Money: Does Objectivism Hold That Govt

Economics
21

A less than 100% reserve monetary standard is prone to inflation, even if it is gold. That is because if banks can accept money deposits and then turn around and loan the money deposited, while still promising it to the depositor, and if, with the government’s blessing, they can get away with calling the value of the loan “money” instead of calling it “debt”, they have created new fiat “money”. Such a fraud cannot be perpetrated without government intervention. It is exactly the case of having one’s cake and eating it too. The cake is the money deposited; if one’s neighbor eats the cake by loaning it out, then one no longer has the cake, only the promise of another cake sometime in the future. The promise of another, different cake in the future is not the same thing as the cake on had to start with, no matter how one wishes to fudge things.

According to Reisman (Capitalism; read his own words before taking this summary as gospel), in a rational capitalist society, where banks cannot perpetrate such a fraud, banks would maintain a 100% reserve gold standard or quickly be put out of business and into prison (speaking only of savings, checking, and similar accounts, it should be understood). Thus, under freedom, money would be inflation-proof.

Incidentally, on a 100% reserve gold standard, the only two basic “currencies” or units of value would be the ounce and the gram, with national currencies, if they exist, being defined as some fixed quantity of gold.

22

Such a fraud cannot be perpetrated without government intervention.

How is this fraud if the two parties are consenting? What if the consumer believes the bank on its word and wants to do business with it?

banks would maintain a 100% reserve gold standard or quickly be put out of business and into prison (speaking only of savings, checking, and similar accounts, it should be understood). Thus, under freedom, money would be inflation-proof.

Under freedom, the government will lock up banks doing business with consenting customers? Dosn’t sound like freedom to me.

23

Treating debt as money is fraud - and, in our society, fiat.

If the two parties are consenting, then both understand that debt is not money, and that a bank which loans out money entrusted to it no longer has that money. If the two parties, knowing this, still wish to do business, the proper term is no longer “banking”; properly, such an activity has more in common with purchasing corporate bonds than with banking.

Under freedom, government will punish fraud. A bank which promises banking, but delivers the equivalent of bonds, commits fraud.

Of course, all this is meaningful only in the context of a commodity gold standard of money. Since fiat money is fraudulent and infinitely inflatable anyway, it makes no difference if government can perpetrate the fraud indirectly through the banks. It is still government fraud and government inflation of the money supply if banks operate on a less than 100% reserve standard, if that standard is fiat anyway.

24

Treating debt as money is fraud

Do you also consider overbooking airline seats a fraud?

25

I don’t know the case well enough to answer. But I’m going to say: No. An expected future seat is not the same thing as a 100% seat right now. Airlines sell the former.

As with all booking - with the dentist, with the hairdresser, with the airline - it is understood by both parties that the time booked is not written in stone, that there are situations which may cause either party not to be able to make that particular time.

This, however, has absolutely nothing to do with treating debt as money by fiat.

26

As with all booking - with the dentist, with the hairdresser, with the airline - it is understood by both parties that the time booked is not written in stone, that there are situations which may cause either party not to be able to make that particular time.

This, however, has absolutely nothing to do with treating debt as money by fiat.

So do I gather correctly that what you object to is using the term “money” to refer to bank deposits for which the bank does not maintain a 100% reserve?

27

If banks have to keep 100% reserves, you might as well keep your money in a sock under your mattress.

28

The reason everyone always argues in support of a hard backed gold standard is that it would be inflation resistant when compared to current fiat currency. Actually I was just reading Gold and Economic Freedom (p 89 1st Edition, 3rd paragraph) and Greenspan actually does take a very Austrian view of currency.

He states effectively that each bank would keep a reserve of physical gold based on their experience. They would then of course loan some out and issue notes based on the total of the gold that they have on their books. So ostensibly the banks would be able to issue more notes than they have physical gold to cover. So, in the marketplace, as Hayek suggested with the “competitive central bank” idea, the value of the currency would fluctuate by the value of what people actually put on it.

Interesting. Citibank could issue paper with less gold but I’d trust them more than paper issued by say some bank I’ve never heard of that promised it’s backed fully by deliverable gold, so I’d demand 100% payment in Citibank dollars but 200% in Bank of Sharpstown. Again, this could go right back to the argument where the government gets back into regulating the ratio of gold to dollars and we are right back to square 1.

Austrians want 100% reserves, that would eliminate inflation. Greenspan is still a fractional reserve banker, which I think is fraudulent. There is a whole thread on this in the econ. section.

29

How is this fraud if the two parties are consenting? What if the consumer believes the bank on its word and wants to do business with it?

Under freedom, the government will lock up banks doing business with consenting customers? Dosn’t sound like freedom to me.

The two parties might be consenting, but when there money is traded with other banks or in the open market, there money is considerably less valuable. If 10 dollars is printed by the bank to cover 1 dollar worth of gold reserve, then there money is only actually worth 1/10 of what it has printed on it. Yet they will trade it for goods and services as if it is actually worth 10 dollars, when in actuality it is only worth 1 dollar. So it is fraudulent to anyone they trade with. And if they are open about the fact that there money isnt backed by gold, then who would trade with them? The effective value of there money would go down to its real value if they ever let anyone know that its not back by gold. And then it would be just the same as having 100% reserves. I don’t understand why all you very intelligent people cannot see how it is fraud.

Lets say I put 10 dollars worth of gold into this bank, they give me 10 dollars worth of CDs. Then the banking system goes out and loans 90 dollars worth of CDs as loans to people. So now the bank has 100 “dollars” in CDs (debt) but only 10 dollars worth of gold. If gold is the only thing with objective value then the amount of paper money will only be a fraction of what the gold is worth. It will have a relative price. So there is 100 dollars/10 gold, which means that each dollar is only REALLY worth 10 cents. The only thing making it worth more is the fact that the bank says its worth more. When the bank doesn’t have the government to force people into accepting the banks word on its dollars’ value, then the market will make these CDs worth what they are really worth. And thus the man who holds 10CDs because he deposited his gold will lose 9 dollars in this transaction, and the man who took the loan will owe 90 dollars when all he really received is 9 and the bank makes out like a bandit. If these people are smart enough to realize this they will go back to the bank and ask for them to make this right, and the bank will nullify the loan, and the man with the deposit will now have 10 dollars worth of CDs, and through market processes it will magically become a 100% reserve firm again. Thus it is either reserve or fraud or stupid people who don’t mind losing 90% on there transactions with the bank.

edit for content

30

One last thing I wanted to point out, look at the accounting sheet of the bank, and there you will see the fraud. The bank owes 100 dollars in CDs, and it only has 10 dollars in assets. If any business had a balance sheet that looked like this, they might be Enron.

And thus the man who holds 10CDs because he deposited his gold will lose 9 dollars in this transaction, and the man who took the loan will owe 90 dollars when all he really received is 9 and the bank makes out like a bandit.

Notice how the man who deposits the money loses 9 and the bank loans out 9. Isn’t that like robbing peter to pay paul? Then the bank has the nerve to ask for there 90 dollars back from the man they only really loaned 9 dollars to. If that was a 1 year loan that would be 1000% interest plus whatever nominal interest rate they attached to the 90. So lets say they asked 5% interest on that loan, that would make the interest rate 1050%. Who would take that loan if the bank was honest about its fractional reserve policies?

31

How would that work? Wouldn’t the lack of a national currency cause potential chaos? Even more so internationally?

Why would you want a national currency? Wouldn’t the government have to dictate what the currency would be in order to make it a national currency? That seems like government control of the free market, which wouldn’t make it a very free market.

I suggest everyone should read Murray Rothbard’s “What has government done to our money?” or Ludwig Von Mises “Theory of Money and Credit.” Both are available to read online at www.mises.org

Rothbard’s book will only take about 20 minutes to read.

Money

32

Under freedom, government will punish fraud. A bank which promises banking, but delivers the equivalent of bonds, commits fraud.

That’s not even an issue here. Don’t you think that upon openning an account, the bank would require the customer to sign an agreement notifying them it is not 100% backed?

33

Yet they will trade it for goods and services as if it is actually worth 10 dollars, when in actuality it is only worth 1 dollar. So it is fraudulent to anyone they trade with. And if they are open about the fact that there money isnt backed by gold, then who would trade with them?

The issue you bring up is not that fractional reserve banking is fraudulent, it’s whether a lying bank would trade its currency with others under the guise that it is 100% backed with gold. Sure, that’s fraudulent, but fractional reserve banking isn’t.

34

The issue you bring up is not that fractional reserve banking is fraudulent, it’s whether a lying bank would trade its currency with others under the guise that it is 100% backed with gold. Sure, that’s fraudulent, but fractional reserve banking isn’t.

Okay, so lets say all the parties consent. And anyone who holds the CDs is honest about the fact that they are not worth their face value, then why would anyone use fractional reserve banking if they stand to lose 90% of their gold’s value simply by putting it in a fractional reserve bank? When no one commits fraud everyone but the bank loses.

I concede that it is possible for it to not be fraudulent, however, I cannot see any use for that type of system because the loanee has at least 1000% interest on his loan, and the depositor of gold loses 90% of his golds value, and the only one who wins is the banker. See my example above if you don’t understand what I just said.

35

The issue is whether one can have one’s cake and eat it too. Under a fiat money, whether paper or fractional reserve, the government says you can: but in reality, once you’ve eaten your cake, you’re left with inflation.

The issue is not with the depositor. The issue is with the new and additional fiat money which the bank creates, with the blessing and protection of government, when it loans out the real money deposited while still promising that very same money to the depositor. Once the money has been loaned out, it’s eaten, and the bank no longer has it. Government treats the case as if the bank still has it.

The practical effects of fractional reserve banking and the inflation it causes are quite evident: the numerous deflation-depressions that plagued the United States late in the nineteenth century and in the twentieth century up until the Great Depression. It is the natural state of affairs that businesses sometimes fail. When they do, they default on their loans, and when they do that, the banks’ promises to keep depositors’ money safe is shown to be false. The new and additional fiat money which the banks had created via fractional reserve banking is destroyed as businesses default on loans made with it. Depositors cannot withdraw the money in their bank accounts, and when the depositors are businesses especially they no longer have the cash necessary to carry on transactions. As depositors demand money which the banks owe them but which the banks no longer have and which no longer exists, they force banks to fail. Bank failures cause further business failures, and further business failures cause yet further bank failures. The inevitable result of the inflation of fiat money or of fractional reserve money is deflation-depression. And the only agency capable of causing inflation, whether via fiat money or via fiat fractional reserve money, is government intervention in money.

Business failures and defaults on loans cannot destroy 100% reserve gold-backed money, because the gold itself is never destroyed. It is only fake money which is exposed in this way and destroyed.

36

The issue is not with the depositor. The issue is with the new and additional fiat money which the bank creates, with the blessing and protection of government, when it loans out the real money deposited while still promising that very same money to the depositor.

What if the bank does the same thing in a completely laissez-faire economy, WITHOUT any blessing or protection from the government, and with the full consent of the depositor? Would you still be opposed to it?

Once the money has been loaned out, it’s eaten, and the bank no longer has it.

The bank still has it as an asset, only it’s not cash now but a debt owed to the bank. It’s a less liquid and somewhat riskier kind of asset, but it is still an asset. Only IF the debtor defaults has the bank lost the money.

Keeping the money in gold has its risks too: The bank can be robbed and the gold can be stolen. The bank can take measures to reduce the risk of theft–just like it can exercise caution in making loans–but the risk is still there. The presence of this risk–the inability of the bank to guarantee with 100% certainty that it will still have the gold when the depositor wants it back–does not make the deposit fraudulent. The depositor knows about robbers; in fact, they are probably the very reason he wants to keep his money in the bank (assuming that the deposit is 100% gold backed, and therefore yields no interest).

Banks do offer this kind of service today, in the form of safes where you can keep your gold, jewelry, and important documents. The bank charges a fee for their use, but the clients are willing to pay that fee in exchange for the reduced risk of theft. People who don’t mind the risk of keeping their valuables at home will not take advantage of this offer by the bank, but those of them who are even more risk-tolerant might take another offer: the offer of the interest-yielding current account.

You have $100 now. By next year, you can have:

  • $99 with a probability of 99.99%, or $0 with a probability of .01%
  • $100 with a probability of 99.95%, or $0 with a probability of .05%
  • $103 with a probability of 99.9%, or $0 with a probability of .1%

If you like the first option, a safe in the bank is the way for you to go. If you prefer the second, no one is keeping you from keeping your gold in your home. If you, like me and most other people, are attracted to the third option, go to the bank and open an account.

37

I really wish someone would address the points I made. Yes, it is possible for that type of banking to be non-fraudulent. But who would participate in that type of system. If I were a bank and I had 10 dollars in gold, and then printed 100 CDs to represent that gold, what would you say the price of my CDs would sell for if the bank was honest and open about the fact that they have 100 CDs and only 10 dollars (gold)? It wouldn’t be 100 dollars, unless you had the government enforcing it like it does now.

38

I think a good example of how shady this practice is would be to pretend that I can do what a bank does. Lets say I take my printer and print off some cool looking checking deposit slips, and I give 1000 of them to you at a 5% interest rate in a loan. Right now, I only currently possess 500 dollars in money. So really I just pulled the other 500 dollars of my thousand dollar loan out of thin air, and loaned it to you with interest. If anyone figured out my scheme and that I just “made up” the other 500 dollars, the value of your CDs would drop by 50% making them worth the amount of money I have to back them up. Thus fractional reserve banking, if honest about its practices, would become 100% reserve banking through market forces.

39

I really wish someone would address the points I made.

Nimble, Has it not been addressed in the previous thread that you started? I find myself lost in these two threads, with main arguments and incidental side issues all mixed together by now. Would you like to re-cap by starting with the points on which you find general agreement in the forum, and then the points on which you’re hearing arguments you disagree with? I think that would help focus the discussion on essentials.

40

Yes, it is possible for that type of banking to be non-fraudulent. But who would participate in that type of system.

Same people who deposit money in banks today. No one is forcing them to do so, and yet they do it nonetheless. That would seem to indicate to me that they think it is in their interest.

If I were a bank and I had 10 dollars in gold, and then printed 100 CDs to represent that gold

You are begging a number of questions here: Where do you have those $10 in gold from? Why do you print CDs? Whom do you give them to? Are you getting something in exchange for them, or are you just giving them away? What is in it for you?

I’ll be charitable and assume that you really don’t know how banking works. So here is how: Jack has $10 in gold, which he does not want to spend until next year. He figures he could just keep it in a box under his bed, but the bank is offering him a deal: If he gives the gold to the bank now, the bank will give him $11 in gold next year.

“So where would that extra $1 come from?” he asks the bank.

“We would loan out your money and collect interest for it. To make it worth while for you, we pass on some of the interest to you.”

“That would sound like a good deal, but I am not completely sure I won’t need the money until next year.”

“No problem, you can withdraw any time you want. You just present your CD and we’ll give you $10 in gold.”

“But if you’ve loaned it out, it won’t be yours to give back.”

“We don’t loan all our depositors’ money out. We always maintain a reserve of gold that is sufficient to cover the likely withdrawals of our clients. If we happened to run out of gold, we can borrow some on the money market.”

“What if ALL your depositors wanted to withdraw at the same time?”

“Since we have millions of depositors from all across the country and from all walks of life, it is extremely unlikely for all of them to conspire to withdraw at the same time. Sooner will a meteor hit your house than our bank become insolvent. I grant that there is some risk involved with your deposit, but it is no greater than the general risk involved in ANY kind of business transaction.”

“Hmmm … okay, I think that makes sense. Where do I sign?”