But the more fundamental disagreement is about fractional reserves.
I disagree, but I have nothing more to add to what I’ve already written. Yeh, it looks haphazard as it is, and a big clean-up is in order, but here is not the place. My own work besides my thoughts is just a set of notes and observations rather than a fully-written chapter for another’s reading. I’ll get around to that eventually.
There is nothing wrong with defining a concept for both an action and its consequence
There is if the aim is to keep in mind the natures of different causes with similar consequences for the immediate future but which causes lead to different paths of consequences as time passes. Calling different causes by the same one used-daily term obscures this crucial difference.
I still don’t quite see what essential characteristic is supposed to unite those actions.
The one thing that unites them (fiat paper, deliberate FRB, incidental FRB, and so on) is the injection of something valueless into the money supply. The immediate consequence is a fall in the purchasing power of a unit - but this is because the value of the existing units is being diluted by the addition of the new units. The man doing the injection is thereby gaining a value without producing a value. It is right that this injection, dilution and value-shift be identified with a term whose application is consistent with its original meaning, consistent with its opposite term, and which non-virtuous actions are validly labeled with a pejorative too.
In contrast, an increase in the gold (or silver or whatever) in circulation is objectively differentiable from all the variants of the above because it is the addition of what really is valuable into the money supply. The immediate consequence is also a fall in the purchasing power of a unit - but this is because of the operation of the Law of Diminishing Marginal Value taking place because of the fungibility of the existing units with the new units. The man doing the addition is gaining a value by producing both a value and an earned profit to boot. It is wrong that this addition and profit-generation be identified with a term whose application is in contradiction with its original meaning, in contradiction with its opposite term, and which virtuous actions are unjustly labeled with a pejorative.
Pepsi Guy!
Pepsi-MAX to be precise :o Cheers, mate!
The bank has a right to use whatever terminology it pleases as long as it is clear to customers what the bank means.
No, it does not. This is crossing over into contract law and the law’s recognition of the meaning of words. In a personal context you can do as you like, but in a formal setting with strangers involved and there are legal expectations and presumptions everywhere a slide in the meaning of the words is coming perilously close to fraud. Indeed, in the early days when FRB got started it damn well was outright fraud.
It’s the same principle as gays having every right to expect the government to recognise the existence of and protect the content of their contract of personal partnership but being disallowed from calling it marriage because (amongst other reasons) there are third-party legal ramifications relating to that term and related ones like husband and wife. For instance, an insurance contract may specify special deals for married couples. If the government legally recognises a shift in what ‘marriage’ refers to then it is engaging in the use of force to unilaterally alter valid contracts to suit a social agenda - which is exactly why the activists are out to have the government do that.
The present usage of “deposit” is only not outright fraud today because everyone has sort-of gotten use to the new arrangement, but that does not make it right. A key point in this is that the slides in the meaning of ‘deposit’ and of related concepts such as “I have X money in the bank” have not gone so far as to make the redemption of the term more trouble than it is worth. As well as noting the proper use of the term in “safety deposit box” and of law relating to them accordingly, have a look at what people actually think and do. Note that most people aren’t in fact fully aware of what’s going on but instead they only have a vague notion whose implications have not sunk in. To this day a lot of people still say “it’s MY money” and are almost totally unaware of their status as creditors under the present legal situation. Notice how people get upset and immediately think of theft or other wrong-doing when banks go under? This is not simply dislike of financial institutions - notice how indignant they get when they find out that they are unsecured creditors and that as a consequence of this they are way way down on the priorities order to get funds back. As far as I can see (I’d have to do more research), nobody with any clout has taken it upon themselves to address the matter clearly even though it is often a newsworthy matter and an important talking-point in discussions of reform of banking law and practice.
For someone in a bank or the legal justice system, or theorists for both, to deliberately seek to maintain that state of affairs while knowing of its nature and importance is fraud - but I wouldn’t automatically make judgements about banking and legal people’s characters on this score because with the state of today’s education they are likely as muddled as everyone else, too. One of the solutions to the “unsecured-creditor problem” that has been mooted is to change banking law to rearrange the order of creditor claims priorities, as had already been done in relation to tax liabilities and employees’ back-pay. This is highly improper as again it is the unilateral change of valid contracts by force to suit a social agenda. The proper solution is indeed the redemption of the word “deposit” and all the practical consequences that flow from this.
(ps: it’s funny that I should be re-listening to Dr Peikoff’s Art of Thinking, and have not long past the part where he was stunned that Miss Rand could validly link economics and sex. Now I know how that works 
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What is a paper dollar bill going to denote, if not a bank’s obligation to pay the bearer a certain fixed sum in gold, independent of who presents it and when? A profit-oriented bank will not issue bills unless it can make money from doing so, which means that it either has to charge for the storage of gold an amount proportional to (or otherwise dependent on) the time of storage–or earn interest by lending out a carefully chosen portion of the gold.
I am not a gold bug, but for simplicity let’s just say gold=money and it’s $20/oz.
A bank note is when the bank holds gold that it owns, as distinct from holding gold that its customers own. FRB for for notes is when the total nominal value of those notes and coins is greater than the amount the bank actually holds (deliberate FRB is when the bank does this intentionally, while incidental FRB is when it arises because the reserves are stolen or lost). You’re missing out on other ways a bank can earn revenues. A bank can make money by issuing notes even without resorting to FRB, by two methods.
The immediate source of revenue is seignorage. A customer with some gold walks into the bank with want of something easier to carry around (whether too heavy or too fiddly). There is more value in the note than the gold because of that ease, which is why the customer wants the note rather than the gold. The bank will then not exchange exactly 1 ounce for $20 but require say 1.02 ounces per $20. This is no different to that same arm of the same bank taking raw gold and minting coins with it, again for seignorage. This is also no different from the wider principle of the bid-ask spread. In the other direction, a note presented for redemption must get back exactly what it says, ie $20 -> one ounce, because the issuer is contractually bound to do so.
Certainly, a bank could issue bills of exchange drawn upon its own reserves, and today there is still some circulation of these in the place of money (the last figures I saw put the negotiation of bills as being roughly a quarter of the total amount spent to acquire bills), but bills tend to be high-value instruments rather than the notes and coins you’re thinking of. They also presently attract stamp duty, which in a laissez-faire world would become the voluntary kind Miss Rand wrote about as being required for a court to hear a dispute relating to them. That part would be unlikely in relation to notes and coins.
The other and more diffuse source of revenue is the advertising effect of the note. A bank having its notes in circulation is effectively a bank having great numbers of its advertising flyers in people’s pockets and regularly being made visible when spent. The very fact that people would trust the bank enough to keep and use the note will itself help further that bank’s reputation and gain more customers for the banks’ other services - that is no trivial value. The advertising effect will also reduce the amount of seignorage the bank will charge for the issue of those notes (and minting of coins).
As a historical note, there was a drawn out process of the US government deliberately destroying the advertising effect over the course of the decades leading up to the founding of the Federal Reserve System. Initially, notes were distinctive to each bank, but over the years (starting with the Civil War and the greenbacks, I think?) regulations on note design became ever more restrictive and aimed at uniformity, so that by the founding of the Fed the notes were more or less indistinguishable from each other. With that (and other things) in place it was a cinch for the Fed to monopolise note issue without requiring any change in people’s attitudes towards what notes they used. The founding of the Fed and its machinery was not all some sudden thing, but a coup that had been planned for a very long time and had been implemented bit by bit.
If the bank could not earn interest, a bill issued for depositing a $1 coin today would be worth $.95 next year, $.90 in two years, $.85 in three years–and $.72291666666… in 5 years, 6 months, and 15 days.
During which time the bank should have made additional earnings by wisely using the initial seignorage revenue it earned by parlaying it into other business activities whose customers had been drummed up by advertising. If a bank did well, then of course it will have no problems in redeeming face value of its issued notes just as the law of contract requires it. If a bank did not then that’s on the shareholders’ heads, and if in the face of this the bank does not fulfill its contractual obligations by redeeming the note at face value then it is acting illegally.
If you had ten dollar bills in your wallet, you would have to look at the date on each of them, compute the number of days since then, then look at the bill to see what the bank charges for keeping, multiply the number of days with the charge, and substract it from the nominal value of the bill–all this just to find out how much money you have on you.
The charges had already been paid by whoever first bought the note from the bank with gold, and so play no further part in valuation. After that the note can trade freely on its face value without anyone else having to make calculations - unless it is known or suspected that the bank practices FRB in relation to notes issue, in which case a risk premium is used as a discount factor. That is actually how it used to be done, and financial ratings agencies regularly published their opinions about the solvency of banks for the purpose of helping people form opinions about how to discount notes. Time-preference only enters into people’s valuation of notes insofar as it affects the entire phenomenon of the demand for money as such, irrespective of whether that money consists of gold or notes.
But in exchange, you can be 100% sure that the bank will be able to give you nice and shiny gold coins if for some strange reason you suddenly develop an urge to have them–instead of the 99.9999% assurance you would have with fractional-reserve banking. That a good deal?
Not if the bank’s reserve policies or its key officers are irrational or unpredictable, no. Any practice of FRB that would rationally give rise to 99.9999% confidence on the part of bank customers would involve an X so close to 1.00 as not to be worth the bank’s administrative trouble to practice it at all. Making FRB worthwhile would mean doing it far enough to earn an interest on the fiduciary money lent out to cover the administrative overhead it generates, and so would mean a confidence level significantly less than 99%. That’s not likely in a world populated by rational people because they know that the bank adds nothing to the economy in doing so and makes that bank less solvent, and so they would shun that bank. That’s why I think there would be little departure from 1.00.
Gold coins are weighty for big sums and fiddly for small (a gap that silver can fill, to a point), but have the upside of being the real thing and possesses all those attributes that made gold the objective choice for money in the first place. Money substitutes are easier to use physically, but have the downside of users having to pay heed to issuers’ rationality, which is not always easy to judge. There is a trade-off there that anyone who has the option between them has to make. Nothing can absolve a man of the responsibility to judge that trade-off for himself. IMHO, one of the reasons for public support for central banking is that it allows men the illusion of escape from that responsibility. The publications of those ratings agencies, for example, were often hefty tomes and had price tags to match, so naturally the sirens’ singing of eliminating the need for them drew many to the rocks. The supposed-benefits of FRB are a major theme in that song, but not the only one.
JJM
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