Yes I agree. Calling money as dept is very crude and not correct. Your distinction is correct when fiat money’s value is imposed via force of law.
I’m talking about fiat however on a free market., in the absence of force. It holds no real value. It’s value is guaranteed by the person who issued it to you. I would much rather take a unit of gold than a piece of paper. Or a check which claims a unit of gold, ect…
But on a free market a fiat monetary unit would not hold any real value. Thats the point I want to stick to. There is no need to get off on a money-as-dept discussion with me. You won’t find me disagreeing.
Back to the point.
Fiat money is welcome to compete on the free market, we just speculate that it will be unable to do so adequately.
Fiat money is only money through government decree. Even if banks were to practice 100% reserve banking this would only serve to eliminate the multiplier effect. How would it prevent debasement of currency.
While I don’t insist on commodity backed money, I believe it is what the majority would choose in an unrestrained open market. For the digital/electronic equivalent, several specie backed models already exist, e.g. http://www.e-gold.com/ , http://www.goldmoney.com/ , & http://www.pecunix.com/
With any exchange, trust is paramount. I prefer to trust those which are regulated by the market rather than those that attempt to regulate it.
Fiat currency draws its worth solely from the power of the state. The state draws its power via the consent of the governed. To consent, one must compromise on their belief in the non-aggression principle. Libertarians in all flavors tend to be very principle based and thus oppose most anything dictated by fiat.
Mansoor, if I understand correctly, you state that paper money in the pocket, plus paper money deposited into a bank, segregated and stored in a vault (or transposed to electronic impulses on a server) and not loaned out represents “sound money” (my word, not yours). Distinct from this, are demand deposits created by fractional reserve banking and the central bank. This is “unsound money” (again, my word) subject to the ills were are familiar with.
The way I see it, the “sound money” deposits would have to go into a separate entity, i.e., a “warehouse bank”. This would prohibit the fractional reserve system from doing what it was created to do; piggy back deposits in a pyramid of fractional reserve lending. It would stop the lending “multiplier” dead in its tracks. This parallel system of “warehouse” banks would rob the banking cartel of the newly printed money from the central bank (from open market operations). The central powers would never allow this to happen. Since the fractional reserve / central bank system is a creature of government, a “warehouse” bank would never be allowed. There would be no “choice” of deposit types. I do not see how your “sound money” concept could coexist with a central bank.
Well yes. But I think there is one more point which can make all this clearer:
Total Money = Base Money (Government Money) + Private Money (Money created by Fractional Reserve Lending by member banks)
The “benefit” of new base money creation (issuance) is pure profit for the central bank. Ofcourse this dilutes the currency.
The “benefit” of new private money creation (issuance) is pure profit for the member banks. Again, this too dilutes the currency.
It is not in the interest of the member banks to lose this power (private money creation). The central bank is pretty much owned by the member banks. So they will not want it to loose the power of new money creation (government money creation). The setup of the whole system is bizarre and unfair and gives the bankers too much power to manipulate the economy by creating booms and busts. The power to issue new money and the initial “profit” from the issuance of the new money should be with the people United States of America and not the bankers.
This system will not last much longer. It has been abused. The real estate bubble broke the camel’s back. It is being held together by stick and gum. The whole thing will implode in a deflationary death spiral or inflationary suicide.
Here is my solution to the whole mess (with sound money: 100% reserve fiat style):
A plan for the resolution of the insolvency of the U.S. banking system:
The core problem of the U.S. banking system (and maybe the world’s banking system) is not liquidity but insolvency. The liabilities of the U.S. banking system exceed the value of its assets. The issue is not only the toxic assets (toxic mortgage backed securities, toxic commercial real estate loans, sub-prime mortgages, alt-A loans, adjustable loans likely to go bust, increase in prime mortgage default rates, etc) but also off-balance sheet liabilities (such as expected, huge-unaccounted-for future derivatives losses).
This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse, leading to an extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
Which will probably lead to even more defaults as unemployment increases and debtor’s are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
Is there a better way?
Here is my idea:
We essentially need an orderly bankruptcy and liquidation of the U.S. financial system.
I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This “transfer” is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the Fed.
Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have “free banking” from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
The new government bank will act as an electronic “piggy bank” only. All deposits will be 100% reserve and it will make no loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government-owned bank exists only as a “safe” money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).
You’re just suggesting resetting the system and letting the government run it into the ground again. If you have a chance to expose yourself to Austro-Libertarian political economy, you will come to appreciate that governments have never ever been able to manage a sound currency because they always have an incentive to create debt money and to debase the currency over time. That is why they oppose market money. Because it cannot be debased or brought into creation as debt.
Defaulting in order to give the government a fresh start is like eating poison because you are hungry.
Yes. It is a reset. Yes. It is still abuse-able by the government. But It is getting closer to the Austrian sound money and it will be fairer. If a choice of 100% reserve safe electronic money storage is availabe (i.e., warehouse banks) then most people will stay away from fractional reserve accounts unless very high interest rate is offered. With no deposit insurance, incompetent banks and greedy depositor’s will be punished by the invisible hand. Also, the initial benefit of new money issuance will go to the people.
At this point we need to avert total chaos in our country and in most of the developed world which is what will ensue if nothing is done (deflationary or inflationary economic collapse and government debt default).
Ofcourse, others like you may disagree. You and others are expecting (out of this chaos) self-organization via markets and private institutions and appearance of sound money as the federal and state government power vaporizes after they default on their debt.
I don’t expect that. I expect re-organization into a proper fascist state under an even more powerful government.
This my friend is just fear mongering. It is what the politicians say each time they launch another hare-brained scheme. We have to do something, we can’t do nothing, or there will be chaos, or the world will end and so on. Global warming, communism, nazism, healthcare, education, the drug war, etc. Always the same story. Crisis after crisis, and only the politicians can save us by doing something. Anything, whether it makes any sense or not.
Austrians understand an important insight. Every form of intervention can only make matters worse.
You can’t solve a problem caused by government, with more government. You can’t solve a problem caused by intervention, with more intervention.
But politicians are more likely to listen to you, than to me, and so there will be intervention, and it will bring even more crisis. Maybe after 30 or 40 years of crisis, if the US economy holds up that long, people will figure out that feeding the patient poison is what is killing him. Maybe.
You have just described what I believe motivated von Mises throughout his entire life. He never waivered. While you fear this will happen, Mises actually witnessed it happen in Germany.
No one knows if a free market will emerge after the inevitable collapse of statism. To me, how else CAN a free market emerge?
Education is the key to bring about the changes we seek. The state will no longer be able to function when one out of twenty people make the paradigm shift towards an ancap society.
Nonsense. Paper money is what Hoppe calls a “money substitute”, not money proper. Paper money has no non-monetary value. As Voltaire wisely said, in the long run paper money returns to its intrinsic value… zero. Market monies have non-monetary value for the commodity use. If they did not, they would never have emerged as money in the first place.
Paper money has an artificial advantage versus commodity monies by virtue of its duty-free status. But the benefits of paper are eventually destroyed by the government in a hyper-inflationary orgy, at which point, the unit of denomination of the national money is usually redefined and a new currency issued.
Bank notes in a free banking system would exist and would circulate as a medium of exchange (money) but it would be false to say they “are not anyone’s liability” since the issuing bank is liable to redeem them. While it is true that fiat money is irredeemable, this is far from a virtue. It makes the currency that much more brittle and susceptible to sudden collapse (Weimar Republic, Zimbabwe). It is the irredeemable status of fiat money that makes it inflatable without limit.
Ledger money, in an honest banking market, would be exactly equal in quantity to the physical backing it represents which has been withdrawn from circulation and securely stored. In other words, it is nonsense to speak of money being “90% ledger and 10% physical” unless you mean by that that 90% of physical money is being stored (which is not the case). You are twisting the language of honest banking - where ledger money represents physical money withdrawn from circulation - and applying it to the central banking system where ledger money represents an inflationary expansion of the money supply.
If it’s not a liability (by virtue of being irredeemable) it sure as hell can’t be equity … it’s irredeemable!
What a load of nonsense. For paper money to equal equity in the nation’s economy, the economy would have to be liable to liquidation in bankruptcy. This, of course, is not possible, so if the economy tanks or the government destroys the currency, your paper money is worthless… well, not worthless, but only good for firing your stove, insulating winter boots or rolling cigarettes (all uses to which paper money has actually be applied).
Well, you can open a safe deposit box and place cash into it. That’s the closest you can get to full-reserve banking in the modern system. Unfortunately, you give up the benefits of checking or modern money transfer methods such as wires and EFT.
I think this would be a positive step in the right direction. Combined with an “adults only” financial market area where the government is statutorily prohibited from bailing out companies which operate in that market, we could have a real economic renaissance. The next remaining step would be to rescind legal tender laws (and eliminate capital gains tax on monetary commodities). Sound money would be restored overnight. By the way, we don’t really need to End the Fed. We just need to End Legal Tender. The Fed will naturally end.
You are unfamiliar with anonymous digital cash systems, such as David Chaum’s digital cash. There is no need for a central bank to be the official central clearinghouse for digital cash tokens nor is there any need for digital cash to be associated with an individual. Ledger money has been around forever and implementations of ledgers on computer systems has been around for decades. The term “digital cash” specifically refers to systems which are not just computerized ledgers.
Sounds to me like you’re trying to say that a cashless society would somehow solve the problems with bank failures and money supply contraction.
Given everythign you’ve said, what role would be left for the central bank?? You don’t want someone setting interest rates, you think citizens should be able to hold their money in 100% reserve accounts if they choose… that is basically everything that Austrians want except the repeal of legal tender laws. With the repeal of legal tender laws the central bank would simply evaporate as people would choose good money over bad. This is called free banking + private currency issue… i.e. Austrian Utopia. [:P]
