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Article: Ron Paul: Bitcoin could 'destroy the dollar' First of all, a caveat: I'm not a Bitcoin believer. I think they have a gimmick that's capturing a lot of people's imagination, and they've walked into the limelight, but I see the hype of Bitcoin tapering off at some point. I could be wrong, but I just don't see it. Maybe they will spawn into something else, or they might find an application for their technology and do alright, but I don't see it as "the next big thing". However, Bitcoin is serving a valuable purpose in the discussion about currency and economics. It's going to change people's minds. It appears to have already changed the mind of Ron Paul. How? It's finally putting to rest a conspiracy theory that many libertarians have held for years: that the Fed secretly controls all trade by controlling The Currency, and it maintains a government-protected monopoly, the conspiracy theorists say, over anything that one could call "money". Never mind the fact that barter in various forms (including complex financial instruments) has been both legal and ubiquitous in the USA since the country began, and that the Fed no more has a "monopoly" over US citizen's transfer of wealth than the mint of Paraguay does. No, the conspiracy--stemming directly from the old Illuminati stuff from the 50s--is still with us in cruddy old corners of Libertarian thought, even overlapping into so-called Objectivists. So today's story is a bit of a celebration for me. Ron Paul has been perhaps the leading warrior in the USA banging the drum about the various Federal Reserve Conspiracies for decades. Now he's in a logical pickle: if Bitcoin could "destroy" the power of the Fed and US dollars--and they are perfectly free to do so--then he's just knocked the teeth out of his own argument. In other words, we're left to say to Ron Paul, "Ron, if a tiny group of eggheads can invent a better product than the US mint and eliminate them in the free marketplace, then why again are we supposed to live in fear of their unassailable power again?". It would appear that the only "conspiracy" the US dollar is a part of is its relative stability and practical usefulness. Take those away and it turns to dust, just like any other product in the free market. I daresay that with that choice of words, Ron is projecting what is in his own mind right now: that Bitcoin has "destroyed" is many of his own long-held beliefs about the power of the Federal Reserve.
[With a special thanks to Yaron Brook and some others who got me to change my mind on this topic] Fractional Reserve Banking By Thomas M. Miovas, Jr. 06/16/2012 I should point out that I am not an expert on financial issues, so this essay is based upon what I have learned over the years without taking any special courses on banking or banking practices. For the purpose of this essay, I am taking a gold as money standard as the correct system; though other commodities (silver, copper, oil, etc.) can be used as money. My original position, which I have to now change, was that fractional reserve banking was inherently fraudulent because it meant that a bank would print out more Bank Notes than they had gold in reserve. Let’s say they had 100 ounces of gold in reserve (in the vaults) and they print out Bank Notes (BN) as claims against 150 ounces of gold and loan them out or use them as transactions for cash exchanges. Surely, I argued, this means that someone is being defrauded because as those customers come to get their gold from the bank, the bank will come up short by 50 ounces of gold. It would be like writing a bad check and not having enough money in one’s account to cover the check, but writing them out anyhow and taking the products, leaving the producer with irredeemable and worthless paper. However, if I were to write such a bad check and then scramble to make cash deposits that would prevent a default in my bank account against the check, then everything would be OK, and I committed no crime and didn’t defraud anyone. Fractional reserve banking operates on a similar principle, though a good bank is more careful about writing “bad checks”. Basically, there is a future dynamic to banking that I wasn’t taking into account. A well-run bank will not only be taking in more deposits, it will also be getting returns on loans paid out. So, a sound bank takes its future earnings into account, projecting , everything else being equal, that they can expect, say, a 10% increase in either deposits or payments, and so they can print out an extra 10% in BNs and use it for cash transactions, provided that when the holder of that BN comes into the bank and demands the gold that is backing it up, the bank can hand over the gold from their reserves within a specified period of time to make sure the BN clears (or that they have gold in reserves or can get it to make the transaction sound). There is nothing fraudulent about this, just as you writing a check and making deposits into your account before the check clears is not fraudulent. It is a risky action to take, however, as no one can really predict their future business operations, nor that they will make a profit day over day or year by year. This is one reason why one would have to be wary of the business practices of one’s bank in a capitalist system, when there would be no banking regulations and no FDIC to back up deposits. If the bank isn’t operating efficiently enough (not getting enough new deposits or enough payments on loans), then it is possible that the holder of the gold BN would be left high and dry when he tries to cash in the BN for gold holdings. It also means that you, the depositor, might not have ready access to your gold cash you deposited until a specified period of clearance is met (say one week to fully close out one’s account). In other words, anyone using the BNs as cash for monetary transactions may be delayed in converting the BN to gold for a certain period of time while the bank scrambles to catch up with the demands on their deposits. For a well-run bank, all of this would be taken into consideration so that their issued BNs would clear for gold at a steady rate; otherwise, no one is going to be using those BNs for cash and would trade in gold only. So, the dynamic version of banking taken into account and the possibility that one would have a waiting period to get the gold backing the Bank Note issued by the bank means that no fraud or theft is involved, so long as the Notes do clear into gold within the specified delay time, which would be contractual on both the bank and its customers.