I tend to think that even a 100% reserve, gold-backed bank would be capable of issuing enough credit to meet the demand. While it is true that the amount of gold they could lend would be limited by the finite amount of gold they actually have, they could easily obtain more by borrowing more. If the bank is reputable, they would be able to borrow money at low interest, and then lend it at higher interest, profiting from the difference.
Another alternative would be to allow the merchant to issue unlimited credit to their customers. Since the customer would not redeem it for gold, but instead for merchandise, it would not need to be backed by gold–even though it would have the same value as gold.
For example, if I want to buy a $25,000 car from a car dealership, I can pay with a $25,000 gold certificate, or I can pay with a $25,000 note issued by the car dealership itself. Both would be of equal value, since both could buy the same car. However, since the former is finite while the latter could theoretically be printed in an unlimited supply, the latter would be available at lower interest (if the issuer deems me credit-worthy).
I’m not sure where you differ from what I wrote. Gold is just one possible medium of exchange. It does not require us to treat it differently than any other commodity, from silver to wheat.
In fact, gold rose to its status as money in part because of the artificial demand for it created by its use in taxation. In a free market a commodity that saw consistent booms and bust would become less sought after as a medium of exchange.
I have no idea what gave you this idea, unless perhaps you misinterpreted my observation that Walmart goods would make poor collateral. That was merely a way of pointing out that many Walmart goods would not, in accounting terms, even be classified as assets, but as expenses - i.e. not as savings but as consumption.
Bear in mind that the bank is more subtle than simply lying about its reserves. It has actually substituted a debt-instrument for the missing gold. It is as if you went into the warehouse to look for some of the gold, and found instead on the shelf a pledge by a third party to repay over several years the gold he has borrowed . Now, the pledge may well have a market value higher than the gold itself. But it is the substitution of that pledge for gold, i.e. debt-monetization, which gives rise to the business cycle.
Certainly the Fed, in conjunction with the private banks, is the agent of US credit expansion today. But the boom-bust cycle is not limited to the Fed, or even to central banking, but has taken place wherever amd whenever there has been debt-monetization.
Rothbard’s works are excellent, but to get a wider historical perspective I recommend Kindleberger’s “Financial history of Western Europe” or “Manias, Panics and Crashes”. An excellent introduction is Edward Chancellor’s “Devil take the hindmost”.
I haven’t opposed it on libertarian grounds. Actually, on libertarian grounds, I think it can be argued either way. Under normal conditions, the bank’s promise holds good. But could it honor its promise if there were a bank run, i.e. if everyone tried to redeem at once? The answer is probably Yes, if all it is promising is FRNs which the Fed is prepared to mass-produce on demand; or probably No, if it is promising to redeem in gold.
My concerns with FRB, however, are not legal or moral but economic. The expansion of credit, without prior commodity cover, depresses interest rates and so gives rise to the business cycle - the cycle of alternating booms and busts that has dogged economies since paper money was invented.
In Mises’ words:
“The notion of “normal” credit expansion is absurd. Issuance of additional fiduciary media, no matter what its quantity may be, always sets in motion those changes in the price structure the description of which is the task of the theory of the trade cycle.”
I agree absolutely! Moreover, the business cycle may, or may not, be eradicable, but stability should never be bought at the price of liberty.