Jump to content
Objectivism Online Forum

Isn't Inflation Fundamentally a Matter of Violating Property Right

Rate this topic


Recommended Posts

To clarify, though each note entitles you to a gold Eagle on presentation, you are also made fully aware of that a fractional-reserve being employed. In other words, you know this is not a regular bailment. (If you wanted something close to a bailment, you would put the money in a 100% reserve account.) Using a fractional reserve account, you know that a bank will not be able to fulfill its commitment to you if it faces a run.

 

Traditionally, the depositor is not the owner of the actual gold deposited into a bank, even in a 100% system. He is a creditor of the bank. If you want a literal bailment, you would put your eagles in a safety deposit box at the bank and withdraw your specific physical coins whenever you want.

 

However, the actual ownership is not material as long as you have full awareness of the bank's intent, and agree to its actions before the fact. Under a scheme of retained ownership, if you nevertheless allow the bank to lend your gold, the bank is acting as your agent. 

 

The law around fractional banking was never perfected. Instead, governments stepped in with one-time measures, and finally we have fiat money central banks that make the whole thing irrelevant. It's impossible to say whether the law would have evolved with ownership retained by the depositor, or if it would have stayed the traditional way (which I suspect it would). Or, perhaps both types of accounts would have evolved. It really does not matter; but if you have a concern about one of them, assume it and argue against it... I'll be glad to take the other side.

 

sN: Thank you for your insights.  Suppose again in a free market, you are the Banker and I have the money.  Say instead of those 100 Eagles, I have 100,000 of them and I propose to you to start a new tradition in your Bank.  Instead of loaning you my coin as your creditor, I want you to safely keep my property, the Eagles, not in safety deposit boxes but in your vault.  I want you to give me denominations of notes, each denomination equal to the same number of coins and redeemable in Eagles upon my demand.  I want you to honor redeeming your notes on demand not only for me but for any note holder who presents them to you.  Also, I want to retain title to my unredeemed coin that I have on balance with you.  And finally, I want you to keep my balance of coin fully on hand in your vault and insured by a reputable private insurer.  Of course, I agree to pay for your services with some agreed upon percentage of my account balance.  

 

Would you consider my proposition good business for you?  Would you be concerned that there may be any Court in our free society who wouldn't recognize our deposit contract?

 

 

PS: Would you have a recommendation of reliable histories on money and banking?  One of the reasons I am asking is because I did not know that I am consider a creditor of my Bank.  I always thought that I was the owner of my demand deposit.  I am curious to learn whether the banking tradition you mentioned in your reply above (about ownership) is recent to modern banking our goes further back into the history of banking.  

Link to post
Share on other sites

Would you consider my proposition good business for you?  Would you be concerned that there may be any Court in our free society who wouldn't recognize our deposit contract?

What you're describing is a "bailment", where you leave your goods with someone else as a custodian of those goods. Typically, it is done for safe-keeping (like a parking company) or because the person is going to work on those goods (like a car-repair shop), but in the case of a bank it is for convenience (to make transactions easier) as well as safety. Yes, as long as the banker is paid for the services, it is a good business. In a free society, a court should recognize such a contract -- I assume a U.S. court would recognize it today.

 

On book recommendations, I would focus on history of banking, particularly British and U.S. Here are some:

Money of the Mind - by James Grant [A good starting point. A history of about a century of U.S. banking, from about 1850]

Lombard Street - by Walter Bagehot [british banking from about 1850]

History of the Bank of England - by Andreas Michael Andreades [Goes much further back]

Link to post
Share on other sites

What you're describing is a "bailment", where you leave your goods with someone else as a custodian of those goods. Typically, it is done for safe-keeping (like a parking company) or because the person is going to work on those goods (like a car-repair shop), but in the case of a bank it is for convenience (to make transactions easier) as well as safety. Yes, as long as the banker is paid for the services, it is a good business. In a free society, a court should recognize such a contract -- I assume a U.S. court would recognize it today.

 

On book recommendations, I would focus on history of banking, particularly British and U.S. Here are some:

Money of the Mind - by James Grant [A good starting point. A history of about a century of U.S. banking, from about 1850]

Lombard Street - by Walter Bagehot [british banking from about 1850]

History of the Bank of England - by Andreas Michael Andreades [Goes much further back]

 

sN:  Thank you for the link to "bailment".  I see there that deposit is listed as a type of bailment. Also I want to clarify one point under my above proposed deposit contract with you (my hypothetical Banker),  The point is that I am not looking to loan you my money (that would be a different contract between you and me) but I am looking to make transactions easier and safer for me with a money substitute and to extend the same ease and security to any holder of your note.  WIth that, any note holder presenting your note back to you can demand possession and ownership of the coin represented by the note.  Or they may elect to start their own account with you under the auspices of their own deposit contract whereby they are the new owner of the coin and have your note to show for it. 

 

And thank you for the book recommendations and the links to them.  These could be helpful in satisfying my curiosity.  I think that the mere deposit of money into a bank shouldn't change ownership of the deposit.  However, because it does, I'll be looking into the tradition of banking to learn whether it has always been that way and if not, then why it changed.  Thanks again.  

Edited by OhReally
Link to post
Share on other sites

No, inflation doesn't violate property rights. The government imposing its currency on a population is a violation of liberty, but, if the money is issued by a private financial institution, manipulating it within the terms it was issued under would not be a violation of anyone's rights.

And financial institutions, if allowed to issue their own currency, would no doubt reserve the right to inflate it to some extent. Even the Bitcoin is inflated (in a predictable way).

 

Nicky: Assume the case of a private financial institution in a free society.  For ease of discussion, let me say that the institution is a Bank but it is only a depository who has elected by its published charter never to make loans but instead only accepts money deposited by its customers.  (It's source of revenue then is limited to the fees it can command for the storage and safekeeping of its customers' money, along with other fees for such services as transfer and account openings and renewals.)  So, the Bank will provide utmost safety of the deposited money.  Upon demand by a note holder, the Bank immediately gives the money.  

 

Regarding the origin of paper currency in this society, I have a question.  You mentioned in your reply the contrast between government imposed currency and "the money issued by a private institution".  In the case that I am presenting for discussion, isn't it a fact that the Bank isn't issuing currency whatsoever but merely giving its depositor a note certifying and guaranteeing the full safety and redeemability of deposited money?  The note holder then carries with him the paper note just (nearly) as good as the vaulted money and (over time) can demonstrate this fact with those he does business with.  By virtue of its use outside the Bank, the note does become a currency based on the common knowledge that it is immediately convertible into the money held safely and readily available at the Bank.  In other words, isn't it the note holders not the Bank who discover (rather quickly) the value and acceptability of using the note as money? 

Link to post
Share on other sites

Nicky: Assume the case of a private financial institution in a free society.  For ease of discussion, let me say that the institution is a Bank but it is only a depository who has elected by its published charter never to make loans but instead only accepts money deposited by its customers.  (It's source of revenue then is limited to the fees it can command for the storage and safekeeping of its customers' money, along with other fees for such services as transfer and account openings and renewals.)  So, the Bank will provide utmost safety of the deposited money.  Upon demand by a note holder, the Bank immediately gives the money.  

 

Regarding the origin of paper currency in this society, I have a question.  You mentioned in your reply the contrast between government imposed currency and "the money issued by a private institution".  In the case that I am presenting for discussion, isn't it a fact that the Bank isn't issuing currency whatsoever but merely giving its depositor a note certifying and guaranteeing the full safety and redeemability of deposited money? The note holder then carries with him the paper note just (nearly) as good as the vaulted money and (over time) can demonstrate this fact with those he does business with. By virtue of its use outside the Bank, the note does become a currency based on the common knowledge that it is immediately convertible into the money held safely and readily available at the Bank. In other words, isn't it the note holders not the Bank who discover (rather quickly) the value and acceptability of using the note as money?

The service you're describing is Paypal (and others, like Skrill for instance). Except that Paypal keeps your money in a bank account (at Wells Fargo, if the Internet is to be believed) rather than a vault, and issues a debit card or a username and password that allows clients to access an online application, to transfer their money, since cards and online banking are safer than using notes (makes it possible to easily track the money after the fact, in case of any wrongdoing).

But Paypal doesn't actually touch your money in any way, beyond transferring it when so ordered by you. It doesn't let it out of its sights to make a profit with it, it takes its profits strictly from transfer and currency conversion fees (and interest on the bank deposit). So, aside from it being stolen, there's no danger of Paypal losing your money (there's a danger of Wells Fargo losing it, but that's besides the point - I'm just mentioning it so that no one is mislead into thinking their money is safer in a Paypal account than in a reputable bank).

The card and or username/password don't fit the definition of money, they're merely a tool for accessing the money that's in Paypal's bank account or in your hypothetical institution's vault. If this was taking place in a parallel universe without cards or an Internet, the notes would also not count as money, they would still just be a method for accessing it.

Edited by Nicky
Link to post
Share on other sites

The service you're describing is Paypal (and others, like Skrill for instance). Except that Paypal keeps your money in a bank account (at Wells Fargo, if the Internet is to be believed) rather than a vault, and issues a debit card or a username and password that allows clients to access an online application, to transfer their money, since cards and online banking are safer than using notes (makes it possible to easily track the money after the fact, in case of any wrongdoing).

But Paypal doesn't actually touch your money in any way, beyond transferring it when so ordered by you. It doesn't let it out of its sights to make a profit with it, it takes its profits strictly from transfer and currency conversion fees (and interest on the bank deposit). So, aside from it being stolen, there's no danger of Paypal losing your money (there's a danger of Wells Fargo losing it, but that's besides the point - I'm just mentioning it so that no one is mislead into thinking their money is safer in a Paypal account than in a reputable bank).

The card and or username/password don't fit the definition of money, they're merely a tool for accessing the money that's in Paypal's bank account or in your hypothetical institution's vault. If this was taking place in a parallel universe without cards or an Internet, the notes would also not count as money, they would still just be a method for accessing it.

 

 

Nicky: I thank you for your reply and insights into Paypal.  I am curious about it because I don't understand why you used Paypal to exemplify the service I've described.  As I understand them, Paypal provides payment services and bases them on a credit card that its customer has with another institution.  I also understand that they provide transfer services by acting as their customer's authorized intermediary transferring his money from his Bank to another party. Like a depository, Paypal provides these services.  But unlike a depository, Paypal does not safekeep its customer's money.  

 

I described a private institution honoring a contract by holding money for safekeeping on their prem and making it available on demand to a holder of their note.  Security and redemption which are heightened electronically are further applications of the idea covered in my posing the hypothetical case.  They underscore the primary need a customer has to contract with the depository.  In particular to this part of our thread, I was interested in discussing the historical origins of paper currency using the hypothetical case of the Bank.  I haven't had the time to study the history of Banking.  softwareNerd has recommended several books on it.  I've started with one of them, the history of the Bank of England.  In the meantime, I am looking at banking and discussing it here from the perspective of common sense and more so by what I would find valuable in a bank.  From that, it made sense to me that paper currency may have evolved starting this way.     

 

Anyway, back to the hypothetical Bank depository. I'd like to discuss a more important question, namely, who owns what and why?  From my perspective, if anyone enters into a money-contract of bailment with this Bank, then ownership is retained by the bailee not the Bank.  At least in my hypothetical, I own 100% of my money and the money is available to me immediately upon my demand.  But if I step outside the case, common sense says otherwise.  People have said that once deposited, the deposit becomes property of the Bank and is treated not as a deposit but as a time deposit, a loan to the Bank.  

 

I mentioned that I am reading about the history of banking.  I am looking to learn whether a depositor always gave up his right to the immediate availability of his property when dealing with a bank.  I suspect that he didn't.  But is there somewhere in the history of banking when he was forced to and today, we are still living with that legacy?  

.  

 

 

Link to post
Share on other sites
  • 9 months later...

"..."

 

"..."

 

"..."

 

The law around fractional banking was never perfected. Instead, governments stepped in with one-time measures, and finally we have fiat money central banks that make the whole thing irrelevant. It's impossible to say whether the law would have evolved with ownership retained by the depositor, or if it would have stayed the traditional way (which I suspect it would). Or, perhaps both types of accounts would have evolved. It really does not matter; but if you have a concern about one of them, assume it and argue against it... I'll be glad to take the other side.

 

Let me change the context completely by asking that you consider a brand new country whose politics and ethics are Objectivist, pure and simple.

 

I have two scenarios to ask you about.  Here's the first and I'll follow up with the second one, later.

 

Say that in this first scenario you open a fractional reserve bank (FRB) without financial capital; you had enough capital to build your brick-and-mortar Bank and have enough left over to finance its daily operating expenses for a healthy period of time but you don't have any financial capital beyond that to use in lending.  I am only saying this in order to keep this part of your ledger at zero.  

 

Say its your first day in business in our brand new Objectivist Country and say that I am your first customer.  I want to deposit my money into your Bank but I want retain ownership of it.  I am looking to you provide me not only safe keeping of my money but also a process whereby you manage settling my account as I draw down on it with the expenditures I make using your checks.  You and I agree to the services fees that you'll charge me.   

 

I also sign an agreement with you acknowledging that you are a FRB so I understand the risks that now or in the future you may not have my money on hand if I demand to cash out my account and I also understand that you may make loans without sufficient money backing them.  I go ahead and make my demand deposit of say 100 ounces of gold.  

 

But suppose that before leaving your Bank with my 100-ounce-check-book in hand, I turn to you and ask for a loan.  I want to borrow 100 ounces of gold and can secure the loan with a small rental property that I own; I will repay you in 5-years time with interest.  You determine that I am good for it.

 

I know and you know that you have only 100 ounces of gold in your vault but you say, "No problem because I am a FRB.  But to be safe, I'll hold title to your rental property and only lend you 90 ounces of gold by simply crediting your checking account with it."

 

My question about this scenario is this.  Wouldn't you and I both be committing fraud?  Even though you haven't misrepresented yourself and we agreed to the transaction, you gave me title via your fiduciary media to 90 new ounces of gold which doesn't exist. You're going to claim that I am obligated to repay you (with interest) on money you didn't have to begin with and.I am going to use your fiduciary media as a money substitute to buy real goods and services from others I'm dealing with.  Doesn't this first scenario smack of having your cake and eating it too?

Link to post
Share on other sites
  • 2 months later...

When discussing money, isn't it correct to say, "Money is (or should be) a form of property obtained by an individual for the purpose of exchange and as a store of value."? Isn't money private property and once in possession of this kind of property, anyone can buy anything, anywhere as long as there is someone on the other side of the exchange who is willing to accept the buyer's property, the buyer's money? And like any property, shouldn't the individual protect it from being taken? Within the context of the proper function of government, shouldn't government enforce this protection?

I am asking these questions because I've been sketching out the fundamental characteristics of inflation with an eye toward defining the concept. I am thinking that instances of violation of property rights serves as the CCD. As to isolating the units of the concept, I am thinking that what distinguishes these from other types of violations of property rights is that these are forcible ways to increase the supply of money by means of counterfeiting the supply of money, whether through criminal or legalized activities. From that, I wrote the following definition of the concept.

Definition: Inflation is a violation of property rights by forcing increases to the supply of money by private or legalized counterfeiting.

With that, I welcome your comments and suggestions.

Inflation is an economic term and may or may not be due to a violation of rights -- you're right though, counterfeiting by definition is a violation of rights. I wouldn't package deal inflation with rights.

A more accurate definition: inflation is the result of the increased ratio of currency to goods and/or services.

The increas in that ratio causes inflation, which may be due to a decrease in goods and not necessarily and increase in currency. For example, a natural disaster might inflate prices of destroyed goods as has been seen in many instances.

Link to post
Share on other sites
  • 1 month later...

Inflation is an economic term and may or may not be due to a violation of rights -- you're right though, counterfeiting by definition is a violation of rights. I wouldn't package deal inflation with rights.

A more accurate definition: inflation is the result of the increased ratio of currency to goods and/or services.

The increas in that ratio causes inflation, which may be due to a decrease in goods and not necessarily and increase in currency. For example, a natural disaster might inflate prices of destroyed goods as has been seen in many instances.

 

Package dealing is one of the things that I am arguing against.  I believe that the current thinking on inflation is mistaken or evasive because it lumps together superficial characteristics of 1) economic condition and 2) resulting from increases in ratio of currency to goods and/or services.   These statements about inflation are true; it is an economic condition and it affects an arithmetic ratio. But these are not fundamental and therefore wrong as a definition.  

 

The question is how.  How do people go about changing the amount of money in society?  In this case, how is the supply increased?  The broadest answer is rationally or irrationally.  I argue that Inflation falls to the later; it is irrational and specifically so because it violates property rights by counterfeiting currency which increases its supply.  

 

Money, money substitutes and the process by which both are brought into existence is sufficient context to answer the question.  As to your example of natural disasters, they do cause a want of goods and this lack does influence their prices, but this is an instance not of inflation but the law of supply and demand.  Your use of non-essentials in defining inflation gives rise to an error of classifying the effects of natural disasters as inflationary and distracts attention from the fundamental question of how people increase the supply of money and money substitutes.   

Link to post
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...