JeffS

I mean only increase the money supply without doing anything else. If more gold is found, you can't increase the money supply wihout productive effort, i.e. digging it out of the ground. In our system, there are only two ways to increase the money supply: print more dollar bills, print more bank IOUs. Do you believe that when the government prints more dollar bills, and all other things stay the same, the result is wealth destruction? What do you mean by "bank properly notes are?" If you mean, "bank notes properly are," then would a bank note be properly backed if there's only 10% of that asset available for repayment? How about 1%? .01%? .0001%? What fraction of the IOU should be real, existing, unconsumed goods, and what fraction can be something unreal and non-existent?

I hope no one minds if I include all responses in one post. He's also considering the fact that the real nature of money can be both currency (that which is legal tender of the government) and credit. As the last Rand quote points out, the divorce of credit from existing, but unconsumed goods, represents a theft of future production: "Under all the complexities of private credit, the economy was kept going by the fact that, in one form or another, in one place or another, somewhere within it, actual material goods existed to back its financial transactions. It kept going long after that protection was breached. Today, the goods are almost gone." Do you agree that inflation, as classically defined (an increase in the money supply), results in wealth destruction? I think it needs something else: time deposits. If the depositor understands he won't get his wealth back for some specified period of time, and he doesn't get his wealth back for some specified period of time, then we don't have the problem of multiple instances of the same produced, yet unconsumed goods circulating through the economy. If we use Rand's definition of wealth as, "Wealth represents goods that have been produced, but not consumed," then Jim does have $90 of wealth. That money would not have existed had Farmer John not raised and sold his pig. Those goods were produced, but not consumed by Farmer John. Nor have they been consumed by Jim (at least until he spends them). Jim may not have a positive net worth, but he certainly has wealth. If he didn't have wealth of some sort, how would he pay for anyone else's production? What would he do with the $90. Are they not treated the same? Couldn't Farmer John use his $100 account to buy things? Couldn't Jim use the $90 in currency to buy things? If the bank simply issues Jim a note for $90, could he not buy things with that? This is the point Rand is making: both the gold and the notes are used interchangeably. It used to be that the notes and the gold maintained their connection - they both represented produced goods that had not yet been consumed. Today, they do not have that connection. Instead, credit (ignoring the fact that the same thing has happened to our currency) now represents goods not yet produced. Rather than lending "the goods which he has not consumed," the "rich man" is lending goods which he has not produced. Farmer John can't ask for it back anytime from Jim, unless you're suggesting Jim took out a callable-at-will loan. That would be highly irregular. Even credit card issuers can't demand you pay them anytime they want you to. Even then we would have to assume Farmer John is a party to the loan contract, but that would be highly unusual, too. The contract is between the bank and Jim. The only way Farmer John could get his money back from Jim is if he convinced the bank to unilaterally break the loan contract with Jim - surely you're not arguing they should be able to do that? What if there's another person, Tom, who banks at Bank B, and he has $100 in his bank account? He banks at Bank B because they don't use FRB. At the start of our hypothetical there is $200 in the economy: Tom's $100 in Bank B, and Farmer John's $100 in Bank A. There's $200 of wealth in the economy; Tom has 50%, Farmer John has 50%. Then Bank A makes the loan to Jim. Tom has $100, which he uses to buy things; Farmer John has $100 which he uses to buy things; and Jim has $90, which he uses to buy things. How much wealth (or currency, if you prefer) is now in the economy? $290. Tom, who has not agreed to the leveraging of his wealth, no longer has 50% of the economy's wealth, he has 100/290ths of the wealth - 34%. Has no fraud, no deception, been used on him? Then Farmer John is consuming goods (whatever he buys) based upon future production (the return of his $90 from Jim, assuming Jim does, in fact return his $90). This is exactly what Rand was arguing against. Reality doesn't allow us to consume what has yet to be produced. I think something needs to be made very clear that I thought was clear from the beginning. I don't have a problem with FRB, per se. I don't think Ms. Rand or Mr. McKeever have a problem with FRB, per se. Fractional reserve banking can be a very useful and moral tool for increasing production, and therefore wealth. The proper use of FRB would require: 1) time deposits where the depositors are informed that their funds will be loaned out, and 2) a currency that is backed by something difficult to create more of - e.g., gold. If Farmer John knows he won't be able to get his money out for some period of time - say, a year, then he won't be able to use it while Jim is using it. Since he won't be using it at the same time Jim is using it, there is no increase in the money supply, therefore no inflation, therefore no reduction of anyone else's wealth. If the currency is backed by something difficult to create more of, then the government won't be able to inflate the money supply at will. The difficulty in creating more of whatever backs the currency will determine the degree of inflation. During years when we had a gold standard, or a gold exchange standard, inflation ran damn close to zero (like .1%, IIRC). Since the rate of inflation will be non-existent, or so very low as to be effectively non-existent, there will be no wealth destruction. Even if someone makes a big gold find, getting it out of the ground represents productivity so the inflation that gold has to the money supply is matched with increased production; i.e. the economy expands at the same rate the money supply expands. This is not the situation we have in banking today. ALL deposits are subject to some degree of reserve requirement less than 100%. That means Farmer John can deposit $100 of wealth on Monday, write a check for $100 on Tuesday - the same day the bank loans $90 to Jim, and Jim can write a check, or spend his $90 loan on Wednesday. I simply cannot see how this is not an increase in the money supply and therefore a destruction of wealth. Even if we assume everyone is perfectly informed of what will happen, and agree to those terms, surely we can all agree that the money supply increases, that no increase of production has occurred, and therefore purchasing power has decreased? Leaving aside the ethical questions, isn't the effect of FRB to increase the money supply and therefore reduce purchasing power?

Okay, but this is a hypothetical, Jake. Farmer John deposits $100 into Bank A. Total wealth in the economy $100. Bank A loans $90 to Jim. Total wealth in the economy $190. Where did the extra $90 come from? Farmer John certainly has wealth, right? He has $100 in currency in the bank. He can go pick up his currency anytime he wants. Jim has wealth, right? He's got 90 real dollars in his hand. Farmer John just got ripped off. He used to have 100% of the wealth in the economy, now he's only got 100/190ths, or 53% of the total wealth. His money has just been devalued by 47%. Are you arguing FRB doesn't result in expanding the money supply?

Well, she may not have named it, but she did argue against it. Fractional reserve banking is the process of loaning money which is backed only partially by assets. Therefore, some of the "goods" loaned are not "goods which [have] not [been] consumed."

I don't think they're arguing the privatization of health care kills. I think they're arguing the privitization of anything, or at least lots of anythings, kills. What they're actually arguing is up for debate, though: "The UK study blames rapidly rising unemployment..." Oh, okay. So, rapidly rising unemployment kills. "They conclude that as many as one million working-age men died due to the economic shock of mass privatisation policies." Oh, okay. So, economic shock kills. "Not only does stress have a direct effect on health, it is also closely associated with unhealthy lifestyles, such as alcoholism. Together this raises the risk of heart disease and strokes, as well as mental illness." Hmmm, well, okay. So, alcoholism, heart disease, strokes, and mental illness kills. I think we're getting closer to the truth. Without seeing the report, it's senseless to put any credence in it.

Such as? I mean, where do your rights end and your neighbors' begin? You have a right to pursue your happiness in loud music. Does that mean your neighbor's right to pursue his happiness in sleep is not being violated? Then no fraud, no theft, no problem. I absolutely have no objection to a gold-standard with fractional-reserve banking as long as the credit notes are clearly distinguishable. People must have a way of distinguishing between JP Morgan notes and Bank of Madoff notes. And there should be penalties for counterfeiting another's notes just as we have laws against counterfeiting currency. There will still be inflation, but the effects will be limited by bank. I can either choose not to accept money from that bank, or demand a premium to do so. If I demand a premium, then the leveraging actions of the issuing bank will be borne solely by the depositor. That is my argument. Even if he deals only in cash (currency), the supply of money (what is reliably used to exchange ownership in goods and services) will go up with the issuance of credit and the gold-bug's existing cash value will decline. When the credit of JP Morgan is no different in form or function from the credit of Bank of Madoff, Bank of Madoff can create as much money as it wants and no one is the wiser. No one is demanding a risk premium, or inflation premium, from Bank of Madoff. Since the inflation of the money supply is not confined to Bank of Madoff depositors, since they're not required to pay a premium to turn their credit into (the presumably safer) JP Morgan notes, the inflation spreads throughout the entire monetary system. The gold-bug no longer has a choice in accepting Bank of Madoff money because he can't tell the difference between JP Morgan credit, Bank of Madoff credit, or gold. I'm not sure how it could not be a violation of the gold-bug's rights since he's done nothing to cause the devaluation of his cash - his wealth. Doesn't he have a right to protect his property from the actions of others? He hasn't agreed to let his money be inflated, he doesn't use credit, but suddenly everyone except he has more money than real wealth; money that doesn't represent productive activities. There's suddenly a lot more people who are willing to pay more for goods and services and he has to compete with that. He can only compete by producing more - by increasing his productive efforts. Surely there must be some violation of rights here. If there weren't, then what justification is there for making counterfeiting illegal? If we were dealing with an entirely gold standard, where gold, or gold backed currency was the only thing exchangeable for goods and services, would it not be a violation of your rights if someone paid you in something you thought was gold, but really wasn't? Suppose you're asking 100oz of gold for your services. The buyer gives you a piece of paper that says, "Good for 100oz of gold on demand from the bank of JP Morgan." You know JP's a good bank, you know their credit really is "as good as gold," so you accept the paper. You go to JP Morgan to receive your gold, but they tell you it's a forgery put out by the Bank of Madoff. They'll still take the paper, but they'll only give you 10oz of gold because they know Bank of Madoff isn't good for 100oz of gold. Have your rights been violated?

That's my point. He actually states that the validity of a moral principle, or any principle for that maater, can be guaged by whether it's held widely. Presumably he would drop whatever moral principles he held, or scientific theory he independently verified, if the majority sided against him. If not, what would he base holding those beliefs on?

Excellent, noumenalself. Thanks for posting that. There was guy behind me video taping the debate, but he said he was having a hard time with the light levels. Don't know if was able to get anything good, or if he'll post it.

Thanks for the reply, Kendall. I'll think about what you wrote.

ifat, Kendall - I watched this Donahue show when I was just starting my research into Objectivism. As I stated, I hadn't take the time to re-watch the show after - that was my mistake and I've since recanted my first, not fully informed, response. With what I know now about Objectivism, Ms. Rand's response doesn't strike me as hostile. However, I think my first impression - based not only on this one little snippet, but the entire show - is important because it is the first impression of someone ignorant of Objectivism. And I wasn't totally ignorant - I had at least read AS, FH, and VoS. I have to imagine someone who doesn't understand the relationship between emotions and reason would get the same impression. Here's my point: We can either be teachers, or not. I've engaged some Objectivists who simply jump down the throat of anyone who questions their philosophy. They act like this is some sort of elite club where if you're not smart enough you don't get in - and if they can keep enough people stupid that just means (to their mind) they're all the more intelligent and elite. These people don't help any rational, self-interested Objectivist. I'm not arguing we need to embrace ignorance, or hostility, or insults - I'm saying we need to embrace any who wish to learn. If we react with hostility, that just makes those watching/reading think, "Well, I'm certainly not going to ask any questions." That's not good. If we don't give people a reason to research Objectivism, they won't. My first impression, as a non-Objectivist, was, "Well, she's certainly proud of herself. And a little unstable." As an Objectivist, or at least a less ignorant student, I know now why she's proud of herself, and that she's completely rational. But as a product of an altruistic upbringing, it's hard to swallow the first pill. It gets much harder the more signals contrary to my upbringing there are. We don't need to be dishonest, we don't need to turn the other cheek, we don't need to soften any messages - we just need to be able to rationally bring people to understanding.

Not necessarily - it just means "leaving, departing, going away," it doesn't presuppose any place to go. They could do what the people in the article I posted are doing - they could just stop working as hard, or working altogether. If I understand your point correctly, you're arguing the producers themselves don't feel they're being used, or they feel it's morally proper that they be used. But that's not the impression I get from the anecdotal evidence I presented, at least not for those producers. Furthermore, I highly doubt most Fortune 500 CEOs are convinced capitalism is bad, or that the government is doing all the nation a favor when it taxes them to death. If that were true, most would not be in business, and most would be giving their money to the government regardless of what the tax rate were. Regardless, let's assume you're correct: What will it take to disabuse them of this faulty thinking? In AS Galt wouldnt' approach any producer until he felt that producer was ready to hear what he had to say - I think that's kind of what you're saying. What will it take for the producers of this country to be ready to hear what "Galt" has to say? That is, what will it take for them to be receptive of the idea that people aren't on this planet to be used by others?

treddeni - I hope I answer your post with this reply. His statement was along the lines of, "I don't believe there is a way to infallible knowledge." He was responding to Dr. Ghate's point that ethics need to be based upon observable evidence, and I agree he went on to argue there was no observable evidence that can play the role of discovering moral principles. He validated my understanding of his point by responding with, in effect, "My knowledge fits in the same framework." Meaning: "There's a probability I'm wrong." He wasn't arguing simply that his knowledge was fallible, he was arguing there's no way to be certain of anything. If we don't have an infallible path to knowledge, then every path to knowledge is fallible, therefore there's no way to know anything - including the statement that we don't have an infallible path to knowledge. Oddly enough, he then went on to describe a way of achieving knowledge with, "Where are ethics? We can't see them." Why would we need to see them? Is seeing something a way of gaining knowledge about that thing? I mean, if he believes observable evidence is the lynchpin of ethical formulation, where is the observable evidence for the seat of his ethical beliefs: intuition. His basic argument is that our ethical beliefs are based upon intuition. Let's skip past that statement being a statement of knowledge and just move straight to, "Where did that knowledge come from? Are we born with it? If we need to see things (or sense them) to validate them, can we see intuition?" He dismisses Objectivist ethics because there's no observable evidence (or rather, he doesn't know where to look) in favor of a morality for which there is no observable evidence - I mean, really no observable evidence, and no logical evidence either. He actually did go into understanding the "Kid Drowning" hypothetical in the Q&A, and I agree that the format didn't lend itself to lengthy exposition - so his response was probably calculated for the time alloted. However, would it have taken so much time to simply say something like, "Being selfish isn't something as limited as dirty clothes, a small gain, or a candy bar. Being selfish is about understanding your entire self and what really are your interests." He made this clear in the Q&A, I just felt it would've been stronger in the rebuttal. You clearly have a great deal more experience with Dr. Huemer than I, but I'll have to disagree with you. I don't question his ability because he disagrees with me, I question his ability because he made fundamental epistemological errors. If it's true that he's well versed on Objectivism, and perhaps he is, then he should've been clearer on Objectivist metaphysics and epistemology. He misrepresented Objectivism severely in this regard. His premise that, "Whatever seems right, is probably right." factored greatly into my estimation of him. His four criteria for validating ethical principles was simply too much to take and sealed the deal. Dr. Ghate was right to expose these as pure nonsense. People like Dr. Heumer strike me as dangerous, noumenalself. They're able to justify every moral deprivation throughout history. However, I will agree with you that we need more non-Objectivists who are willing to treat Objectivism as a valid philosophy and engage in debate. All that being said, I'm still a student of Objectivism myself and this was my first live debate. It's quite possible I misinterpreted everything Dr. Heumer said. It's possible my knowledge of Objectivist epistemology is sufficiently deficient that my reasons for disagreeing with him are not founded in Objectivism. However, everything he said struck me as fundamentally flawed and logically inconsistent.

If I understand you correctly, it seems as if this one check is making its way from third, to fourth, to ad infinitum individuals. If so, is this really how it happens? I mean, you deposit currency (legal tender, or gold) in your bank; you write a check to me drawn on that account; I deposit that check in my bank; my bank presents your bank with the check; your bank transfers ownership of your currency to my account; I can then write checks which will be based in my bank. Isn't this how it would work in reality (assuming no fractional reserve)? In such a case there would be no increase in money, or currency. Right? Absolutely, however... Two things come to mind here: 1) Assuming the example above, if I demand an extra 5% from you before I accept your check (for whatever reason - I don't trust your bank, I don't trust you, because I know my bank will discount my subsequent deposit because it has the same distrust, etc.) wouldn't the cost of that distrust be squarly borne by you? You would write me a check for 5% more; I would depost that check in my bank; my bank would present that check to your bank for payment; your bank would transfer ownership of your currency to my account; I can then write checks based on my bank, which is presumably safe and whose notes are accepted widely. Economy wide there is no increase in currency - what is deducted from your account is deposited into mine - therefore no systemic inflation. There was inflation borne by you, but it wouldn't persist to the third, fourth, etc. tiers once I converted your "dodgy" check into currency (legal tender/gold), and subsequently notes of my "trustworthy" bank. (Isn't this primarily the flight to quality description that Benjamin Andersen explains in Economics and the Public Welfare to explain why the US gained so much gold after WWI?) 2) If we assume a fractional reserve system, and staying within the confines of your example, I'm not sure it would work any differently. The inflation would be borne solely by whomever banks with the leveraged banks (or more highly leveraged banks). In such a situation there's a possibility that the government could create more legal tender notes, and if everyone is dealing in legal tender notes, inflation would be systemic. But I haven't been discussing that in my argument. I'm only concerned with bank credit which is widely used. But, I understand your example to mean there are multiple banks, creating multiple distinguishable notes, and those notes circulate only at the periphery of the different banking markets; that is, the only time those notes circulate between, say "Bank of Madoff" and J.P. Morgan are when a depositor of either uses those notes to buy something, but then that note goes right back to the originating bank and the transaction concludes with a transfer of currency (legal tender, or gold). If you bank with "Bank of Madoff," expect to pay more for things, but your choice won't impact anyone else. My point here is that bank credit now isn't as distinguishable as it was before, say before 1913. No bank has any incentive be any less leveraged. In fact, they would probably place themselves at a competitive disadvantage if they didn't leverage the maximum allowable by law. There's no benefit because their customers believe they don't have to worry, unless they deposit more than $100k. With all banks issuing credit which is equally "dodgy," their credit is indistinguishable and the credit permeates throughout the system. Rather than depositing currency in my account after I cash your check, your bank simply deposits some currency, but mostly credit. When I write checks drawn on my account, I'm just passing credit again - not currency, not gold. Since there's more money (not currency) in the entire system, we're all paying higher prices. I obvioulsy haven't been clear on at least one point: I've no moral argument against informed (or should be informed) individuals writing whatever contracts they want (consistent with Objective law, of course). If you want to bank at "Bank of Madoff," more power to ya'. Fractional reserve banking is not immoral per se. It's only immoral, it's only theft, when the creation of this credit, the creation of this leverage impacts the wealth of those not party to the contract. If I can deposit $10 worth of gold in my bank, then write checks for $100 - and no one understands that $100 in checks doesn't represent $100 in gold, or currency, or some real asset, or some real measure of productive efforts, then I've stolen wealth from everyone I convince to take those checks. Perhaps we all should know this is the state of our banking system. Perhaps that's the point everyone's been trying to get me to understand?

I don't mean the producers would revolt. And I agree "giving up" is not appropriate. What I'm really wondering is when the producers will do what the individuals in the article are doing: withdraw their support of a failed state. How much more can they take? What will be the straw to break the camel's back? It's different for each of them, I'm sure, but I wonder what would cause a mass exodus? Effective tax rates have been much, much higher in the past, even as recently as the 70s, yet I think this was (given America's prominence in the world market) more endurable than it would be today. Would it take a 70% tax rate? 80%? 90? Would it take another alphabet soup of government programs and regulations? The revolution wouldn't be started by the producers - it would be started by the parasites who wake up one day to discover their hosts have gone. I'm no Cassandra, but the parallels between today and AS are eerie.

Thank you, Jake. I'm trying to figure out why. Perhaps someday, if I figure it out, we'll be able to revisit the topic.

There's this: "President Barack Obama's tax proposal – which promises to increase taxes for those families with incomes of $250,000 or more -- has some Americans brainstorming ways to decrease their pay, even if it's just by a dollar." As well as some conversations I've had with producer friends of mine who say they're not so interested in working hard anymore. I begin by asking them, "How do you handle it? Why do you keep going on?" They usually respond with, "You know, I'm still glad I live and work in this country. I love this country, and I've been able to accomplish a lot. But it's just getting harder and harder to justify being away from my family so much, and worrying about everything." I don't want to sound fatalistic because I've got a fairly good grasp of history to know that "this, too, shall pass." However, it seems to me we're sliding further and further into a hole from which getting out will require revolutionary change, in every sense of the term. It probably won't happen in my lifetime, but certainly in my kids' lifetimes. And it's going to be painful. The longer it takes to get there, the more painful it's going to be. So, if the producers are going to eventually give up, I would prefer they do it soon. But there doesn't seem to be much impetus to do it. The story above, and my own interviews are purely anecdotal, and probably not very representative. But... I wonder.

You can buy off maybe a few media outlets, but you'd never be able to buy off all of them. We live in a world today that is saturated with news and information - regular Joes are becoming reporters. One example is online reviews. I never eat at a new restaurant before checking it out on the web. If there are negative reviews about food quality or sanitation, I never go there. Furthermore, no company is going to have any long-term viability by continually poisoning their customers. With the FDA (and all regulation) we consumers get lazy - we no longer check out whom we buy from. While very few would ignore reviews about the quality of their next T.V., most would ignore checking out the safety and sanitation of the manufacturers they get their food and drugs from. People want these assurances, but they assume the FDA is giving it to them. It's not. Without the FDA the desire for those assurances would exist, and companies that wanted to remain in business would provide them through independent providers. In addition, you could point to the fact that kosher and halal food regulation is privately run. This is an example of the private market demanding, and providing, assurances that food is safe and is what it says it is. Well, what choices do they believe we should be allowed to make? The number one killer is heart disease caused from poor diet. Shouldn't the government also force us to eat certain foods? More people have been killed in the name of God (or gods) than for any other reason imaginable - should government decide which religion we choose, or force us to not choose one at all? There are litterally infinite choices people make which endanger, or harm their lives. Should government make all these decisions for us? After all, we're only "depraved" humans. Ironically, their argument assumes politicians are issued halos and have their depravity expunged upon election.

Exactly! I think Dr. Ghate could've burned all Dr. Huemer's examples with plenty of time to spare in his rebuttal. I wanted him to focus on the rational part of rational egoism, and instead he directs people to read. Well, those with open minds might find the time to do that; those who've already made up their minds are strengthened in their misperceptions. I can't imagine what Dr. Huemer's book is about. There's no verifiable way of finding the truth, yet we're supposed to trust our intuition, which is somehow not knowledge, which is probably, or not probably true? Are we supposed to believe that statement of truth, even though there's no verifiable way of knowing it, simply because it "feels right?" Oh, my, god. I nearly jumped out of my skin. I should've directed my question at Dr. Ghate instead. Perhaps he could've tied it into his explanation of the proper way to arrive at a moral code. I think he would've responded with, "But there are people who are Mafia hit men. And they don't think it's wrong at all." Basically, he would've ignored your question. I was happy when Dr. Ghate addressed this with the very last question, but I wish he would've been more forceful. Yes, it really is quite amazing what the qualifications are for getting a Doctorate, becoming a college professor, and getting published.

Okay, I give up. Thanks for the exchange.

Just got back from the debate, Ms. Hsieh, and I wanted to thank you for putting it together. It was great, but I must admit I was a little frustrated - I suppose it's just the format of formal debate. There were several times I felt Dr. Ghate could've given some counterpoint to Dr. Huemer's responses in the Q&A. I was very antsy to stand up and take over for him. That probably showed when I asked the first question and took up too much time! My kids seemed to stay interested, too, and we had a great discussion on the drive home. Sorry I didn't get a chance to meet you and wish you luck in your future endeavors. I hope you keep us informed of any future Objectivist events in and around the Boulder area. Thanks, again. Jeff

Yes, John McVey was kind enough to give me those links. I've skimmed through them, but I'm not sure how that helps. If I find something incorrect, should I just address it there? If I do, does that help ReasonAlone (the OP). I suppose he can do his own searching, but I was just trying to give him some help on his question. It really wasn't my intention to get that involved in this issue. If those notes are used as money then those banks increased the money supply; they inflated the money supply; they've increased their own wealth at the expense of those who use those notes as money. I do agree that it is not fraud or theft involved in the relationship between the bank and the fully-aware depositor. My position is in the "second-order consequences."

I disagree. Most corporate debt is secured - usually by the assets (which represent production in some other part of the economy) which the corporation purchases with the debt from the bank. Though it's really not an important point in this discussion, if you have any sources which indicate this is not the case I would love to read them. I'm going to just deal with this issue as purely an exchange between corporations and we can cut out what appears to be troublesome references to banks. Economic growth only comes through production. In your example, let's assume we start from a position where all economic growth is paid for with production - in order to purchase company B's bonds, company A would have to pay for those bonds out of wealth it created from doing whatever it does. Money is simply changing hands; there is no net change to the amount of money in the economy - company A gives up money, company B gets the same amount of money. Company B takes that money and uses it to increase its production and, hopefully, repays the loan plus interest through the increase in its productive efforts. It's important to realize that the effect of this increased production serves to grow the economy, but that doesn't mean there is more or less money in the system. There is neither inflation, nor deflation, as a result of these activities. No one's wealth changes. Company A no longer has the asset "Cash," but it does have the asset "Loan to Co. B." Company B has the asset "Cash," but it also has the liability "Debt." What happens is, assuming the velocity of money doesn't change, prices go down so purchasing power remains the same. What would happen if company A didn't have any currency with which to buy company B's bonds? That is, company A has not created enough production such that it has currency which it could loan to company B? Could it buy the bonds? Could it exchange its productive efforts for the future productive efforts of company B? No, it could not. The economy generally, and company A specifically, doesn't have the wealth which would allow it to purchase those bonds. So, what to do? If company A told company B, "Here's a letter of credit for your bonds. Go buy whatever you want and give them this letter." So, company B does that; it presents this letter to company C. What would company C do? Can it go to company A and demand currency for its productive efforts, the same productive efforts it gave to company B in exchange for ownership of the letter of credit? No, it could not - that currency doesn't exist. What happened to company C? How does it get currency for its productive efforts? Was company C defrauded? Was its property, its productive efforts, stolen? What if company C were able to simply turn this letter of credit over to its suppliers? What has really changed? The only thing that has changed is the victim. So, let's go back and see what really happened. Company A increased the money supply. It created, backed by nothing, a transferrable instrument - money - that is now circulating in the economy. Company A inflated the money supply and no wealth was created for it to do so. The economy's wealth has not changed, but the supply of money has. What is the effect? Now everyone in the economy is poorer (assuming the velocity of money hasn't changed), everyone's purchasing power has declined - except company A. Company A owns an asset - the debt of company B, but it gave no asset, no productive value, in exchange for that asset. Company A gained wealth at the expense of everyone else. I think the problem here is we seem to have different definitions of inflation. Inflation is simply an increase in the money supply; deflation is simply a decrease in the money supply. The Velocity of Money theory states that an inflation in money supply, all other things remaining constant, will result in an increase in prices. Inflation is not an increase in prices. If that's not it, then I'm afraid I still don't understand this point. Well, I think in order to have this it would require more distinquishable forms of money. For example, if there were only one form of money - let's call them dollars - and everyone used these dollars, then if anyone printed dollars they would be transferring wealth to them from all the other market participants, regardless of where they kept their currency. However, if you had multiple, distinquishable forms of money - let's say each bank printed their own money - then however many notes that bank printed wouldn't necessarily inflate the money supply of the other banks. In such a case, market participants could choose to deposit their money in whichever bank didn't inflate its own currency, or they could choose to pick banks which did inflate their own currency. It would still be the case though that those who chose to bank with a highly leveraged bank would be giving up their wealth to the bank. Suppose the Bank of Jeff issues Jeffs, and the Bank of Kendall issues Kendalls. In our economy, some individuals would accept Jeffs, others would accept Kendalls. You can go to the Bank of Jeff and exchange 1 Kendall for 1 Jeff, or you can go to the Bank of Kendall and exchange 1 Jeff for 1 Kendall. Now, suppose I start leveraging my demand deposits and you do not. Suppose I have demand deposits of 100 Jeffs, but I print up another 900 Jeffs and loan those out along with all my demand deposits. Would the Bank of Kendall still accept 1 Jeff for 1 Kendall? If you did, I'd be able to buy your bank 10x over. Those I loaned Jeffs to would be able to go to the Bank of Kendall and not only wipe you out, but demand far more assets than you have. Would you allow that? I don't think you would. I think you'd start demanding 10 Jeffs for every 1 Kendall. So, my one demand deposit customer takes out all his Jeffs and goes to the Bank of Kendall. What does he get? Instead of the 100 Kendalls he would've received before I inflated the currency, he'll only get 10 kendalls. Has he not lost wealth? What happened to his wealth? Thanks for taking the time to explain your position.

I'm really confused where we're losing each other, Jake. 1) Do you disagree that an increase in the money supply results in a decrease in the value of the currency you hold? 2) Do you disagree that if someone increases the money supply, their wealth increases and the wealth of the rest of the economic participants' wealth decreases? 3) Do you disagree that banks increase the money supply by issuing credit? Because they inflated the money supply without producing anything. It would be the same as if I demanded you pay me for standing around and doing nothing. But banks are necessarily insolvent at the first moment they create credit based upon assets they don't have. They make promises they can't possibly fulfill. If everyone went to all their banks today and asked to be paid their deposits in currency (we won't even go into the fact that our currency isn't backed by any assets), all the banks in the country would be short by around 90%. That's not the argument I'm making at all, Jake. I'm sorry I can't make you see that. Perhaps if you just answer the three questions at the beginning we can find out where I'm losing you.

I've been back over this entire thread and for the life of me I can't determine where I angered you and John so, but I must have since you are both so hostile to me. I would really appreciate it if you would point out what transgression I've made so I can learn from it and correct it. I've ignored none of your points, though you seem to keep ignoring mine. You began with: "The mistake here is to equate fractional reserves with the case of increasing the fractional reserve rates." I'm not making that mistake, and I addressed this point in my next reply to you. You seem to want to put the effect in the past and then write it off as unimportant, or as if it never happened. If the reserve rate were 100%, meaning banks could only loan out the value of their assets, and then the reserve rate went to 10%, it is then that the money supply has been increased, purchasing power has been decreased, and everyone holding currency has had wealth stolen from them. Sure, if you leave that rate at 10% till the end of time, no more theft occurs (unless someone introduces new assets into the economy from outside the economy). Sure, if you raise the reserve rate some of that wealth is returned to those holding currency. But the fact remains that moving the reserve rate from 100% to some lesser percent results in a loss of wealth of those holding currency and a gain in wealth for those issuing the credit. Does it really matter that it doesn't occur on an ongoing basis? Is a theif any more just simply because he doesn't break into your house every week? Even if you ignore this entire post, I sure wish you would point me to where I've merited the hostility I seem to be getting from you. Perhaps it's just me - we are working in an imperfect format for discussion and debate. Perhaps I'm just reading you wrong.

They are indistinguishable in function. That's actually not usually true. Usually what is exchanged is bank credit. Let's use an example: suppose I owe you $10. I can pay you in one of two ways: give you a US $10 bill, or pay you with credit. Credit can take several forms, let's just look at two of them: a check, or a credit card. A check is an IOU, it's credit. What it does is tell the bank to increase your balance by $10 and decrease my balance by $10. Did you actually get $10 in currency? Did someone go to a deposit box with your name on it and put a $10 bill in there? No, you didn't, and no, they didn't. You got a promise to pay you $10 in currency if ever you asked for it. A credit card is obviously credit and the process is not very much different. When you send your credit card sales off to be cleared, the bank increases your balance of assets, and increases my balance of debt. You didn't get any currency, nor did the credit card company give any currency. Your bank increased its promise to pay you $10 in currency should you ever demand it, the credit card company increased your bank's balance and promise to pay currency if your bank ever demands it. I'm sorry, Jake, but this is not correct. Yes, the bank does loan you money, but it doesn't loan you currency (US dollars). Have you ever had a bank loan? I'll bet you have. In fact, I'll bet you have a bank loan in your wallet right now - it's a credit card. That's not currency. Have you ever gone into a bank and borrowed money, like for a house or a car? They don't give you money. They either give you a cashier's check, a counter check, or a promissory note of some sort. What are these? They are not currency, but they are money - just about anyone will accept them for transfer of ownership of property. They are credit. They are a promise to pay in currency upon demand. Well, I explained above how the ownership of currency (US dollars) rarely ever gets transferred, so I'll just address your last sentence: that's exactly what I'm arguing - it's real money. It's used exactly like currency. If you increase it the results are the same as if you increased currency. Secondly, I never argued banks don't create this credit without permission from the government. They do have permission and the Federal Reserve System enables it. Jake, let's assume I am a trusted bank. Heck, let's just assume I'm a bank. You're validating my argument though, Jake, when you agree that bank credit (VISA card) is treated like real money (currency). Well, that's not the promise they're making. Let me ask you, would you put your money in a bank if the banker told you, "If you ever come in and want your money, we'll give you 10% of it." I agree, if banks actually said this then there are no false promises. But no one in their right mind would put money in a bank with the promise to be paid back 1/10 of that money. You didn't address the fact that creation of this bank credit constitutes theft of wealth. Does that mean you understand how it is theft now?