Debitism

[IAmMetaphysical]

Well, but where does that someone get his money from? I hold that he borrowed his money or got it from someone else who borrowed it. And even though you don't have to pay interest, he does.

That's the point you are missing. Money does not come from nowhere, it isn't a natural resource. Money is PRODUCED. Wealth is the result of man's capacity to think. A mountain full of gold is worthless until someone MINES it, and that gold that they mined is worthless until they can trade it with someone else. The only things that have intrinsic value to a human(man) are those things that further his life, e.g. food, shelter. All other things gain their value in respect to those things, e.g. tools that help man attain his food, to build his shelter, the material his shelter is made out of.

A man who produces just as much as he consumes has no money. A man who produces more than he can consume, has money, he has extra assets that are worhtless to him, but have worth to others if it can further their lives. The extra food a man has, that would spoil in a week or two, gains value to him when others want the food, this is the principle of supply and demand.

So, the origin of money, of the money that is present in any market should come from the overabundance of necessity, of food. This is where "new" money comes from and is introduced into the market, thats why there isn't a finite amount of money. When more food is produced with less effort, the price of food goes down, the value of money goes up, because now you're "dollar" buys you more milk, allowing you to spend the other dollars you have on other things, namely other things with help you produce more goods more efficiently, e.g. computers, cars, atomic energy.

Banks are not the creators of money, producers are. Trudy said that without banks there would be no dollars. He has gotten it completely reversed. Dollars make banks possible, not the other way around. A bank that exists before money is a ridiculous idea. Banks handle money. So money has primacy on banking.

When A bank issues you a loan, they are not creating wealth. They are giving you a means to claim wealth. When you use the money the bank gave you to buy something, the bank is essentially giving you whatever you buy. For example: if you use the money to buy a car, the bank has given you a car, but did they create the car? I think is obvious they didn't. Money REPRESENTS goods. You can "create" the paper that is used to represents the good(the value) but you can not create the value, unless you are the actual producer of that value.

TRUDY: I haven't read your "Scenarios" because I don't except your premises, the premises which are in direct conflict to the above.

[Trudy Cool]

Prove that it's a cartel.

You yourself state exactly that in the next line "our money supply is controlled by people who ..."

To the extent that the government abuses its power, it is. But that is governmental--or as you like to say, "public sector"--control. We have a problem of statism, not a problem of "debitism."

It is unquestionably a problem of statism. I couldn't agree more. But that statism has its roots in and feeds upon a deeper and more subtle problem from a much earlier phase. If you will examine my scenarios you will see that I show a progression of complications to the money creation process: Central Banking Mixed Economy grew out of Mixed Economy which grew out of Fiat Paper Economy which grew out of Borrowed Gold Economy which grew out of Owned Gold Economy. My argument is that the flaw inherent in the Borrowed Gold Economy, (but not in the Owned Gold Economy), has mushroomed through the subsequent stages to become the principal engine of statism world-wide. This is my main concern and the reason I am trying to get it discussed.

Why?

Because of the Boom-Bust mechanism I describe in the Borrowed Gold Economy scenario.

Why?

It's dead simple -- if money is created by borrowing, the money stock is the sum of the principal of all loans. If the principal is all paid back, reduced to zero ... then the money stock is also reduced to zero. Every last cent of it.

Given:

P = Principal

S = Money stock

I = Interest

D = Total Debt

Money stock is created by borrowing. Therefore P = S while D = P + I. If P = 0 then S = 0, meanwhile D = 0 + I

How can it be any other way?

I have an equivalent of US$10,000 on my company's checking account as of today. If all bank loans were suddenly repaid, the bank would still owe me the $10,000. Sure, it couldn't pay interest on it, but I could still write checks or wire my money to my suppliers.

When a bank loan is repaid the money ceases to exist. Poof. It was only a book entry in the first place. The book entry is cancelled by the book entry of the last payment. The money is gone. You could write the cheque but the cheque would bounce because the bank would have no funds.

Huh? I thought we were talking about a scenario where all loans were repaid !

The amount of the principal of all loans is all that can be paid, as I show in the formula above, and as I explain in my Borrowed Gold scenario. If we could discuss that scenario, we could actually move forward here. That was my purpose in describing it. So far you have ignored its meaning completely. Can you see the inherent Boom/Bust cycle built into that scenario, or not?

In the same sense it was when it had a debt of 0. It used to have assets worth $100, and shareholders' equity of $100. Now it has assets worth $200, shareholders' equity of $100, and a debt to the bank of $100. Sure, now I only really own half the assets, but half of $200 is just as much as all of $100.

Are you saying that shareholder's equity is NOT part of Net Worth. (I have no knowledge of US accounting standards). To my understanding, if your debt is 100% of Net Worth, the creditor holds title to 100% of the company.

If I take on a loan and default on it, I have to bear the consequences. But I have to bear the consequences of anything I do, be it getting a loan, eating an ice cream, marrying, or getting on an airplane. Should I stop doing all these things because you can come up with a scenario where they have negative consequences on me? Or should I rather exercise rational judgment to assess the risks and weigh them against the potential benefits?

I am in no sense disputing the primacy of individual responsibility. But it is completely besides the point. I'm trying to show how a systemic flaw in the money issuance mechanism places unnecessary pressures on the productive sector that make loan defaults increasingly likely on a broader and broader scale over time. I'm also trying to draw attention to two alternative money creation scenarios that do not do this. Those scenarios also reject centralized control and allow productive persons to concentrate on being responsible to their customers rather than to their bankers.

If you get on an airplane, you are in the hands of the pilot to a far greater extent than you can ever be in the hands of your creditors, especially if you have incorporated your business. Does this mean that aviation is "designed by the airline sector to ensure that the productive sector is obedient to its wishes" ?

I already answered this exact jeering when I answered your earlier jeering about the food industry, and mentioned at that time that the entire question had been explained in my first post much earlier still.

Ah, a "genuinely free" market! Freer than the free market? Is that something like "fair trade," a.k.a. protectionism?

You quote me without having made any attempt to understand the context of the quote. I said :

If the above is true, then it is naive to talk about a free market without considering deeply how that control mechanism operates.

My entire effort here has been to draw attention to the way in which the free market is not yet free because of manipulations to the money supply. Also, I have been trying to make this more understandable by offering for analysis two alternative economic scenarios that respect your free market principals completely.

If you would have the decency and courtesy to think about what they mean, we could move forward here.

Thanks, but I want none of it. You can experiment with your whacky schemes in your third-world rathole to your heart's content, but leave America alone.

Once again I must swallow your insults and jeering, while you delay posting my reponses to check if I respect forum rules. How do you justify your behaviour?

Which wacky schemes are you referring to? I have presented two "schemes": Clearing Economy and Private Paper Economy. So far you have ignored them completely. Now you declare them "wacky" without any explanation or justification. If they are wacky, please state how, and allow me to respond to honest arguments instead of shameful heckling.

[Felix]

Okay, and where did the bank get the money from?

As far as I know all currency, that is all coins and bills are lent by the central bank. With interest, of course. This is where the bank borrows its money. It then lends it to other people at a higher rate of interest.

[Felix]

That's the point you are missing. Money does not come from nowhere, it isn't a natural resource. Money is PRODUCED. Wealth is the result of man's capacity to think. ...

Banks are not the creators of money, producers are.

Okay. I understand your position. You hold that money is just another good that has to be produced. It is then used to trade, because it makes trading much easier. In the end, money is produced just as cheesecake or computers are produced. And then they are exchanged to mutual benefit. Banks play a minor role in this as they only manage the money produced by others and get paid for their service.

Is that a correct summary of your position?

[Trudy Cool]

No, it is an asset because everyone wants to get their hands on it in order to buy goods. Repaying debt is just a deferred way of buying goods; if you have to repay a debt today, it means you obtained some equipment, real estate, etc. some time ago and didn't pay for it at that time. And you know I'm against taxes.

The Fed note says on it that it's legal tender for all debts, public and private, but that is not what gives it its value. If I offered to give you a bag full of dollar bills for free, would you

• A, say "Yuck! It's heavy! I don't need it!"
  
• B, open it, count out as many dollars as you need to pay your taxes and bank debts, and leave the rest, or
  
• C, snatch the whole bag eagerly?
  

If your answer is anything other than C, I can officially diagnose you as an idiot or a troll, and the discussion is over. If your answer is C, you have some explaining to do!

My answer is C, obviously. It is very easy to explain. The dollar is the reigning money system, and I use it when necessary. However Commercial Barter, a multi-billion dollar industry, is a superior alternative, I use when I can. I also have direct experience with a clearing economy, and use that when I can. Meanwhile, I know the issuance protocols of the US dollar to be stacked in favor of the financial sector. I am arguing that it is at best sub-optimal, at worst dangerously unstable over the long-term, and that there are superior alternatives that are more conducive to a free-market than the one I cannot avoid using.

I consider a centrally controlled fiat economy unethical, but I have no choice but to use it. For reasons I can explain, I consider an Owned Gold economy ethical acceptable but infeasable in curren circumstances. That is the reason I have sought out an intellectually challenging forum to assess the alternatives I propose.

[Trudy Cool]

TRUDY: I haven't read your "Scenarios" because I don't except(sic) your premises, the premises which are in direct conflict to the above.

How can you reject a premise you are unable to put into words. If you understood my premise you would not reject it. Put into words what you believe my premise to be, with reference to things I have actually said, and I can proceed to clear up your misunderstanding. To do otherwise is an insult to the intellectual integrity of the others following this thread.

[IAmMetaphysical]

Not entirely. Right now we don't have that system in place, my argument is that is how it SHOULD be. Like a prvious poster said, the problem you pose with the "money" system is not a debitism, but a statism problem, or a problem with the inclusion of an element of force into the economy.

[Felix]

Not entirely. Right now we don't have that system in place, my argument is that is how it SHOULD be. Like a prvious poster said, the problem you pose with the "money" system is not a debitism, but a statism problem, or a problem with the inclusion of an element of force into the economy.

So you agree that your model doesn't describe the economy as it is? Why, then do you argue against our model of the current system by referring to an ideal that never existed? Of course it doesn't comply with it. That was my premise right from the start: The free market barter idea doesn't describe reality as it is and was, which is all I am concerned with here. I don't really understand that. And why don't you read Trudy's scenarios? Wouldn't that help you understand? Trudy also dislikes the system we describe. And so do I. If our description of the actual doesn't comply with the ideal, then what is our fault? Trying to understand actual reality? I really don't understand that. And all this hostility really puzzles me.

[IAmMetaphysical]

Not that your position doesn't accurately describe the current situation, but that you are wrongfully attributing a cause. It is not lending that creates the problem, but the element of force.

Your examples have been thus:

A bank lends me 100 dollars, on the stipulation that I must repay the bank 110 dollars. Where does the extra ten dollars come from? Oh no, I have to steal it( get it from someone else at their loss).

That is where you are wrong because you are assuming that it is the debt that is creating wealth. This is the premise I reject. When A bank lends me 100 dollars and charges me ten percent interest there is still only 100 dollars. The extra ten dollars I CREATE. I am paying the bank ten dollars of MY EFFORT so that I can enjoy the advantage that capital gives me, instead of having to create the hundred dollars myself, or waiting until I create it.

The problems that exist in the current system arise because of an institution controlling the supply of money arbitrarily. The only thing that cojntrols the amount of money is the amount of production.

[Trudy Cool]

When A bank lends me 100 dollars and charges me ten percent interest there is still only 100 dollars. The extra ten dollars I CREATE. I am paying the bank ten dollars of MY EFFORT so that I can enjoy the advantage that capital gives me, instead of having to create the hundred dollars myself, or waiting until I create it.

This is sadly mixed up.

Meta. it works like this ...

1. you CREATE $10 worth of new value
   
2. you sell it and receive $10
   
3. you pay off $10 of interest on your debt
   
4. the banker spends your $10 back into circulation
   
5. someone else gets the $10
   
6. they pay down the principal on their debt
   
7. the $10 ceases to exist
   

The bank must extinguish paid down principal. The bank may spend paid down interest or add it to its reserves.

The $10 you got for your CREATED value came from the buyer. He got the $10 through a, possibly extended, chain of transactions from someone who borrowed from a Federal Reserve System bank.

You CREATED the value, the sale of which, attracted $10 into your hands, instead of someone else's.

You created the value, but not the $10. You are prohibited by law from creating $10 of legal tender. The privilege of doing so is a legal monopoly bestowed on the FRS by the Federal Reserve Act of 1913.

[Trudy Cool]

The problems that exist in the current system arise because of an institution controlling the supply of money arbitrarily. The only thing that cojntrols the amount of money is the amount of production.

It is completely unjust of you to jeer at my inability to differentiate between money and currency (in the chat) and proceed to make the same confusion yourself.

According to your definition: money=goods, currency= medium of exchange -- so the correct wording of the above would be "The problems that exist in the current system arise because of an institution controlling the supply of moneycurrency arbitrarily."

In your terms the Fed controls currency, not money and the next sentence is a tautology --> "The only thing that cojntrols(sic) the amount of moneygoods is the amount of production."

[aequalsa]

I read a heinlein book a while back that referenced the banking system that I think that I understand you to be describing. The title was "for us, the living". Starting on around page 200 in the paperback he describes the monetary cycle and recommends a sort of board game using chess pieces, playing cards and poker chips to help explain it. I think it is a somewhat difficult concept to grasp because you are trying to shrink the workings of a large and very complex economic system into a concrete perceivable representation. For those who haven't and are interested in understanding trudy's point of view, I highly recommend picking up the book and playing the game described.Disclaimer: It describes the problem well but I have some problems with his proposed solution.

To Trudy:

I am wondering first, if I understand you correctly. The problem is that the bank(all banks) loans money($100 at 10% interest) to the manufacturer that he(the banker) doesn't possess by "virtue" of fractional reserve banking. The Entreprenuer(all producers) builds something and sells it using the loan to pay for raw materials and labor(all consumers). Now he has spent the $100 on the people who are selling him raw materials and labor who are also the consumers. He sells them all his produced items and can only gain back at most the $100 since that is all of the money that exists. So he pays of the principle of the loan with the $100 but still owes $10 in interest. But he now has a surplus of his produced items which he cannot use to pay interest with since no more money exists in anyones hands that can purchase them.

If that is correct, is the problem, essentially caused by fractional reserve banking?

If not, what is the cause and what solution do you recommend as the best solution in as simple terms as possible?

[hunterrose]

I understand very well that if my theory is correct, Galt's Gulch is impossible.

Felix, what you fail to take into account is that in an expanding and efficiency-improving economy, prices will gradually fall relative to the medium of exchange; that is, the same dollar will buy a larger amount of goods. The average production of goods and services per person increases, so each person can trade more goods and services with others. Everyone [can] come out ahead.

[What can happen is efficiency-improvement, yes, but] unless people start taking on debt, the economy can't possibly expand.

Someone actually loses when another one wins. In objective, (ac)countable monetary terms.

In order to begin getting to the bottom of this thread, I'd like to first address the idea that economic expansion requires the creation of new money (via debt.)

John and Eddie live in a Gulch. John can chop 4 bundles of wood in 4 hours. Eddie can cook 6 pots of stew in 4 hours. Starting off, John has 50 gold coins, and Eddie has 50 gold coins. Perhaps John created them from gold ore and sold some to Eddie for pots of stew, or perhaps they each independently procured gold to make their gold coins. At any rate, their initial possession of coins doesn't require taking on debt.

Every morning, John trades 1 bundle of wood to Eddie for 5 pots of stew. One day, they decide to use their gold coins as a medium of exchange, and John begins purchasing the 5 pots of stew for 2 gold coins, and Eddie purchases a bundle of wood for 3 coins.

Each day, John has a net increase of +1 gold coin, and Eddie has a net of -1 gold coins per day. An equilibrium has to be reached, or Eddie will no longer be able to trade for wood (or John to trade for stew.) To whatever extent John and Eddie value their mutual trade and gold currency system, their trade must allow both parties to keep some currency in order to continue. This can be done in a number of ways. Eventually Eddie might buy less wood, or John buy more stew, or Eddie charge more money, or John charge less. John might have 90 coins and Eddie 10 before they adjust the trade, but it must happen. (If John wants to obtain all of the gold coins, and Eddie doesn't mind, then you return back to the barter system.)

To facilitate the example, suppose that Eddies decides to now buy 2/3 a bundle of wood for 2 coins.

From the perspective of quantity of gold coins, John's gain did come at Eddie's loss. But this is a myopic means of profiting: by definition, his maximum quantity of coins is 100 gold coins, and having all of the coins would be detrimental anyway (as it'd prevent further trade.)

To really profit, John has to increase his efficiency at chopping wood. Suppose he finds a means of chopping 4 bundles of wood in 2 hours instead of the previous 4 hours. Now, he can chop 4 bundles of wood and still have 2 hours left, pure profit.

He can chop 8 bundles of wood in the 4 hours and trade more wood, though there is a limit to this, as there are still only 100 coins to be had, and Eddie is already limited in how much wood he wants/can afford.

Finally, he, since each bundle of wood is costing him less time, can pass on some of that efficiency to Eddie. Suppose he decides to now sell a bundle of wood for 2 coins. Formerly, it took John 40 minutes to chop 2/3 a bundle of wood and received 2 coins for the hour's work. Now, he works 30 minutes to chop a bundle of wood and receives 2 coins for the half hour's work.

So he can apply an increase in efficiency with more free time, passing on the efficiency to his trading partner via lower prices, and depending on the market situation, he may be able to sell more goods.

If John passes on some of his increased efficiency, Eddie can act in several ways. Previously, it took Eddie 200 minutes to earn enough money to buy 2/3 a bundle of wood. Now, Eddie gets a whole bundle for the same amount of work. Or, he can work for 133 minutes (over an hour less) and buy the same amount of wood - albeit selling less stew in doing so, an arrangement John may not like. Or, he can pass (back) some of the passed efficiency by lowering his prices.

Eddie decides to now sell 5 pots of stew for 1.5 coins, and buys 0.75 bundles for 1.5 coins (in order to maintain his net coins, although there were other means of balancing his amount of coins.

Originally, John wants 3 bundles of wood for his personal use and 1 to trade with Eddie. Eddie wants 1 pot of stew for his personal use and 5 in order to trade with John. Each works 4 hours for this, and their net at the end of the day:

John: 3 bundles of wood and 5 pots of stew - 4 hours work

Eddie: 1 bundle of wood and 1 pot of stew - 4 hours work

After equilibrium (For any time under four hours that is unnecessary in order to obtain his 3 personal and 1 trade bundles of wood, he uses half the time to produce more wood for himself, and rests the other half):

John: 3.166 bundles of wood and 5 pots of stew - 3 hr 50 mins

Eddie: 0.666 bundles of wood and 1 pot of stew - 4 hours

After John's increased efficiency( Eddie uses 25% of his free (sub 4 hour) time making more stew, and relaxes the other free 75%):

John: 5.125 bundles of wood and 5 pots of stew - 2hr 56 min

Eddie: 0.75 bundles of wood and 1 pot of stew - 4 hours

Eddie can reduce the amount of time he works without increasing his efficiency at stewing, but it requires he either sell less stew to John or reduce the amount of stew he keeps for himself.

At any rate, such (a Galt's Gulch?) scenario seems possible, the economy has expanded without taking on debt, and since there is only so much money in the system, John can only profit so far from increasing the amount of currency he has. In objective terms, he works less for more wood, and has even caused Eddie to have more goods.

*falls asleep*

[EC]

At any rate, such (a Galt's Gulch?) scenario seems possible, the economy has expanded without taking on debt, and since there is only so much money in the system, John can only profit so far from increasing the amount of currency he has. In objective terms, he works less for more wood, and has even caused Eddie to have more goods

Can't you all see that statements like this are completely nonsensical and false and that this whole thread is COMPLETELY POINTLESS.

Eg.-- I buy a remote start to put in someone's vehicle at cost at about $69. I then sell and install it for say $169. For the sake of argument say I have essentially no overhead. I have litterally CREATED $100 that never existed before. I don't mean the hundred dollars that was in my customers pocket, but the literal creation of wealth that had previously not existed and continued to have not existed had I chose not to do the job.

In other words the wealth that that crisp hundred dollar bill REPRESENTS was created solely by my own actions via voluntary trade. Money can be printed till the cows come home but until people create the wealth that gives that printed money purpose all you end up with is inflation.

[Capitalism Forever]

Prove that it's a cartel.

You yourself state exactly that in the next line "our money supply is controlled by people who ..."

Our money supply is controlled by the Fed. The Fed is not the same thing as "the financial sector."

It is unquestionably a problem of statism. I couldn't agree more. But that statism has its roots in and feeds upon a deeper and more subtle problem from a much earlier phase.

Statism has its roots in collectivism, altruism, power-lust--in one word, irrationality. If all the people who make the government's policy were committed to respecting the rights of individuals, you could have a gold-based fractional-reserve economy and no statism would ever grow out of it.

If you will examine my scenarios you will see that I show a progression of complications to the money creation process: Central Banking Mixed Economy grew out of Mixed Economy which grew out of Fiat Paper Economy which grew out of Borrowed Gold Economy which grew out of Owned Gold Economy.

If your Borrowed Gold scenario is meant to be an illustration of how the gold standard works, you got it completely wrong. And this is not a jeer but a statement of fact. In reality, gold is not introduced into the economy by bankers but by miners. There is not a fixed supply of gold, just like there is no fixed supply of oil. And rational people do not borrow gold unless they have a business plan that will allow them to create enough wealth to pay the interest, and keep some. Nor would a rational bank lend any gold to a person without such a business plan.

In the terms of your scenario, the gold would be mined by one or more of the participants; Midas would obtain the gold by selling them something he has produced; and no gold would be lent to anyone until Midas was convinced that the borrower could make enough drinks to sell him.

The lack of loans would bring all trade and commerce to a halt. All checking accounts would be empty. Debit cards would refer to empty accounts. Wire transfers would cease.

Why?

It's dead simple -- if money is created by borrowing, [...]

Money isn't created by borrowing. Money is created by producing. Specifically, gold is produced by mining, and the gearing of fractional reserves results out of the ability of businesses to produce goods in excess of their debt service. The only kind of money that doesn't result from productive activity is inflationary money in a fiat system--but that kind of money isn't created ; it is stolen.

When a bank loan is repaid the money ceases to exist. Poof. It was only a book entry in the first place. The book entry is cancelled by the book entry of the last payment. The money is gone.

No, it was not a book entry in the first place. A bank cannot lend money it doesn't have. A bank can only lend the amount of money that appears as "cash" on its balance sheet. The cash may take the form of 1) gold, or 2) a credit balance on an account held by the bank at the Federal Reserve another bank. But regardless of which form it takes, in a gold standard economy, the sum of the "cash" entries of all banks less the sum of all interbank debt would always be equal to the amount of gold held by banks.

So a bank cannot have cash on its balance sheet unless the bank's shareholders or depositors have provided it. And therefore, a bank cannot lend any more money than its shareholders and depositors have provided. Under the gold standard, no money is "created out of thin air."

Are you saying that shareholder's equity is NOT part of Net Worth.

Shareholders' equity is the same thing as net worth. Liabilities to creditors are not a part of net worth. Assets = net worth + liabilities. So if your debt is 100% of your net worth, you have e.g. $200 in assets, $100 of which are liabilities and $100 is your net worth.

My entire effort here has been to draw attention to the way in which the free market is not yet free because of manipulations to the money supply.

We agree that a fiat system is not a free market. But you are contending that a gold-based fractional reserve system is not free either, aren't you? But it is; freedom means absence of force, and there is no force involved in a gold-based fractional reserve system.

Also, I have been trying to make this more understandable by offering for analysis two alternative economic scenarios that respect your free market principals completely.

They're cute, but perfectly impractical. The problem with the first one...

Clearing Economy: Midas maintains an accounting book. As each pair of participants negotiates a firm trade, they ask Midas to debit the buyer and credit the seller. Midas charges a percentage on each transaction. Everyone starts with zero. The net value of all accounts is always zero. Negative closing balances are settled up by some form of contractual agreement, perhaps involving interest.

...is that it lacks a standard of value. They ask Midas to debit the buyer--in what currency?

• U.S. dollars? Then you have a fiat-money economy.
  
• Amounts of gold, or gold coins? Then you have a gold standard.
  
• Glasses of drinks? Then you have just another commodity standard.
  
• Units of whichever good the buyer is buying? Then we're back to barter.
  
• An invented currency without any definition other than that it's a currency? Then you have fiat money, without even a Fed to keep inflation in check.
  

The second one...

Private Paper Economy: Each invitee brings to the party self-printed paper notes denominated in the products/services they offer. [...]

...is really just barter-on-credit. It might work in an economy that consisted of a couple dozen people, but less efficiently than gold. In the U.S., which has more than two hundred million grown-up citizens, you would have more than two hundred million different currencies in circulation. Scale is key indeed! Need I say how frivolous it is of you to come to an American forum and suggest this as a viable alternative for Americans ?

Edited April 21, 2006 by Capitalism Forever

[Trudy Cool]

I read a heinlein book a while back that referenced the banking system that I think that I understand you to be describing. The title was "for us, the living". Starting on around page 200 in the paperback he describes the monetary cycle and recommends a sort of board game using chess pieces, playing cards and poker chips to help explain it. I think it is a somewhat difficult concept to grasp because you are trying to shrink the workings of a large and very complex economic system into a concrete perceivable representation. For those who haven't and are interested in understanding trudy's point of view, I highly recommend picking up the book and playing the game described.Disclaimer: It describes the problem well but I have some problems with his proposed solution.

That sounds very interesting, thanks I'll look for it.

I am wondering first, if I understand you correctly. The problem is that the bank(all banks) loans money($100 at 10% interest) to the manufacturer that he(the banker) doesn't possess by "virtue" of fractional reserve banking. The Entreprenuer(all producers) builds something and sells it using the loan to pay for raw materials and labor(all consumers). Now he has spent the $100 on the people who are selling him raw materials and labor who are also the consumers. He sells them all his produced items and can only gain back at most the $100 since that is all of the money that exists. So he pays of the principle of the loan with the $100 but still owes $10 in interest. But he now has a surplus of his produced items which he cannot use to pay interest with since no more money exists in anyones hands that can purchase them.

That is the problem we are highlighting, yes. Unfortunately it is layered over with complications that makes it almost too hard to explain. E.g. How much interest the banker chooses to spend. If he spends all of it locally, eventually some of it will work its way back to you and you can cancel the interest.

You can possibly see from that, how this places at a disadvantage: 3rd world countries with respect to first world countries, rural areas w.r.t to urban, "Western" debtors w.r.t to the "Far East" -- In all those cases the liquidity they need to have locally, has washed away to other regions. In short, "dollars go where dollars grow". What I am proposing -- see below -- is different means of creating a medium of exchange that manifest that property (dollars go where dollars grow) with different dynamics.

If that is correct, is the problem, essentially caused by fractional reserve banking?

That is my point, yes. I'm trying to show alternatives, which detract in no way at all from the goal of a free market. I'm also trying to show that fractional reserve banking is harmful to a free market.

If not, what is the cause and what solution do you recommend as the best solution in as simple terms as possible?

I describe two possible scenarios in Post #95. They are interesting in that their internal dynamics show that inflation, the Boom/Bust cycle and the flushing away of liquidity are unnecessary properties of a medium of exchange.

Here they are again...

Clearing Economy

: Midas maintains an accounting book. As each pair of participants negotiates a firm trade, they ask Midas to debit the buyer and credit the seller. Midas charges a percentage on each transaction. Everyone starts with zero. The net value of all accounts is always zero. Negative closing balances are settled up by some form of contractual agreement, perhaps involving interest.

Private Paper Economy

: Each invitee brings to the party self-printed paper notes denominated in the products/services they offer. They provide, for public viewing, a "To The Bearer" contract that defines the exact meaning of their notes. Participants deposit a portion of their notes with Midas. Also, they pay him a periodic auditing and maintenance fee. On this income Midas audits their conformance to contract. Should one of them suddenly die, holders of the deceased's notes can redeem them for a basket of notes of various issuers, or Midas' own notes. Should Midas determine through audit that an issuer is spending in excess of contract he will increase their periodic maintenance fee by that amount, and publish this decision. Seeing his informed decision, all sellers will demand a similarly increased price for the notes, and the the issuer will find everyone reluctant to accept his notes at all.

I elaborate upon the first in this post http://forum.ObjectivismOnline.com/index.p...post&pid=113324

[A.West]

This has got to be the most rationalistic threads I've ever read. For the rational people here, it could potentially provide a benefit, as one sometimes clarifies things in one's own mind by refuting someone else's argument. But the rationalism and evasion exhibted by others is breathtaking. Now I'm starting to understand the epistemological problems behind the Rothbardians and other various doomsday cults who go on about the financial system without even understanding what a bank does, or what money is. After a certain point, one can't continue to assume that there's an honest effort to understand reality in process.

One little tip I'll throw in - banks supply only a tiny fraction of all loans. It is productive savers who ultimately make loans, using banks as their agents (intermediaries). Besides that, companies make massive interlocking loans to one another (called accounts payable & accounts receivable). Using "simultaneous repayment of all loans" as the standard of system's stability is like saying life on Earth is unstable because "if there was not a drop of rain anywhere on earth for one month we would all die".

Also, don't let the Debitismists confuse their opposition to finance with opposition to central banking.

[Capitalism Forever]

As far as I know all currency, that is all coins and bills are lent by the central bank. With interest, of course. This is where the bank borrows its money.

That is just the last-resort sort of cash for the bank. The bank primarily gets its money from its shareholders when it is founded and when it issues new stock, and from its depositors. It will only borrow money from other banks (including the central bank) if it has a liquidity shortage.

[Capitalism Forever]

This has got to be the most rationalistic threads I've ever read.

I agree ... it is only surpassed by some of LauricAcid's posts on math.

Thanks for the tips!

[Felix]

The bank primarily gets its money from its shareholders when it is founded and when it issues new stock, and from its depositors.

Where do they have their money from?

[Capitalism Forever]

Where do they have their money from?

The gold mine.

Even under a fiat money system, some portion of the money stock will consist of gold. If none other, then at least the gold that formed the basis of the currency before fiat money was introduced. A purely fiat currency is only possible in Trudy's dreams about a "Clearing Economy" (if that's how he meant it; he hasn't answered my question yet).

[Felix]

CapitalismForever: I should have asked this question right from the start:

How, according to you, does money enter the market? Where does it come from? And I don't mean in a gold standard or in some ideal state, not how it was or could be or should be, but how it is, right now, today, this very minute.

[hunterrose]

Can't you all see that statements like this are completely nonsensical and false and that this whole thread is COMPLETELY POINTLESS.

Ironic. Tell me what's wrong with the following example, and then tell me what's wrong with yours:

I buy a remote start to put in someone's vehicle at cost at about $69. Unfortunately, I can sell and install it for only say $49. For the sake of argument say I have essentially no overhead. I have litterally DESTROYED $20 that had existed before. I don't mean the Andrew Jackson that was in my pocket, but the literal destruction of wealth that had previously existed and continued to have existed had I chose not to do the job.

[The problem is] essentially caused by fractional reserve banking?

That is my point, yes.

I'm ... trying to show that fractional reserve banking is harmful to a free market.

Well, why didn't you say so at first There are so many side issues here, but I bet a conclusion can be reached if this is the focus:

1. Is fractional reserve banking harmful to a free market?
   
2. Does the Clearing Economy/Private Paper Economy avoid fractional reserve's (at the moment supposed) pitfalls?
   

Are you contending that a gold-based (i.e. non-fiat) fractional reserve system would be harmful?

Clearing Economy

Private Paper Economy

I think I begin to see what you meant about trust If Midas is intervening in these two economies, doesn't he pose the same threat you're attributing to fractional reserve systems?

On the other hand, why not support a system in which success requires trading with good businessmen, but doesn't require trusting auditors - doesn't require auditors in the first place? Is non-fiat fractional reserve such a system?

[softwareNerd]

Right now, money is created by government fiat.

[Capitalism Forever]

How, according to you, does money enter the market? Where does it come from? And I don't mean in a gold standard or in some ideal state, not how it was or could be or should be, but how it is, right now, today, this very minute.

Right now, new money is introduced into the market when the Fed decides to grow the money supply. It achieves this by adding to the reserves in the banking system. How does it add to the reserves? It buys gold or Treasury bonds on the open market, and lends them to commercial banks. I'm not sure about the proportion between the two, but I believe it's mostly Treasury bonds these days.

Banks are required to keep a certain percentage of their clients' deposits in the form of reserves; they can lend the rest out. Thus, if the reserve requirement is 10%, then a deposit of $1 at the bank is backed by 10 cents of gold and Treasury bonds, and 90 cents' worth of whatever collateral the bank's debtors have provided (real estate, vehicles, etc.).

Thanks to this fractional reserve mechanism, one dollar in a bank's vault adds to the money supply as much as nine dollars in a guy's wallet. The tuning of the money supply is achieved by shuffling dollars between the two places.

Edited April 21, 2006 by Capitalism Forever