The unforgivable stupidity of the anti-banking “libertarians”

At the recent Mises Seminar in Sydney there was a speech by Chris Leithner that explicitly called for the banning of fractional reserve (FR) banking. Leithner and other Australian libertarians (including Michael Conaghan & Benjamin Marks from Liberty Australia) follow the lead of some American libertarians (Walter Block, HH Hoppe, JG Hulsmann — BHH) and argue that FR-banking is fraud and should be banned, and further that it is economically damaging and causes inflation.

These two issues need to be addressed separately. The first is a deontological issue about whether FR-banking is consistent with a free world. The second is a consequentialist issue about whether FR-banking leads to bad outcomes. It is possible that FR-banking is consistent with freedom and yet leads to bad outcomes, and then those libertarians who accept the “non-aggression principle” would have to tolerate FR-banking even if they don’t like those outcomes. But before delving into that debate, it is worthwhile quickly explaining what we are actually talking about with FR-banking.

Vaults, loans & banks

Anything can be money. In jail (and POW camps) cigarettes have been used as money. In the early years of Australian settlement, rum was used as money. In some small island nations, shells have been used as money. Through much of history, precious metals (especially gold and silver) have been used as money. And today, the most common sort of money is “fiat” paper money that is created by government but is intrinsically worthless (ie it has no value except as money). This is not the place to go into a debate about what should be money or who should decide, but the important point is simply that there is some original supply of money that then becomes the standard “unit of account” and “store of value” and “medium of exchange” in an economy. For the sake of this discussion, this original supply will be called “base money” and in Australia it is created by the Reserve Bank of Australia (RBA).

As soon as money existed, people founds ways to store their money. One option is to put it in your wallet. Or under your bed. Or you could put the money in a vault to make it more difficult to steal. These options have always existed, and they still exist today.

And while many religions have frowned on “usury“, the idea of lending money is also an ancient concept. You sister needs to borrow $10 for the bus, and so you give it to her on the understanding that she will pay you back when you see her next.

But providing “vault services” or even “simple non-tradable loans” is not really banking. For all intents and purposes, when people talk about banking they are talking about FR-banking, which involves another important step. The innovation that gave rise to modern banking was the idea that you could have a secondary market for loans. That means that after you lend $10 to your sister, she gives you an IOU$10 voucher. That IOU$10 voucher is a “financial asset” that you can then sell to somebody else.

If the IOU$10 voucher is widely accepted as being worth the equivalent of $10, then it will circulate in the economy similarly to the original $10. This is why some people say that FR-banking allows for the “creation of money out of thin air”. They are partially right. To be more specific, the “IOU$10 voucher” is actually credit (not base money). However, if the credit is traded like base money then it too becomes a “store of value” and a “medium of exchange” and so the base money (created by the original money supplier) and the credit (created by the people who created the loan) are fungible.

If we allow people to voluntarily create and voluntarily trade in financial assets, then we have allowed FR-banking.

Modern banks accept “deposits” from savers, which basically is the creation of a financial asset. The bank now has your $50 deposit, and you now have a financial asset called “IOU$50 voucher” from your bank. If people are willing to voluntarily accept your financial asset as money (for example, when you use EFTPOS or B-Pay) then there is now effectively $100 in the economy — $50 base money held by the bank (which they can then use), and $50 credit held by you (which you can use).

It is worth pointing out that credit is risky. The person (or bank) who owes you money might not pay it back.

So why would you be willing to exchange $50 of base money for $50 of credit? Probably because it is (1) safer from thieves; (2) more convenient for transactions; and (3) the bank may offer you interest. But for whatever reason, when you deposit with a bank you are engaged in FR-banking and the creation of credit. Congratulations. It is this action that Leithner, BHH & friends want to ban.

One consequence of FR-banking is that if the money supplier creates $100, then there will be more than $100 circulating in the economy. Indeed, it is quite easy for the amount of “credit” to exceed the amount of “base money”, and this is the case in all modern economies. The relationship between (base money) and (base money + credit) is called the “money multiplier” or the “credit multiplier”. For example, if the base money supply is $100 and the credit multiplier is 3 then the (base money + credit) is $300.

There is one more small point to note here before going on. It is possible for the same $1 to be spent several times in the same day. If I go out and spend $20 on lunch then there might have been $20 circulating that day. But if the lunch seller then uses that $20 to buy a hat, then actually $40 has circulated. If the hat seller then uses the same $20 to buy movie tickets then $60 has circulated. The multiple use of the same money is called “velocity”. With all of these concepts in mind, we can now define:

Broad money = base money * credit multiplier * velocity

For most of this article we will ignore velocity, but it is important to know that it exists to have a full understanding of monetary economics. As far as I know, not even Leithner, BHH & friends want to ban the same-day re-use of money and so they don’t object to the existence of velocity.

FR-banking as fraud

Since Leither, BHH & friends claim to be strict libertarians, they can only justify their call for a ban by arguing that FR-banking is fraudulent. But here their argument immediately runs into trouble, because people who enter into FR-banking contracts do so voluntarily and then they clearly follow the rules of their agreement. Where is the fraud?

Hoppe responds by saying “two individuals cannot be the exclusive owner of one and the same thing as the same time” (quoted in BHH, 21) and then BHH go on to say “yet this, precisely, is what a fractional reserve agreement between a bank and a customer involves” (22). This is an extraordinary admission of ignorance. Under FR-banking there is no instance where two people own the same thing. When you deposit $50 in a bank the bank now owns the $50 base money and you own the IOU$50 financial asset. They are two different things.

Leithner makes a similar argument, saying: “It’s also logically impossible for two people simultaneously to own the same item of property. They may, of course, say or even certify otherwise — just as I may say, certify and sincerely believe that 1 + 1 = 3 or that I own a kangaroo that can speak Finnish”. Leithner is of course correct that two people cannot simultaneously own the same item, but FR-banking does not involve simultaneous ownership (or talking kangaroos). Like BHH, Leithner is showing that he simply doesn’t understand how banks work.

It is actually astounding that we should even be having this discussion, and it deeply embarrassing for Leithner, Block, Hoppe and Hulsmann.

BHH go on to say that the creation of new credit (which they call “fiduciary media”) does not create any new property. That is true, but also blindingly obvious and totally irrelevant.

At one point BHH imply that the simple act of creating credit is fraudulent, saying that because credit comes “out of thin air” and because it isn’t linked to new property then the existence of credit “in and of itself, constitutes fraud” (22). Wow. They are literally saying that it should be illegal to give somebody a loan, since the act of giving a loan creates credit. Their basic problem here is that BHH don’t understand that “base money” and “credit” are different things, and so they think that credit is fraudulent because it pretends to be base money. But the simple truth is that base money and credit are different things, as explained in the introduction to this essay. This sort of undergraduate mistake makes BHH painful to read and utterly meaningless.

Suffice to say, if two people voluntarily agree to a loan, there is no fraud. This is true under any definition of contract. It also doesn’t matter if you call the newly-created credit a “financial asset” or “fiduciary media” or “widget” or whether we discuss the issue in French or Chinese or Esperanto. Saying that “credit is fraud” is no better than the pointless communist slogan that “property is theft”.

But if BHH allow loans to exist, and they allow people to voluntarily trade in the consequent financial assets, then they have allowed FR-banking. So they really are caught.

That is the end of BHH, but Leithner comes back with one more argument. He claims that putting money in an FR-bank cannot be called “deposit” because that word has some sort of sacred meaning that can never be violated. Consequently to misuse the sacred word is to commit fraud, even if the definition of the word is clearly stipulated in the contract. It is not clear why Leithner thinks he has divine inspiration about the “one and only correct” use of one specific word in the English language, but part of his justification seems to be the rules of Rome 2000 years ago.

This is an amazingly shallow argument, that rests entirely on a pointless semantics game. If every bank did a “find and replace” in their contracts and changed the word “deposit” to “pedosit” (or whatever other word you like) then the exact same system of banking would exist and Leithner could have no more objection. Further, Leithner’s complaint must disappear for the banking system of any country that doesn’t use English (unless Leithner’s divine language powers extend to other languages too). And finally, if we use a standard dictionary instead of the Leithner dictionary, then we discover that the word “deposit” is already accepted to mean money placed in a FR-bank account.

In a final desperate attempt to salvage the “fraud” theme, Conaghan argues that he accepts people’s right to create credit (which he also calls fiduciary media), but his “problem is when that gets traded with someone who isn’t aware, thinks that the promissory note is backed by something and later finds out it’s not”. In other words, Conaghan is worried that when you offer to pay using EFTPOS or B-Pay, the seller may not know that you are using EFTPOS or B-Pay. Once again — wow.

One of the Austrian economists who are caught semi-defending BHH & friends is Stephan Kinsella, who concludes that “the solution is for the bank to be very clear about what they are doing … as long as things are clear, we have no fraud, no problem”. There is nothing particularly wrong with this sentiment, except that banks are already extremely clear about what they are doing. It is in the contract you sign with the bank. It is in every banking and finance textbook. It is blindingly obvious if you think about banks for more than 5 seconds. And if you’re still not sure, you can simply ask your bank, and they will tell you to your face how banking works.

FR-banking as dangerous

While the “fraud” arguments are embarrassingly silly, the arguments about the consequences of FR-banking are more complicated. Allowing people to make and trade in financial assets has a number of consequences, some good and some ambiguous.

The main benefit of allowing trading in financial assets is that it provides more efficient matching between savers and investors. This means lower real interest rates for borrowers and higher real interest rates for savers — which leads to more saving and investing. Basically, FR-banking reduces transaction costs in the inter-temporal market, and so the invention of FR-banking was an amazing economic innovation that allowed for a significant increase in real investment and capital accumulation. It is no surprise that the growth of FR-banking is correlated with economic development.

If we were to ban the creation of credit, then there would be no matching between savers and borrowers, and so significantly less investment. Even if we take the watered down “you may make loans, but not trade in them” then there would be much higher transaction costs as you could only borrow from somebody who had the exact same debt-maturity preferences as yourself. This also would significantly reduce investment, therefore reduce capital accumulation and economic growth.

The obvious benefits of FR-banking is further shown by “revealed preference”, where people who have the choice between FR-banks and vaults overwhelmingly chose to put their money in FR-banks. If FR-banks provided no benefit, then why have they been so popular? Selgin and White make this point, but unfortunately it was too complicated for BHH to understand. In response, BHH try to draw an analogy between “voluntarily dealing with banks” and “involuntarily having to deal with government”, but amazingly fail to understand that the former is voluntary and the latter is involuntary.

There is another consequence of FR-banking that is harder to assess — and that is the impact on broad money, monetary distortions & the business cycle.

Here it is necessary to quickly review some monetary economics. When the amount of broad money increases faster than the amount of production, then there will be inflation. When the amount of broad money increases slower than the amount of production, there will be deflation. If all prices adjusted instantly then there would be no problem (money neutrality). But prices do not adjust immediately or uniformly around the economy, which leads to mal-investment and artificial boom/bust cycles (also called “monetary distortions”). This is the short version of the Austrian Business Cycle Theory. So far, so good.

Critics of FR-banking point out that allowing credit will mean that broad money is higher than base money (due to the credit multiplier), and that this must be inflationary. The most simple form of this argument rests on a confusion between “stocks” and “flows”. It is true that if you suddenly introduced FR-banking then broad money would increase by the amount of the credit multiplier… but the simple fact is that we already have FR-banking and we already have a credit multiplier. So long as the credit multiplier doesn’t change, then it will not impact on the amount of broad money (and so it will not impact on inflation).

A more nuanced argument is to point out that the credit multiplier does change, and that a sudden and significant change in the credit multiplier will create a sudden inflationary or deflationary distortion. This is true, but it begs the question “why does the credit multiplier change”? Put another way — “why would people/banks be more willing to give loans”?

On this issue, BHH actually agree with Seglin and White and other libertarians that in a free market people/banks will be more willing to give loans because there are more productive investment opportunities. The logical consequence of this is that the increase in the credit multiplier (and consequently broad money) will be related to an increase in production, and so there would be no significant monetary distortion. Indeed, as Seglin and White explain, the growth of the credit multiplier would be necessary to prevent a potential deflationary monetary distortion. But while BHH effectively admit that FR-banking doesn’t cause inflation, they go on to argue that prices adjust instantly and so there is no such thing as “monetary distortion” anyway. They don’t seem to realise that such a situation of money neutrality makes the whole debate irrelevant and FR-banking perfectly benign.

Opponents of FR-banking could perhaps claim that people/banks will start providing more loans due to “animal spirits” or “irrational exuberance” or some other random force, and this is possible. It is certainly true that when you allow people to provide loans (or undertake any activity), they may make mistakes. If enough mistakes are made, then it could create a monetary distortion. However, this potential cost must be weighed against the above benefits. Further, it is worth remembering that monetary distortions can easily be created even without FR-banking (a sudden change in production, or the base money, or velocity) so banning FR-banking will not prevent monetary distortions.

We don’t just have to rely on theory about FR-banking and inflation; we can look at the evidence. During his speech at the Mises Seminar, Chris Leithner claimed that FR-banking caused inflation. He then proceeded to show a graph of price changes over the 19th and 20th century which showed mild deflation over the 19th century and then continued inflation in the 20th century after the introduction of government central banking. What Leithner failed to notice was that FR-banking existed all throughout the 19th century, and yet it didn’t lead to inflation. In other words, he proved himself wrong.

There is one other reason why people may complain that FR-banking is dangerous, and that is the possibility that FR-banks could go bankrupt. That is certainly true, but it is also true for any other business in the world. When you give money to a bank, or any other business, you need to take responsibility for the risks you take. If you give money to a high-risk bank (presumably for higher interest) then you must accept the possibility that you could lose some of your money.

To each their own

The beautiful thing about a free economy is that if people have different preferences, they can buy different things. Under “free banking” there would be competition between different money suppliers, and competition between different banks, each offering their own products. There is no need for BHH to determine the “one true way to bank”, just as we don’t need to determine the “one true way to bake bread”. In a free economy, we can simply allow people to make their own choices, and the more effective system is likely to win out.

There are of course many problems with the current monetary system, and those problems were a significant cause of the American financial crisis. Key among these problems were government mismanagement of money supply (printing too much money) and moral hazard where the government effectively subsidises bad banking decisions, and so they get more bad banking decisions. Austrian economics has a lot to say about these matters, and the economic discussion would improve significantly if Austrian ideas were better understood. Unfortunately, while we have some Austrian economists arguing that “credit is fraud” and wanting to effectively ban banking, it will be hard for the broader economic community to take us seriously.

 

Originally published at my personal website johnhumphreys.com.au

136 thoughts on “The unforgivable stupidity of the anti-banking “libertarians”

  1. Just to start the comments rolling-
    FRB should be thought of as gambling. People going in know the risks, and still choose to use banks. Since no coercion is being used, no one should pass laws against it.
    If people are opposed to it, they could start their own bank, and issue money with full backing, and we will see which one people choose to use.

  2. Fractional Reserve Banking would be ok if banks did not have limited liability.

    Ultimately, losses should be borne by one of the contracting parties not society in general. By giving limited liability to shareholders, and taking their place in guaranteeing deposits, the government screws up accountability in the financial system.

    Consequently, I support the FRB skeptics. While I don’t think we are likely to get rid of limited liability any time soon, I think we can end government exposure with the following measures:

    1. ADI’s to operate as trust banks. Every bank account is held in trust and the depositor picks the underlying securities they want their funds invested in. As all exposures are then on the market, and if you want a government guarantee, you pick to invest in government bonds.

    2. Portable lender’s insurance. This is already underway in the recent banking reforms, and is not really controversial. One important aspect, though, is to ensure that mutuals such as credit unions are allowed to provide it.

    The use of mutuals in providing the inusrance provides an excellent benefit: the financial instutions themselves become risk free. Their only concern is to be dutiful trustees processing transactions effeciently. They don’t end of taking positions which, given their “too big to fail” size, put whole economies at risk.

    Where does the risk goin this scenario? In the first place, to the remaining borrowers. This actually makes sense – in the scenario of a failure, they have been paying an interest rate which is too low for the risk they represent. The mechanism for this is simply a reduction in an interest rebate paid to the mutual’s members.

  3. Technically the loan you mentioned early on is splitting up money along the horizontal axis. A promise to relinquish money in the future but hold it until then is dividing the ownership between now and the future. So two people own the same money, but they own different portions of it (present and future). It’s not literally double-counting money, since in the future the possession shifts; there’s never a point where the same temporal slice of value is owned and tradeable by different owners.

    In a way, it’s no different from selling one half of a parcel of land. You’re dividing property between two owners, but instead of dividing it physically, you’re dividing it temporally.

  4. I can’t tell if you’re entirely against limited liability, or only against it for shareholders and partners, but either way you’re more or less talking about the abolition of modern investment-driven capitalism.

    If investors are risking their house, their car, their pensions, and their kids’ college funds by investing or owning a business, then the risk of doing business goes up enormously. Everyone would want to be an employee, rather than owner, to shift the risk onto somebody else. No large enterprises would survive because you’d have total exposure of all your assets based on the riskiest behavior of your dumbest partner or employee.

    Of course, given the enormous economic benefits of limited liability, if one country abolished it then international commerce would proceed apace, with multinationals choosing to relocate to more favorable jurisdictions. If possible, they’d structure their affairs to mostly keep assets in foreign bank accounts out of the reach of the liability-heavy jurisdiction. International trade would severely undermine the reach of any wayward governments.

  5. What I’m against is limited liability where losses are borne by government, and thereby the taxpayer, who has had no say in the suitability of the original capital investment. This appears to be unique to the banking and finance sector, and the moral hazard created is doing enormous damage.

    Most limited liability is ok, since, outside of the banking and finance sector, losses are carried by the creditors who are, in general, contracting parties, and should have done due diligence before extending credit.

    The objections to privatised gains and socialised losses are well founded. Ultimately, it’s a question of accountability. Scapegoating the taxpayer means bad decisions.

  6. I think where your premise goes off is that you have this odd assumption that when a deposit is made into a bank, that ownership of the base money is transferred. Possession is transferred; that is the point. Ownership is not. The bank does not owe me money, it holds it on account for me. It remains ‘my money’.

    If you forget this, you end up in the same sort of poo as MFGlobal (not a bank, I know, but still a current example) which suffered catastrophic losses investing its clients assets.

    Now an arrangement may be reached by which ‘my money’ may be invested for a time by the bank for benefit to us both; this leads to ‘term deposits’, with the notable characteristic of ‘matched maturities’.

    But this is only an adjunct to the primary function, which as pointed out above, is storage.

  7. What you call an “odd assumption” is close to a fact. Check the contract you signed with your bank. The bank has the right to use the money you have given them.

    The primary function of banks is *not* storage. The primary function of vaults is storage. The primary function of banks is to match loans of different maturities and different liquidities. And it is all done voluntarily.

  8. We don’t need to have limited liability introduced by the government. The same thing could be achieved quite easily through contract law where anybody dealing with a company voluntarily agrees to terms and conditions which create the same outcome as limited liability. Solved.

    I totally agree with you that “society” should not be guaranteeing deposits, nor should they be guaranteeing bank owners. That does, as you say, screw up accountability in the system.

    But it is important to clearly identify the problem, or else we may end up “solving” the wrong thing. The problem is government guarantees & bail-outs, government control of money supply, and bad government regulation. The solution is to end the guarantees & bail-outs, end government control of money supply, and end bad government regulation. The solution is *not* to try and ban the voluntary creation and voluntary trading of credit (which is what the “ban FR-banking” crowd are saying).

    It is an inherently socialist idea to try and “solve” a government problem by banning something.

  9. John, for so long as we have “too big to fail” banks, the political imperative means we are going to have bailouts, and all of its associated moral hazard. Even in your “contract law” proposal, the prospect of a failing bank would create an insurmountable demand for a government bailout. I appreciate your philosophical position, but its not a political practicality. This is why I see trust banking as the way out here. Also, I don’t think it would make the regulation in total more onerous/costly, just different from our already heavy banking regulations.

    In terms of identifying the problem, I also note the role of the rating agencies in causing the GFC. I think we must now accept that “independence” simply doesn’t work, and where it is relied upon as a source of information, it must be replaced. The information provider must also be a risk acceptor. Which is why I am suggesting fellow borrowers via risk sharing mutuals. Fellow borrowers have a good source of information on credit policies – they have been through the process themselves!

  10. Oh, John Humphries, you are wrong on one point- if the anti-bankists really are stupid, then their views are forgiveable. If, though, they have brains, and don’t come up with good facts to support their case, then they may be suffering from some childhood trauma- perhaps an early dispute with a piggy bank?
    Certainly their arguments do not seem very libertarian.

  11. That was Graeme Bird again. Sometimes he comes back with a different name and e-mail address and spams the comments. If I find him, then I slap him and put him back in his box. Naughty Graeme.

  12. I disagree that the loaned $10 and the IOU for that $10 can be separate assets which can be owned by two people. The IOU is the acknowledgement that the loaned $10 is really still owned by the lender. It is not owned by you sister. That is the meaning of “lend” and “borrow” – it is not a transfer of ownership. It is not a gift or a sale. If it were a transfer of ownership, there would be no IOU.

    Somebody may well accept the IOU as having value; but that value is in the actual $10 which was loaned, not in the IOU itself. That person recognizes the IOU as having value only because he expects the $10 it stands in for to be returned to him. If the $10 was never to be returned, the IOU would have no value The IOU is nothing more that a note of entitlement to the $10 which was loaned. It’s only intrinsic value is that of paper and ink.

    If you promise the $10 to your grocer as payment (by giving him the IOU), then he owns the $10 – not your sister, the borrower. If you give the IOU to your grocer, you are merely transferring ownership of the $10 you loaned your sister from you to your grocer, who will actually receive it after your sister pays it back to you. Your grocer does not own the IOU$10 and your sister the $10.

    Twenty dollars has not been created out of that $10 just by lending it. The $10 you promise to your grocer is the same $10 you loaned to your sister. That is all the IOU represents to the grocer: a promise of that $10 (assuming he knows it is an IOU and not real money). It must come back from your sister at some point in time and be paid to your grocer. The IOU$10 and the corresponding $10 do not go their separate ways forever and increase the overall money supply.

  13. If somebody owes one money, then one has an asset. That is the case even if the debtor does not have the cash immediately available to them, provided the debtor can get the money by selling or earning it to pay the debt when it comes due, then the creditor has an asset.

    Both the $10 note and the $10 IOU are debts, and consequently are assets to whoever is owed the money. The $10 note is a debt owed by the central bank to the depositing bank. The IOU is a debt owed by the depositing bank to the depositor.

  14. The real problem is that Humphreys is mentally deranged and doesn’t see the obvious things. If fractional reserve, debt, and limited liability, all come together, it is obvious and totally undeniable that business will need to be regulated. Ergo, to have these three working together makes libertarianism totally untenable. Fractional reserve always, under any circumstance obviously entails deception. Because people don’t like to be stolen off. Should you not want to earn a living, and would rather be unjustly enriched, clearly deception is required. Because no-one wants to be giving up their stuff for you.

  15. I agree with your first paragraph. Not the next paragraph..

    An IOU is not a debt, is a receipt for a debt. The IOU$10 is not an asset to the lender, the $10 he is owed is the asset. The IOU$10 is just a record or proof of that debt.

    I don’t follow what you are saying about the central bank and the depositing bank. Are you are saying the central bank owes $10 to the depositing bank (the holder of the $10 note) which the depositing bank in turn owes to the depositor, (the holder of the IOU)? If so, then the IOU held buy the depositor is not a debt, it is a notice of the debt of $10 and the note held by the depositing bank is likewise a note of debt to of $10.

    There is really only one debt of $10, it has just been loaned out twice in succession. The $10 belongs to the depositor, who loaned it to the depositing bank, who in turn re-loaned it to the central bank. The $10 in effect is indirectly owed by the central bank to the depositor, via the depositing bank, who directly owes it to the depositor.

    There is only one owner – the depositor who originally loaned it. The fact that the depositing bank re-loaned it does not make the depositing bank the owner of some other $10. The $10 has merely been re-loaned by the depositing bank which borrowed it.

  16. Loki, I’ll allow you that the instruments are both “a note of debt”, rather than the debts themselves.

    However, there are two debts here. One is owed by the depositing bank and the other owed to the depositing bank. The two positions held by the depositing bank are separate, and the depositing bank can deal with them separately.
    They arise from two different sets of statutory and legal obligations. They give their respective creditors different sets of rights. Two separate debts, and two separate assets owned by two separate creditors.

    A debt can only exist as a relationship between two parties. There are two relationships here.

  17. Reply to 2dogs’s second reply to comment #8 above. (I was not given the “Reply” option for replying beneath it). This is a very important point in Humphreys’s article. Whether or not Leithner et al are “stupid” rests largely on this point. I don’t believe 2dogs addressed my original argument and I wish to follow through with it.

    You will “allow me” that the “notes of debt” are not themselves debt? Are they notes or are they debts?

    Yes there are two debts and debt is a relationship between two parties. But in this case the debts are both for the same item, i.e. an item which the first debtor re-loaned to somebody else, who is then a debtor to him in turn. That does not mean that there are now somehow two separate amounts of $10. It is still only the same $10 which has been re-loaned while still owed to the actual owner. It is not a case where one person loaned two separate items to two separate people. The loans are “nested”.

    If I lend you my book, and if you then lend my book to another person after you read it, there are not now two books and two owners. It has merely been passed on by you to another person. There is one book and one owner – me. There is no other book and there is no other owner of the book. There are two relationships, or possible three, since the person you lent the book to owes it to me as well as to you. If we had issued receipts, there would be two receipts. (Or you could have passed the receipt I gave you to the person you re-loaned the book to, and told them to return it to me directly, though responsibility for returning my book should properly remain with yourself.) But there is only one book with one owner.

    Please address my argument; don’t recite out of a text book. The text book is what is in question here.

  18. I think we need a sort of fanciful scenario to explain the situation, for those who lack the ability to take an historical perspective. Supposing you are coming out of a dark ages. A dark ages of the sort that we have been through before and will go through again. And suppose you alone come out of that dark age, as a benevolent immortal. You figure the only way to help your mortal humans, is to get the money right, as good as you can get it so, then most things will take care of themselves. Your goal is to wind up with as many commodity monies as is possible. Some for coins, some for transfer of ownership while they are in storage. You cannot expect total purity of the elements used. But you are after a standardised and practical level of purity.

    Everyone is starving of course. And people have to use what they can at first. Alcohol. Warlords (i.e. “Kings”) tax vouchers. Unchipped glass bottles. All excellent monies under the circumstances. But if metallurgy ever gets off the ground again (and thats a big if) you would want metals, that are resistant to oxidation. Big copper coins and small silver coins are the natural coin money. Gold, Platinum, Palladium, Chromium (Chromium oxidises, but the oxidised layer prevents further oxidation) Tungsten, Titanium …… these are all good storage monies. Platinum and Gold are good for settling large international purchases.

    Now for the surviving human race to be prosperous and living in a fair and decent society, what they need is homogenised money in all cases. At first they will have coins, and other monies, of all different purities and weights. Such a primitive state of affairs means there has to be an element of barter ON THE MONEY SIDE of every level of transaction. It is not conceivable that we could maintain technology and wealth beyond 19th century levels is this state of affairs continues. We could not beat Malthusian considerations. The Malthus reality will be harder to beat the next time around since the resources available are so much more remote.

    So you get to where you have general agreement in the rules of money. You’ve got a lot of monies on the fly, whereas the bankers would prefer just gold, so they can dominate it. But you’ve got your unclipped, unworn coins, of copper and silver, and your ingots of various sizes of the other metals. But with banking when you had varying degrees of impurities, and coins-and-ingots of unreliable weight, the bankers and the customers knew ….. They knew and all agreed …. All parties were in agreement ….. that to lend out your ON-CALL worn-and-clipped stash, was a betrayal and a fraud.

    Track back and forwards over that point at which you standardise the money. Yes if society is not vigilante, the banks will have already started to cheat a little where they can. But everyone will agree that to lend out YOUR stash is fraud. No-one will deny it. The bankers, who will be at this stage, metallurgists, will offer standardisation remelting at cost, so they can get your other business. You will probably be quite grateful to them for such cheap re-coining. Not grateful enough for you not to be cut in on the next opportunity that comes their way. Naturally they will have started becoming lending banks, and not mere depositaries, once they have the capacity to standardise your coins at cost for you. But pretty soon the money-lending …. the term loans side of their business, will be a cover for the practice of fractional reserve. They would never at this stage openly lend out your on-call stash. Because this would be a giveaway as to what they were up to.

    We know if we track backwards and forwards over that point of time, when the coins and bars, finally become standardised as to purity and weight … we know that before that fractional reserve is fraud, and that the practice will be introduced by stealth. Then normalcy bias will set in. Why can we not consider it fraud, when it is the ruination of the free society? When it is the ruination of us ever having the best money we can have? Its a simple choice society can make, to consider it fraud, as it clearly is at that point, and be vigilante about this fraud.

    Recall that we had to get a variety of monies, and not just gold and silver. There is economic dead loss to simply having gold and silver. Thats two elements that have to be taken out of the periodic table for industrial uses just for starters. Their price winds up as an uneconomic, and therefore unstable price. But to quickly get back to a high-tech non-Malthusian society, we need to standardise weights and purities. We can surely still use the Warlords tax vouchers as a medium of exchange. Nothing wrong with that. But we cannot trust the warlord, except to inflate, so most of the money has to be natural.

    So we have standardised purity, at a practical and economic level, correct weight, and standard shape and so forth. And what I’m telling you is that we can-and-must continue to consider that lending out your stash, on-call, is fraud but not fraud-alone. Its conspiracy to pervert the mediums of exchange. Its a conspiracy to engage in theft and unjust enrichment. Its the destruction of any chance the species has to reach for the stars. The perversion of one side of every transaction. A ponzi-conspiracy to bugger up any possibility of efficient capital markets. People have problems with thinking of this act as a crime, because it starts so small and innocent with no cut-off point. And because its many crimes rolled into one.

    The first thing that happens in this story is only gold and silver can then be money. Because if the banks are engaging in these multitudinous crimes you will still bank with them. My oath you will. But you aren’t going to go for any other money, because Platinum, Palladium, Chromium, Titanium …. these are all indistinct. The banks will see to the purity of the gold and silver. At the first available opportunity they will enter into a conspiracy to destroy silver as a medium of exchange. Then they will have all the gold and you will be carrying around paper.

    So I”m saying we go with the natural law. John is saying that we can never aspire to efficient capital markets and excellent and cost-effective money. He is always going to make this case, because he is in the tribe of economists which looks after the financial looters, whereas the Keynesians are in the tribe that look after the public servant looters.

  19. In your book secnario, there are three assets:

    a) the physical book held by the third person;
    b) the right I have the book returned to me by the third person;
    c) the right you have to have the book returned to you by me.

    They are not the same item. If (a) was destroyed, the third person still owes me a book, and I still owe you one – (b) and (c) continue to exist.

    In our banking scenario, we did not discuss the (a), but it would presumably be the various securities held by the central bank in its reserves. In this regard, the RBA has positive equity and the AUD dollar is more than covered.

  20. Leaving aside (b) for the moment, my right to have the book returned (c) is not an asset, it is my right to have the asset (the book) returned – my right of ownership. An asset is nothing but that to which we have the right of ownership. That right is not itself an asset, it is merely what makes the asset an asset. It is merely the definition of the word “asset”.

    Similar argument goes for (b), except (b) is not a right of ownership, it is a right to have an item returned. You don’t own the book, you owe it to me – it is not your asset. Your right to have it returned by the third person is not an asset, because your right to have it returned to you is canceled by your obligation to return it to me. (Consider it as an equation.)

    If the book (a) was destroyed, both you and the third person would still owe me and yourself a book respectively, yes. But that says nothing more than the definition of “owe” or “lend”, i.e. if the property is not returned (in this case because the book was destroyed), it is still owed. In this case the book must be replaced by an identical item or something of equal value to the lender.

    The whole problem with Humphrey’s and your logic is this: You are trying to make the person’s right to an asset into another asset. You are making the thing which makes something an asset into another asset. These rights do nothing more than tell us who the real asset ultimately belongs to, they are not new assets.

    It all seems like a small time confidence trick to me, except it’s backed up by some slick academics and crooked politicians. That’s all that separates the sleazy used car salesman and big-time global corporate swindler.

  21. Loki — you just wrote that a “loan” is not a new asset. You are wrong. A loan is a financial asset. Look on any balance sheet of any business. If somebody owes you money, then that is considered an asset (sometimes called “receivables”).

  22. John – Continuing again (from comment #10 above) despite the limit on number of replies here.

    True, a loan is an asset. Not the loan itself, but the actual item loaned. But in the situation we are talking about, i.e. re-loaning an amount of money or some other item, that loan is ALSO a liability to the person who is re-lending it. “Asset” is just an accounting term for the item on one side of the balance sheet. On the other side, it is a liability. They cancel out to zero. It cannot really be an asset in the real-world sense of the word.

    They are NOTHING MORE THAN labels on the balance sheet – convenient terms for accounting calculations. In the real world, the item is not materially an asset for the re-lender. This is exactly what the word “loan” tells us. The borrower/re-lender does not own what was loaned to him – not just because he lends it to someone else. An asset is something one owns. If you borrow something, you don’t own it, whatever your accountant sometimes calls it.

    This is the meaning of the word “balance” in “balance sheet”. You balance your receivables against your payables. From the re-lender’s standpoint, that amount of money is simultaneously an asset and a liability. You can’t call it an asset without also calling it a liability. You can’t look at only one column in the balance sheet. It seems to me that you are confusing accounting and real-world uses of the word “asset”.

  23. You seem to be saying that only physical assets can be assets – that a “balance sheet label” can’t be an asset in the real-world sense of the world. If this is not what you mean by real-world uses of the word “asset”, you need to explain further.

    Assumiong you mean physical assets, let me then go back to my first paragraph, which at the time you agreed with. That a debt is an asset to the creditor, even if the debtor is yet to get the money to pay for it. The debtor may not yet have earned the money, If a person borrows money to take a holiday, then has to work to pay off that loan, that loan is an asset to the person who lent the money, even though no physical asset exists. If, as you say, the borrower does not own what was lent to him, but it is owned by the creditor, what is it that the creditor owns in this example?

    Regarding that I “can’t call it an asset without also calling it a liability.”, I’d recognise both of these things. But on the re-lender’s balance sheet, they are separate items.

  24. Whether or not the asset is physical is irrelevant. Patents are not physical (they are ideas) but they are valuable assets. Music and literature are not physical – only the book the literature is printed in and the CD on which a performance of the music is recorded onto are physical.

    A balance sheet label is not an asset, it merely represents a real-world asset – as long as that asset is not also a liability on the same person’s or business’s balance sheet. In that case, “asset” is nothing more than a label in one column of the sheet.

    Try this: Take your balance sheet out with you, stop somebody on the street and offer to tear out a page and sell it to him for the value of all the things listed in the “assets” column.. Explain to him that all the written entries in the “asset” column on the balance sheet are themselves assets, even though they only look like ink on paper. Try it a number of times and see how long it takes to attract the interest of the authorities. Try explaining it to them also. They will explain to you that you have a choice between psychiatric supervision or time in the joint.

    I still agree with your first paragraph, because it claims nothing more than the obvious fact that if you lend something, you still own it. The answer to your question is of course that the creditor owns what the borrower/debtor borrowed from him.

    On the balance sheet the entries for the loan may be physically separate things (made of ink or magnetism) and even used separately in calculations. But they are only symbols and they refer to the same real-world object. They represent the same material thing seen from different points of view or described for different purposes. After all the calculations are done, you still have to pay back that $10 to the owner and when the person you re-lent it to pays it back to you, you will be no richer than you were before you lent it to him.

    I agree with you that you can label the loan as an asset from the point of view of your dealings with the person you re-lent it to; but that is looking at it from only one side of the equation, from one column of the balance sheet. In the big picture, you are just holding it for the person who really owns it. It is really a liability – both on the balance sheet and in the real world. It is not an asset in the real world.

    The simple fact is that if you have borrowed something, then by clear definition you do not own it, and therefore it is not an asset – not even if you have re-lent it to someone else, who therefore owes it to you. There is no escaping it: A person who borrows something can never call it an asset, simply because borrowing is not owning. Humprhreys criticized Leithner in his article for not owning a dictionary. Yet his whole article seems to be about creative use of accounting terminology to get around the commonly known meaning of the word “loan”. He doesn’t even have the excuse of not owning a dictionary.

  25. “it claims nothing more than the obvious fact that if you lend something, you still own it.”

    What is the asset in my holiday maker example? What is it that the creditor owns?

  26. “offer to tear out a page and sell it to him for the value of all the things listed in the “assets” column.. Explain to him that all the written entries in the “asset” column on the balance sheet are themselves assets, even though they only look like ink on paper.”

    If this in the form of, say, a deed of loan assignment, then I would most certainly be selling something valuable. The debtors would then be paying him instead of me. The signed contracts from my debtors are, of course, also just “ink on paper”, and would go with the assignment.

    I probably wouldn’t go to any person in the street, but I might go to a bank that provides a “factoring” service.

  27. “Since no coercion is being used”

    Sorry, but, yes, there is coercion with FRB. In every jurisdiction where you have FRB, you have some form of regulator imposed capital adequacy requirement.

    This represents a substantial barrier of entry to new players and limits the amount of business they can do, no matter how good their product is, or how much people want to use it.

    With trust banking, there is no need for a capital adequacy requirement. A good, efficient transaction processor can enter the market with little financial capital and do as much business as they like.

  28. Replying to both your above comments:

    (1) I was responding to this comment by you, where you seem to be saying that labels on balance sheets are assets:

    “You seem to be saying that only physical assets can be assets – that a “balance sheet label” can’t be an asset in the real-world sense of the world.”

    Ridiculous as that sounds, it is what Humphreys and yourself and others here seem to be saying or implying. You seem to be saying it in your example of a deed or loan assignment. The value of the deed or loan assignment is not in the piece of paper with writing on it, it is in the assets actually being transferred. If the text books say otherwise, the text book writers are insane.

    If the loan being assigned were a loan of your own money, yes it would be an asset. But if you borrowed the money from somebody else and then re-loaned it to another person, it is not. That loan of course has value in itself and you could sell it to another person and for that person it would be an asset – assuming he pays less for the loan than the amount of the loan. But you would still have to pay back that amount to the person you borrowed it from. All you have effectively done is pay the person who bought the loan from you some of your own money. You have made a loss.

    You can’t hide the fact that the loan is a liability just by loaning it to another person and calling it an asset and then selling it as if like an asset to another person. It is only an asset for the person you sell it to because he doesn’t have to pay the money back to the person who originally lent it. You do.

    It is just a shell game.

    (2) The creditor owns the money he lent you to pay for the holiday. As far as you have told me, he did not borrow it from somebody else before he lent it to you. If that were the case, he would hot own it – it would not be his asset.

    Do you agree that the real meaning of the term “asset”, outside of accounting calculations, is “something you own”?

  29. I think a good name for Anti-Fractional-Reserve-Banking-Operators should be AFBROes, or Afbros. Just a thought….

  30. There is a sort of school of thought in a lot of these discussions, wherein it is assumed that there are to be no regulations in a libertarian society. For convenience we could call that school of thought “kiddie-libertarianism.” The thinking goes something like this:
    1. regulations are an initiation of force 2. A libertarian society is one where there is no initiation of force 3. So therefore a libertarian society in totally unregulated.

    Actually this thinking is fully untenable. Since we need to have very clear and just property titles before we can even so much as decide which party has initiated force. We can only spell out the ins and outs of these property titles by way of regulations. Such economies as have relied on local custom and norms have worked fine from time to time. Perhaps in some isolated valley somewhere. But for constantly improving technological development, and relentless capital accumulation, what you need is clarity and justice in property titles, which, without-controversy, requires regulations.

    So since regulation is always required, the choice is not between no regulation, and regulation. But between the current regulatory regime and a better one, and one still better than that, and yet another, closer to as good as you can get it.

    The kiddie-libertarians acknowledge this reality if you watch them closely enough. That is to say they acknowledge the need for regulations, and only plead otherwise when they are being little bitches. Actually kiddie-libertarians are SOFT-ON-REGULATION. For example, John Humphreys and others, in a mean-spirited way, plead “free banking” but then they claim that financial sector reform is a “twentieth order issue”. The implication of this is clearly that they are quite okay and cool about thousands of pages of regulations. And that one and only one regulation really gives them trouble. This being the reserve asset ratio.

    People always see through those who argue from a position of bad faith.

  31. This may be due to an ignorance of the fact that there are just and unjust kinds of laws or government. The basic principle of libertarianism is that an individual has the right to do anything he likes with his own property as long as that does not infringe upon the rights of other individuals to do the same. Therefore a just government or law is one which protects that right, i.e. stops individuals from infringing upon the rights of others. An unjust government or law is one which itself infringes upon those rights. That is, a just government protects individuals from crime and an unjust government commits crimes, a crime being a violation of an individuals rights or freedoms.

    However, some libertarians believe that the government is not necessary even to protect individual rights, and arguably it is not necessary. As with other roles, the government is not necessarily the best agency for law enforcement. Individuals may have other ways to protect their rights, just as they have ways of providing all other things for themselves.

  32. Supposing you are a sole trader, whose business is enforcement of contracts. No way are you going to have a bar of attempting to enforce a fractional reserve contract. Unless you yourself are involved in some sort of shonky business. Because you cannot enforce the contract. You cannot recover the lost silver. You cannot indemnify the aggrieved party, except perhaps at horrendous expense. Plus, if you let the contract go ahead, in order to keep the banker in line, you’d have to worry about thousands of other stipulations, and the need for oversight would be your ruination, and a detraction from the capacity to constantly improve your own business operations. A workable anarcho-capitalist model, would be a lot less keen on some conceptions of the idea of “freedom-of-contract.” Because to enforce contracts, you are only going to want to work with contracts, that basically enforce themselves.

  33. Have you never heard of spontaneous order? This is where order arises from an initial condition of chaos. For instance, roads in cities are heavily regulated, and people simply assume that they need to be. However, in some places, they removed speed limits and rights of way, and found that people were more responsible, and had less accidents, then previously. the supposed chaos did not happen.
    So this minarchist libertarian believes in a very light touch by governments, and only over public roads.

  34. “Have you never heard of spontaneous order? ” Spontaneous order never happens without human action. In this case the spontaneous order could never happen, because without fail, the bankers got together with the government to see to it that it didn’t happen. That is the history of affairs. Spontaneous order, in this regard, can happen, if the government butts out, and then the contract enforcement sole traders, come to their senses, and decide that we will have 100% backing. Or the government can mandate spontaneous order by simply making illegal fractional reserve, and other forms of phantom supply.

    We know exactly how this works Nuke. Its not as if there is any mystery to anything about this subject. You go one way, “….. everything follows with certainty …. even in the midst of chaos…. ” If you allow fractional reserve, you’ve sold out the human race to oligarchy, servitude, and periodic collapse. And we don’t have all the time on the world on this planet. Our survivability, as a species, on this planet, is not a forever thing.

  35. Dear Immortal, so what if spontaneous order only occurs with human action (I’m not sure that is true, but we are talking about the human level of existence here, so I won’t go into natural spontaneous order, i.e. chaos theory, etc.)? So long as it occurs without outside regulation, we do not need heavy-handed government interference. Wasn’t that the initial argument?

  36. “The creditor owns the money he lent the holiday maker”

    Surely, it would be the property of the hotels and restaurants where the holiday maker spent it? Your answer is truly bizarre!

  37. Reply to 2dogs’s last reply in post #14:

    “What is the asset in my holiday maker example? What is it that the creditor owns?

    “The creditor owns the money he lent the holiday maker”

    Surely, it would be the property of the hotels and restaurants where the holiday maker spent it? Your answer is truly bizarre!”

    It’s nothing but what you said yourself when you stated the example:

    “If a person borrows money to take a holiday, then has to work to pay off that loan, that loan is an asset to the person who lent the money, even though no physical asset exists. If, as you say, the borrower does not own what was lent to him, but it is owned by the creditor, what is it that the creditor owns in this example?”

    Yes, the money the holiday maker borrowed from the creditor and spent on his holiday belongs to the hotels and restaurants etc. where the holiday maker spent it. But the same amount of money still owed to the creditor – he still owns the amount he loaned. It is merely the same as if the creditor paid for his debtor’s holiday himself on the condition that the debtor would pay it back.

    The people the debtor paid on his holiday own the money he spent. The creditor owns the amount – the amount – of money he loaned to his debtor. Of course the debtor cannot get it back from the people he paid it to on his holiday. Now, he must work to get the money from somewhere else.

    Of course the debtor is going to pay the money he borrowed to somebody else. That is the reason he borrowed it. The fact remains that the creditor gave him an amount of money and that amount of money must be returned.

    It does not mean that the hotels and restaurants and the creditor simultaneously own the same money. The money the hotels now own came from the creditor. The money the creditor owns must come from somewhere else – from the labor of the debtor. That was true from the time the money was lent, since it was borrowed for the purpose of paying somebody else.

  38. No you are just not getting it. The spontaneous order would go ahead. But it is always trounced by bankers. The spontaneous order is always stymied by the bankers. Because this is a crime, with no natural cut-off. A crime that seems innocent at first. But its a crime that prevents spontaneous order. And its all to do with bankers having access to stuff, that they are tempted to exploit, through sheer physical proximity.

    By forming a conspiracy, a conspirational league of bankers, through fraud, can quickly out-compete other less-fraudulent bankers, though they be less “EFFICIENT” then their market victims: Then their “industry-colleagues”.

    That way all attempts of spontaneous order are pre-empted and destroyed. But note that the ponzi-scheme cannot go on forever without the perversion of legal and government norms. And so the next step is the perversion of legal and government norms.

  39. “The money must come from … the labor of the debtor.”

    Why the labour, in particular? Why would it be so wrong for him to have, having borrowed the money, then proceeded to lend the money, at a higher interest rate, to someone else, instead of taking the holiday?

    And if that is not wrong, isn’t it just what banks do?

  40. If he re-loans the money instead of spending it, the person he lends it to will probably spend it, in which case that second borrower must work to pay back the loan and the money come from his labour. Yes, banks re-loan money agt higher interest rates. They also expect the recipients of those loans to work to earn the money to repay them.

    The second borrower could also re-loan the money at a higher interest rate instead of spending it himself, but not so on ad infinitum: The purpose of the loan is for spending money for somebody somewhere down the line and the interest rate can’t go on being put up forever. There are not an infinite number of people in the world for the loan to be passed on indefinitely.

    The banks certainly can’t profit by passing loans around to one another forever.

  41. The entire concept of “free banking” is unforgivably stupid. Only a moron would go in for it. Whose copper (grain, gold, platinum …) is it? Its either yours, or its the banks. John says its the banks. But he’s not talking about free banking. He’s talking about right now. So he’s just confused himself. No-one would ever give their copper to someone to look after, on-call, who is then going to turn around and claim its his copper. Supposing I say its my copper, but he says no its his copper. John says its his copper. But is John talking about free enterprise conditions, or is he talking about now? He doesn’t know. He’s clueless.

    Always term loans have a higher interest rate attached to them then on-call loans. So if you can afford to loose your on-call money, you will have lent it at term. You only keep money on-call, with 2 or 3% storage costs (less than 1% per year if its gold) if you cannot afford to lose this money. This copper let us say. So no way would you to go a bank and deposit that which you cannot afford to lose, on the basis that the bank has the legal right to steal that which you cannot afford to lose at any time.

    Now in the first instance, excluding other regulations, bankers have the legal right to steal our money. John says so. Its their money, so its not stealing. Clearly only subsequent regulation makes it that they cannot simply steal this money at any time. Subsequent regulation, social norms, the fact that they are subsidised and licensed, so have something to lose, and so forth. But this is under the current system. Not under “free banking”. So John is totally ignorant, and confused. What is he talking about? Is he talking about our system, when he says its the banks money? Or about free banking? He has no clue.

  42. “The entire concept of “free banking” is unforgivably stupid.”

    No you are lying.

    “Only a moron would go in for it”

    New York State had it during the “golden age of capitalism” and was macroeconomically stable and lifted America from third world living standards to the richest nation in the world.

    Only a blithering imbecile would repudiate this.

    “Whose copper (grain, gold, platinum …) is it? Its either yours, or its the banks. John says its the banks.”

    You belong to the 0.00001% of the population this befuddles. Consider castrating yourself and checking into a special needs section of a nuthouse, please stay there forever

  43. No that is all rubbish. There was no such time or place where “free banking” was in action. You are claiming that the customers knew that the money was the bankers money, and not their own. Clearly you are lying.

  44. So once again, we see the case for free banking, based on ignorance, unforgivable stupidity, and constant lying.

  45. This is always going to happen, and anyone trying to understand this topic has to get used to this. A few posts above, I explained very clearly why “free banking” as defined by the advocates, can never happen. Always someone will then claim that it has happened, when it cannot. When something cannot happen, its irrational to claim (particularly if the claim is made in total ignorance) that this thing did happen.

    We have a situation, where some of us have been aware that our account contracts imply that our money is the banks money. But up until very recently, all of the people who even so much as knew about this legal outrage, understood, that this was simply a way to cover the bankers in an emergency, so as to lend the situation enough time for the trucks to arrive from the mint. Now John claims that our money is the banks money (read the contract sucker). That this is the legal situation is now a very scary reality for many people in the US, and it can become that way for us at fairly short notice as well.

    But the situation is different under free enterprise conditions. Since the bankers are not subsidised, cartelised, or in any way regulated, it is simply not possible that you would undertake to store silver, gold, or other valuable stuff with them, on-call, on the basis that this is not your money, but theirs. So free banking has never existed. Anyone claiming otherwise is simply lying.

  46. No you are a liar and idiot Graeme Bird.

    New York State, Australia and Canada all enjoyed successful free banking episodes.

    But you’re an idiot and lunatic. You think banking involves free deposit boxes for money banks cannot lend out using crude commodity currencies with no generally accepted currencies of money. Nor are the items you describe as money in high demand from the public.

  47. No that is a lie. On all three occasions the person depositing the money on-call thought it was their money. Hence there has never once been “free banking”.

    So as we see this entire push for what is ludicrously called “free banking” is based on lying. In all cases fractional reserve banking is bound up with deception.

  48. I’ve explained why “free banking” can never happen. And you lie and you claim it has happened. When something cannot happen, that means it hasn’t happened. Its just no use calling these incidents “free banking.” They cannot magically become “free banking” era’s just by you calling them that. You don’t even specify the time periods involved. You are just basing this all on personal ignorance.

  49. Graeme sez: “I’ll redefine free banking from what everyone else is talking about into something else”

    Graeme, you’re playing the definition hijacking game. I also note on your blog you play the chain blame game.

    http://bovination.com/cbs/definitionHijacking.jsp

    http://bovination.com/cbs/chainBlameGame.jsp

    I always knew you were a leftist.

    The sum of your argument is: I don’t think on call money is real money therefore depositors who made deposits with their own free will and full disclosure were duped and it isn’t a free market system.

    You are a colossal dullard.

  50. I think Tim’s argument against the possibility of free market fractional reserve banking is really an argument that FRB is inherently based on a fraud, and therefore would be illegal in a free market (and should be in an unfree market, if the government could be relied upon not to participate in fraud itself). However, if all customers of such a banking system were fully aware of what FRB is (presently the average customer is not aware), then, even though it is based on an illogical fiction, it would not be a fraud.

    The argument I think Tim has with John Humphreys (the author of the above article) is over whether FRB is a legitimate idea. Since it is based on the idea that two people can own the same asset at the same time, i.e. that the IOU for a loaned amount of money can be a separate asset to the actual amount of money loaned, I also disagree with Humprhreys that an FRB system which is based on this belief is a sound one. (I argued this at unnecessary length in previous comments here.)

    In a free society, a person has the right to be wrong with his own property, as long as he does not interfere the the freedoms of others. Therefore if the customer were aware of the basis of FRB and he makes all other people he does business aware of the real nature of the money that he is paying them with, i.e. that it is an IOU from his bank, not actual money from the bank, then no fraud would be committed. It would merely be a silly thing to do. But in a free society, one is allowed to believe that 1 + 1 = 3, as long as he does not impose that idea on others (which is what the present FRB system does, via deception and the cooperation of the government’s laws and banking institutions).

    However, does FRB necessarily require that people treat an IOU and the owed amount as separate assets? If people dispensed with this ridiculous idea and simply were openly told that their deposit was used by their bank for lending to other people, and therefore could not be relied upon to be wholly available to them at all times (and could possibly be partly or entirely lost), then FRB would not be based on either a ridiculous idea or deception/fraud. It would simply be based on an openly acknowledged risk. Risk is perfectly legal and logical and is a normal feature of business.

  51. “However, if all customers of such a banking system were fully aware of what FRB is (presently the average customer is not aware), then, even though it is based on an illogical fiction, it would not be a fraud.”

    They are fully aware. Banks have no duty of care if you are too smug or dopey to read the PDS. They don’t exactly hide the facts either.

  52. “They are fully aware. ” are. ARE. You get it? Present tense! So you are lost. Yes they are aware, under this subsidised, cartelised, insured, and fiat system. Congratulations. No free banking can ever exist, because if your money is the banks money, as John and you claim, then they can steal that money, and it is not stealing. Only further regulations can stop them from stealing that money. Further regulations, can hardly be a situation of “free banking”. So free banking is impossible, its never happened. Its just a childish lie.

    “I think Tim’s argument against the possibility of free market fractional reserve banking is really an argument that FRB ….”

    Look the advocates say its the banks money. But at no time in history, under unsubsidised, unlicensed conditions, has anyone ever put on-call metals with the bank, no the understanding that its the banks property, by virtue of the customer doing this. So the advocates are just talking nonsense. “Free banking” can be done with deception, or with further regulations, but not with no further regulations, and not without subsidy. It can be fraud, it can be socialism, but it can never be a functioning free enterprise affair.

    Capitalism, and a free society, is in no way about the absence of regulation. Rather it is about regulation to clarify fair, just and reasonable property titles. A society based on the absence of all written and codified regulation is not a free society, its a chieftainship. Illiterate clans, sliding up to a tribe on the most populated examples.

  53. That would mean that Humphreys’s lengthy article explaining the whole thing to us from first principles was completely unnecessary..

  54. “‘They are fully aware. ‘ are. ARE. You get it? Present tense! So you are lost. Yes they are aware, under this subsidised, cartelised, insured, and fiat system. Congratulations.”

    I didn’t post that comment, “.” did.

    “Look the advocates say its the banks money. But at no time in history, under unsubsidised, unlicensed conditions, has anyone ever put on-call metals with the bank, no the understanding that its the banks property, by virtue of the customer doing this.”

    That is beside my point. I was only saying that people should have the right to participate in such a scheme in a free society/market, as long as all parties are aware of what they are participating in, i.e. as long as no fraud/deception is being perpetrated. I am not saying that sensible people should or would do it.

    “So the advocates are just talking nonsense. “Free banking” can be done with deception, or with further regulations, but not with no further regulations, and not without subsidy. It can be fraud, it can be socialism, but it can never be a functioning free enterprise affair.”

    I agree, it can only be sustained and given popularity by deception and government backing. I was merely making the point that if some misguided people wish to believe that it can work, that business can be conducted successfully on the belief that a single asset can somehow be owned by two people, or that a receipt for an asset and the asset are two separate assets, then as long as they understand this belief and state it to anyone they deal with, they are not guilty of fraud (only stupidity) and have the right to conduct business this way. FRB could survive if practiced to a limited extent, but people with this belief would see no reason to restrict it.

    However, FRB does not require parties to believe that assets can be owned by two people. Customers could agree to allow banks to use money they deposit with them for loans, and retain ownership of that money as lenders to the bank. If they wish to take such a risk, they have the right to do so. In the absence of regulation, this system could runaway into collapse, depending on how sensibly the banks practice it. Perhaps the free market would restrain the extent to which banks fraction their reserves. Whatever the real outcome would be, i am just pointing out that people have the right to participate in such a scheme and it need not even require belief in the accounting sleight-of-hand I believe Humphreys is participating in in his article.

  55. The present system of FRB could not exist without government support, cartel cooperation between banks and by withholding the true nature of the enterprise from the public. This is because the system relies upon the creation of credit from nothing and the printing of money by the government to back this credit with actual currency. The credit is created from nothing by making the money loaned from the fractional reserves of real wealth into actual real receipt money.

    However, if this deceptive and fraudulent practice were abolished and banks simply and openly lent out credit money based on fractional reserves, without claiming that this credit was actual money over and above these real reserves, then it would not constitute fraud. There would be no pretense that the depositors had all their money in the bank while the bank simultaneously loaned the same money to borrowers. Depositors would understand that there was some risk of losing part or all of their deposits, say if there was a “run” on the banks by many or all of the depositors while the loans were still out.

    Such a system would work only if individual banks conducted business with suitable restraint, with the knowledge that they were dependent upon sound conduct in order to stay in business. In a free market, there would be no propping of the system by government, therefore the system could not run away in the manner it has been since the Federal Reserve Act in the U.S. and corresponding legislation in other countries. Either the banks would be forced to practice restraint or they would fail. Either way, the system would not be allowed to get out of control and adversely affect the whole economy.

  56. “That is beside my point. I was only saying that people should have the right to participate in such a scheme in a free society/market, as long as all parties are aware of what they are participating in, i.e. as long as no fraud/deception is being perpetrated. I am not saying that sensible people should or would do it.”

    No that is ridiculous. They have no such right. Because the pretense is that the choice is between regulation or not. When that is not the choice we are facing. The choice we are facing is between bad regulation, and regulatory excellence. If you have excellence, and then a conspiracy arises to debase your monetary system, damages price signals, ruin your capital markets, and enrich themselves unjustly, then you ought to stop them. We find in practice that such claims are always mean-spirited, and that it is only the reserve asset ratio that such advocates are against.

  57. Supposing you are working with the Perth Mint, and the norm is for them to charge transport, fabrication fees, storage fees and so forth. Suppose that is the norm. Now the reason why the Perth Mint makes all these charges, is that they are selling you real Palladium. Now someone else comes along, and decides to sell you …… nothing at all. Thin air. Obviously if the newcomers are only pretending to sell you Palladium, whereas the Perth Mint is actually selling you Palladium, then the costs for the newcomers are going to be less. They don’t have storage charges, because they are not storing anything. They don’t have fabrication costs, since they are selling you make-believe. How can such a system, sort out the most competitive suppliers of Palladium, when someone is selling you thin air and instead calling it Palladium?

    Now the advocates are claiming that the selling of nothing, in replace of Palladium, ought to be a free choice of the participants, DESPITE all the mischief it causes. That consequences are of no consequence for policy. Whereas prior the advocates suggested that there was positive benefits with mindless anti-competitive ponzi-conspiracies of this sort. Of course this could not be sustained, since it defied the laws of physics, let alone economics. But supposing you now pay your bills with your thin air? You’ve just passed on this lemon, to someone who themselves may have passed this make-believe off as Palladium, within the same day.

    Since the actual choice, rather than the childish nonsense that is being promoted, is BETWEEN regulations, and not between no regulations and some regulations, then it is a mystery as to why the advocates, would suggest that laxness in this matter was a virtue. The advocacy of bad regulation in this story, amounts to mindlessness and irrational religious belief.

  58. Every so often the advocates will dip their hand, admitting that the argument is between the best regulations, and not between the laughable pretence of no-regulation versus some-regulation. The advocates are a slippery bunch, but now and then they can be relied upon to admit that they want scarce enforcement resources to go to stopping the non-bank printing up of banknotes. So supposing the ANZ had their banknotes, the Commonwealth has their banknotes, and so forth. And these guys are selling us thin air, and swapping this for items of real value, when in reality they have almost no platinum, and that which they do have is of poor refinement. So the banks and the advocates both, will want to bring in the cops, for people passing off home-made banknotes of their own!!!! So that is a regulation. So the advocates are just mucking about, and their arguments are pointless, having no logic value.

  59. John

    I have one issue with your post. You say:

    “If people are willing to voluntarily accept your financial asset as money (for example, when you use EFTPOS or B-Pay) then there is now effectively $100 in the economy — $50 base money held by the bank (which they can then use), and $50 credit held by you (which you can use).”

    I don’t really agree with that. The moment the charge hits the account.. you press code into the machine and the trasncation is approved… your account falls by that sum while the shop’s account rises. So there isn’t an extra 50 buckS floating around in the economy and therefore no new money created out of thin air.

    I honestly don’t see how banks are supposed to create money. They can’t lend more than what is possible from their balance sheets and a debit in one account immediately is credited to another account.

    Only the central bank can create money, base money. Banks can leverage, but they can’t leverage deposits. They can only leverage their capital.

  60. “I honestly don’t see how banks are supposed to create money. ”

    Clearly you are a failure in basic monetary economics.

  61. You are right JC, private banks can only create money with the consent of depositors from continuing sustainable economic activity.

    Graeme thinks it is fraud but he also thinks it is money creation.

    What a confused imbecile.

  62. This is what we have to put up with when it comes to fractional reserve advocates. Gross ignorance of basic economics, and a total unwillingness to correct eachothers mistakes. Commercial banks create money. Yet JC thinks he has a new theory of monetary economics, which unfortunately he is going to keep a secret. Whereas “.” clearly is never going to understand the old theory. The standard theory. Neither of these guys will be corrected by John. The whole advocacy is therefore based on fraudulence in a full spectrum sort of way.

  63. “No he’s not right. You and JC have just confessed to failing basic monetary economics.”

    Incorrect Graeme Bird you weirdo.

    You flip flop between monetary creation and not actually being money – so shut the hell up.

    A depositor must make a deposit before the money is loan out each time. Even a high school dullard could comprehend this, you cannot.

  64. Graeme Bird you do not understand a thing about economics, banking – or perhaps the real world.

    You have been humiliated over this issue ad infinitum.

    This is how you think banks will operate in the future:

    1. Offer free safe deposit boxes for any old crap you impose on people to use as “money”.

    2. Somehow loan “money” at 100% capital adequacy ratios, whilst at the same time banning all maturity transformation such as insurance firms.

    3. Write off their loan books by making the PV of their mortgages worthless by inflating the crap out of the currency.

    4. ???

    5. Profit!

    You are unhinged. No adult could be this stupid.

  65. No no. He was not correct. The commercial banking sector actually creates new money. This is a fact. So he’s wrong and you are ignorant, and John is not about to correct either of you. This is in fact what we come to expect from advocates of fraud. Intellectual fraud at every step of the argument.

  66. Note also in this story everyone, no matter how ignorant, thinks he is an expert. That JC and Dot don’t even so much as understand the money creation process, which is basic economics, does not preclude themselves, in their eyes, from posing as experts.

  67. So I see now you say it creates money whereas previously you said this was fraud. Stop talking shit.

    The money creation process requires deposits or an expansion in base money. Only undemanded (excess) base money creation is inflationary.

  68. You are right. When banks make loans, the sum of which they do not have real reserves for, they are selling thin air, nothing. If they have $1 held in deposits for every $10 they loan out, $9 of every loan is thin air. Not even air – just nothing. However, if a group of people – banks and their customers – wish to participate in such a scheme among themselves, and if the banks fully and openly inform their customers of what they are doing, and the customers and banks fully and openly inform anybody else they give their receipts-for-nothing (really receipts-for-debt) to as payment that those receipts do not represent actual money, then (in a free society) these people should be allowed to participate in such a scheme if they think (rightly or wrongly) that it benefits them. Of course, most bank customers do not understand the scheme they are using. That is what makes it a fraud. If there were no deception, it would not be a fraud. Butit would also be useless, because most people would probably not take receipts-for-debt as payment for anything.

    So that answers your first question: Such a system would be sorted out by the free market simply because, given a choice between debt-receipts and receipts for palladium, it would simply not benefit most people to choose debt receipts. The system would disappear back to where it came from – the inventive minds of some crooked deposit vault keepers. It would not cause any large scale mischief, because few people would be stupid enough to use it. It would have less effect on the economy than the traveling con men who sell people siding for their houses for up-front payments, because in the case I am speaking of, there is not even any deception. People would have to be, not gullible, but clinically stupid or insane to use such a system.

    The advocates here (Humphreys and his supporters) are arguing for free, unregulated FRB solely on the basis of the ridiculous notion that if an asset is entered as an “asset” in the “receivables” column and a “liability” in the “payables” column of an accounting book, then it is somehow two assets or an asset owned by two people. If people pretended that was true in a free market, with no government legislative backing (i.e. legal tender laws, printing of currency, central banking and legal recognition of the validity the above invalid notion), it would be reduced to either a low-level scam or a pathetically stupid financial scheme.

    BTW, a great book on the whole banking system, which everybody in the entire world should read, is “The Creature From Jekyll Island”, by G. Edward Griffin (4th ed. 2002). He clearly explains FRB in Chapter 8.

  69. Tim – don’t join your opponents in mudslinging and abuse. Keep on responding to their comments with reasoned arguments until you think it is not doing any good. They will give up sooner if you do that, if they give up at all. Note that I had the last word in the discussion I was having above. My opponents got tired of thinking up new ways to say the same thing, i.e., repeating themselves. Just be patient, if you have the time. On the other hand, if you think it’s a waste of time, find some sensible people to talk to.

  70. “The money creation process requires deposits or an expansion in base money. Only undemanded (excess) base money creation is inflationary.”

    Yea, exactly Dot.

    Bird please go away, as you’re now trolling.

  71. No the fact is neither of you understand money creation, and its a very simple thing. JC claims that banks don’t create money. Whereas Dot says that JC is right. We don’t ignorant people in this conversation.

  72. These people are idiots and liars. You just cannot let them get away with lying about this stuff. The fact is that JC has claimed that banks don’t create money. Dot has said that he is right. John will be correcting neither of them. So they ignorant liars. And this has to be understood.

  73. “The fact is that JC has claimed that banks don’t create money. Dot has said that he is right. John will be correcting neither of them. So they ignorant liars. And this has to be understood.”

    No you are lying.

    A deposit must be made, and for this to be a continuing process, viable economic activity must fund the deposits.

  74. No no don’t get ahead of yourself. JC has claimed that banks don’t create money, you say he is right. Both of you must be excluded from these conversations until you learn basic monetary economics.

  75. Your job is to resolve this matter. JC said that banks don’t create money. Now you could correct him on this, if you understood the subject, but you said he was right. Hence its clear that both of you are unwilling or unable to learn the truth of this matter. Now you are trying to change the subject, put words in peoples mouths. But you have to go back to where JC claimed that the banks don’t create money, and instead of claiming he was wrong, you said he was right.

  76. “These people are idiots and liars. You just cannot let them get away with lying about this stuff. The fact is that JC has claimed that banks don’t create money. Dot has said that he is right. John will be correcting neither of them. So they ignorant liars. And this has to be understood.”

    “Your job is to resolve this matter.”

    No, it is your job to resolve it. Humphreys, dot and JC are not going to resolve it. Don’t tell them that they are ignorant or liars. That just goes back and forth forever. It is not an argument. It amounts to two people saying “You are wrong”, “No, you are wrong” etc. You have to tell people WHY they are wrong. If you think they are beyond reason, then calling them liars, stupid or ignorant won’t help – because labeling them those things does not prove to them or anyone else reading your comments that they actually are those things. You have to attack their arguments, not the people.

    Perhaps start by telling them (and others reading here) how banks create money from nothing.

  77. Here is my basic understanding of how the banks create money, i.e. my explanation of fractional reserve banking.:

    Banks began as vaults for depositing gold. The vaults gave depositors receipts for the amount of gold deposited. Depositors could trade these receipts as payment instead of directly trading with the gold the receipts stood for. That way they could trade the gold without physically taking it out of one person’s deposit and putting it into the receiver’s deposit.

    The vault owners decided to go into the business of loaning gold in return for interest. They used the gold deposited with their vault by others for making these loans. They loaned other people’s money and charged interest for it, as well as charging the depositors for holding and guarding their gold. They worked out the fraction of the gold deposited with them which would likely to always be in the vault, i.e. the maximum fraction which they could normally expect to be collectively withdrawn by depositors at any given time. This figure turned out to be 85%/15%. They could use 85% of the deposits for loans. After the depositors found out what the vault owners were doing, the vault owners started sharing the interest on the loans with the customers. Everybody thought it was fine to put the idle gold to work, to make profit, rather than just have it sit there forever.

    There was one thing very wrong with this system, however, Depositors were simultaneously holding receipts for the money deposited and using those receipts for their own spending money and at the same time authorizing the lending of some of the deposited gold which those receipts represented to other people. The receipts were proxies for the coins, therefore it is wrong for the depositors to simultaneously trade those receipts and have the coins on loan. This is where Humphreys comes in and tries to tell us that the receipts and the coins are two separate assets which can be traded separately. This amounts to saying that the coins can be in two different places at once. If the depositors want their gold taken out of the vault and loaned to another person, they should retire receipts for that amount of gold to the vault. They should not remain in circulation while the gold is also in circulation as a loan.

    Humphreys tells us that it is legitimate to retain these receipts because, though the coins are on loan, they are still an asset and therefore tradable. This is true, but in this case the receipt must be identified, to anyone who receives it, as being for money on loan, not as a receipt for immediately spendable money held in deposit. It can be traded as a loan, but not as money held in deposit. People are far less likely to accept money on loan as a payment than they are to accept ready cash. Therefore it is wrong to treat receipts for these loans as require money, which is how Humphreys implies that it should be treated.

    After this, the vault owners got really greedy. Just as the depositors wanted their gold left in the vaults and receipt to trade with, the people who borrowed money from the vaults wanted to leave the gold in the vaults and use receipts for the loans to spend the borrowed money with. So now we had receipts held by the depositors and, in addition, receipts for 85% of the amount of the same deposits held by the borrowers. These receipts were all simultaneously in circulation. The real money supply was artificially expanded by 85%. The banks had created this extra 85% out of nothing. More accurately, they had created this extra 85% out of DEBT. The receipts in circulation was now only backed by 100/(100 + 85) = 54% of their face value in actual gold. (Meaning 46% of the money supply was backed by nothing but debt.)

    This is was termed fractional money and the process by which it is created is what we call fractional reserve banking.

    It has become progressively worse after it began, especially after the advent modern central banking. Today, ALL of our money has been created by debt and is therefore backed by nothing but debt. If all debts were repaid today, there would be zero money in circulation.

  78. Bird:

    Let’s be clear about this. I don’t believe a bank has created money in the example John gave. I could be wrong, but I don’t obviously think i am because I put the argument forward. If I am, john of course can explain why I am and it’s no big deal as we’re all grown up men here without chips on our shoulders (unlike you).

    Money has to be created through the central bank- not the banks- and here’s how. Deposits + equity have to equal loans otherwise the balance sheet won’t, ummm balance.

    Money is created is through the base and this must come from the CB by an expansion of the money supply through market operations where the CB buys assets and pays for them with money. Banks also can only lend within the constraints of their capital to loan ratios, so their capital has to increase through retained earnings or an equity raising or maneuvering their risk ratios before they can leverage the balance sheet to say 13 (odd) times tangible common equity.

    Now instead of saying, it’s not true, that I’m lying and and that I’m a “fucking wop” and bank apologist how about trying to refute my argument with a thoughtful comment instead of the waffle and garbage you post. I can fully appreciate the fact that sticking to the point of the argument is hard for you, as you have only a limited grasp of economics, but give it a shot and see where you come out the other end.

  79. What goes back and forth forever is these guys lying about these matters, or alternatively not learning the material, they are affecting to be experts about. There is no reasoning with them, but for the sake of third parties, we need to clamp down on the lying and ignorance.

  80. Graeme Bird.

    You are not an expert. Seglin and white are. Hans Herman Hoppe is off his tree and his results are divergent. S&W have done scholarly empirical research. HHH has gone on a rant devoid of thinking in slavish devotion to the worst mistake that Rothbard et. al., made as scholars. It’s pretty stupid really. Insurance receipts are not money, yet the 100% reserve mob think they are. This is clearly bullshit.

    You have nothing to offer in this debate you illucid bore.

    “It amounts to two people saying “You are wrong”, “No, you are wrong” etc. You have to tell people WHY they are wrong. If you think they are beyond reason, then calling them liars, stupid or ignorant won’t help – because labeling them those things does not prove to them or anyone else reading your comments that they actually are those things. You have to attack their arguments, not the people”

    Loki my dear boy…Graeme has been banging on with this for six years now, with some fairly stupid arguments. Graeme has shown to be substantively wrong about finance, law, accounting and economics on various forums. He has never engaged in civil debate, has shyed away from argument and responding to devastating questions and then runs all over the net like a coward spreading the lie that he’s “won” a debate and he is some kind of scholar.

    You too will lose patience with this crank. He will never answer your questions and only respond with long winded irrelevant answers or denials with no counter arguments. He has been taken on directly several times and his arguments demolished in the face of some fairly easy to find, well known facts and has no response other to this than accusing his opponents of being uneducated except that his opponents have been eminently qualified experts and scholars and given some of his rather nutty ideas as someone who purports to be qualified in economics (i.e “there are no such thing as opportunity costs”, which is, BTW, the foundation of economics more or less) there is a healthy criticism in the Australian libertarian online community whether or not he even graduated from university at all.

  81. “It has become progressively worse after it began, especially after the advent modern central banking. Today, ALL of our money has been created by debt and is therefore backed by nothing but debt. If all debts were repaid today, there would be zero money in circulation.”

    No. Unless everyone let the chain off assets and liabilities be paid off. Or there would be a massive influx of cash and the base would expand at the expense of the bank created money.

    Do you think if we already run on a credit based money system and the money supply dried up….there would be an incentive to supply credit based money?

  82. “You are not an expert.” Actually he is. He’s the leading expert in this matter. But that is not the point. The point is that YOU are not any sort of expert, and you refuse to learn basic monetary economics. Once again. JC claimed that commercial banks DON’T create new money, and you said that he was right.

    So before you go in for more logical fallacy (in 2012, argument from authority is ALWAYS, a logical fallacy) you have to learn basic monetary economics. And you would have to explain it back to us, just so we know, that you know, what it is the people who understand monetary economics, are talking about.

  83. Are you or are you not; willing to learn BASIC ….. MONETARY ….. ECONOMICS. If you are going to be belligerently ignorant on this matter, then what is the point of you engaging in conversation. I see no evidence here, that you so much as understand, how it is that commercial banks create money. This is the topic at hand.

  84. “What goes back and forth forever is these guys lying about these matters, or alternatively not learning the material, they are affecting to be experts about. There is no reasoning with them, but for the sake of third parties, we need to clamp down on the lying and ignorance.”

    Challenge the lies and their pretense of being experts with facts. That will stop the lies going back and forth. “Clamping down” by just calling them liars does not benefit the third parties. Arguments will, even if they have no effect on the liars.

  85. Now whereas dot and JC don’t understand basic monetary economics, John Humphreys does. Because John Humphreys, to his credit, opposed the T.A.R.P.

    John Humphreys understood in 2008 that the TARP, and any other form of basic stealing, was unnecessary, and that what had to be done, was to get a lot of cash out there, and let the banks fall as they may.

    So being as DOT, and JC don’t understand monetary economics, and John Humphreys does, its a matter of opinion, who we ought to be the most disappointed in; Being as they all favour a bad regulatory environment, and oppose striving for the better (or the best possible) regulatory environment.

  86. The important thing is never to let them get away with even one lie. There is one thing that a fractional reserve advocate shares with the worst of the nastiest of the left-wing. They will never back down or admit that they were wrong, no matter how tangential, or trivial the point may be.

    I’m not talking about civilians here. I’m talking about graduates, who are relying on their alleged bona fides.

  87. Loki, why don’t you side-swipe these guys, and just ask me anything you wanted to know about the subject? Is it too expensive to go to 100% backed gold? Ought we even try to go to 100% backed gold? What ought to be the conversion rate if so? What are the costs in such a scheme? Which way is the best way to transition? What is the best way to regulate a stock market? How valid is the Fama “efficient market theory” and how valid might it be if we got the regulations right?

    These mindless advocates of crony advantage, wouldn’t have a clue about any of these subjects. The idea is to leave them with their puny obsessions.

  88. In 1941 the Governor of the Federal Reserve System, Mariner Eccles, testified before the House Committee on Banking and Currency that money is created completely out of credit (read “debt) and that “If there were no debts in our money system, there wouldn’t be any debt”. The English language is very precise, Dot.

    Robert Hemphill, Credit Manager of the Federal Reserve Bank in Atlanta, wrote in the forward to the book “100% Money” by Irving Fisher (1936)”: “If all the bank loans were paid, nobody could have a bank deposit and there would not be a dollar of coin or currency in circulation. … Someone has to borrow every dollar we have in circulation, cash, or credit.”

    The fractional reserve system expands until the fraction of receipts (paper or computer currency) backed by gold or other assets eventually reaches zero. This is what we call fiat currency – currency which is based entirely on debt and given value only by government decree or fiat (legal tender laws). Fractional reserve banking is the transition from gold-based currency to fiat currency. The banks cannot stay in business with zero reserves, so the government steps in and forces the people to accept it as having value.

    “Do you think if we already run on a credit based money system and the money supply dried up….there would be an incentive to supply credit based money?”

    The supply of credit based money is what stops the money supply from drying up, because credit is what supplies our money. That is my whole point. The incentive for supplying credit is to charge interest (profit) on that credit. The fact that there need be no material backing for such credit means that there is no risk in supplying it – only profit.

    The fact that our money system is based on credit means that we are completely reliant on commercial banks for our money – our prosperity. That is also a big incentive – the biggest.

    Any more questions?

  89. 100% backed gold is less expensive than fractional money., simply because, by definition, 100% gold-backed currency buys more gold than fractional money. It has higher value. Yes we should try to go back to it. The conversion rate would be decided by the weight of gold for which a given receipt for that gold is issued for, i.e the amount of gold backing it. The costs would be the storage fees for gold deposits and the minting and associated costs. The best way to transition is to abolish the whole banking system (i.e. repeal all of the legislation which created it) tomorrow and let people trade freely. The stock market should be unregulated, like any market should be, except by laws against fraud and theft and breach of contract (a form of theft). I don’t know what Fama’s theory has to do with this topic, but feel free to explain.

  90. You see I don’t agree Loki. Because my understanding of the history of the topic is that the reason we had to settle for only gold and silver, is because, and only because, we had not clamped down on fractional reserve.

    My understanding of the history of banking, is that the mere SMELL of fractional reserve, stops us from using STORED Chromium, Palladium, Platinum, Tungsten, Copper, Silver, Titanium, and perhaps others. The mere SMELL of fractional reserve, means that gold and silver ALONE can be monetary metals, and the reason being, that these are the only two metals for which we can, on a practical level, say “screw you guys, I’m going home” and take our gear out of the bank. Fractional reserve leads to rampant fraud, if not checked in its infancy, which leads to us being reduced to only two metals for money, which leads to massive dead-weight loss in monetary affairs, whether or not we are to go for 100% backing.

  91. The good news, is if we get the monetary regulations, AND the transition right, then hard money is fundamentally costless.

    The premium price that hard money policy puts on some metals (like the metals I listed above) merely underwrites the cost of us extracting the base metals. In fact its better than having a cost. Its essentially costless. BUT IT IS ALSO THE HEIGHT OF PRUDENCE…. being as we get the monetary metals up earlier, use them with greater discretion, and have the information necessary to find the OTHER metals we need, further ahead in time.

    So excellence in money becomes a righteous sort of social, and civilisational, insurance.

  92. Loki you are kidding yourself if you are “worried about Humphreys”.

    Read John’s blog.

    Read Graeme’s blog.

    Then come to your own conclusions, I am sure you are sentient enough to have an epiphany.

    “The fact that our money system is based on credit means that we are completely reliant on commercial banks for our money – our prosperity. That is also a big incentive – the biggest.”

    No – look at the history of cheques, or alternate source of money, like “Ithaca Hours”. Securitisation influences money supply with usual maturity transformation. Your assumptions are far too generalised to be correct.

  93. “Now whereas dot and JC don’t understand basic monetary economics, John Humphreys does. Because John Humphreys, to his credit, opposed the T.A.R.P.”

    I opposed the TARP, JC went back on his support, so shove your lies up your arse you bleach quaffing crackpot.

  94. No you didn’t. You were silent. And it would not matter if you did. The idea is to understand monetary economics before you start typing.

  95. Credit where credit is due. Humphreys was almost unique, in working economists in this country, in coming out against the form the bailout took. The rest of you were either going along, or hiding under a table.

  96. People ought to see that there are really only three reasonable points of view in this story. There is the Reisman/Rothbard view. The Bill-Still view, and my view which is a third way, which takes all the arguments of these other two into account. The rest of you are really just mucking about.

  97. ““If all the bank loans were paid, nobody could have a bank deposit and there would not be a dollar of coin or currency in circulation. … Someone has to borrow every dollar we have in circulation, cash, or credit.””

    IF all bank loans were paid and NO OTHER NEW LOANS were made out…

    This is false anyway. The idea that hard currency would disappear off the face of the earth if the entire banking system was deleveraged to the point of winding itself up is something requiring further explanation.

    It also demands you desist from signing off with “any questions?”

    ““If all the bank loans were paid, nobody could have a bank deposit and there would not be a dollar of coin or currency in circulation. … Someone has to borrow every dollar we have in circulation, cash, or credit.””

    So then our currency is trust based. Why do you think you ought to be able to demand others write off the goodwill of others?

  98. Yes yes yes yes yes, well this is all well and good. But the fact is there can be no meaningful communication at least until you get as far as the John Humphreys level of understanding of monetary economics. And I can deride this man, but he at least supports Ron Paul and he at least has made a couple of good calls on this subject in a timely fashion.

    But until you are willing to learn, I don’t see how you could even possibly be a part of this controversy. You’ve heard of “literary snobs” no doubt? Well I am ……. a “monetary-economics snob.”

  99. A lesson for Graeme Bird who thinks it matters if you define money supply narrow or broadly or that it can be done by black letter law…and then assumes that the issue of securitisation matters little.

    All this leads to is a realisation that dogmatically defining money in the way an Australian Standard is made is bound to fail and that the near religious zealotry of 100% reservists is untenable. If you cannot define money supply by legislation then you CANNOT impose 100% reserve rules.

    Listen for a moment because you are incorrect.

    If M3 changes on confidence – then so can money. Prices relate to quality of issue.

    If confidence is shot, then the money supply collapses – as happens at the end of a hyperinflation.

    Remember too that securitisation alters the credit supply with no necessary steps involving the bank credit multiplier.

    You don’t understand the implication of this because you refuse to believe that an increase in money supply can ever be market demanded.

    If, as you have said on the ALS blog, that M3 is simply what money can buy, what happens if credit for productive activity continues to be created without any requisite increase in the money supply (narrowly defined)?

    The implication is that there is excess money supply over any length of time and at the same time, what you call “growth deflation”. (At a point in time V has increased and real output exceeds the change in demand for money until V increases and they equilibrate at a later point. Here under free banking an incentive to issue base money would then reappear until equilibration [which would then be sped up]).

    The idea we can define money by black letter law and then rewrite immutable laws of economics around this is seriously and fatally flawed.

  100. I don’t know how Graeme cuts off my replies. It’s insane. This fool is blowing up over being given an argument but then when he’s presented with one he urges his social betters to get an education.

    Apparently Graeme thinks that trust based currencies don’t exist. I gave him an example.

    Time to lock this poor fellow up in the nut house.

  101. “Loki, why don’t you side-swipe these guys, and just ask me anything you wanted to know about the subject?”

    Bird you low rent philosopher’s impostor.

    You ought to be prosecuted for asebeia and forced to drink hemlock, if Zeus wills such a thing.

  102. “If you cannot define money supply by legislation then you CANNOT impose 100% reserve rules.”

    I wouldn’t expect 100% reserve to be imposed by law. It would be imposed by the market. All I would impose by law is the requirement that receipts for loans shall not be defined as money, though those loans may be traded. Money deposited in banks which is on loan cannot be used as cash. The owner of deposited money cannot treat money on loan as ready cash, therefore the receipt he has for the loaned money may not be used as currency – it is a tradable loan, not money.

    “If M3 changes on confidence – then so can money. Prices relate to quality of issue.

    If confidence is shot, then the money supply collapses – as happens at the end of a hyperinflation.”

    You’ve got that the wrong way around. Confidence is shot after hyperinflation because the money supply collapses. The collapse is caused by hyperinflation, not by a loss of confidence. Loss of confidence is the result of the collapse.

    “If, as you have said on the ALS blog, that M3 is simply what money can buy, what happens if credit for productive activity continues to be created without any requisite increase in the money supply (narrowly defined)?”

    Money supply should not be derived from credit..That is the point being argued here. You are using your conclusion to argue for your conclusion. You are begging the question, arguing in a circle.

    “The idea we can define money by black letter law and then rewrite immutable laws of economics around this is seriously and fatally flawed.”

    So in order to argue your case, you are throwing out the definitions of words. Without definitions of words, no logical argument is possible. Ignoring definitions is the resort of somebody who is losing an argument. If economics is not based on laws, then it is of no value

    Here is my definition of money: Currency which is available for immediate spending. A loan is money, but only for the borrower – not for the lender. If you want me to make it clearer than that, I’m going to have to draw it for you.

  103. Graeme – you have said the creation of bank money is fraudulent.

    How can you possibly argue both positions you duplicitous twit?

    All I ever maintained is that whilst M1 is a good working definition actually committing the definition of what money is to black letter law is actually a very harmful thing to do.

  104. Graeme I am sick of your bullshit. The list of refutations you refuse to stand accounted for is as long as my Adonis like arms.

    You have been wrong about law, finance, accounting, economics and have refused to discuss the mathematical reasons why you are incorrect, you have dodged questions and ignored blatantly obvious evidence presented towards you.

    The only solace from this stupid argument is that you will never hold a position of power. The woeful part of this exercise is that unlike in Socrates day we cannot force you to drink hemlock for asebeia.

  105. I am a working economist. JC is a finance industry professional.

    Who the fuck are you, where did you graduate from and what is your GPA?

    You fool. You have swallowed Rothbard’s dumb researcher paper hook, line and sinker.

    Have you even bloody read the incorrectly named “Austrian money supply”?

    Do you honestly think that insurance receipts are money? 99.999999% of society thinks they are simply a shorthand copy of a financial services contract.

    “I’m going to buy a new house with all of these insurance receipts”

    How could a normal person be this stupid? Are you drinking bleach again?

  106. “All I would impose by law is the requirement that receipts for loans shall not be defined as money, though those loans may be traded.”

    You’re just creating an unnecessary secondary market. Why raise transactions costs? Why turn a savings account into a series of bank bills?

    “Confidence is shot after hyperinflation because the money supply collapses. ”

    So you think there is a massive oversupply of money, they don’t lose confidence in the monetary system, stop using it, and then lose confidence?

    “Money supply should not be derived from credit”

    Why? Why should you tell other people what to do? If it fails under lassiez faire, so be it. You are making a commercial and not a policy judgment.

    “So in order to argue your case, you are throwing out the definitions of words.”

    No. Where did I reject or change the definition of a word? Money is the most sought after commodity. That is entirely true. Now try telling me what exactly the most sought after commodity is, given the vagaries of confidence, velocity and money creation.

    “Currency which is available for immediate spending.”

    What is currency?

    ” A loan is money, but only for the borrower – not for the lender. If you want me to make it clearer than that, I’m going to have to draw it for you.”

    Dude,your bank deposits are being borrowed by your bank. You are the lender.

    So what you’re saying is, you want to end or will not accept electronic funds transfers. This is a bit extreme. Why do you want to end all electronic commerce and send us back to the 1970s?

    You ought to really think this through. It’s quite a stupid idea.

    Have you looked at Graeme’s and John’s blog yet to determine which one of them is sane?

  107. Your definition of money loki also means that simply withdrawing cash increases the money supply.

    You may want to think this one through a bit more.

  108. ‘“All I would impose by law is the requirement that receipts for loans shall not be defined as money, though those loans may be traded.”

    You’re just creating an unnecessary secondary market. Why raise transactions costs? Why turn a savings account into a series of bank bills?’

    I’m not creating anything. I’m just calling things what they are. A receipt for a loan is not money because that money is temporarily in the possession of the borrower, not the lender, and therefore the lender cannot spend it as if it were money. It’s either on loan or it’s not – it can’t be both on loan, to be spent by the borrower, and at the same time be available for the lender to spend. That is the meaning of “loan”, not an idea I invented.

    ‘“Confidence is shot after hyperinflation because the money supply collapses. ”

    So you think there is a massive oversupply of money, they don’t lose confidence in the monetary system, stop using it, and then lose confidence?’

    The oversupply devalues the currency. The people lose confidence in it because it has little value. Then they stop using it. Of course, the fact that nobody is using it – that nobody else will accept it for payment – is a secondary reason for losing confidence, but it’s drop in value already implied that nobody wants to accept it. That is what “value” means.

    ‘“Money supply should not be derived from credit”

    Why? Why should you tell other people what to do? If it fails under lassiez faire, so be it. You are making a commercial and not a policy judgment.’

    I am not saying people cannot trade loans. I am saying that money on loan is not ready cash. Again, if money is on loan, it is not available to the lender for his own spending. It is being spent by the borrower. The same money cannot be simultaneously spent by two people.

    ““So in order to argue your case, you are throwing out the definitions of words.”

    No. Where did I reject or change the definition of a word?’

    You told me I was wrong to make strict definitions about what money is. If we cannot define money, how can we have economics, except to talk about bartering systems?

    ‘Money is the most sought after commodity. That is entirely true. Now try telling me what exactly the most sought after commodity is, given the vagaries of confidence, velocity and money creation.’

    Gold. Gold is historically and in current practice the commodity on which sound money is based. The pieces of paper which tell us how much gold we have are just receipts for the deposit of that gold in a safe. Debt is not a sought after commodity. It is not particularly desirable either have our money temporarily in somebody’s possession or to be owing other people money, That is one profitable way for both parties to do business, but it is not the only or the best way to make a profit or finance a venture / pay for a house or car.

    ‘“Currency which is available for immediate spending.”

    What is currency?’

    The medium of exchange. Historically, gold. Represented, for practical convenience, by paper receipts of some kind, which can be denoted in units of some kind bearing some relation to the actual medium, depending on it’s value in relation to other commodities.

    ‘” A loan is money, but only for the borrower – not for the lender. If you want me to make it clearer than that, I’m going to have to draw it for you.”

    Dude,your bank deposits are being borrowed by your bank. You are the lender.’

    Yes, and if I and every other customer of my bank simultaneously try to draw out our entire deposits, we won’t get it all. Let’s say we all have gold deposited in our bank (ha ha) and some of that gold is physically in the possession of borrowers. We go to the bank and ask for all of our gold back. Our bank will tell us what some people here refuse to recognize: We can’t have it all because some of it is on loan.

    Now, we can fool ourselves into thinking we can get away with this if the bank issues receipts (legal tender notes, bank account entries) instead of actual gold. But we don’t really get more money. We just get more receipts. And having more receipts than actual money (gold) devalues those receipts. We could all have receipts to the value of our entire deposits while our borrowers also have receipts for how much of it they have borrowed, but overall this brings down the value of our receipts.

    That is an iron-hard economic law.

    ‘So what you’re saying is, you want to end or will not accept electronic funds transfers. This is a bit extreme. Why do you want to end all electronic commerce and send us back to the 1970s?’

    EFT is not the same thing as pretending loaned money is simultaneously available for us to spend. EFT is just a way for us to make a transaction of money which really is available. It is the electronic version of trading receipts for gold. Or would be in a sound money system. Presently it is not, but that is nothing intrinsically to do with EFT, it is due to the fact that our money is presently based on debt and not gold.

    ‘You ought to really think this through. It’s quite a stupid idea.’

    Obviously you did not. You equated EFT with debt-based money. This shows that your own ideas about money are very confused.

    ‘Have you looked at Graeme’s and John’s blog yet to determine which one of them is sane?’

    No, but I can tell just from this one comment by you that you have some serious problems of your own, problems which reading John’s blog have not helped you to recognize.

    ‘Your definition of money loki also means that simply withdrawing cash increases the money supply.

    You may want to think this one through a bit more.’

    In a 100% gold-backed money system, the amount of gold remains the same. The only thing that changes is whether that gold is in a safe and traded using receipts or whether it is traded directly without receipts. Even the receipts could be kept under the owners mattress for 50 years and not be in circulation. That’s the whole point of gold-backed money: to increase the circulation of it, you have to mine more of it. The size of the money supply and circulation are not the same things. The gold, or receipts for it, are only in circulation when the owner puts it into circulation – i.e., spends it. If he doesn’t spend it, it still exists, He is just keeping it, i.e. saving it.

    Careful who you call stupid. It could really be you.

  109. Loki — I’m not saying how bank-credit should be treated. You can treat it any way you like, but you should not try to prevent other people from using bank-credit if they so choose. If a business accepts payment by credit card, then they know perfectly well that they are accepting payment by credit card. Are you suggesting that the buyer has a legal obligation to remind the shop that a credit card is a credit card? I would have thought that was fairly self-evident.

    I’m not saying the coins are in two different places at the same time. They are in one place, and the IOU is in another place.

    To argue against FRB you need to either argue that (1) credit doesn’t exist, or shouldn’t be allowed to exist; or (2) people shouldn’t be allowed to voluntarily trade in credit. As a libertarian, I believe people should be allowed to voluntarily create credit and voluntarily trade credit.

  110. JC — It depends on your definition of money, which is why I was careful to distinguish between “base money” and “broad money”.

    Broad money includes base money and credit that is traded as money.

    Banks cannot create “base money”, but they can create credit. You also can create credit. Terje and I created credit at the Mises Seminar by exchanging $10 IOUs with each other. In a free market people are then allowed to create and trade in credit.

    If people don’t trust the credit, then it will trade at a premium. But if people have enough trust in credit, then it will become fungible for base money. This is why some people say the banks “create money”. It is an understandable claim, but it would be more accurate to say that banks “create credit” and then note that sometimes credit is fungible with base money.

    If the anti-FRB types really don’t want to deal in credit, then they are free to not deal in credit. Some shops still are “cash only”, and they can keep their cash in a vault. That is allowed. To each their own, so long as they don’t try to shut down voluntary exchange.

  111. I suspect that Tim and Nathan are both Graeme in disguise, and so they will be put on moderation. If they are real people, then they can feel free to e-mail me on john.humphreys99@gmail.com and I will take them off moderation.

    Graeme — please stop making up fake identities to try and join this discussion. You have your own blog, where you are free to write whatever you like, but you are on moderation here.

  112. “I’m not saying how bank-credit should be treated. You can treat it any way you like, but you should not try to prevent other people from using bank-credit if they so choose.”

    People can treat credit however they wish, as long as they don’t treat it as if it is money IN the bank. If it is on loan, it is not in the bank. I am not saying that credit or loans cannot be traded. I am saying that it is wrong to pretend that tradable loans are the same thing as real money. It is wrong to trade a loan (as payment) without telling the receiver that it is a tradable loan rather than money in the bank. Yes, it is a loan of money. But it is money in somebody elses possession for some agreed amount of time and which has no guarantee of being repaid. (Loans involve risk.)

    FRB does not inherently involve treating IOUs for loaned money as money in the bank, but that is the current practice (using legal tender laws). If FRB were practiced by telling everybody that IOUs for loans of deposited money were nothing but IOUs for loans, then the system would probably not be used by anybody. Who is going to take at face value a note with $5 printed on it which they know is only 54% backed by gold and 46% backed by nothing but debt and really worth only $2.70? Presently, as I mentioned previously, our notes are backed by 0% gold and 100% debt. It’s value is entirely fiat, i.e enforced by law.

    “If a business accepts payment by credit card, then they know perfectly well that they are accepting payment by credit card. Are you suggesting that the buyer has a legal obligation to remind the shop that a credit card is a credit card? I would have thought that was fairly self-evident.”

    In the case of a credit card, the receiver of the funds knows that if the purchaser doesn’t pay it, the bank who issued the card will pay it, and the purchaser will be held responsible for paying the money to the bank. This is not the same thing as me trading a loan of an amount of money equal to the price of the purchase as payment to the merchant. The bank is lending me money and I have to pay it to the bank. The merchant risks nothing. I am paying him real money, loaned to me by the bank for the purpose of spending.

    “I’m not saying the coins are in two different places at the same time. They are in one place, and the IOU is in another place.”

    You are saying that the IOU is a separate asset of equal worth to the coins it stands for, which is effectively the same as saying the coins exist in two places at once. A tradable loan is not of equal worth to an equal amount of money in the bank. A loan involves the risk that it will not be repaid or will require legal action and expenses to enforce it’s repayment. It also requires that the lender wait for the agreed period of the loan before he can use the money himself. For the period of the loan, the money is in somebody elses possession.

    The coins are either held in the bank for the depositor to spend or held in the bank for the borrower to spend. They cannot be available to both the depositor and the borrower to spend simultaneously. The bank cannot issue receipts for the coins to both the depositor and the borrower. When the depositor agrees to loan the money, he retires his receipts for that money and the bank issues a receipt to the borrower and an IOU to the depositor. To issue receipts to both the depositor and the borrower would be the same as physically giving the coins to both parties,if that were possible. Giving them both receipts for those coins is effectively giving the coins to both parties, which is fraudulent.

    When the depositor puts the money on loan, he gets an IOU. He can trade that IOU, but that is not the same as trading the actual coins themselves or a receipt for them. He is trading a LOANED amount of money, not an amount of money in DEPOSIT and therefore available for immediate spending. The IOU for the loaned amount is only usable as payment if the person it is offered to wishes to take over the loan, and he may not be willing to pay for it an amount of money equal to the amount loaned.

    “To argue against FRB you need to either argue that (1) credit doesn’t exist, or shouldn’t be allowed to exist; or (2) people shouldn’t be allowed to voluntarily trade in credit. As a libertarian, I believe people should be allowed to voluntarily create credit and voluntarily trade credit.”

    FRB presently does not simply involve the extension of credit or the trading in credit. It involves the issue of paper notes which purport to be currency but are in fact IOUs for loaned money. That is how FRB works. It is based on a lie and at best (if the deception were dispensed with) it would be based on an unpopular practice. The lie is that “$5″ is printed on notes wich are (currently) backed by nothing except debt, i.e. nothing of intrinsic worth. It would also be a lie to print “$5″ on notes backed by only $2.70 in gold in a system where the notes are 54% gold-backed. Everybody using the system might be aware of the lie but it would still be a lie.

    Issuing depositors receipts, to be used as spendable cash, for real money (gold) held by the bank in the form of paper money is fine. Issuing borrowers receipts, to be used for spendable cash, for amounts of gold held in the bank but on loan to the borrower is fine. But issuing a depositor receipts, to be used as spendable cash, for gold owned by him but on loan to a borrower is not okay. IOUs for money on loan are not cash and currency should not be issued for them.

    Loans can traded for currency but they are not currency themselves, any more than a car or house or any other tradable commodity is money. Money is a medium of exchange, it is not the commodities which are traded with it. A loan is tradable, but it is not a medium of exchange. It is not money. Yet our money today is all exactly that – debt. Treating these loans as money in circulation is the same thing as treating houses, cars – all commodities which may be purchased with money – as if they are also money in circulation, i.e. part of the money supply.

    People should be free to create and trade credit – of course. But they should not be free to pretend to others that money on loan is the same thing as money in their pockets. People should be free to participate in FRB if they wish but it would not be as popular as it is now, with the government effectively telling us that we must recognise tradable loans as if they are money in our pockets. Give anybody a free choice between accepting $100 which is in your pocket and $100 which you have lent to somebody he doesn’t know, and he will take the $100 in your pocket every time. They do not have the same value. Only legal tender laws presently make them artificially the same value.

    Your basic mistake is treating tradable loans (IOUs for loaned money) as if they are money.

  113. “It depends on your definition of money, which is why I was careful to distinguish between “base money” and “broad money”.

    Broad money includes base money and credit that is traded as money.”

    Credit should not be traded as money. It should only be traded FOR money.

    “Banks cannot create “base money”, but they can create credit. In a free market people are then allowed to create and trade in credit.”

    This requires that a distinction is made between money and credit, i.e. that it is fraudulent to trade credit as if it is money.

    “If people don’t trust the credit, then it will trade at a premium. But if people have enough trust in credit, then it will become fungible for base money.”

    That’s a big “if”

    “This is why some people say the banks “create money”. It is an understandable claim, but it would be more accurate to say that banks “create credit” and then note that sometimes credit is fungible with base money. ”

    Banks compel us, via legal tender laws, to always – not sometimes – treat credit as money. In a free market, this would not be possible (there would be no legal tender laws and therefore no fiat currency based on debt). The fact that credit is (sometimes) fungible with base money does not make it money. Issuing notes for that credit artificially makes it into money. That is what we mean when we say banks “create money”. It is fraudulent.

    “If the anti-FRB types really don’t want to deal in credit, then they are free to not deal in credit. Some shops still are “cash only”, and they can keep their cash in a vault. That is allowed. To each their own, so long as they don’t try to shut down voluntary exchange.”

    Everybody at some time might wish to deal with credit. FRB would only be legitimate if IOUs for loaned amounts were distinguished from receipts for amounts not on loan, i.e. not treated as actual money.

  114. “The oversupply devalues the currency. The people lose confidence in it because it has little value. Then they stop using it. Of course, the fact that nobody is using it – that nobody else will accept it for payment – is a secondary reason for losing confidence, but it’s drop in value already implied that nobody wants to accept it. That is what “value” means.”

    …and this is NOT what you said happened before,

    “I’m not creating anything. I’m just calling things what they are.”

    You wish to impose a system on people which isn’t necessary and is costly.

    “I am not saying people cannot trade loans. I am saying that money on loan is not ready cash. Again, if money is on loan, it is not available to the lender for his own spending. It is being spent by the borrower. The same money cannot be simultaneously spent by two people.”

    This is semantic babble. If two people cannot spend the same money at the same time, then there is no problem with fractional banking.

    “You told me I was wrong to make strict definitions about what money is. If we cannot define money, how can we have economics, except to talk about bartering systems?”

    You can define money at a point in time. Confidence means what money is changes.

    “Yes, and if I and every other customer of my bank simultaneously try to draw out our entire deposits, we won’t get it all. Let’s say we all have gold deposited in our bank (ha ha) and some of that gold is physically in the possession of borrowers. We go to the bank and ask for all of our gold back. Our bank will tell us what some people here refuse to recognize: We can’t have it all because some of it is on loan.

    Now, we can fool ourselves into thinking we can get away with this if the bank issues receipts (legal tender notes, bank account entries) instead of actual gold. But we don’t really get more money. We just get more receipts. And having more receipts than actual money (gold) devalues those receipts. We could all have receipts to the value of our entire deposits while our borrowers also have receipts for how much of it they have borrowed, but overall this brings down the value of our receipts.

    That is an iron-hard economic law.”

    No it isn’t. You’ve already accepted that two people cannot spend the same money in a fractional banking system at the same time.

    “Obviously you did not. You equated EFT with debt-based money. This shows that your own ideas about money are very confused.”

    1. You call bank deposits debt based money (as all deposits are loans).

    2. You use bank deposits to undertake EFT.

    3. You then say EFT is not or cannot be used for EFT.

    You then call me confused with no proof or argument.

    “No, but I can tell just from this one comment by you that you have some serious problems of your own, problems which reading John’s blog have not helped you to recognize.”

    Comments like this make me suspicious you are Graeme Bird.

    “In a 100% gold-backed money system, the amount of gold remains the same. The only thing that changes is whether that gold is in a safe and traded using receipts or whether it is traded directly without receipts. Even the receipts could be kept under the owners mattress for 50 years and not be in circulation. That’s the whole point of gold-backed money: to increase the circulation of it, you have to mine more of it. The size of the money supply and circulation are not the same things. The gold, or receipts for it, are only in circulation when the owner puts it into circulation – i.e., spends it. If he doesn’t spend it, it still exists, He is just keeping it, i.e. saving it.

    Careful who you call stupid. It could really be you.”

    So what you are saying is that you oppose not finding more gold but having increased economic activity – in which in MV = PY velocity would increase, P would increase, Y would increase in real terms. Perhaps M may as well if there was more leverage (an increase in V implies a change in M lower than but proportional to V). In this case gold could be exchanged for more goods and services and the money supply would also expand.

    The only idea which is stupid is the idea that money supply should be tied strictly to the supply of asset backed hard currency. it is a simpleton’s idea.

  115. “Your basic mistake is treating tradable loans (IOUs for loaned money) as if they are money.”

    This is arrogantly stupid. If someone wants to use them as money, THEY ARE.

  116. ‘“The oversupply devalues the currency. The people lose confidence in it because it has little value. Then they stop using it. Of course, the fact that nobody is using it – that nobody else will accept it for payment – is a secondary reason for losing confidence, but it’s drop in value already implied that nobody wants to accept it. That is what “value” means.”

    …and this is NOT what you said happened before, ‘

    This is what I said before:

    “You’ve got that the wrong way around. Confidence is shot after hyperinflation because the money supply collapses. The collapse is caused by hyperinflation, not by a loss of confidence. Loss of confidence is the result of the collapse.”

    Your original comment was:

    “If confidence is shot, then the money supply collapses – as happens at the end of a hyperinflation.”

    Confidence doesn’t start to decrease until the value starts to decrease. We might say that a drop in value is a drop in confidence, since value is ultimately nothing more than what value an individual assigns something. However, drop in value of currency is primarily caused by the oversupply of it. The drop in value – or confidence – follows from that. Even the original drop in value begins at the higher levels of finance and is transmitted secondarily to the rest of the population. In general, for all practical purposes, decrease in confidence follows drop in value, which is caused by oversupply, not decrease in confidence.

    Please do what I do: Think through the issue before responding. Don’t waste space here on knee-jerk responses.

    —————————————————–

    ‘“I’m not creating anything. I’m just calling things what they are.”

    You wish to impose a system on people which isn’t necessary and is costly.’

    The inflation which is inherent in any FRB system is costly, When a $10 note is really only worth $5.40, that costs us all $4.60 out of every $10 in income we earn, before we even get it. And that’s only with the old 54% FRB system. Today it is 0% gold-backed and 100% debt backed and based purely on fiat.Each $10 you earn today is intrinsically good for only one thing – wiping your arse. That’s why the world financial system is collapsing. Tell me what the costs of 100% gold-backed money are.

    —————————————————————

    ”“I am not saying people cannot trade loans. I am saying that money on loan is not ready cash. Again, if money is on loan, it is not available to the lender for his own spending. It is being spent by the borrower. The same money cannot be simultaneously spent by two people.”

    This is semantic babble. If two people cannot spend the same money at the same time, then there is no problem with fractional banking.’

    Let me take you by the hand. Let’s people trade directly with gold coins and not receipts. When a person wants spending money, he draws coins out of his deposit in his bank, not receipts. When he loans money from his deposit through his bank, the bank gives the borrower coins, not receipts, and gives the lender an IOU. There is no paper money, no “bank notes”. A depositor who has 46% of his deposit on loan to another person has 54% of his deposite available to him (in coins) and 46% of it in IOUs. He can’t use the coins on loan – the borrower has them – they have been transfered to the borrower’s deposit in the bank and perhaps he has withdrawn it from the bank spent it all. All the lender has is some paper IOUs for those coins. The depositor takes some IOUs and some coins to his grocer. He asks the grocer if he will accept payment in IOUs for money he will get when – and if – the borrower pays it back. The grocer says no, he wants payment NOW – in coins.

    See? IOUs for coins in somebody else’s possession are not the same as coins in your pocket. Therefore IOUs are not money. They are IOUs for money. An IOU and a receipt for coins in your possession – in YOUR bank deposit, not your borrower’s deposit – are not the same thing. Yes, they are both made of paper and ink; but that is not an excuse to ignore the difference between the things they each represent.

    —————————————————-

    “You told me I was wrong to make strict definitions about what money is. If we cannot define money, how can we have economics, except to talk about bartering systems?”

    You can define money at a point in time. Confidence means what money is changes.

    Money is a medium for exchanging commodties. It is true that money is itself a commodity – that is what makes it good money. Good money is itself a commodity which everybody has confidence in, i.e. which has value. So theoretically, yes, tradable loans could become a medium of exchange. Anything can be a medium of exchange. It used to be cattle. But how much confidence do people really have in loaned money, compared to immediate money? Well, since the government has to tell people to treat debt-based money as if it were the same value as 100% gold-backed money, obviously not a lot. There is no escaping it: a 100% gold-backed dollar is not worth as much as a 54% gold / 46% debt backed dollar. Today, our money is 100% debt backed and 100% fiat backed, which indicates that it has 0% confidence.

    ————————————————————–

    ‘“Yes, and if I and every other customer of my bank simultaneously try to draw out our entire deposits, we won’t get it all. Let’s say we all have gold deposited in our bank (ha ha) and some of that gold is physically in the possession of borrowers. We go to the bank and ask for all of our gold back. Our bank will tell us what some people here refuse to recognize: We can’t have it all because some of it is on loan.

    Now, we can fool ourselves into thinking we can get away with this if the bank issues receipts (legal tender notes, bank account entries) instead of actual gold. But we don’t really get more money. We just get more receipts. And having more receipts than actual money (gold) devalues those receipts. We could all have receipts to the value of our entire deposits while our borrowers also have receipts for how much of it they have borrowed, but overall this brings down the value of our receipts.”

    No it isn’t. You’ve already accepted that two people cannot spend the same money in a fractional banking system at the same time.’

    I did say they cannot spend the same money, yes, that was my point. In FRB, two people don’t spend the same MONEY, the bank issues people RECEIPTS for the same money, which makes the value of those receipts less than that of the actual money

    —————————————————————————

    “1. You call bank deposits debt based money (as all deposits are loans).

    2. You use bank deposits to undertake EFT.

    3. You then say EFT is not or cannot be used for EFT.

    You then call me confused with no proof or argument..”

    EFT is nothing more than what the name says: electroninc transfer of funds. It says nothing in there about what kind of money is being transfered. It could be debt-based money or it could be 100% gold-backed money. It could be cows. By opposing debt-based money, I am not opposing EFT. If we had 100% gold-backed money, we could still use EFT. We can trade gold in the form of receipts, so we can trade gold using EFT.

    ————————————————————————————

    “So what you are saying is that you oppose not finding more gold but having increased economic activity – in which in MV = PY velocity would increase, P would increase, Y would increase in real terms. Perhaps M may as well if there was more leverage (an increase in V implies a change in M lower than but proportional to V). In this case gold could be exchanged for more goods and services and the money supply would also expand.”

    The amount of gold in existence affects nothing but value of gold and hence the price of other commodities in terms of gold. It is merely a stable medium of exhange. It does not inhibit the economy, it merely regulates the economy so that market price signals reflect the economic reality. Pretending that tradable loans are money does not reflect economic reality, because it is itself a total lie.

    “The only idea which is stupid is the idea that money supply should be tied strictly to the supply of asset backed hard currency. it is a simpleton’s idea.”

    Tie it to whatever you want – just don’t pretend that coins on loan, in someone else’s bank deposit, are the same thing or the same value as coins in your own deposit, i.e., don’t lie about the value of what you are tying it to.

  117. If I gave you a choice between a $100 note in your hand and an IOU for $100 from somebody you don’t know, which would you accept? The IOU is not money, it is an IOU for money presently in somebody else’s possession. You and the borrower cannot both, simultaneously have the actual $100 in your hands, for immediate spending. So, would YOU treat the IOU$100 as having the same value as the $100 note? Yes, you might accept it as payment, i.e. as money, but you would not value it at the amount for which it is written. A $100 note and an IOU$100 are not the same thing. FRB treats them as if they are.

  118. “In general, for all practical purposes, decrease in confidence follows drop in value, which is caused by oversupply, not decrease in confidence.”

    So you agree. Confidence can change money supply. Defining money supply strictly in black letter law is then a folly. I never set out to make a precise chronology. You are correct here. You were incorrect before.

    Clearly confidence can change money supply simply through the quality of money – as well as the incentive to supply money at differing levels of quality.

    “The inflation which is inherent in any FRB system is costly”

    This is complete and utter rubbish. There is NO inherent inflation.

    The ONLY inflation that can happen is from an oversupply of the base unless there are some other persistent distortion.

    Creation of bank credit is not inflationary. It requires a deposit. Deposits can only be continually made if there is ongoing and sustainable economic activity,

    “Therefore IOUs are not money. ”

    No. As long as someone is willing to use them as money (high levels of confidence in the commercial system for whatever reason) they ARE money.

    You have now changed your story and bank deposits ARE NOT money? Can you at least keep your story straight?

    “Today, our money is 100% debt backed and 100% fiat backed, which indicates that it has 0% confidence.”

    Actually it indicates about 100% confidence (give or take a 4% premium on inflation), otherwise we would find the monetary system collapse. Are you saying that fiat systems can’t collapse? If so you are not doing a good job of spruiking gold backed, 100% LVR banking and money.

    “I did say they cannot spend the same money, yes, that was my point. In FRB, two people don’t spend the same MONEY, the bank issues people RECEIPTS for the same money, which makes the value of those receipts less than that of the actual money”

    This is just dishonest…and very, very stupid. In the early 1980s Australia dropped the capital requirement of banks from 25% to 8%. DID WE SUFFER 300%+ INFLATION?

    Of course we didn’t. The credit multiplier doesn’t devalue money as it operates in an expansionary manner from continuing economic activity.

    There was asset inflation but it was vastly, vastly less and correlated to base money supply.

    “EFT is nothing more than what the name says: electroninc transfer of funds. It says nothing in there about what kind of money is being transfered. ”

    You lost the argument. It is being used as money – and you are also wrong about “the type of money” (like it matters). An EFT transfer is of course made up of bank deposits – which you say are money and say are IOUs as your disjointed argument suits.

    “Tie it to whatever you want – just don’t pretend that coins on loan, in someone else’s bank deposit, are the same thing or the same value as coins in your own deposit, i.e., don’t lie about the value of what you are tying it to.”

    I’m lying because you cannot match up your silly pet theories with economic identities like the quantity of money equation?

    Dude. This means your argument sucks.

    I have $100 in the bank and John has $100 in the bank – we both have $100.

    You have the temerity to call me stupid. Unbelievable.

  119. dot — Well, anything can be money in the broadest sense. Shells & cigarettes can be money. We need to be clear about whether we are talking about “base money” in our current system (only issued by the central bank) or whether we are talking about “broad money” (anything regularly used for exchange), or whether we are talking about the concept of money (anything, depending on the circumstance).

    I don’t think Rothbard was a lunatic. A great thinker and great writer… he was just very wrong on this issue.

    Btw, I wish you would go back to a normal name, maybe even something radical like “Mark”. :)

  120. Loki — I believe I’ve addressed all of your issues in my original article, and I don’t have the time to be doing free tutorials, but I’ll address a few more points in the hope that you’re open to learning.

    You seem to think that some sort of authority figure on high should determine what can be used as a medium of exchange. Strange. I believe that anybody should be allowed engage in voluntary exchange for whatever they like. If you want to exchange a banana for a cigarette, that should be allowed. If you want to use shells or silver or sheep or sex-vouchers as a form of money, then you should be allowed to do that. There is no “divine” money given to us by god or government.

    So if people want to treat credit as a medium of exchange, they should be allowed. Who are you to ban them?

    You seem to be worried that people who are paid in credit don’t know that they are being paid in credit. Seroiusly loki? Are you taking the piss? So when a shop accepts credit cards they don’t know that they are accepting credit cards? Are they in a zombie daze? Is there a jedi mind trick going on?

    I promise you — when a shop says “we accept credit cards”, the secret hidden meaning in those words is “we accept credit cards”.

    You claim that if people understood the current system, they wouldn’t use it. This is strange. Many people (I thought most people until I started debating anti-banking people such as yourself) understand how the system works, but still choose to use it. I understand the system and use it happily. All free-banking people understand the system and use it happily. Indeed — you try to understand the system, think it’s evil, and yet you still probably use FR-banks!!

    But you are free to start up a vault business and try to encourage people to put their money in your vaults, instead of banks. You are free to start a shop that only accepts cash. That is how a free market works. I don’t think you’re vault business will be successful, but you can try, and we’ll let the consumers decide. There are cash shops that currently exist, which don’t deal in credit at all.

    You get confused again about money when say that it is “backed by nothing but debt” and is therefore worthless. Financial assets are real things and they have real value. You aren’t forced to buy them, but they really do exist. Without trying to be mean… you keep making very fundamental mistakes which show a deep ignorance of what financial markets are and how they work.

    You wrongly paraphrase me as saying that an IOU has equal worth to the underlying asset. I never said that. Things are worth whatever people are willing to pay for them. We have known this since the marginal revolution which was the start of the Austrian school of economics about 140 years ago. If people happen to treat an IOU as the same value as an underlying asset, that is their free choice in a free world. Why do you want to deny people this free choice?

    You simply assert that an IOU can’t be worth the same as the underlying asset. But you don’t get to decide that. Prices are determined by the market forces of supply and demand… not by you deciding from some authority position what the “one true” price is supposed to be. You seem to be suffering the “fatal conceit” of thinking that you know the correct “planned” price of things. You don’t. Just let the market exist and it will decide the correct price of financial assets.

    For example, you don’t get to decide that shares in BHP are worth zero, and you don’t get to decide if they’re worth $20. You don’t get to decide the price at all. Shares are a financial asset, and their price is determined by the market. Not you.

    Later, you are again confused about how the current system works. The paper money is the base money (issued by the central bank), and is not bank credit. You are confusing “base money” with “bank credit” and you are wrong to say that paper notes are IOUs for loaned money. This is explained in the original article, please read it more carefully.

    You say a house or car can’t be money. Of course they can. Anything can be money… cigarettes were money in POW camps and in jails. Shells were money in some island communities. You aren’t the king of commerce who can tell people from some imaginary authority position what they are allowed to use as money.

    You say a loan can’t be a medium of exchange. Of course it can. All people need to do is decide that a loan is their medium of exchange and then it becomes their medium of exchange. You seem to have some sort of god-complex where you think you’re allowed to tell people what they are allowed to trade, and how they are allowed to trade it. Please leave people alone to make their own decisions.

    In another comment you show that you don’t know the difference between fiat money and FRB. This is really a dangerous level of ignorance.

    “Your basic mistake is treating tradable loans (IOUs for loaned money) as if they are money.”

    Your basic mistakes are (1) not understanding what the word “money” means; and (2) thinking you are some sort of god-figure who is allowed to control what other people use as their medium of exchange. You are not. Leave us alone.

  121. Describe your preferred regulatory environment for banking John. What regulations would you have? What regulatory environment would most facilitate commerce?

  122. “You say a loan can’t be a medium of exchange. Of course it can. All people need to do is decide that a loan is their medium of exchange and then it becomes their medium of exchange. ”

    This is not true at all. For a loan to be a medium of exchange the government has to come in and regulate this matter. Supposing I owe someone money. It doesn’t follow that I owe anyone else money. If the person I owe the money too decides to sell off my debt to him, there is nothing in nature to say that I owe some third party money. All this exchange of debt is highly dubious, and requires the state to back it up. Its pretty impossible to make the case that the trading of debt has ever brought anything worthwhile into the world, and yet it always requires some sort of legal cover, to be able to have all this tradable debt.

  123. My preference is no banking regulation. No bailouts. No minimum requirements. No central bank. No fiat currency. No government-backed financing entities. No government support of ratings agencies. No government deposit insurance.

    In a purely free banking environment there is no way to know exactly what the banking system would look like. Indeed, there would likely be lots of very different banking products available, including competing currencies. I suspect that the competition between currencies will create a strong incentive for private money-suppliers to have little or no inflation — but the exact nature of that private money supply will be determined by the market.

    The harder questions are (1) how to get to free banking; and (2) what to do in the “second best” world where the government continues to offer implicit or explicit deposit insurance and “too big too fail” arguments.

    I’ll leave those questions for another day…

    Exchanging credit does not require the state to back it up. It simply needs the consent of the people involved. Voluntary exchange is a good thing.

  124. As a libertarian, I note that any attempt to outlaw Fractional reserve banking will lead to lots of laws, and lawyers with jobs for life. GB seems to be an exceptional libertarian- that is, he believes in liberty EXCEPT for his particular hobby-horse. I also note that neither side seems to have converted the other, so it might be time to recopgnise that nobody will win this battle, and go elsewhere. See you in the funny pages!

  125. Since an IOU can be treated as money, if people accept it as such, then that solves the problem. Anything can be used as money, so long as others will accept it in trade. Q.E.D.

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