“Hmmm … okay, I think that makes sense. Where do I sign?”
That was nice 
I’ll add (in anticipation of an objection) that the bank does have assets to cover $10 and more, even if those assets are not immediately liquid when the whole world comes calling. In fact, the bank probably has $11 of assets (the $1 belongs to the shareholders) to back up the $10 on the CD.
I’ll add (in anticipation of an objection) that the bank does have assets to cover $10 and more, even if those assets are not immediately liquid when the whole world comes calling.
Of course; that is what I spoke about in post #37. And it is also worth noting that the CD in your hands is an asset too, so if you really need the cash quickly and for some reason the bank can’t give it to you, you can sell your CD to someone, who can cash it later when the bank is liquid again.
In fact, the bank probably has $11 of assets (the $1 belongs to the shareholders) to back up the $10 on the CD.
Exactly; good that you mention this.
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.
The only reason it is in their interest is because the government decrees that those worthless CDs have value and backs it up with its power to tax, so they take a part in the cheat because they stand to benefit from it.
Second, I do know how banks work. Ever read Von Mises? He has the exact same stance I have, if you ever read Rand, you would know she agreed with him economically. I would say that Objectivism dictates my position, but that isn’t the point.
Banks do not have assets to cover their debts, and most of the time the assets they do possess will not cover their debts. For instance, when I got my car loan, the car was collateral. I paid 10,000 for the car. If the bank confiscated the car, if I default on my loan, it will not even get them close to 10,000 dollars. Paper is worthless. Lets say they print and have given out $1000 in CDs, yet they only have $100 in real MONEY gold. The paper is only worth the gold it represents. Thus all 1000 CDs only have worth relative to their gold. Thus each CD is only worth 1/10 of a dollars worth of gold. Or stated simply, they are only worth 10 cents each even though they may have a face value stated at a dollar. The bank cannot create value out of nothing. I only possess 500 dollars right now (this is my reserves). If I loaned out $5000 to my friends with interest, what would I be giving them? It doesn’t matter that I print out checking deposits slips that say I loaned them 5000 dollars, I still didn’t have the money to loan. The paper I gave them is worth considerably less than I printed on it.
Banks do not have assets to cover their debts,… For instance, when I got my car loan, the car was collateral. I paid 10,000 for the car. If the bank confiscated the car, if I default on my loan, it will not even get them close to 10,000 dollars.
This is a minor point, but your car is not an asset of the bank. The loan itself is an asset. In other words, the bank’s asset exists in the form of your promise to repay the whole amount. The car is merely extra security, as is the insurance policy that the bank will usually insist you take before they give you the money.
I would say that Objectivism dictates my position, but that isn’t the point.
What is your position? In your first post, the one that started the thread, you state that money should be private. That’s a similar stance as in second post in this thread. Basically, there was overwhelming agreement with your position from other posters, saying that Objectivism calls for separation of government and economics. It follows that money should be private.
The disagreements seem to be about how private banks might operate in a free-market, whether they will be called banks or brokers, and things like that. Or, am I missing the gist of your position?
I think it is futile to talk to nimble until he at least understands the difference between a deposit into the bank and a loan from the bank.
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?
All that would have to happen is that both sides stop considering the deposit to be a money asset, and instead to be a debt asset, because that is what it is. Unlike our society, in which government makes it easy to pass off debt assets as money assets, in a capitalist society debt assets will not be treated as money either by the government - via legal tender laws - or by anybody else.
A simple Google search picked up an essay which clarifies some ideas.
All that would have to happen is that both sides stop considering the deposit to be a money asset, and instead to be a debt asset, because that is what it is.
Is there a significant difference between the two?
A simple Google search picked up an essay which clarifies some ideas.
Good article; thanks for the link. The author is correct in his recognition that the distinction between the “warehousing” and “loan brokering” services crucial in understanding that both are legitimate ones, without any fraud or other form of force involved in either.
I do not share his prediction about what will happen in a free market, though:
Since a genuine need for safe storage does exist, there will also be someone, somewhere, who issues 100 per cent backed notes for the convenience of his customers, and those pieces of paper will circulate as money, by the natural workings of the market.
There is a need for safe storage of specific physical objects, but only in cases where the identity of the objects matters (such as jewelry, documents, or works of art). In the case of gold kept for later purchases, it does not matter if the bank returns you the exact same bar of gold you deposited or a different one (possibly of a different shape) that some other client deposited more recently. All you care about is to get back the exact same amount of gold. Because of this and because of the fact that interest-yielding “loan brokering” accounts are almost totally risk-free, clients will overwhelmingly prefer the latter.
This is a minor point, but your car is not an asset of the bank. The loan itself is an asset. In other words, the bank’s asset exists in the form of your promise to repay the whole amount. The car is merely extra security, as is the insurance policy that the bank will usually insist you take before they give you the money.
What is your position? In your first post, the one that started the thread, you state that money should be private. That’s a similar stance as in second post in this thread. Basically, there was overwhelming agreement with your position from other posters, saying that Objectivism calls for separation of government and economics. It follows that money should be private.
The disagreements seem to be about how private banks might operate in a free-market, whether they will be called banks or brokers, and things like that. Or, am I missing the gist of your position?
I am saying that in a free market, having a bank not have as much assets as it has debts, would cause the market to value the money of a fractional reserve bank less, to the extent that the fraction of the reserve that is kept would cause the value of the CDs to equal the fraction of the total CDs divided by the amount of real money (gold) in the reserve. So if a bank had 2000 CDs out standing in loans and deposits, and only 200 in reserves, their CDs would be worth the fraction 2000/200 on a free market (only if no fraud is committed). Also if you read Von Mises “Theory of Money and Credit” you would know that fractional reserve banking is the cause of inflation and the business cycle, which are both bad things.
Also…
I think it is futile to talk to nimble until he at least understands the difference between a deposit into the bank and a loan from the bank.
I have never confused deposits with loans in any one of my posts. So I do not see any truth in your condescending statement.
Here is a good selection from the Austrian School that illustrates the point I was trying to make.
We come now to perhaps the thorniest problem facing the monetary economist: an evaluation of “fractional reserve banking.” We must ask the question: would fractional reserve banking be permitted in a free market, or would it be proscribed as fraud? It is well-known that banks have rarely stayed on a “100%” basis very long. Since money can remain in the warehouse for a long period of time, the bank is tempted to use some of the money for its own account—tempted also because people do not ordinarily care whether the gold coins they receive back from the warehouse are the identical gold coins they deposited. The bank is tempted, then to use other people’s money to earn a profit for itself.
If the banks lend out the gold directly, the receipts, of course, are now partially invalidated. There are now some receipts with no gold behind them; in short, the bank is effectively insolvent, since it cannot possibly meet its own obligations if called upon to do so. It cannot possibly hand over its customers’ property, should they all so desire.
Generally, banks, instead of taking the gold directly, print uncovered or “pseudo” warehouse receipts, i.e., warehouse receipts for gold that is not and cannot be there. These are then loaned at a profit. Clearly, the economic effect is the same. More warehouse receipts are printed than gold exits in the vaults. What the bank has done is to issue gold warehouse receipts which represent nothing, but are supposed to represent 100% of their face value in gold. The pseudo-receipts pour forth on the trusting market in the same way as the true receipts, and thus add to the effective money supply of the country. In the above example, if the banks now issue two million ounces of false receipts, with no gold behind them, the money supply of the country will rise from ten to twelve million gold ounces—at least until the hocus-pocus has been discovered and corrected. There are now, in addition to four million ounces of gold held by the public, eight million ounces of money substitutes, only six million of which are covered by gold.
Issue of pseudo-receipts, like counterfeiting of coin, is an example of inflation, which will be studied further below. Inflation may be defined as any increase in the economy’s supply of money not consisting of an increase in the stock of the money metal. Fractional reserve banks, therefore, are inherently inflationary institutions.
Defenders of banks reply as follows: the banks are simply functioning like other businesses—they take risks. Admittedly, if all the depositors presented their claims, the banks would be bankrupt, since outstanding receipts exceed gold in the vaults. But, banks simply take the chance—usually justified—that not everyone will ask for his gold. The great difference, however, between the “fractional reserve” bank and all other business is this: other businessmen use their own or borrowed capital in ventures, and if they borrow credit, they promise to pay at a future date, taking care to have enough money at hand on that date to meet their obligation. If Smith borrows 100 gold ounces for a year, he will arrange to have 100 gold ounces available on that future date. But the bank isn’t borrowing from its depositors; it doesn’t pledge to pay back gold at a certain date in the future. Instead, it pledges to pay the receipt in gold at any time, on demand. In short, the bank note or deposit is not an IOU, or debt; it is a warehouse receipt for other people’s property. Further, when a businessman borrows or lends money, he does not add to the money supply. The loaned funds are saved funds, part of the existing money supply being transferred from saver to borrower. Bank issues, on the other hand, artificially increase the money supply since pseudo-receipts are injected into the market.
A bank, then, is not taking the usual business risk. It does not, like all businessmen, arrange the time pattern of its assets proportionately to the time pattern of liabilities, i.e., see to it that it will have enough money, on due dates, to pay its bills. Instead, most of its liabilities are instantaneous, but its assets are not.
The bank creates new money out of thin air, and does not, like everyone else, have to acquire money by producing and selling its services. In short, the bank is already and at all times bankrupt; but its bankruptcy is only revealed when customers get suspicious and precipitate “bank runs.” No other business experiences a phenomenon like a “run.” No other business can be plunged into bankruptcy overnight simply because its customers decide to repossess their own property. No other business creates fictitious new money, which will evaporate when truly gauged.
The dire economic effects of fractional bank money will be explored in the next chapter. Here we conclude that, morally, such banking would have no more right to exist in a truly free market than any other form of implicit theft. It is true that the note or deposit does not actually say on its face that the warehouse guarantees to keep a full backing of gold on hand at all times. But the bank does promise to redeem on demand, and so when it issues any fake receipts, it is already committing fraud, since it immediately becomes impossible for the bank to keep its pledge and redeem all of its notes and deposits. [15]Fraud, therefore, is immediately being committed when the act of issuing pseudo-receipts takes place. Which particular receipts are fraudulent can only be discovered after a run on the bank has occurred (since all the receipts look alike), and the late¦coming claimants are left high and dry."
If the bank is not fraudulent about its practices and admits that its paper money (CDs) are not equivalent to the real money (gold), then the value of the CDs will fall to the right fraction of gold that they should represent (as I showed in many above posts). First, the practice of inflating the money supply is not beneficial at all economically. If the money supply increases, have capital goods, labor, or production increased? NO! So, what benefit does having more money in an economy have economically? None. It only causes inflation. Second, if gold is the medium of exchange, (not paper) why would the paper be worth the equivalent of gold when the ratio of CDs to gold is not 1:1 (or 100%)? If you can get passed those two issues you might have a case for fractional reserve banking, but you won’t be able to. I think what you guys are arguing for is not a fractional reserve bank, but a financial planning firm, that you agree to “loan them” your money, then they take risks with your money (loan it to another at a higher interest rate than they are paying you), and meanwhile, you cannot redeem your money until they have received payments for the loan adventure they made on your behalf. That isn’t a bank at all. And that isn’t fractional reserves. Its financial planning.
Also, I particularly liked this overview at the end of Rothbard’s “What has government done to our money?”
What have we learned about money in a free society? We have learned that all money has originated, and must originate, in a useful commodity chosen by the free market as a medium of exchange. The unit of money is simply a unit of weight of the monetary commodity—usually a metal, such as gold or silver. Under freedom, the commodities chosen as money, their shape and form, are left to the voluntary decisions of free individuals. Private coinage, therefore, is just as legitimate and worthwhile as any business activity. The “price” of money is its purchasing power in terms of all goods in the economy, and this is determined by its supply, and by every individual’s demand for money. Any attempt by government to fix the price will interfere with the satisfaction of people’s demands for money. If people find it more convenient to use more than one metal as money, the exchange rate between them on the market will be determined by the relative demands and supplies, and will tend to equal the ratios of their respective purchasing power. Once there is enough supply of a metal to permit the market to choose it as money, no increase in supply can improve its monetary function. An increase in money supply will then merely dilute the effectiveness of each ounce of money without helping the economy. An increased stock of gold or silver, however, fulfills more non-monetary wants (ornament, industrial purposes, etc.) served by the metal, and is therefore socially useful. Inflation (an increase in money substitutes not covered by an increase in the metal stock) is never socially useful, but merely benefits one set of people at the expense of another. Inflation, being a fraudulent invasion of property, could not take place on the free market.
If inflation is a result of a increase in the money supply, and inflation also is a tax on the holders of money. Both economics definitions, then we can deduce that when a bank causes inflation it basically taxes both the depositor and the loanee for the benefit of the bank who holds the real money (which wont lose its value) and lets its fiduciary media lose value which luckily it isn’t holding, the depositors and the loanees are holding. Thus giving the bank stolen real value. And even if all parties enter this willingly, the bank is at least not giving its customers a very good deal, which makes me think that on a free market, there would be no use for a business that screwed over its customers.
nimble, you can’t expect us to take you seriously until you quit quoting losertarian frauds like Rothbard.
nimble, you can’t expect us to take you seriously until you quit quoting losertarian frauds like Rothbard.
I cannot believe you just said that. Anyone who believes in reason and logic should know it is the argument you must attack, NOT the person. I just lost alot of respect for you there.
nimble, you can’t expect us to take you seriously until you quit quoting losertarian frauds like Rothbard.
Also, Rand was able to still like Von Mises even though he was an anarcho-capitalist. She mentioned that he is the economist to read, if you want to understand economics. Rothbard is Von Mises closest pupil, and he has the EXACT same stance on money, read “Theory of Money and Credit.”
.. Von Mises even though he was an anarcho-capitalist.
Ludwig von Mises is, from what I have read, most known as in favour of a minimal government. Rothbard coined the term anarcho-capitalism but I don’t think he managed to persuade von Mises to change his opinion on politics. On economics though they are much the same, and to dismiss Rothbard on economics just because you don’t agree with him on politics is a bit silly in my opinion.
Ludwig von Mises is, from what I have read, most known as in favour of a minimal government. Rothbard coined the term anarcho-capitalism but I don’t think he managed to persuade von Mises to change his opinion on politics. On economics though they are much the same, and to dismiss Rothbard on economics just because you don’t agree with him on politics is a bit silly in my opinion.
Oh, I didn’t know Von Mises wasn’t an anarchist. The language he uses everytime he mentions government made me think he was, although I guess he never explicitly stated it in any thing I’ve read of him. Thank you for that information.
So, paper money and coinage should not be manufactured by the government.
<{POST_SNAPBACK}>
Ever since the Federal Reserve Act, our money, paper and coin alike, has not been in the hands of the government, but the FED, which is a private organization.
The reason the Constitution specifically gave Congress the responsibility–and the reason we got together to create the document in the first place–was that each of the colonies had their own currency based on fiat paper money. The FED, being a private corporation, is not restricted to the Constitution, as Congress is. The Federal Reserve Act is a fraud anyhow, since Congress cannot pass off their responsibilities to someone else, just as a traffic cop cannot hand over her/his responsibilities to a Citizen.
Antony Marcus Reed
to dismiss Rothbard on economics just because you don’t agree with him on politics is a bit silly in my opinion.
I deeply disagree with Rothbard on philosophy. That is reason enough to dismiss him on all that depends on philosophy–which is EVERYTHING.
Ever since the Federal Reserve Act, our money, paper and coin alike, has not been in the hands of the government, but the FED, which is a private organization.
That alone would not be a problem. The problem is that it is a private organization enjoying a monopoly granted and enforced by the government.
The reason the Constitution specifically gave Congress the responsibility–and the reason we got together to create the document in the first place–was that each of the colonies had their own currency based on fiat paper money.
Replacing many small evils with one big evil is not something I call a solution. And I’m sure the Founders would disagree with you that “the” reason–or even “the main reason,” or “one of the main reasons”–for writing the Constitution had anything to do with currency.
Anyone who believes in reason and logic should know it is the argument you must attack, NOT the person.
Not true, if the person is the problem.
I deeply disagree with Rothbard on philosophy. That is reason enough to dismiss him on all that depends on philosophy–which is EVERYTHING.
Do you agree with Newton, Turing, Bohr, Tesla or Cantor on philosophy? Does mathematics, physics and computer science depend on philosophy?
Rothbard’s character and ‘philosophy’ has no bearing on whether his arguments on a specific topic are valid. I disagree with Rothbard’s general stance, but have found several of his essays quite lucid.