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Source link: http://archive.mises.org/13175/the-case-for-a-100-percent-gold-dollar/

The Case for a 100 Percent Gold Dollar

July 6, 2010 by

Murray Rothbard has given us another provocative, informative, and elegantly reasoned economic tract. He defends his position brilliantly — not only with prodigious historical scholarship but also with unrelenting logic. FULL ARTICLE by Henry Hazlitt

{ 205 comments }

Michael R Stoddard July 6, 2010 at 8:57 am

There is another group. Those of us who advocate allowing the interaction of free individuals in a free society to choose what money is. My guess is that that would involve the remonetization of silver and copper. Copper as a monetary substitute, silver as the unit of account, unit of exchange for most of life’s daily transactions and the savings vehicle for the poor and middle classes, and lastly gold as the store house of wealth and backing for large contracts. Fractional reserve is inherently a system of embezzlement and under evolved contract law would be deemed a specific instance of fraud. But let the market rule.

Michael R Stoddard July 6, 2010 at 9:06 am

WHY GOLD DOLLAR ??? The dollar was the creation of politicians. It was a legislated creation (all be it an acknowledgement of the market choice at the time of the Great American Secession). How about a 100% Free Market Money solution. Let US (you, me and a billion others) the market speak.

panika2008 July 6, 2010 at 10:55 am

That is exactly my point. Gold standard was a creation of influential politicians and bankers at the end of XIX century, after battling and lobbying many years whether to change from bimetalism (another broken statist construct) to a silver standard, a gold standard, or even maybe fiat money. Gold standard won. And then, some 50 years later, all those self-appointed “libertarians” and “free marketers” went on and started to praise the solution, and the praise lasts to this very day. Strange.

james b. longacre July 9, 2010 at 4:03 am

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts…..
To borrow money on the credit …….
To coin Money, regulate the Value thereof, and of foreign Coin……..
To provide for the Punishment of counterfeiting…. [of] current Coin of the United States;….
No Money shall be drawn from the Treasury….a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published….
No State shall ….coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any ….. Law impairing the Obligation of Contracts, ……
In Suits at common law, where the “value” in controversy shall exceed “twenty dollars”, the right of trial by jury shall be preserved,…..
a tax or duty may be imposed on such Importation, not exceeding ten dollars …..
but no Appropriation of Money to that Use …..
The Congress shall have Power …… to pay the Debts…..

i guess the above constitutional info is correct.

here, coin, coin money, borrow money on the credit, emit bills of credit, and no thing but gold and silver coin shall be used as tender in debts, is used. twenty dollars is also used.

was this a gold or silver standard??? “or just adopting a market money that was already in use” (albeit mostly from european kings)???

in these constitutional passages has a fiat currency been established???? has a legal tender been established???? or have both been establsihed, sorta-kinda???

is there a distinction between money and credit when congress can borrow money on the credit????

as far as standards go, is there a difference between a standard and using two metals as money in differnt purchasing situations but using one method of measure. houses priced in (hecta)grams of gold, loaves of bread priced in grams of silver?

is that a standard??? is that what the us country started with???

Michael Suede July 6, 2010 at 11:23 am

I’m with you buddy.

I would say the market has decided already.

When people are given the choice of what currencies to use, they inevitably choose gold (or a combination of precious metals) backed currencies.

There is no need for debate over currencies, only a need to remove legal tender laws and the allowance of currencies to be privatized.

George July 6, 2010 at 1:53 pm

Amen.

Peter July 8, 2010 at 2:56 am

But how do you propose a “100% Free Market Solution” be done? See Mises: you can’t just “decide” what money will be. It either has to come as a development from the currently-existing system (in the same way the current fiat system was developed out of the preceding gold standard), which you’re arguing against, or we have to go back to a purely barter economy, which would involve massive problems; a big step backwards in living standards, to say the least.

james b. longacre July 9, 2010 at 4:07 am

The dollar was the creation of politicians. It was a legislated creation (all be it an acknowledgement of the market choice at the time….

the the dollar was not a legislated creation, right? it was legislated to be used for….

Michael May 18, 2011 at 11:50 am

Nothing Murray Rothbard has ever said precludes competing currencies. Infact iirc he has actually advocated them.

He says:
“the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud from any source is a 100 percent gold standard. This is the only system compatible with the fullest preservation of the rights of property. It is the only system that assures the end of inflation, and with it, of the business cycle.”

He doesn’t say:
“the only permissible monetary system is a 100 percent gold standard.”

Infact I am 100% positive he must have advocated competing currencies because his most well known disciple (Ron Paul) has actually attempted to bring in legislation to enable competing currencies on more than one occasion.

Deefburger July 6, 2010 at 9:11 am

There is a way without fractional debasement and still have electronic transfer.

First, a trusted, non-centralised electronic system of exchange. An smartphone/pc app that operates itself as a “bank” and communicates with other “banks” using secure protocols. Add to this system distributed memory of successful transactions between “banks” and this data reveals the level of trust amongst a community of “banks”.

Second, use gold as the standard of value measurement and evaluation. Not as peg for a currency, but simply as a yardstick reference value for comparison at the time of exchange. Composite indices such as silver and gold are also possible. In any case, when this system exchanges fiat currencies, their measured value should be the spot price today on the open market. (Use the gold weight and silver weight defined in the Currency Act of 1792)

Third, use any asset of equal measurable value as the backing of the currency exchanged between “banks”. Time is available if you are alive and breathing. Silver, Iron, Aluminium, or any other physical commodity listed by the “bank” as an asset. So long as it can be compared, equitably, to gold as a measure, then a correct and useful numeric value can be stored and/or transmitted.

The only judges of value in any exchange within such a system is the two individuals making the exchange, and their subjective differences when comparing time/material to gold.

panika2008 July 6, 2010 at 10:59 am

Bull. Large scale transactional finance (both many transactions AND large transactions) is impossible without some degree of centralisation and trust between institutions able to clear tons of gold, not grams as all those poor hippie libertarian wanna-be iphone bankers can. At least it is impossible in the same sense as decentralised, small-scale processing of iron ore into steel is impossible.

J. Murray July 6, 2010 at 12:05 pm

Yet, for some odd reason, steel mills managed to form with just about no interaction with a government.

panika2008 July 6, 2010 at 1:04 pm

That is obviously right. What is unreasonable is expecting the centralized banking to somehow revolutionarily restructure and spontaneously disintegrate into a “democratic clearing” system after fiat money is either abolished or spontaneously self-combusts ;)

Deefburger July 6, 2010 at 2:00 pm

“That is obviously right. What is unreasonable is expecting the centralized banking to somehow revolutionarily restructure and spontaneously disintegrate into a “democratic clearing” system after fiat money is either abolished or spontaneously self-combusts”

The spontaneous self combustion you speak of is a loss of trust in the central bank and it’s fiduciary media. That is what is happening now.

How do you propose the problem be solved?

panika2008 July 7, 2010 at 2:52 am

Is there a problem with the centralization of banking? Is there a problem with centralization of iron ore processing? Is there a problem with centralization of car manufacturing?

J. Murray July 6, 2010 at 2:52 pm

It’s going to have to. Our monetary system is collapsing right now. The only decision we have to make is if we want to repeat failed history and let government run it yet again or finally kill this central bank idea once and for all.

panika2008 July 7, 2010 at 4:07 am

Failed history? Ask the wide masses swimming deep in debt. How did the system play out for them? Are they really damaged? Or are they perfectly happy to generally have less and less to repay as the inflation helps them (periods of temporary disinflation aside)?

George July 6, 2010 at 3:39 pm

Or just use Bitcoin.

panika2008 July 7, 2010 at 2:55 am

A currency backed with CPU cycles? Expanded by a constant amount in time? You gotta be kidding, right? Though I guess some Friedmanite monetarists would kinda like it.

johann July 7, 2010 at 4:56 am

Actually one of the main features of BitCoin is that it will stop expanding and total amount will be permanently fixed.
e-gold worked very well, but the Fed’s took it out. (It still exists, but is no longer a player)
I like Goldmoney… but it will come under attack from US govt. sooner or later, once it reaches a certain size.
iGolder looks excellent, but it hasn’t taken off…
…and of course there’s:
http://www.opencurrency.com

panika2008 July 7, 2010 at 5:18 am

Unless a currency is backed by substantial (and I mean *substantial*, on the international economy scale, like trillions USD rather than billions) real assets, it is going to forever remain a pipe dream or a local community currency, like seashells that I am told are still in use in some small obscure communities in Oceania (?).

George July 7, 2010 at 10:18 am

Panika, please tell me what “backs” gold?

panika2008 July 7, 2010 at 10:32 am

George, physical gold is unsuitable as a real, contemporary, currency, otherwise there would never be such thing as banks. There is too much counterparty risk and fringe cost when transacting in physical gold on a large scale. How do you imagine buying a house or even a car? Walk to the realtor’s with a backpack with 10 kilo bars in it? Walk to the car dealer’s with a kilo bar? Somehow I don’t think that the money market, once set free, would shape itself in such a form.

George July 7, 2010 at 4:42 pm

What does that have to do with anything? I agree with you here, but what was the point of saying that?

panika2008 July 8, 2010 at 3:16 am

What I mean that for you to have a money proper it has to be backed by something because of technicalities. Raw base money is actually not money at all, not in the sense we use money since at least the end of medieval and the development of banks. So bank notes backed by gold or silver or government bonds or a mixture is money proper – as soon as it is universally accepted and starts circulating. The part “it is universally accepted and starts circulating” requires that the backing of the paper be substantial – substantial on an international scale. Substantial means big real value, like a lot of bonds (in a fiat money system) or a lot of gold/silver/whatever (in a gold/silver/whatever standard) or even a lot of real estate or oil (in some theoretically discussed systems). Now, please note that scarcity is obviously not nearly enough for value. You cannot start a monetary system by ensuring scarcity and expecting that the paper somehow magically starts circulating and starts to be accepted. It has to go the other way: first you post substantial collateral that defines the money’s worth AND obtain the needed trust in the market AND ensure the market the paper will be scarce and THEN the paper might start successfully circulating. Omitting the part of posting substantial collateral is silly. You might as well expect the world to trade in gallons of water, after all it’s also somewhat scarce, there is “just” ~300 million trillions gallons on earth. Now please try to consider why a monetary system based on water (or air, or abstract things like unique numeric IDs) would be met with little enthusiasm by the market.

Peter July 8, 2010 at 3:04 am

There’s a reason GoldMoney is based in (either Jersey or Guernsey; I can’t remember), not in the US. The US government attacking them would be declaring war on the English monarchy :)

George July 7, 2010 at 10:17 am

You have clearly not read the Bitcoin whitepaper nor looked into how Bitcoin actually works.

1) The currency is not “backed” by anything, just as gold is not backed by anything. They are their own reserve, due to their unique properties of scarcity, fungibility, and durability.
2) It is not expanded by a constant amount in time. Rather, it decreases exponentially. After some years, no new Bitcoins will be generated.

Market demand will determine how successful it is, but at least do your research before spouting off nonsense.

Russell July 6, 2010 at 9:15 am

I hadn’t read Rothbard on this subject yet but have been arguing with my economist friends for Rothbard’s position of 100% backing of notes by gold for a while, since I started thinking about it. The advantage of this is that you can’t debase notes or clip them like you can with specie. You just have to make sure that the 100% gold backing is really there. This is a political societal problem which may not be be acheivable. But it would provide the most honest and efficent type of money.

To Michaels first point above, I wouldn’t preclude anyone from backing their notes with silver or copper or whatever the market will accept. But gold backed notes will likely turn out to be the “Gold Standard” of monies.

To Michaels second point about free market money, it is probably a good idea but out governmnet would never go for it for all the reasons that governments like to controlt he money supply we all know about. The electorate is not sufficiently educated to appreciate the benefits.

The key to any successful system is complete transparency as to what is being done. Laws and methods of enforcement are needed to ensure this.

desanto July 6, 2010 at 9:37 am

The idea of a gold standard is great. However, there seem to be some challenges that have to be addressed. In order to have a viable system which we can use for commercial transactions the rate must be fixed. Obviously it cannot be 1,200 an ounce one day, and $1250 another, This would wreak havoc with the free exchange of goods.

Sellers would wait for the highest price, delaying distribution until they get the best price possible. Since the market value will be constantly fluctuating, they may wait until thy feel the time is optimal to sell and get the best price. This could take days even weeks. Consumers will natually wait until they decide when the price is right also disrupting the free flow of goods and services.

Another problem is practicallity. How are fractional units carried and utilized.? At $1,200 an ounce, pennies, nickels, dimes, even dollars, etc. would be microscoptic. Instead, the smaller denominations would have to represented by paper substitutes, which destroys the hard money concept.

J. Murray July 6, 2010 at 9:54 am

That honestly isn’t a problem. Rothbard proposes we cease using the term “Dollar” and trade in ounces of gold. This wipes out any price fluctuation issues when converting between gold and a unit of currency called the Dollar.

The second issue already happens on a regular basis.

The third issue is also not a problem as we are abandoning terms like Dollar, Nickel, Quarter, and Dime. Gold is actually better suited for smaller denominations as an ounce can be easily cut into 100 parts for “change” due to its malleability properties.

All of the flaws you percieve are founded in attempting to create an intermediary term to define a set quanity of gold. We don’t need to add a second layer of nomenclature to confuse the system, just call it ounces of gold and everything falls into place.

Deefburger July 7, 2010 at 10:03 am

@desanto

Take a close look at what 1200/oz means. What changes from day to day? The gold or the currency?

The ounce is still an ounce, day in and day out. The substance of that ounce is still the material substance it was, day in and day out.

The People buying and selling are basically the same people, making the same similar decisions, day in and day out.

The change is in the perceived value of the currency, the one with no base, no stable unit, no measure.

George July 7, 2010 at 10:20 am

Actually, they both change. Prices are more volatile in gold than currency. What you are describing is a hypothetical situation where there is no legal tender ;)

Al Thomas July 6, 2010 at 9:48 am

Of course, Rothbard is right, but he was about 50 years too llate. When the Federal Reserve took over that was the end of gold. Fiat currency took over. When this batch of fiat currncy we call dollars goes to zero then gold will come back. Don’t ask me when. In the memantime buy some gold.

Deefburger July 6, 2010 at 10:01 am

I want to add here a note on the dynamics of exchange. You and I exchange apples and oranges and we agree on relative value when we do. Real commodity and real value move in both directions.
If we exchange gold for apples, again, real value moves in both directions.
If we exchange time for apples or gold, then too, real value moves in both directions.
If we exchange time for time, the currency in the above “banking” system, then real value moves in both directions.

But in a centralized banking system using debased currency, value only moves in one direction, towards the bank that issues the worthless tokens. Any transaction between individuals of tokens for time/material is not an exchnage of value, it’s a transfer of value in one direction.

In a normal sound-money exchange, there is a difference in perceived value that results in profit for both parties. In a fiat money exchange, there is no value in the tokens so the appearance of exchange remains, but the value was actually a transfer. That value can be traced all the way back to the bank that issued the token in the first place. That bank received full value in a transfer, not an exchange. (Who owns the house, the car, the big screen TV? The holder of the debt instrument, the bank)

The loss to the economy, you and me, occurs where the tokens enter the system.

In the system described above, The tokens enter at every point within the system, not a central repository like the Fed. In every exchange where a token is generated, real value is received by the person who deserves it and can and does evaluate it at the time of exchange. So even though each person is exchanging tokens of value, the value moves in both directions, every time. (Unless there is a mistake or fraud, or non delivery of time/material, of course)

The first gaff of fiat money and centralized production of “official” tokens is the lack of a unit base to measure value in the first place. It works in the short term, but causes inflation in the long term, and so is largely unseen.

The second gaff of fiat money and centralized production of “official” tokens is in the appearance of exchange, when in fact there is only transfer when the tokens enter the system of the economy.

Eliminate the centralization and replace it with peer to peer “banking” and the entry gaff disappears. Eliminate the debasement by using a fixed weight of gold as the standard unit, and you eliminate the measurement gaff disappears as well.

The key to the use of this system is the trust. The system must record the equitable outcome of each exchange and be capable of query on demand. Not for the amount, but whether or not the individuals involved were satisfied and have a history of satisfactory exchange. Then, a community can trust itself, and begin to exchange with other communities and individuals from other communities without the need of a central clearing house for every exchange, and the loss of value that house represents.

Jerryhorse July 6, 2010 at 10:40 am

I love gold coins. In fact, I wear a ten dollar 1912 Indian Head gold piece on my right pinky finger, a pinky ring created by some jewler somewhere sometime ago. Just imagine having a pocket full of gold coins, shinning brilliantly whenever you took them out in the sunlight! Rothbard was a brilliant shinning example of Libertarianism that seems to be flourishing today. No flourishing is too strong a word. Libertarian thought is just barely alive, holding on by a thread because coercive government in all its greed and fraud has triumphed over 99 percent of the people.

I must say that the Mises Institute gives me some hope but even from that oasis of Liberty, I find it improbable that real headway can be made to brake the bonds of statism. However, while I don’t see much hope of returning to a gold standard in our monetary system any time soon or even in the foreseeable future, Rothbard’s books are certainly shinning nuggets of gold in and of themselves. Recently I began reading his 4 voume set of “Conceived in Liberty,” which, I must say is one of the richest descriptions of American history that I have ever read.
If you really want to bring about Liberty in our time or in your children or grandchildren’s time, simply get your school district to use this masterful set of books to teach American History. Never before in all of my readings have I ever truly understood the development of the Enlightenment from the point of view of Liberty as I have by reading each successive chapter. Murray does not leave any aspect of the development of Liberty in America unturned from the reasons that feudal landownership developed into mercantilist power struggles to the religious implications to the first truly Libertarian settlements in Pennsylvania in the 1670 to 1690′s. I never understood just how the Quaker communities in PA fought off Royal and proprietary dominance so that for at least 20 years PA existed peacefully with virtual no government at all. All this at a time that the colonies were at war with the native American indians, constantly fighting for territory and dominance among themselves, having the King’s Privy Council imposing Navigation Acts and the Proprietors collecting quitrents on all land grants.
To see that the Quakers actual did thrive without government, without taxes in a state of peaceful co-existence with the native indians and without a militia, is something that the present day Libertarians need to teach and re-teach to any and all people who truly want Liberty.

Yes, the monetary system is important and returning to a gold standard may be important, but without the underlying understanding of just how independent people can exist despite the world of oppressive governmental coercion, the world will never be capable of keeping free from such things as coercive government and fraudulent reserve banking systems.

panika2008 July 6, 2010 at 10:49 am

Rothbard’s religion is obviously wrong even considering his own axioms (self-contradictory). There is nothing wrong, fraudulent or unsound about groups of people engaging voluntarily and consciously in clearing, credit and debit through commercial banks using fractional reserve of gold, or any other base money for that matter.

There is an anecdote that once upon a time Rothbard confronted a group of other economists and they talked about gold standard. They asked him if he considers FRGS legitimate or not. Of course the answer was “no”. The next question was: “what if all parties involved are acting with awareness of the fractional reserve?”. The answer was still “no”. When asked “why is that?”, he resorted to literal hand waving and with an elevated and all-knowing tone replied, “because they don’t know what they are really doing”.

There you are, your idol acting like a perfect nazist or communist, enforcing his holy theory on the dumb masses. A libertarian, hahaha!

Magnus July 6, 2010 at 11:37 am

The next question was: “what if all parties involved are acting with awareness of the fractional reserve?”.

The only way for “all parties” to have “awareness” of the fraction in reserve would be for EACH AND EVERY NOTE issued against a particular reserve fund to be plainly labeled as to (a) the type of commodity in reserve, and (b) the minimum amount in reserve that is guaranteed to be held, even if ALL of the holders of all of that fund’s outstanding notes were to show up at the bank window at the same time to demand payment.

In other words, to avoid a fraud on downstream takers of a note, the NOTE must state, on its face, that it is a 10% gold note, or a 50% silver note, or whatever. If this were done, then the MARKET PARTICIPANTS who are expected to accept these notes in trade can determine, right there on the spot, if they want to accept a 10% copper note or a 100% gold note, and what the value of each is.

Only then would we be able to know what the market premium (and discount) really is for notes issued pursuant to the practice of fractional reserve banking.

But, we all know that no bank would ever make such transparent disclosures on its notes. It would expose the fraud that modern banking depends on.

panika2008 July 6, 2010 at 12:36 pm

What you have shown in your comment is insistence on extreme contractualism and legalism, which is by the way generally characteristic of Rothbard’s works (on the other hand, he works in the framework of common sense and common law in other areas, especially criminal law; this dualism was always something phony for me).

To the point. First of all, even in an extremely contractual setting you describe, it is unreasonable to force banks to mark voluntary contracts with its clients in any way. It is not the bank’s, or generally, the “financial system’s” fault if someone resells a complex contract to an uinformed person – it’s the seller’s responsibility to inform the buyer what is actually sold. You can no more expect the banks to exactly state terms of redemption on its notes than you might want the producer of laundry machines to plate exact terms of warranty on the back of the machine itself. It is the reseller’s responsibility to provide the buyer with the terms of warranty as a separate document or even orally. Is there some problem with this as well? Would Rothbard or you insist on plating the terms on the machine? On the back or on the front? And then – in what language? We have several hundreds of them…

Secondly, it is unreasonable to expect perfect and instantaneous convertibility of any bank paper to gold at all. It is actually impossible for a bank, even if it holds 100% or 110% reserves, to satisfy redemption run on one of its branches – and many banks have multiple branches, possibly in different countries or continents. Liquidity under any and all circumstances MUST be managed. It is unreasonable to expect that a small branch in a small city would be able to instantaneously redeem a large sum of notes for gold (and although it is very unlikely, it might actually happen when several wealthy persons gather in a small town eg for a conference). It is unlikely that this run could be settled faster than in 24-48 hours, possibly more if there are circumstances such as holidays, highway and/or railway personnel strikes etc. Do you actually want for all of these terms of (neccesarily delayed) redemption to be explicitly stated on every note? And what if the terms change slightly, due to eg. interbank M&A or change of liquidity policy or even the most mundane situation of a mistake in the terms?

Deefburger July 6, 2010 at 1:15 pm

@panika2008 Ok, so what is an FRN worth? You don’t know. The only answer you can ever have is, “Whatever someone is willing to “trade” for it.”Again; What is it worth?With no knowledge of it’s true value at any given time, any exchange using it is really a transfer. Show me how this is good for the economy, the people exchanging value with one another, and show me how this does not transfer real wealth from that population to the issuers of those “promissory” notes. What are they worth? What do they promise? What will that be worth in the future?FRN’s are a gaff on the populace as a whole and do nothing to stimulate any kind of greater good whatsoever. Any apparent gain in the short term is an illusion of wealth, and the real worth will show itself over time as less-than what it looked like. What you see in the world today is the result of that knowledge coming to light.

Peter Surda July 6, 2010 at 6:07 pm

Ok, so what is an FRN worth? You don’t know.

What is anything worth? You don’t know. You only know it when you trade it for money. Rothbard defines money as something which is used in almost all indirect exchanges. So, regrettably, this creates a circular problem and we’re stuck.

Deefburger July 6, 2010 at 8:43 pm

@Peter Surda
“What is anything worth? You don’t know. You only know it when you trade it for money. Rothbard defines money as something which is used in almost all indirect exchanges. So, regrettably, this creates a circular problem and we’re stuck.”

Not so, another strawman. What something is worth to YOU is what is important. If you can’t answer that question, then you do not value yourself enough to make a trade.

Each one of us in an exchange applies our own self worth to the evaluation of the things of the trade. What those things are worth is ultimately dependent upon how we value ourselves. The use of a common verifiable and knowable standard of value, such as a weight of gold, or a glass of water, allows the both of us to compare self to the thing, and reach an agreement. If I am dyeing of thirst, I may value the glass of water more than the gold. If you have much water but need gold, you might be inclined to trade with me to both our mutual benefit. The exact nature of the evaluations each of us makes is irrelevant, so long as both of us can measure the value as equal to ourselves and our circumstance.

There is no circularity at all. Trading it for money only puts one kind or class of measurement on the table. It does not provide knowledge unless there is a unit of measure involved, such as a weight, or volume of substance. Fiat currency has no such value measurement. It’s a guess everytime you use it. I don’t guess about my own worth, I know.

What are you worth?

Peter Surda July 7, 2010 at 4:01 am

What something is worth to YOU is what is important.

Actually, even this is not correct. What is important is the difference between how much something is worth to you and how much it is worth for others. If the latter is higher than the former, you can use it as a medium of exchange.

I am suprised that some austrians which normally insist on the subjective value theory suddenly jump to objective value when talking about money.

Trading it for money only puts one kind or class of measurement on the table.

See? This is what I’m talking about. There is no reason why money should somehow represent an objective measure of value. Sure, it might be more accurate than, say loaves of bread, but that is a quantitative, rather than qualitative, difference.

Magnus July 6, 2010 at 1:45 pm

an extremely contractual setting

I don’t know what this means. More to the point, it makes no sense. “Settings” are not more or less “contractual.” There is only the real world we all inhabit.

it is unreasonable to expect perfect and instantaneous convertibility of any bank paper to gold at all. It is actually impossible for a bank, even if it holds 100% or 110% reserves, to satisfy redemption run on one of its branches

It’s not unreasonable at all. If a bank wants the benefit of holding itself out as a 100% reserve depositary bank, and issues 100% reserve notes, it can make them payable at only one branch, for example. If it wants the market benefits of claiming to redeem all notes on demand, then it should incur the expense of being able to make payment on demand, which (in this extremely contractual setting that I call “society”) is what banks have PRETENDED to offer for centuries — PAYMENT ON DEMAND. Hence, the phrase “demand deposits.” Which is a fraud, since as we all know, a fractional reserve bank account is merely an unsecured loan to a bank, not a deposit at all.

If people want the benefit of running note-issuing banks, then yes, they should list the actual terms of redemption on the face of their notes, or be liable for fraud when they claim to hold specie for redemption on demand and fail to do so.

Let’s say Bank A’s notes say: “100% gold reserve, payable on demand” and Bank B’s notes say: “50% silver reserve payable on demand, the remainder payable in 48 hours, unless there’s a big conference in town, and payable in some substitute metal as we deem fit, and then payable in 15 days, but only at the 5 main branches, and at all other satellite branches, payable in a month, at the most …” Which note trades at a premium in the marketplace, and which trades at a discount?

The only way for anyone to KNOW what the actual costs of the various forms of liquidity management are is for the terms to be disclosed.

The problems you have identified are trivial. They are not economic in nature, and your arguments have said nothing about the inevitable fraud that note-issuing banks routinely commit, with the active sponsorship and protection of the State.

Deefburger July 6, 2010 at 2:08 pm

It is not necessary for an independently operated 100% reserve bank to hold only monetary metal. Short term holdings could include any real commodity such as grain, or cement. Full discloser of holdings would be an advantage to such an institution. The problem of clearing house large scale transactions is a straw-man argument. It is not the centralisation of free market institutions that is the problem, but the monopolistic centralisation of fiduciary media creation and distribution that is the problem, worthlessness by force.

A standard is a unit of measure. You don’t need the standard inch from the NIST to measure an inch. You don’t need an actual ounce of gold to know what it is and what it would be worth to you if you did have it in your possession.

panika2008 July 7, 2010 at 8:46 am

Yeah, what you describe is some kind of a solution. An awkward one, because every bank would have to state all the dirty details on its notes. There is generally no need in society for such an extreme exactness, but OK, I guess there would be a lot of work for lawyers (and printers, who would have to reprint the notes over and over). What you assume about the valuation of notes is I think quite far from correct and I think their values would be extremely close to each other, especially on developed financial markets, where there are other means of handling counterparty risk than discounting its debt (CDS comes to mind). But now – what if all the major banks standardized the terms of their principal notes to be, say, “at least 50% silver on demand in any branch, then the rest in at most 30 days in a designated branch”? Would not the long-term adoption of such a standard make it, on the ground of common sense and expediency, reasonable to emit all these notes with just some simple description like “payable in silver”? Would there be anything immoral, unethical or illegal in that? Does anyone here really think that the opposite, the placement of extreme details of every contract on every piece of paper circulating, is some kind of a libertarian nirvana? I really don’t think the general population would need this. What works – works. As simple as that, and functioning many past centuries.

james b. longacre July 6, 2010 at 8:25 pm

It is not the bank’s, or generally, the “financial system’s” fault if someone resells a complex contract to an uinformed person –……….

did anyone say its the financial systems fault??

Secondly, it is unreasonable to expect perfect and instantaneous convertibility of any bank paper to gold at all. It is actually impossible for a bank, even if it holds 100% or 110% reserves, to satisfy redemption run on one of its branches………..

economically, is there a difference if a particular bank and its branches actually have the money spread out over there own bank properties and whether the ‘money’ is in someone elses hands and they have to try to get it or collateral…whilst creating spendable bank credit??? is this what so called austrians claim causes real economic boom and bust periods??

panika2008 July 7, 2010 at 3:00 am

“did anyone say its the financial systems fault??” – yeah, Magnus did.

What you describe in the second part of your reply is more or less an example of (hopefully efficient) liquidity management in a fractional reserve system. I have nothing against it as long as the government keeps out of the business of banking risk management.

Peter Surda July 6, 2010 at 5:50 pm

… EACH AND EVERY NOTE issued against a particular reserve fund to be plainly labeled ….

Now hold on a second. Fractional reserve banking does not create additional notes of the same type. Even now, the notes are issued by central banks rather than FRB banks. FRB banks usually do not create notes, but other type of money, such as accounts. A minimum reserve ratio for banks, as far as I know, is prescribed as well. So where’s the problem? I mean apart from legal tender laws.

Deefburger July 6, 2010 at 6:21 pm

The problem is you don’t know what it is worth. For a free market to function properly, it requires knowledge not guesswork. If the fiduciary media you carry has no known value, has no basis in real commodity value, then it’s worth is a guess at best and usually wrong as a result. Since human evaluation is subjective, then, the only way for two human beings to agree on anything requires a physically provable standard. This is why there are Pantone colour wheels. That is why the NIST maintains unit standards of measurement. So too the economy, you and me exchanging requires knowns for equality in perceived value. Just saying “One” is about as informative in an economic exchange as saying “Red” is to a printer, or “10″ to building contractor. Without the unit base, it is baseless and meaningless.

Again, a monetary metal standard is not just a media of exchange, it is a standard of unit value, plain, simple and knowable even to the subjective reasoning of a human being, the fundamental unit of the economic system.

What is a Federal Reserve Note worth? Tell me. Then you might have a real argument against a standard based upon monetary metals.

If the notes, any notes, do not have the full backing of real commodity value, then what what are they worth? Nothing but the fraction, whatever that is, is worth, the rest is a guess. Knowledge is necessary for there to be any real value, so notes distort the market the same way as thin-air media, and for the same reason.

james b. longacre July 6, 2010 at 8:31 pm

is a fluctuating value of a note vastly different from the fluctuating purchasni power of an ounce of silver???

couldnt an ounce by a gallon of gas one day and .75 gallon a week later?

Deefburger July 6, 2010 at 10:03 pm

@james b. longacre

Yes, definately.

http://www.wolframalpha.com/input/?i=gold+value

Look at the chart. In 1972 the peg to gold of the Bretton Woods agreement was lifted.

That loss of the peg, which at least gave a unit of value to the fiat currencies disappeared. The result was very wild fluctuation with the tendency to higher prices in dollars for the same fixed value of an ounce of gold.

Before that, the line is almost flat. Almost is the mild fluctuation of a gold standard.

So your price of gas difference would be more due to gas supply and other gas related factors, rather than the fluctuation of the perceived value of the ounce of gold.

Please note that a peg of value to a fiat note is no solution to the fiat money problem of monetary expansion. It just limits the price fluctuations in the market. The inflation still happens, and the reserve held against those notes is still irredeemable and so the notes have no real value. What is different with the peg to monetary metal is the perception of value is relative to the peg. Thus, if the peg is stable, then the pricing is more stable than it would have been otherwise.

The problem for the banks is that the peg forces them to enumerate against a real measure. They can extract more value from the economy if the economy doesn’t know the worth and prices rise as result. It’s easier to print up new cheques when noone knows what that means.

Before 1972, a “stimulus” of a Trillion “dollars” would have to have several Billion in real gold and other commodities in reserve. No peg, no limits.

Peter Surda July 7, 2010 at 3:33 am

The problem is you don’t know what it is worth.

However, this is a circular argument. You don’t know what anything is worth, you only know your own relative utility and the relative exchange values. As long as one perceives the consumption utility of a good lower than the indirect exchange utility of the same, the good will be used for indirect exchange. The problem here is that the acts of government inflate the exchange value of legal tender above the market level.

Besides, I was addressing FRB, while you now switched to fiduciary media. These are distinct elements.

Now, don’t get me wrong, I agree with most of the aspects of austrian monetary theory. I agree that FRB and fiduciary media cause inflation, and that commodity money has some advantageous features compared to them. But some of the conclusions drawn by some proponents of the theory I simply cannot follow. Every medium of exchange has some advantages and some disadvantages compared to the others. Even in the hypothetical case of gold as money, if you introduce warehouses and money substitutes (100% reserves), that is already a new type of medium of exchange, with features distinct from gold itself.

I don’t know what the free market for money would look like, but at least I hope we can agree that it would be preferable to government interference.

Russell July 6, 2010 at 11:45 am

Rothbard was 100% correct even if he did not explain the why of it at the time. People don’t really understand what fractional reserve banking is and how it affects the market and the conomy. All depositors care about is that they perceive that their demand deposit is safe because of the FDIC. I have asked many highly educated people whether they understand that their demand deposit in a checking account is not really all there; the the bank can lend out up to 90% of leaving only 10% and then the bank might have only another maybe 8% of capital to cover the 90% shortfall were the loan to go bad. These people with advanced academic degrees look at me like I have two heads when I explain this. They are utterly surprised. This leads to the real problem with FRB.

Our demand depositors thinks and behaves as if their so called demand deposit is all actually in their checking account. This perception affects their spending and saving decision causing them to spend more and save less than if they knew that there was only 10% of their demand deposit actually there in their account. This sends false price signals into to the market place compared with the price signals that would be generated if the depositor knew only 10% of his deposited money was really on deposit and that the bank had only another 8% to cover his deposit if he and everyone else demanded it.

Moreover, FRB is contrary to generally accepted understanding of how one obtains money in the marketplace. Normally, we expect to first have to work to obtain money. Thus the principle is that in order to obtain money, which is a claim on the marketplace filled with goods and service, first we have to add to that marketplace. This system encourages growth of the amount of goods and servces making our money worth more than if money was first printed before the work was supposed to be done because once someone has the money, their incentive to work is reduced. Giving out the money before the work is done is called a “loan” because there is risk that the money will not be repaid. So we charge interest to compensate for the risk.

Let’s go back to fractional reserve banking. From a functional standpoint (ignoring the legal fine print which has no effect on economic behavior), when lending out demand deposits, the bank is lending out money that was earned by the depositors, not the bank, that the bank has not no right to lend out. The bank is earning interest on the loan but shoveling risk onto the depositor, or FDIC and ultimately that taxpayer for 82% of the loan it has not covered by the 10% reserve plus the banks 8% equity. So the bank reaps the rewards of the risk but socialized the losses. Sound familiar? This is plainly an unhealthy economic system.

The bank should not be allowed to loan out demand deposits at all. If they want to lend depositor’s money, the banks should get the depositor’s express agreement to allow it to be lent out for the entire term of the loan. It is a very elementary concept consistent with honesty, fair dealing, and a sound marketplace. This will provide the optimum balance of supply and demand signals of credit and will reduce the size of booms and busts.

Given the above, Rothbard was clearly right that 100% reserve banking backed by 100% gold is the fairest system and would result in the most stable economies. It is difficult to see how anyone who understands this can disagree with it.

james b. longacre July 6, 2010 at 12:02 pm

The bank is earning interest on the loan but shoveling risk onto the depositor, or FDIC and ultimately that taxpayer for 82% of the loan it has not covered by the 10% reserve plus the banks 8% equity.

the 10 percent resereve….is that paper cash specifically??

Russell July 6, 2010 at 3:41 pm

Yes, its paper cash printed by the Treasury or credit created out of thin air by the Federal Reserve.

james b. longacre July 6, 2010 at 8:20 pm

so the 10 percent reserve isnt solely paper cash??? it can be or can be a mix of paper cash and fed credits???

Deefburger July 6, 2010 at 10:10 pm

@james b. longacre

Yes. Ridiculous as it sounds. However, it serves no purpose to the bank to hold only paper. They tend to sell that for trade and use the value of realestate and other collateral on “loans”, which are entry points for new thin-air “money”, as assets in reserve.

The bailouts only fixed their balance sheets to adjust the overestimated value of their real estate holdings when the knowledge of their over-value came to light in the crash of that market.

panika2008 July 6, 2010 at 12:46 pm

Hey, why don’t you change your elitarian tone? “People don’t really understand what fractional reserve banking is and how it affects the market and the conomy” – that might be perfectly right, but people don’t understand the working of antiinflammatory drugs as well. Nowadays they don’t quite understand how a washing machine works, not to mention the car or the computer that you and I use to write these comments. Should this too be somehow a pretext to completely reshape the contract law? To require for each and every complex product to be first either totally described by the seller to the buyer, or rebuilt in the form that the customer is able to comprehend? Like you know, even the worst of morons could comprehend how an abacus works, so, taking into consideration the fact that 99% of population will never ever be able to understand how a computer works, why don’t we FORCE the sellers to sell abaci only?

I think that living in a society with such norms might be very, very, very hard, impractical and pretty silly. And it would not have any of your beloved scents of liberty. On the other hand, the fascist or communist terror would look like a walk in the park in this society for everyone except maybe lawyers – suddenly we would need like 100x more of them, and every one of them would be guaranteed employment and plenty of work for many, many years.

Russell July 6, 2010 at 3:46 pm

Panika2008, we are talking about good banking design for an economy here. Once one understands the problems fractional reserve banking and fiat currency engender in the market, it is obviously a bad design. Just like a poorly designed car that break down a lot of a drug that has side effects whose downside exceeds the upside like with thalidomide and pregnant women.

I don’t know why you would defend a system that inherently promotes unstable economic cycles. Are you suggesting that no improvement can be made, that this is the best we can do. Then you must be resigned to playing poker where the dealer had a marked deck.

panika2008 July 7, 2010 at 1:11 am

I don’t defend the system. I oppose unrealistic and intellectually suspicious solutions to our problems.

panika2008 July 6, 2010 at 12:50 pm

Oh, and by the way. If you think that the money you deposited on your account (checking or otherwise) is lent out somehow behind your back, I suggest your checking the contract that you have signed when opening the account. I read mine – and I no longer whine about banks cheating on me. In the past it was just me that was uninformed what I was signing.This should satisfy the extreme contractualists here as well.

Russell July 6, 2010 at 3:50 pm

Panika2008, as I said above, it is not about what the fine print says on the banking contract. From an economic and societal benefit point of view, it is the effect on the depositor and economy as a whole. It is poor human engineering because it has the effect of privatizing the profits and socializing the risks. Surely you can appreciate that! You gotta be a banker to like that.

panika2008 July 7, 2010 at 3:49 am

If what you are after is “proper” human engineering on a society scale then well, we have nothing more to discuss.

Russell July 7, 2010 at 7:42 am

I am not sure what you mean. Do you agree or are you so cynical that you will accept the status quo without trying to change it? If the latter, maybe we can’t change it but it won’t change unless voters generally recognize it is a bad deal for the economy as a whole.

panika2008 July 7, 2010 at 7:52 am

For a change to be effected, one should have proper intellectual ground, otherwise it can end up badly. There is not much proper intellectual ground for legal enforcement of 100% reserve gold standard through, I suppose, outlawing of fractional reserve banking and unbacked money. Sorry about the human engineering response, I assumed you are for “proper human engineering” while now I see you are just against “improper human engineering” – am I right?

james b. longacre July 6, 2010 at 8:33 pm

……..when lending out demand deposits, the bank is lending out money that was earned by the depositors,…………….

when the bank lends out a demand deposit, what are they lending exactly??? is it actaully money??

is it paper currency??? is it a promise to repay another demand deposit and not paper cash at all???

Deefburger July 6, 2010 at 10:16 pm

@james b. longacre

The truth is that they don’t lend deposits at all. What they do is exchange a brand new amount of currency created on the spot. Like this:

$400,000.00

That’s it. Thin air. When I do it here on this computer, it’s worthless. When they do it in their computer, it’s a loan and the house is now theirs as collateral, by contract.

Shocking isn’t it? You and I have to work for years to actually create that wealth. They do it for nothing, literally, because the Federal Reserve Act of 1913 says they can.

james b. longacre July 7, 2010 at 1:15 am

james b. longacre July 6, 2010 at 8:33 pm

……..when lending out demand deposits, the bank is lending out money that was earned by the depositors,…………….

@james b. longacre

The truth is that they don’t lend deposits at all. What they do is exchange a brand new amount of currency created on the spot.

ok..so a movement towards the truth.

who creates the new currency on the spot??? commerical banks or the federal reserve??
the on the spot currency that you claim is created (true??) is it paper or something else??
if something else could you describe it???

Deefburger July 7, 2010 at 10:21 am

It is a number typed into the the computer at the bank, and a loan contract produced at the same bank at the same time.

The money is destroyed as you pay off the loan. Every dollar you deposit to the loan account, decreases the asset on the bank’s balance sheet.

As long as the loan to asset ration does not fall below the reserve limit, on the books, then the bank can loan the funds.

The loan funds are created just by typing the number.

panika2008 July 7, 2010 at 1:18 am

No, it’s not shocking at all. It has been done since at least 17th century. What you forgot about is that the bank creates a deposit as well. $400k credit AND $400k debit with the flow collateralized by a mortgage.

james b. longacre July 7, 2010 at 1:12 am

…..Before that, the line is almost flat. Almost is the mild fluctuation of a gold standard.

So your price of gas difference would be more due to gas supply and other gas related factors, rather than the fluctuation of the perceived value of the ounce of gold……..

i dont know if that line means much or not. was much of the gold mined over the last century or so aquired with paper dollars to get it???

and if gas could shoot upward in price quickly do to gas related factors paid in gold would it be a problem if the price went up or could even be stabilsied in some way via the current money/currency system????
could or does the current money system bring money to market goods faster than gold??? paying for a new well or prospecting quicker and thus stabilising price shocks???

Jerryhorse July 6, 2010 at 11:51 am

When you speak of groups of people voluntarily clearing huge amounts of money, you are, in all likelihood, speaking of oligarchs and those who have obtained vast wealth through monopolistic and coercive governmental privilgeges. Tim Geitner, acting on behalf of the American Empire does need to tax the people to keep the big wheels turning. But would those big wheels keep turning if the little wheels were to stop? Of course not. The need is for the powerful oligarchs to maintain their power not freely but with the coercison of government taking from individual liberty.
Now I understand that it is a freightening thought to have the current order of the world become undone. It is a freightening thought that individuals can actually make their own decisions without the brillance of the war machine assuring that all the oil resources are under the control of the western powers. It is even more freightening to think that Goldman Sachs may be unable to pay its salesmen multi-million dollar bonuses for helping to disrupt the world’s economic stability. Yes, it is freightening to think that governments may stop waging wars so that billionaires can keep their family estates in tact on at least two continents if not more.

I understand your concerns about the oligarchs losing their freedom to move billions of dollars at the flip of a switch or the push of a button. These are very freightening thoughts. What is even more freightening is when the oligarchs decide to stop voluntaring and start competing with each other over oil rights, land rights and which lands they wish to control. When a George W. Bush comes to power and decides to move his toy soldiers in a show of “Piss and Awe” killing the rabble, the towel heads so your friends can move their credits and debits in default swaps and gamble with the world economy, it is pleasureable to your friendly oligarchs, so long as they are on the right side of this hegemony.

Yes Rothbard may have waived his hands up and down, but not like your friends the National Socialists, who held rapiers and machine guns in theirs. Rothbard was preaching his “confused” religion as you would like to call it to those with enough intelligence to understand the difference between freedom and false arguments not like those who would compare a scholar to a barbarian.

panika2008 July 7, 2010 at 3:08 am

Are you some kind of a commie? Not every wealthy person is wealthy because of fraud, connections or outright plunder. Go study Rockefeller, will you? How about Bill Gates? Is he some kind of a “software robber baron”, a “software oligarch”? Is Zuckerberg an Illuminati or something? How about Steve Jobs? WTF is wrong with you?

By the way, the ability to transact billions of dollars at the push of a button is called financial market efficiency and it’s one of the most important things in the last century’s economic developments around the world. The thing that (together with the development of efficient IT systems) most, if not all, highly developed countries owe their supremacy and an extremely high standard of living. So why don’t you stop biting the hand that feeds you?

Peter July 8, 2010 at 3:10 am

There is an anecdote that once upon a time Rothbard …

No there isn’t. You made that up as you were typing.

panika2008 July 8, 2010 at 3:19 am

Please see Mike Sproul’s comment under http://blog.mises.org/11395/free-banking-and-contract-law/, the one from January 7, 2010 at 12:47 pm.

Peter July 8, 2010 at 6:31 am

Oh…so Sproul-troll made it up…

panika2008 July 8, 2010 at 6:56 am

Well, at least he has an actual life, a position in academy and signs his posts with his real credentials.

Beefcake the Mighty July 8, 2010 at 8:08 am

So what? He’s still a monetary crank. So are you, apparently.

panika2008 July 8, 2010 at 8:19 am

Beefcake, do your troglodite accusations somehow invalidate or undermine the story quoted by Mr Sproul? Cause you know, you’re acting childish. Like a 6-year old who is asked by his parents “where is the money we left in the closet” and he answers “Jim must have taken it, he is so damn ugly”.

Beefcake the Mighty July 8, 2010 at 8:41 am

panika, give me a break. Not that I give two shits (or even one) about what you think, but these issues (including Sproul’s positions) have been extensively debated on this site on different threads. You’re totally unaware of these debates, you simply content yourself with the belief that all Rothbardians are just closed-minded fanatics. Please, piss off.

panika2008 July 8, 2010 at 8:50 am

I never wrote that “all Rothbardians are just closed-minded fanatics”. What I wrote is that Rothbard was somewhat closed-minded and gave an anecdotic proof of it; the issue is very important because it lays shadow on much of Rothbard’s work on money and banking. And as to yourself… you have just shown for a second time in row that you have some serious problems in reading comprehension, intelligent thinking and relating your position to what the other side said. If not for your silly childish aggression, it would maybe even be sad…

Beefcake the Mighty July 8, 2010 at 8:55 am

“I never wrote that “all Rothbardians are just closed-minded fanatics”. ”

I never claimed you did; why don’t YOU do a better job of reading. I said this was your belief, which it clearly is as your numerous posts amply demonstrate.

I say again: piss off.

panika2008 July 8, 2010 at 9:00 am

Well then it’s very cool you are so proficient at telepathy and long-range mind reading. Too bad it does not come together with good manners. I guess you can never have everything.

Beefcake the Mighty July 8, 2010 at 9:15 am

Well that’s rich; panika is complaining about *my* manners.

FatBeard July 6, 2010 at 1:15 pm

Gold is just as much a tool of the monied elites and central bankers as fiat is. Liberty and the rule of law is the antidote to tyranny not any kind of government backed gold standard. Let’s not jump out of the pan into the fire.

james b. longacre July 6, 2010 at 8:35 pm

if fiat gold and silver money better than than the current paper/fed/banking currency system???

FatBeard July 6, 2010 at 8:38 pm

No. The current system is more flexible. Throwing away options is rarely a good idea.

james b. longacre July 7, 2010 at 1:21 am

well, the govt takes currency from you, right??? you get somethigns in return that you may or may not like.

would you rather have the govt managing and controlling the dollar as it is now or would you (or others) here prefer gold and silver taxed by the govt???

i guess you would still be free to contract payment in anything you wish.

more flexible for whom??? the govt and tax collection and managed currency????
flexible in what way????

FatBeard July 7, 2010 at 7:58 am

You asked me to choose between two evils so I chose. The solution is liberty and the rule of law not a choice between precious metals and fiat. Under liberty, you could use gold and silver with or without fractional reserves or anything else as money. As for me, I think common stock is the ideal money form. Let the market choose, I say. Are we libertarians or not?

james b. longacre July 7, 2010 at 3:34 pm

no. that isnt what i asked. if you were a prisoner you could be fed spoiling food or fresh food. yu would stil be a prisoner byut perhaps not a sick one with hair falling out and brittle nails.

would the operation of gold and silver as money/legal tender with a taxing govt be preferable to you (or others here) rather than the govt managed system of currency today under a taxing govt???

Andras July 6, 2010 at 1:29 pm

People go to casinos clearly knowing that the odds favor the house. People buy lottery tickets with even worse odds. The problem is not fractional reserve banking or fractional reserve gold standard but legal tender laws which enforce them. If the government wants to participate honestly in money creation open its mint to the public to mint gold coins denominated in weight and abolish legal tender laws! Otherwise it is all a fraud.

Russell July 6, 2010 at 3:53 pm

But the government is us. Only the voters can change it. Voters can only change things if they understand why a system is bad and what a good system looks like.

100% reserve banking backed by 100% gold would result in a much more stable economy than fractional reserve banking with fiat money. People need to understand that it is so and why it is so.

james b. longacre July 6, 2010 at 8:38 pm

100% reserve banking backed by 100% gold would result in a much more stable economy….

do your wages gyrate wildly??? bologna in the deli?? electric bill kwh charges???? mine has been around 27.00 for the last 8 months.

is stable better than….unstable, i guess that is what you consider the economy to be now???

Peter Surda July 6, 2010 at 6:11 pm

While I completely agree with the abolishing of legal tender laws, that takes away an income source from the government and makes taxation more difficult. Not that I would be unhappy about that, but the government would be shooting itself in the foot, therefore it seems unlikely to happen.

Deefburger July 6, 2010 at 10:24 pm

@Peter Surda

We seem to agree on this point! The Federal government wasn’t supposed to have easy access to funds. That was only supposed to happen when it was really necessary, like we’re under attack and are going to war, declared by Congress and fought by volunteers.

There are other possible sources of revenue for the government, such as tariff, fees for real valuable services, as well as taxes, as defined in the Constitution. But I don’t think it would matter too much in a country of free people engaged in free and open trade. Why mess with a nation that only offers goods and services at reasonable prices and in a stable currency?

Peace would be possible if government were out of the way, and broke!

james b. longacre July 7, 2010 at 1:28 am

“There are other possible sources of revenue for the government, such as tariff, fees for real valuable services, as well as taxes, as defined in the Constitution. But I don’t think it would matter too much in a country of free people engaged in free and open trade. Why mess with a nation that only offers goods and services at reasonable prices and in a stable currency?

Peace would be possible if government were out of the way, and broke!”

i guess you will be stormign congress soon with commados.

but if you arent and the govt isnt going anywhere is taxation to fund govt with gold and silver as the money (which is how i understand the constitution) somehow superior economically and for taxpayers than the current system????
with still freedom to contract in any number of payment terms….which is how i thought things operated during colonial /contsitutional era???? final tender had to be in gold and silver coin…i dont know what the federal govt collected taxes in. i assume it was largely gold and silver coin too.

FatBeard July 7, 2010 at 9:32 am

While I completely agree with the abolishing of legal tender laws, that takes away an income source from the government and makes taxation more difficult. Peter Surda

Let government money be legal tender for government debts only not private ones. That would insulate the private sector from government monetary fumbles including a nation-wide boom-bust cycle, I would bet.

panika2008 July 7, 2010 at 9:45 am

This is the situation you have now in many countries, including most of EU. Somehow I have not noticed gold (or silver for that matter) banks popping up like mushrooms. Let’s see, maybe it has something to do with the Copernicus-Gresham law?

Peter Surda July 7, 2010 at 9:51 am

But that is how it already works. With very minor exceptions, you don’t need to accept payment in legal tender. Unless you are a bank, you’re probably off the hook. However, tax due is calculated based on legal tender, and that causes a crowding out effect, unless the rate of inflation is too high compared to the income tax rate. Only in countries like Zimbabwe and Cuba it is prohibited to refuse payment in legal tender.

FatBeard July 7, 2010 at 10:14 am

But that is how it already works. With very minor exceptions, you don’t need to accept payment in legal tender. Peter Surda

OK, point taken. However, potential private currencies are disadvantaged by taxation as you have pointed out. An inflation resistant currency would do little good if for taxation purposes it had to be measured against inflated government money.

Matt July 6, 2010 at 5:19 pm

I have a question and please don’t attack me for asking it :) Lets say a free market society became a reality and banks existed that practised fractional reserves. If all parties who deposited their money in said banks were aware of the situation (the bank did disclose the information to the customer at the time the customer’s first deposit was made and required a signature of acknowledgment that they understood the terms) and voluntarily deposited their money in such a bank would you believe that that/those banks should be outlawed? Of course I would not do business with such banks but why should others who are fully aware of the risks be prevented from doing so.

tralphkays July 6, 2010 at 6:09 pm

Matt
A very intelligent question! This point more than any other divides “Austro-libertarians”. The short answer is that if a bank openly admitted that it could not redeem all of the claims against it, most would say that is ok. But think about it for a minute, has there ever existed a bank that told its customers, when they deposited money, that there was no possible way for them to return everyones money? That told people the only way they could be sure of getting their money back was to beat everyone else to the bank? The very definition of “banking” involves such a guarantee and is exactly what every bank throughout history has claimed. Similarly, every form of fraud or swindling would disappear if the fraudsters and swindlers told their victims exactly what they were doing, but that is not a reason to de-criminalize fraud or swindling.

tralphkays July 6, 2010 at 6:14 pm

Matt
A second consideration is the effect of creating more money under fractional reserve banking and the theft inherent in that act, which is the same as the theft involved in counterfeiting.

Deefburger July 6, 2010 at 6:32 pm

No need to outlaw them. The market will either support their efforts or discount their media. If they are doing something right, and not getting themselves and their clientèle into trouble, fine, otherwise they will go belly up, like any other business that fails.

Our biggest problem is that that business model is forced.

Ned Netterville July 6, 2010 at 6:38 pm

“Of course I would not do business with such banks but why should others who are fully aware of the risks be prevented from doing so.”

Me neither, nor do I suspect that there would be enough people who would to keep such banks profitable, since I presume that in the absence of laws affecting money and banking, more secure banks would arise to push fractional-reserve banks into oblivion. Of course if enough people wanted them, for whatever advantages they were able to offer, so be it. I am personally unable to envision a free society that wasn’t free from human government, and absent government there would be no one to prevent–nor protect and subsidize–fractional-reserve banking under a regimen of unhindered freedom. Would gold be the money of choice in the absence of government intervention? I don’t know, nor does anyone else. I presume electronic banking and transfers would be every bit as compatible with gold money as it is with fiat currency. It is amazing what free markets can devise. The best reasons for choosing gold have already been asserted here. Gold is nigh on to impossible to counterfeit, and it is divisible into virtually any small amount demanded by the market. Silver and copper might compete, but I doubt it because INMO gold’s divisibilty would render those metals superfluous for monetary purposes.

Libertarian thought and Austrian economics have advanced since Rothbard wrote, in large part because he thought and wrote. I suspect that if he was still around he would have come to the conclusion that the market should decide what is or isn’t money without any interference from states nor state participation in monetary affairs. He was so much the anarchist champion of liberty that I can’t imagine him subscribing to any scheme that imposed a standard.

Deefburger July 6, 2010 at 10:44 pm

“…He was so much the anarchist champion of liberty that I can’t imagine him subscribing to any scheme that imposed a standard.”

I think you are right, but he might not have had any problem at all with a standard per se. That is a requirement for exchange over any broad geographical area, and today that area is the world.

In 1792 the standard in the market was best represented by the Spanish gold and silver of the time. It was consistent and wide spread and recognisable to all. It was called dollars in the States, and it was not referenced in the Constitution as anything else except Silver and Gold because the meaning of dollar was synonymous with money. But the exact weights and fineness were defined in the coinage act of 1792. This was done as a matter of “regulation”, as the word itself was used at that time. Clocks were also called regulators, not because they forced the time, but rather because they measured it consistently and accurately. It is this meaning of the word “regulation” that is the proper interpretation of the commerce clause “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes”. That kind of “regulation” requires units and standards that are consistent, and is valuable to the economy for wide spread commerce and consistent value in contracts over time.

Peter Surda July 7, 2010 at 3:46 am

Me neither, nor do I suspect that there would be enough people who would to keep such banks profitable, since I presume that in the absence of laws affecting money and banking, more secure banks would arise to push fractional-reserve banks into oblivion.

I am skeptical about this conclusion. I suspect rather that a more strict distinction between current and savings accounts would arise, maybe savings accounts would become more like term deposits. Current accounts might have 100% reserves, other account types less, but have more restrictions about when you can withdraw from them. I don’t know how about you, but out of the money I entrusted to banks, I only keep a relatively small proportion on current accounts. I don’t need the rest of it on demand.

panika2008 July 7, 2010 at 3:55 am

You are dreaming. Fractional reserve banks can be easily proven to be competitively vastly superior (wrt bank revenues weighted by risk) to full reserve banks (think leverage level), and they would easily push them out of the market when free banking was allowed – some bankruptcies notwithstanding. Now, what is wrong with a bank bankrupting? It’s their owners’ problem to set a sane leverage and reserve levels and manage liquidity adequately to both stay safe and earn a lot of money.

tralphkays July 6, 2010 at 6:47 pm

The belief that market forces would be enough to eliminate the fraud of fractional reserve banking is akin to the belief that honesty is enough to eliminate theft. It is absolutely true that if EVERYONE were honest, there would be no theft. That has nothing at all to do with theft being illegal however.

Deefburger July 6, 2010 at 7:07 pm

@tralphkays

The belief that the market can’t deal with fraud when it happens is what leads to the eventual legalization of fraud itself. Look at the history of humanity and you will see fraud imposed over and over again. Leave the market/economy alone and it will deal with the little fraud that will likely occur.

tralphkays July 7, 2010 at 12:12 am

So fraud is not a crime?

panika2008 July 7, 2010 at 3:57 am

And how is voluntary fractional reserve banking a theft or a fraud?

tralphkays July 6, 2010 at 7:03 pm

The only way for a fractional reserve bank to operate non-fraudulently, would be if they made it clear, to each depositer, that they had no obligation to return that persons money. Would we really call a business that took peoples money, with no legal obligation to give the customers anything back, a bank?

Deefburger July 6, 2010 at 7:19 pm

Nope. In a free market with sound money competing in it fractional reserve has no use or purpose. It was invented almost by accident when gold smiths realized that the claim cheques on deposits of gold were being traded in place of the gold itself that they held in “safe” keeping. They began issuing claims on gold that didn’t exist when they realized that their clients did not all come in and claim their gold at the same time.

What they did was a shell game gaff of real value in actual gold held against the shells of paper claims. They inserted false claim cheques into the economy as though they were real, and thus produced an unseen way of debasing. Before that time, the debasement was done with IP, such as the king’s face making up for the full weight of the coin, or the clipping or alloying of a lesser full weight, again by decree of the value of the king’s face or mark.

Today, the claim cheques themselves are not redeemable in any value, and the only “value” they have is the President’s face. Same gaff, different time.

tralphkays July 7, 2010 at 12:15 am

When these goldsmiths did this you are saying that this was legal and should be legal?

jerry July 7, 2010 at 5:28 am

I agree with tralphkeys. Steve Horwitz explicitly said on a thread a while back something to the effect of “the free market should decide how much fiduciary media there should be”. This makes about as much sense to me as saying “the free market will decide upon an acceptable murder rate”.

Why or how does it make sense to ever – ever – create money (remembering that prices come from how much of this money there is) from thin air? If gold were money and everyone paid everything cash and there were no such thing as cheque books or debit cards, how much sense would it make to ask how much “fiduciary media” there should be then?

None, none at all. Good luck even defining “fiduciary media” in such a society. FRB has no place – it is always and everywhere an attempt at fraud.

panika2008 July 7, 2010 at 6:01 am

Utter bullshit. Fiduciary media – or any other financial asset – on a free market is an expression of voluntary bilateral relations between market participants, relations of trust mostly. It’s NONE of your business if I and Mr Rothschild write unbacked promissory notes for each other via Mr Morgan’s bank (essentialy what banks do today) and use these notes to clear trade between us and Mr Buffett – someone that is fully informed about the rules, and participates in our market, say, as a speculator, trying to forecast our future financial relations and profit from it.

jerry July 7, 2010 at 6:10 am

So what is your opinion on the effects of this behaviour you advocate on the price system?

Beefcake the Mighty July 7, 2010 at 6:11 am

“Utter bullshit. Fiduciary media – or any other financial asset – on a free market is an expression of voluntary bilateral relations between market participants, relations of trust mostly.”

Uh, do you understand this point is precisely what’s under dispute?

Totally clueless.

jerry July 7, 2010 at 6:14 am

In fact, when many such banks are busy passing around “promissory notes” with varying degrees of reserves to back them up, do we even have a price system? If so, how?

panika2008 July 7, 2010 at 6:14 am

Why should I care what effects on the prices have my dealings with monsieurs Rothschild, Morgan and Buffet? I never force anyone to accept our promissory notes and never falsely claim that they have better backing than they truley have. What is wrong with that?Likewise, I don’t really care what effect does my writing C code for a living have on the level of prices, or my digging of gold from ground, or my production of cargo ships. What I care about is that I make a profit – and also that noone gets screwed along – because I’m a honest worker/trader/producer. What is wrong with that?

panika2008 July 7, 2010 at 6:15 am

Beefcake, please note the explicitly stated “on a free market” part.

jerry July 7, 2010 at 6:43 am

Well, “What is wrong with that?” is that your economy is signficantly less efficient than one with a sound price system. The members of your economy have less sound information on which to base their decisions about where to allocate their resources – there is no unit of account due to there being essentially a barter in promissory notes. Barter is not efficient.

Free market hard money solves this problem (of having only local information) by capturing the availability and desirability of the good and services and the resources in the economy, via the price system.

If you’re saying we throw the economy-wide price system away as we just don’t need one, then please say so explicity and I’ll know where we stand.

panika2008 July 7, 2010 at 7:06 am

jerry, why do you stipulate that our dealings (between me, Mr Rothschild, Mr Morgan and Mr Buffett) are somehow unsound? How do you know what is best for us? Like you see, the practice of circulating short term promissory notes (early commercial paper) between merchants, speculators and banks, was widespread from late medieval to maybe XIX century and what I think happened was an explosion in worldwide trade and a system that was impressively stable and efficient. It could have probably been improved upon, as everything could. I for one think that the system of gold money that Mr Newton single-handedly introduced for UK circa 1714 could be improved upon much more than the spontaneous merchant order that I describe.

And why should I care whether other people have sufficient information about our dealings? Is it 100% obvious that it would benefit them? Likewise I don’t think the knowledge of arcane details of processor production is really necessary for general population. Some people are in the business of making CPUs, some in the business of writing poetry, some in the business of managing money and other paper in banks. It would seem extremely natural for me.

You misunderstood me. I never stated I intend to throw any institution of society away. On the contrary, I have opposed here two things: one, bank-bashing, two, imposition by legal force of 100% reserve gold standard on all of the population. It would seem obvious to me that the solution that assumes less legal force is more libertarian overall. The system of prices would prevail, there is no question here. But I really, really, really can’t see how is the imposition of 100% reserve gold standard somehow neccesary or beneficial for this.

jerry July 7, 2010 at 7:38 am

“It would seem obvious to me that the solution that assumes less legal force is more libertarian overall.”

Ok, all I ask is that you just respect the fact that it is not at all obvious to me.

“why do you stipulate that our dealings (between me, Mr Rothschild, Mr Morgan and Mr Buffett) are somehow unsound?”

I did not stipulate that. I did not say the dealings themselves were unsound. I said the price system is unsound when people are bartering with many types of promissory notes. A single hard money allowing price comparisons throughout the economy (and not just locally) is much more efficient than barter and pseudo-barter situations. Do you agree with this?

“How do you know what is best for us?”

Well, I can’t speak for any individual of course but I can say some sensible things about a group as a whole: for example, I can say that (all other things equal) an economy that uses barter will produce less goods and services that one that uses a hard money system. Do you agree with this statement?

Groups as a whole can, if they choose, agree on conventions to make it better for everyone, like everyone agreeing to drive on the left/right – and sometimes it is clearly better to do this than to have a free for all (though making them illegal is NOT what I’m saying, I’m saying that conventions can arise on the free market). Do you agree with this?

Property rights vioations can become “laws”. For example, murder is illegal – you will be hunted down if you murder people, you have violated their property rights. Do you agree with this?

And what if you violate property rights of many people in a roundabout and odd way – and, further, do this by violating a convention which evolved on the free market and which we agree is therefore “better for all”. We could, in some circumstances, make this illegal to. Do you agree with this? IF not, why not?

“And why should I care whether other people have sufficient information about our dealings?”I’ll answer this after you get back to me.

panika2008 July 7, 2010 at 7:58 am

jerry, yes, I agree that an effective economic system must have money and a price system to function. Although I still don’t see any connection between the need for money and a price system with enforcing 100% reserve gold standard. The ad hoc system I described is tried and true, and guess what – it included a mix of currencies (silver, gold, fiat), a mix of fiduciary media (fractional reserve deposits, backed and unbacked promissory notes) and mixed centralized/ad hoc clearing. I admire the spontaneous efficiency of this ingenious system. On the other hand, I cannot stand the brutish primitivisation of economy by some gold bug “austrians” that insist that for all practical purposes ONLY gold and 100% backed notes are money and that fiat money and fractional reserve banking should be legally abolished as fraud.

Beefcake the Mighty July 7, 2010 at 8:09 am

“Beefcake, please note the explicitly stated “on a free market” part.”

Please note, the debate concerns what is legitimately “free” and what are in fact property rights violations. Why don’t you try to actually understand Rothbard’s arguments here instead of hurling insults (“religiosity,” “fanboys,” etc).

jerry July 7, 2010 at 8:12 am

So you agree having “money” and a “price system” of some kind is good for all, in some sense. Ok.

“Although I still don’t see any connection between the need for money and a price system with enforcing 100% reserve gold standard.”

You don’t see any connection between how the money is created and how much of it there is and the prices (which are based on how much money there is)? Well, I do.

As I already said

“If gold were money and everyone paid everything cash and there were no such thing as cheque books or debit cards, how much sense would it make to ask how much “fiduciary media” there should be then?”

Gold (or copper or slver or tobacco or a combination or whatever, I don’t care) as money serves the purpose fine. Can you answer the question above?

jerry July 7, 2010 at 8:20 am

“Although I still don’t see any connection between the need for money and a price system with enforcing 100% reserve gold standard.”

Can I ask, do you say there is NO connection, or that the connection is so small as to be insignificant?

panika2008 July 7, 2010 at 8:29 am

Beefcake, how come you consider my voluntary, private dealings with monsieurs Rothschild, Morgan and Buffett somehow a property violation? Whose property? My property? I don’t feel violated. As well as Mr Rothschild – after all, we voluntarily exchanged promissory notes just between ourselves. Mr Morgan acted as a banker (a clearinghouse and underwriter) – is there anything property violating in that? Or did Mr Buffett violate someone’s rights when he bought some of our promissory notes on the secondary market? What is here to understand and why should Mr Rothbard’s opinion have any bearing on labeling our private dealings free or unfree? Is it something like a stamp of kosherness from a Rabbi? Do we need Mr Rothbard’s blessing to *feel* we are not violated, and otherwise we *will* be violated/violating? I don’t get it.

panika2008 July 7, 2010 at 8:32 am

Jerry, technically there could be a connection as a legally enforced 100% reserve gold standard could in fact effect the universal pricing system. What I actually don’t understand is why this exact solution would be somehow necessary or optimal for obtaining the result.

Peter Surda July 7, 2010 at 9:17 am

Beefcake, how come you consider my voluntary, private dealings with monsieurs Rothschild, Morgan and Buffett somehow a property violation? Whose property?

Indeed, this is my main issue with the view that FRB should be outlawed. The most accurate description of FRB I can think of from economic point of view is that it is a negative externality. It is not entirely unlikely that Rothbard’s aversion against the concept of externalities is what caused his opinions about FRB (and, to a lesser extent, IP). Maybe that is also why Mises seems more reluctant to draw the same conclusions regarding FRB Rothbard did. Nobody’s perfect, Mises erred on anarchy, Rothbard may have erred on the externalities. In my opinion, both errors are caused by unfounded assumptions. I don’t think I know enough about the subject to claim the upper hand, but certainly it would make me happy if the proponents of illegalisation of FRB addressed the problem of distinguishing between property and externalities.

jerry July 7, 2010 at 9:53 am

Panika

“technically there could be a connection as a legally enforced 100% reserve gold standard could in fact effect the universal pricing system.”

I’m not sure what you mean by “technically” here. Can you expand upon this point please? I am asking if and how much the kind of money in use will effect the price system. How does frb effect the price system?

And another question. What would be your opinion of someone who, say, faked deeds for houses and sold the same house twice, passing one person the real deed and one person the fake deed? Is this fraud? If so, why?

panika2008 July 7, 2010 at 10:41 am

Jerry, a priori it is impossible to say which kind of a currency would be better for an economy: an expanding one, constant supply, contracting, or oscillating or whatever.

Of course selling fake deeds is fraud. Let me explain to you why. There are two cases. First, the seller owns the property and sells it to more than one buyer, second, the seller does not own the property at all. In the first case, one of the transactions must come first, and at the moment the first buyer is served, the original owner cannot sell the house to the second one, because he no longer owns it. In the second case, the seller is upfront selling rights to something that is not his – which is really a subcase of the first case.

I guess you wanted to somehow relate it to fractional reserve banking. Please note that the seller (emmitent) of the notes in this case does not sell an essentially unlimited rights to property of base money (fee simple absolute/freehold). It is selling/emitting conditional rights to perform certain actions, ie conditional rights to redeem something within the framework of either a stated contract (when you are opening an account) or the bank charter plus common law (when you accept and use its notes).

jerry July 7, 2010 at 12:09 pm

You’ve still not answered my question. You said:

“technically there could be a connection as a legally enforced 100% reserve gold standard could in fact effect the universal pricing system.”

Again, I’m not sure what you mean by “technically” here. Can you expand upon this point please? I am asking if and how much the kind of money in use will effect the price system. How does frb effect the price system? How does this differ from a price system established by a commodity money?

panika2008 July 8, 2010 at 3:05 am

Jerry, the term “technically” referred to the stipulation that a 100% reserve gold standard is related to the neccesity of having a price system. Let’s drop this discussion, it’s gone totally eristic.Yeah, it’s obvious a 100% reserve gold system would greatly stabilize the price system. But please note that a government that forcefully enforces a 100% reserve real estate monetary system after nationalizing all real estate of the country and posting it as collateral for bank paper would achieve the exact same effect. If you would judge it only on this ground – that it achieves price stability and monetary aggregate stability – it is a great system. What I oppose is the primitivism of judging a monetary system only on the ground of price and monetary aggregate stability.

jerry July 8, 2010 at 9:46 am

Panika – you keep guessing what i do and don’t think. Why? I’m asking you questions – surely you would welcome this, it being an opportunity to clarify your position? Where did I say I “judge it only on this ground – that it achieves price stability and monetary aggregate stability”? I don’t know what “monetary aggregate stability” means exactly, and I’m not saying that “price stability” is the only or main goal (this is something that should follow from a good choice ofmoney). Rather than guess my position, why not wait until I say things and answer that?

I’m asking YOU what effect the type of money has on prices – but you seem a bit reluctant to answer. Actually prices would not be stable over the long term with a gold standard (they would in fact very likely drop over time as they did in the US up until the second world war).

To make the question more concrete, do you agree that prices are “more accurate” with 100% gold standard than with a system the same in every way except with fractional reserves? And how do the prices differ in the latter case? What does “more accurate” even mean in your view? And do you agree that frb brings about a boom bust cycle?

What we started discussing here was this: should we make fractional reserve banking illegal? This is not a trivial question. But frb just doesn’t make any sense to me at all – I think even in a totally (supposedly) free banking scenario it violates property rights, except it does so in a roundabout and very hard to track way and that the only way you can justify it is by saying the you don’t need a price system. As you say you do want a price system, I don’t see how you can justify it.

Every bank in history who has practiced fractional reserves (that is, who has taken advantage of a useful convention that has evolved on the free market and printed up receipts for stuff it didn’t have and lent them out) didn’t do it for the good of the country or because of concerns for the “money aggregate” or some other vague notion. They did it to make more money than they would otherwise when keeping 100% reserves. Regardless of whether this action can be considered fraud or not, do you agree with this statement?

I’ve asked and you haven’t answered, Why or how does it make sense to ever – ever – create money (remembering that prices come from how much of this money there is) from thin air? If gold were money and everyone paid everything cash and there were no such thing as cheque books or debit cards, how much sense would it make to ask how much “fiduciary media” there should be then?

I must also point out that I do NOT “note” that “a government that forcefully enforces a 100% reserve real estate monetary system after nationalizing all real estate of the country and posting it as collateral for bank paper would achieve the exact same effect.”

panika2008 July 9, 2010 at 2:16 am

There are many legitimate reasons a free market would want to create fiduciary media, occasionally on a large scale. It would take too long to describe it here – and I am already really bored by the discussion – but it obviously has to do with smoothing out the jitters of money supply and interest rates, including some catastrophic events like bank robberies, temporary bank closures due to M&A or legal problems – so generally it’s all part of liquidity management, spontaneously coordinated on a free market. But it’s not even neccesary to provide these reasons. As long as an action does not hurt third parties and is an effect of explicit contract between consenting adults it should generally not be delegalized – it’s as simple as that. What bankers and their customers deal between themselves is noone other’s business. They are not building an atomic bomb or trading humans, for God’s sake! It’s just business.

jerry July 9, 2010 at 3:49 am

You’re bored by this? Fine, go about your business. Let the recprd show though that you were asked for but don’t have an argument.

“..obviously has to do with smoothing out the jitters of money supply and interest rates..”

You just keep reasserting the claim in different words – as Beefcake says, you can’t use the proposition under discussion as part of your argument. You’ve done this four times now in about 8 posts. Whether your statement above makes sense is what is under discussion.

You think things are “obvious” that I think are not only non-obvious but are not true at all. The difference is, i’m wiling to show my claims follow from things that we can agree on, you instead just want to say I’m talking “bullshit”. OK – good luck with that, you’ve got plenty of company.

panika2008 July 9, 2010 at 4:27 am

jerry, you asked for legit reasons a free market might develop fractional reserve banking (“Why or how does it make sense to ever – ever – create money (remembering that prices come from how much of this money there is) from thin air?”). I answered that question. What is your problem, man?

jerry July 9, 2010 at 4:42 am

The problem is that your answer

“..obviously has to do with smoothing out the jitters of money supply and interest rates..”

is an assertion (instead of an argument resting on agreed upon definitions). Anyone can assert things to be true, it is meaningless.

jerry July 9, 2010 at 4:52 am

And what’s more, it’s an assertion which I anticipated and so asked you a very specific question, namely

“Every bank in history who has practiced fractional reserves (that is, who has taken advantage of a useful convention that has evolved on the free market and printed up receipts for stuff it didn’t have and lent them out) didn’t do it for the good of the country or because of concerns for the “money aggregate” or some other vague notion. They did it to make more money than they would otherwise when keeping 100% reserves. Regardless of whether this action can be considered fraud or not, do you agree with this statement?”

which you ignored. Your answer to this would appear to be “No” – you think bankers create money from thin air to help the economy smooth “jitters in the money supply and interest rate”.

That’s what you think? I think that is an idiotic thing to say. And what’s more, you are contradicting yourself. YOu said eariler

“Why should I care what effects on the prices have my dealings with monsieurs Rothschild, Morgan and Buffet?”

I agree, you should care about yourself, as should the bankers. The system should be such that it remains stable despite and because of people behaving in such a manner. We seemed to agree on this earlier.

But now you are saying that bankers issuing fractional reserve money should do so to “smooth[ing] out the jitters of money supply and interest rates..”.

What gives? Which of these contradictory positions do you hold, should bankers be selfish or not? I can’t tell what you think.

panika2008 July 9, 2010 at 5:51 am

What is your problem with a bank wanting to maximize its revenues? Do you or anyone you know work in the economy with some other goal than personal profit? OK, I know that there are charities but then it’s impossible to build a functioning economy on just charities, right? So yeah, I agree with your statement about banks not giving a flying f*k about higher ends but I find it in no way amusing. Neither do I. Probably (correct me if I’m wrong) neither do you. I thought the question is so trivial that it does not need elaboration. I never said the bankers SHOULD do anything to smooth out the market jitters. What I meant – and maybe it was not exactly clear to you – is that the smoothing effect of fractional reserves (and many other tools of modern finance, for example CDSes which are already proven to have a stabilizing effect on rates and debt markets in general) would emerge naturally as a part of revenue-seeking behavior of financial markets.

jerry July 9, 2010 at 7:28 am

I know what you meant. You say

“What I meant – and maybe it was not exactly clear to you – is that the smoothing effect of fractional reserves (and many other tools of modern finance, for example CDSes which are already proven to have a stabilizing effect on rates and debt markets in general) would emerge naturally as a part of revenue-seeking behavior of financial markets.”

You are again asserting things – “the smoothing effect of fractional reserves”. Your entire argument rests on assertions. I don’t agree that frb has a smoothing effect, obviously – that is in fact what we are discussing, the effects of frb. So now for the fifth time you have asserted the point under discussion as part of your argument. Can we try deduce these assertions from basic definitions that we agree on? Asserting things is pointless.

What I’m saying is quite simple: everyone is allowed to pursue their own self-interest SO LONG AS it respects the property rights of the other members of the economy. And that if you agree we can throw away the price system then I say that bankers can practice fractional reserves as much as they like (and throwing out the price system will mean a greatly reduced efficiency overall for everyone, which is why money and price systems have always appeared on the free market).

However, as you say we would like to keep the price system AND frb, then I say this is a problem.

This is why I’ve asked you three times to tell me what effect bankers practicing fractional reserves will have on the price system, and I also asked if you agree frb brings about the boom bust cycle, so we can discuss if fractional reserves (via the price system distortion, interest rate distortion from the unbacked credit and the consequent boom-/bust cycle) violate property rights or not. I agree this is not a trivial matter, but you appear to be reluctant to answer these simple questions so we might debate this further.

Do you want to answer them now? BEcause your assertion that frb has a “smoothing effect” on the economy is just that, an assertion. I don’t agree. Can you explain what effect introducing frb will have on prices and on the interest rate, and then show how this means it will “smooth” the economy in a way that using, for example, 100% gold reserves will not please, so we might move forward?

jerry July 12, 2010 at 7:50 am

So, Panika joins the long long list of pontificators who can barely be stopped from asserting stuff in the comments but who are a little less eager to actually back up their reasoning in any detail.

Maybe it’s because they just “know” they’re right and so what’s the point? Or, maybe it’s because they can’t because their view makes no sense and is actually largely wishful thinking.

panika2008 July 7, 2010 at 3:59 am

“if they made it clear, to each depositer, that they had no obligation to return that persons money” No kidding! Why don’t you read the paper you signed when opening your bank account? Look for clauses like “withdrawals of large sums of money” or “protection of deposits under the FDIC system”. It’s clearly stated there. If you haven’t read it carefully – well, it’s your problem you take part in something you don’t want to understand.

tralphkays July 7, 2010 at 10:53 am

Mister Panika you are an idiot, the clauses you reference only give the bank a certain amount of time to come up with the money, ultimately they are legally obligated to return all of their depositers money. The FDIC insures deposits up to $100,000 but that does not eliminate the legal obligation on a banks part to return all of a depositers money. The entire point of this thread is that under fractional reserve banking this legal obligation is mathematically impossible, even with those clauses in place.

panika2008 July 7, 2010 at 11:47 am

Why do you think I’m an idiot? Is it because I read the papers I sign and actually try to understand what is really going on?

Why is the obligation impossible? Under current system it is trivially possible to service all on-demand withdrawals with reasonable delay (several weeks probably) by printing all the needed money by the Fed on behalf of banks, Fed gets as collateral long-term deposits of banks – voilla. I guess you are aware that the demand deposits are just a tiny fraction of money supply, and such an event would not even really dramatically change the value of dollar (ie it would NOT be hyperinflation; just deposits transfered to phys cash).

tralphkays July 7, 2010 at 12:05 pm

Mister Panika
No, it is because you assume others don’t read those papers, and because those papers don’t say what you claim they do. Also, the Fed doesn’t print money, the treasury does. The fact that an outside agency has to step in and give money to the bank simply proves my point, THE BANK doesn’t have the money to meet its legal obligations. Also, the whole point of fractional reserve banking means exactly that the withdrawal of a “tiny amount” of actual cash brings the whole house of cards down. Of course this would not be hyperinflation, that is just stupid, it would be the opposite, hyperdeflation.

panika2008 July 8, 2010 at 2:46 am

Mr tralphkays, I don’t know about you, but all the bank account contracts I have ever signed specified terms for withdrawal of money and described “special circumstances” when there could be a delay (and the bank waits for phys money to materialize from a central bank or for it to arrive from another banks which supply extra liquidity). I find it hard to believe that banks in any place you live don’t state these terms. Please specify what bank and what branch is doing this to you, it’s curious.

The bank does not need to have any money to meet any of its obligations. There is NO obligation for the bank to redeem all deposits on demand – and it is explicitly stated in many places. You might as well say that the manufacturer of Fords doesn’t have enough diamonds to meet its obligation of putting a diamond lining on every Mondeo.

tralphkays July 8, 2010 at 11:18 am

Mister Panika
You are claiming that being able to delay returning money a few weeks is the same as never returning it. Like I said, an idiot.

panika2008 July 9, 2010 at 2:11 am

tralphkays, I never claimed that. Practice reading comprehension.

tralphkays July 9, 2010 at 11:28 am

Mister Panika
This is your post: [“if they made it clear, to each depositer, that they had no obligation to return that persons money” No kidding! Why don’t you read the paper you signed when opening your bank account? Look for clauses like “withdrawals of large sums of money” or “protection of deposits under the FDIC system”. It’s clearly stated there. If you haven’t read it carefully – well, it’s your problem you take part in something you don’t want to understand.]
Then another post:[Mr tralphkays, I don’t know about you, but all the bank account contracts I have ever signed specified terms for withdrawal of money and described “special circumstances” when there could be a delay (and the bank waits for phys money to materialize from a central bank or for it to arrive from another banks which supply extra liquidity). I find it hard to believe that banks in any place you live don’t state these terms. Please specify what bank and what branch is doing this to you, it’s curious.]
Clearly you have equated a delay in returning money with never returning money. Not only an idiot, but a liar as well.

james b. longacre July 8, 2010 at 2:57 am

The FDIC insures deposits up to $100,000 but that does not eliminate the legal obligation on a banks part to return all of a depositers money. ……..

are you saying $100,000 insured by the FDIC is the ‘depositors money’???

james b. longacre July 6, 2010 at 8:43 pm

i think a natural aversion to one-persons-promise to repay money trying to circulate as many-different-persons-money would limit the fractional reserve issues in the scenario that you conjour.

so the outlaw question would not really be an outlaw question under a free marketopia.

but more contract fulfillment and it-aint-my-promise issues.

Peter July 8, 2010 at 3:28 am

If all parties who deposited their money in said banks were aware of the situation …

You might ask: if a company started up, and made it well known to everyone that it would murder the occasional customer and make shoes and hand-bags out of their skins, would that be OK? I mean, people could simply choose not to shop there, and they’d go out of business. But if people want to shop there, is it OK for them to murder people?

panika2008 July 8, 2010 at 3:44 am

The analogy is extremely failed. What you describe is passing costs by the firm on to the unconsenting and probably unconscious third parties. What fractional-reserve bank actually is might be somewhat compared to a casino. Because the casino always wins and statistically some customers must lose does not in any way mean that the game is somehow unsound, as long as everyone voluntarily consents.

Peter July 8, 2010 at 9:33 pm

On the contrary, what I described is a company that only murders its own customers, who are fully aware of where the human-skin shoes and hand-bags come from. With a fractional-reserve bank, on the other hand, there will always be “unconsenting and probably unconscious third parties” affected by its behavior. If anything, the murder company is less evil than the FRB!

panika2008 July 9, 2010 at 2:11 am

So I guess you should wholeheartedly support delegalization of all gambling. How about you clearly state that you are an extreme statist, fascist or a communist?

billwald July 6, 2010 at 6:32 pm

The big difference between gold and money is that there is only one kind (brand) of gold in the world, gold is gold is gold. There are many competing brands of money in the world. If there was only one major brand of money . . . .

FatBeard July 6, 2010 at 6:54 pm

Fractional reserve lending is absurd and obsolete,IMO. In a truly free market, corporations would be forced to issue common stock to buy capital and labor. Common stock is a ideal money form for many reasons.

Deefburger July 6, 2010 at 7:26 pm

@FatBeard
So is your time. It’s the most valuable thing you will ever have. What is an hour of your time worth in gold? I’m at about .1ozAU/hr(Me) and about 5.5ozAG/hr(Me).

My lawyer is about .3ozAU/hr(him)

There is no comparison in value between my time and a Fed note of any denomination. In that comparison, my time is priceless.

FatBeard July 6, 2010 at 7:38 pm

That would depend on the job.

Deefburger July 6, 2010 at 8:02 pm

@Fatbeard

No sir, it depends on you and what you can do and what you know.
What are you worth? What value do you place on yourself? That is what you compare when you measure the value of anything else in your life. That is the source of wealth, your wealth.

Now, ask yourself, “What did the Fed and the Treasury do for you that is worth all of that time it will take to pay the national debt, at least your per capita portion of it?”

What did the goldsmiths do for the value they spent in claims before the war?

What value is given to you for the king’s puss on a false coin?

Same answer, different times, different circumstances.

0

Deefburger July 6, 2010 at 7:49 pm

When you look at what the goldsmiths did hundreds of years ago, you see the problem of expediency. If the king or potentate pissed off his neighbour king, and that king started marching troops in his direction, then everybody in town would descend on the goldsmith with their claims and find themselves…poor. The goldsmith, if he didn’t escape early would likely have been hung.

Today, what we see is the same problem, only it’s been compounded by the lack of a standard of measure. In other words, even the “goldsmith’s” can’t tell what something is worth, so houses and everything else get overpriced. Eventually the actual real value of the things in question can not be determined by anybody with any certainty, including the bank.

The banker’s got caught by their own gaff! The loan paper they created for each house was written for an amount that was greater than the real value, and so when the prices reached their peak even the banks were left without any knowledge of value.This is precisely why a standard unit of value is absolutely necessary for a properly functioning free-market economy. This why fractional reserve is a deceit and a fraud and not worth trying to maintain.

It’s not how big the numbers are, it’s what they mean that counts. If you don’t know what they mean, if you don’t know what something is worth, you can’t use it as money and not expect failure.

FatBeard July 6, 2010 at 7:55 pm

I believe in free market floating exchange rates. We doan need no stinking “standard unit of value”. Let government issue money that is legal tender for government debts only and let the free market create private monies for the private sector.

Deefburger July 6, 2010 at 8:10 pm

@FatBeard
Read your history. King’s pusses on coins is no basis of value. It’s been done over and over again with the same disastrous results, regular Joes getting screwed in the end.

Money is made of three things: Trust, Knowledge, and Value. Government issued paper has none of these things, except value, so long as they have guns to point at the taxpayers to get it. And even then, as long as the numbers of claim cheques keep increasing, the real value they might have is decreasing.

Why not just use poker chips? They are the very same thing.

How many units of paper are you worth? How many pictures of president’s heads are you worth? Do you even know?

Look at Zimbabwe and tell me how many trillions of pieces of worthlessness it would take to satisfy you for one hour or more importantly, one meal?

FatBeard July 6, 2010 at 8:13 pm

Money is made of three things: Trust, Knowledge, and Value. deefburger

Government money is backed by taxing authority and government services. Common stock, which is an ideal private money form, is backed by the assets of the corporation.

Deefburger July 6, 2010 at 8:20 pm

Yes, and as long as those assets are liquid, and the company has profits consistently over time, the stock has value.

But what is it worth? How do you measure that without a standard? What do you convert it to when you sell it? How do you use it in a frangible form? You need a clearing house and a standard unit of value.

FatBeard July 6, 2010 at 8:23 pm

You need a clearing house and a standard unit of value. deefburger

In a free market, any number of clearing houses and “standard units of value” could arise.

james b. longacre July 6, 2010 at 8:54 pm

with a govt however that taxes and spends….is a fiat currency like gold and silver that can be freely aquired via mining and minting better in some way than the current managed currency system with central bank and bank charters etc???

FatBeard July 6, 2010 at 9:01 pm

Let’s just have a free market and you would be free to use whatever for money; gold, silver, common stock, whatever. As for the government, let its money by legal tender for government debts only, not private ones (“Render to Caesar” only what is Caesar’s).

Deefburger July 6, 2010 at 10:52 pm

Touche!

panika2008 July 7, 2010 at 4:03 am

This is the situation that you almost have now. The market is not forced to transact in government’s money – the bans have been lifted long ago. You can deposit, lend and securitize gold, silver and their derivatives. Yes, there are still legal tender laws – the one step from generally free banking.

Peter Surda July 7, 2010 at 4:44 am

Well, there is a minor problem. If you combine the existence of legal tender laws and the fact that it is the central bank that defines the official exchange rates, unless they screw up heavily on the exchange rates, or you have hyperinflation, this creates a comparative advantage for legal tender and crowds out other currencies. If your business gains additional income by using a different currency, that increases the income tax you need to pay (denominated in legal tender). It’s kind of like Gresham’s law.

panika2008 July 7, 2010 at 5:15 am

The CB does not define the exchange rates, it follows the market. Even FX interventions are quite benign these days.

I don’t understand the part about earning more by transacting in different currency. By itself, the transactional currency has very little influence on business revenues, as long as the devaluation is reasonably benign (does not approach hyperinflation or out-of-control inflation), as has been the case for most first world currencies in the last 20 or 30 years.

Peter Surda July 7, 2010 at 6:46 am

Maybe I did not use the proper terms, I’m not 100% sure about the English terminology. If you receive a payment in a currency different than legal tender, the CB prescribes the exchange rate you have to use in your bookkeeping to record such a transaction, and is subsequently used to calculate the tax due. If there is a change in the rates between the date of invoice issuance and payment, the difference needs to be recorded in a separate account as an exchange loss/profit. This does not mean that the the market exchange rate is the same as the one set by CB, in fact, it is this difference which is the core of my argument. Because CB can force you to use a rate different from the market rate to calculate your taxes, this has a crowding out effect. Just like Gresham’s law when in a bimetallic system the law prescribes a ratio between the two metals that differs from the market rate.

So, you can only take a definite advantage of a another currency with lower inflation rate if you avoid all transactions in the legal tender (i.e. keep your cash & bank accounts in a different currency). This creates a chicken & egg problem, unless a substantial amount of people that you do business with do not use legal tender, the advantage you gain by switching some of your transactions out of legal tender is very limited, depending on how CB sets the rate even fully counteracted. For example, I was able to avoid this problem some time ago when I lived in one country and had business registered in a different country (which used a different legal tender). So I only had to perform the tax transactions in legal tender, but used a different currency (different legal tender) for all actual business transactions (income+expenditure).

This is more related to accounting and tax laws rather than to economics, surely there is literature that explains this, alternatively consult a tax advisor.

FatBeard July 7, 2010 at 7:15 am

Not just legal tender laws but capital gains taxes on gold, silver, common stock and other money alternatives, I suppose.

panika2008 July 7, 2010 at 7:23 am

I’m not sure about US, but the entirety of EU is exempt from any taxes on gold that would be in excess of what is collected on “normal” monetary revenues. Capital gains taxes are collected on monetary gains (be it interest or gains from appreciation of foreign money) as well.

Peter Surda July 7, 2010 at 7:27 am

@FatBeard: Yes, that too, thanks for pointing it out.

@panika2008: That is not entirely correct. If you use gold as a store of value (as a substitute for a bank account, for example), then you might be able to avoid extra taxes and even VAT, but if you use it as a currency (income+expenditure), the tax office would probably still complain.

panika2008 July 7, 2010 at 7:48 am

I am pretty sure that for transactional purposes gold is exempt as well. There is a specific EU directive addressing this – http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31998L0080:en:HTML. As for the other taxes, most countries in EU I know of impose no other tax on gold transactions, making gold a perfect substitute for official money.

Peter Surda July 7, 2010 at 8:08 am

The directive only mentions VAT. That is however only one type of tax, please consult my other post regarding the income tax. Any business transaction you do, you need to record in your bookkeeping using the legal tender as a unit of account. As long as you are using gold for exchanges rather than investment, the best you can hope to achieve (absent prescribed exchange rates) is to avoid the inflation that occurs between the date of invoice payment and the date you pay your taxes.

panika2008 July 7, 2010 at 8:57 am

As I said – in the countries I know in the EU there is no other tax on transactions in gold. Of course there is nothing other you can achieve by transacting in gold than avoiding inflation, sure you cannot avoid normal taxes that way. But that’s what people here have on their minds, right? That the anti-inflationary, good-reserve, stable-value status of gold would somehow make it desirable in transactions. Well, it is quite possible today, at least in the places in EU I know.

Peter Surda July 7, 2010 at 9:31 am

If you trade goods against gold, you need to record both transactions in your bookkeeping, and both need to be denominated in the units specified by the legal tender. If there is a profit, it creates an income tax liability, which might negate the anti-inflationary effect you were hoping to achieve. At the end of the accounting year, you need to pay the tax due not in gold, but in the legal tender, which again limits the advantages you were hoping to achieve.

panika2008 July 7, 2010 at 9:42 am

No, come on, it was not me that was trying to achieve anything. I just wanted to demonstrate that there are much fewer barriers to trading in gold than thought. It’s obvious that the tax is calculated on profits after they are expressed in the local currency, but this is not a disadvantage of transacting in gold, it’s a disadvantage of holding gold long-term. If you transact in gold and use the proceeds to immediately pay back your debts (as is normally done in firms, which are commonly quite leveraged) in gold and use the profit to buy eg a car or a house, the taxes are exactly the same as if you have transacted in local money. What you describe is in fact an anti-thesaurisation policy; similiar policy exists in many countries wrt other, more traditional forms of thesaurisation: earnings on deposits, stock appreciation etc. At least you don’t have to pay the regular tax you have to pay when holding real estate.

Peter Surda July 7, 2010 at 9:56 am

You are quite right, you can get most of a different medium of exchange (e.g. gold) if you use it for as many transactions as you can. If you use it in a small amount of transactions only, you might not get anything or even a negative result (even if we ignore the tax issues, there are still transaction costs). Which is precisely the chicken and egg problem that I am trying to point out.

Deefburger July 7, 2010 at 12:03 am

@james b. longacre

What fiat means is “by decree”. That is what it is now. A monetary metal standard is simply a unit weight of metal of a particular fineness. Fineness is the percent of the unit metal in the alloy. For instance, the silver dollar is defined as “371 4/16 grain (24.1 g) pure or 416 grain (27.0 g) standard silver” http://en.wikipedia.org/wiki/Coinage_Act_of_1792

The “full” weight is the monetary metal only even if it is alloyed.

The most common alloy metals are copper and nickel, mostly nickel because it adds hardness and durability in coin.

It is interesting to note that this act is still Law and has never been repealed or amended. It defines the legal Dollar. This is very different from Federal Reserve Notes, that are legally promissory notes redeemable (supposedly) in Dollars as defined in the Coinage Act.

Another interesting note is that promissory notes are not valid tender for the payment of taxes! Only Dollars as defined in the Coinage Act.

Ask your senator or house rep to define “dollar” legally. The Congressional records office has the answer in a report they produced for Senator John Ensign of Nevada in 2007 according to this:

http://educate-yourself.org/cn/letterdefiningmoney28dec07.shtml
(I haven’t written my “reps” yet but I intend to very shortly)

In any case, the Coinage act is at least clear about the measurement of silver and the measurement of gold in a ratio of 15:1. I myself would dispense with this peg and concentrate the standard on a single ounce, as it is in spot pricing on the open market, and fixed fineness as defined within the Coinage Act for each coin, and dispense with the name dollar and just use Silver Coin, and Gold Coin for ounce coinage and let the market determine their relative value. The alloys defined in the act are good ratios of nickel to silver and nickel to gold for coins. Bullion is simply the pure metal and needs no nomenclature to convey value besides the fineness and weight stamped into it.

As long as I can hold a coin and know what it is, it makes no difference what it is called or who’s face is on it. If I can test it, and it is what it is, then that is what counts.

james b. longacre July 8, 2010 at 3:51 am

What fiat means is “by decree”. That is what it is now. A monetary metal standard is simply a unit weight of metal of a particular fineness….

i have seen that definition of fiat.

i guess a govt can decree (fiat-ee) gold and silver too, right??

panika2008 July 8, 2010 at 3:55 am

No it’s not. Monetary metal standard is much more than defining the unit of money as a certain weight of metal of particular fineness. If it were just that, you might say that we have a monetary metal standard today – because standardized weight/fineness coins are widely circulated.

james b. longacre July 9, 2010 at 3:33 am

well…when the constituion states “no state shall make anything but gold and silver coin a tender in debts” is that not creating a legal tender??? is that different than a fiat currency???

did the constitution not create a fiat currency by stating that consgres shall have the power to coin money??? and regulate foreign coin??

if a king or monarch decreed gold and silver as money on his realm…that would be fiat currency, right???

panika2008 July 9, 2010 at 4:30 am

Yes, mr longacre, you are quite right. BTW I think you could try to make your comments more readable by not ending most sentences with three question marks and using capitals where appropriate.

Nick July 7, 2010 at 2:36 am

With a large personal gold position. Bring it on!

Enforcing a monopoly of money, with my prefered choice of that money, means I’m going to clean up.

Don’t you just love monopolies when you own the resources

panika2008 July 7, 2010 at 4:04 am

Incidentally, one of the most ardent proponents of the gold standard back in the days when it was nationally debated in the USA was John P. Morgan himself.

FatBeard July 7, 2010 at 10:34 am

While you guys debate gold vs fiat with or without FRL, common stock as money bypasses many of the problems with conventional money:

Common stock as money:
1) requires no borrowing or lending; capital and labor are merely bought with new stock issuance.
2) Deflation is not a problem because the money (common stock) does not go out of existence as is the case with FRL.
3) Any price inflation is born by the corporation’s owners since all money recipients are by definition part owners of the corporation.
4) The amount of new money to be issued is under the authority of the current money holders since they can vote their money ( common stock).
5) Common stock as money shares wealth as it purchases it thus precluding the social problems associated with wealth disparity (bad) while allowing capital concentration (good).

panika2008 July 7, 2010 at 10:50 am

I don’t think that borrowing (debt) could ever be eliminated from any system, unless you accept that people (as in concrete physical bodies) are to be allowed to sell fairly general rights to parts of their live for the purposes of all future income. What is crucial that stocks cannot be repudiated by the seller unless he is liquidating, because they are parts of ownership and ownership cannot be eliminated unless the object of ownership is eliminated. On the other hand, debt binds a lot less strongly – it is repudiable unilaterally by the debtor, with detailed procedures designed for the settlement. In a society where most of acting agents are physical entities (as opposed to firms), which neccesarily is the case, such a system would be unworkable, because there would be no market for physical persons’ own shares – because they are uncollateralized and cannot be effectively enforced (unless you want us to return to slavery).

FatBeard July 7, 2010 at 11:02 am

Individuals would not normally issue shares. Instead they would receive shares for their labor from larger corporations and re-spend them.

As to whether the idea is workable or not, let’s let the free market decide that, eh? I would bet that if corporations had not the luxury of borrowing from the government backed counterfeiting cartel (the banks) then they would be forced to issue new stock to purchase capital and labor.

panika2008 July 8, 2010 at 2:55 am

Well, so you do expect that everyone just waits and accumulates these shares until he has enough of them to buy a condo or a house. And you expect that on a free market no mortgage debt market develops. Strange.

And why do you think the corporations would need to always issue stock? How about private debt markets? Like you know, commercial paper or corp bonds? What is wrong with that?

FatBeard July 8, 2010 at 4:04 am

Well, so you do expect that everyone just waits and accumulates these shares until he has enough of them to buy a condo or a house. panika2008

Borrowing and lending would still exist of course but they would not be a source of money creation. Without a government backed counterfeiting cartel (the current banking system), interest rates would rise, encouraging saving, and housing prices would stabilize at an affordable level.

And you expect that on a free market no mortgage debt market develops. Strange.

I never said that. However, the need for mortgage debt would greatly diminish.

And why do you think the corporations would need to always issue stock?

Under liberty, anyone could issue money but also anyone can refuse it so ultimately it must be backed by something. Without private legal tender laws, the free market would reject unbacked monies. A probable ability to redeem (fractional reserves) pales in comparison to genuine ownership (equity).

How about private debt markets? Like you know, commercial paper or corp bonds? What is wrong with that?

Sure, why not? A market in government money (which would only be legal tender for government debts) might develop. I would hope that fractional reserves would be forbidden in government money but perhaps the free market could keep it in check. In any case, there would be no government backed deposit insurance and insolvency laws would be ruthlessly enforced.

james b. longacre July 8, 2010 at 2:47 am

I don’t think that borrowing (debt) could ever be eliminated from any system, unless you accept that people (as in concrete physical bodies) are to be allowed to sell fairly general rights to parts of their live for the purposes of all future income.

borrowing shouldnt be eliminated, right???

panika2008 July 8, 2010 at 2:56 am

I don’t think it should. Do you?

George July 7, 2010 at 4:47 pm

I’ll put at the bottom since this threaded format is hard to follow:

* No need to dictate what format of money to use. The whole point is to let the market decide.
* Bitcoin is a reasonable digital alternative.
** The currency is not “backed” by anything, just as gold is not backed by anything. They are their own reserve, due to their unique properties of scarcity, fungibility, and durability. If you want liquidity, exchanges exist for that.
** It is not expanded by a constant amount in time. Rather, it decreases exponentially. After some years, no new Bitcoins will be generated.
** It is anonymous and distributed.
* The issue isn’t just legal tender, it is taxation. You can already settle debts in other currencies if you want, just not government debts.

FatBeard July 7, 2010 at 5:11 pm

You can already settle debts in other currencies if you want, just not government debts. George

I don’t think that is the issue. If someone offers me an FRN in exchange for a private debt then I am compelled to accept it,no? Which raises the question of exchange rates.

james b. longacre July 8, 2010 at 10:07 pm

You can already settle debts in other currencies if you want, just not government debts.

hasnt that always been the case???

unless it went to a govt court and there was no other currency was ‘legal tender’ then required for settlement?

David J July 9, 2010 at 2:44 pm

There were no bank failures in Canada or Hong Kong during the period of 1934 -1965, and their banking systems were less regulated than the US’s. Where’s the “instability” that’s supposed to be inherent in FRB? http://www.cato.org/pubs/journal/cj16n1-3.html#FOOTNOTE_10

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