this tangent came about when you opined that certificates of having-deposited-money-for-a-set-period-during-which-time-the-money-is-invested could be money
My whole argument is that in a world where FRB is outlawed time-deposit certificates would become the new bank note.
In a 100% reserve world the lender to the bank is faced with two options, either put his money in there and pay a fee, or put his money in there and the bank pays him (albeit at a later date.
Lets say you have 10,000 grams in gold and it’s kinda heavy and you don’t want to be carrying around all your gold coins for all the usual reasons. To alleviate this uneasiness you go to the bank and you talk to the banker and ask what are your options. The banker says well you can put those 10,000 grams of gold in our vaults and we’ll take 10 grams of gold out every year, or you can promise us that you’ll keep the gold in the vault for four years and every year we’ll add on 50 grams (i.e a 5% interest rate). They also say that they’ll give you paper certificates certifying this and that they can divide into as small amounts as you want. You do not like the idea of losing your money when you could be gaining, so you tell the bank you would like to deposit your gold for four years by which it will become 12,000 grams of gold and that you would like 120 100grams-in-four-years certificates and you figure these will be as good payment (perhaps with some slight discount) as real gold. When you walk into the shop tomorrow you find out that a bunch of other people have made a similar choice and that the shop keeper accepts 100 gram notes as 90grams of present gold and you can make this sort of trade with him.
In a 100% reserve world Time Deposits would most likely become “fiduciary media” because most people want their money growing and most people would want to trade these certificates because there are benefits in doing so. The certificates would come in change like bank notes and token coins we know today.
I see no reason why they would not. I also predict, because of the disutility of calculating interest and the worth of tickets at different dates, these certificates will trade at face value. That is, a $10 certificate for gold in the future will be just as good as $10 of gold now because the gains of trade outweigh the hassle of calculation.
I point to England’s episode with token coins as an example of this occurring.
There’s no reason to believe that time-deposits wouldn’t come with the caveat that they are not for circulation.
In a world where bank notes are outlawed I maintain that time deposit certificates would be as much money as bank notes are in a system of free banking and gold reserves.
I believe that there are strong reasons to believe that I am correct in doing so.
Of course in today’s world where no such restrictions exist and no such gold reserves are used time deposits are rarely used for payments except maybe some large scale transactions.
However in a world where the only way your money can grow while in a bank is through time deposits or similar means, I do believe that because of the gains associated in trading these certificates, they would in fact become money-like.
But is it possible that money substitutes can thus outcompete-
and displace-genuine money as a medium of exchange? No; even
many hard money theoreticians have been too quick to admit such a
possibility. The reason is that money substitutes are substitutes and
have one permanent and decisive disadvantage as compared to money
proper. Paper notes (claims to money) are redeemable at par only to
the extent that a deposit fee has been paid to the depositing institu-
tion. Providing safeguarding and clearing services is a costly busi-
ness, and a deposit fee is the price paid for guarded money. If paper
notes are presented for redemption after the date up to which
safeguarding fees were paid by the original or previous depositor, the
depositing institution would have to impose a redemption charge
and such notes would then trade at a discount against genuine
money. The disadvantage of money substitutes is that they must be
continuously re-deposited and re-issued in order to maintain their
character as money-their salability at par-and thus that they
function as money only temporarily and discontinuously. Only money
proper (gold coins) is permanently suited to perform the function as
a medium of exchange. Accordingly, far from inside money ever
displacing outside money, the use of money substitutes should be
expected to be forever severely limited-restricted essentially to the
transaction of very large sums of money and the dealings between
regular commercial traders-while the overwhelming bulk of the
population would employ money proper for most of their purchases
or sales
-Hoppe
Professor Hoppe refers here to money traded by checqueing accounts under a 100% system, not time deposits. Indeed there would be a fee associated with these.
The fees would only come about precisely when banks are not allowed to loan your money out.
When banks are allowed to loan out the money you deposit witht hem, as they are under modern deposit accounts under a fractional reserve system or as time deposits would be under a 100% reserve system, banks pay you for this right. This is why time deposit accounts and indeed, modern chequeing deposit accounts in today’s banks, have an interest rate which grows your money, not takes it away from you.
Time deposits, indeed, increase in amount over time, not decrease. There are no such fees associated with time deposits because the bank is paying you to allow them to loan out your gold.
Thus Hoppe’s argument while valid, does not apply in the slightest to time deposit accounts
What do you think would happen to the old bank note?
And what happens when he takes the notes to the bank? Can he redeposit them immediately? Can he take his gold away?
If you read the above quotation from an article of professor Hoppe’s you will find a good explanation of how in a 100% reserve world the “old bank note” (even though this bank note is different from the banknote of a fractional reserve system) would be at a severe disadvantage to hard money.
However time deposit certificates would have an advantage over hard money and, therefore, over bank notes as they would exist under a 100% regime.
Definitely if its past the redemption date, and possibly even if it is earlier, unless such activity is outlawed.
This is correct.
If you were not allowed to legally use time-deposit notes for transaction purposes and such transactions were enforced very strictly (it would have to be by a Maoist China like mentality where everyone spies on their neighbor lest they use one of these things in a transaction and then everyone would rush to report it to the authorities. I think you saw something similar with the food rationing boards in America during World War One ) then there could be no problem of time-deposit notes becoming a type of money or “fiduciary media” if you will.
However a much easier way to deal with the issue is to just outlaw time-deposits all together, which I feel must be necessary for a 100% system to not be just as or even more so inflationary than a FRB system
This is only true if no one is willing to accept your time deposit certificate as a means of payment. This would imply that you are unable to find a person who values this future sum of money as much as some amount of present money of a smaller or equal amount.
While in a world where we have chequeings account it may be more difficult for you to arrange such a trade, although not absurdly difficult, in a world where time deposits are incredibly common because chequeings accounts are restriced it would, indeed, become quite easy.
Please read my posts above for an elaboration on this point and the reasons why I believe time deposit accounts would indeed be popular in a world without chequeing accounts
For reasons I have outlined in these earlier posts I even expect that these certificates would trade at future value. This might arise even through a process where one store or firm, in order to attract customers says “we value one year time certificates as much as the real deal!” and other similar competition among suppliers.
What is the source of this quote?
If my memory serves the source of the quote by nigrahamUK is a paper of Hans Herman Hoppe’s called “how is fiat money possible” it was in one of the later issues of the Review of Austrian Economics.
I will try and find a link for you
EDIT: Here is the link
Its a great paper providing a solid argument of how fiat money can only ever be achieved through the institution of the state, and not by the market.
I’m not sure, but I think a few arguments may have been omitted. I haven’t read all the posts in detail so I apologize in advance if someone has stated the following.
Demand deposits have an effect on people’s psychology. The vast, vast majority of people I have met (actually, everyone I have ever talked to about this, except my dad) believe that their bank’s do not loan out current accounts. Even economics students often fail to understand this, and FRB is only glancingly overviewed in most curriculums nowadays.
Thus, regardless of what in fact happens to demand deposits, the people at large subjectively believe that their deposits are held safely by the bank. This increases their time preference! If you subjectively believe you have $1000 in your bank account, although you may not spend it immediately, you will act differently. Your spending behavior will in general change. For example, people who believe they have large reserves of cash in the bank may be likely to spend more money on clothes, groceries, and other consumer goods.
Moreover, all a bank has to do in order to balance their accounts is to have an equal amount of liabilities and “assets”. Since every new loan it gives out counts as an asset, then it is very easy to balance the bank’s accounts. The important factor is that while the demand deposits consumers have are of a high liquidity, the loans banks give out to commercial entities or for mortgages, etc. have a low liquidity. Such a problem can never be encountered with time deposits, since time deposits also have a low level of liquidity. If I were to put $1000 into a time deposit account for a period of one year, I would adjust my current expenditures and lifestyle to suit my deferred consumption.
So two arguments, higher time preferences in view of most people’s subjective beliefs and liquidity differences.
Of course I was assuming it still had time to run before its redemption date. If he can take the gold immediately, what’s to stop the original owner taking the gold before the redemption date, instead of trading away the certificate? If he (or anyone) can do that, how is it a “time deposit” again? It’s starting to look a lot like a “warehouse receipt”, to me! (Not to mention, where does the gold come from? It’s presumably lent out the gold that was deposited: that was the purpose of the time deposit, after all! Bank run!)
If the (new) owner can deposit it as if it were money proper, what happens? Does the bank just issue him with another CD that has a longer term (so that the original term is up and the actual money can be transferred to the new CD), with the interest rate calculated to cover only the difference, or something? Bizarre banking gymnastics to get the result you (think you) want…
Well I don’t think much would stop a bank and client from entering into a mutually beneficial agreement that allows the client to claim the gold amount with interest accrued on the time deposit certificate (maybe with a penalty, maybe some banks would make it a policy to have no penalty on such events) earlier than maturity date other than a law and enforcement of that law.
You are correct in claiming that there are many similarities between “warehouse receipts” (by which I assume you mean FRB bank notes) and time deposits.
No this is not what happens nor do I see why it would happen. When you have a bank note under a system of FRB and you go to the bank you can’t deposit it, it already represents a deposited amount of gold, it is a claim . You may choose to part with your receipt in exchange for some gold or hold onto it but you cannot deposit your receipt other than for safeguarding. I guess in the case of “safeguarding” the receipt itself is destroyed and the gold amount is placed under your account with the bank.
The same is true for time deposits.
I do not see why you think time deposits would be “money proper” (under a reserve system whether fractional or 100% (that uses gold) gold is “money proper” or hard money if you will) , or why banks and customers would set up the institution of depositing these things.
When you say “the law”, you appear to be referring to legislated law. But what stops him taking the gold away early is not legislated law, it’s physical law (like “gravity”) – the gold isn’t there*!* The bank lent it out!
Of course “warehouse receipts” means 100%-reserve notes, not FRB notes! If he can take the gold, the bank has to have the gold on hand, so it can’t lend it out.
That’s what happens in a 100%-reserve system, yes; but with fractional reserves, the gold amount can’t be placed in your account because it belongs to somebody else!
Exactly. Gold (or whatever) is what’s deposited!
Or done at a discount, i.e. you’re trading a future claim for a current good, which means the time-deposit isn’t worth face-value.
And we’ll just forget your nonsense hyperbole.
Well yes
I have written at length and detail about the face value and present values of time deposits. Basically
1)Time deposits have a future value of deposited sum + future accrued interest as “face value”
2)Time deposits trade at a present sum equal to the future value of the deposit discounted by time preference rate of the buyer of the deposit.
3)The present sum of the market clearing price (the equivalent value in gold on a given day) for time deposits will tend to equal the exact amount originally deposited on the day of deposit, and greater thereafter (this is holding time preferences constant)
4)For reasons such as the benefits of trade, disutility of constant calculation and competition among buyers of time deposits, time deposits are actually highly likely to eventually start trading even at face value
@ Paul
Sorry if I’m misunderstanding you but I’m not sure what you’re trying to prove or, what exactly, your disagreement with me is
Could you please, if you have the time, make a brief statement of what you think I have been trying to say
Nevertheless I’ll try my best to address some of your comments
Yes when time deposits are used in a 100% reserve system it is likely that when you come to claim your gold that the bank doesn’t have it on hand at the moment. As I discussed earlier it is the same likelihood as a bank not having your gold in a system using Fractional Reserve Banking and demand deposits.
Apologies for misinterpreting you
As I have discussed at length earlier, this is true of warehouse receipts, however it is not true of time deposits. When you give your gold to a bank under a time deposit, you give them the right to loan it out till the maturity date of your deposit.
It is true that under a fractional reserve system the bank does not have enough capital on hand to give everyone his amount of gold if they were to all come in and withdraw at it once, however, a system using time deposits and 100% reserve banking inevitably encounters the exact same problem. This is because under both systems there will be a greater amount of future claims to gold than present gold exists.
Given that we save money for a rainy day, why would you put money in a bank that would definitely not have your money on a rainy day?
Would you put your savings for a downturn in the economy into a fractional reserve bank? Or one that had to have your deposit on hand at all times?
If your response is that you would put some in a fractional reserve account for the extra interest, and some in a 100% reserve backed account for money you want access to at all times, why wouldn’t you put the money into a time deposit where you can get a little extra interest than a fractional reserve account anyway?
How would you act if you had these real choices? (remember, these would be competing ‘currencies’ from the different banks)