My claim is that it will happen under free-market conditions, and everything I’ve written addresses that point. The prior bulk of your post is on a subject nobody here, including me, has any argument with.
Of course.
If I knew that, I wouldn’t need to look for it here.
And that may be the start of a viable refutation, but I’ll have to work on it some more…
…but not from a consequentalist angle. The fact that it may lead to something considered bad is not itself enough to refute it.
I’m still getting through HA, so I have yet to see in detail what Mises wrote. I can only hope that his analysis has more depth to it than what I’ve seen here.
Yes, there are two main strains at issue here, bank deposits and currency issuance. I haven’t been distinguishing between the two because they are closely related, the main functional difference being whether the receipts are circulated to third parties as money or not. The issues involved are basically the same, though at some point, if the conversation ever gets deeper than dogma, it may be necessary to distinguish the two.
Any FRB scheme impies issuance of more reciepts, or notes, than there is physical gold backing them, but not necessarily a pure fiat note that has no backing at all. That is still the main issue with the Federal Reserve (although the issuance of “notes” is virtualized to entries in an electronic ledger), but they’ve expanded their mandate to include things like the Bear Stearns bailout. It’s a predictable, but nasty consequence of the premises they operate under.
Most everybody here is arguing that FRB iteself is the cause of these problems, my counterpoint is that it is the monopolization of currency issuance that allows them to abuse FRB without any market discipline that is the cause of the problems, not FRB itself.
Absolutely.
DriftWood: Nice explanation.
Juan: Thanks for the links, I will listen to them as soon as I have a chance, probably later today at work.
fsk: I’ve got your article series up in my browser, and will read it, but it might be a few days till I have time.
FRB is not bad at all. It is central banking that is bad. Prior to the Federal anti-Reserve system in the US, banks were locked in a dog eat dog world of trying to keep their reservers high enough to pay off runs on the bank while at the same time lend out enough money to maintain a profit. Also quite a few organizations acted as fractional reserve banks. It is the central bank that mucks it up. Without the Federal anti-Reserve the largest banks would be Microsoft, Walmart and Exxon as these have the largest reserves. But the central bank stops these organizations from participating in giving borrowers cheap loans. Instead they steal money through inflation and give it to their friends. Absent the central bank lending would be much better for the borrowers.
There’s one key point that people are missing. I can’t legally boycott the Federal Reserve.
If I want to set up my own private monetary system based on gold or silver, that’s practically illegal. It’s theoretically legal, but the taxes and regulations I would need to follow make alternate monetary systems effectively illegal. The cost of complying with all the taxes and regulations would make such a business unprofitable.
Plus, the income tax effectively bans alternate monetary systems. If I use an alternate monetary system, income taxes must still be paid in Federal Reserve Notes. I can’t boycott the Federal Reserve unless I also boycott the income tax.
If you follow the full trail, the immoral agent is the government violence that bans alternate monetary systems. For example, the Liberty Dollar had their assets seized by the FBI. People who attempt to set up alternate monetary systems find themselves the victim of government violence. (The Liberty Dollar is a bad example, because that has its own issues, but e-Gold vendors have come under similar regulation/seizures.)
If there were no government violence backing the Federal Reserve, people would just boycott it and use sound money instead. Similarly, back in the days of the gold standard, government violence protected banks from the consequence of their misconduct. Government violence and regulation of banking prevented sounder banking models from competing with fractional reserve banking.
There’s really two separate fractional reserve banking systems that are being cricitized. There’s the present system of fiat debt-based money, which is totally fraudulent. There’s the pre-1913 system of fractional reseve banking based on a gold standard.
In the present, I’m legally barred from boycotting the Federal Reserve. Government violence prevents sound banking systems from existing. The people who say “Fractional Reserve Banking isn’t immoral” are ignoring the fact that violence prevents me from using alternate forms of money.
Banks can and have done exactly this without fractional reserves. And back when they did this without fractional reserves, the economy was much more stable, and prices tended to go down over time, not up.
Then why is the government actively trying to make this supposedly unpopular option illegal?
Study your history. Markets came up with banks. They didn’t come up with fractional-reserve banking, which is only possible when governments do specific thing to force people to use the notes of the politically-favored banks. People may want to be able to get back their gold on request, and not pay much of a storage fee, but in 1913, after years of political maneuvering and propaganda, the banks got the federal government to grant the Federal Reserve a government-enforced monopoly on bank note issue. And in 1929, when people called the banks on the fact that there were twice as many bank notes in circulation as there was gold on deposit, the government’s response was to outlaw gold:
http://www.presidency.ucsb.edu/ws/index.php?pid=14509
Now days the ratio of debt-based money to ‘real’ money is something like 100-to-1, only now ‘real’ money is Federal Reserve notes, created electronically at the whim of the Treasury. This is a massive transfer of wealth from the economy to the banks and the government. They can only get away with it because people know next-to-nothing about economics and history, and the government controls education to make sure it stays that way.
But this is mises.org. There is tons of material on the topic here. Start with this:
The gold confiscation and default on the dollar occurred in 1933, not 1929. In 1929, the Federal Reserve jacked up interest rates, causing a money supply crash.
The default on the dollar began in 1929. It was merely made official in 1933. It wouldn’t have happened at all were it not for the Federal Reserve’s artificial expansion of the money supply, only made possible by its monopoly on bank note issue. And the official story is that the Great Depression happened because the Federal Reserve didn’t expand the money supply fast enough. The truth is that the Fed desperately tried to expand credit but couldn’t.
If you’re going to be really technical, the default on the dollar occurred in 1913, when the Federal Reserve was created. Before 1913, the paper dollar was a warehouse receipt for gold in the US Treasury. Every 20 paper dollars correlated with an ounce of gold in the Treasury. After 1913, the Federal Reserve was allowed to print more Federal Reserve Notes than actual gold was in the Treasury. Legal tender laws meant that Federal Reserve Notes traded at parity with gold.
Allowed to print more paper dollars than it had physical gold, the Federal Reserve caused an inflationary boom in the 1920s. The Federal Reserve was 100% responsible for the Great Depression. The Great Depression was a massive loot and pillage operation by politically connected insiders. It wasn’t an accident or incompetence. They knew exactly what they were doing.
Fine. In which case the receipts will be traded at a discounted rate, reflecting how much backing they have. That would be the free-market at work.
If FRB was subjected to market discipline, then the possibility of issuing unbacked notes would be drastically reduced - so we would end up a with a system called ‘fractional’ but which actually operated using full reserves - or discounted papers - or both.
What happened historically, as people in this thread tell you, is that, when bankers realized they could not really cheat the public they turned to the state for help.
Does FRB necessarily lead to statism ? Well, I don’t know, but it sounds likely.
So you can apply a formula to an inflated currency and know the exact level of prices it would produce? If I’m not mistaken, that runs counter to Mises.
Anyway, the fact that they are redeemable means that the discount would not be to the amount of backing, but a percentage based on the perceived risk of default.
Enough already. Fraud and cheating are off the table, and you’re simply lying every time you refer to what I have been talking about as fraud or cheating.
My next sentence, which you didn’t quote was : “That would be the free-market at work.” - so stop pretending that I want to regulate banking or anything like that. The heart of the matter is that you seem to be advocating a flawed system. Theory says it is flawed and there are hundreds of years of history to illustrate the point. What you call ‘dogma’ actually is reality. Of course you are free to disregard reality if you want.
I think the word fraud aptly describes the phenomenon in a ‘value-free’ way - I don’t see why you don’t like.
Fraud
Wouldn’t the question of fraud depend on the specific contract?
Maybe I’m missing something, but if one has a contract with a bank stipulating that gold is redeemable on demand would not failure to produce that gold result in breach of contract? And wouldn’t a representation by a bank that gold is redeemable on demand contstitute fraud in such a case where the bank knows full well they may not be able to produce the gold?
On the other hand, if the contract stipulates or implies that gold may not be immediately redeemable, or if the bank makes it clear that they use the fractional reserve system, then there would be no breach of contract and no fraud. Why anyone would want to trade in dollars/pounds/whatever that would not be backed by 100% gold, I don’t know.
(**Just the two cents of someone who knows nothing about econ)
Agreed. Now, have you ever seen such a contract ? A contract making clear that for each piece of gold that every customer deposits, the bank will issue notes for say, three pieces of gold ? all notes redeemable ‘on demand’ ? I don’t think such contracts ever existed…
Exactly, and goes to my point that such note/receipts would be lottery tickets. Sometimes you can redeem them, sometimes they are worthless.
And I have no idea how in trade with said notes/receipts, we could accurately price in the statistical chance that the note will turn out to be irredeemable.
That wasn’t my point at all, it was only that you seemed to be implying that the rise in prices would be based deterministically by the inflation of the currency, and that that is, as far as I know, counter to Austrian theory.
“Fraud” is value-free? I object because “fraud” is the only argument I hear here, after explicitly positing a non-fraudulent context. It’s a strawman, raised over and over.
Exactly. At least someone gets it. Clarity on the FRB nature of the deposits implies an understanding of the risk of non- or delayed redeemability.
I can think of several reasons. At the very least, Gresham.[:D] But seriously, The most immediate advantage to depositors is the reduced storage fees, and possible payment of interest on demand deposits, and thus greater personal liquidity by having to keep less of their money in time deposits. The benefit to bankers and borrowers is considerable, and so they would have an incentive to sweeten the pot to depositors. A less tangible benefit is the inflationary nature of it. (Ooh, I’m gonna catch hell for that, ain’t I?)
Yes, its the govt intervention that is bad, not the private free market fractional reserve banks. Banks have no effect on prices, as banks only lend money from one person to another. No money is created, only debt is created. And thats not money. People dont need banks as the middle man to create debt, but its easier that way. So the banks dont have an effect on prices, and they sure cant control any prices. Banks and FRB is not to blame anything.
So, any controlling of prices, threw (base) money supply manipulation is done solely by the govts, as only the govt can create money. Monetary infation or deflation is entirely their fault. A govt usually inserts money into the private economy buy lending it on the cehap to banks, but it does not need to do this threw banks. It could just aswell do it threw public spending.. or by creating and selling bonds on the open market. You see? The end results, of an expanded money supply, would be the same.
Cheers