How is desoto’s book any different than mises - theory of money and credit?
DeSoto’s book is clear on the nature of whether or not fiduciary media can be considered legitimate(it can’t) - as far as i have understand from my own reading, Mises’ theory appears to justify fiduciary media (in places) since it allows for a flexible response to changes in the demand for money (substitutes). It does reflect the negative impacts of such inflationism but DeSoto’s book was also written after the major developments in ABCT had taken place through Hayek and Rothbard’s works on the subject, and so its analysis on that is more concrete (if a little bit of a repetition of other works in places, especially Prices and Production).
K thanks.
Also I thought that desoto defends the euro?
Relative to a system of fluctuating fiat currencies of many different kinds in Europe, I believe so, but I believe that’s not the same as his ideal. Certainly the benefits compared to having those monetary policies that each individual country had before are great, but yes, it does however remain a FRB system. There also appears to be some confusion as to whether Bagus changed his mind regarding theEuro, but if i get in to the Rey Juan Carlos University i’ll try and ask them in person! haha
grant,
A simple way to look at it is to divide it up into normative vs positive views, and to realize that in a completely free market no honest contract is fraudulent. If a demand deposit is identified as a call loan, and both parties are aware of this, then there’s no fraud. There would be no need for 100% reserves so long as everyone knew and agreed to the remedies of not meeting a contractual demand. Basically that means everything that would be a demand deposit would be defined as such, and anything else would come with a degree of risk that both parties accepted. That’s the positive the view. The normative view generally sees fractional reserves as fraud on an ethical and moral basis, and so would be the type of people who would only agree to demand reserve contracts for money they wanted warehoused, and if they accept government intervention in the markets, would want the government to enforce those contracts. I think people mix up the normative and positive view on this issue a lot, not in the least because the issue is highly politicized because banks generally have the government giving them a pass but holding customers’ feet to the fire whenever possible. And historically Austrians and Austrian Libertarians see this government - bank partnership as the source of a lot of current problems.
I thought that was a good article, also nicely highlighting how private deposit insurance (I agree it would not be “insurance” in the traditional sense, since there is knightian uncertainty and it would rather be a speculatory task) might work with discrimination occuring between banks as to help out who with reserves, etc.
The only thing I find weird about the freebankers (e.g. Selgin and White) is some of their macroeconomics (though I find that with a lot of maroeconomics).
xahrx - not sure why you responded to me. i was simplying wondering desoto’s view point in his book.
Anyways since you’ve have come to a conclusion that i disagree with i will more than welcome a discussion.
“realize that in a completely free market no honest contract is fraudulent” - if you and i reach an agreement, and i knowingly cant live up to it that is fraud. So fraud can occur on a free market and can occur easily.
“both parties are aware of this, then there’s no fraud” - yes, but the bank IS KNOWINGLY loaning out money that they cant possibly live up to. That’s fraud. If a customer knowing enters a contract with someone that they know is committing fraud does it make it nonfraudulent? If i’m a multibillionaire and best friends with bernie madoff and he says he will give me 50% returns on my money if i invest with him. Bernie Madoff still committed fraud even if i got the 50% returns.
“There would be no need for 100% reserves so long as everyone knew and agreed to the remedies of not meeting a contractual demand.” - this is one of the biggest arguments i see from people that dont believe FRBing should be made illegal. I havent reached the same conclusion. Your conclusion is reached without thinking about the 3rd person. A contract isnt always reached by parties involved in a contract. You are leaving out the elephant in the room, the 3rd person/everyone in that society that doesnt want FRBing/or hasnt reached a contract with that bank.
If i dont believe in fractional reserve banking because it obviously expands the money supply (lets just assume on a free market we are on a gold standard) then why does my oz of gold have to compete for goods against a counterfeit gold oz? because 2 parties reached an agreement to counterfeit gold? thats not right. if i reached an agreement with a hitman to kill person C how is that justifiable? if i reach an agreement with a slavemaster to enslave person C how is that justifiable? Isnt that exactly what you are doing when you say FRBing is legal because the two parties involved in the loan know what the contract is?
Ive heard the argument that the notes from banks that practice FRBing will not be worth as much. say a Bank of America 1 gold oz note actually only trades for .75 oz of gold. But still, how is it justifiable for my gold oz to compete against fractions of counterfeit gold ounces at ANY fraction?
If my wages are 1 oz of gold a week then a New York City bank (that practices FRBing) loans out a million ounces of gold to everyone in my town then my wages have been reduced. My wages were reduced by someone i had no contract with. I wages were reduced by a company who loaned out money that was not theres to loan out. Then i’m normally countered with the argument 'well what if that money was loaned out anyways with 100% backing of gold? then this is fine because actual gold, 1:1 backing of gold, is hitting the market. Investors had reached a decision that those people who received the loan are worth the 100% risk. Not the 10% risk that a 10% reserve holdings that banks have today. Banks today cant loan out 10 gold ounces against 1 gold oz. Meaning they can 9 ounces of gold that they KNOW is going to fail and STILL make a profit from the 1 person who lives up to the loan. How in the world does that make sense to you? With 100% reserves if ANY loan fails the banks lose money. THATS BUSINESS. Why do you make an exceptions for them?
(i’m assuming that you agree a central bank is bad) so if you disagree with me how is it any different if a private bank virtually prints money (without the backing of a central bank) than a central bank printing money? Sure a central bank has 10000% more power and greater ability to print money, but they are still both printing money out of thin air.
Here is what i believe what i believe FRBing would be in a free market:
-
Unless made illegal FRBing WILL exsist on a free market
-
Yes, FRBs will have a billion times better business practices and wont be able to loan out near the fractional reserve lvl that they do with a central bank.
-
Yes, having a gold standard (commodity money) will restrict them even further.
-
A bank will be able to successfully loan out at least 1 gold oz that isnt backed by anything.
My question, how loaning out 1 gold oz that isnt backed by 1 gold oz legal? Why does my $$$ have to compete against fake counterfeit money?
they are invalid as either loans or deposits becasue they require that two parties are simultaneously in possession of the same availability of the funds.
That is not the case. When a customer issues a call loan to the bank, the funds go to the bank, as with any normal loan. The funds do not remain with the customer. If the customer comes back and asks for his money, he is calling in the loan. You’re thinking that the money is at once lent to the bank and deposited in the customer’s account. But only the former is true. The “deposit” in the customer’s account is a fiction, it represents the ability of the customer to call in the loan at any time, but there is no actual money sitting in a vault for the customer.
That is, a deposit cannot simultaneously be a loan because availability simultaneously belongs to two parties. ]
It’s not a deposit and a loan, it’s just a loan. You’re thinking that “the money” is somehow available in full to both parties, but that’s not the case. The customer, like any lender, will get paid back only if the bank happens to have the money when the time comes.
How can the one use it if the other is using it?
They can’t, and don’t, which is why bank runs are possible.
a loan without a term cannot be considered a loan
Nonsense.
http://financial-dictionary.thefreedictionary.com/Call+Loan
http://financial-dictionary.thefreedictionary.com/Call+Loan
http://financial-dictionary.thefreedictionary.com/Brokers'+Loans
A loan must either have a term or be repayable on demand.
Since these practices exist, it is clear that availability is simultaneously held by two parties (why would they calculate these things otherwise?)
Again, the fact that bank runs are possible, and that banks take steps to avoid bank runs, demonstrates that the funds are not available to the bank and the depositor simultaneously. That’s why there can be a conflict. The bank receives the call loan from the the customer, the bank loans the money on out to make a profit on the spread, at some point the customer calls in his loan (in part or in full: e.g. by using the ATM or by writing a check), and he gets the money if the bank happens to have enough to cover the liability. If not, tough luck for the customer, who took the same risk that every creditor takes.
I think part of the confusion here is that you’re thinking that both the bank and the customer have access to “the money.” But that’s wrong. The bank got “the money,” and if the customer calls in his loan, he gets some other money which is in the possession of the bank - money is fungible. It’s no different than a pure time-deposit commercial bank. If I make a time deposit at the bank, the bank is not obligates to repay me the specific dollars I loaned them, just some dollars. The dollars I lent them may not be available, they may be funding petty cash operations in a tin mine in Brazil, and they have to borrow from someone else to repay me what I am owed. Sound familiar? That is exactly what FRB is. The bank funds the repayment of my call loan with money they borrowed on call from other customers.
EDIT: think of it this way…
The fact that a customer who made a "demand deposit: with a bank might go to the bank and find that his money is not there is analogous to a customer who made a time deposit with a bank going to the bank when the term of the deposit ends and finding that the bank cannot repay him. In neither case was the customer defrauded. Rather, the customer took the same risk that every lender takes (the risk that the borrowed may not be able to repay him).
FRB per se is not fraudulent. It would only be fraudulent if the bank pretended to be holding the customer’s money in bailment (warehousing) when they were really taking a call loan from the customer. In our current system, it’s debatable whether customers understand that they’re loaning the bank money, but that doesn’t mean that FRB per se would have to be fraudulent in a free banking environment.
well I suppose that the answer is your dollar WOULDN’T have to compete, because you don’t have to use that bank. This is the process by which those who don’t have a problem with FRB say that FRB would be limited by itself in a free market. A central bank of course would not be needed in a 100% reserve situation. Those who don’t mind FRB but don’t like a central bank are dealing with a phenomenon (as Mises says) different in degree, not in kind - the extent to which the negative effects of FRB take place are more pronounced of course with a central bank but not eradicated without one - and ignore the majority of history considering the fact FRB was around long before central banks, and in fact was the reason central banks were formed (at least, that’s the line).
The interesting question of whether or not it’s fraud is dealt with in Money, Bank Credit and Economic Cycles, with interesting comparisons to misappropriation of for example wheat from grain warehouses. Good points regarding the legality of contracts though, grant.
those who don’t have a problem with FRB say that FRB would be limited by itself in a free market.
Yes, that’s my position as well. In a free banking environment, the inflation would be much smaller in scope (banks could never run up such low reserve ratios as they do now without going bust) and local (as opposed to systemtic).
…and the bottom line is that, even if we think any amount of inflation is a bad thing, we as libertarians should not prohibit voluntary contractual relationships between banks and their customers.
One thing I’ve never understood about pro-FRB people:
If it is wrong for governments to create money backed by nothing, how did it magically become OK for private banks to do the same?
Is it magically ok because they create money backed by nothing on a smaller scale than the state?
At what point does issuing money not backed by anything (counterfieting) not become fraud?
wegreenall - but i dont understand, how would my dollar not have to compete if my dollar is gold and their dollar is gold? Why would a business or actors in a society not accept fractional reserve notes?
Lets just take me personally, i would accept fractional reserve notes gold at face value if they are redeemable in gold. I might not choose to bank their, but i would still accept the notes and only stop accepting those notes when the bank fails. Or if it is a large purchase, where i cant absorb the payment in case of a bank run or bank failure, i would transfer gold first then give the good or service. Either way my gold is still competing with counterfeit gold.
Now why would i refuse to bank with FRBs? If i bank choose to bank with 100% reserve banks they CANT give me returns on demand deposits. When a fractional reserve bank will give returns because they are able to loan that out. My guess returns on demand deposits will start to get real returns when banks have to compete for every dollar. So why wouldnt someone who doesnt really know the problems with FRBing bank with someone who offers 0% returns over a 3% return with a FRB? Not to mention contract obligations that FRBs will start to enforce requiring ppl to bank with them in order to receive a loan. Since they inherently have more money than 100% reserve banks they will win. They will get the customers because they are able to loan out more money to more people.
if we believe in capitalism, if we believe the best businesses will be the most successful then whats a better business model then loaning out counterfeit money? The business that will win is the best counterfeiting company and not someone whose business model refuses to counterfeit.
If i am able to clone 10 cows at no additional cost for every cow i have do you think anyone will be able to compete with my business? However in my business i actually am able to produce 10 cows, when a FRB doesnt produce 10 ounces of gold.
minarchist - “Yes, that’s my position as well. In a free banking environment, the inflation would be much smaller in scope” - because its much smaller it doesnt matter? Is a murderer not a murderer if they just murder a single person? Hey its much smaller in scope than murdering 100 people.
bottom line is, we as libertarians, emphasize liberty, freedom, and mutual agreements. I DO NOT AGREE in devaluing my currency for the benefit of banks and debtors because they want the authority to counterfeit currency.
If it is wrong for governments to create money backed by nothing, how did it magically become OK for private banks to do the same?
To answer your question with a rhetorical question: If it’s wrong for government to have a monopoly on 1st class mail delivery, how did it magically become OK for private companies to deliver first class mail?
In other words, the problem is not “money from nothing” (and your chicks for free?) as such, it’s the fact that the State operates a coercive banking cartel, and enforces legal tender laws, and does all the other things which allow a few crony banks to inflate far more than they ever could in a free market, which is the whole point.
At what point does issuing money not backed by anything (counterfieting) not become fraud?
Money back by nothing (paper money which cannot be redeemed for anything else) is never fraud per se. Fraud requires deception. No activity is fraudulent per se. It depends on whether or not all parties concerned know what’s going on, or whether someone is being deceived.
If a bank issues you paper money and tells you you can redeem them for gold, but then you discover that the bank actually won’t redeem them for gold, you have been defrauded. But if the bank issues irredeemable paper money to you, and you know that’s what it is, no fraud has occurred. Of course, no one would ever do this. The only reason irredeemable paper money “works” (is accepted and in circulation) is because of legal tender laws. In a free banking environment, the banks would issue paper money, but it would all be redeemable for hard money, one way or the other. That’s how things worked in the 19th century. That doesn’t mean there isn’t inflation, there is - even though the banks issue paper notes redeemable in gold, they don’t have enough gold to meet all demands.
because its much smaller it doesnt matter? Is a murderer not a murderer if they just murder a single person? Hey its much smaller in scope than murdering 100 people.
bottom line is, we as libertarians, emphasize liberty, freedom, and mutual agreements. I DO NOT AGREE in devaluing my currency for the benefit of banks and debtors because they want the authority to counterfeit currency.
When the bank inflates and your savings lose value, they have violated your property rights?
So, if I sell my house, and as a result, your house loses value, did I violate your property rights?
Or if I sell my shares of IBM, and your shares loses value, did I violate your property rights?
The answer to all these questions is no.
If you choose to hold your savings in a particular form of asset, and the market-value of that asset goes down because of the actions of some third party, that third party did not commit a tort against you, they did not violate your property rights, they do not owe you anything.
Otherwise, every change in prices would violate somebody’s rights.
So, your analogy between a little inflation and a little murder is way off base. Inflation may be bad in an economic sense (distorts the structure of production), but it is not criminal.
And this is our fundamental disagreement - The problem is money from nothing.
The State cartel and legal tender laws just allow banks to take a bad practice and make things worse.
Money backed by nothing is fraud - just because you’ve convinced idiots that it is actually worth something when it isn’t, that doesn’t make it right.
Just because someone would be stupid enough to accept your scheme still doesn’t make it not fraud. It just makes you a really convincing con man.
A few of us are just not falling for the con.
The state legalised the money backed by nothing FRB con with central banks, legal tender laws and legislation.
Take all those things away and it is still a con. It no longer has state backing, but it it still quacks like a duck.
“When the bank inflates and your savings lose value, they have violated your property rights?” - umm yes. They did so fraudulently counterfeiting money.
“So, if I sell my house, and as a result, your house loses value, did I violate your property rights?” - thats a bit egotistical dont you think? to suggest anyone you sell to will devalue property value? But no they didnt violate my property rights because their land is theirs to do with what they want. As long as they sell in accordance to the HOA bylaws. What is fraudulent in selling your home? i have the right to sell too.
“if I sell my shares of IBM, and your shares loses value, did I violate your property rights?” every owner of IBM shares go in knowing that anyone is allowed to sell their shares. You selling shares doesnt take away my right to sell. If IBM sells shares then dilutes the shares by 90% of its value then that is theft.
“If you choose to hold your savings in a particular form of asset, and the market-value of that asset goes down because of the actions of some third party, that third party did not commit a tort against you, they did not violate your property rights, they do not owe you anything.” - I am not choosing gold to be money THE MARKET IS. A bank WILL inflate ANYTHING that is considered money. I have no rights to hold anything i deem as money that banks wont have a right to inflate.
“Otherwise, every change in prices would violate somebody’s rights.” - change in prices caused by someone counterfeiting money is completely different then the supply and demand of goods. In your world where banks can counterfeit money. What prevents me from from loaning out Bank of America notes that i print myself? Nothing fraudulent there. If my notes are good enough Bank of America will accept them for gold. hey if businesses want to accept my notes its all good on the free market. Or if i put a little * mark that is invisable to the naked eye and can only be seen with a black light and a magnifying glass. Its just my artistic interpretation of Bank of America notes and i just thought business accepted my BOA notes because they valued my art. BOA exchanged that note for gold because they value my art as well.
“So, your analogy between a little inflation and a little murder is way off base. Inflation may be bad in an economic sense (distorts the structure of production), but it is not criminal.” - it is criminal. Thats the whole point. Counterfeiting is illegal. If i sell you a house that i dont own thats illegal, but hey the owners of the home only use it as a vacation home which they visit once a decade so who is going to ever find out.
I should be a real estate agent. I can goto cabo mexico and sell property that i dont have rights to sell. I will rent out all property! I just wont rent it out when the home owners come to visit. I’m not violating their property rights. The property is still there, and property value will actually rise because more ppl will be in that area spending money. They still have full use of the property. Everything will be left the way they left it. Its their fault for owning something in that particular form of asset!
wegreenall - but i dont understand, how would my dollar not have to compete if my dollar is gold and their dollar is gold? Why would a business or actors in a society not accept fractional reserve notes?
well, the idea based on a free banking solution to the problems of FRB is that actors would, as soon as they realise the inflation of their currencies not occuring in other currencies, they would stop using those currencies. If there was some gold backing my paper dollars and i could see that this bank was inflating, I would stop using those dollars. Of course, these end up in bank runs and many people do not realise this inflation until the run itself.
Furthermore, for minarchist this time - consider you have some wheat in a warehouse. You have certificates for that wheat, so you can claim it back any time. If you go and get the wheat out, and they don’t have it, they have misappropriated the wheat you deposited with them. There have been cases where owners of such grainstores have gone to prison for the crime of misappropriation, because it is fraud. the fraud did not, however, occur when you went to demand your wheat, it occurred the moment they used the wheat deposited with them, deposited being the important term, because availability of that wheat was not passed over as it was in a loan agreement. As for the explanation you gave of FRB, i am well aware of the way in which it works, but as I said the fact that it is known as a “call loan” does not mean that it is somehow a valid loan. As well as this, I am aware of the fact that they pay me ten dollars of someone else’s money NOT currently being used, but the point is that on the WHOLE they are unable to redeem their deposits. Bank runs are a result of fraudulent activity. The warehouse example should suffice to show that misappropriation occurs - and this is the crime. The logic of saying that it is not fraud means that allowing bank runs to occur as a method of cleaning the system of insolvent banks is legitimate, but also that the very process that is considered illegitimate elsewhere is somehow OK in banking practice. The reason for its repeated occurrence and the longer time that it takes between the inflation and the bank run is the result of the fact that since the majority of commodities (such as wheat, which is why the example is so nice) are perishable, at some point the claims will definitely come to bear, but claims for money can operate as representing money. This however does not change the principles of the matter; it is fraud and misappropriation to issue claims to things you do not have. or rather, to use those things for which you have issued on-demand claims, that is a (in this case irregular) deposit contract under the assumption they will not be claimed for.
Aso it is important to remember that it is not the legal tender laws which give money its value, it is its use as a medium of exchange - the influence the government has over whether or not a medium of exchange will become so is much less than most people would believe (as we know from Mises; T of M and C).
Admittedly, I do not consider fiat money itself (not the same as fiduciary media) as fraudulent, because it is not the commodity itself that provides it the value. (We all understand the the negative consequences of such institutions, and that’s what bring us to this website.) Clearly, fiat money can have value since I am sure you all use fiat money dollars when you buy your merchandise from the Mises store. However, fiduciary media in a situation of commodity money IS fraud because it refers to on-demand claims for commodities that are not available, and thus, misappropriation.
And this is our fundamental disagreement - The problem is money from nothing.
The State cartel and legal tender laws just allow banks to take a bad practice and make things worse.
“Money from nothing” is just a slogan. If you want to legally prohibit the printing of irredeemable paper money, you need to explain why it should be illegal. You seem to think it is inherently fraudulent - what definition of fraud are you using? Because by any normal definition, the printing of paper money is not fraudulent per se. As I said already, fraud requires deception. If a bank prints paper money, and people accept it willingly, knowing full well it is not redeemable for anything, where’s the deception? Where’s the fraud?
Money backed by nothing is fraud
Again, why is it fraud? Define fraud.
just because you’ve convinced idiots that it is actually worth something when it isn’t, that doesn’t make it right.
Who decides whether something is valuable? You? Me? Do we take a poll? No, the value of a thing (including money itself) is determined in the market[lace by the people involved in the transactions. If a customer of a bank thinks that the banknote is worth something, it is. Value is subjective. Econ 101.
They did so fraudulently counterfeiting money
If ABC Bank prints up banknotes that say 'ABC banknote" how is that counterfeiting money? They aren’t pretending to print banknotes, they are printing banknotes. There is no deception here.
no they didnt violate my property rights because their land is theirs to do with what they want. As long as they sell in accordance to the HOA bylaws. What is fraudulent in selling your home? i have the right to sell too.
And you also have the right to print paper money. So what’s fraudulent in the bank printing paper money?
You selling shares doesnt take away my right to sell.
And the bank printing paper money doesn’t take away your right to print paper money.
change in prices caused by someone counterfeiting money is completely different then the supply and demand of goods.
Again, explain why a bank printing money is counterfeiting.
What prevents me from from loaning out Bank of America notes that i print myself?
Nothing. You should be free to print your own paper money. I doubt anyone will accept it, but you’re welcome to try.
it is criminal. Thats the whole point. Counterfeiting is illegal. If i sell you a house that i dont own thats illegal, but hey the owners of the home only use it as a vacation home which they visit once a decade so who is going to ever find out.
For that analogy to make sense, it would have to be the case that customers making “demand deposits” were under the mistaken impression that the bank was storing (rather than lending out) their deposited funds. If that were the case, then it is fraud. If that is not the case, and customers know that the bank is lending out the money, then there is no fraud.
I can goto cabo mexico and sell property that i dont have rights to sell.
If a bank buys paper, and printing press, and ink. And the bank prints up some pieces of paper. Does the bank have the right to sell these pieces of paper? If not, why not?