Here’s my question: What financial incentive is there for a bank to issue their own currency? In a pure anarcho-capitalist society people would be free to issue their own currencies but why would they do that? There would have to be some kind of financial reward in it for themselves, correct? Could someone become rich if they issued their own currency that proved to be reliable and others adopted for trade?
Gold and silver ore have to be refined to be marketable. So the miners would sell their ore to refiners who would process it into coins and ingots. The metals would then enter the banking system where they would back letters of credit and other financial instruments. People will be willing to pay banks to act as clearing houses for commercial paper and as depositary institutions because they wouldn’t want to lug a bunch of precious metals around.
Issuing a backed currency provides convenience to your customers, so it is a way to increase the scope of your business.
The main reason for issuing an unbacked currency is to abuse people’s trust in your currency and secretly confiscate wealth by producing more of it. Historically this happens with every fiat currency. For example, since 1913 the dollar has lost about 96% of its purchasing power. Inevitably, the printing presses are abused until the trust in the currency is finally destroyed.
“they wouldn’t want to lug a bunch of precious metals around”
I don’t really understand this argument. 1 pound of gold is worth about $16000 now. If I needed that much money on hand, “lugging” around a pound of gold would be no more trouble than getting a cashier’s check or carrying around a bulky packet of hundred dollar bills. If I need a more reasonable amount of wealth, say $100, a tiny gold coin would be adequate. It makes more sense to carry gold coins than debased disks of zinc, at least. If the dollar continues to collapse, and their is a flight to gold, its price could easily more than double. If that happens, I wouldn’t complain about “lugging” it around.
I think a better reason to store gold with a 3rd party is that they might be able to provide better security (vaults, guards, etc.).
baxter,
In an an-cap society, gold wouldn’t be “worth $16,000.” Rather, the currency unit would be defined in terms of a quantity of precious metal.
And just like you wouldn’t walk thru certain areas with a wad of cash, so too you wouldn’t walk thru certain areas lugging a wagon full of ingots. So the market developed banks that issued letters of credit and created economies of scale by settling large baskets of accounts between themselves. This is simply an evolution from direct exchange to increasingly sophisticated forms of indirect exchange.
His point was that there’d have to be a tremendous amount of value involved before it would become unreasonable to carry actual gold coins.
Because, of fractional reserve banking. A bank can take in a deposit and issue the ammount of the deposit/reserverate in loans. So a reserve rate of 10% means that a bank has 10 times the deposits in loans outstanding. WIthout a national currency monopoly, the banks normally use gold or some other asset and guarantee their reserves in gold. So a bank without a national currency would take in a quantity of gold and issue checks for that amount of gold. These checks become currency and that is exactly what happened when President Jackson closed the central bank(After the central bank fought like hell to keep open to the point of hurting the economy.).
You can see that banking can be very profitable depending on the reserve rate. If the bank pays 2% in interest and loan the 10 times that amount with 6% interest then the bank is making a return of 6%x9+(6-2)% = 58%. Not bad. The trick for a bank is to keep enough deposits as depositors hate low reserve rates.
Where is the problem? It is in the Regulation of Banks: ALL US banks have the same reserve rate provided by the Federal Reserve. The money comes in from both depositors and from the best depositor the Federal Reserve. Because the Federal Reserve provides this source of money the banks do not have to compete on reserve rates but have to complete on getting the highest interest in their loans. In other words they take on the riskiest loans and give the best terms to their deposits because they have a back method to pay off their depositors.
First of all, you do not need a “pure anarcho-capitalist” society. You just need to make it legal.
Second of all, private currencies have been issued throughout the history of the United States. For example, the Liberty Dollars most recently.
Lastly, they do it to make money, just like every other business.
"A bank can take in a deposit and issue the ammount of the deposit/reserverate in loans. So a reserve rate of 10% means that a bank has 10 times the deposits in loans outstanding. "
Which is nothing but pure fraud. It’s like having a car and renting it out to two people telling both of them they have bought full use of it, because both of them travel a lot and are only at home a month a year and I hope they won’t be at home in the same montth.
Oh good, another thread can now be filled with the same free-banking vs. 100% gold reserve debate. On the original question, if you can issue an unbacked currency and people will actually take it, it’s not that you now have a way to be rich - it would be that you are rich. You could have anything you want simply by printing a bill in the appropriate domination. Of course, unless you have legal tender laws on your side, that wouldn’t actually work. Now, why would you issue a backed currency? Conceivably, you could do it with the intention of going fractional, but to a lesser degree than others do, so that your currency would still be accepted. The equilibrium position for that game is, of course, 100% gold reserves.