Like my other post, this is merely an attempt to gain more knowledge and insight into the mechanisms of money and monetary policy…at heart I’m an Ausrian through and through and thoroughly believe in a gold currency and 100% full reserve banking.
That said, I had a few questions (and ones that I’ve seen as support for fractional reserve banking).
When a loan is made for an item it’s always for the amount of the item (in most cases), it’s often, then argued that it’s not inflationary since the item being purchased with a loan can be sold to cover the cost of that loan, and thus, in essence, the loan is a type of commodity-backed currency.
It’s also been argued that gold, silver, or copper would not be the free market monetary choice, and that we’d end up with a paper currency that was backed by various items in the economy…this is basically just an ultra-expanded view of the fractional-reserve bank scenario I just posted above, only expanded to any/all sectors in the economy.
In order for this kind of a system not to be inflationary, the value of the currency created when the loan is made must be connected directly with the credit-worthiness of the debtor. If someone borrows $10,000 into existence, but a year later can only come up with $8,000 to destroy, the cost of this default is spread among all the holders of dollars in the form of inflation. This creates a prisoner’s-dilemma situation that leads to an over-extension of credit and ultimately a boom-bust cycle (see this article). Therefore, the $10,000 created must not be indistinguishable from all the other dollars, but instead must be identified specifically with the particular person who created it. This in effect allows each individual to create their own currency, rather than the government monopoly on money that we have now.
An advantage to this system, as opposed to a 100%-backed commodity standard, is that the real assets backing the money are freed up to be actually used by people, rather than being buried in a vault somewhere.
The backing is not the medium of exchange. The medium of exchange is still the certificates or receipts. Backing a currency with metals does not mean money, wealth or capital gets buried in a vault to the detriment of the economy.
it’s highly unlikely I would…I must admit I have a very very strong bais in favor of gold, but ultimately, I’d be highly leary of something that wasn’t universal, well divisible, and easily tangible…the current Federal Reserve System is partially based upon what I covered in my original post, and it’s still resulted in massive inflation…granted it’s a government organization…but, well, in private hands (fractional reserve banking) it doesn’t seem to work out all that well either.
This isn’t true. If I take out a loan to pay someone to cut my lawn, can you recoup the value of the cut lawn? Items (capital goods) are not the only things purchased with capital. Sometimes capital is invested to offset lost production while research or setup is being done. That too cannot be recouped easily.
Well, there are lots of ideologues who think they know what would happen in a free market. Unless their name is Jesus, I wouldn’t put too much faith into it. We haven’t seen a free market in money for at least 100 years. A lot has changed with the goods and materials we use, the nature of our economy, our spending patterns, technology etc. There could be a free market in money, in that different goods back paper (digital) receipts, but it would be disadvantageous to use too many different forms of money, because exchange, clearing and arbitrage could become very costly. If you’ve ever operated a retail business you probably know that handling two currencies is a hassle. 20 or 50 or 100 different currencies per day? This is why we have mediums of exchange, to avoid having to constantly find a coincidence of wants.
What is important, is that the market finds the backing(s) of choice, and be able to change or adjust exchange rations on the fly without government interference or permission. If someone tries to manipulate the gold market, people can shift into silver and so on. They aren’t trapped in a manipulated currency. Like all things free market, competition breeds honesty and efficiency.
You’ve at least twice referred to something in your original post re: FRB. I assume you know what you mean, but I don’t think you clearly wrote it.
Markets. Competition. In a free market, banks doing FRB will be run on. The currently banking cartel links loans and deposits (warehousing). There is no need for these two activities to be linked these days. Money can be stored digitally, and the storage and security can be paid for with transaction fees instead of fixed charges.
The reason why we have a linking of deposits and loans, is that FRB requires deposits in order to extend leverage. Thus, banks want to encourage that all “money” stay within the cartelized banking system, so they can pyramid on pyramid on pyramids.
Break that monopoly, and you will have sound money. What it will look like, who will produce and regulate it, will be handled by competing parties. It doesn’t matter what it is or how it works, only that it does.
If you read Menger’s elucidation of how money comes to be, he states that a medium of exchange comes into being when entrepreneurs wish to widen their market and therefore trade whatever good they’re selling for a more saleable good. This process continues until there remains but one widely accepted good used as money, and the division of labour has been greatly widened and economic calculation is now fully rational. The problem of a bundle of goods serving as money is simply that the bundle would be necessarily less saleable than the most saleable good in the bundle and would therefore never be adopted by entrepreneurs and otherwise outcompeted.
I think so, because gold/silver/copper/platinum can lose value if the demand for it falls (since the total supply is fairly constant).
What does happen to the metals?
The loan-backed currency you described doesn’t seem to involve any fractional-reserve banking at all. But yes, it’s unlikely that people would think of fractional-reserve banks as anything other than a highly risky investment.
It’s not too hard to imagine that someone could have a card loaded with small amounts of hundreds of different currencies, which are automatically exchanged for the desired currencies at the time of purchase. Or, you could have your bank print you some notes signifying ownership of your chosen basket of currencies, while stamping them with their gold-equivalent value so that other people have an idea of how much they are worth. A free currency market would be creative.
No, I really didn’t; anyway, FRB is defined as a bank acting, as you state later, as a wharehouse and a loan-bank…the major difference is that a FRB will loan out money while simultaneously maintaining access to deposits. In our current system, the Federal Reserve sets a reserve requirement of 10%…therefore, if $100 is deposited in a bank, the bank can loan out $90 to someone else. The only thing is, however, the $90 is not locked off from the depositor; therefore the money supply has, in actuality, increased to $190. This is also why there’s a run on the bank, because there IS a double-claim to the money.
Yeah, I’m currently in the middle of reading “The Mystery of Banking” (Already read “What Has the Government Done to Our Money and The Case for the 100% Gold Dollar”, so this isn
I most definitely don’t disagree with you here, in any sense.
They would be warehoused but their ownership would be traded via the receipts.
I can also imagine recreational space travel. I don’t claim to know how the free market will look 50 years in, or even 5 years in. But I do know as someone who engages in commerce, that there is an overhead cost to clearing and exchanging currency. The more currencies, the more costs. And thus, the currencies I see most often, will get discounted which means I will favour them in trade. And that will lead to lower purchasing power of competing currencies. And people will abandon them.
A market has diversity, in that it has winners and losers. But losers are not winners, and vice versa. Market share will never be in a perfect equilibrium between all parties.
I do not think it is feasible for 6+ billion people to print their own money and exchange it. That would be even worse than barter, because at least barter would be limited to the # of goods in trade. People money could be baskets, which adds an enormous (exponential) new layer of complexity to the trading.
A free market will be creative, but it will also favour the simpler solutions (efficiency).
I know it’s impossible to predict what the market will do, but is it likely, in any sense, that the market would support more than 10 currencies in a given area? I ask because, as you said, it seems to be a bit impractical.
I don’t think a market could support more than a couple/handful in the same region. I don’t think it would be practical, efficient or desirable.
The notion of free market money is to have money chosen by the market, that can be changed by the market. It is not to make everything money. That would bring us back to barter.
of course, I just wanted your personal opinions/thoughts on the matter. It would be interesting, though, if the market would pick gold and silver again, or something else? Naturally, as you’ve stated multiple times, there’s no way of knowing, but, at the same time, history seems to be on the side of gold and silver.
I’d say additional evidence for the market picking gold is Nixon axing the gold-exchanged standard in 1971. Friedman predicted gold’s price would drop like a rock because the only reason it was valuable is because the government tied it with the dollar…well, that obviously proved him wrong, as the price increased and continued to do so until the Fed was forced to reign in inflation in the late 70’s.
In a full reserve banking system, someone has to save in order for you to borrow. Several people might have to save a couple thousand each for you to be able to borrow $100,000 for a house. That means that several people are collectively not consuming $100,000 of products, lowering prices, thereby enabling you to borrow $100,000 and purchase a product without inflation. However, when $100,000 is created out of thin air and then lent out, since nobody saved a corresponding $100,000, there is bound to be price inflation, all else being equal.
Bi-metallism poses its own problems, namely both currencies (gold and silver) would have to exchange on floating rates, which would cause daily pricing fluctuations between the two methods of payment.
If I am a vendor, I don’t see a lot of value taking a currency that could lose 5% of it’s exchange value by the end of the week. This is why here on the CDN/US border, we take American currency, but punish it with lousy exchange rates, so the vendor is unlikely to lose value in exchange short of a dollar collapse. When we ask non-specialists (shoe stores for example) to perform currency exchange, we will not get good rates as consumers, and this will discourage us from using foreign monies in local exchange.
correct me if I’m wrong, but assuming a Full Reserve banking system and only gold is used as money, wouldn’t bankers have little to no incentive to give out consumption based loans? Not that I have a problem with that, just a question.
I never said it did; I merely said under a situation where gold is money and we simultaneously have fractional reserve banking…
Anyway, I’m sure they would exist, but would not they be considerably lessened? After all, they’d be inherently riskier than loans for industry/capital.