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Source link: http://archive.mises.org/13511/the-form-of-saving-matters/

The Form of Saving Matters

August 9, 2010 by

By focusing on broader aggregates such as “supply and demand for money,” the free bankers are overlooking important issues — such as who gets the extra funding from fractional-reserve banking. FULL ARTICLE by Robert P. Murphy


pravin August 9, 2010 at 8:29 am

so,only by focussing on the aggregates like ‘price level’ and ignoring the relative prices can malinvestment be classified as normal investment. i get that
i wonder if banning fractional reserves has any moral/property rights basis. why is applying queueing optimization or fractionalising electricity (by utilities) ok while not ok for banks?

Paul S. August 9, 2010 at 2:53 pm

John Adams declared, “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and is therefore a cheat upon somebody.”

Electricity or energy cannot be fractionalized. However, I could sell more electricity coupons than I have the capacity to produce and then suffer the consequences. John Law comes to mind.

Fractional reserve banking of printed pieces of paper representing nothing tangible is just fraud compounded.

Russell August 9, 2010 at 9:30 am

Here is how I look at fractional reserve banking which is probably just a different way of saying the same thing as was said in the article.

When the consumer (all consumers) deposits $100 in a checking account, regardless of what the fine print says on the banking contract, the consumer believes that there is $100 cash immediately available to the consumer to spend. The FDIC merely reinforces this belief.

When the consumer makes a consumption decision to buy or not to buy something such as $10 wallet or $10 shirt or whatever, in each individual’s own personal calculus, the consumer is thinking, if I buy this, I still have $90 immediately available to me for other needs or emergencies.

In reality, with 10% reserve banking, there is only $10 immediately available to the consumer. If the consumer knew that in reality, there was only $10 available, then the consumer would likely make very different purchasing decisions and be far less likely to spend the $10.

So fractional reserve banking distorts information to consumers about immediately available money and causes consumers to spend more than they would otherwise be willing to spend under the actual economic circumstances. This throws supply and demand for goods an services out of equilibrium in that moment in time for the existing pot of goods and services available. In the long run, it causes a lot of wasted investment exacerbating the size of booms and busts.

Silas Barta August 9, 2010 at 10:52 am

I’m having a similar argument right now with a Scott Sumner acolyte who thinks that monetary policy can somehow neutrally satisfy this demand for money and restore equilibrium without distorting signals in relative prices.

Right now he seems to recognize that he made an erroneous assumption somewhere, in that he says he has to give the issue more thought, and hasn’t replied in almost a week. (Keep in mind he wants to settle the disagreement too.)

bob August 9, 2010 at 11:18 am

In the case of savings occurring due to an increase in cash “hoarding” in place of consumer spending, what should happen to the interest rate? It would seem it should remain neutral, as cash is a present good.

And in my mind that seems to be what happens. The bank’s supply of loanable funds decreases, as the “hoarded” cash never makes its way into the incomes of consumer goods producers, who would use part of that money to loan to the bank and other parts of it to purchase inputs to produce its goods. The price level would adjust downwards for production inputs, at about the same amount as the bank lost loanable funds. Thus, those producers relying on credit to purchase productive inputs would require smaller loans to buy the same amount of inputs, while the banks had less funds to loan out. Thus, supply and demand have both increased in terms of the monetary unit, balancing each other out with no effect on the interest rate.

Does the above logic hold water?

Richard August 9, 2010 at 12:34 pm


Your logic, as I understand it, does hold water. Rothbard explicitly argued in “Amerca’s Great Depression” that the demand for money does not necessarily impact the interest rate (see section on “The Liquidity Trap” on pg 39-40 of the .pdf version: http://mises.org/rothbard/agd.pdf and excerpt below):

“…Keynesians maintain that if the “speculative” demand for cash rises in a depression, this will raise the rate of interest. But this is not at all necessary. Increased hoarding can either come from funds formerly consumed, from funds formerly invested, or from a mixture of both that leaves the old consumption–investment proportion unchanged. Unless time preferences change, the last alternative will be the one adopted. Thus, the rate of interest depends solely on time preference, and not at all on “liquidity preference.” “

bob August 10, 2010 at 9:27 am

Thanks, Richard. That was actually my first “Austrian” book – there are lots of things in there that would probably stick out to me more now since I’m much more familiar with all the different aspects of the Austrian School.

It would seem to require it comes from funds formerly consumed but not invested, because investments are necessarily future goods, while cash money is a present good. As the article mentions, a preference to hold cash does not imply the same time preference as holding bonds.

Eric August 9, 2010 at 12:06 pm

I have a few minor quibbles with the article.

1. The author says that holding cash balances in either savings accounts or in their wallets is the same things.

Not true. In a savings account (assume no Fractional reserves for the moment) the bank re-lends the savings, and is merely an intermediate between the borrower and the lender. One must “hoard” their cash balances to cause the money supply to shrink and thus lower prices.

2. The author’s version of free banking assumes we have only one kind of cash; paper money as we know it, probably with legal tender laws.

In real free banking, each bank creates its own banknotes. This allows the public to discount notes from certain banks – say those that are known to have lower reserves. This would bring into equilibrium the total amount of money since if a bank was holding, say, only 50% reserves, then this means they have doubled their banknotes, but only have real resources of half the face value of each banknote. If these notes were then discounted 50% we would be back to square one.

Of course there are problems of time delays and incomplete information. That part, I agree, is nearing the fraud side. But if the banks posted their reserve amounts, and admitted they might not be able to make all their payments and the depositor takes the risk, then it is not fraud. It becomes more like an investment instead of a money warehouse.

3. The author did not state what cash was. If it is receipts for some quantity of gold, then gold is the true money. I think this should be included in the discussion since Rothbard states that money does not come into existence except as a commodity. It’s difficult to analyze the situation when you begin with fiat money. I realize the author stated he didn’t want to go into all the details in a small article, however.

Russell August 9, 2010 at 12:57 pm


I don’t get number 1. In 100% reserve banking, and assuming the deposit is gold or notes backed by 100% gold, the bank cannot loan out demand deposits unless the depositor agrees to take the fractional reserve risk. The bank has to bargain to have the deposits remain in the bank for the period of time they are going to lend them out.

Number 2

I agree that if banks posted their reserve amounts, then the market could take care fo it.

Eric August 9, 2010 at 2:30 pm

I agree. Maybe we are just using different definitions. What you are describing is what I would call a money warehouse.

The usual notion of a savings account (as I think of it) is one in which the depositor’s deposits are lent out, usually with a stipulation that the depositor cannot withdraw those funds immediately – rather must give some sort of notice, or at the very least, pay some sort of early withdraw fee. Perhaps a CD is more what I’m thinking about.

A savings account that allows immediate withdraws without notice is probably better described as a demand account or a checking account. Today, my checking and savings accounts are essentially one and the same, except I can’t directly write checks on the savings account. But I can transfer between these two in minutes, without notice so they act almost identically.

I was thinking of my old savings and loan account which had a 90 day notice on withdraw as part of the contract.

Russell August 10, 2010 at 5:14 am

Ok, I was thinking money warehouse but with check writing benefits..

J. Murray August 9, 2010 at 2:38 pm

Savings accounts are accounts where the bank pays you, the depositor, a set interest rate for keeping money in the account. This is the pool of resources that banks use to satisfy short-term loans (in addition to Federal Reserve borrowings and inflated reserves).

Old Mexican August 9, 2010 at 12:18 pm

The disagreement arises in the case when the commercial banks increase the supply of loanable funds in response to a sudden increase in demand to hold money. In this case, people like Steve Horwitz and Bill Woolsey believe that the banks do not set in motion a boom–bust cycle. On the contrary, they think that the banks merely offset painful readjustments that would otherwise have to take place to restore equilibrium between the supply and demand for actual money balances.

Insane. It’s like a grocer conjuring up made-up tomatoes [tomato notes] when the demand for tomatoes suddenly increases – instead of merely raising prices.

What troubles me the most is that otherwise very competent economists would treat money in a totally different manner than other economic goods.

Eric August 9, 2010 at 12:50 pm

But they ARE different. When the quantity of money (in total) increases or decreases, NO social benefit results. But when goods increase or decrease, social benefit increases or decreases respectively.

Unlike other goods, money does not get used up. It is like a catalyst that allows two, otherwise dissimilar goods, to be exchanged. The goods changes hands, but the money is not used up. Two purposes are served by money (as a medium of exchange) one is the allow exchanges of partial quantities, another is to allow time between exchanges. The following example demonstrates the time difference.

An example:

A has a 5 hats. B has 10 loaves of bread. They agree to exchange 1 hat for 2 loaves. This is direct exchange.

Now, C has 20 gold pieces. A exchanges 1 hat for 4 gold pieces with C. B then exchanges 2 loaves of bread for 4 gold pieces with C.

Tomorrow, C has 2 loaves, 1 hat, and 12 gold pieces. A and B both have 4 gold pieces and their other goods. They exchange their 4 gold pieces with C (A wants the 2 loaves, B wants the 1 hat).

After these 4 exchanges (which take place on different days) it’s the same as if the original direct exchange took place. And C is back to his 20 pieces of gold. The gold is not used up in the exchanges.

NOW, here’s the thing. One could just as easily performed this transaction with 10 times as much gold. Just add a 0 to the end of each transaction in gold. Not just 4 pieces of gold, but 40 pieces.

There would be NO difference here other than there being more gold. (Assume we only use gold as money, not for other useful things, like jewelery). This situation is VERY DIFFERENT from what we would have if we multiplied the loaves of bread and hats by 10.

In one case there would be 10 fold as much wealth (i.e. goods like hats and bread). We would be much better off. But having 10 times as much money (again, to be used ONLY as money) does not make us any better off. It simply adjusts the relative price of gold vs. other goods.

This is the difference between money and other goods. They are NOT the same. This is why Rothbard states one amount of money will serve the same purpose as any other kind of money once you establish a money.

This is my interpretation of Rothbard on the supply of money. Hope I didn’t mess up the numbers.

Eric August 9, 2010 at 12:58 pm

oops, meant to say, “… same purpose as any other AMOUNT of money…”

Don Lloyd August 9, 2010 at 2:34 pm


Good note. It triggered the following :

NFL football has a statistic called ‘time of possession’ which accumulates the time that each team controls the football on offense. There is only one ball allowed in play at one time, and so at the end of a regulation 60 minute game the sum of the ‘time of possession’ numbers for the two teams is effectively 60 minutes. While it is a good thing to win the ‘time of possession’ battle, it is only a means to an end and actually winning the game requires more points (touchdowns, extra points, field goals, safeties) than the opponent.

Because money is not consumed in exchanges, it is the ‘time of possession’ of money that finally gives money its scarcity and economic value. If I have a dollar with a serial number of XYZ, no one else can have it at the same time. If I exchange it to my twin brother for a candy bar, nothing of significance has happened from the overall point of view of the economy.

The primary demand for possessing money is for use as a medium of exchange for immediate, unpredictable purchases that come along and can’t be accomplished with anything except for actual money. Holding money in excess of what you expect to need for those purchases is a sacrifice of the interest or return that you could otherwise receive from some investment.

If you possess $1million and I possess $100, I might still be wealthier than you if I own assets whose exchange values exceeds that of your assets by about $1million or more.

For most purchases, you don’t need to possess actual money for an extended time period, but only to be able convert an asset to money in time to satisfy the vendor’s requirement for payment.
But how long you actually do possess the money (an hour or a month, for example), may strongly affect the scarcity of money (actually the ‘time of possession’ of money).

Regards, Don

J. Murray August 9, 2010 at 2:40 pm

There may be no social benefit, but there is a clear social detriment to fluctuating supplies of money stock, particularly if the money stock is permitted to increase ad infinitum. Changing money stock distorts pricing, creating false signals to adjust operations.

Silas Barta August 9, 2010 at 4:49 pm

@Eric: Okay, so explain to me how you “edit” the money supply in such a way that all prices move in unision by the same percentage as the change in money, rather than — oh, I don’t know — massively distorting markets as money enters certain politically-favored sectors first?

bob August 10, 2010 at 9:42 am

That is the correct Rothbardian view; however, I believe it is wrong. There is no praxeological truth that prevents freely consenting adults from desiring an increased money supply in spite of the decrease in purchasing power it will cause.

And there are practical reasons to suggest this will happen. The primary commonly-perceived usefulness of money is to facilitate indirect exchange. Other uses, such as serving as a store of value, are secondary. Thus, if an increase in the money supply helps facilitate greater transactions or makes them more pleasant (coins have a larger size making them easier to handle), this might be an acceptable trade-off.

Of course, once you get to the point where money substitutes are preferred nearly ubiquitously over commodity money itself, the issue more or less disappears, but not entirely. If the amount of commodity backing say $20 is microscopic, it is impossible for the common man to redeem his substitutes for commodity money, which induces banks to engage in fractional reserve banking.

Gene Callahan August 9, 2010 at 8:04 pm

“Insane. It’s like a grocer conjuring up made-up tomatoes [tomato notes] when the demand for tomatoes suddenly increases…”

Right, Old Mexican, because just like you can’t eat tomato notes, you can’t spend fractional reserve notes!

“What troubles me the most is that otherwise very competent economists would treat money in a totally different manner than other economic goods.”

Yes, because for other economic goods, producers certainly can never MAKE MORE OF THEM in response to an increase in demand — all they can ever do is raise prices.

Jonathan Finegold Catalán August 9, 2010 at 8:20 pm

While I’ll refrain from commenting on the nature of fractional-reserve banking or the viability of full-reserve banking, it strikes me that the comparison of money to the other goods is not entirely accurate. Demand for wealth is essentially limitless, and as such industry tends to meet this limitless demand for wealth by producing ever-increasing quantities of economic goods.

The difference between money and other economic goods seems to be that while other economic goods directly satisfy individuals, money is simply a method by which to achieve that satisfaction. In other words, only the goods money buys directly satisfy the individual. So, from this perspective (and this perspective alone), the case for increasing the supply of money doesn’t make much sense. A decrease in the supply of money doesn’t really deny anybody of their wealth (it actually may lead to an increase in one’s wealth!), or it doesn’t deny industry the ability to meet a limitless demand for wealth (wealth for economic goods, not money).

However, that is as far as that goes (I am too deep in my own confusion on fractional-reserve banking versus full-reserve banking to make any meaningful comments on the subject).

Gene Callahan August 9, 2010 at 9:38 pm

“The difference between money and other economic goods seems to be that while other economic goods directly satisfy individuals, money is simply a method by which to achieve that satisfaction.”

The same is true of all higher-order goods. Few people are directly satisfied by steam rollers.

Jonathan Finegold Catalán August 10, 2010 at 1:01 am

The same is true of all higher-order goods. Few people are directly satisfied by steam rollers.

True enough, but capital-goods are directly invested to increase production. Money doesn’t serve this role, either. My point is that an increase in the volume of the supply of money does not directly contribute to an increase in wealth.

Another point which I wanted to refrain from making (but, I will make it anyways) is I was never sure on how demand for money would be met. I own four books on free-banking, including Selgin’s The Theory of Free Banking and I admittedly have never read any of the four books cover to cover, and so I admit that my understanding is deficient. As I understand, however, this demand would be met in exchange for gold deposits (or whatever is used as money). So, effectively, you would get a note in exchange for a gold deposit. It might not be the case that individuals want to carry notes, instead depositing their gold and withdrawing notes only when they mean to spend (i.e. similar to our current system, where we withdraw dollars only with the intention of spending them).

In a period of high uncertainty, where the demand for money increased, this demand may be in the form of base money (for simplicity, gold) or demand for notes that the bank already owes the client. So, in a fractional-reserve system the only option the bank has is to make use of some type of legal clause in its contracts allowing it to push back its liability to meet this demand, otherwise I don’t see how a free banker could claim that meeting that demand does not cause intertemporal distortions.

But, again, I have to read Selgin’s book.

Russell August 10, 2010 at 6:15 am


Here is a different analogy for money. Money is like a marker or chip that entitles the holder, by mutual consent with all other market participants, to the holder’s allocate share of all goods and services in the available economic pie. Let’s say there the economic pie contains 4 widgets to sell and 4 people with a dollar each that they are willing to spend on widgets at the same time, there are $4 chasing 4 widgets. If everyone has $2 they are willing to spend on widgets, then there are $8 chasing 4 widges. If there are 8 widgets instead of 4 has and everyone has $4 to spend on widgets, then widgets then there are $4 chasing 8 widgets. We prefer 8 widgets being chased by $4 if we have the $4.

At every point in time, three is a market containing a certain amount of goods and services and a certain amount of money that people are willing to spend to meet their needs at that moment. If the money is fixed in quantity, its value at any point in time will depend on how many other of the other dollars people are willing to spend the same economic pie we are inerested in at any given point in time. There is no fixed value for the money, it always depends on supply and demand. It is merely a means for dividing up the existing economic pie.

Assuming the rule is that one must work and create goods or services that the market wants to obtain some of that fixed quantity of money and the person who earned it wants to save some, the saver hopes that when it comes time for him to spend the savings, that there will be at least as big, if not bigger, econonic pie of the things he wants to purchase relative to the amount of money in the market chasing those items as when he earned and saved the money. Then his money will be worth as much or more than when he earned it. No one would exchange goods and services in a barter system without receiving other goods and services of value to him in exchange. And so no one shold be able to obtain money without providing something of value first if the goal is a system that encourages the preservation of the size of the economic pie or encourages it to grow bigger.

If the system does not require people to add to the economic pie before obtaining money, then people will who get money without working for it will be able to share in the pie without at least sustaining the size of the pie and in the long run, the pie will tend to shrink all other things being equal. Saviings will then be worth less. This is a bad system from a human engineering point of view as it does not encourage productivity.

In such a system where people can get or create money before creating value in the marketplace, the money they create and spend sends signals to the rest of the working marketplace to invest in production to satisfy the non-contributors needs. This drains the resources of the workers and leads to a smaller economic pie.

This is the system of fractional reserve banking and central banking that create large amounts of demand by creating money out of thin air. That is why it is a bad system.

J. Murray August 10, 2010 at 6:49 am

I would say the ultimate problem is that we don’t have any examples, modern or historical, that could fit any of the systems. We have always, in effect, been operating under a fractional system of one sort of another, be it printing money, adding electronic zeros, or the physical debasement of gold coins. Without putting a new system into operation, we can’t truly discover if it’s a good idea or not. As it stands, it’s purely a philosophical debate and there is always an angle we will miss when discussing full reserve vs fractional reserve.

Jonathan Finegold Catalán August 10, 2010 at 9:33 am


Unfortunately, none of that has to do with what I am discussing with Gene Callahan. While I may not have made up my mind concerning the debate between free bankers and full reserve bankers, I do know how money works.

Old Mexican August 9, 2010 at 10:04 pm

Re: Gene,

I stand corrected.

If money was like tomatoes, it would not be money. So money IS different. Saw that after reading your points.

bob August 10, 2010 at 9:49 am

The demand for wealth is not limitless. Assuming there is no physiological need to eat or sleep, would you work a 168 hour week? The idea is silly.

Money is a special good, but the laws of economics still apply to it. Money has marginal utility; however, since it is valued virtually equivalently to any good it is capable of purchasing, the utility of the next marginal unit is likely to contain nearly as much utility as the previous. In other words, money will likely have a higher marginal utility than any other good; but it is still subject to it.

J. Murray August 10, 2010 at 10:34 am

Oh, demand for wealth is limitless. Take your food example. How much food does the average household throw away every month? It’s highly common in our society to let food spoil and be disposed of. This is a new phenomenon in history. Our ancestors did what they could to eat spoiled food because it was that or starvation. Entire culinary styles were developed to hide this fact. Spicy foods, for example, are nothing more than the society developing a style of food that would both kill the microbes and hide the foul taste of rancid meat.

And yet, here we are. Food has become so cheap that the marginal utility of us buying it to throw away exceeds the cost of throwing it away. The psychological comfort of knowing we have more than we need is there.

The point is that if prices were set to zero, demand would be limitless. Satisfying the demand is a different story, which is where marginal utility comes into play. At the low, low cost of free, you will always be at or lower your marginal utility for the product, except in rare instances where getting more actually creates a net marginal hindrance (storage space for example).

Demand is always infinite, even for things you may not have interest in. The price is what sets us straight.

Jonathan Finegold Catalán August 10, 2010 at 10:40 am


The demand for wealth is not limitless. Assuming there is no physiological need to eat or sleep, would you work a 168 hour week? The idea is silly.

Yes, that is actually the idea. The demand for wealth is limitless. The ability to produce wealth is limited (i.e. scarcity of labor).

Beefcake the Mighty August 10, 2010 at 11:34 am

“Money has marginal utility; however, since it is valued virtually equivalently to any good it is capable of purchasing, the utility of the next marginal unit is likely to contain nearly as much utility as the previous. ”

This is an extremely poor way of phrasing things. Money is indeed a good, however it is meaningless to speak of it or any other good “containing” utility. That is not what distinguishes money from other goods in the context of marginal analysis, see eg Rothbard’s discussion of the regression theorem.

Rafael Hotz August 9, 2010 at 1:21 pm

thanks for writing this article… i’ve been trying to expose the same argument on coordination problem and it did not touch them…

Mike Sproul August 9, 2010 at 1:31 pm

The most interesting thing about this article is its demonstration that the anti-fractional reserve crowd can look long and hard at a voluntary transaction between a bank and its customers, declare that it should be banned, and walk away calling themselves libertarians.

DD5 August 9, 2010 at 2:03 pm

The objective of this article was to demonstrate that the assumptions made by Monetary Equilibrium theorists are false. That is, if some monetary institution (any and not just FR banks) expands and contracts the money supply so that it only offsets changes in demand to hold money, intertemporal disequilibrium still results. An exact opposite conclusion of the one held by ME theorists.

Now, maybe you should take something for that knee jerk reaction you get whenever you hear something that threatens your comfort zone, and go back and reread the article.

J. Murray August 9, 2010 at 2:42 pm

The problem is that Rothbard did outright declare all fractional reserve banking a fraud. But I do agree, the article isn’t on the legitimacy of fractional reserve banking, it’s a rebuttal to claims that it is a good thing. I personally find fractional reserve banking to be a detrimental practice, but in a libertarian community, it is permissible so long as we’re aware of the behavior.

I wouldn’t keep my money in such a bank or accept notes from a fractional reserve bank, but that doesn’t mean it’s an illegitimate business practice.

DD5 August 9, 2010 at 4:10 pm

“The problem is that Rothbard did outright declare all fractional reserve banking a fraud.”


J. Murray August 9, 2010 at 5:22 pm

A strawman is setting up a false statement that is easy to attack and attributing it to the opposition. Rothbard openly claimed fractional reserve banking a fraud. Thus, it is a statement of fact, not fabrication and attribution.

Bone up on your logical fallacies.

DD5 August 9, 2010 at 6:39 pm

It is a strawman! Rothbard never had a chance to respond to the modern FRB school. Rothbard’s FRB and Selgin’s FRB are in some respects different. Rothbard would have likely responded to the modern school differently. Probably somewhat more in line with how Walter Block has responded to Selgin’s FRB system with clauses.

Gene Callahan August 9, 2010 at 9:39 pm

I think somebody doesn’t understand what “strawman” means.

J. Murray August 10, 2010 at 6:50 am

You didn’t specify modern vs otherwise. Again, not a strawman as nothing was propped up that wasn’t said.

Huntsmen August 10, 2010 at 12:09 pm

“It is a strawman! Rothbard never had a chance to respond to the modern FRB school. Rothbard’s FRB and Selgin’s FRB are in some respects different. Rothbard would have likely responded to the modern school differently. Probably somewhat more in line with how Walter Block has responded to Selgin’s FRB system with clauses.”

Quickly my brother! We must defend our lord and saviour, Murray Newton Rothbard! We must not let this GMU scourge steal his apriori crystal of infallibility! To arms my brothers! Let us never relinquish our Rothbardian dogma! It is the one true rational brand of Austrian Economics! HUUUZZAAAHH!!!

bob August 10, 2010 at 9:52 am

No. I think the point was that ethics aside, some ideas are stupid.

bob August 10, 2010 at 9:56 am

In a free market, if bank customers understood the fractional reserve process, they wouldn’t hoard money substitutes, but draw down their bank accounts for actual gold/silver/whatever. Because that’s the only way they’d have certainty that they’d actually have their money. So the whole free-banker argument is a giant fail.

Ethically, I think it’s fine. It CAN be fraud, but I don’t think it always is.

The only way it is practical is if the bank’s know their customers’ time preferences better than the customers themselves. That’s an exercise in arrogance that probably won’t stand the test of time.

Beefcake the Mighty August 9, 2010 at 2:28 pm

FWIW, this point — that it is *specific* actors whose demand for money changes, and these may
*not* be the same actors who receive the banks’ issue of fiduciary media through loans — was
already raised in the seminal article Against Fiduciary Media by Hoppe, Huelsmann, and Block.
And yes, whenever this question is raised at the GMU blog, it is never satisfactorily addressed,
beyond contentions that free banking could better handle the problem than central banking.

Paul S. August 9, 2010 at 2:36 pm

John Adams declared, “Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and is therefore a cheat upon somebody.”

I read it first in John Kenneth Galbraith’s “Money What it is, from whence it came.”

In that book JKG point out the dangers and damage of inflation (devaluing the coin or currency) in history starting with the Byzant. Towards the end, however, I got bored as he moved into the the Federal Reserve Era and I thought he sounded like he was justifying his existence as chief price fixer during WWII.

Paul Edwards August 9, 2010 at 2:46 pm

In a discussion of fractional reserve banking with the assumption of a free market, i think it is important to include in the discussion at some point, the crucial distinction between money and money substitutes. In a free market, money would necessarily be some form of commodity, most likely in a form functionally resembling the coin.

Secondly, assuming a free market, there would be no form of state sanctioned bank cartelization, deposit insurance, lenders of last resort, or legal tender legislation. Banks would operate on the faith of their customers which would be contingent on the banks’ honest and reliable operations.

Taking these two factors alone into account leads me to conclude that in accordance with Guido Hulsmann’s thesis in “Toward a General Theory of Error Cycles”, there can be no action undertaken by private banking institutions that could possibly lead to anything resembling a business cycle.

Since private banks, to even begin to think of participating in FRB, would either have to misrepresent the nature of the paper they were lending out – misrepresenting them as money substitutes, representations of money ownership, truly capable of being redeemed on demand for specie, or this paper would have to be represented as a form of debt – which cannot be treated as a money substitute at all.

In either case, incidences of FRB would be checked by the market very quickly. In the former case, banks would suffer runs and lawsuits, and would be put into bankruptcy quickly. In the second case, since debt simply is not money ownership, and not a money substitute, and so simply cannot operate as a money substitute, these debt paper would simply be just that – another form of debt. As such, they would be nothing of importance to discuss in the context of FRB, simply because, it would not represent an increase in the money (substitute) supply, and would not be a form of credit expansion as we are analyzing it. It is key that the paper issued by the bank, to have a credit expansion effect, be deemed money substitutes by the public. If they are not money substitutes, and are not misrepresented as money substitutes, they cannot be viewed as a money substitute, and cannot therefore operate as a money substitute.

Therefore i simply conclude the following: in a free market, credit expansion via the expansion of FRB notes beyond those backed by specie would be non-existent. If these notes operated as money substitutes, they could only do so fraudulently and bank runs and lawsuits would quickly ensue, or the notes would never operate as money substitutes to begin with. In a free market.

Matt C. August 9, 2010 at 3:59 pm

The argument against banks printing money is the same as the one against private citizens doing the same thing. The argument of the free banking crowd is just a bunch of macroeconomic smoke.


The free banking school doesn’t seem to understand that fractional-reserve banking is what eventually brings on more government regulation of the industry. That’s the real world. Sorry for spoiling the fun. It’s not as simple as arguing that people could invest with currencies and banks that they would trust in a free market. It’s a cute idea but fictional.

Matt C. August 9, 2010 at 4:06 pm

Here is the pdf link:

de Soto, Jesús Huerta. 2001. “A Critical Note on Fractional Reserve Free Banking,” The Quarterly Journal of Austrian Economics, Vol. 1, No. 4, Fall, pp. 34–35

Del Lindley August 9, 2010 at 5:54 pm

My only quibble with this article relates to the implication that the act of money hoarding is an instance of general savings in the Austrian sense. This thinking has merit only if one defines savings as merely deferred consumption.

In my view the Austrian theory expands the meaning of savings into: “deferred consumption for the purpose of sustaining future investment.” Note that the one doing the saving does not have to be the one doing the investing. At the most basic level the typical money commodities (e.g. gold, silver, or banknotes) are not consumable and so are not directly capable of sustaining anyone for any time for any purpose. More generally the plain savings or hoarding of any commodity cannot qualify as a form of general savings if there is no commitment to use that commodity to support future investment activity.

Finally, the linkage between the act of transforming land/labor into capital goods (investment) and the act of provisioning the sustenance or energy needed for it (savings) helps to expose the macro-economic fallacy that treats savings/investment as independent supply/demand variables.

bob August 10, 2010 at 10:04 am

Thanks for pointing this out. Money is always capable of being exchanged for present goods, whether its owner chooses to employ it as such or not. But a half-built factory cannot produce any presently consumable goods.

Gene Callahan August 9, 2010 at 8:17 pm

“There is a second problem with Woolsey’s entire discussion: He acts as if the form of saving were irrelevant.”

I don’t see Woolsey making that claim. All he says (that I can see) is that the general effect on interest rates and investment will be the same. Nowhere do I see him claiming that consumers ought to be indifferent between holding cash and buying bonds.

“To repeat, Woolsey thinks he has answered this objection by telling a story in which the banks do lend money to precisely those firms who would have sold more corporate bonds to the public, in the first scenario. And then Woolsey admits that this is a “heroic assumption.” Does everyone see the problem here?”

No. Because Woolsey then goes on to relax the heroic assumption, and contends that his general conclusion still holds. Now, he may be right and he may be wrong about that, but it is either sloppily or maliciously unfair to Woolsey to contend that he relies on this heroic assumption.

Beefcake the Mighty August 9, 2010 at 8:43 pm

How’s that PhD coming, Gene?

Gene Callahan August 9, 2010 at 9:35 pm

Done, Beefcake.

Gene Callahan August 9, 2010 at 9:36 pm

Oh, and thanks for asking. Send me your snail mail address and I’ll get you a copy of the book when it comes out.

Beefcake the Mighty August 9, 2010 at 9:52 pm

Thanks for the offer, but I figure I can get my fill of your bad analogies directly from the web, don’t need a hard copy. Please don’t take it too hard, I know you get very upset that your former Misesian colleagues fail to appreciate your brilliance, and shockingly have not seen fit to change their viewpoints based on your penetrating “insights”.

bob August 10, 2010 at 10:06 am

kids these days have no respect.

Gene Callahan August 10, 2010 at 1:47 am

Oh come on, Beefcake, just send me the address, and I can also send you my contribution to the book coming out this year on the thought of Michael Oakeshott. Oh, and I have a chapter in a book on Austrian Law and Economics coming out soon, too. Ah yeah, and a chapter on trade cycle theory in another book coming out this fall. And several papers and reviews in peer-reviewed journals. I know you’d really like all of this stuff. And then you can send me all of your publications…

mpolzkill August 10, 2010 at 7:02 am

If I step up being a total asshole to you, will you give me any free stuff, Callahan? I’m not afraid.

Gene Callahan August 10, 2010 at 8:02 am

mpolzkill, I’ll send you a copy of any of the above you’d like WITHOUT you having to act like Beefcake.

Beefcake the Mighty August 10, 2010 at 8:53 am

Speaking of assholes, here’s a grade-A example of one dismissing the notion that one’s publication list might be some indication of the merits of one’s ideas:


Just search for “Gene Callahan.” Not much consistency, I’d say. Choice comments on Hobbes and Locke as well; I guess he’s flush with confidence after finally finishing his PhD after all these years.

bob August 10, 2010 at 10:09 am

losers spend all their time pointing out the errors of others while winners create their own successes.

someday you might realize being a dick is getting you nowhere.

J. Murray August 10, 2010 at 10:29 am

Avoid ad hominem no matter how badly you want to use it. That makes us superior.

Russell August 10, 2010 at 9:32 am

There has been a lot of deep thinking and writing about banking and money. It is often hard to reconcile all of it. To my mind, if one is looking for an ideal simple principle to follow that would result in the most efficient allocation of scarce resources and promote the maximum stable growth of an economy, that principle would be the simple, common sense principle that no one gets anything for nothing. In a totally barter economy, this is self evident.

In a money lubricated economy, the rule would be that no one gets money without earning it, not banks, not central governments (which earn by obtaining votes for services rendered and then obtain money through taxes), not anyone.

The initial invention of money was through trading commodities that are easily divisable and relatively indestructable like gold. No one gives away gold for nothing. No one creates gold out of nothing. There is no good reason for this rule to be broken when paper money redeemable for a particular amount of gold is used. No paper money not backed by 100% gold should be permitted to be issued. If it is, it undermines the growth of the economy.

Paper money is handy because it can be infinitely divided into smaller pieces. It is dangerous because one cannot necessarily trust the printer not to print more money than he has gold reserves and therein lies the problem. It is a problem of human nature. Whoever has the power to print money has the temptation to print more money than he has gold to redeem or than he has earned.

But if somehow we could follow this golden rule of not printing more money than he had to be redeemed in gold, the system would work optimally.

No one would obtain money without first adding to the economic pie at least as much as the he intended to consume at any given moment and often the market participant would add more than he intended to immediately consume saving the rest of his money for a rainy day. In the long run, this would encourage people to grow the economic pie.

The saved money would then likely be worth as much or more in the future than when the money was first earned and some of it spent (all other things being equal and if they are not, there is nothing we can do about it anyway. It is still a better system for the marketplace).

With one’s savings, one could put it under the mattress or, if one wanted to risk a loss,invest stocks or bonds thereby allowing one’s savings to be used to increasing the means of production and grow the economic pie.

It is very simple if we can prevent governments or banks from creating money out of thin air. That is the real problem.

Mike Sproul August 10, 2010 at 9:53 am


So on your view, would it be ok to issue gold dollars 100% backed by a specified weight of gold, silver dollars 100% backed by silver, copper dollars 100% backed by copper, wheat dollars 100% backed by wheat, etc?

Russell August 10, 2010 at 10:07 am


The answer is yes for what they are worth. I suspect gold backed dollars would be more popular than wheat backed dollars but maybe not. However, whatever backs the currency has to really be there as if you were trading the commodity itself. And then there is the problem of making sure that the backing is always there which is the main problem.


Mike Sproul August 10, 2010 at 1:01 pm


Assuming all those different kinds of dollars are circulating, what if someone issues dollars denominated in specific weights of gold, but 100% backed by an equal value of wheat? Assume for the sake of argument that each gold-denominated wheat-backed dollar clearly says that it is actually backed by wheat, and that the gold-value of each dollar depends on the gold-value of wheat. Is this system still OK with you?

JGiles August 10, 2010 at 2:05 pm

Well, a gold-denominated wheat-backed dollar wouldn’t actually be money, it would be, for lack of a better term, a speculative instrument. That is to say, the value of a wheat-backed dollar would never vary relative to wheat; 1 dollar equals one bushel, or whatever the set rate is. The value of a gold-backed dollar also never varies relative to gold.

But the value of a gold-denominated wheat-backed dollar would vary relative to both. If wheat becomes more valuable, so gold brings in less wheat, your dollar is worth less wheat. Similarly, if gold becomes more valuable, your dollar brings in more wheat.

As such, the question of whether that currency would actually be “fully backed” is very interesting, because what that backing was worth would vary constantly. Like I said, I don’t think such a thing would actually be “money”; rather it would be a speculative tool. You would buy it when gold was valuable, cash it in for a lot of wheat, then wait for wheat to go up and swap back for a larger amount of gold than you originally had. Or vice versa, of course.

Example; You purchase a dollar for a fixed quantity of gold in the summer; say 2 oz. You then purchase ten bushels of wheat.

That winter, when there isn’t much wheat around and the prices have risen, you sell your 10 bushels for $2, and exchange them at the Bank of Wheatie and Goldman for 4 oz of gold.

Russell August 10, 2010 at 3:30 pm


Russell August 10, 2010 at 3:29 pm


No, if the dollars says gold, then it is redeemable in gold. If it says wheat, it is redeemable in wheat. The relative value of gold and wheat will fluctuate. If on redemptions, the issuer offers me more wheat than I think the gold it worth, I might take it. But the issuer is obligated to have the amount of gold available for redemption stated on each and every dollar. If that is the case, there will never be a run on the bank because there would be no reason to do so. It is better than insurance.


michael August 11, 2010 at 7:59 am

Russell: In all fairness, what promises a nation puts on its currency is no guarantee that it is correct. Back when all nations were on the gold or silver standard, didn’t they encounter balance of payment problems, where foreign demands on their specie could not, or would not, be met? And did they not then have to face the dangers of insolvency?

That would make of allegedly metal-backed paper just another form of fiat currency. It returns to the degree of confidence a public has in its own currency.

Mike Sproul August 10, 2010 at 5:34 pm

Russell and JGiles:

Most of the dollars people have ever traded with were denominated in gold, but backed by a general claim against the issuing bank’s assets, which consisted of things like land, wheat, etc. That’s been the norm for centuries.

Or how about this: In 1690, the Massachusetts Bay colony issued paper shillings, each supposedly based on a silver shilling coin. The problem was that the colony had practically no shilling coins. What the colony did have was the ability to collect taxes. So they declared that the tax man would accept those paper shillings in place of silver shillings (or commodities, since taxes were often paid in kind), and the paper shillings thereafter circulated widely as money. Rather than a paper shilling giving its holder the right to demand a silver shilling, these paper shillings relieved their holders of the obligation to pay 1 silver shilling in taxes. The paper shillings were backed by the colony’s assets (taxes receivable) in the same way that paper money issued by banks is backed by the bank’s assets. 100% reserves of coins was not necessary for the paper shillings to have value.

Russell August 11, 2010 at 6:17 am


Read This Time is Different. You will see that all these economies experienced booms and busts, bank defaults and country debt defaults, both internal and external, have been the norm for centuries in every country that followed these practices which is all of them. It is an inherently destablizing practice. If a 100% gold standard were followed, then these problems would be substantially minimized. You couldn’t have a run on all the banks because the banks would have the gold. Governments could still default but the economies, and therefore the tax base, would be a lot more stable and governments could not just print money. They would have to get it from taxes from the voters.

JGiles August 11, 2010 at 7:21 am

Mike, I don’t think you understand the Austrian objection to fiat money.We don’t claim, and have never claimed, that fiat money is somehow ‘valueless’; value is subjective, so you can’t actually say anything is ever valueless.

The argument is instead that fiat money, particularly in combination with centralized banking, allows the central government to expand the money supply at will, which causes inflation, malinvestment and the business cycle.

So here is the acid test of whether a currency is actually “backed”, or if it is fiat:

1. Can you redeem the money, at the issuing institution, for a set amount of a commodity?

2. Is there enough of that commodity in the possession of the issuing institution to redeem all extent money at once?

If and only if both answers are “yes” is a money fully backed. Any other kind of money opens the door for inflation and the business cycle.

michael August 11, 2010 at 7:45 am

Thanks for that ray of light, JG. The issue that presents itself, then, is that the maintenance of steady monetary value has become, in our society, a management issue. Because it is backed by nothing other than the “full faith and credit” of the United States. It’s a matter of maintaining confidence in the dollar.

Here I feel the urge to note, once again, that people the world over continue to maintain a greater confidence in the USD than in whatever currency’s in second place. It holds value in the minds of the world public because we surmounted the danger of runaway inflation at the beginning of the 1980s, and have shown that we have been able to fine tune the allowable amount of (price) inflation since that time.

We have a track record of managing our federal debt responsibly, and so are entrusted with new debt every time the Treasury holds an auction. The occasions when the Fed has to buy back a portion of the debt being offered have been minimal. And the interest rate we are forced to offer by the buying public has also been minimal, holding down that portion of the federal budget dedicated to interest payment.

Meaning they like Treasury debt better than just about any other bond offering. In their minds it’s ‘gold plated’, even though there’s no actual gold involved.

So yes, the door is technically open to runaway inflation– because human beings are in charge and a madman could conceivably take the reins and drive us into a disaster. But the likelihood of that ever happening is about the same as the likelihood that an airline pilot will decide to steer his planeload of passengers into the ground, instead of landing safely in Milwaukee.

JGiles August 11, 2010 at 8:15 am

Everything that you’ve said is true, as far it goes.

But really, what constitutes “runaway” inflation? Consider that fifty years ago, someone making $50,000 a year was living large. Nowadays, they’re barely making ends meet in most of the country. Consider that a loaf of bread that you could have got for a quarter then costs three dollars now. The value of our money has decreased enormously in the recent past. How much did a pair of shoes cost when you were ten, Michael? How much do shoes cost now?

Consider that we regularly suffer crashes caused by malinvestment, which is itself caused by the exact same problems I just mentioned; central banking and fiat money.

I know there are a number of people on this site who predict the utter destruction of our economy sometime in the near future. I’m not one of those; but I do think that our current system has problems, which will only get worse over time. And these problems are inextricably linked to government control of the money supply.

In short, my argument isn’t that our current economy is terrible; it’s that it isn’t anything like as good as it could be. I think that if the free market was allowed to operate unhindered, we could prevent a lot of suffering and create a lot of wealth. Instead, we have misguided politicians trying to exert more and more control, in the belief that if they can only tweak the economy in just the right way everyone will be happy. Unfortunately, for them and for everyone they hurt, that isn’t how the world works.

J. Murray August 11, 2010 at 1:20 pm

The thing is we are very close to a total destruction. You may not want to believe it, but all it will take for a total economic meltdown of the United States is China dumping our money. America doesn’t produce much anymore. We may be a major consumer, but we don’t produce enough in return. The USA has become a parasite on the world economy. Many economies throughout history have gone through radical collapses from total prosperity to misery in a year. France, Britain, Rome, Germany, China, all of them went through drastic changes from one year where everyone assumed it couldn’t happen to the next where it did.

The United States is in an incredibly fragile position right now. Our apparent prosperity doesn’t mean much considering it’s mostly built on illusion.

Russell August 11, 2010 at 1:10 pm

Michael, you are looking at a very small slice of time and comparing the US currency to currencies of other countries who are playing the same games with their currency and suffering the same large amount of wasted assets. This could easily lead to a global depression. Get the facts. Read This Time is Different. 800 years of economic history.

It might help if you looked at it from a different perspective. What is most important in an economy, money or the goods and services available to purchase in an economy? One cannot eat money. One cannot wear money. It is good only to exchange for things we want.

Assume there was no money, everything was infinitely dividable and could be traded, bartered. No one would get anything for a mere piece of paper. You would have to first create something of value to trade for something of value in the market. Supply anddeman would match. It is the most efficient way to allocate scarce resources, resources created or found and brought to market by people.

But goods and services are not infinitely dividable. But some are more dividable than others. Gold, commondity that was used for jewelry and some industry, is limited in quantity that is dividable. So you can trade a little gold for some bread or milk or clothes etc. Gold became useful as money. But it did not break the rule that one has to first make something of value and sell it in the market before one can get something of value.

Governments printing money break that rule. That money does not represent the prior creation of goods or services. If the government were a person, to one would pay any attention to demand by this person who created nothing in a barter economy. This person would not be entitled to share in the economic pie because they have done nothing to add to the economic pie. He is a mere freeloader who benefts at the expense of those who have worked to create value in the economy.

When that governments print money and injected it into the market, they are facilitating freeloading. But since the money they print looks the same as money that is earned, the market cannot tell the differnce and goods and services are consumed by the freeloader. The more the freeloader consumes, the less the productive part of the economy benefits. If freeloading is to a large enough extent, you get a recession or a depression because all of the investment to satisfy the needs of the freeloader simply results in the shrinking of the economic pie.

The US government and fractional reserve banking system is a giant freeloader. It has created trillions of dollars out of thin air. This lead to banking crises and our curred resessoni/depression. Other governments have doe the same thing and are politically weaker than we are so we get away with a lot. But it doesn’t mean that we would not be better off without the freeloading.

Think about it, what good is the freeloading? What can be accomplished by freeloading that cannot be accomplished by taxing to obtain money needed by government to do what people want the government to do? The answer is nothing. Again, nothing should be done with money that one would not do with the underlying goods and services were there no money.

Mike Sproul August 11, 2010 at 12:57 pm

Russell and JGiles:

The Bank of Amsterdam (est. 1609) maintained 100% reserves, charged fees of 2-4% for storing coins, and eventually went bankrupt because of dishonest directors. That caused a recession, just like fractional reserve banks cause recessions when they fail. The problem isn’t fractional reserves. It’s loss of assets. That’s actually more likely to happen with 100% reserves, since those banks earn no interest and are more vulnerable to robbery.

There is no such thing as fiat money, as you might find by reading my paper of that title. Economists have observed that modern paper money is not physically convertible into metal, and have wrongly concluded that it is unbacked. If fiat money were real, there should be some historical example of a bank, central or private, that issued money (of positive value) without holding assets of adequate value against that money. There has never been such a bank.

Russell August 11, 2010 at 1:18 pm


Dishonesty if bad for the economy whether it is in the form of fiat money or dishonest bankers who rob their own bank. The problem is a practical one of preventing dishonesty. Condoning the dishonest (from a market standpoint) of fiat money does not solve the problem.

There will always be dishonesty. Keeping to a minimum and out of too big to fail banks and central banks is probably all we can hope for in the long run.

You need to define what you mean by real money. What mean is either a commodity like gold itself or something that is convertable 100% into a commodity as advertised. That way it is treated like the underlying goods and services it facilitates trading. No one wold give me a loaf of bread for nothing and no one should give me a loaf of bread for money that I have not earned by first creating goods or services in the marketplace. Making the money redeemable in a commodity is just a way to promote this principle.

But money need not be backed by anything so long as its quantity is fixed. Without redemption rights, it is hard to prevent inflation of the quantity of money.

Mike Sproul August 11, 2010 at 3:10 pm


“money need not be backed by anything so long as its quantity is fixed.”

If this were true then the issuer got a free lunch. This would attract issuers of rival moneys, and as those rival moneys proliferate the demand for the original money would fall, with no stable solution short of zero value.

“Without redemption rights, it is hard to prevent inflation of the quantity of money.”

Assets of adequate value are what prevents money from losing value. Without that, any attempt to maintain convertibility will only lead to a bank run, and a complete loss of the money’s value.

Russell August 11, 2010 at 3:53 pm


You are right, the initial issuer of the money gets a free ride the first time it is issued. But after that, it has value serving as money. That is what all governments do today. The problem is that they don’t stop. The only way to stop them is to require the money to be backed by something that they can create out of thin air and whose supply is as limited as possible like gold. If money is backed 100% by gold meaning the bank has all the gold it is supposed to have, then there is no risk of bank run because they will not be bankrupted by it. Knowing that their money/gold value is safe, there won’t be a bank run.

The basic problem is the problem of preventing people, banks and governments from spending money they don’t have. In a non-money economy where all goods were perfectly dividible, no would could exchange nothing for something as happens when paper money backed by nothing is traded for something. Yes, you could have loans but the market would take care of pricing and it would not be priced equivalent to an immediate good of the same type. The pricing signals would not be screwed up as happens when you have governments printing money and spending it rather than taxing money that was earned and spending that.

You need a system that is as simple as possible for people to understand the nature of the transaction so supply and demand are optimally balanced. The gold standard is the simplest I have seen but if you can think of a simpler one, I am all ears.

Mike Sproul August 11, 2010 at 6:36 pm


But that free ride would attract rival moneys, and the presence of those rival moneys prevents any free ride from ever happening in the first place. There is no such thing as “thin air” money. All money is backed. You insist that it must be backed by gold, but land or wheat or taxes receivable works just as well. And that’s what we have: Paper money that is backed by the assets of the government, which include things like taxes receivable, land, wheat, etc.

Russell August 11, 2010 at 10:12 pm

Mike, That is why money starts as a commodity. But when government takes over, it evolves into “thin air” money and hence the problem. Government money is backed by nothing in that you can not redeem it from the government for anything. Revenue bonds are backed by something but not Federal Reserve notes. There is no limit to the amount they can print as the Federal Reserve has demonstrated over the past couple of years.

JGiles August 12, 2010 at 7:15 am

Mike, you keep insisting that US money is backed by “the assets of the government”. Does that mean I can take my money to the Federal Reserve and swap it for a piece of government land?

No? Then it isn’t actually backed.

Look back at my two tests of fiat-ness, above. Federal Reserve notes CANNOT be redeemed for ANYTHING. Backed money is essentially an IOU for some physical good, which must be honored, or the issuer faces charges. Fiat money isn’t an IOU for anything; it’s a funny green piece of paper, and that’s all.

Gene Callahan August 12, 2010 at 8:09 am

JGiles, you may send me all of yours. E-mail me for my address.

Gene Callahan August 12, 2010 at 8:11 am

“Government money is backed by nothing in that you can not redeem it from the government for anything.”

But you can — you can redeem it for a reduction in your tax liabilities.

JGiles August 12, 2010 at 8:24 am

In case you were unaware, “tax liabilities” are not a commodity. . .

Beefcake the Mighty August 12, 2010 at 8:35 am

He’s probably aware, but there’s never been an analogy, no matter how bad or inapt, that he’s refrained from using.

Russell August 12, 2010 at 10:14 am

Actually, tax liability is supposed to be payment for government services rendered. So I think it fits the definition of goods in the economic sense. The problem is not with the goods (I am not saying it money well spent for the most part but we do elect the government and can throw them out if we don’t like the amount of taxes we are paying or what they are doing with the money).

The problem is that when the government keeps creating more out of thin air, it dilutes savings and undermines the real economy which produces the rest of the goods by sending false price signals. That is why the more stimulus the government thows at the current economic problems, the worse they will get in the medium and long term.

michael August 12, 2010 at 10:48 am

So when are you fellows going to get together and form a third party? I think it would be an excellent approach, as opposed to standing around complaining about everything.

Don’t try to influence the Republicans. If you haven’t noticed, they drive up the deficits even faster than the Democrats. Check the chart:


The federal debt as a proportion of GDP (GNP) goes down under every president from Truman through Carter. Then under Reagan and the first Bush, it increases with gathering intensity.

Clinton arrests, then reverses this trend. But it resumes under GW Bush, increasing by some 20% just during his second term. BY the time it gets to Obama, federal hemorrhaging is already out of control.

You’d seemingly be better off talking to the Democrats. But I think your best relief would be to just establish your own party.

Russell August 12, 2010 at 2:20 pm


You hit the nail on the head. That is what we need but it is a very tough thing to do. It takes a lot of money and a lot of time. I work 10-12 hrs a day so I don’t have time. Money, well I am not complaining but I am not retiring very soon either.

The Tea Party is a manifestion of this discontent. I am sorely tempted to vote for them no matter how wacky some of them are. People realize viscerally that they are getting screwed. They just don’t know how.

Short of a third party, educating everyone we know about how we are getting screwed is the next best thing we can do.



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Bill Woolsey November 15, 2010 at 9:06 am

Thank you for the response to my blog post.

My “heroic” assumption was that the banks lend by purchasing the excact same bonds that the households would have purchased.

I find it a bit puzzling that you failed to even consider that banks might make loans by purchasing bonds. They do it quite often.

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