Juan: Yes, maybe you signed a contract that says that your money is available on demand but if somehow is not, then you get a timed deposit. Fine, I see no 'formal' problem with that, but on the other hand I don't think such a contract makes sense.
Well, the "formal" problem is fraud. If I sign a contract and the counterpart is aware of not being able to deliver his part of the obligation I would call that "formal" fraud.
If you as a customer accept this, so be it. You are free to do so. You are also free to accept theft and any other crime. But that doesn't change the quality of the action, which is a crime.
You seem to say, that it is acceptable for a party to arbitrary change the conditions of a contract, in case it can not fulfill it? I was used to think that there is, at least, an agreement between the contractors required? Why should the rest of the business world keep contracts, while banks do not have to? If You made a contract with a building company to build your house, what would you say if they came up, after you paid, and tell you, "sorry but our funds are not sufficient to build the roof". You wait until they have the funds, meanwhile standing in the rain? I doubt it? Why would you allow banks to engage in exactly the same behaviour, without any risk of being sued?
In the begining there was nothing, and it exploded.
Terry Pratchett (on the big bang theory)
meambobbo: Juan, there is no such thing as fictional reserve banking - even our fiat money is backed by something (although far not enough so maybe you're right). It is backed by the federal government's ability to tax our future economy.
Juan, there is no such thing as fictional reserve banking - even our fiat money is backed by something (although far not enough so maybe you're right). It is backed by the federal government's ability to tax our future economy.
This is to say our money is backed by the power of the state to coerce people to work as part-time forced laborers?
Well, one can argue that way, but than you have to agree that banking is as imoral as a state that finds the funds it can steal of todays citizens insufficient and promises to steal more from the future generations?
nhaag: Juan: Yes, maybe you signed a contract that says that your money is available on demand but if somehow is not, then you get a timed deposit. Fine, I see no 'formal' problem with that, but on the other hand I don't think such a contract makes sense. Well, the "formal" problem is fraud. If I sign a contract and the counterpart is aware of not being able to deliver his part of the obligation I would call that "formal" fraud.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Nhaag, I am quoting Rothbard here from America's Great Depression:
"Private banks, it is true, can themselves inflate the money supplyby issuing more claims to standard money (whether gold orgovernment paper) than they could possibly redeem. A bankdeposit is equivalent to a warehouse receipt for cash, a receiptwhich the bank pledges to redeem at any time the customer wishesto take his money out of the bank’s vaults. The whole system of“fractional-reserve banking” involves the issuance of receiptswhich cannot possibly be redeemed. But Mises has shown that, bythemselves, private banks could not inflate the money supply by agreat deal.22 In the first place, each bank would find its newly
issued uncovered, or “pseudo,” receipts (uncovered by cash) soontransferred to the clients of other banks, who would call on thebank for redemption. The narrower the clientele of each bank,then, the less scope for its issue of pseudo-receipts. All the bankscould join together and agree to expand at the same rate, but suchagreement would be difficult to achieve. Second, the banks wouldbe limited by the degree to which the public used bank deposits ornotes as against standard cash; and third, they would be limited bythe confidence of the clients in their banks, which could bewrecked by runs at any time."
He then goes on about how government intervention has institutionalized inflationary fractional reserve banking, protecting it from the market using violence. He describes the FED, etc...
THEN:
"While unregulated private banking would be checked withinnarrow limits and would be far less inflationary than Central Bank
manipulation,26 the clearest way of preventing inflation is to outlawfractional-reserve banking, and to impose a 100 percent goldreserve to all notes and deposits. Bank cartels, for example, are notvery likely under unregulated, or “free” banking, but they couldnevertheless occur. Professor Mises, while recognizing the superioreconomic merits of 100 percent gold money to free banking,prefers the latter because 100 percent reserves would concede tothe government control over banking, and government could easilychange these requirements to conform to its inflationist bias.27But a 100 percent gold reserve requirement would not be justanother administrative control by government; it would be partand parcel of the general libertarian legal prohibition againstfraud. Everyone except absolute pacifists concedes that violenceagainst person and property should be outlawed, and that agencies,operating under this general law, should defend person and propertyagainst attack. Libertarians, advocates of laissez-faire, believethat “governments” should confine themselves to being defenseagencies only. Fraud is equivalent to theft, for fraud is committedwhen one part of an exchange contract is deliberately not fulfilledafter the other’s property has been taken. Banks that issue receiptsto non-existent gold are really committing fraud, because it is thenimpossible for all property owners (of claims to gold) to claim theirrightful property. Therefore, prohibition of such practices wouldnot be an act of government intervention in the free market; itwould be part of the general legal defense of property against attackwhich a free market requires.28, 29"
So I am right about Mises's tolerance. Rothbard disagrees.
BUT how does Rothbard want to enforce this? A regulated banking sector? An agreement to audits? Going back to the petty cash example, how do you know if the petty cash has been spent outside the business if you're not going to check it?
It seems these things will only be discovered at the same time that problems arise: depositors cannot redeem their deposits/a legitimate use for petty cash has arisen but there is none available. Even if we chose instead to use a system of agreed upon audits, possibly random, possibly completely 3rd-party, the outcome is similar. If the audit found a bank in breach, confidence in the bank would crumble, and you'd get a bank run.
Mises and Rothbard's positions aren't that different. Mises believes the market will prevent fraudulent fractional reserve banking, while Rothbard believes the government should (or simply enforce the fraud). Of course, Rothbard would more likely say A government, than THE government.
I feel this discussion is breaking down. I am becoming confused about what we are talking about. To me it seems that fractional-reserve banking is simply whenever a bank owes its depositors more money on demand than is available. But this isn't inflationary if the bank is not creating claims to wealth it does not and never had. If the bank is simply lending out of its deposits, it has a finite amount of genuine credit that it can loan. Even if there is a bank run it cannot fulfill, it still holds debt that should amount to greater than what it owes. In the absence of a loss of confidence in such an institution, its bank notes should still exchange at a nearly exact value as the gold they claim to represent.
What seems to be getting thrown into the mix is artificial credit. This is unlimited. This is inflationary. If I'm a bank who has received $500 in deposits, I can still create claims to $10.0 x 10^9,999 and loan these out. I can make bank notes to my heart's content. This is much more similar to our current system than the free banking system, although the banks themselves don't want to continually inflate at a break-neck pace. This would destroy the real value of their outstanding loans and additionally collapse the system. Regardless, fractional reserve banking and artificial credit are two different things, although one follows the other (IMO).
As far as fraud is concerned, is the bank offering to store money as a werehouse or serve as an investment broker? This can become quite watered down by the fine print. Obviously, your deposit can't be risked and guaranteed simultaneously; but when there are many, many deposits functioning as such, there is the appearance that this is the case. The fine print may clear up what is actually going on. Many of these online digital gold/silver currencies/funds are not truly backed by gold/silver. Yet, it is not fraud if that's what the fine print says. From what I've seen, e-gold seems to be the only one that has audits (although not conducted by an independent agency) and has survived a virtual bank run. I am going to try to get an account agreement from a regular bank to see what their fine print says about this issue. However, it will probably be fruitless because even if it is clearly fraud, the government will not enforce it. The system is designed to prevent such anyway, as it is nearly impossible to conduct a bank run where a depositor is not given his nominal amount...of course, to do so means to debase the *** out of the currency. In any case, the existence of the FDIC seems to suggest the government wouldn't acknowledge fraud.
It seems to me artificial credit (creating claims to wealth that does not exist) is ALWAYS fraudulent, while FRB is SOMETIMES fraudulent, depending upon the agreement between depositor and bank.
As far as I'm concerned, I don't care if we have free banking or regulated 100% reserves for demand deposits. I believe both systems will prevent the (widespread) creation of artificial credit. Our more pressing goal should be to restore some unit of value to our currency. I like Ron Paul's plan best: simply legalize competition - remove (unconstitutional) legal tender laws, remove (unconstitutional) prohibitions of private minting and/or alternative currencies, and remove sales and capital gains taxes from gold and silver.
I went back and re-read Rothbard's What Has Government Done to our Money, and I was wrong about his feelings on werehousing money and using the receipts as mediums of exchange. But he does state that such was done because transporting and exchanging actual precious metals was less convenient. This would mean there is no redemption premium for bank notes; in fact, it implies the opposite (unless the market generally preferred using physical gold over banks).
However, both Mises and Rothbard believed that the only means to get from simple werehousing to unending fraud and artificial credit was government alliance with banking.
Check my blog, if you're a loser
nhaag: meambobbo: Juan, there is no such thing as fictional reserve banking - even our fiat money is backed by something (although far not enough so maybe you're right). It is backed by the federal government's ability to tax our future economy. This is to say our money is backed by the power of the state to coerce people to work as part-time forced laborers? Well, one can argue that way, but than you have to agree that banking is as imoral as a state that finds the funds it can steal of todays citizens insufficient and promises to steal more from the future generations?
I was not arguing morality. Of course I feel it is immoral that someone else's debt is backed by my child's labor. It is a clear violation of the free market, liberty, and personal responsibility. I feel most of what the government now does is clearly immoral...either in the means, the ends, or the lack of authority.
meambobbo: [...] To me it seems that fractional-reserve banking is simply whenever a bank owes its depositors more money on demand than is available. But this isn't inflationary if the bank is not creating claims to wealth it does not and never had. If the bank is simply lending out of its deposits, it has a finite amount of genuine credit that it can loan. Even if there is a bank run it cannot fulfill, it still holds debt that should amount to greater than what it owes. In the absence of a loss of confidence in such an institution, its bank notes should still exchange at a nearly exact value as the gold they claim to represent.
[...] To me it seems that fractional-reserve banking is simply whenever a bank owes its depositors more money on demand than is available. But this isn't inflationary if the bank is not creating claims to wealth it does not and never had. If the bank is simply lending out of its deposits, it has a finite amount of genuine credit that it can loan. Even if there is a bank run it cannot fulfill, it still holds debt that should amount to greater than what it owes. In the absence of a loss of confidence in such an institution, its bank notes should still exchange at a nearly exact value as the gold they claim to represent.
First you say: "To me it seems that fractional-reserve banking is simply whenever a bank owes its depositors more money on demand than is available." But later in the very same paragraph you say: "In the absence of a loss of confidence in such an institution, its bank notes should still exchange at a nearly exact value as the gold they claim to represent."
You keep skipping a step in your logic—a really big one. At what point would the claims on the assets of the bank trade as bank notes assuming the bank notes weren't fraudulent? We have money market deposit accounts now. Such deposits don't trade as bank notes. They trade in parallel as a form of checkbook money. They don't trade as money. They never have. This deserves explanation if fractionally-backed bank notes were indeed likely to be a spontaneous product of the free market. And the obvious explanation is that debt will never trade at face value. There's no reason to think it ever would.
meambobbo: I went back and re-read Rothbard's What Has Government Done to our Money, and I was wrong about his feelings on werehousing money and using the receipts as mediums of exchange. But he does state that such was done because transporting and exchanging actual precious metals was less convenient. This would mean there is no redemption premium for bank notes; in fact, it implies the opposite (unless the market generally preferred using physical gold over banks).
No, it means that there will occasionally be circumstances where people will want to trade warehouse receipts in place of gold, and that they are willing to pay extra for the service in those occasional circumstances when it is indeed a service. It does not mean that bank notes can be used anywhere gold is expected, i.e. that there is "no redemption premium." It depends entirely on the circumstance.
hjmaiere, is this what you are saying:
If we trade debt (bank notes) as though it were money, then its being used for exchange in addition to the money it represents being used in exchange, there is increased demand and increased prices? If the debt is being used for exchange, its underlying assets must not be used for exchange for such a system to retain a stable money supply?
I can see how this is the case. I think this is different from all debt carrying a premium, however.
You are definitely right about the circumstance-dependency on accepting bank notes.
meambobbo: hjmaiere, is this what you are saying: If we trade debt (bank notes) as though it were money, then its being used for exchange in addition to the money it represents being used in exchange, there is increased demand and increased prices? If the debt is being used for exchange, its underlying assets must not be used for exchange for such a system to retain a stable money supply? [...]
[...]
The main thing I'm saying is that merely trying to talk about what happens when bank debt serves as money presumes that it would sereve as money in the first place. I'm saying that this presumption is false. People have been programmed by a hundred years of institutionally-controlled education to think of it as perfectly normal—so normal that apparently people don't even realize it is a presumption anymore.
I'm not declaring a moral imperative. I'm not saying that "If debt is being used for exchange, its underlying assets must not be used for exchange." I'm saying a debt's underlying asset simply won't be used for exchange unless someone lies or points guns at people. I'm saying that if it is happening, it's exactly because it allows somone to make money on money they don't really have because they've tricked or forced someone into accepting a piece of paper or magic token as if it were money.
meambobbo: Nhaag, I am quoting Rothbard here from America's Great Depression: "Private banks, it is true, can themselves inflate the money supply by issuing more claims to standard money (whether gold or government paper) than they could possibly redeem. A bank deposit is equivalent to a warehouse receipt for cash, a receipt which the bank pledges to redeem at any time the customer wishes to take his money out of the bank’s vaults. The whole system of “fractional-reserve banking” involves the issuance of receipts which cannot possibly be redeemed. But Mises has shown that, by themselves, private banks could not inflate the money supply by a great deal.22 In the first place, each bank would find its newly issued uncovered, or “pseudo,” receipts (uncovered by cash) soon transferred to the clients of other banks, who would call on the bank for redemption. The narrower the clientele of each bank, then, the less scope for its issue of pseudo-receipts. All the banks could join together and agree to expand at the same rate, but such agreement would be difficult to achieve. Second, the banks would be limited by the degree to which the public used bank deposits or notes as against standard cash; and third, they would be limited by the confidence of the clients in their banks, which could be wrecked by runs at any time." He then goes on about how government intervention has institutionalized inflationary fractional reserve banking, protecting it from the market using violence. He describes the FED, etc...
"Private banks, it is true, can themselves inflate the money supply by issuing more claims to standard money (whether gold or government paper) than they could possibly redeem. A bank deposit is equivalent to a warehouse receipt for cash, a receipt which the bank pledges to redeem at any time the customer wishes to take his money out of the bank’s vaults. The whole system of “fractional-reserve banking” involves the issuance of receipts which cannot possibly be redeemed. But Mises has shown that, by themselves, private banks could not inflate the money supply by a great deal.22 In the first place, each bank would find its newly
issued uncovered, or “pseudo,” receipts (uncovered by cash) soon transferred to the clients of other banks, who would call on the bank for redemption. The narrower the clientele of each bank, then, the less scope for its issue of pseudo-receipts. All the banks could join together and agree to expand at the same rate, but such agreement would be difficult to achieve. Second, the banks would be limited by the degree to which the public used bank deposits or notes as against standard cash; and third, they would be limited by the confidence of the clients in their banks, which could be wrecked by runs at any time."
That is my understanding of Rothbards view, I hadn't looked it up before I wrote my comments.
However, I feel that the discussion is kind of oscillating. For sure, fractional reserve banking, not backed by the government has a less inflationary impact, yet, my argument is, that fractional reserve banking is either a no brainer a free market - because the demand for a "warehouse" scheme like this would be pretty low and customers could choose where to store their valuables- or, fractional reserve banking, the way it is implemented today, must be seen as a fraud - because banks today commit to a contract, they are not obliged to follow. Wether the result of such a fraud is socially amiable and beneficial - which I do not believe - or not, doesn't change the act itself being a crime, like the act of taxation is still theft - unless it is voluntary :-).
meambobbo: THEN: "While unregulated private banking would be checked within narrow limits and would be far less inflationary than Central Bank manipulation,26 the clearest way of preventing inflation is to outlaw fractional-reserve banking, and to impose a 100 percent gold reserve to all notes and deposits. Bank cartels, for example, are not very likely under unregulated, or “free” banking, but they could nevertheless occur. Professor Mises, while recognizing the superior economic merits of 100 percent gold money to free banking, prefers the latter because 100 percent reserves would concede to the government control over banking, and government could easily change these requirements to conform to its inflationist bias.27 But a 100 percent gold reserve requirement would not be just another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud. Everyone except absolute pacifists concedes that violence against person and property should be outlawed, and that agencies, operating under this general law, should defend person and property against attack. Libertarians, advocates of laissez-faire, believe that “governments” should confine themselves to being defense agencies only. Fraud is equivalent to theft, for fraud is committed when one part of an exchange contract is deliberately not fulfilled after the other’s property has been taken. Banks that issue receipts to non-existent gold are really committing fraud, because it is then impossible for all property owners (of claims to gold) to claim their rightful property. Therefore, prohibition of such practices would not be an act of government intervention in the free market; it would be part of the general legal defense of property against attack which a free market requires.28, 29"
"While unregulated private banking would be checked within narrow limits and would be far less inflationary than Central Bank
manipulation,26 the clearest way of preventing inflation is to outlaw fractional-reserve banking, and to impose a 100 percent gold reserve to all notes and deposits. Bank cartels, for example, are not very likely under unregulated, or “free” banking, but they could nevertheless occur. Professor Mises, while recognizing the superior economic merits of 100 percent gold money to free banking, prefers the latter because 100 percent reserves would concede to the government control over banking, and government could easily change these requirements to conform to its inflationist bias.27 But a 100 percent gold reserve requirement would not be just another administrative control by government; it would be part and parcel of the general libertarian legal prohibition against fraud. Everyone except absolute pacifists concedes that violence against person and property should be outlawed, and that agencies, operating under this general law, should defend person and property against attack. Libertarians, advocates of laissez-faire, believe that “governments” should confine themselves to being defense agencies only. Fraud is equivalent to theft, for fraud is committed when one part of an exchange contract is deliberately not fulfilled after the other’s property has been taken. Banks that issue receipts to non-existent gold are really committing fraud, because it is then impossible for all property owners (of claims to gold) to claim their rightful property. Therefore, prohibition of such practices would not be an act of government intervention in the free market; it would be part of the general legal defense of property against attack which a free market requires.28, 29"
Mises, focused on the preaxeolocigal aspects of the issue. That means, by definition, that no moral principles can be used to either proof nor disaprove. Like in mathematics or logic, there is no moral principle involved. So he simply describes the means and their outcome rather than judging about them using moral priciples.
meambobbo: BUT how does Rothbard want to enforce this? A regulated banking sector? An agreement to audits? Going back to the petty cash example, how do you know if the petty cash has been spent outside the business if you're not going to check it? It seems these things will only be discovered at the same time that problems arise: depositors cannot redeem their deposits/a legitimate use for petty cash has arisen but there is none available. Even if we chose instead to use a system of agreed upon audits, possibly random, possibly completely 3rd-party, the outcome is similar. If the audit found a bank in breach, confidence in the bank would crumble, and you'd get a bank run. Mises and Rothbard's positions aren't that different. Mises believes the market will prevent fraudulent fractional reserve banking, while Rothbard believes the government should (or simply enforce the fraud). Of course, Rothbard would more likely say A government, than THE government.
Wow, i would love to hear Rothbard on him supporting government intervention to fix a crime :-)
Rothbard doesn't say a government nor the government. What agency will be used to settle a conflict is open to discuss. There are ways to do that, which not even involve something like a state. What Rothbard says is, as far as I understand him, that fraud is a crime, crime is an aggression, aggression is wrong and requires to be settled. How it is settled is open. The Agressed has the right to force the Agressor to make amends. The Agressed has also the right to just forgive. How the Agressed enforces his claims has no effect, whatsoever, on the cause, being a crime. So no rule is nessecary to explicitly state that FRB is fraud. It simply is. And fraud is aggression. So the law would be in place already.
meambobbo: However, both Mises and Rothbard believed that the only means to get from simple werehousing to unending fraud and artificial credit was government alliance with banking.
Yup.
Have a great time
Sorry, am an imbicile new to this subject and need help, so plse excuse. Thanx!
I understand how FRB cannot cause inflation PROVIDED that
a) the underlying asset (say gold) is always transfered during trade
b) trading with representations of that gold is forbidden.
Let's assume that only gold can be used in trades, and NOT a representation of the gold such as a certificate of ownership of the gold as issued by a bank as a receipt of deposit. Also assume the bank doesn't issue promises of gold to a borrower, but will only lend out gold directly to them (since only gold can be used when trading).
For example, person A deposits 100 gold coins at bank and gets a certificate for that 100 gold coins but no traders will accept his certificate as a form of currency . The bank then lends out 80 of these gold coins to person B, keeping 20 in reserve. They lend him the actual coins and not a representation of the coins. Person B then trades using these real gold coins (as he must in this example), eventually all coins returning to banks. Hence No inflation.
In this example, why not replace the 100 gold coins with a 100 square pieces of special, unforgable paper?
So people trade directly with these paper squares and bank them identically as in the previous example. Only these square pieces of paper can be used directly when trading, and not a representation of these square pieces of paper. Isn't that the system we already have, hence yielding no inflation?
No, you need to go back to the origin of money. Money is the most widely exchangeable good. People accept gold as the medium of exchange because it is widely desired. Paper isn't. The current system treats money as backed by debt, which is to say future promises to repay in terms of... more paper money. So the current system is by no means analogous.
-Jon
To darkness I condemn you...
Thanks,
Incidentally i have never understood what currency represents. If you gave me a gold bar, i'd only have appreciated it in terms of how many paper squares it got me.
Perhaps i have misunderstood you, but if a 'non backed' bank note represents a future promise to repay with another 'non backed' bank note, then surely a bank note represents its own value, and not some particular underlying physical asset.
In the same way that a gold coin is 'non backed' in that it represents itself, and not some particular underlying asset.
Surely, in neither system can inflation occur via FRB alone, assuming of course, that in the case of the gold system that gold promisory notes, and gold receipts for the same bar of gold as well as the bar of gold itself are not in circulation simultanously. In the case of non-backed paper currency, this situation surely cannot arise, since the 'valuable' paper is traded directly and isn't represented for a second time in 'higher level receipt currency' in circulation (apart from say cheque book money that would bounce if the situation occured).
In neither system is there some underlying asset being represented more than once by the currency.
perhaps i should do more reading because I still remain confused and unconvinced.
confuse a cat: Incidentally i have never understood what currency represents. If you gave me a gold bar, i'd only have appreciated it in terms of how many paper squares it got me.
Here is the advantage of gold as money over paper as money.
Right now, the price of gold is $920/ounce. If you offered to swap me 46 Federal Reserve Notes labeled '$20' for an ounce of gold, I'd say "fair trade", either way.
Two years from now, suppose the price of gold is $1500/ounce. If you then offered to swap me 75 Federal Reserve Notes labeled '$20' for an ounce of gold, I'd say "fair trade".
What happened? Did your gold magically become more valuable? Or, did someone print more pieces of paper, driving down their value?
As another example, suppose you offered to trade me 0.3 ounces of silver for a gallon of gasoline. Right now, that's pretty close to a fair trade. If you attempt the same trade two years from now, it will probably still be reasonable. Do you expect to be able to buy a gallon of gasoline for $5 two years from now?
Gold and silver keep their purchasing power over time, but pieces of paper do not. The people who print the pieces of paper like printing more of them and giving them to their friends. That's a pretty sweet scam they're running! However, you can't just print more gold and silver.
Money supply inflation is literally stealing the purchasing power out of your pocket and bank account. The nominal value of your money stays the same, but the amount of wealth it represents decreases.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
Really nice post. I'm constantly looking for ways to better explain inflation to people!
I'm hesitant to call it "money supply" inflation though. I usually say monetary inflation, but have been trying to put a stop to it. It is inflation, pure and simple. Peter Schiff debunks the notion of price inflation pretty convincingly in Crash Proof.
It's also counterfeit, which is illegal. It is illegal if you do it, if I do it, or if anyone else besides the government does it. Which if the act is wrong, how can it be right when done by government? That's illogical. A lot of people respond strongly to that point. Why does the government get to do what we would be jailed for doing ourselves?
If you find something evil that wobbles, push it. - Gary North
liberty student:I'm hesitant to call it "money supply" inflation though.
Assuming the velocity of money is constant, money supply inflation and price inflation occur at the same rate. Due to asset bubbles, price inflation is not uniform.
If you want a true picture of inflation, look at commodities with relatively inelastic supply and demand, such as oil and gold. That's the reason energy is excluded from the CPI. The price of oil rises very nearly in lockstep with money supply inflation.
Most people remember that they used to pay $10 for a full tank of gasoline. They probably don't remember what a loaf of bread used to cost.
confuse a cat: Incidentally i have never understood what currency represents. If you gave me a gold bar, i'd only have appreciated it in terms of how many paper squares it got me Perhaps i have misunderstood you, but if a 'non backed' bank note represents a future promise to repay with another 'non backed' bank note, then surely a bank note represents its own value, and not some particular underlying physical asset. [...]
Incidentally i have never understood what currency represents. If you gave me a gold bar, i'd only have appreciated it in terms of how many paper squares it got me
Perhaps i have misunderstood you, but if a 'non backed' bank note represents a future promise to repay with another 'non backed' bank note, then surely a bank note represents its own value, and not some particular underlying physical asset. [...]
Money always has value independent of its function as money. There will always be plenty of people in the world that want gold just to have it (for jewelery or whatever). That, combined with the fact that gold is durable, fungible, divisible, and portable made gold highly remarketable. This meant that even if you didn't want gold for yourself just to have it, you know that it wouldn't be too hard to find someone who did. This is what made gold serve well as money. Consider that cigarettes have served as money in prisons even for people who did not smoke. Same principle at work. Cigarettes, salt, spices, silver, Persian rugs, tea, sea shells, feathers, etc. have all been highly remarketable goods that have served as money.
Federal Reserve Magic Tokens (FRMTs) are 'backed' by the fact that you need them to pay your taxes. That is, everyone needs to come up with them at tax time. If you don't come up with them, the government will take your stuff away and throw you in jail. This makes FRMTs very remarketable. Without this threat of force by the government, FRMTs would be completely worthless. And indeed, history is littered with fiat currencies that have become worthless. All this stuff about money being backed by debt is an attempt to obscure the true purpose of fiat currency, which is to allow the banks and the government to extract wealth from the economy without the political inconvenience of taxing people directly for it.
confuse a cat: Surely, in neither system can inflation occur via FRB alone, assuming of course, that in the case of the gold system that gold promisory notes, and gold receipts for the same bar of gold as well as the bar of gold itself are not in circulation simultanously. In the case of non-backed paper currency, this situation surely cannot arise, since the 'valuable' paper is traded directly and isn't represented for a second time in 'higher level receipt currency' in circulation (apart from say cheque book money that would bounce if the situation occured). [...]
Fractional-reserve banking is about allowing a bank to treat debt that it is owed as if it were money that it could spend now. You are correct in that in some weird sense the 'value' of the paper in the case of fiat currency doesn't really derive its value from the debt it supposedly represents because that debt is nothing but more paper.
The true purpose of the accounting system behind fractional-reserve banking is to cartelize the banks. Since FRMTs are created out of nothing, any one bank could in theory create as many of them as it wanted. But this would immediately destroy their value. The purpose of the banking regulations is to allow all banks to create FRMTs as long as they all simultaneously do so at the same controlled rate—a rate that in theory won't completely destroy the economy.
For what it's worth, it's impossible to really understand banking until you entertain the possibility that it is the single biggest criminal activity on earth, because that's exactly what it is: http://mises.org/story/3010
Perhaps i have misunderstood you, but if a 'non backed' bank note represents a future promise to repay with another 'non backed' bank note, then surely a bank note represents its own value, and not some particular underlying physical asset. In the same way that a gold coin is 'non backed' in that it represents itself, and not some particular underlying asset.
Alright, and why would anyone accept pieces of paper for payment, as opposed to actual production? You see, if people actually valued the pieces of paper highly, as is the case with gold, you'd be correct. However, the way the currency arose, the paper money was originally backed by gold, until this link was severed. It was only by government force that the paper could remain in use as money. Money that can be printed at will, that has no real value other than that garnered by the imposition of government force, is disanalogous to a good that is widely desired, is difficult to produce and has value independent of the use of any force. That is the asymmetry between paper money (as it currently exists) and gold qua money.
I've accepted worthless pieces of paper all my life. I never questioned for 32 years whether notes really represented anything, yet it didn't stop me valuing this paper and desiring it more than gold for which i have no use. To me my money is just information about my spending power and nothing more. Of course, if the entire population woke up tomorrow and decided they were no longer going to accept my paper money, for example because they all decided paper money in reality was intrinsically worthless paper and not worth trading, then equally my notes would no longer have any value to me and i'd look for another medium of exchange they desired. But this potential problem with paper currency, albeit unlikely, equally applies with a gold currency i might use.
If money was 'written on' an intrinsically useful medium with real value to industry, say silicon, then surely the money supply would shrink due to consumption of the medium by industry and the price of silicon would also inflate due to its use as coinage? In the past wasn't gold currency really used in the same way as 'non backed' paper currency with the main difference being that its harder for the government central bank to expand the gold supply? (which they still can do, albeit to a finite extent by maipulating reserves in the usual manner). I can see that paper money requires trust in both bankers and the government not to debase the currency and that people don't trust government or bankers or fractional reserve banking. But issuing currency in gold in order to be assured of a fixed money supply is surely going from the information age and returning to the middle ages. Surely the important thing is restoring public confidence in the current financial system. Not returning to gold.
Also, as i asked before, surely the problem with fraudulent banking where receipts are counterfeited can only occur with respect to 'backed' currency where potentially both receipts of an underlying asset and the underlying asset itself can float in circulation simultaneously. Clearly this cannot occur with direct gold trading, but how can this fraudulent duplication occur with non-backed paper money? any paper notes deposited at a bank are removed from circulation and can no longer be spent by the depositor. When he deposits his notes he doesn't get a receipt apart from a number written into his account. To spend the money written into his account, the borrower must first return the money (hopefully with interest). If this wasn't the case and FRB really did create money, why would bank runs occur in the first place? Banks could just lend money to each other indefinitely to create as much money as needed....
Thanks for reading agian, CAC.
confuse a cat:I've accepted worthless pieces of paper all my life.
You're entirely missing the point. People don't use pieces of paper instead of gold because pieces of paper are a better monetary system.
People use pieces of paper instead of gold because State violence prevents them from using other forms of money. Consider what happened to E-Gold and the Liberty Dollar.
It's one thing to say "everyone got together and voluntarily decided to use paper instead of gold as money". It's another thing to say "a handful of people use violence to force everyone else to use paper as money".
For any monetary system based on pieces of paper, the people who print the paper will print more and give them to themselves. Historically, every fiat currency has ended in hyperinflation for this reason.
I never said you aren't free to use pieces of paper as money if you want to. I said that I shouldn't be prevented from using other forms of money. You're a fool/slave for using unbacked pieces of paper as money.
confuse a cat: I've accepted worthless pieces of paper all my life. I never questioned for 32 years whether notes really represented anything, yet it didn't stop me valuing this paper and desiring it more than gold for which i have no use. To me my money is just information about my spending power and nothing more.
I've accepted worthless pieces of paper all my life. I never questioned for 32 years whether notes really represented anything, yet it didn't stop me valuing this paper and desiring it more than gold for which i have no use. To me my money is just information about my spending power and nothing more.
But the fact that other people accept them from you for payment of things clearly means they aren't worthless. Money is not merely a matter of social convention. There are people who want you to think that. There are people who want you to think that a sound and efficient and modern monetary system is about trustworthy bankers and political leaders. But as I tried to explain, Federal Reserve Magic Tokens are, in a very real and concrete sense, 'stay-out-of-jail' tokens. They are not at all "worthless." They merely derive their value from the business end of government guns.
confuse a cat: Of course, if the entire population woke up tomorrow and decided they were no longer going to accept my paper money, for example because they all decided paper money in reality was intrinsically worthless paper and not worth trading, then equally my notes would no longer have any value to me and i'd look for another medium of exchange they desired. But this potential problem with paper currency, albeit unlikely, equally applies with a gold currency i might use.
Of course, if the entire population woke up tomorrow and decided they were no longer going to accept my paper money, for example because they all decided paper money in reality was intrinsically worthless paper and not worth trading, then equally my notes would no longer have any value to me and i'd look for another medium of exchange they desired. But this potential problem with paper currency, albeit unlikely, equally applies with a gold currency i might use.
It is not at all unlikely that you could wake up tomorrow and find that people no longer accepted your paper money. It happens all the time. It's happening now. The dollar has lost almost half its value in the last five years. And there are reasons to think that it will only get worse. Gold, on the other hand, has always had value in the marketplace.
confuse a cat: [...] I can see that paper money requires trust in both bankers and the government not to debase the currency and that people don't trust government or bankers or fractional reserve banking. But issuing currency in gold in order to be assured of a fixed money supply is surely going from the information age and returning to the middle ages. Surely the important thing is restoring public confidence in the current financial system. Not returning to gold. [...]
[...] I can see that paper money requires trust in both bankers and the government not to debase the currency and that people don't trust government or bankers or fractional reserve banking. But issuing currency in gold in order to be assured of a fixed money supply is surely going from the information age and returning to the middle ages. Surely the important thing is restoring public confidence in the current financial system. Not returning to gold.
You seem to think that gold was money because the government declared it to be money. Gold was used as money because it had properties that made it particularly well-suited for use as money. And this is the real issue. Students of the Austrian School might sound like they're advocating gold as money. They're not. What they're realy advocating is that the government not be allowed to force people to use any one particular thing as money. They don't care at all if people use silver or copper or hemp script as money so long as they do so voluntarily. Most Austrians are pretty convinced that a free market will naturally settle on gold as money, but they are not at all arguing that "we" (in the political sense) should use gold as money.
Also, bankers and the governmnet always debase the currency when they have the chance. That's the very reason they force people to use bank notes as money in the first place.
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