In a 100% Gold Backed Currency, would credit cards still exist? No fiat, no credit?
What's the (supposed) relationship?
If you pay for something by credit card, then what happens is that the bank (or whoever is the issuer of the credit card) deposits cash into the merchant's bank account, and at the same time increases the amount that you owe on your credit card.At first glance, credit cards appear to confer conflicting claims to money, just like demand deposits in fractional reserve banks. If everyone used their credit card right up to its limit on the same day, then it is unlikely that the banks could meet the demand. Where would they get that much gold to pay the merchants?One way would be for each bank to keep a separate gold reserve for each credit card holder up to his credit limit. But then, where would the bank have got the gold from? If it got it from time-deposits, then it can't afford to keep it in the vaults just so that someone can use his credit card whenever he feels like it. It could do so by charging the holder interest on his undrawn balance, but who would want a credit card like that? It would no longer then be a credit card, but a debit card linked to a loan account incurring interest on its undrawn balance.Fortunately that is not necessary. A credit card does not confer a claim to money, but a conditional right to BORROW money on demand. It is conditional on availability of funds. There is therefore no conflict between multiple claims. A bank need merely invest some of its time-deposits in liquid investments sufficient to meet the totality of expected credit card claims. When the credit card is used, the bank sells some of those investments in order to pay the merchant, and debits the customer's credit card balance. In accounting terms, it does this: debit investment asset credit cash on hand (proceeds of sale)and then: debit cash on hand (to pay merchant) credit loan assetIn the unlikely event that everyone uses his credit card at the same time, the bank might have to dig into its capital to meet the demand. If that is not enough, then it might have to borrow from other banks. And if it still cannot raise the required funds, then the credit card transaction would be denied. Not with the message "credit limit exceeded" but with the message "funds exhausted".What is more likely is that the bank will allow the transaction, by obtaining funds at a higher interest rate, possibly at a loss. Then next month it will recoup its loss by raising interest rates on credit card balances across the board. Even today, however, I believe that the bank has the right to deny transactions on credit cards, if the need arises.So - yes, credit cards are consistent with 100% gold-reserve banking. It would be simpler if everyone used a debit card instead, but credit cards will flourish as long as merchants persist in paying customers' short term interest costs for them.
ViennaSausage: In a 100% Gold Backed Currency, would credit cards still exist? No fiat, no credit?
Assuming 100% commodity currency and 100% reserve banking. For purposes of example, we will assume gold is the currency.
My thinking is that credit cards as we know them would NOT exist. In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce, it MUST be tightly and strictly managed. Unsecured, revolving credit is NOT the best allocation of scarce credit. Instead, most credit would likely go in the secured direction, such as mortgages, business loans and car payments. Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium. For most of us, credit cards would be a memory.
I am afraid folks would actually have to SAVE to get the things they want. PERISH THE THOUGHT. :) Seriously though, the days of instant gratification via credit cards would be over and rightly so.
Mark B.:I am afraid folks would actually have to SAVE to get the things they want.
The whole economy would change without unsecured credit. Perhaps for the better in the sense of personal responsibility, but perhaps worse, in the sense of instant gratification.
Mark B.:Unsecured, revolving credit is NOT the best allocation of scarce credit. Instead, most credit would likely go in the secured direction, such as mortgages, business loans and car payments.
The market will decide the best allocation of scarce credit. And there will be credit in abundance - at the right price.Current credit cards already charge an inordinate amount of interest - both to the merchant who pays the initial charge-fee, and to any consumer imprudent or desperate enough not to pay off his balance within the interest-free period. Yet they are still popular.Unsecured credit is expensive. But to many consumers it is preferable to no credit at all. Living without a fridge, or a washing machine, can be unpleasant. To anyone who gets a job when their savings are low, a credit card can be a godsend.
Perhaps the name - credit card is what is throwing everyone off base? I tend to use this moe (media of exchange) like one would a check or debit transaction. Currently having a grace period (25 days?) to pay does put this use into a short term loan status, but seeing how the agreement is that if paid in full, then no interest is charged. Great loan rate (0%) don't you think?
I can't see why these wouldn't exist in a gold based economy, but I bet there would be a minimum 'accounting/handling' fee put onto this use. Isn't this rather like asking if there will be LOANS in a gold based money system? I'd bet that the main reason credit cards as we now know them exist is due to the high interest charged and PAID by those who do NOT pay the total debt each month.
Mark B.: In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce...
In 100% reserve banking, credit will be at a premium, since it could not be artificially created. It could only exist to the level of actual savings. Since credit would be scarce...
Why do you think so? Most businesses, except for retail sales, operate on credit anyway - customers often have 30-50 days to pay. They'd have the same deal with credit card suppliers, so they really don't have to pay over any money before the customer pays off his CC (except for idiots who don't pay it off each month; and they already get charged a ridiculous rate of interest)
Mark B.: Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium.
Certainly elite individuals might possess lines of unsecured credit, but likely at a VERY expensive premium.
You mean, like, credit-card level interest rates?
Jain Daugh: but I bet there would be a minimum 'accounting/handling' fee put onto this use.
but I bet there would be a minimum 'accounting/handling' fee put onto this use.
They already charge a fee - they just charge it to the merchant, not you, and they don't allow him to charge you the difference.
Credit would be common, but it would be different. Today if I want to buy something on credit from Walmart I get Visa to pay Walmart up front and I'll pay Visa back in installments.
Without an easy credit environment the risk would not be externalized. I would pay the installments directly to Walmart, who would not be compensated upfront.
It is not required for $10 worth of liquid assets to exist some where for me to buy a $10 item on credit.
Yes, credit would still exist.
Yes, of course. Think of a credit card as a means of acquiring a fairly small, short term loan. The problem would be a bank could not issue more credit than it had in reserve, but it's not as if loans stop existing in 100% reserve banking. And the bank able to accumulate more available credit to issue out in these instantaneous transactions would undoubtebly be more prosperous in it's credit card business.
JonBostwick: Without an easy credit environment the risk would not be externalized. I would pay the installments directly to Walmart, who would not be compensated upfront. It is not required for $10 worth of liquid assets to exist some where for me to buy a $10 item on credit.
I hope to God you are wrong, and that the system does NOT evolve into this.This is fractional reserve banking under another name. Instead of using the bank's credit to buy things, you are using your own personal credit. You could take on ten times as much debt as you have gold to back it up with, and it would be no different from a bank issuing $10 of bank-credit (i.e. money) for every $1 in real savings.Entire share bubbles have been financed using this mechanism. The South Sea bubble, for example.The whole point of Rothbard's 100% reserve system was that ALL borrowing would be financed out of PRIOR saving. But you want to be able to buy a $10 item on credit without $10 worth of prior saving.At least the business cycle which it would give rise to it would be mercifully short, thanks to the requirement to make repayments in gold instead of fiat money.
You seemed to be confused about savings. For credit to exist prior savings must be owned by the creditor, not the debtor.
LanceH:You could take on ten times as much debt as you have gold to back it up with, and it would be no different from a bank issuing $10 of bank-credit (i.e. money) for every $1 in real savings.
Yes it would. If I take on debt, I am receiving the real savings of someone else. A fractional reserve bank lies about how much gold it owns.
LanceH:The whole point of Rothbard's 100% reserve system was that ALL borrowing would be financed out of PRIOR saving. But you want to be able to buy a $10 item on credit without $10 worth of prior saving.
Thats silly. The $10 was saved by walmart. Thats why they are the creditor and I am the debtor.
But like I said, the savings are not LIQUID. The savings are in the form of the actual product.
JonBostwick:For credit to exist prior savings must be owned by the creditor, not the debtor.
False. Suppose that I, a penniless vagabond, offer to shine a millionaire's boots for 20c, and he accepts my offer, and I shine them. I then expect him to pay me the 20c he owes me. I am the penniless creditor, he is the wealthy debtor. Credit has nothing to do with prior savings. It is simply faith in someone's ability and willingness to pay."If I take on debt, I am receiving the real savings of someone else."Indeed? Then if I borrow $1000 from the bank, I am in receipt of real savings? If I promise to pay someone to spit at me, I am in receipt of real savings?"the savings are not LIQUID. The savings are in the form of the actual product."OK, let us suppose that I do, in fact, receive something which might be described as real savings (even though my bank manager might be less than impressed if I offer him my Walmart goods as collateral). Then what does that have to do with the source of my finance?If I buy a house with fractional reserve notes, does that make those notes any more legitimate? The house can be regarded as a form of illiquid saving, but it has been purchased with a debt-instrument that is NOT backed by real savings. It is not a matter of what I spend the money on, but of where I got the money from. Did I get my payment out of real savings? I did not. I got it by conjuring up a debt-instrument out of thin air."The $10 was saved by Walmart."Suppose I buy something from a company under your deferred payment arrangement. In exchange for a good, the company is accepting my IOU. That IOU is not backed by anything but my promise to pay. Under normal conditions I expect to be able to honor it. But if I lose my job, or if I have taken on too much debt, then I might not keep my promise.Now suppose that I pay for the good with a banknote drawn on a fractional reserve bank. Under normal conditions it expects to be able to honor it. But if there is a bank run, then it might not keep its promise.In both cases, the means of payment is an IOU which is not backed 100% by gold but by the expectation of future income."A fractional reserve bank lies about how much gold it owns."Very well then, let's change the banknote for a promissory note, or even an interest-bearing banknote, redeemable in the future. That's even more similar to my own IOU, which also falls due in the future.Money consists in whatever is commonly accepted as payment. If a large proportion of companies operate in the way that you suggest, then the effect will be inflationary, since if they had to accept cash instead, then the transaction would take place at a reduced price or possibly not at all.Actually, credit granted on consumer goods is not too big a deal. It would get serious if factories started selling stuff to merchants on installments, and then the merchants' IOUs (i.e. bills of exchange) were themselves negotiable instruments and used as money substitutes. A discounted bill of exchange was the preferred medium of exchange for free merchants centuries ago. In Amsterdam whole trading bubbles were financed by chains of bill of exchange. If that is the future direction of credit, if history is destined to repeat iself, then 100% reserves in banks will not be enough to stop credit expansion and its consequences.
Jain Daugh: Perhaps the name - credit card is what is throwing everyone off base? I tend to use this moe (media of exchange) like one would a check or debit transaction. Currently having a grace period (25 days?) to pay does put this use into a short term loan status, but seeing how the agreement is that if paid in full, then no interest is charged. Great loan rate (0%) don't you think? I can't see why these wouldn't exist in a gold based economy, but I bet there would be a minimum 'accounting/handling' fee put onto this use. Isn't this rather like asking if there will be LOANS in a gold based money system? I'd bet that the main reason credit cards as we now know them exist is due to the high interest charged and PAID by those who do NOT pay the total debt each month.
Sorry to burst your bubble Jain Daugh, but credit cards most certainly do not allow you to borrow for a grace period without paying interest. The "minium 'accounting/handling' fee" has been there all along. Merchants pay something like 3% or more on every single CC transaction, so your first month or two's interest is just built into the price of goods you buy.
If you think your CC is equivalent to a cheque or debit, then you are getting sorely ripped off. Many merchants will sell at a discount if you pay with anything but CC; those who don't are just pandering to debt ridden CC junkies who probably are their best customers anyways.
No adjustment needed for a gold based economy, although interest rates might drop alot since inflation would be basically nil.
LanceH:Very well then, let's change the banknote for a promissory note, or even an interest-bearing banknote, redeemable in the future. That's even more similar to my own IOU, which also falls due in the future.Money consists in whatever is commonly accepted as payment. If a large proportion of companies operate in the way that you suggest, then the effect will be inflationary, since if they had to accept cash instead, then the transaction would take place at a reduced price or possibly not at all.Actually, credit granted on consumer goods is not too big a deal. It would get serious if factories started selling stuff to merchants on installments, and then the merchants' IOUs (i.e. bills of exchange) were themselves negotiable instruments and used as money substitutes. A discounted bill of exchange was the preferred medium of exchange for free merchants centuries ago. In Amsterdam whole trading bubbles were financed by chains of bill of exchange. If that is the future direction of credit, if history is destined to repeat iself, then 100% reserves in banks will not be enough to stop credit expansion and its consequences.
Definitely money substitutes could be inflationary, as more and more media become accepted. But like you say, they are "discounted" bills of exchange so the value of the actual money -- gold remains at a premium, to whatever the extent of the risk and interest rates require. Their value could be as much or as little as anyone wishes to attribute to them. What's important is that there is no law imposing their acceptance at any fixed rate with actual gold.
I find this staunch libertarian opposition to fractional reserve banking somehow misguided. So long as a bank does not expressly lie about the status of depositor's claims as being conditional on availability, then I cannot imagine what wrong is done. Even if depositors are not lied to, they will still treat their time-deposits as demand provided the bank has a good reputation for obtaining liquidity on demand.
The value of gold will be guided by consumer demand and certainly no libertarian law could prevent this. No one can be forced to retain a certain demand for gold; so unexpected changes in this demand could presumably still cause business cycles as we know them. I would suggest that lack of free markets and/or reliable enforcement in futures exchanges (eg, legal tender laws) are a far greater cause of malinvestment than strictly monetary inflation or demand fluctuations.
LanceH:
You are trying to paint loans not backed 100% by collateral as being equivalent to fractional reserve banking, that is nonsense.
If I sell my bike to you, there is no artificial expansion in the supply of bikes. There is still only one bike. It doesn't matter if I demand payment up front or in a year.
Now let say that instead of selling my bike, I decide to sell time shares for my bike. Eventually I notice that the bike spends most of its time sitting in my garage, as people rarely redeem the notes and instead prefer to exchange them among themselves. So I decide to sell overlapping time shares, thinking people will never notice. There is still only a single bike in my garage, but in order to fulfill my time share obligations I would need two bikes.That is fractional reserve.
Fractional Reserve is not a monetary phenomenon. It is a pitfall of warehousing, there is always incentive to sell more than you own, thinking you won't be found out. It was practiced outside of banking, like in wheat market, until it was outlawed.
You seem to be too focused on money. Gold is just a medium of exchange. Real savings is any endeavor that will lead to future consumption at the expense of current consumption. Shining someone's shoes is in deed a form of saving, as you are trading current labor for future consumption, you are employing your labor as capital.
You should read Rothbard's The Case Against the Fed.
LanceH:In Amsterdam whole trading bubbles were financed by chains of bill of exchange.
So? Anyone foolish enough to engage in those trades were eliminated from the market. Sounds like a functioning market to me.
Fractional reserve is prohibited because it is fraud. But if someone wants to enter into risky loans that is there prerogative.
I pretty much agree with what Jon Bostwick wrote. I would amend his 'Gold is just a medium of exchange' statement though. I think the only reason gold has remainded an historic choice for 'money' is because it can't be manipulated like script/fiat money or other items (yes even shells) that can be easily duplicated/grown/made etc.
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