the Mighty June 1, 2010 at 9:52 am

Well, Ludwig, like I said, I don’t read everything you post here (some of your posts are in fact quite interesting, I don’t view this personally, as you seem to think), so I didn’t detect the patterns until I saw you plugging your own work here under a pseudonym. That’s bad form (and really annoying), but whatever. The real giveaway was your aggrieved sense of resentment that Austrians (of whatever faction) fail to recognize your brilliance. Then I knew it was you.

David Pierce June 1, 2010 at 10:06 am

Beefie: “The real giveaway was your aggrieved sense of resentment that Austrians (of whatever faction) fail to recognize your brilliance. Then I knew it was you.”

I assure you it has nothing to do with that. Where did you get this? It´s true I have to work in more difficult circumstances than some others, which may perhaps explain an occasional and superficial air of grief, if any… Smartness, brilliance etc. I never start talking about that, and when I do, it´s always in irony and in response to others…

David Pierce June 1, 2010 at 10:36 am

Beefie: “Then I knew it was you.”

Laughable! I do not have any real reason for resentment vis-à-vis other Austrians; my PhD thesis is being published world-wide, my papers get published etc… What are you talking about?

But I now know a little secret about Austrians: their inflated sense of self-importance is often greater than their real brilliance…

Beefcake the Mighty June 1, 2010 at 10:39 am

Ludwig/David/Jonathan is proving my point here.

David Pierce June 1, 2010 at 5:17 pm

Beefie: “David/Jonathan is proving my point here.”

No, the point is: scholars, economists etc. should never discuss who´s most brilliant, smartest etc.; this is misplaced narcissism, this is for kids; scholars should discuss the quality of arguments…

David Pierce June 1, 2010 at 5:27 pm

Beefie: “David/Jonathan is proving my point here.”

Actually Mises himself would be more like an example proving your point…

David Pierce June 1, 2010 at 5:35 pm

Beefie: “The real giveaway was your aggrieved sense of resentment that Austrians (of whatever faction) fail to recognize your brilliance.”

As I see it, in a scientific context the only real manifestation and proof of grief, resentment etc. consist of intolerance toward rational criticism… So who is displaying resentment and grief?

Current June 1, 2010 at 7:06 pm

I’ve mostly abandoned this thread since Graeme Bird joined in and it became impossible to read…

Anyway, Ludvig van Der Hauwe, can’t you stick to one name? Even if it’s not your own name? Surely you can come up with a nice internet handle.

If I’d known that the previous posts by David Pierce were by you I would have read them more carefully.

Beefcake the Mighty June 1, 2010 at 9:26 pm

“David/Jonathan is proving my point here.”

LOL, Ludwig can’t even admit he’s David Pierce when it’s clear by now that he is. C’mon Ludwig, you spent half the day stewing over this, then submitted three different posts in a 20 minute span, and that’s the best you can do? Somehow, Ludwig thinks this is about an immature reaction to criticisms he’s offered and not his own utterly asinine behavior. Not true: the honest and intelligent criticisms that he has offered, I’ve taken into account, no problems there. The problem is his own over-inflated sense of self-worth, but with shenanigans like this (and last year at the GMU blog) I suspect even less people will take him seriously than before. There’s simply a limit to which oddball behavior can be tolerated.

Ludwig June 2, 2010 at 2:27 am

Current: “If I’d known that the previous posts by David Pierce were by you I would have read them more carefully.”

OK, I will post under the name “Ludwig”. But agree, “David” or “Jonathan” is still much better than “Beefcake”.

David Pierce June 2, 2010 at 2:41 am

Beefie: “LOL, Ludwig can’t even admit he’s David Pierce when it’s clear by now that he is.”

I am extremely puzzled by your personal attacks and arrogance towards Ludwig van den Hauwe. Are you aware of the kind of information you are giving away about your own personality in acting in this manner? I think Ludwig is simply applying the principle of reciprocity: you do not post to him under your real name, so why should he?

Beefcake the Mighty June 2, 2010 at 6:13 am

Obviously Ludwidg, this has nothing to do with using pseudonyms, but with sockpuppetry. Or do you think boosting your own papers under an alias and accusing de Soto of not properly citing you is acceptable behavior?

Ludwig June 2, 2010 at 7:25 am

Beefie: “Obviously Ludwidg, this has nothing to do with using pseudonyms, but with sockpuppetry. Or do you think boosting your own papers under an alias and accusing de Soto of not properly citing you is acceptable behavior?”

I did not accuse Prof. Huerta de Soto of anything. I apologize if I gave that impression. I just gave some relevant information. He is a great scholar whom I respect enormously. Prof. Huerta de Soto has assured me that he will cite all my papers in the next edition of his book. Others should take an example on such fair-play.

I think every scholar obviously has a right to refer to relevant work, including his own work, provided this is done in an appropriate context. You have yourself referred several times to the work of Hülsmann on this thread. Short memory?

As to using another name, I have acted on strict reciprocity. If you do not post to me under your real name, I do not understand why I should. Plenty of participants here do not post under their real names. Upon explixit request, I will now post under the name “Ludwig”.

I think you still do not realize the kind of information you reveal about yourself in acting this way.

Beefcake the Mighty June 2, 2010 at 7:47 am

Hey Ludwig, I am NOT Huelsmann (nor Kinsella, as others here have claimed in different posts), although I admire his work very greatly. And give me a break; you weren’t merely “citing” your paper, you were acting as your own cheerleading squad. Again, bad form.

Ludwig June 2, 2010 at 8:58 am

Beefie: “you weren’t merely “citing” your paper”

Of course, and I will go on with it; you are all invited to join my facebook page:
http://www.facebook.com/pages/Foundations-of-Business-Cycle-Research/130625333427?ref=ts

They all promote their own work via their web-pages etc. so I do the same.

Of course you are not Hülsmann, you are Beefcake the Mighty; it´s all in the name. The point is only that you are not in a position to give lessons, moral or other; perhaps Hülsmann would.

David Pierce June 2, 2010 at 10:01 am

Beefie: “I am NOT Huelsmann”

I know you are not Hülsmann because Hülsmann is much smarter; you made errors he wouldn´t make. I do not always agree with him but I know he is smart.

Beefcake the Mighty June 2, 2010 at 10:15 am

That’s right, Ludwig/David/Jonathan, Huelsmann is very smart, a lot smarter than you. But, unlike you, the Austrian community by and large does have an interest in what he has to say. Don’t worry, I guess you can keep trying.

David Pierce June 2, 2010 at 10:40 am

Beefie: “I guess you can keep trying.”

Of course, who does not try does not win. I will win! Absolutely sure!

(Note that only a small faction of the Austrian School has an interest in the work of GH. But I hope that he too will go on trying, and that in the end he will win.)

Beefcake the Mighty June 2, 2010 at 11:01 am

“Note that only a small faction of the Austrian School has an interest in the work of GH.”

I guess by “small faction” you mean the various scholars affiliated with the Mises Institute. Not sure how they measure up numbers-wise with the GMU wing of the school, but one thing is for sure: neither camp gives two shits about what you have to say.

David Pierce June 2, 2010 at 4:05 pm

Beefie: “neither camp gives two shits about what you have to say.”Thanks for your kindness. But that´s OK, even great. Actually what I am working at is a third camp all on my own and there will be no place in it for drop-outs. You´ll see.

David Pierce June 5, 2010 at 2:28 am

BM: “Huelsmann is a lot smarter than you.”

You cannot know this.

David Pierce June 5, 2010 at 2:34 am

BM: “you weren’t merely “citing” your paper, you were acting as your own cheerleading squad. Again, bad form.”

No, I was referring to SSRN. I do not understand why no more folks here post their papers there. It´s very professional, no drop-outs, nothing of all that…

Stephen Grossman June 1, 2010 at 9:53 am

as you abandon 100% reserves, you will have in-concert credit expansion, business cycles, bank runs etc. which is a completely un-Misesian idea.

I don’t have a scholarly knowledge of Mises but it seems to me that the above is one of Mises’
main discoveries. I cannot integrate your denial w/any memory I have of Mises. Can you quote or otherwise provide some evidence for your claim?

David Pierce June 1, 2010 at 10:21 am

One of Mises´main discoveries is that in-concert (that is, collective, generalized) credit expansion leads to business cycles etc. The defining characteristics of free banking exclude this. These defining characteristics are: a multiplicity of coexisting, independent banks, but not necessarily strict adherence to the 100% reserve rule. The latter would be sufficient probably, but Mises is not saying it is strictly necessary for avoiding business cycles. Always try to distinguish between necessary and sufficient conditions (simple philosophical point). It´s all in _Human Action_.

Ludwig June 2, 2010 at 4:08 am

OK, this was by me, Ludwig

Stephen Grossman June 2, 2010 at 8:19 am

Mises thinks FR banking (“free” banking) is the main cause or one of the main causes of business cycles. Are you denying this? Please provide some quotes from an online edition.
Again, you contradict my memory of _HA_.

David Pierce June 2, 2010 at 9:16 am

Your memory is wrong.

Ludwig June 2, 2010 at 7:49 am

I have to make a rectification here. Prof. Huerta de Soto has assured me that thereaon why hedidn´t cite my paper in the second edtion of his book, is that he had already introduced the page proofs

David Pierce June 2, 2010 at 8:10 am

Prof. Huerta de Soto didn´t cite Ludwig van den Hauwe´s paper because he had already introduced the page proofs at the moment the paper came out. Prof. Huerta de Soto has confirmed to Ludwig van den Hauwe that he will make appropriate citations in the next edition of his book. Any other suggestion in this respect — see Beefcake´s comments — is misguided. Ludwig van den Hauwe still adds that he has moral lessons to receive from nobody, and certainly not from a guy going under the name “Beefcake the Mighty”. He also adds he has the highest respect for Prof. Huerta de Soto.
I have been authorized by Ludwig van den Hauwe to make this statement.

Stephen Grossman May 31, 2010 at 7:16 pm

Bernanke says the Fed has “Infinite Credit.”
Is this a secular version of God or a reference to the Divine?
May we refer to the Fed as the Church of the Perpetual Inflation?
Discuss.

Stephen Grossman May 31, 2010 at 7:47 pm

>cret: arent concretes often mixed aggregates.

Hah? Please define by essentials and provide some examples.

Is a Jack Daniels and coke a mixed aggregate? If you had five, would you care?
“Bartender, I’m buying my blond bar buddy at the end of the bar a mished aggravate.”

cret June 1, 2010 at 5:19 am

hopefully you would be removed from the bar and stuck in a cab. the guy proobably isnt your buddy anyway.

Stephen Grossman June 1, 2010 at 10:10 am

Guy?!

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