I’m kind of new to this stuff so forgive me. . .
I think a 100% gold standard with 100% reserve banking is very harsh and would make economic growth very slow. I was wondering if a mixed metal standard might work for our banking system. Like Gold, silver, platinum. But every bank would have to choose one metal to print their paper by and it would have to be 100% reserve banking(central bank).
They only have access to their own banknotes. They made a loan to the bank which pays interest. This has nothing to do with warehousing. The bank just has to pay back the money with interest on demand.
Why is the same myth repeated over and over and over and over and…?
What people fail to notice is that the interest in a fractional-reserve system barely covers the inflation rate. Even if the interest rate is higher than current inflation, this is because banks predict future inflation rates.
As F. Hayek points out, inflation is not beneficial at all. In the short term, inflation makes investors see higher-than-expected returns, but they quickly adapt and predict. The government/issuer is forced to increase the inflation rate further in order to surpass these predictions, hence an ever increasingly inflation. Given this mechanism, it is easy to see why fractional-reserve banking is really a no-win for the customer that deposits money, even when the interest exceeds current inflation.
Economic growth under inflation is equal or worse than under full-reserve. It is worse because of misguided investment. And growth is not faster, it’s just a false perception. Once the perpetuum mobile of inflation blows up (by reaching hyperinflation), the economy contracts back.
Well, under full reserve banking the resource costs are much higher. The gold is used for transactions instead of industrial purposes or jewellery.
Fractional reserves over a commodity standard like gold cause no sustained inflation. The amount of fiduciary media is limited by the gold reserves, they cannot expand indefinetly, just under full reserves.
I believe this is a wrong perspective on the matter. If gold has a double usage, as a material and as money, people could equally well exchange gold (= money) with manufacturers for goods. The manufacturers can further use it to create jewelery or electronic devices.
Remember, gold is not carried around too much these days because the state frowns upon it. But in a free market, gold exchanges for goods would thrive.
What do those notes represent exactly? If they’re not backed, why would anyone accept them?
-Jon
By issuing fiduciary media there is less demand to hold gold for monetary usages, its price relative to other goods decreases so manufacturers can get it cheaper.
What they say. To pay the bearer on demand a given amount of money. They are accepted because they are redeemable.
OK, I see what you mean now. Nevermind.
-Jon
It’s great to have inflationists instructing us on the benefits of replacing commodity money with worthless paper…
The thing is, FRB is propped up by the fed at the point of a gun, while the market comes up with things like e-gold or the liberty dollar…which are being suppressed at the point of a gun…
The idea that in a free-market people would accept worthless paper as money is…naive. Of course, if the privately issued notes are 100% backed they will be traded at face value. If they are only 20% backed then…they will not trade at face value. Easy.
I will happily buy your banknotes below face value.
You mean, you’ll give me 100 gold coins in exchange for a piece of paper ? A piece of paper which you’d be able to then trade for 20 gold coins ? I’d love to do business with you =]
All money has the purpose of storing value, to facilitate trade over time and over distance, and over a wide variety of goods. At all times it is being saved, although who is saving it may change. Exchange should accompany the production of new demanded goods to the market. Thus, the best money is the one that is not able to be manipulated severely by market players at low cost, for this would represent a transfer of wealth, which would almost always favor he who controls the money over he who uses the money.
We have seen that inflation, not only endorsed, but really forced upon all banks, favors the interests of the FED, and the hedge funds, and other central banks. It is paid for by everyone else.
Anyway, the point here is that the transfer of wealth does not accompany production of wealth; therefore, it is a distortion to the entire structure of production. Artificial credit may create the appearance of greater economic growth, but it also prevents any true measurement of what could have been without it. Nominally, it is an illusion. We often use the CPI to determine real economic growth, etc., but there is no real way to know.
Money is the central life-blood of any economy. It is the common indicator of price, allowing consumers and businessmen quick wisdom on what actions would be personally and commercially profitable.
Austrian Business Cycle Theory would hold both booms and busts caused by artificial credit creation as flawed sustainable economic models. The boom is unsustainable. That is what most schools of economics fail to believe. But it is really caused by price fixing money.
One of its cheif points is that by lowering the price of credit, people are less induced to save. Rising consumer prices due to higher rates of consumption to production and increases to the money supply create an unpredictable change to the amount of available real credit.
Rising producer prices increase costs, forcing entrepreneurs to seek greater credit to finish their ventures. But as price inflation kicks in, to retain positive real interest rates, nominal rates must increase. Many entrepreneurs cannot find the required credit at a price that would leave their venture profitable, and must liquidate.
The less real savings there are, the less able artificial credit can be accepted as valuable. Monetary inflation and price inflation will have little time lag, as they rise exponentially. This currency has destroyed its role as money. It now represents barely any real output of the economy, only arbitrary transfers of economic power. It is abandoned.
Artificial credit could have some useful purposes I suppose; however, it would require the voluntary consent of those involved. In such cases, it could never represent a continuous one-way path of inflation. If customers trust their bank and banks trust their customers, customers can tolerate mild price changes while agreeing not to withdraw their money.
If this were done in the form of time deposits however - it would be far more failsafe and legally conclusive.
So…perpetual involuntary inflation via artificial credit is bad for real economic growth.
1 - arbitrary, virtually costless transfer of wealth without a creation of wealth.
2 - business cycle, with misallocation of limited resources in both the boom and the bust
I don’t understand how, in today’s system, the fractional reserves system is a signifcant culprit even if they are not totally honest. After all, if banks are able to keep enough on demand to satisfy depositors, doesn’t that have almost the same effect as time-deposits in a free market, considering that they are able to make overnight loans to each other?
It seems that the real problem is that banks are a trap for the fed to get you by inflation.
I could be missing something, but isn’t the what’s causing 95% of the problems is fiat money controlled by the fed?
There’s one oddity in the whole reserve banking system that has bothered me: why if there’s to be a fractional form of it why not tie to the person who takes out the loan? Printing more notes only “pads the packets” of wealth.
The problem is, when the fed injects 1 billion dollars into the economy, it ends up as 1 billion in reserves at a bank. Then with fractional reserves the bank lends this out as 5 billion thereby multiplying the effect of the fed by 5.
Store of wealth is not really accurate. Money is solely for the purposes of exchange. And fiduciary media played that role well. Its manipulation is limited by the need to redeem it on demand.
To me it seems the problem is the Fed can inject 1 billion into the economy out of nothing.