Jump to content
Objectivism Online Forum

On Private Banks

Rate this topic


ReasonAlone

Recommended Posts

First thing's first, I know almost nothing about economics. I have heard from many sources that private banks are lending money they do not have. When the borrower signs his name on the dotted line for a loan, the bank simply prints more money, not backed by any real value. I am very confused on this issue, as well as economic theory in general. So, are private banks simply creating money out of thin air? I am confused. Bad.

Link to comment
Share on other sites

  • Replies 120
  • Created
  • Last Reply

Top Posters In This Topic

Well, if it is the case that they are printing money, then they're not actually creating "money" per say, but rather diverting what is known as "purchasing power."

This is because of the nature of the U.S. monetary policy. Fiat money isn't connected to any objective value, so therefore its value is extremely prone to fluctuations according to how many individual units of money are in the economy. If the units are reduced, then the value goes up; if the units are increased, then the value goes down.

So when the banks print more money, value, literally speaking, is confiscated from other people's monetary wealth and then transferred to whomever receives this new money. For the government this is a method of taxation that is hidden from those ignorant of economics; perhaps even some of the politicians especially so.

But in the end however, given that no new values were created alongside with the printing of the money, the economy absorbs this new amount of money by increasing the *numbers* on the price tags (in order to deal with increasing demand) and thus leaving everyone where they started. Double the money supply and the prices double as well. So it is only during the transition period that purchasing power is transferred from Joe to Jane.

Of course, this is what is going on assuming that this is the case. If it is the case, then it is terribly ironic: the banks would merely be loaning to the populous what it has taken from it; sort of like taking an Oreo apart to give the appearance of having more Oreos.

To remedy economic ignorance I recommend the book Economics in One Lesson by Henry Hazlitt.

Link to comment
Share on other sites

First thing's first, I know almost nothing about economics. I have heard from many sources that private banks are lending money they do not have. When the borrower signs his name on the dotted line for a loan, the bank simply prints more money, not backed by any real value. I am very confused on this issue, as well as economic theory in general. So, are private banks simply creating money out of thin air? I am confused. Bad.

It's called "fractional reserve lending" and has been around since shortly after the invention of banking. Here's how it works:

You deposit $100 into your bank. Your bank then loans out that $100 to someone else. Since it's unlikely you'll need all of that $100 anytime soon (I'm making the example terribly easy, you have to imagine this on a much wider scale - on that scale, it really is unlikely that the vast number of depositors will actually need all of their money in the short term), the bank can lend out the same $100 to someone else. In fact, under our Federal Reserve system, your bank could lend out the same $100 to ten other people. The bank doesn't actually "print" money, it's actually printing IOUs. By the time all those borrowers spent the $100 they borrowed, and those demands for payment reached the bank, the bank would have payments from everyone else on those loans in order to make good on the demands. If you showed up the next day and demanded your money back, the bank wouldn't be able to pay you all your money. This is called a "run" on the bank, and at that point the bank is insolvent - or bankrupt.

Benpercent is correct in pointing out that this creation of IOUs is actually not a creation of wealth, but a destruction of wealth. In my simple example, your purchasing power, your wealth, has been stolen from you just as surely as if someone had reached into your pocket.

If you would like a much better, and much more in-depth look into money and banking, watch all six episodes of Paul McKeever's "Understanding Money and Banking." You can find the first episode http://www.youtube.com/watch?v=zWHoo3Tkv38.

Link to comment
Share on other sites

Benpercent is correct in pointing out that this creation of IOUs is actually not a creation of wealth, but a destruction of wealth. In my simple example, your purchasing power, your wealth, has been stolen from you just as surely as if someone had reached into your pocket.

As far as I read him, Ben isn't discussing fractional reserve banking, and I continue to find it disturbing that people call fractional reserve banking fraud, when the terms under which you give a bank your money are known ahead of time. In addition banks finance operations out of all sorts of future cash flows (which is what a lent out fractional reserve is on a banks balance sheet) and noone seems to think that this is fraud.

Is it riskier? yes. Would banks do it as much if the limit wasn't arbitrarily set? Some would, some wouldn't and there would probably be a market in different levels of risk associated with fractional reserves. Overall the level probably wouldn't be as high as it is today, but it woudlnt' be 100% either. The idea that fractional reserve is in and of itself fraud is bizarre.

Link to comment
Share on other sites

Do you mean that it wouldn't be if it wasn't government enforced with a single currency?

No, I mean that Jeff is talking about fractional reserve banking and Ben was not. Who prints the money is irrelevant to the basis on which it is lent.

Link to comment
Share on other sites

As far as I read him, Ben isn't discussing fractional reserve banking, [...]

Kendall is correct. To be clear, I am a beginner student in economics myself. My comment only pertains to what printing money does, and it applies only if it is the case that banks are printing money. If they are not, then my point is irrelevant (though educational).

Link to comment
Share on other sites

As far as I read him, Ben isn't discussing fractional reserve banking, and I continue to find it disturbing that people call fractional reserve banking fraud, when the terms under which you give a bank your money are known ahead of time. In addition banks finance operations out of all sorts of future cash flows (which is what a lent out fractional reserve is on a banks balance sheet) and noone seems to think that this is fraud.

Is it riskier? yes. Would banks do it as much if the limit wasn't arbitrarily set? Some would, some wouldn't and there would probably be a market in different levels of risk associated with fractional reserves. Overall the level probably wouldn't be as high as it is today, but it woudlnt' be 100% either. The idea that fractional reserve is in and of itself fraud is bizarre.

I understand Ben isn't discussing frational reserve banking, but the effect of printing money or printing IOUs is the same - an increase supply in purchasing power, and therefore inflation. I'm not arguing fractional reserve banking is fraud, I'm arguing it's theft. Whoever gets to inflate purchasing power is taking wealth from those who currently hold currency.

Link to comment
Share on other sites

The "thin-air" idea is a slur; the new money is backed by valuable assets. The idea that fractional reserve banking as applied to notes = "printing money out of thin air" is an extremely sloppy way of saying that fractional-reserve money instruments (called fiduciary media) are backed not exclusively by specie (ie gold and silver) but a mix of specie and credit. The bank's credit is as real an asset as any other credit instrument, no more created "out of thin air" than a house mortgage or 10-year bond are. In all cases the bank has to earn that credit in the marketplace by demonstrating good judgement and financial soundness - that takes a lot of hard work over a sustained period of time to create. By contrast, if a total nobody tried to issue a note of the same tenor then that note would be worthless.

Even if all that a bank physically did was run a printing press and used the notes it printed to buy things that is still not fraud, "printing from thin air", or theft etc, because that act simultaneously creates the bona-fide economically-identifiable asset backing that note. The obligation for the bank to pay on demand is a credit asset to the holder of the note, whose value is determined chiefly by the credit-worthiness of the issuing bank. This is no different than were the printed document in question say a bill of exchange (pay the bearer in 1-12 months' time) a commercial note (pay bearer in 1-5 years) or a bond (5+ years), rather than a demand note (pay bearer on demand). If you condemn the latter as fraud then you're unjustifiably condemning the entire practice of credit-instrument issuance as fraud. Determination of the value of the instrument is the holder's problem, and the issuer is not to blame merely because holders routinely get their sums wrong.

I understand Ben isn't discussing frational reserve banking, but the effect of printing money or printing IOUs is the same - an increase supply in purchasing power, and therefore inflation.

Actually, Ben is discussing fractional reserve banking when discussing the issue of notes printed by private banks, which is why the economic effect is the same. It just so happens that the particular context no longer exists in this day and age because note issue has been monopolised by central banks and the use of specie has been made a federal offence. As a result of the the context no longer being current, people have forgotten that the practice is still FRB and had been one of the original forms of it. The context would instantly return to existence and the private-note-issuance matter become very relevant again when we obtain an LFC world.

I'm not arguing fractional reserve banking is fraud, I'm arguing it's theft. Whoever gets to inflate purchasing power is taking wealth from those who currently hold currency.

That argument is plain rationalism, an epistemological fault rampant among the vast bulk of anti-FRB advocates. Among other things wrong with it (eg what I said way above), what you've said overlooks the fact that even expansion of the money supply via minting from new gold-finds necessarily devalues the purchasing power of the existing stock of gold - by your logic, that would be theft! It is high time that the advocates faced facts: the practice of issuing fiduciary media backed by credit along side rather than purely by gold is not fraud, not pulling assets out of thin air, and not theft. The mere fact that the practice is economically worthless is beside the point and not sufficient on its own to make a moral judgement of it or of those who espouse or practice it.

So, while I completely reject the practice of fractional reserve banking, I share Kendall's disdain for the "fraud!" claim and related ones like the thin-air slur. Ain't nobody inherently being morally wronged by the practice in either variant (the old fractional notes issue and the still-current and well-known fractional accounts issue), the problem with it is purely economic these days. Go look at other threads if you're interested.

JJM

Link to comment
Share on other sites

First thing's first, I know almost nothing about economics. I have heard from many sources that private banks are lending money they do not have. When the borrower signs his name on the dotted line for a loan, the bank simply prints more money, not backed by any real value. I am very confused on this issue, as well as economic theory in general. So, are private banks simply creating money out of thin air? I am confused. Bad.

The best way to learn economics is to study from the experts.

Check out http://mises.org/literature.aspx?action=subject&ID=11 and look for Von Mises' Theory of Money and Credit. You can download it for free.

Link to comment
Share on other sites

I understand Ben isn't discussing frational reserve banking, but the effect of printing money or printing IOUs is the same - an increase supply in purchasing power, and therefore inflation. I'm not arguing fractional reserve banking is fraud, I'm arguing it's theft. Whoever gets to inflate purchasing power is taking wealth from those who currently hold currency.

It's neither. The mistake here is to equate fractional reserves with the case of increasing the fractional reserve rates. If you increase the fractional mutliplier arbitrarily that is inflationary. If you decrease the rate it is deflationary. If it generally holds the same, it is neither.

The funny thing is that you can think of fractional reserve banking as a form of financing. I can get the same credit expansion effect if I finance a bank through corporate debt (i.e. bonds) as if I finance it partially with time deposits. But no one ever says that debt financing of bank operations is theft. The reason is that leverage rates generally equilibrate so the practice is neither inflationary or deflationary.

To the extent that leverage rates would change due to actual structural changes in risk profiles of the economy at large the change is not inflationary, and differences in leverage rates between individual bank porfolios depending on their individual real risk profiles do not contribute to overall increases in credit.

That said, I do think that government interference in the credit markets has led to ever increasing arbitrarily set fractional reserve rates, and in fact leverage rates in general. That is inflationary, but it is not a result of the leverage per se, but of government encouraging increased leverage arbitrarily.

Edited by KendallJ
Link to comment
Share on other sites

Thank you everyone. I will look at Paul McKeever's videos (JeffS), and I will check out Von Mises' Theory of Money and Credit (A is A).
As a starting point I would advise that you understand only the concretes, without the evaluation. First, find the answer to the question: what exactly, in concrete terms, do banks do today. Most economic text books that cover banking will explain the basic concrete steps (simply try to ignore the normative evaluations of the author). Indeed, you can get a comic from the FED that give an overview.
Link to comment
Share on other sites

The "thin-air" idea is a slur; the new money is backed by valuable assets. The idea that fractional reserve banking as applied to notes = "printing money out of thin air" is an extremely sloppy way of saying that fractional-reserve money instruments (called fiduciary media) are backed not exclusively by specie (ie gold and silver) but a mix of specie and credit. The bank's credit is as real an asset as any other credit instrument, no more created "out of thin air" than a house mortgage or 10-year bond are. In all cases the bank has to earn that credit in the marketplace by demonstrating good judgement and financial soundness - that takes a lot of hard work over a sustained period of time to create. By contrast, if a total nobody tried to issue a note of the same tenor then that note would be worthless.

Even if all that a bank physically did was run a printing press and used the notes it printed to buy things that is still not fraud, "printing from thin air", or theft etc, because that act simultaneously creates the bona-fide economically-identifiable asset backing that note. The obligation for the bank to pay on demand is a credit asset to the holder of the note, whose value is determined chiefly by the credit-worthiness of the issuing bank. This is no different than were the printed document in question say a bill of exchange (pay the bearer in 1-12 months' time) a commercial note (pay bearer in 1-5 years) or a bond (5+ years), rather than a demand note (pay bearer on demand). If you condemn the latter as fraud then you're unjustifiably condemning the entire practice of credit-instrument issuance as fraud. Determination of the value of the instrument is the holder's problem, and the issuer is not to blame merely because holders routinely get their sums wrong.

This is completely wrong. What you're arguing is a bank can create as many IOUs as it wishes and somehow assets are created everytime it does. I don't see where you're getting that idea from. Yes, a bank does have a marketable asset of goodwill, or trust if you prefer, but I doubt any person would accept some trust and goodwill when they go to withdraw their money from the bank. What will the bank pay them with? More IOUs backed by the bank's trust and goodwill? You're arguing for fiat currency - a currency which has no intrinsic value other than someone's ability to fool enough people for long enough. There's no asset, just a promise that whomever you got the currency from will fool someone else into accepting that currency long enough to pay you back. And what will they pay you back with? Another promise to fool someone else. What happens when you run out of fools? What happens when all the fools want something real - some labor, a new car, a house - in exchange for the IOUs?

Let's take a simple example. You have 100 units of something which is accepted everywhere for trade - anyone on the planet will accept it in trade. I also have 100 units of this currency and that's all the currency in our economy. Suppose there's a painting we both want. You offer the owner 100 units of currency. Well, why can't I just go print off some IOUs and offer the painter 200 units? Once I do, the money supply has been inflated. And what has happened to the market participants - you and I? Your purchasing power has gone down, and mine has gone up. The effect is the same as if the money supply had stayed the same and I had taken some of your money. What asset have I created in doing so?

You might want to argue I'm a total nobody, but that doesn't change anything. Suppose I'm a really trustworthy guy - suppose everyone on the planet trusts me to pay these IOUs I create. Does that make my creation of new IOUs somehow backed by something? What am I promising to pay? More trust? Would you similarly argue the US government can just print as many dollar bills as it wants and this isn't the same as creating money out of thin air? Would you argue the printing of those dollar bills does not reduce your purchasing power? How would that be different from prices staying the same, but you just having fewer dollars to spend?

This is not the same as bills of exchange, commercial notes, bond, or any other promise of payment in the future. There's nothing intrinsic in these financial instruments which create currency. Currency now is simply exchanged for a promise to pay currency in the future.

Actually, Ben is discussing fractional reserve banking when discussing the issue of notes printed by private banks, which is why the economic effect is the same. It just so happens that the particular context no longer exists in this day and age because note issue has been monopolised by central banks and the use of specie has been made a federal offence. As a result of the the context no longer being current, people have forgotten that the practice is still FRB and had been one of the original forms of it. The context would instantly return to existence and the private-note-issuance matter become very relevant again when we obtain an LFC world.

No, Ben is not discussing fractional reserve banking. He's explaining that an increase in the money supply results in a loss of purchasing power. Apart from that, I'm not really sure what you're arguing here.

That argument is plain rationalism, an epistemological fault rampant among the vast bulk of anti-FRB advocates. Among other things wrong with it (eg what I said way above),

:D Rationalism is an epistemological fault? Interesting place to find that position.

what you've said overlooks the fact that even expansion of the money supply via minting from new gold-finds necessarily devalues the purchasing power of the existing stock of gold - by your logic, that would be theft! It is high time that the advocates faced facts: the practice of issuing fiduciary media backed by credit along side rather than purely by gold is not fraud, not pulling assets out of thin air, and not theft. The mere fact that the practice is economically worthless is beside the point and not sufficient on its own to make a moral judgement of it or of those who espouse or practice it.

I overlook this fact because it's not pertinent to the discussion. New gold finds would devalue the purchasing power of the existing currency, but it would be an infinitely smaller degree of inflation due to the fact that finding gold, digging it out of the ground, and refining it is far more difficult to do than simply writing on a piece of paper, "Will Pay Bearer Some Trust." Inflation is not prima facie theft, inflating the money supply without any real asset behind it is theft.

So, while I completely reject the practice of fractional reserve banking,

Why?

Link to comment
Share on other sites

It's neither. The mistake here is to equate fractional reserves with the case of increasing the fractional reserve rates. If you increase the fractional mutliplier arbitrarily that is inflationary. If you decrease the rate it is deflationary. If it generally holds the same, it is neither.

I would agree that's generally true. However, you're merely stating the theft has already occured.

The funny thing is that you can think of fractional reserve banking as a form of financing. I can get the same credit expansion effect if I finance a bank through corporate debt (i.e. bonds) as if I finance it partially with time deposits. But no one ever says that debt financing of bank operations is theft. The reason is that leverage rates generally equilibrate so the practice is neither inflationary or deflationary.

The reason no one ever says debt financing is theft is because the debt is back by real assets - something the bank could exchange for value; something either it, or someone else can use to turn into productivity. What is being exchanged when a bank creates promises to pay $1000 when it only possesses $100? Promises?

Link to comment
Share on other sites

The reason no one ever says debt financing is theft is because the debt is back by real assets - something the bank could exchange for value; something either it, or someone else can use to turn into productivity. What is being exchanged when a bank creates promises to pay $1000 when it only possesses $100? Promises?

Yes. Promises. People exchange money or goods for promises (or you can call them commitments) all the time. That's not theft.

Theft is taking something from someone without their knowledge.

If two people wish to exchange money for promises (i.e. someone gives me 100 bucks for an IOU), and a third steps in, claiming that it's theft, the third's the problem.

Of course, if you mean that the government is doing something improper by controlling the money supply, you are right.(but you should really be more clear then) The US dollars banks give out are worth the same no matter who the bank is, because the US government is backing that currency (the source of the government's power is of course the gun). Any time the government is doing (or allowing banks to do) what Kendall described, it is stealing from the holders of US dollars.

However, without the government's involvement, the bank who is printing and lending the currency would only be inflating its own currency, and only in ways that were previously understood by all holders of that currency. When you accept such currency, either from the bank or from someone buying a pack of cigarettes, you are aware of the rules under which the bank inflates or deflates its currency. You could either choose to deal in that currency, or go to the competition and deal in theirs. Either way, it's a voluntary arrangement, not theft. Any argument against such practices (on the basis that any manipulation of that currency without express agreement from all its hoders is theft) is also an argument against public corporations who issue extra shares to raise money, among others. It isn't a valid argument however, because anyone who is against the practice can choose not to participate.

Edited by Jake_Ellison
Link to comment
Share on other sites

The reason no one ever says debt financing is theft is because the debt is back by real assets

Collateralized debt may be. Corporate debt is not collateralized debt. It's irrelevant.

Link to comment
Share on other sites

Yes. Promises. People exchange money or goods for promises (or you can call them commitments) all the time. That's not theft.

Theft is taking something from someone without their knowledge.

People exchange money or goods for products and labour, not promises. Would you give me your money for my promise? Promise for what? To pay you back? In what, another promise?

The only way to increase wealth is to produce. If we're all just going to pass around promises to each other, then none of us are going to get anymore wealthy. None of our lives will improve in any way. One of us is going to have to produce something. Eventually, that person is going to want more for their production than just a promise.

Though it's not really important to the discussion, I would disagree with your definition of theft. If I break into your house and take your T.V. is this not theft? You clearly have knowledge that it's been done.

The US dollars banks give out are worth the same no matter who the bank is, because the US government is backing that currency (the source of the government's power is of course the gun). Any time the government is doing (or allowing banks to do) what Kendall described, it is stealing from the holders of US dollars.

Well, perhaps I misunderstand Kendall's argument, but banks don't give out dollars - banks give out IOUs; they give out credit. Yes, if someone requests what the bank owes them (close their account, redeem their CD, etc.), they do give out dollars, but that's not what we're talking about. That's not the thrust of ReasonAlone's question.

However, without the government's involvement, the bank who is printing and lending the currency would only be inflating its own currency, and only in ways that were previously understood by all holders of that currency. When you accept such currency, either from the bank or from someone buying a pack of cigarettes, you are aware of the rules under which the bank inflates or deflates its currency. You could either choose to deal in that currency, or go to the competition and deal in theirs. Either way, it's a voluntary arrangement, not theft. Any argument against such practices (on the basis that any manipulation of that currency without express agreement from all its hoders is theft) is also an argument against public corporations who issue extra shares to raise money, among others. It isn't a valid argument however, because anyone who is against the practice can choose not to participate.

That's all well and good, but banks (at least in the US) don't create currency.

Money is something which can be reliably exchanged for goods and services. If everyone accepted cows in exchange for goods and services, then cows would be money (and they used to be). In the US, there are two forms of money - currency and credit. The US government prints currency, banks create credit. Both can be used to purchase goods and services (products and labour). Inflation is defined as an increase in the money supply. An increase in the money supply devalues the money currently in circulation. The effect is, all other things remaining equal, to increase the price of the goods and services, the production, that money buys. When the government prints more money it devalues the money currently in circulation. When banks create more IOUs they devalue the money currently in circulation. In both cases, wealth has been stolen. If you prefer, it has been stolen without your knowledge.

Let's do a little hypothetical, and if I could get you, Kendall, and John to play along it would help me reduce the number of posts.

Can we all agree on these premises for our hypothetical:

Each of us have 100 units of currency - that is, real money which can be exchanged anywhere in the economy for goods and services.

Therefore, we each own 1/4th of the economy's wealth.

If I take 50 units of currency from each of you (with, or without your knowledge) I would then have 5/8ths the wealth of the economy and each of you would have 1/8th the wealth of the economy.

Can we agree that the effect of this is to reduce your purchasing power? Can we agree that I have stolen from you?

Link to comment
Share on other sites

Though it's not really important to the discussion, I would disagree with your definition of theft. If I break into your house and take your T.V. is this not theft? You clearly have knowledge that it's been done.

I'd say the definition of theft is the most important thing to the discussion, since you're calling something theft, and that's what I disagree with.

Define theft then.

Can we all agree on these premises for our hypothetical:

Each of us have 100 units of currency - that is, real money which can be exchanged anywhere in the economy for goods and services.

Therefore, we each own 1/4th of the economy's wealth.

If I take 50 units of currency from each of you (with, or without your knowledge) I would then have 5/8ths the wealth of the economy and each of you would have 1/8th the wealth of the economy.

Can we agree that the effect of this is to reduce your purchasing power? Can we agree that I have stolen from you?

Wnhat do you mean take 50 units from me? How are you going to get that done? Unless you break into my house, which no one is disputing would be theft, I can't see how you're going to accomplish this.

Edited by Jake_Ellison
Link to comment
Share on other sites

This is completely wrong. What you're arguing is a bank can create as many IOUs as it wishes and somehow assets are created everytime it does. I don't see where you're getting that idea from.
Accounting 101, plus independent thought about and verification of concepts taught therein. Try it sometime before railing into people.

I suspect that in days gone by you'd have been a physiocrat, or at least a sympathiser - though considerably more adversarial than they were.

This is not the same as bills of exchange, commercial notes, bond, or any other promise of payment in the future. There's nothing intrinsic in these financial instruments which create currency. Currency now is simply exchanged for a promise to pay currency in the future.
1) you missed the principle involved that separates the moral argument from the practical one.

2) those instruments can be (and some often are) used as currency, and are included as supplementary components of the broad money supply accordingly.

No, Ben is not discussing fractional reserve banking. He's explaining that an increase in the money supply results in a loss of purchasing power.
Well excuse me for interrupting your cathartic finger-waggle with mere facts.

Apart from that, I'm not really sure what you're arguing here.
I noticed.

:D Rationalism is an epistemological fault? Interesting place to find that position.
Interesting place to find that response.

I overlook this fact because it's not pertinent to the discussion.
Uhuh.

Why?
I already provided a number of links with lots of material that I and others have written.

JJM

Link to comment
Share on other sites

What John said.

Your example commits the same error I started out telling you about. Fractional reserve is not synonymous with an increase in the reserve rate. I then gave you examples of how the reserve rate can reach a certain level without it being inflationary.

So yeah, you misunderstood my argument, and no I'm not going to start with an example I already dealt with. Look a basic course in corporate finance would very quickly end this. You are confusing basic mechanisms of finance, with arbitrary government interference in the money supply and throwing the baby out with the bath water in the process.

Link to comment
Share on other sites

John and Kendall-

It's unfortunate you think I'm being adversarial and rude. I'm not trying to be. We're working in an imperfect medium for debate, and certain cues available in face-to-face interaction aren't available. At any rate, you have my apologies for your perceptions.

I'd say the definition of theft is the most important thing to the discussion, since you're calling something theft, and that's what I disagree with.

Define theft then.

I didn't believe it was important because we're both talking about the concept of taking something from someone without their permission. Whether I call that "theft" and you call it something else, we're still talking about the same thing. You add an element of the victim knowing his property has been taken without his permission. For our purposes here, whether the victim knows it or not, I believe, is not important. But I do agree defining terms is important.

Theft: to take someone's property without their consent.

Wnhat do you mean take 50 units from me? How are you going to get that done? Unless you break into my house, which no one is disputing would be theft, I can't see how you're going to accomplish this.

Sure, I could break into your house, put a gun to your head and tell you to give it to me, pick your pocket. Would you agree these are theft? Would you agree the effect is to reduce your purchasing power?

Link to comment
Share on other sites

What John said.

Your example commits the same error I started out telling you about. Fractional reserve is not synonymous with an increase in the reserve rate. I then gave you examples of how the reserve rate can reach a certain level without it being inflationary.

As I pointed out before, you're ignoring the fact that the inflation began the moment the reserve rate went from 100% to some lower percent and banks acted on this new reserve rate by creating credit (IOUs); the theft had already occured. It doesn't matter if you keep the reserve rate the same till the end of time, the fact is you've gone from having X amount of currency in the economy to having (X/reserve rate) amount of currency in the economy where no one has produced anything (other than some paper with words on it) to get that extra currency. My example doesn't commit this error because my currency units aren't part of an economy where the reserve rate has been moved from 100% to some other percent - that's why I'm using "units" instead of "dollars," or "pounds," or "yuan."

So yeah, you misunderstood my argument, and no I'm not going to start with an example I already dealt with. Look a basic course in corporate finance would very quickly end this. You are confusing basic mechanisms of finance, with arbitrary government interference in the money supply and throwing the baby out with the bath water in the process.

Well, I've had a number of basic courses in finance and economics, as well as a number of advanced courses. Is there anything specific you can point me to which would explain your point in more depth?

Link to comment
Share on other sites

Theft: to take someone's property without their consent.

Sure, I could break into your house, put a gun to your head and tell you to give it to me, pick your pocket. Would you agree these are theft? Would you agree the effect is to reduce your purchasing power?

I agree on both counts.

But I honestly don't understand how your example could possibly relate to what bankers do.

Also, in the second case I agree that the effect of theft is to reduce my purchasing power, but I don't agree that reducing my purchasing power is synonymous with theft. Theft involves the use of force at some point. (when the thief violates my right to property)

As an aside, if someone wishes to demonstrate theft, the easiest way would be to point out where the force is used.

Edited by Jake_Ellison
Link to comment
Share on other sites

I agree on both counts.

But I honestly don't understand how your example could possibly relate to what bankers do.

I think we'll get there.

Let's change the hypothetical a little. Let's suppose I don't actually take your money. Let's suppose instead that you each keep your 100 units, but instead I counterfeit more money. My counterfeits are really good; they look exactly like the real thing. I make another 400 units of, for all intents and purposes, more money. The economy now has 800 units of currency - you each own 1/8th of the economy's wealth where you used to have 1/4 of the economy's wealth; I now have 5/8ths of the economy's wealth. Your wealth has gone down by 50%, mine has increased by 150%.

Did I steal from you? Did I reduce your purchasing power? If I didn't steal from you, how do you explain the fact that you no longer have the wealth you used to have? Wasn't it my actions which caused the value of your property to decline? Wasn't the effect to transfer part of your wealth to me? What would you call it, if not theft? Should what I did be considered a crime? If so, why? What initiation of force did I use against you if not theft? Is it true that I have not violated your right to property?

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...