Indeed. Since the system is nonsense market forces will wipe it out. No need to use ‘legislation’.
You can produce as much commodity money as you wish. Nobody would object to that…
But it seems you don’t fully understand how money works. You seem to advocate the mercantilist fallacy that more money is needed “to make commerce easier” or somesuch and seem to believe that banks issuing tickets is what’s needed to fix the ‘problem’. You advocate inflation.
I’m not sure why you interject the word “insolvency.” Sorry if I am confused here, but I posted the above to present Block’s view on why he believes FRB if fraudulent and per se illegitimate.
Block’s point is that the person who received the loan can deposit the 90 in the bank and have a demand deposit on the 90.
The original depositor also has a demand depsoit for 100.
Thus there are property rights for 190 ounces of gold (or title to demand deposit for 190 ounces of gold) – but only 100 ounces.
The bank has created property rights to property that does not exist. This is fraud and illegitimate.
For example, If we signed a contract by which I agreed to lease you a room in the White House for the next year, such a contract would be illegitimate and fraudulent, as I do not have a property right in the White House which I can contractually transfer to you. I can’t legitimately contract to give you what I don’t have.
No, the bank has given Party A title to 90 ounces of gold for a set time (unless it is a call loan). There is no need to pay it back until the loan is due. For the term of the loan, Party A has title to 90 ounces of gold. The loan is a contract that gives Party A title to 90 ounces of gold, but the bank itself does not have title to these 90 dollars for the term of the loan. The bank has lent something it does not have title to, and thus created addtional property rights beyong those than really exist.
This is essentailly printing more titles to cars than there are actual cars in existence as described by Block above.
A could not pay B with the 90 ounces unless A had title to 90 ounces. Now that A has transfered title to the 90 ounces to B, B has 90 ounces and deposits the 90 ounces into the bank as a demand deposit. Again, there are demand deposits for 190 ounces, only 100 ounces still exist. Fraud and illigetimacy still exist.
Your point seems to be that in FRB with demand depsotis, when the loans are paid back there is no longer fraud. I agree.
But for the term of the loans, there is fraud, as the bank lends title to money it does not itself have title to. This is the point. While the illegitamite contract (the FRB loan) is being executed, there is fraud.
I’m not sure what you are getting at here, but again the Austrians associated with the Mises Institute agree that borrowing short and lending long of time deposits can cause the business cycle if enough of this lending occurs.
Please listen to the Block/Barnett lecture I have posted twice in this thread, it is only 17 minutes: http://media.mises.org/mp3/ASC2009/ASC09_Block_Barnett.mp3
It appears your point is predicated on a misunderstanding of austrian business cycle theory as advanced by those associated with the Mises Institute.
Because the foundation of liberty is the preservation of property rights.
Do you really not understand why its problematic to suggest that the “market” can just ignore property rights?
Because if we permit anti-market behavior, such as robbery, fraud, extortion, etc., then there is no market. If people really want to play hot potato with fractionally backed deposits/notes, that’s fine with me. That should definitely be legal. However…
If they represent them as titles to money, that’s fraud. If they represent them as fully collateralized by real goods, this is also false and fraudulent. They must be represented as debts that have a substantial risk of never being repaid. In fact, the system relies on some % of debt not being repaid. If redemption demand exceeds that, the bank goes bankrupt. Without legal tender law and other anti-market interventionism, there is no realistic possibility these instruments would be accepted as the same thing as commodity money.
Banks will deal with two sets of time periods in regards to the redemption of time deposits. There is the de facto time period, and the de jure time period. The de facto is how banks actually practice. The de jure is the time are contractually allowed to delay redemption.
To make their time deposits function as a money substitute, they would have to reduce at least one of these to a very short period, likely less than on month. But in either case, they are still playing hot potato. When the music stops, there simply won’t be enough chairs. (…Yeah, I know I’m mixing children’s games…)
In a case of de facto demand redemption and a contractual obligation of 3 months, 3 months may seem like enough time for the bank to sell their assets at a pace that does not push down their total price below their obligations. However, by starting to invoke delayed redemption, word will spread about the policy change, all the notes and deposits are less likely to serve as present money anymore. This reduces the amount of circulatory money and must result in lower prices.
In the case where it is contractually obligated to redeem its claims within a fairly short period of time, the speed of trying to sell off its assets is likely too rapid, resulting in losses. Each redemption places the bank in a less solvent position. It becomes insolvent long before it can sell off all its assets. The worse shape the bank becomes, the less likely its notes will remain acceptable as present money. Again, this puts deflationary pressure on prices.
The banks are insolvent because they cannot sell their assets in exchange for either gold or their deposits, like other market goods. They must sell them for gold only, because they need the gold to pay off the time deposits. The banks must sell for steep discounts from the market price.
I loan my friend $10, and in exchange he gives me an IOU, due tomorrow. He takes the $10 and buys lunch. I take his IOU and buy lunch as well. In fact, every pair of people in society does this. Well, in this scenario, let’s say my friend wants to sell his labor to recoup the $10 and pay me back. His normal day’s work is worth $10. Yet, labor prices are adjusted to the supply of dollars + the supply of IOU’s. Attempting to sell his labor for $10 will fail if he can only accept dollars, not IOU’s for them. The more apparent a preference for dollars over IOU’s become, the more the money supply shrinks, and the more difficult it becomes to repay debt as price deflation kicks in.
If nobody spent the IOU’s, then your example would hold water, as IOU’s would not have any effect on the price structure. And maturations ARE in fact equal in your example - it is implied that your friend is capable of earning $10 by the next day. If your friend requested $1,000,000 for a personal fireworks show and promised to pay you back tomorrow, this would be fraud, as he knows he is incapable of earning $1,000,000 in a day.
True, but it is 100 oz worth of claims when there is only 10 oz there. The bank is now insolvent unless the stipulated waiting period is in line with the term on the 90 oz loan. In addition, it is inflationary. The claim holders may use those claims for purchases, while the gold holders may use the 90 oz of actual gold in purchases also. So 190 oz worth of gold may now be put to use in various transactions when only 100 oz exists. Business cycle.
Keep in mind that no bank operates that way. They will actually hold the 100 oz as reserve and create 900 oz worth of certificates to loan out. Anyway, when are the loan assets due to be repaid? Unless they exactly line up with your stipulated delay period, the bank is insolvent. And there are still 190 actual or claims to ounces in existance. So your bank is inflationary. Business cycle.
I sense a theme here. Can anyone tell me what would happen if a contract between two parties is known to harm various third parties by creating the business cycle? What do legal principles dictate? Is it possible that, contrary to this “contracts are everything” libertarian, that some things just can’t be contracted? Maybe because they are known to cause 3rd party damage?
They also say that time deposit liabilities and assets must be temporally in line. If you have 5 billion in deposits with a contractually stipulated 30 day delay, you have to be able to meet that demand within 30 days according to your balance sheet at all times - not by selling year long notes discounted as an emergency measure to regain solvency in the event that everyone asks for their deposits back. You need to be solvent on your balance sheet at all times which implies that your assets and liabilities have to be in line with regard to time. You have to have money coming in every 30 days to the tune of 5 billion.
You see, the Austrians have you on 2 fronts, one of which you have no hope of winning. Your banking system is inflationary, which means that your deposit contracts are known to harm 3rd parties. No school of economic thought has mounted a winning argument against ABCT. On the second front, you haven’t seem to have done a good job arguing, contra Huerta de Soto and traditional legal principles, that your deposit contract is a valid contract. Again, I know you are wedded to the idea that signed contracts are everything. They aren’t. When they say A and not A, or when they encourage the various parties to the contract to act as if A and not A are both true, then they are unenforcible and null and void.
only contracts which cause 3rd party property damage are illegitimate. other damage that is not property damage (so long as its no illegitemate for other reasons) is legitimate. i.e. if two people have a contract that involves one of them disparaging a 3rd parties ‘reputation’ this involves no property damage and so is legitimate.yet; if the contract involved insulting the 3rd party, by graffitti vandalising the 3rd parties wall with the insult, then this is property damage and illegitimate.
Violation of property rights I thought we agreed was wrong. So where property rights have been violated the violator is in the wrong and this should be prevented when possible and punished after the fact.
I have not said we should let the market determine what fraud is only that we should let the market determine if they want to accept time deposits as the equivalent of demand deposits.
They cannot be equivalent, by definition.
Now perhaps you can maintain that CDs would be traded instead of money - but only in equilibrium, in which what you suggest would almost certainly be the case.
This is all just speculation and is certainly not inherently true in all cases. The fact that any business activity is more risky than other business activity does not make it inherently insolvent.
And why would this be prohibited?
What everyone else does ain’t my problem. I am only on the hook to pay back ten dollars tomorrow.
The fact that you might not get paid back tomorrow is part of the risk of loaning money. If you want guarantees about how the loaned money will be used you should put that in the contract not bitch about it later.
i didn’t say they were equivalent just that people could treat them as equivalent.
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i quote myself from another recent thread on the board.
a way out is to say that the bank may have other assets like they just do banking as a side line and they would be able to meet their contractual obligations to their depositors by dipping into other assets that are not related to their loan assets. but i imagine that will seem like a hollow victory for you.
perhaps to better make your case Max. you will describe the actual ‘legitimate contract’ you see depositors making with their banks, to allow the kind of banking that you feel is legitimate but then many of us here are skeptical of. please make special reference to Title’s over properties spelling out how for whatever commodity is at stake, who has what title at what time and under what conditions. I believe Block does this when he analysis the fraudulent ‘duplication over property rights problem’ but perhaps you can give an improved story that seems superior in contrast to his.
“accept time deposits as the equivalent of demand deposits”
Which is absurd.
So you want ppl to voluntarily do something which is absurd. I personally have no problem with it. The contracts stipulating such absurd activity may be regarded as void by legalistically minded ppl but I don’t really care.
The thing is, in the real world (assuming a free market) your system will not work.
No, they cant’.
If I offer cash now or an IOU which you can redeem in one second, most people will treat that as the same even though technically it is not.
Anything that is a substitute for the actual thing functions like this. As long as there is the perception that it can be redeemed for the actual gold then the range at which people accept the time deposit as a demand deposit is dependent on the individual person and not you. Have you ever heard of the expression “thirty days same as cash”?
The word can’t means physically unable to do so. Is that what you meant to say?
Of course. A scams lasts as long as people’s perceptions don’t match reality.
I think we all understand the difference now. I don’t understand where the actual harm of FRB is though. If under time deposit people will accept most credits for gold at a later date, then doesn’t that have the same effect of FRB?
FRB fraudulently creates non-existent property rights. It is also a credit expansion beyond that supported by real savings that leads to the systematic misallocation (squandering) of productive resources and the business cycle.
If banks are borrowing short and lending long on time deposits, yes.
Austrians associated with the Mises institute think the business cycle is caused by credit expansion unsupported by real savings. FRB is the most common example of such a credit expansion.
But even without FRB, if banks borrow short and lend long for time deposits, or lend time deposits for longer than they have title (the length of the time deposit), then banks are 1) fraudulently creating non-existent property rights and 2) expanding credit beyond the pool of real savings, leading to a misallocation of resources and a business cycle if the credit expansion is pervasive enough.
I break the rule and reply to you.
I am simply challenging the double standard you have. It is good if more money is being produced in face of demand when it is a shiny metal. But somehow it is all evil if it is a different kind of money.
Well the optimal amount of money is not whatever currently exists but what matches supply and demand. See?