To all you quibblers over what is money and what is not:
Around 1700, people denied that the new-fangled paper pounds were money, since each paper pound had ultimately to be paid in coin. Around 1840, people denied that the new fangled checking account pounds were money, since they were ultimately paid in notes or coin. Since about 1950, people have denied that credit card dollars are money, since they are ultimately paid with checks, notes, or coins. Seems it takes 100-150 years for people to recognize money when they see it. So in the year 2100, people will finally recognize that credit card dollars are actually money (except for Austrians, of course). As for recognizing that money’s value depends on its backing, that will probably take about as long as the heliocentric theory of planetary orbits did–2-3 thousand years or so.

We can all be rich! Hurray! I am a genius! Hurray!

All people should be allowed to print dollars under the condition that we all commit ourselves to offer them as loans, which would be a very good thing. We would not need to work anymore! As long as the loans we make are backed with property, everything is just fine. We could even make more backing and provide more security through not lending out more “money” than the value of the properties which we already own (our houses, cars etc). If we all also call ourselves “The Federal Reserve”, it will be even better! I wonder if I will receive the “Nobel Prize” for this? I am a Swedish guy and I live in Sweden, so the Nobel Prize committee should really recognize me with such a genial idea. But the Nobel Prize committee is in Stockholm and I live in Göteborg (only the second largest city in Sweden)? I know it! They will discriminate me for being a “Göteborgare” (an inhabitant from Göteborg). That is why I will not receive the “Nobel Prize” for this genial idea. That is the only reason. They might change their minds if I also suggest that all people should be allowed to print kronor (Swedish currency). Naturally, the printing of kronor must be done under the same specifications that I have suggested for being allowed to print dollars. Those specifications are of the greatest importance for making this a very good thing.

Björn Lundahl,
Göteborg, Sweden

A 100 percent fiat money reserve standard.

If we lived under a system which banks are required to maintain 100 percent reserves of fiat money against all demand deposits and the Central Bank did not print more money (including minting) than those that are worn- out, that would, also, bring an end of the business cycle and inflation. Banks would no longer be able to create money out of thin air.

Some implications:

A/ The government still has the power to change the reserve requirements.

B/ Fiat money would still be counterfeited money (as money can arise only out of a commodity previously used directly in a barter situation).

C/ People would still not be allowed to choose which goods they want to use as a medium of exchange (money).

D/ The government still influence the market and the system, therefore, deviates from pure liberty and a pure free market.

Björn Lundahl
Göteborg, Sweden

Bjorn:
No money-issuing bank, public or private, is a counterfeiter. Banks only issue money in exchange for assets whose value is equal to or greater than the money issued. Banks also stand ready to use some of those assets to buy back the money they have issued. No counterfeiter does this. For example:

…ASSETS…………………..LIABILITIES
1) 100 oz. silver deposited…..100 paper dollars
2) IOU worth $200……………200 paper dollars

In line 1, the bank receives 100 oz. of silver on deposit and issues 100 paper receipts called dollars in exchange. In line 2, a customer borrows 200 newly-printed dollars, while promising to repay (say) $220 next year. At a 10% interest rate, this IOU is worth $200 today. The value of each dollar must remain at 1 oz, even though the supply of dollars has tripled, because if it fell below 1 oz, customers would return their dollars, demanding one oz. each. The bank could respond by selling its $200 IOU for 200 of its own paper dollars and then burning the dollars. Then the bank could pay out the remaining 100 oz. for the remaining $100. At no point does the value of the dollar fall below 1 oz.
This does not create a free lunch for the banker or anyone else.

Bjorn:
I had this same discussion with Rothbard around 1993 or so, when he gave a seminar at Cal. State Northridge. I said “What if the bank sold 50 oz. of silver for an equal value of gold. Is that fraud?”
He answered that it was, then became angry, saying things like “Why can’t you understand this?” When I spoke to the four other econ professors who had been at the seminar, and asked if they believed that stuff about fraud, one answered “Not a word.” and the others agreed. It’s simple: If the banker sells or lends the silver, and the customers agree to it, it is not fraud. (Rothbard’s reply to that one was “They don’t know what they’re agreeing to.”, and that pretty well cemented his reputation as a kook.)

Mike S> You missed the point about backing.

No point was missed. You don’t know the difference between a private bank and the government.

If a banker gets 100 oz. of silver on deposit, and issues 100 paper receipts called [defined as] dollars in exchange, then each of those dollars will be worth one ounce, even on nights and weekends, when the dollars are temporarily inconvertible. If they get another 100 oz deposit and issue another $100, each dollar will still be worth one ounce, because backing has moved in step with the issue of dollars.

No problem with that. Who said otherwise?

Mike S> If someone comes in with an amount of gold that is worth 100 oz. of silver, then the bank can issue another $100 for it without causing inflation.

Um, no they can’t, because “today’s” market parity of X weight of gold to Y weight of gold is not “dollars.” It is just “today’s” exchange rate between silver and gold in terms of dollars. And dollars were solely specified (defined) in silver. A depositor may willingly choose to accept the particular weight of gold as a substitute, but that is another matter. You are not justified in simply assumming a pegging of exchange between commodities, any of which may be used as money.

Mike S> The same remains true if people bring in 100 oz. worth of wheat, land, bonds, etc.

Mike, that is just pure nonsense. You have some bizarre notion of constant exchange value of commodities. One can’t issue silver backed notes because they got a z grams of crack as a deposit. They could, however, issue crack backed notes. If someone issues a note for 100 oz. of silver it doesn’t mean z grams of crack. It means what it says on the note — the note is basically a contract of redemption.

Mike S> Perfectly true. GM might get more or less than $60 of new cash flow.

No, GM would have gotten exactly $60 of new cash flow, and don’t start confusing that with inflation or deflation, which has to do with changes in the total money stock, and more. What the GM stock was valued at before and after the stock sale is another matter entirely.

Mike S>
…ASSETS…………………..LIABILITIES
1) 100 oz. silver deposited…..100 paper dollars
2) IOU worth $200……………200 paper dollars

In line 1, the bank receives 100 oz. of silver on deposit and issues 100 paper receipts called dollars in exchange. In line 2, a customer borrows 200 newly-printed dollars, while promising to repay (say) $220 next year. At a 10% interest rate, this IOU is worth $200 today. The value of each dollar must remain at 1 oz, even though the supply of dollars has tripled, because if it fell below 1 oz, customers would return their dollars, demanding one oz. each. The bank could respond by selling its $200 IOU for 200 of its own paper dollars and then burning the dollars. Then the bank could pay out the remaining 100 oz. for the remaining $100. At no point does the value of the dollar fall below 1 oz.

You should at the outset say you are defining a dollar as 1 oz of silver. Are you saying that? If so, the comment “if it fell below 1 oz” is a nonsensical condition — the matter is purely definitional. And what sucker, pray tell, would buy the empty IOU, which calls out 200 non-existant oz. of silver (220 oz futures)? Say the inital borrower was building a house and bought some lumber with the silver backed dollar notes. You’re saying the IOU for $220 future dollars worth of presently non-existant silver is valuable to the lumbar company (or someone else in the chain)? You’re saying the lumbar yard says “sure, fine, I feel good about the next unknown Comstock strike — I’ll gamble it — the IOU is fine”? Does the intial author of the IOU know they are on the hook for mining some silver? Tell me more.

Mike S> I had this same discussion with Rothbard around 1993 or so, when he gave a seminar at Cal. State Northridge. I said “What if the bank sold 50 oz. of silver for an equal value of gold. Is that fraud?”
He answered that it was, then became angry, saying things like “Why can’t you understand this?”

His question looks to be a good one. If I deposit 50 oz of silver, and get a note of deposit for it, then that is what I expect to get back, not gold. I am not an expert on Rothbard, but I think he viewed the bank in an old-fashioned sense, where it would be more like a safety deposit box rather than the modern view. Of course, someone would have to pay for the safe keeping, and I think I remember him writing so. I think from the private contractarian perspective, depositors and banks could make any arrangements they wish. This means they wouldn’t necessarily demand the exact same oz of silver back that they deposited and may even accept certain exchange ratios to other materials as gold. As long as the contract spells it out (the notes reflect this in an obvious way) I don’t think there is a problem. In fact, even fractional reserve (to me) is conceptually acceptable on the private market if the parties know what they are agreeing to. (The notes *say* they are fractional — the taker willingly accepts the risk of a bank run when they accept the notes in a transaction.)

Mike S> When I spoke to the four other econ professors who had been at the seminar, and asked if they believed that stuff about fraud, one answered “Not a word.” and the others agreed.

I doubt they even understood what they weren’t agreeing to. So are you saying this is like a democratic theory? We vote to decide which is the right perspective?

Mike S> It’s simple: If the banker sells or lends the silver, and the customers agree to it, it is not fraud.

I like how you now add “if they agree to it.” I have my doubts about the details of your conversation with Rothbard.

Mike S> Rothbard’s reply to that one was “They don’t know what they’re agreeing to.”, and that pretty well cemented his reputation as a kook.

When it comes to economists, that is pretty much a non-statement. It’s like the imates X & Y of an asylum calling inmate Z a nutjob.

PS: Regarding credit cards, send your’s to me and I will check them to see if they are money.

Björn: Mike Sproul is a crank. Just ignore him. “Don’t feed the trolls”

Greg:
“I think from the private contractarian perspective, depositors and banks could make any arrangements they wish. This means they wouldn’t necessarily demand the exact same oz of silver back that they deposited and may even accept certain exchange ratios to other materials as gold. As long as the contract spells it out (the notes reflect this in an obvious way) I don’t think there is a problem. In fact, even fractional reserve (to me) is conceptually acceptable on the private market if the parties know what they are agreeing to. (The notes *say* they are fractional — the taker willingly accepts the risk of a bank run when they accept the notes in a transaction.)”

My point exactly. And as long as money-issuing banks only issues new money in exchange for assets–not necessarily silver–of adequate value, then every new issue of money is matched by an equal increase in bank assets, and there is no fraud and no inflation.

Breaking with my own advice to ignore the clown:

A key point was that the customers agree to it. That is, they agree that the bank will actually keep just 50 oz. of silver on hand, while the rest is lent at interest, part of which will be paid to the depositor in order to compensate him for the small chance that there will be times when the bank will not be able to pay silver on demand. Two rational parties with their eyes open: no fraud.

This is perhaps the first sensible thing you’ve ever written…but that’s not a demand deposit! If customers want to lend their money to the bank for its own use, in return for interest, nobody has any problem with that.

Regarding this:
[in the event of a bank run] The bank could respond by selling its $200 IOU for 200 of its own paper dollars and then burning the dollars. Then the bank could pay out the remaining 100 oz. for the remaining $100.

Just who are they supposed to sell these IOUs to? When a bunch of customers turn up demanding their ounces of silver, they want silver, not IOUs! You’ll have bankers – and RDB cranks, hopefully – hanging from the nearest telephone pole.

Banker:

Once or twice in my life, I’ve tried to withdraw a few thousand in cash from my bank and been told they didn’t have enough cash on hand. I was miffed, but kept my money in the bank for the sake of convenience and the interest they paid. Like most depositors, I recognize that this will happen sometimes, but I still prefer fractional reserve banks to 100% reserve banks, partly because of the interest they pay, and partly because they are less vulnerable to robbery. The only 100% reserve bank I know of was the Bank of Amsterdam, established 1609, and I believe it crashed around 1800. Apparently natural selection has favored fractional reserves.

I was not talking about the merits between a private fractional reserve bank versus 100% reserve bank. I am correcting the mistaken belief that “receipts” issued by a fractional bank is considered a true currency. You CANNOT use IOUs from a fractional reserve bank as currency. You can deposit Real currency into a fractional reserve bank and get an IOU, but you cannot use this IOU as a substitute for currency unless the bank is 100% reserve bank.

Basically, it can be summed by:
Custodian vs Investment vehicle

PS Do you use a treasury bond to buy groceries?

Banker:
“You CANNOT use IOUs from a fractional reserve bank as currency.”

A checking account dollar is my bank’s IOU, which promises to deliver one paper dollar on demand. I use checking account dollars to buy stuff all the time. I also use credit card dollars, which are the credit card company’s promise to deliver a checking account dollar to the merchant. I even use gift certificate dollars, which are the merchant’s promise to deliver a dollar’s worth of stuff on demand.

The only 100% reserve bank I know of was the Bank of Amsterdam, established 1609, and I believe it crashed around 1800. Apparently natural selection has favored fractional reserves.

There is nothing “natural” about the economic policies of one of the most aggressively mercantilistic governments at the height of its mercantilistic period.

That’s the trouble with historical data — you can’t isolate an economic actor from the environment in which exists. I assume this bank was in competition with other banks. To what extent did government policy favor competitors?

In other words, to be useful as an example, you will have to account for how all of the banks of this period were affected by the legal environment in which they all operated.

Mike Sproul:

Well, actually, I am a Libertarian. I did not think that a small request that the minimum fractional reserve be placed on a bank note disqualified me. If a bank is not operating on 100% reserves, consumers have a right to this information. For example, suppose I am running a small store. There are four banks in town, Bank A at 100% reserve, Bank B at 90% reserve, Bank C at 60% reserve and Bank D at 40% reserve. In good economic times, I would probably do business with all four bank’s banknotes. However, if things turn sour, I may start restricting the amount of banknotes from Bank’s C and D and if I think there is trouble, I may stop accepting them altogether. Even when I do accept them, I will hurriedly redeem them either for gold coin or exchange to banknotes from Bank’s A or B.

Bottom line, it is a matter of the customer of the bank being fully informed, which point I think you conceded earlier in the thread.

Bjorn:
“A bank makes a contract with a depositor that the 100 oz silver is only redeemable during daytime and rushes to make a 100 oz silver loan in the evening and adds 100 oz silver to the “daytime demand deposit” of the borrower. In day two, during daytime, the bank must meet its obligations for both of them, but how?”

The silver is lent out at sundown, and repaid at daybreak. Overnight there is no obligation the bank has to meet. The next day, the bank has its 100 oz. of silver back, so it can meet its $100 obligation. Meanwhile, overnight the borrowed silver can be spent, and so can the 100 dollars.

Mike Sproul

“The silver is lent out at sundown, and repaid at daybreak. Overnight there is no obligation the bank has to meet. The next day, the bank has its 100 oz. of silver back, so it can meet its $100 obligation. Meanwhile, overnight the borrowed silver can be spent, and so can the 100 dollars”.

Peter

”If the 100oz borrowed overnight is spent, how does the bank get it back the next morning???”

I wonder too. If the borrower does some sort of short term speculation and can not pay back at daybreak, the bank is in trouble, because it is a criminal act if the 100 oz silver is not there. The bank itself could do the speculation, but it would not dare. In reality this would be a very serious matter and not just an intellectual abstraction for mental play.

Björn Lundahl

Mark Brabson

I am against fractional reserve banking and I do believe that 100% gold reserve banking is in accordance with true libertarian principles.

Never mind, I also believe that to avoid lawsuits in a libertarian society, there would be a lot of warnings and information on products, and in connection with services, which are sold. When buyers know the risks that are involved in using a certain product or service, this knowledge is an essential part of a contract.

Björn Lundahl

Mike Sproul.

“It’s not a criminal act if the borrowers agreed to it in the first place. Banks lend money overnight all the time, where it is spent on short-term projects, bonds, etc. It is usually repaid, and if it’s not the depositors knew the risk. Depositors would correctly figure that the 100% reserve bank might be robbed overnight anyway, so why not let the money be lent overnight for a profit, as long as the money’s at risk anyway”.

If the money is not there for the depositor during daytime the bank is in trouble. During daytime the deposit is a demand deposit. That is the contract and nothing less.

Anyway, as the bank notes are not payable on demand during night time, they also cease to be bank notes and a part of the money supply during the same period. If merchants accept inconvertible “bank notes” during nights have nothing to do with it. They might accept “bank notes” that are convertible even further away in time.

This discussion is all about technical issues and has nothing to do with neither fractional reserve banking nor 100% gold reserve money.

Björn Lundahl
Göteborg, Sweden

Billwald

” Why do the gold traders who advertize only on “talk radio” want my valueless govt money more than they want their metallic gold?”

I do think it, partly, has something to do with legal tender laws.

I quote from answers.com:

“Legally valid currency that may be offered in payment of a debt and that a creditor must accept.”

And:

“Money recognized by law as acceptable payment for debts owed to creditors. In the United States, legal tender (also called lawful money) is all forms of circulating paper money, mostly Federal Reserve Notes, and coins. The term means that money offered as payment has the backing of the government and must be accepted by a creditor, unless a contract calls for another method of payment”.

http://www.answers.com/topic/legal-tender

For more causality, please also, go and read this:

http://mises.org/money/3s3.asp

Björn Lundahl
Göteborg, Sweden

In response to Mike Sproul’s November 2nd post – The “money” you borrow isn’t backed by the house, it’s backed by your future labor. The Fed bets on you toiling for the next 30 years. They print up the debt money without contributing anything to society. You go to work, contribute to society and the Fed profits on “money” they didn’t have to begin with. Under this counterfeiting system, the people get the privilege of trading in their lives in order to make their interest and tax payments.