“speculators had set up private banks with little or no gold to back the notes they issued. The nation’s monetary system became more stable when the United States introduced a gold standard”
why couldn’t the free market push the bad money out…why didn’t a gold standard bank naturally rise to the top?
In my opinion: 100% reserve banking discounts the value of loans. If someone signs a piece of paper that says they will pay you money over time this piece of paper has legitimate value assuming that their obligations are enforced in some manner (and most people are actually paying off their debt). Under free banking (no legal tender laws) banks would be privately guaranteeing their loans. People, being free to not do business with banks they didn’t trust, would cause some natural level of fractional reserve banking to come about as banks that made fairly safe unbacked loans would make more money than banks that only made fully backed loans. Just like the stock market of today there would be an element of risk:reward regarding how much unbacked debt you were willing to issue.
it is hard to say whether or not a bank that practices milder levels of FRB is or is not solvent. ostensibly anytime the bank can’t cover its obligations it can sell off some of its unbacked debt. when everyone is running this game it leads to moral hazard (everyone tries to sell at once, prices tank, toxic assets). When you assume you can sell future money (loans) at some price today you are performing a maturity transformation. You are denominating future money in today dollars and calling it a done deal ignoring the fact that nothing really has a price until you actually manage to sell it for that price.
So would people refuse to do business with fractional reserve banks knowing that there was a risk of an insolvent bank if all the banks tried to sell some debt at the same time? (current crisis)
I don’t think so. I think there would be quite a market for fairly safe unbacked loans despite the risk.
it also seems fairly deceptive to talk about the money multiplyer without discussing deleveraging. as loans are paid back the future value they represented becomes real value.
I don’t think the problem is FRB, I think FRB is merely a symptom of the problems with legal tender laws. abolish legal tender laws and you have a drastically reduced appetite for unbacked loans, since the debt can’t be transferred around easily. Each time you transfer an unbacked loan with no legal tender laws the person you are doing business with has to acknowledge the lack of backing and accept the risks. This would quickly kill the majority of FRB and relgate it to people who were specifically interested in invenstment, and taking on the full risks involved with it.
again, this is caused by legal tender laws. if banks are privately backing their FRB based loans people can nchoose whether or not to do nusiness with that bank. With legal tender laws once the bank money is issued it is indistinguishable from all other money, hence inflationary.
not if, instead of money, a party takes the loan obligation itself as payment. this is what I mean when I say that they have to acknowledge the risk. without legal tender laws the maturity transformation can’t happen. loan obligations aren’t directly transfered into money. an unbacked loan is a form of money.
What do you mean by “unbacked loan”? And what does that have to do with FRB?
Say a bank has 1 gold coin in deposits and issues two demand deposits receipt for 1 gold coin each (one actual demand deposit receipt and one loan of one ounce to a borrower). Thus, each demand deposit receipt has 100% claim on that one ounce of gold. That’s a contradiction of rights. To clarify, the loan isn’t made in paper; it is made in specie. Thus, the gold coin is not in the vault at the bank and is in the posession of the borrower. So what will happen when the depositor comes to withdraw his gold coin from the bank? The gold coin won’t be there.
Also, say that the bank issues paper to the borrower so that the gold coin remains in the bank’s vault. What will happen when the borrower spends the paper at, say, a lumber yard and the lumber yard owner then goes to the bank to demand the gold coin?
Imaginary or non-existing stuff cannot be owned; thus, no property rights in that concern. How can you make a loan obligation for something that doesn’t exists? Property rights don’t exist for stuff that doesn’t exists. You can’t murder your imaginary friend (lol, that was a hilarious example). You can say you did, but you didn’t actually do it.
right, under a non-fraudulent system one of those loans is unbacked. an unbacked loan is a different form of money, one that relies not on a valid claim for some reserve somewhere, one that relies on the likelihood that it will be paid back. there is an element of risk in the transfer of an unbacked loan, not taking this risk into account is why FRB as currently practiced is fraudulent.
Also, I was neither saying that FRB was un-libertarian “because all the loans aren’t backed.” I said FRB is un-libertarian because having multiple parties with 100% claim to the same gold coin is a contradiction of rights. Your example of the “unbacked loan” isn’t per se FRB. Or, are you saying that all “unbacked loans” would have claims to the same nothing?
right, that’s the definition of an unbacked loan. it isn’t actually a claim to anything, it is a promise by the loanee that he will pay a certain amount of money over time. If someone else wants to take that promise as a form of money (credit in general) in exchange for assets they can. The problem is when that promise gets converted into cash. This is a maturity transformation and reminds me of money laundering. You’re converting non guaranteed future money into definite present dollars. This is a huge problem.
I understand your example of unbacked loans, but how is it necessarily FRB? There is nothing backing all of the loans, how can it be Fractional Reserve Banking? One big reason why FRB is called FRB is because the demand deposits were backed by something, but the total amount of gold on paper exceeded the amount of gold in the vault. I’m not saying that unbacked loans can’t lead to huge problems, nor that it isn’t inflation, instead, I am saying that your example of unbacked loans is not necessarily FRB. For it to be FRB, all of the loans would have to be backed by sometihng, not nothing. A better name for your unbacked loans would be Nothing Reserve Banking.
well a loan for X dollars isn’t worth X dollars now, otherwise it would just be money. It’s worth the total value of the payments minus some amount based on inflation (how much less the money will be worth when it is paid off), the risk of the payer defaulting, and the general demand for this form of money. So it is X-some discount. Usually this discount amount is backed by the loaner. that way they can claim solvency.