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Source link: http://archive.mises.org/5226/will-the-federal-reserve-create-the-new-socialist-man/

Will The Federal Reserve Create The New Socialist Man?

June 26, 2006 by

Karen De Coster and Eric Englund explain the devastating cultural effects of fiat money and central banking. Americans are stepping up to mainline a new kind of drug known as debt. Instant money, after all, is something that provides on-the-spot gratification and pacifies their anxieties about their status in the social order. Indeed, one can have it all, at the drop of a (fiat) coin, and without the standard save-and-wait period which earlier generations experienced. FULL ARTICLE

{ 90 comments }

Paul Edwards June 28, 2006 at 1:29 pm

banker,

“If you want your money in a vault and are willing to forgo interest income then you should not be depositing money in a bank.”

Why. This is what a bank deposit is. If, on the other hand, a bank wants to borrow money at interest, it must borrow money with a term with interest and the lender must forgo instant demand access to it and must undertake the risk involved in lending. One should not be depositing money in a demand account for the purpose of lending it. This is fraudulent.

“Banks promise to deliver money, but may not be able to.”

They may not be able to because they have fraudulently made fulfilling their legal short-term obligations impossible by creating and loaning out a second and counterfeit demand claim to this money which they are obligated to keep available on demand to its real owner.

“The riskier the bank the higher the interest they pay on your deposit. Basically, a bank is no different from a fixed income mutual fund.”

A demand deposit is not a mutual fund. With the demand deposit, the bank issues a warehouse receipt that is a promise to redeem on demand at par. The value of the mutual fund is what it is that day, or at a discount or else it is not available on demand.

“If you want to store your money you should just bury it underneath your house in a safe.”

If banks want to offer demand deposit services, it must do it non-fraudulently. It can charge for this service, but it cannot honestly issue duplicate warehouse receipts on the same money. If it wants to borrow money from its customers, it must explicitly borrow it.

Vince Daliessio June 28, 2006 at 1:40 pm

banker said;

“If you want your money in a vault and are willing to forgo interest income then you should not be depositing money in a bank.”

That definition reveals just what is wrong with the system – in the bank, money is supposed to be secure (Thats what the FDIC guarantee implies, and what we have culturally come to expect, not very libertarian I know, but bear with me).

However, even if banks WERE 100% reserve banks, under the current system, you would STILL LOSE MONEY by putting it in a bank, because inflation drains the money of value.

If you had deposited $1000 in a no-interest bank in 1913, it would still be $1000. Except that $1000 deposit would have lost 95% of its purchasing power.

If, instead, you had placed $1000 worth of gold (at, say, $25/oz – 40 ounces) in a 100% bank, it would have also earned no interest, yet its buying power would have increased (40 oz x $580 = $23,000 and change at today’s price).

banker June 28, 2006 at 2:01 pm

Your arguing over semantics. It is obvious that banks lend out deposits; that is why deposits earn interest. I am not talking about the increase in dollars in the system (inflation). All I am saying is that banks are in the same business as hedge funds, mutual funds, insurance companies, etc. The current phrase now is financial services firms; this is because the lines between different lines of businesses are very blurred.

If someone does not know that their deposits are being lended out and that the bank could possibly fail then that is simply gross negligence. FDIC insurance is not a private bank problem, but a government problem. The FED is a government problem, not a private bank problem. As long as banks are allowed to go bust instead of being bailed out with taxpayer money, then it is okay. As long as everything is voluntary, I don’t really see the problem, aside from terminology.

Mark Brabson June 28, 2006 at 2:33 pm

Going back to the original topic.

Ultimately, the ONLY solution is the abolition of the Federal Reserve and the dismantling of the central banking system. Outlaw fractional reserve banking with provisions for liquidating any banks that cannot meet their requirements to redeem in specie. Demand deposits and bank notes must be fully and immediately redeemable in specie. Banks would be able to issue their own bank notes, no central bank of issue. Eliminate FDIC, again, liquidation for insolvent banks. Interest rates would again resume their Rothbardian defined function.

The Federal Reserve is a cancer and only its complete destruction will allow any hope at all for return to a completely free market.

Mike Sproul June 28, 2006 at 2:50 pm

Philanthropic patriot

“You are claiming that the value of those federal reserve notes get their value because there is collateral backing them so when the bank loans out federal reserve notes that already exist, by your logic they are ‘backing’ that money twice so that money should gain the value of the collateral on the second loan. That should cause deflation.”

No; If the investors hand $200 in FR notes to the bank, and receive $200 of stock in exchange, then when those $200 are lent the entries on the T-account would be -$200 cash on the asset side, offset by a +$200 IOU on the asset side. The $200 of FR notes do not appear on the liability side of the banker’s balance sheet, and therefore are not backed by the banker’s assets. The $200 FR notes do appear on the liability side of the Fed’s balance sheet, since they are the Fed’s liability.

Mike Sproul June 28, 2006 at 3:05 pm

Paul:

A banker could issue green paper notes that are 100% backed by silver in the vault, and each redeemable for one ounce. The same banker could then issue blue notes that are 100% backed and redeemable for a certain weight of gold. For convenience, the weight of gold could be chosen to be equivalent in (today’s) value to one ounce of silver, so that the green and blue notes would initially trade 1-1 on the market, though any changes in value of gold & silver would change that ratio accordingly. Having done this, the bank could issue purple notes 100% backed and convertible into copper (initially worth 1 oz. of silver), red notes convertible into iron, brown notes convertible into wheat, yellow notes convertible into land, etc.

Assuming all these notes are backed by commodities actually owned by the bank, and convertible into those commodities during normal business hours, they would satisfy your idea of non-fraudulently issued money, correct?

Vince Daliessio June 28, 2006 at 4:09 pm

banker said;

“As long as banks are allowed to go bust instead of being bailed out with taxpayer money, then it is okay. As long as everything is voluntary, I don’t really see the problem, aside from terminology.”

Then we agree. I was trying to illustrate that monetary inflation and fractional-reserve banking are two distinct, if interrelated government problems. I agree with you – as long as the banks are explicit that they are lending out your money (and in multiples) the real risk is then apparent, and the banks will have to pay the corresponding amount of interest necessary to attract investors.

As it is now, however, the entire thing is a sham from top to bottom. The only things that allow it to operate the way it does is the FDIC guarantee and the Fed.

Paul Edwards June 28, 2006 at 5:15 pm

Hi Mike,

“Assuming all these notes are backed by commodities actually owned by the bank, and convertible into those commodities during normal business hours, they would satisfy your idea of non-fraudulently issued money, correct?”

In this scenario, what are you thinking of as being money? If silver is money, then yes, the silver certificates, to function as honest money substitutes, must be truly redeemable on demand at par at face value in terms of ounces of silver and the silver must be available during normal business hours and hence not loaned out. But if silver is money, then gold and copper are not money, and so the gold and copper certificates are simple warehouse receipts for those commodities, presumably deposited for safe-keeping by the customer, just as would be the case for grain elevator warehouses for grain. These should also remain safely in storage and not loaned out. However, just as very few people would accept a warehouse receipt for a ton of grain in payment for groceries, neither would they be likely to take warehouse receipts for other non-monetary commodities such as copper as payment.

Paul Edwards June 28, 2006 at 5:35 pm

It just occurred to me to mention that it is slightly misleading from an ethical perspective, although handy for discussion, to view bank deposits on an asset and liability sheet. A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank. The cash from a bank deposit remains owned by the depositor. The warehouse receipt is not a debt security, it is claim of ownership.

This is just like any other warehouse situation. If you put your dining room table in storage, it does not become an asset of the storage company; nor does the fact that you will claim it make that claim a liability on the books of this company. The fact that money is fungible does not change this.

Mike Sproul June 28, 2006 at 7:21 pm

Hi Paul:

I’m not trying to draw a line between what is “money” and what is not. I don’t have a problem with two people agreeing that a loaf of bread will be traded for a silver certificate, while another two people agree that a loaf of bread will be traded for a copper certificate, etc. For the moment I’d just like to confirm that you see no reason to prohibit the issue of any of these certificates, or to prevent people from trading them for a loaf of bread.

“A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank. The cash from a bank deposit remains owned by the depositor. The warehouse receipt is not a debt security, it is claim of ownership.”

I’m no accountant, but I think accountants in practice actually do consider these things as assets and liabilities.

banker June 28, 2006 at 7:56 pm

“This is just like any other warehouse situation.”-

Maybe 200 years ago banks were considered warehouses. Today, though, banks are financial services, not warehouses to store your goods. Banks are all about the balance sheet. They are highly levered entities. Deposits are zero maturity liabilities, while the loan portfolios (asset side) are considerably longer durations.

M E Hoffer June 28, 2006 at 8:06 pm

banker, well put. How is it possible that, on this site, there is confusion over the basic operation of banks and the banking system?

Peter June 28, 2006 at 8:44 pm

A bank deposit is not a liability to the bank, and the deposited cash is not an asset to the bank.

It shouldn’t be, but of course that is what it is today. Places that accept “deposits” that continue in the ownership of the depositor call that “bailment” to legally distinguish it from a “deposit” which changes ownership.

Peter June 28, 2006 at 8:47 pm

How is it possible that, on this site, there is confusion over the basic operation of banks and the banking system?

There isn’t. Banker is describing what is, today; Paul Edwards is describing what should be. I’m sure Paul knows that what should be isn’t what is. I’m not sure banker knows that what isn’t isn’t what should be. But nobody’s confused. (And I’m certain Mike Sproul doesn’t know that he’s describing crackpottery)

Paul Edwards June 29, 2006 at 1:41 am

LMAO! Thank-you all for a sequence of very huge laughs! This subject is thick with irony and other funny things; Peter’s “I’m not sure banker knows that what isn’t isn’t what should be.” was great. And thanks, Peter we see eye to eye.

Anyways, I guess I have some questions to answer:

Mike, I have no objection to using titles to ownership in commodities in barter transactions, so strictly speaking, I have no objection to your scenario. The problem I have is that I suspect you are on the verge of, or have already misconstrued what the bank does when it expands credit to lend for the purchase of any given commodity. The bank does not take into its possession copper, for instance, and then issue a receipt for this copper, and then people make barter transactions with these receipts, or titles to ownership in the copper. What rather, you are really trying to slip by is that with a deposit of a certain amount of silver, presuming silver is the unit of money in our theoretical economy, that the bank can issue duplicate claims to this same deposit of silver and lend these claims out, and then put on its books as owning the copper (the alleged collateral backing) that was bought with this loan of this duplicate receipt for this silver.

The person who sold the copper to the borrower of the counterfeit duplicate demand claim to the silver now has this claim to silver, and at the same time, the original depositor continues to also have a very same demand claim on the very same silver. When the seller of the copper redeems his claim to silver at the bank, which it is his apparent legal right to do (although it is counterfeit claim), it turns out that the original depositor of the silver to his demand deposit account no longer can collect back his silver.

What you are proposing is that all is well, regardless of this minor inconvenience to the silver depositor, because the bank has in its possession copper (collateral of the counterfeit loan) with which to pay the hapless silver depositor. But alas, this is not the case at all. For starters, the term of the loan for the copper is not a day or a month but a year or perhaps more, and the term of the loan is not up and so it is very far from being in default, not that the copper would likely be anywhere to be found if the loan were in default. But the upshot is, the bank contracted to hold silver on demand for the depositor, and then proceeded immediately to render itself entirely unable to fulfill all of its short term contractual obligations in redeeming receipts on this silver. This is not bad luck, or bad management, but plain and simply fraudulent embezzlement.

I guess Peter answered the other questions. I’ll just add on M E’s question on how there can be so much confusion on the subject of banking. It stems from the long and infamous history of the nature of banking, its tendency to be abused by criminally minded bankers, and the state’s opportunistic tendency to collude with the banking industry to form a mutually profitable if criminal conspiracy to defraud the public through unnatural banking legislation. This benefits the bankers by being able to collect interest on money that the banks create out of thin air, historically labeled counterfeiting of claims to money, or generally fraud, and the governments benefited by often being the first recipients of these loans of counterfeited claims to money and by being able to defraud their creditors through a devaluation of the currency.

After a few generations of state, intellectual and media propaganda, (it was as recent as 1913 when the general public had a healthy and well founded suspicion and disrespect for the ethics of the banking industry), the public has become well indoctrinated that modern banking practices are on the up and up and nothing to be suspicious of at all. However, a thorough reading of Mises, Rothbard, Hoppe, Huerta de Soto, and many others of mises.org, will dissolve this confusion quite completely. It’s just that we have a long way to go in spreading the word. But all in due time.

Peter June 29, 2006 at 7:05 am

Yes, Money, Bank Credit, and Economic Cycles is required reading.

This made me laugh: on February 13, 1300 it was established that any banker who went bankrupt would be vilified by a public spokesman and forced to live on a strict diet of bread and water until he returned to his depositors the full amount of their deposits [...] on August 14, 1321 the regulations pertaining to bank failures were modified. It was established that bankers who did not immediately fulfil their commitments would be declared bankrupt, and if they did not pay their debts within one year, they would fall into public disgrace, which would be proclaimed throughout Catalonia by a town crier. Immediately afterward, the banker would be beheaded directly in front of his counter, and his property sold locally to pay his creditors.

Now that’s what I call deposit insurance!

Yancey Ward June 29, 2006 at 8:54 am

This entire discussion is analogous to the one I had with Kevin Carson the other day about the mutualist credit house. The essence of the problem seems to be this: the monetary cranks are attempting equate barter transactions with fractional reserve banking. For example, the mutualist credit house is to create monetary units using the property of “borrowers” as collateral with the theory being that such a transaction is not really a loan and, thus, should have a zero rate of interest rate. Carson described this as “monetizing” the property of the mutualists which would allow them to purchase capital equipment. Of course, in order to truly monetize the property, the mutualist should either sell the property for commodity money, or actually trade the house for the goods he desires in a real barter transaction.

Mike Sproul June 29, 2006 at 8:57 am

Hi Paul:

Glad to hear you’re OK with trading ownership claims. In particular, how about ownership claims to land? Unlike an ounce of silver or copper, a square foot of land can’t be carried in your pocket or held in your vault, but the deed to a square foot of land can be, and it can be traded for commodities. Unlike silver and copper, the land can continue in productive use while the deed to the land is being held in a pocket or vault. So just to be sure, you have no objection to the issue of paper claims to a square foot of land? or to people using those claims to buy groceries?

banker June 29, 2006 at 9:22 am

To me why would someone accept an IOU from a bank for some unit currency? A bank could only loan out 100% of its deposits and now more. I would think that a third party would be responsible for actually routing the money order between owners. Something like Paypal or e-gold would be the custodian of the gold and not the bank. I don’t think banks in their current form would be in the business of making currency.

Paul Edwards June 29, 2006 at 12:05 pm

Mike,

“So just to be sure, you have no objection to the issue of paper claims to a square foot of land? or to people using those claims to buy groceries?”

You are correct. I have no objection to barter of any resource, including land for any other resource. But again, I will add that people aren’t going to view a deed to land as money, and so it is just a whole lot less likely that you will be able to efficiently trade land in this way. Money is the best way to buy and sell land, and other commodities. This is why money exists in the first place.

Mike Sproul June 29, 2006 at 12:12 pm

Banker:
“To me why would someone accept an IOU from a bank for some unit currency? A bank could only loan out 100% of its deposits and now more. ”

Example: A bank has $100 FR notes on deposit and it has issued 100 checking account dollars in exchange. A borrower then asks for a loan of 200 checking account dollars, and offers his house, worth maybe $400, as collateral. The banker can issue the extra money, and the bank has, in a sense, lent more than 100% of its deposits, if you count only the $100 FR notes as deposits. But in fact the collateral could be considered as a “deposit” at the bank, so in that sense the bank has only lent as much as it had in deposits.

Paul Edwards June 29, 2006 at 12:21 pm

Peter, “Now that’s what I call deposit insurance!”

HA! Amen to that.

Yancey, I agree. The common theme is to create money from nothing and justify it via the monetization of other assets and simple debt itself. I think it stems from a very fundamental misunderstanding of the nature of money.

banker, “I don’t think banks in their current form would be in the business of making currency.”

Each FR loan any bank makes out represents the expansion of the money supply, which corresponds in your terminology to the “making of currency”. Was there $100 cash in someone’s pocket today? Let him deposit it to his checking account and his bank will quickly turn this into $190 of checking deposits: $100 in the depositor’s name, and $90 in the name of a new borrower. That’s $190 worth of demand claims against only $100 worth of real cash. That’s effectively making currency.

Mike Sproul June 29, 2006 at 12:21 pm

Paul:

“You are correct. I have no objection to barter of any resource, including land for any other resource. ”

OK. How about if a bank accepts 1 oz. of silver and issues a paper receipt promising to pay (say) 1.05 oz. to the bearer in 1 year. Over the year, banker and depositor agree that the silver will be lent out by the banker. Meanwhile the customer has a piece of paper that will start the year worth 1 oz. and gradually rise to 1.05 oz. at year-end. Furthermore, both understand that there is some risk of default, but are willing to proceed. Any objection to the issue or subsequent barter of those pieces of paper?

Paul Edwards June 29, 2006 at 12:45 pm

Mike,

“OK. How about if a bank accepts 1 oz. of silver and issues a paper receipt promising to pay (say) 1.05 oz. to the bearer in 1 year.”

Excellent. I like it. This sounds like a bond or a certificate of deposit. These are great debt instruments and are completely valid. The customer lends 1 oz of silver for a year to the bank.

“Over the year, banker and depositor agree that the silver will be lent out by the banker.”

The LENDER has agreed that this silver is now the banks. All the lender owns is a claim to silver in the future (1 year) with interest. The bank owns the present silver and can and should do what he wants with it, which will be lend it out again. This should show up on the bank’s balance sheet by the way. Perfect!

“Meanwhile the customer has a piece of paper that will start the year worth 1 oz. and gradually rise to 1.05 oz. at year-end.”

God bless the banker for identifying and providing such a fine and honest manner to do business. :)

“Furthermore, both understand that there is some risk of default, but are willing to proceed.”

Yes, they would understand this; LENDERS understand there is risk when they lend money.

“Any objection to the issue or subsequent barter of those pieces of paper?”

As long as this customer who has loaned his money to the bank has been given no legal demand claim on this loan, then all is on the up and up. I have no objections. But did you intend to omit this small caveat, or were you intending for me to understand this as a simple one year term loan by the customer to the bank. This scenario has nothing to do with FR banking.

Yancey Ward June 29, 2006 at 12:47 pm

Mike,

I think I see where you are going with this last question. Though Paul will answer your question, I would gather that he would have no problem with this scenario. The barter transaction you proposed would involve the initial saver, the holder of the bank’s IOU, transferring his abstention from consumption to another party.

Yancey Ward June 29, 2006 at 12:57 pm

Paul,

You are just too quick! :~)

Though, you do make a good additional point about the potential omission in Mike’s scenario. That one had not occurred to me.

banker June 29, 2006 at 1:18 pm

The scenario in which I was referring to was the absence of the Federal Reserve system; this is just speculation on my part. Assuming there is no Fed I would guess people would use gold as the primary currency. Paypal type companies would hold the physical gold and act as a custodian/trust for clients. Banks would pretty much accept deposits (investment), pay out interest cost, and loan out deposits to make money.
The currency would basically be e-gold and private banks in this case would be unable loan out more than 100% of deposits. Cash in = Cash out.

Chris Donabedian June 30, 2006 at 1:03 am

I don’t care for the catagorical characterization of Wall St. (as a “moral sewer”. While there are plenty of cretons on Wall St., there are also many brilliant businessmen who provide the critical function of allocating capital among and within businesses, and many of them are honest and ethical people. Furthermore, many of these men have created ever more efficient innovations for businesses and individuals to manage risk. I know a few of these men and women and find that kind of categorical disparagement to be offensive.

Peter June 30, 2006 at 2:07 am

banker: do you have in mind something like CyberGoldBank, perhaps?

Mike Sproul June 30, 2006 at 10:08 am

Paul:

I lend the bank one ounce of silver for 1 year. I get the bank’s interest-bearing IOU, while the bank lends the silver at interest. The guy who borrowed the silver can use it to buy a loaf of bread, while I can also use the bank’s IOU to buy a loaf of bread. Furthermore, the bank’s IOU can be deposited in a second bank and lent, while the depositor receives the second bank’s IOU, which he can also use to buy a loaf of bread. This is fractional reserve banking. Still no objections?

Also: In my previous example of notes backed by gold, silver, copper, land, etc., do you suppose that as new notes redeemable in copper are issued, there would be no effect on the value of notes redeemable for silver?

Are you feeling like a real bills adherent yet?

quasibill June 30, 2006 at 10:39 am

Mike,

But money is a present good, not an IOU.

When I accept money, I am not accepting a contract for future performance – I have the present good in hand. That good may increase or decrease in value, but it is in fact a present good.

An IOU, on the other hand, is a promise of future performance. When I accept an IOU, I know that I am accepting a risk of default, that I do not currently have title to the underlying good, and that in fact, I may never have title to it, because the debtor may default. These are not the considerations people think of when they accept money – they think they have title to a present good.

Only in the current distorted market created by the Fed can people mistake IOUs for money. They are not the same thing. Someone can pay money for an IOU (obviously garnering a discount in the process), but that does not make them an identity, anymore than the fact that you buy a car with money makes a car money.

The problem with RBD is that people do expect that they can pull their money out entirely, on demand. It is not a loan. If banks were forced to tell customers that their deposits were loans that couldn’t be called for a year, I think banks would have a lot less business. Instead, they call them deposits, and have the government provide insurance and excess liquidity to cover for the fact that they are fraudulently using the deposits to make loans.

Vince Daliessio June 30, 2006 at 11:17 am

quasibill sez;

“But money is a present good, not an IOU.”

Right on, Bill.

Look – I put money into my investments knowing that there is both some increase in risk and decrease in liquidity from doing so. I accept that in exchange for a return.

But all I want when I put money in a bank is a low rate of interest and the ability to get at it, with a minimal risk to the principal.

Two different things.

Paul Edwards June 30, 2006 at 1:08 pm

Mike,

“I lend the bank one ounce of silver for 1 year. I get the bank’s interest-bearing IOU, while the bank lends the silver at interest. The guy who borrowed the silver can use it to buy a loaf of bread,”

So far so good, but…

“while I can also use the bank’s IOU to buy a loaf of bread.”

Not at the grocers I do business with. There, they intend to take only money. This is the point where you introduce massive confusion into your argument. You can’t take 1-year bond to the local store and exchange it for goods. People want M O N E Y not someone’s loan! Now, you can fraudulently misrepresent a piece of paper as clear and exclusive title to present money, but people will only accept it if they fall for it. Your premise depends on that people will fall for it, which thanks to legal tender laws, FDIC, the fed, and various establishment lies and propaganda, they do, or at least they must.

“Furthermore, the bank’s IOU can be deposited in a second bank and lent, while the depositor receives the second bank’s IOU, which he can also use to buy a loaf of bread. This is fractional reserve banking. Still no objections?”

Mike, if I didn’t know better, I’d think you are just trying to be funny by concocting this bizarre addition to the very sensible scenario you laid out in your previous post. You are proposing to loan out a loan? I suppose we could loan out a lone on a lone of a lone? A person can sell his bond to someone for money, but it must be for real money, not some counterfeit duplicate claim to someone else’s money.

“Also: In my previous example of notes backed by gold, silver, copper, land, etc., do you suppose that as new notes redeemable in copper are issued, there would be no effect on the value of notes redeemable for silver?”

I don’t get the question.

“Are you feeling like a real bills adherent yet?”

Less so than ever.

quasibill June 30, 2006 at 1:23 pm

Vince,

“But all I want when I put money in a bank is a low rate of interest and the ability to get at it, with a minimal risk to the principal.”

I would have to call that an investment/loan as well, and not a deposit account. A deposit account would likely generate no interest, as it would not be available to be loaned out (of course, I won’t discount the possibility of some entrepreneur finding a non-fraudulent way to make money off a bailment, but I can’t think of it myself right now :)). The only risk in a deposit would be that of theft, or loss of value in the money itself. In fact, for a true deposit situation, one would likely pay money to the bank for the service of holding the money in a secure place.

The fraud comes in where you claim to have present title to the money you deposit, while at the same time, the bank is lending out the same money to another person. Only if you agree to forgo present title for a time period (i.e., a loan) can the bank then non-fraudulently lend out your money during that time period.

I’m not as strong a critic of fractional reserve banking as some here. I believe there is nothing wrong with it as long as the customer is made aware of what is being done and can choose to avoid it – then it’s just an investment. But I agree that currently, it’s a fraud, as present title to a single piece of money can be in the hands of several different people.

Mike Sproul June 30, 2006 at 7:19 pm

Paul, Vince, and Quasibill:

Paul said in his previous post that he had no objection to the issue and subsequent barter of those silver-based IOU’s. So if I take that silver IOU, which has a fair market value of one ounce at the start of the year, and I trade it for one loaf of bread, he’s OK with that. But let someone try to call that silver IOU money, and suddenly all three of you would call it fraud. Simple solution: stop calling the IOU’s money, but let people continue to barter them as they please.

Now, if the original ounce of silver and the IOU are both in the hands of the public, and both being bartered, spent, or whatever, in exchange for loaves of bread, you cannot deny that the fractional reserve process is in operation. So you either have to call it fraud and prohibit people from bartering their IOU’s, or you have to recognize that it is not fraud as long as both the borrower and lender agree to the issue of the IOU.

As for the silver and copper notes: My point is that on real bills principles, copper notes could proliferate without affecting the value of the silver notes, and likewise for any other kind of notes.

Paul Edwards June 30, 2006 at 8:38 pm

Mike,

“Paul said in his previous post that he had no objection to the issue and subsequent barter of those silver-based IOU’s. So if I take that silver IOU, which has a fair market value of one ounce at the start of the year, and I trade it for one loaf of bread, he’s OK with that. But let someone try to call that silver IOU money, and suddenly all three of you would call it fraud. Simple solution: stop calling the IOU’s money, but let people continue to barter them as they please.”

Mike, first of all, we live in a monetary economy not a barter economy, so people expect to be paid with money, not bartered with in financial securities. Therefore, in general, to the extent that people are aware that you are offering them a financial security rather than money in exchange for a present good, they will not be willing to trade with you. To the extent that they are willing to trade with you, they have been fraudulently misled to believe that you are offering money and not a security. I say generally, because the odd person is actually looking for a security. But not your grocer or car dealer or employee, or…. etc. etc.

Mike Sproul July 1, 2006 at 2:33 pm

Paul:
But supposing for the sake of argument that we are in a time or place where people do in fact trade using things with varying degrees of ‘moneyness’, those silver certificates could and in fact would be used to buy things. So if you say on the one hand that people should be allowed to issue and trade with those certificates, while on the other hand you oppose letting the certificates be issued on fractional reserve principles, then you are caught in a contradiction.

Peter July 1, 2006 at 9:15 pm

There’s no contradiction here; there’s no fractional reserve – the silver is not available on demand, on presentation of the IOU at the issuing bank; you have to wait a year, or however long the IOU has to run. Your idea that the IOUs can be deposited at another bank for other IOUs is just nuts – why would anyone do that? The bank wouldn’t accept it unless the interest paid on the deposited IOU was more than on their own IOU, and the customer wouldn’t accept it unless it was the other way around. I.e., it would never happen.

Mike Sproul July 2, 2006 at 1:06 am

Peter:
The ounce of silver is in the hands of the person who borrowed it from the bank, and it can be used to buy things. The silver note is in the hands of the person who deposited the silver, and the note, worth 1 ounce, can also be used to buy things. That is fractional reserves in a nutshell.

The IOU, which starts the year at 1 ounce and ends the year at 1.05 oz, is a thing of value, and like any thing of value, it can be lent. A borrower borrows it at the start of the year when it is worth 1 oz, and repays it at the end of the year when it is worth 1.05 oz, paying 5% interest like anyone else. Not a common transaction of course, but no reason it couldn’t happen.

Peter July 2, 2006 at 2:29 am

That is fractional reserves in a nutshell.

No, it isn’t.

The IOU, which starts the year at 1 ounce and ends the year at 1.05 oz, is a thing of value, and like any thing of value, it can be lent. A borrower borrows it at the start of the year when it is worth 1 oz, and repays it at the end of the year when it is worth 1.05 oz, paying 5% interest like anyone else. Not a common transaction of course, but no reason it couldn’t happen.

I explained above why it couldn’t happen.

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