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Free Banking and Economic Development, Part 2

by George Selgin August 9th, 2011 3:44 pm

(Both parts of this article originally appeared, under the title "Fractional Reserves and Economic Development," on the short-lived Free Market News Network.)

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When Adam Smith first drew attention to the benefits of fractional-reserve banking, those benefits were but a glimmer of far more impressive gains to come. In 1776, the year of the appearance of Smith’s Wealth of Nations, Scotland had only 10 note-issuing banks, the two oldest of which, the Bank of Scotland and the Royal Bank of Scotland, were but 81 and 49 years old, respectively. The note-exchange and settlement system was still in its infancy, so metallic reserves still accounted for about a fifth of issuing banks’ liabilities. By the time of the passage of the Scottish Bank Act of 1845, which placed restrictions on further Scottish note issues, Scotland had almost twice as many note-issuing banks, with coin reserves often amounting to less than two percent of their liabilities. Scottish banks’ had thus achieved a substantial improvement in their ability to invest Scotland’s money holdings productively, and had done so without engendering the least loss of public confidence in their notes.

Although Scotland offers an especially impressive example of the gains to be had from fractional-reserve banking, such banking has also played a crucial role in worldwide economic development. Persuasive evidence of this can be found in two collections of studies, Banking in the Early Stages of Industrialization (1967) and Banking and Economic Development (1972), both edited by economic historian Rondo Cameron. Surveying the findings of the first volume, Cameron concludes that banks, through their “substitution of various forms of bank-created money for commodity money,” played an essential part in fostering industrial development, and that they were most effective in so doing in places, like Scotland in the early 19th century, where they were least hampered by government regulations, including regulations limiting banks’ right to issue circulating notes.

More recent research has reinforced Cameron’s conclusions by showing how “repressive” financial regulations—meaning regulations that prevent banks from functioning as efficient savings-investment intermediaries, such as statutory minimum reserve requirements—have impeded economic growth in less-developed countries. Oppressive banking regulations are especially harmful to poor countries, where money holdings represent are large portion of available savings. Of such oppressive regulations the monopolization of paper currency by central banks is perhaps the most oppressive of all, for it means that a substantial part of the public’s monetary savings is diverted from the private sector, which might employ those savings productively, to the government, which tends to squanders them instead.

As nations become wealthier, the relative importance of fractional-reserve banks diminishes, because the public becomes increasingly able to afford financial assets other than money, including stocks and bonds. Industry can then rely, to some extent at least, on funds acquired by selling securities, instead of having to borrow from banks. Yet bank loans remain a major source of business funding, and of small-business funding especially, even in wealthy nations with well-developed securities markets. In the United States, for instance, businesses today get more than twice as much credit from banks as they get by issuing their own bonds, and many times as many funds as they get by selling shares. In Germany and Japan bank loans account for a still larger share of business funding. And although commercial banknotes have been legally suppressed in most countries, demandable bank IOUs, in the form of demand deposits, remain banks’ own principal source of funds. Without fractionally-backed bank money, in other words, most businesses would have to go begging for credit—as they were forced to do, temporarily, during the banking crisis of the 1930s.

I realize that claims concerning how fractional-reserve banks promote prosperity will carry little weight among those who insist that such banking necessarily entails fraud. It would be tragic indeed if they were right, for then we would confront a stark choice between condoning fraud on one hand and enjoying economic prosperity on the other. Fortunately, though, we face no such dilemma: as I hope to make clear in a later essay, the claim that fractional-reserve banking involves fraud is just as untenable as the claim that it has contributed nothing to the wealth of nations.

108 Responses to “Free Banking and Economic Development, Part 2”

  1. avatar Lord Keynes says:

    The extent of FR banking's creation of fiduciary media was astonishing in the 19th century.

    For example, R. Triffin (1985: 152) estimates that in 1800 bank money or credit money probably constituted less than 33% of the money supply. But by 1913 paper currency and bank deposits accounted for 90% of overall currency circulation in the world, and actual gold itself for not much more than 10%.

    Triffin concludes that the "nineteenth century could be far more accurately described as the century of an emerging and growing credit-money standard, and of the euthanasia of gold and silver moneys, rather than as the century of the gold standard.” (Triffin 1985: 153).

    You argue that the "the monopolization of paper currency by central banks is perhaps the most oppressive of all, for it means that a substantial part of the public’s monetary savings is diverted from the private sector, which might employ those savings productively, to the government, which tends to squanders them instead".

    Your opponents would respond that Britain had a central bank in the 19th century, and far from being some "oppressive" force provide a measure of stability lacking in other free banking nations like Australia. For example, Bank of England intervention prevented the near insolvency of Barings from becoming a severe financial crisis:

    "Barings, led by Edward Baring, 1st Baron Revelstoke, faced bankruptcy in November 1890 due mainly to excessive risk-taking on poor investments in Argentina. Argentina itself suffered severely in the recession of 1890 with its real GDP falling by 11 percent between 1890 and 1891[1], the effects of which are illustrated by the picture in this article. An international consortium assembled by William Lidderdale, governor of the Bank of England, including Rothschilds and most of the other major London banks, created a fund to guarantee Barings debts, thereby averting a larger depression. Natty Rothschild remarked that if this had not happened, perhaps the entire private banking system of London would have collapsed, which would have created a tremendous economic catastrophe."

    http://en.wikipedia.org/wiki/Panic_of_1890

    Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds), The Gold Standard in Theory and History, Routledge, London and New York. 140–161.

    • avatar George Selgin says:

      Lord Keynes, I don't accept the conventional treatment of the Bank of England as a stabilizing presence in the world financial system, either past or present. It ignores that bank's role in promoting booms, looking instead only at the post-boom "rescue" operations it occasionally undertook, while rehearsing the dubious and now all-too-hackneyed claim that X must be rescued in order that the entire banking system not collapse. For an opposite view, see my essay "Central banks as sources of financial instability."

      As for the gold standard, Triffen appears not to understand the difference between a metallic standard and metallic money. The "gold standard" of course refers to a system in which a unit of gold serves as an economy's basic monetary unit, but not necessarily one in which gold makes up any large portion of the actual money stock.

  2. avatar Lord Keynes says:

    It is also such a refreshing change to see a different view from Rothbardian anti-FRB ramblings, I might add.

  3. avatar Paul Marks says:

    What is at issue is not (strictly speaking) "fractional reserve banking" - a bank may take in (for example) one ton (weight) of gold (of a certain purity) and lend out nine tenths of a ton of this gold.

    Now that is a fractional reserve ratio of only a tenth - yet there has been no incease in the money supply what-so-ever. The savers have given up their money (in the hopes of getting it back, with interest, at some later date) the banks have kept a fraction of it (hence "fractional reserve") in the vaults - and lent out the rest.

    However, this is NOT what happens (as both George Selgin and "Lord Keynes", sorry I am not going to be "refreshing" you ..... interesting person, know).

    If it was what happened then there would be no difference between the "monetary base" and "broad money" - "broad money" ("M2", "M3", M whatever.....) being defined as the monetary base plus bank credit.

    Why "PLUS" bank credit?

    If (as they always claim) banks just "put people's saving to work" (i.e. lend them out) then there would be no difference between the monetary base ("MB") and "broad money" (monetary base "plus" bank credit - M3 or whatever). The savings would come into the bank, and then out of the bank (as loans - with a fraction, perhaps, being kept in the vaults) increase in the money supply ZERO.

    What "Lord Keynes" describes (i.e. "broad money" being bigger than the monetary base) can only happen if "credit expansion" is going on.

    Now one can debate if this is "fraud" or not (but to call it "fraud" is certainly not just "ramblings" - it is drawing attention to a serious problem), but it is certainly folly.

    It is folly because it violates a fundemental rule of political economy - indeed of logical reasoning itself.

    Borrowing must be from real savings (i.e. money that people have earned - but chosen not to spend, to make available for loans instead, in the hope of getting the money back, with interest, at some future time) - it must not be GREATER than real savings.

    In short if "broad money" (the monetary base "plus" bank credit) is ever larger than the monetary base there is a serious problem - whether of "double counting" or treating debt paper as a "deposit" (which can be lent out) or some other scam (if the word "fraud" is disputed).

    Now J.P. Morgan was a great man in many ways. Indeed I have even heard (rightly or wrongly) that the enterprise he controlled operated on the basis of one to three (not one to ten) in terms of physical gold in relation to loans - so (for example) he was able (in an emergency) to lend large sums of physical gold to the United States government.

    But not even J.P. Morgan could make this system work which is why he (along with the other main faction on Wall Street - the Rockefeller faction, and John D. Rockefeller was in, many ways, also a great man) supported the creation of the Federal Reserve - indeed the Wall Street factions designed the system, at that private meeting on the island in your own State of Georgia).

    "J.P. Morgan and (to a lesser extent) John D. Rockefeller were the creation of the Civil War National Banking Acts"

    To the extent that this is true (and it is not fully true) it is not relevant - as the pre Civil War banking system did not work either (as such things as the crash of 1857 show).

    Again it is not, strictly speaking, the fault of "fractional reserve banking" - it the fault not of lending out all but a "fraction" of savings, it is the fault of lending out MORE than savings.

    I.E. it is the fault of trying to use "money" (in various complex ways) that DOES NOT ACTUALLY EXIST.

    That is why talk of a gold "standard" (and so on) is so harmfull.

    People should be able to pick any commodity they wish to use as money - and specify their contracts in line with their voluntary (civil) choice.

    But, for example, a gold contract must be paid in gold (and a silver contract paid in silver - adn so on). No rigged ("fixed") exchange rates between gold and silver (or any other commodity) and no subtitution of debt paper (in any form - no matter how complex) for the actual commodity laid down in the private contract.

    This is all so basic that it should not need to be said - but it has to be said, again and again.

    Because some people do not understand it - or pretend they do not understand it.

    Of course private companies can "produce money" in various ways - for example up till the 1850s (when Congress banned it) private mints (in the West) produced gold and silver coins.

    People mined gold and silver and handed it over to private mints who (in return for a small amount of the gold or silver mined) produced coins of a certain weight and purity.

    This was the "private production of money" and I have no problem with it at all (as long as the coins really are the weight and purity they say they are).

    But that is NOT a bank (or other such) taking in X amount of gold and lending out X PLUS amount of money.

    That is a scam (if people do not like the word "fraud" for technical legal reasons), and it remains a scam - no matter how complex the methods of trying to make 1+1=3 (or ten - or an hundred, or a thousand) are.

    Borrowing must not be greater than real savings. Money must not be treated as a "base" which can be "built upon" (like an inverted pyramid) with loans and debt (not matter how complex the methods used to do so).

    For this is a bubble - the basis of a boom/bust.

    And the more it is done - the more that lending is greater than real savings, the bigger the gap between the "monetary base" and "broad money", the bigger the bust will be.

    The problem with Central Banking is not the lack of a "profit motive" or lack of private ownership of the Central Bank - or even "lack of competition".

    The problem with Central Banking is that it allows banks (and "near banks") to get even further from sanity (from real savings being no less than total borrowing - from "broad money" not running away from the "monetary base") than they would be without it.

    • avatar Floccina says:

      Paul what if people want there money backed with only bank assets? IMO if you have an option clause and 2% gold reserves and 30% capital and depositors know this your money is backed in bank assets (loans, stocks and bonds). At that point gold is just used to keep currency trading on par. Perhaps left to evolve you would end up with a certain bank providing the par and no gold used at all.

  4. avatar Paul Marks says:

    "But Adam Smith said...."

    This is known as the philosophical error of "arugment from authority".

    But, O.K., let us examine this "authority".

    Adam Smith may not have fully invented the terrible error of the Labour Theory of Value (David Ricardo and James Mill may be more resonsible for the formal development of that that - and J.S. Mill was guilty of terrible dishonesty in his pretense, in his "Principles of Political Economy", that no one opposed the theory), but Smith did (at least) open the door to the Labour Theory of Value (party by forgetting his own words refuting what was later known as the "paradox of value", i.e. making in his old age mistakes he himself had denounced in his youth - the mistake of thinking in terms of, for example, "water" and "diamonds" rather than a specific amount of water and a specific amount of diamonds at a specific time and place).

    But the "problem with Smith" does not stop there.

    For example, the idea that large undertakings (what is now called, although it never was called so by Smith, "infrastructure") should be undertaken by the state.

    This is simply untrue. Indeed Adam Smith did not even need to have any knowledge of economic theory to know it was not true - all he would have had to do is look to England.

    In England (and Wales) in the time of Adam Smith vast "infrastructure" developments were going on in terms of roads and canals normally without taxpayers money being used.

    I know a Scotsman would always rather look to France (where, indeed, roads and canals were a matter for the taxpayers) than to England - in law, (in pin factory figures) or in anything (and sometimes with good reason). But this is taking the habit to an extreme (counter blasts against the traditional, long gone, English - that we are "hobbits", "Colonel Blimps - better dead than flexible", "Bulldogs", "the only country in the world where the word "clever" is regarded as an insult - indeed a deadly insult" and so on, duely noted).

    However, it is not simply a question of a few ill judged words (in "The Wealth of Nations" and so on) - it had political consequences.

    The vast infrastucture developments of the Highlands of Scotland are an example.

    The roads, briges, ports (and so on) were well built - (for example by the Scots engineer Thomas Telford), but an economic blackhole.

    Indeed as they were what is now called a "public, private partnershop" they were not just a mess for the taxpayers in general they were a special drain for the landowners (who were drawn into the projects) plungeing them into terrible debt - and leading directly to the infamous "Highland Clearances" as landowners desperatly (and unsuccessfully) tried to save themselves from bankruptcy.

    At the risk of sounding English (in the old sense - certainly not in the modern sense, for this land has become corrupt) - clever schemes do not work, and the more clever (complex - highly intelligent) they are, the worse they are.

    A good rule of thumb....

    Could the local blacksmith work out all the details of a political/economic scheme or plan (both near curse words in the old days - the correct reply to "that is an interesting plan you have deveoped" is still punch in the face) whilst drinking one pint of beer?

    If the man could not work out and understand all the details in that time - it is a bad plan, and most likely evil as well.

    Of course that was the mentality that the real Keynes (and the whole Cambridge "intellectual" set) revolted against - although in morals (as well as economics) they were wrong about just about everything (and, yes, they knew they were wrong - all the stuff about "I would rather betray my country than my friend" was just "rationalization" for their own wickedness, yes I can use long words as well).

    To put the above in more formal (Scots) terms.

    A past President of what is now Princeton (in the days when they would not have hired Paul Krugman) said about fellow Scots (but of the "moderate" i.e. "intellectual" party) - there are two things one never hears being valued in churches they take control of.

    One is the scripture of God. And the other is the opinion of the "Common People" whom they claim to love so much.

    "Bottom line".

    You can not take in X amount of money (in gold or silver - or whatever) into a bank and then turn round and lend out X PLUS.

    That is not "fractional reserve banking" - because you are lending out MORE money (not a fraction of the money) than you started with.

    It may not be "fraud" (especially if you own the people who write the fraud statutes), but it is not straight either.

    It may be very clever - it may be wonderfully complex (and mathematical), but it is still a scam.

    And scams do not end well.

    Never lie or cheat or steal - even if this means you are dirt poor all your life and die in the gutter.

    Never take a step back when a man takes a step towards you - even if it means you die then and there. And never let anyone else be bullied either - even if you hate them, and (yes) even if you have to lay down your own life to save the life of a person you despise.

    If you want money - then work for it.

    If you can not afford something - then do without it.

    Never envy another man for having more stuff than you - but never think he is a better man than you, because he has got lots of stuff, either.

    If you want to invest in something that means either you have to do without (you have to eat less - and so on) or some other person or persons have to do without (they have to eat less - and so on) for you to be able to afford to make the investment.

    If no one is having to make a sacrifice - it is a scam.

    A get rich quick scheme is for two sorts of people - crooks, or greedy fools. Be neither.

    And on and on.

    I do not need list the rules - every person knows them (including the people who deny and violate all of them).

    It is a question of whether one chooses to live by them or not.

    It is true that one must not judge morality by consequences (that is the error of the utilitarians), but there are consequences (very bad consequences) for choosing the wrong path.

  5. avatar Paul Marks says:

    The key point is very short.

    If you want to invest in something, either you or someone else has got to consume less (eat less - buy new clothing less often, whatever).

    You can not have investment without sacrifice - either by yourself, or by other people.

    You can not have "something for nothing" (not sorry to come over all "Gods Of The Copybook Headings" Kipling on you), you can not have a loan which no one has saved (no one has sacrificed) in order to loan to you.

    In your heart you know that - in spite of all the clever double talk.

    And if that means "business has to beg for credit" - well they should not "beg", perhaps they should learn to pay their ordinary bills (keep money by to do so - rather than borrowing money for ordinary expenses). And for investment there are such things as "profits" - one can eat one's cake (i.e. consume a profit as dividends) and still have the profit for investment.

    As for a loan (for a productive investment) - a businesman must make his or her case, that they can pay it back and at interest rate that a saver or savers are prepared to give them money.

    That is not "begging".

    The 1930s - whenever a boom busts there is terrible suffering (and we both know govenrment efforts to "help" made things a lot worse for a lot longer).

    But there is only one way to prevent the bust.

    Prevent the credit expansion "boom" in the first place.

    Do not do it - do not have the credit expansion something-for-nothing "boom".

  6. avatar Othyem says:

    Good post.

    I just got Banking in the Early Stages of Industrialization in the mail the other day. I'm going to have to wait on Cameron's other book on banking due to its price. I'm reading through Bodenhorn's books now.

    I never thought I would enjoy financial history...

  7. avatar RickDiMare says:

    Unless banks are being "commandeered" by gov't for well-defined wartime purposes, which has been occurring in the U.S. since the Civl War (with increasing inefficiency), the only circumstance where I can see fractional reserve banking as being non-fraudulent is where bank shareholders are putting their personal assets at stake. Otherwise, bankers are like poker players who are always placing bets, but never putting their chips into the pot. Or, imagine an auction room full of private bidders where none have put up collateral to be there. Then, when the seller seeks to enforce the terms of sale against the winning bidder, the IRS forces the American taxpayer to pay.

    Also, even though the fostering of industrial development is important, I think it's a mistake to assume it to be a primary economic goal. The U.S. legal system, at least at its inception, was quite revolutionary in putting the individual's "pursuit of happiness" as the primary purpose of government. This is admittedly a vague and general idea, but it does tend to suggest that microeconomic concerns are to be given greater weight than macroeconomic.

    • avatar Martin Brock says:

      Suppose you want to buy a house. The seller claims the house is worth 100 ounces of gold, and you agree. You arrive at my bank with this proposition, and I provide you with 100 banknotes each promising an ounce of gold. You purchase the house, but you don't hold its title. I hold the title while you repay the loan. You gradually accumulate equity in the house. The bank holds the balance of the equity. You repay the loan by returning my banknotes or by returning gold itself or by returning other credible promises of gold.

      What deposit backs the notes I provide you? The house. The house is an asset as valuable as gold, and my bank holds this value as much as it holds another depositor's gold.

      Who makes this deposit? The seller of the house. He receives banknotes signifying the value of his deposit.

      If someone deposits gold in my bank, I also issue banknotes to him. If my loans are sufficiently liquid, if I can always exchange the bank's equity in houses for gold in a sufficiently short time, I don't need any gold depositors. Since the housing market is not so liquid, I need gold depositors to insure my promise to exchange the bank's notes in gold.

      The house seller's deposit is also at risk. The value of his banknotes are at risk just as gold depositor's notes are at risk.

      Bank shareholders own the building in which I conduct my business and similar resources. If I can rent these resources, I don't need any shareholders, but if the bank owns resources, these resources are at risk along with the depositors' gold. Typically, shareholder equity is most at risk, because gold depositors refuse to play otherwise.

      All of this risk is inevitable. States can't prevent it by declaring it "fraudulent". If you don't like banking risk, don't use banks. You can always bury your gold in your back yard. If you want "full reserve" banking, you can rent a safe deposit box for your gold. Gold in a safe deposit box is not at risk in the same way.

      • avatar RickDiMare says:

        Martin, you seem to be describing a bartering transaction, not a transaction for money or "dollars."

        When the Treasury Department specifies that a certain weight of a certain metal equals a "dollar," that's only for assuring uniformity of coinage. Private parties can't use transactions for "dollars" to effect transactions for bullion.

        Also, under the Necessary and Proper Clause, Congress has every right to use banking corporations as conduits to effect its Constitutional monetary duties, so if I want to use only current U.S. coin to transact, I should not be forced underground, to "bury gold in [my] back yard," or to transact only by using a safe deposit box.

        • avatar Martin Brock says:

          Barter is the exchange of one good for another good of comparable value. A monetary transaction exchanges a good for the promise of a good of comparable value. I describe the latter, not the former.

          Gold is a good, not the promise of a good. Exchanging gold for something else of value is barter. Under a gold standard, an ounce of gold is not money at all. Even calling it "base money" is misleading. It's the standard of value, the yardstick against which the value of other things is measured.

          A statutory gold standard can fix the price of gold in "dollars", but I'm not discussing a statutory gold standard or gold as a legal tender. In the scenario above, you could replace "gold" with "silver" or "crude oil" or "corn" or "pork bellies" or any other commodity. When promising a good or accepting such a promise, people compare the value of goods they exchange to a standard measure, like an ounce of gold. They don't accept promissory notes for gold because they want nothing but gold. These notes denominate the value of everything relative to the value of gold.

          The U.S. government has nuclear weapons and does what it wants. I don't care. I have no interest in reforming the Constitutional monetary system in the United States. If we concern ourselves only with Constitutional "money", this web site is a waste of bandwidth. Any free banking system in the U.S. must call its unit of exchange something other than "a dollar". "Free banking in U.S. dollars" is an oxymoron. That ship has sailed.

          If you only want to use gold to transact, then you aren't using money at all, and you don't need any U.S. currency. You only need U.S. dollars to pay U.S. taxes and anything else a U.S. court orders you to pay in dollars. If you want only to barter with gold, do that. Just start doing it.

          A free bank doesn't force you to do anything. You may still deposit your gold in a "full reserve" bank or lend it to your neighbor yourself. In my neck of the woods, the only force you need to worry about is the U.S. government forcing you to pay taxes and other debts in dollars, because you're then obliged to pursue dollars, and this obligation keeps you continually on the state's leash.

          • avatar George Selgin says:

            "Barter is the exchange of one good for another good of comparable value. A monetary transaction exchanges a good for the promise of a good of comparable value. I describe the latter, not the former."

            Even letting the first statement pass, despite its implicit assumption that values "reside" objectively in goods rather than being subjective judgements of specific traders, the second is incorrect. Not all money consists of promises. Thus if I hand you a $100 Federal Reserve note for some gold, I am not handing you a promise to anything, any more than I would if I traded you, say, 4 bottles of whiskey for the gold instead. Indeed, if I pay you a $100 check, though the check is indeed a promise, it is not a promise to any good; it is a promise to pay $100 ine Federal Reserve money.

          • avatar Martin Brock says:

            I don't assume that values reside objectively in goods. How have I implied it? Comparing the value of an ounce of gold to the value of an ounce of silver or a bushel of corn is necessarily subjective.

            I won't debate the semantics of "money" with a monetary historian for long. Words mean what people commonly mean by them, but I'm a mathematician and have a fetish for precise categories. I don't see how "barter" makes consistent sense except as I've defined it, but people commonly use "money" to describe gold and other things other than promissory notes. "Money" is like "God". The word has many usages, but I don't use all of them myself.

            When I accept a $100 Federal Reserve Note from you, I do accept a promise from you, i.e. the note signifies an obligation that someone (not you) owes to me after the transaction. The note records a promise, and I accept this promise from you, but you don't make me a promise in the bargain. Before the exchange, you are the obligee of the promise. After the exchange, I am the obligee. I exchange my goods for a promise, and you agree no longer to be the obligee of this promise.

            I might also exchange the note for other goods, so the note promises other goods in this sense, but how does a Federal Reserve Note promise other goods? I accept George Knapp's answer to this question. State money has value because a state imposes upon its subjects an obligation to acquire the money to pay taxes and other obligations. In going through the motions required to acquire a state's money, I am following the state's program. I am the subject of a story that the authorities author.

            I accept this role to avoid the state's penalties for failure to acquire its money as required, so the state's promissory note ultimately promises not to confiscate my property or lock me in a cage or something else harmful to me. Not being harmed is valuable to me, so I seek these promises, and others also seek them for the same reason, so they're an effective medium of exchange.

          • avatar Martin Brock says:

            Needless to say, I'm not defending state money, only describing it. I prefer notes promising other things.

          • avatar Martin Brock says:

            I misspell a name above. It's "Georg (Friedrich) Knapp", rather than "George Knapp". You'll find the state theory of money by googling for "Georg Knapp" but not "George Knapp".

        • avatar George Selgin says:

          Martin: "When I accept a $100 Federal Reserve Note from you, I do accept a promise from you, i.e. the note signifies an obligation that someone (not you) owes to me after the transaction."

          If this is so, then someone, somewhere, is legally bound to give you something--and presumably a definite amount of something (for otherwise the "obligation" is meaningless)--on penalty of being dragged before a court. So, who is it that you are entitled to sue for satisfaction of the debt that you allege to be represented by a $100 Federal Reserve note? Not the Fed: it owes you nothing, though for a word note you might coax from it another. Not a storekeeper: he made trade you goods for the note; but certainly he's under no legal obligation to do so, and besides he decides how many goods. So upon who does the supposed obligation rest?

          Rick: Let's face it: w.r.t. monetary affairs, the "necessary and proper" clause, as actually interpreted by the Supreme Court, gives Congress the right to do whatever the blazes it wants to!

          • avatar Martin Brock says:

            If this is so, then someone, somewhere, is legally bound to give you something--and presumably a definite amount of something (for otherwise the "obligation" is meaningless)--on penalty of being dragged before a court.

            That's not the only sort of promise I can imagine. The state needs only to promise not to confiscate my property or lock me in a cage if I present the notes to it as required. I prefer a promise of something else, even a definite amount of something beneficial to me, instead, but the state promises only what it promises.

          • avatar RickDiMare says:

            Martin stated above: "When I accept a $100 Federal Reserve Note from you, I do accept a promise from you, i.e. the note signifies an obligation that someone (not you) owes to me after the transaction."

            George & Martin, My opinion is that the legal effect of Martin's acceptance of the $100 Federal Reserve note is worse than you both think.

            Martin, not only is it true, as George states, that the Fed "owes you nothing," but you are now holding a note that states you are INDEBTED to the Federal Reserve for $100. I know this sounds absurd, but that's what happened in a strict legal sense (and the central bank is more than willing to exploit this absurdity). However, the Federal Reserve note is "legal tender for all debts public and private," so at least courts and public opinion will recognize your debt to George as being discharged.

            Contrast this with Martin accepting $100 in current U.S. coin from George. Now, not only is Martin's debt to George discharged, but the use of Treasury-Direct coin causes no central bank indebtedness for Martin.

          • avatar RickDiMare says:

            CORRECTION (I tend to confuse myself when explaining this stuff.)

            Martin stated above: "When I accept a $100 Federal Reserve Note from you, I do accept a promise from you, i.e. the note signifies an obligation that someone (not you) owes to me after the transaction."

            George & Martin, My opinion is that the legal effect of Martin's acceptance of the $100 Federal Reserve note is worse than you both think.

            Martin, not only is it true, as George states, that the Fed "owes you nothing," but you are now holding a note that states you are INDEBTED to the Federal Reserve for $100. I know this sounds absurd, but that's what happened in a strict legal sense (and the central bank is more than willing to exploit this absurdity). However, the Federal Reserve note is "legal tender for all debts public and private," so at least courts and public opinion will recognize George's debt to you as being discharged.

            Contrast this with Martin accepting $100 in current U.S. coin from George. Now, not only is George's debt to Martin discharged, but the use of Treasury-Direct coin causes no central bank indebtedness for Martin.

          • avatar Martin Brock says:

            Rick, I am not indebted to the state because I accept FRNs from George. Rather, I accept FRNs from George because I am indebted to the state. These particular notes (as opposed to notes promising other things) are valuable to me, because they enable me to purchase my liberty from armed men threatening to harm me if I don't purchase it from them with these notes. I may not use other notes to purchase my liberty from these men, because men do not accept other notes. I may not even use gold to purchase my liberty from them, because they don't accept gold. They only accept FRNs.

            I am indebted to the state because it credibly threatens to harm me and for no other reason, so you are right that it promises me less than nothing for its notes, but these promises of less than nothing are actually valuable to me, because I want something rather than nothing, and while it takes things from me and returns nothing of comparable value, the state generously leaves me with more than nothing. It could just shoot me right now, but since I'm more valuable to it alive, it pursues a different policy.

            If the state did not threaten to harm me, I would not seek its notes, and I suppose George wouldn't seek them either, so the notes would not function as money. Ideally, I prefer notes promising to help me rather than notes promising to not to harm me, but I don't live in an ideal world. Maybe we can move toward a more ideal world, but I don't see how we'll do it by banking the state's notes.

          • avatar RickDiMare says:

            Martin, under the Constitution, and given the legal relationship between Congress and the Federal Reserve (our central bank), the Federal Reserve is not "the state." So, it seems to me, because you associate the privately-owned central bank with the Congress (the true, publicly-owned "state") you don't see a way to get off the "state's leash" or to escape the "armed men [who] do not accept other notes."

            Congress deliberately gives the Fed "independence" to respect its separate legal identity from the state. If you were correct--i.e., that both Congress and the Federal Reserve are the state--then, yes, we'd have no choice but to barter for goods and services to be free.

            When you get a chance, look up "agency law" at Wikipedia. If I recall correctly, it provides a good summary of the ancient relationship between servant and master, which relationship after the Civil War became important in defining the employer/employee relationship, which in turn led to fine legal distinctions in monetary and income tax law.

            But, anyway, the point I'm trying to make is that when we demand current U.S. coin at U.S.-incorporated banks--a Constitutional right available to us under McCulloch v. Maryland (1819)--the Federal reserve becomes our "fiscal agent," which means it becomes Congress' servant, and of course Congress is nothing but a representative of "we the people."

            On the other hand, if the central bank debt-based currency is used, yes, we are the state's servants or fodder, because as you said we "want something rather than nothing," which means to me that an abusive relationship with the state is better than pure anarchy.

          • avatar Martin Brock says:

            Rick,

            Here's my understanding of the matter. You and George may correct me.

            A specific act of Congress created the Federal Reserve, and this act grants the Fed a monopoly of the creation of legal tender for the purchase of various "assets", particularly (as amended) the entitlement to tax revenue sold by the Congress.

            As such, the Fed is part and parcel of the state. It is "privately owned" in name only. If the Congress wants to declare the White House "privately owned", while requiring its "private owner" to rent the building to the President and only the President, it can do that too; however, "private ownership" of this sort is Orwellian newspeak.

            You have no choice but to transact in Federal Reserve notes, because each transaction increases your obligation to pay taxes, and you must pay taxes in Federal Reserve notes. Trading in coin makes no difference. Even if you barter with gold bullion, the transaction still obligates you to pay income taxes with Federal Reserve Notes. If you barter to avoid Federal Reserve Notes, you shouldn't tell anyone at the Treasury, and if you think you can safely tell someone at the Fed, I'd say you're mistaken.

            My father is an attorney. He once told me the story of a man he knew personally. This man paid little or no income tax for years. The IRS finally determined (or asserted) the value of this man's assets at two points (or various points) in time and ordered the man to pay income tax on the difference, plus interest, in Federal Reserve Notes. Federal judges and officers of the court typically enforce these orders. Nothing else matters.

            Fine legal distinctions can be interesting, but the distinctions often make little difference. I have no idea why holding U.S. coin is more valuable to me than holding a Federal Reserve Note or an FDIC insured bit in some Fed member's computer or a T-bill for that matter. All are cash equivalents. All are equivalent to the legal tender I need to pay taxes.

            Congress is a group of men and women asserting a monopoly of coercive force chosen in biannual plebiscites with choices effectively limited to one of two pathological liars. These people rarely represent me. I am an individual, not part of any collective titled "we the people" by central authorities. The mechanics of selecting these authorities makes little difference.

            I'm not sure what "pure anarchy" means, but I don't wear the "anarchist" label. The only anarchy recognize is the state of nature, before men developed powerful weapons and systematic decrees. I don't want to return to this anarchy, but its deficiencies do not excuse excesses of the state in my way of thinking.

            I call myself a minarchist, but the constitution of a minimal state is obviously debatable. I hold out little hope for the U.S. Constitution. It's only a God-damned piece of paper. One of our Presidents allegedly said so, and I believe the rumor.

          • avatar Martin Brock says:

            Also, the Fed's nominal "profits" belong to the Treasury, not to any "private owner".

          • avatar RickDiMare says:

            Martin, just like we have a right to walk through “public” Central Park in New York, but not similar rights to walk through the lobby of the “private” Trump Tower, we have a right to demand public or “people-owned” coinage, but not similar rights when using the Fed’s privileged, income-tax-regulated currency.

            You could argue that Congress is playing a legal shell game by chartering the Fed in 1913 and then declaring the Fed to be "privately-owned,” and in a sense that’s correct because without government indemnifying the Fed’s directors, officers and shareholders, giving the Fed perpetual life, along with many other unnatural corporate rights, the Fed couldn’t exist anywhere near its present form.

            In fact, I agree that from a natural law perspective it’s ultimately fraudulent to call ANY state-chartered corporation “private.”

            However, from a practical legal perspective, the term “private corporation” just tries to make a distinction between things the state can do directly vs. things it sends indirectly-controlled “loose canons” out into the marketplace to do. And lawyers freely admit that corporations in general are legal fictions or artificial entities.

            In my opinion, the sense of order or continuity provided by corporate chartering is more important in the formation of public corporations, than private ones. Without “legal fiction” or “artificial person” public corporations, such as the federal government, there would be no public currency option and great instability whenever the natural-person leader died. …

            Yes, certain types of bartering will trigger an income tax liability, but that’s a tax on a different form of income (income derived from property sources), which differs from the tax imposed on the incoming transfer of fiduciary media like the Federal Reserve note (which is income derived from non-property sources). …

            Although I’m highly disappointed with Congress and the U.S. legal system for obscuring and obstructing our right to use only Treasury-Direct coin at U.S. banks, I disagree that “we have no choice but to transact in Federal Reserve notes.” …

            “Minarchist” is a good term I think. Government in its present form is out of control and unsustainable, but some government will always be needed to protect property.

            The bottom line is that we need to wake up, start asserting our monetary rights, and thereby withdraw discretionary power from central bankers. Then, at least theoretically, Congress will need to start looking to “the people” for its support again, rather than simply knocking on the Fed’s door. Hopefully, a serious legal challenge to the use of central bank money will begin with intelligent groups like the one in this blog. It's crazy to keep thinking we need to wait for a gold standard, a Constitutional amendment, a new president, etc.

  8. avatar Martin Brock says:

    How have commercial banknotes have been legally suppressed in most countries? What form do these laws take? What is forbidden specifically?

    • avatar George Selgin says:

      Martin asks: "How have commercial banknotes have been legally suppressed in most countries? What form do these laws take? What is forbidden specifically?" In most countries central banks have the exclusive right to issue circulating notes. The specific laws by which this outcome has been accomplished vary from country to country. In England Peel's Act of 1844 resulted in the gradual elimination of commercial banknotes as grandfathered banks either merged with others or failed or decided to enter the London market (which meant forfeiting their rights to issue notes). In the U.S. state banks were forced to abandon note issue by a prohibitive tax imposed in 1866, while national banknotes could only be issued on the security of specific government bonds, the last of which were retired in 1935. Interestingly, as Kurt Schuler has shown, later revisions in the U.S. law effectively though inadvertently repealed the restrictions on note issue by U.S. banks. However it is almost certain that, were any of them to test this, the Fed would swoop in with an order to cease and desist.

      • avatar Martin Brock says:

        Does "circulating note" refer only to legal tender? I don't expect much of Bitcoins ultimately, but would you say that they violate any law?

  9. avatar Paul Marks says:

    If I buy a house for a hundred ounces of gold (by the way that means the seller thinks it is worth LESS than a hundred ounces of gold, and I think it is worth MORE than a hundred ounces of gold) then I pay the seller hundred ounces of gold.

    But I do not have the gold - so I borrow it from the "Martin Brock bank" - and you pay the seller one hundred ounces of gold (hopeing I will be able to pay you back later).

    "Bank notes" or other financial instruments do not come into this picture.

    Unless (of course) the seller says "I would one hundred bits of paper with the words Matin Brock Bank nicely printed upon them" (and some bank notes are attractive - I like the Bank of Ireland ones).

    The seller is quite free to do this.

    But you (Martin Brock) said the seller wanted "one hundred ounces of gold".

    So PAY HIM OR HER ONE HUNDRED OUNCES OF GOLD.

    • avatar Martin Brock says:

      The seller may demand a hundred ounces of gold for his house immediately, or he may use my credit outsourcing service and accept a hundred of my banknotes. The seller is free to choose either option. If the seller requires a hundred ounces of gold directly from a buyer, he severely limits his market, but my service does not deny him this alternative.

      If the seller finds a buyer with a hundred ounces of gold, he then has a hundred ounces of gold. What does he do with it? He can't sleep under it, as he slept under the roof of his house. He can't eat it. Wearing so much gold as jewelry is a heavy burden and hardly secures the gold from the risk of loss.

      If he chooses, the seller may deposit the gold in my bank. I then give him banknotes instead. Now, I have his gold but not the title to his house. If I had both the gold and the title to his house while also circulating banknotes signifying the value of either or both, then I'd be guilty of fraud.

      ... the seller thinks it is worth LESS than a hundred ounces of gold, and I think it is worth MORE than a hundred ounces of gold ...

      As a banker, I understand that perceptions of value differ, but I accept your compromise price. I also accept your freedom to dispute my characterization of the agreement. If you prefer to say that a buyer agrees that a price is too low while the seller agrees that the price is too high, that's OK with me. Same difference.

      But I do not have the gold - so I borrow it from the "Martin Brock bank" - and you pay the seller one hundred ounces of gold (hopeing I will be able to pay you back later).

      No. I issue the seller banknotes and hold title to the house. If I lend gold as you wish, I do not hold title to the house. The seller knows that I hold title to the house, so he is not confused. He may also read my business charter, referenced by the fine print on my banknotes.

      "Bank notes" or other financial instruments do not come into this picture.

      In my bank, they do. Of course, you are not required to do business with my bank. You are no required to accept my banknotes for a house or anything else. I wouldn't have it any other way. I wouldn't require you to accept gold for anything either. If you don't like my business model, you may employ a different business.

      Unless (of course) the seller says "I would one hundred bits of paper with the words Matin Brock Bank nicely printed upon them" (and some bank notes are attractive - I like the Bank of Ireland ones).

      That's exactly what the seller says when he freely accepts my banknotes rather than a hundred ounces of gold. He can always hold out for a hundred ounces of gold instead.

      Of course, these days, bits of paper are increasingly superfluous. Sellers increasingly accept electronic bits. They transact on the web, so instead of fine print on a banknote, they have a hyperlink to follow to read the terms they accept. Does this ease of reviewing the terms satisfy you?

      But you (Martin Brock) said the seller wanted "one hundred ounces of gold".

      No. I said that the seller asserts that the house is worth a hundred ounces of gold. If he actually wants a hundred ounces of gold, rather than my banknotes, he is free to wait for someone with a hundred ounces of gold.

      • avatar Martin Brock says:

        If I had both the gold and the title to his house while also circulating banknotes signifying the value of either or both, then I'd be guilty of fraud.

        Correction: If I had neither the gold nor the title to his house while also circulating banknotes signifying the value of either, then I'd be guilty of fraud.

        I understand your confusion, and I'm not trying to sell you anything, only explaining the system. I don't favor a gold standard myself. I prefer a different standard, but the principles are the same.

  10. avatar Martin says:

    George, a bit broader question perhaps than dealt with in this article, but how does the argument for free banking relate to the shadow banking system?

    Would you blame the run on the shadow banking system on the consequences of the 'fraud' committed in individual mortgage applications?

    • avatar George Selgin says:

      I don't like the expression "shadow banks," which seems to me useful only for extending (already bad) arguments for propping up failing commercial banks to justift propping up investment banks. Remember, the excuse for the narrow propping up is that it averts monetary collapse. Calling investment banks "shadow banks" is a cheap way of pretending that they are "like" commercial banks in the sense that their failure can have similar macroeconomic consequences.

      At any rate the investment banks' recent troubles had little to do with fraud. Even mortgage-backed-securities based on individual mortgages that were entirely above-board would have depreciated rapidly, thanks to increasing numbers of borrowers "walking away" from their creditors, once house prices started to decline.

      • avatar Martin says:

        Fair enough, to clarify, that is how I meant it. In the SSRN article - later turned book - 'slapped in the face by the invisible hand', Gary Gorton seems to make this argument. That is he likens the repo-market to the commercial banking system in the pre-FDIC era.

        The article if you're interested is:
        http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882

        It seems to me that if free banking works, it is supposed to work in this case case as well, that is if these are alike. And if it doesn't work and FDIC'ing is the solution in the case of commercial banks, then that should also be extended to this system of 'shadow banks'.

  11. avatar Matt Young says:

    OK, fractional reserve bankers are often liars, one does not always get their full money back. Oil consumers often don't get their shipment, and retail consumer get ripped off often.

    It seems the better idea is to tell depositors there is risk of losing money, but go on with fractional reserve banking. Why would we want a risk free bank?

  12. avatar Martin Brock says:

    In the entrepreneurial world, a loss does not imply a lie, but a fiat money system can encourage liars. "Fiat money" does not describe money backed by a house rather than by gold. It describes debts imposed on the debtor, like your children's obligation to repay a portion of the Federal government's debt and even a portion of debts owed to Fannie Mae's creditors. When the state socializes losses by imposing on your children an obligation to pay debts owed to me by others (including the state itself), it increases my willingness to lend to others rather than your children, regardless of their creditworthiness. If your children need credit to become more productive, socializing losses leaves them with less of this credit. Think about that the next time you buy a Treasury security.

  13. avatar Paul Marks says:

    "Fraud" is difficult one - because the key legal cases (19th century) and the modern statutes say all this is not fraud.

    SO I will simply say that if someone asks me for 100 ounces of gold for a house and I agree to pay 100 ounces of gold - then that is what I should do PAY THEM THE 100 OUNCES OF GOLD.

    If I do not have the 100 ounces of gold I borrow it (if I can find someone to lend it to me on terms that suit us both - interest rate, time to pay and so on).

    That is where the Martin Brock bank comes in - you have the 100 ounces of gold and you are prepared to lend it to me on terms that suit us both (otherwise you are no use to me - or to the person selling the house). Where do "banknotes" come into this?

    After all you have not mentioned legal tender laws in this or taxation (i.e. demands that taxes be paid in....). So your "banknotes" are no better than bits of paper that I might print myself - if that is what the house owner wants (not gold) then why should I not print the notes myself and give them to him?

    Where do you come in?

    Of course if you are saying that your banknotes are in fact PROMISES TO PAY THE HOUSE OWNER PHYSICAL GOLD then the picture changes. And, of course, the first thing the house owner is going to do with these notes is to arrive at your bank and ask for his gold.

    Ditto silver - or whatever other commodity people are choosing to use as money in their contracts.

    You may say "my notes are as good as gold - and they do not wear holes in your pockets" - but you are going to have to prove you actually have the gold. Although YES it is not "fraud" if you do not have the gold - because the judges have ruled that it is not, and you have convinced the legislators to write statutes saying you are in the right.

    But if you do not have the gold (if you are lending out "money" that does not really exist) then sooner or later things are going to end in tears - although perhaps not for the banker personally (if he is clever - and gets out before things come crashing down).

    By the way what has "title" got to do with any of this?

    Legal ownership of the house either remains with the seller till he is paid, or goes to the buyer even before he has paid (on the promise) - it depends on the exact wording of the contract (ditto the bank's position, it depends on the contract).

    Of course the legal codes of various nations (such as France and Germany) vary also - as do the statute laws of various nations and (in the United States) between various States.

    For example, a bank is very unlikely to lend you money to buy farm land in North Dakota - because it is virutally impossible for a corporation to foreclose on farm land (or the homestead) in North Dakota. I am not saying that is a good thing (although it does have the good side effect of meaning farmers in North Dakota do not tend to get into debt - because no one will lend them much money), it is just one of the weird things about local statute law.

    Anyway you asked a question Mr Brock and I went off to work without replying to it (my apologies).

    You asked about banknotes, suppression of.

    In the British case few banks are left that can still issue notes.

    Basically ones that were around (and issueing notes) when the 1844 Act was passed (limiting all this) and have not gone bankrupt since.

    Indeed it is really only a couple of Scottish banks plus the Bank of Ireland - the rest of the notes are Bank of England (since 1946 government owned, but closely connected with government right from when it was founded in 1694).

    The Bank of Ireland is the odd one - it is not (contrary to what its name might suggest) the Central Bank of the Republic of Ireland, but it is based in the Republic.

    Yet it produces Pounds of its own - not the currency of the Republic of Ireland (which uses the Euro), but widely used in Ulster (Northern Ireland - where the Bank of Ireland still has many branches) and also "legal tender" in mainland Britain.

    Colourful notes they are - but (yes) just as much fiat money as Bank of England notes.

    Still the Act of 1844 - the Peel Act (after Prime Minister Sir Robert Peel).

    This leads us into the great "Currency School versus Banking School debate" of the 19th century.

    Now as George Selgin represented Hayek in the recent BBC debate one might think that he (like Hayek and Mises) was broadly on the "Currency School" side of the debate.

    However, it has become obvious to me (since I first visited this site a few days ago - I missed the debate itself) that George Selgin is (like the Keynesians he was debating against) on the "Banking School" side - most likely this is why they find him "refreshing".

    Well what does this actually mean?

    The Banking School held that one could get something for nothing - that banks should increase money for the "needs of trade" or "needs of business" and that everyone would benefit from this (as long as it did not go too far - they were a bit vague about what "too far" meant, but it seems to have meant as long as only certain, connected, people were getting the sweetheart low interest loans - not everyone getting them).

    Now this is (in scale) not really Keynesiansim - Keynes took the ideas of what used to be known as the "monetary cranks" (Major D. and the rest of them) and ran with them - i.e. he held that the people as a whole could prosper if only "demand" (i.e. what nasty people like me call a credit money bubble) was maintained. His difference with Major D. (and the rest of the monetary cranks) was that Keynes stressed that monetary expansion should be done via the banks (thus he got the establishment, to some extent, on his side) whereas the old "Social Credit" types (and other such) had just wanted to print notes and hand them to people.

    Broadly speaking if you do something as crude as print money and hand it out, most people will smell a rat - but (as Keynes rightly figured out) if you make everything as complex and obscure as possible, most people will just nod and say "whatever" and get on with their busy lives (till the whole thing collapes around them).

    Now the Banking School people were very much on a smaller scale - they were let-us-play-games-at-the-margin type people (not let-us-destroy-civil-society-and-replace-it-with-Bloomsbury-collectivism type people). They wanted to enrich certain people (often themsleves - or people they were connected to) and convinced themselves that they were not hurting anyone by doing so - indeed by increasing the money supply (by using money that did not actually exist) they were actually helping people - they were helping "trade", "business climate" (and so on).

    Often they were quite sincere - rationalizations can be very effective.

    However, their manipulations (their get rich quick monetary expansion schemes - sorry their "helping trade along with a bit of ..... to greace the wheels") produced boom/busts. They did not want to do that - they just did (in the end intentions and "confidence" and the rest of it - just do not matter).

    Now back in the early 19th century their favourate scam (sorry - scheme) was to produce banknotes - knowing perfectly well they did not have the physical gold the bank notes promised (just a fraction of it).

    No-one-is-going-get-hurt (yes they will - in the end).

    The Act of 1844 was intended to end the boom/busts, by limiting the issue of banknotes.

    It failed.

    This was the great error of the Currency School (as pointed out by Mises and others much later).

    The Currency School became so fixated on "bank notes" that it forgot that they were just one means of pulling off the con (I mean just one means of "maintaining confidence").

    There are many ways (and they can be vastly complex) of lending out more money than you actually have - of trying to "expand credit" or "reduce interest rates".

    Mostly perfectly legal (at least under modern law) - but still something for nothing, get rich quick schemes.

    And some people do get rich and stay rich (if they get out in time) - but the general public loses (again and again).

    Can this stuff be stopped by "bans on fractional reserve banking" and other such?

    I doubt it.

    Remember these people are very clever (I do not know about you, but they are far more intelligent than I am, and they do not have my short temper, they can sit and plan things out - play the long con).

    What can be done is not have the government back them.

    No "Central Banking" no "deposit insurance", no "our regulations keep everything straight".

    No fictional world where wise Feds "look after the folks" (and remember that line is from Bill O'Reilly - the illusion that the government can protect investors is as common on the right as on the left).

    If you are going for a swim with sharks - at least know they are sharks.

    "Buyer beware".

    For example - going back to one method (the method of the "bank note").

    "So this note represents gold".

    "Yes Sir".

    "How many notes have you issued? And show me all the gold you say you have."

    "Well Sir you must understand....." (long explination involving long words and mathematics).

    If the mark (sorry "the member of the general public") accepts all this - then he or she is really to blame for their own trouble. They have been greedy - at let people take advantage of their greed, the really honest man, the person who does NOT want something for nothing, is actually a difficult target. Although YES - when the ecomomy goes into a major bust (caused by a major credit expansion "boom") then even the most honest and careful people get dragged down with it (as if they were climbing a mountain - tied to fellow climbers who are drunk and think they can fly).

    But what ever the method used......

    The heart of it is always the same.

    Borrowing can be greater than real savings.

    You can build a business, or just have nice stuff - without working your b... off sacrificing for it.

    And it is a new economy - a "boom" where the old way of working in sweat, tears and blood is over, and a new happy age has dawned.

    • avatar Martin Brock says:

      If someone asks a hundred ounces of gold for a house and his house sits on the market unsold for months, may he not change his mind and decide to accept instead a hundred ounces of gold paid in installments over ten years? He might even ask a hundred and ten ounces of gold payable over ten years and have more luck than asking a hundred ounces payable immediately.

      The seller doesn't need a bank to accept a hundred ounces of gold paid over ten years for his house, but banks offer this accounting service and issue banknotes. If you are not compelled to accept these banknotes, why is that a problem for you?

  14. avatar Paul Marks says:

    By the way I agree that, economic, value is subjective.

    If a home owner values bits of coloured paper and will sell his house for one hundred of them - that is his choice.

    But if he wants to be paid in gold, and the customer AGREES to that, then he must be paid in gold - not paper "representing" gold (long before 1933 the gold "standard" was a scam - although not openly so, as someone could still ask to be paid in physical gold), the physical gold that buyer and seller agreed to.

    Ditto silver - or whatever other stuff the contract was in. In the quanity and the purity that was agreed.

    In short President Roosevelt was a thief when he did what he did in 1933 - and (more seriously) broke his oath of office.

    As did five of the nine Justices of the Supreme Court when it got to court in 1935.

    These six men - "F.D.R." and the five Justices who backed him, were not just criminals (although they were criminals) they were also oath breakers.

    They were from "good backgrounds", and were "well educated" and spoke and dressed nicely - but they were scum.

    A man may be dirt poor (no boots on his feet - and no food in his belly), never seen the inside of a school in his life, and not know who is father was - and still be a man (and a good man).

    But a man who breaks an oath he voluntarily took - in order to steal and break contracts, is scum.

    And if he says it is for a "higher good" - it actually makes it worse (not better).

    "That is morality not economics - Paul Krugman said that Austrians confuse morality with economics, moral-theory-of-the-economic-cycle and so on".

    Well Von Mises always said that his economics were value free - he simply told you that forcing someone to drink a cup of deadly poison would kill them (not improve their health) he does not say whether murdering people (or "an economy") is good or bad - just what will do it.

    If you want to destroy an economy - this is what you do, I (Mises - as economist) am not claiming that your causing starvation (and so on) is a "bad thing".

    However, if the best the collectivists can do is to spit "you are honorable", that is an insult I have will have to bare as best I can.

    For my part I am prepared to praise the left by fulling agreeing with them that they have no honor at all - that they lie, cheat and steal (and so on) whenever it suites their purposes, and that a sworn oath means nothing to the "Progressive" (including, of course, to a "Progressive lite" Republican).

    I hope they are very happy with me for praising them in this way. Although I do not see how it proves they are good economists.

    • avatar Martin Brock says:

      If a home owner values bits of coloured paper and will sell his house for one hundred of them - that is his choice.

      A homeowner accepting banknotes promising gold does not simply accept bits of colored paper. He accepts the banker's pledge to hold the title to the house and accept payments from the buyer over time, gradually replacing the bank's equity in the house with the buyer's gold. Most likely, the home seller never wants to hold the entire value of his house in gold, not immediately and not when the buyer has repaid the loan. In spite of your repeated claims, a hundred ounces of gold likely is not what the seller wants. He more likely wants another house.

      If you want a hundred ounces of gold, and only a hundred ounces of gold, for your house, then you may wait for a buyer with a hundred ounces of gold on hand. That's fine with me, but I advise you not to hold your breath. If you tire of waiting and decide to deal in credits, my bank is open from nine to five, Monday through Friday.

  15. avatar JP Koning says:

    I enjoy Henry Dunning Macleod's take on credit and development. I'd describe him as a free banker, or free banking tendencies. Have you read him, George? He continues a long line of thought linking development to banking that begins, as far as I can tell, with John Law and continuing through Adam Smith.

    • avatar George Selgin says:

      Yes, I do. Macleod was very idiosyncratic and consequently much underrated. His work on the legal status of bank deposits is excellent and puts paid to the claims of Huerta de Soto and Co. concerning the illegitimacy of fractional-reserve banking, almost as if it had been written directly in response rather than 1.5 centuries ago (as I have tried, unsuccessfully of course, to indicate to them). Finally Macleod was indeed a free banker, most explicitly so in a series of articles he wrote concerning Indian currency reform, in which he championed the cause against those who were advocating an English-like system for that nation.

  16. avatar Paul Marks says:

    Martin Brock - "a home owner who accepts notes promising gold does not just accept colored bits of paper".

    I agree with you - so the bank (or whatever) better actually have the gold when he goes to get those notes honored, ditto if the notes promise silver (or whatever other commodity that is being used as money in the contract).

    After all the contract did not say "bits of colored paper" it did indeed say gold (I repeat the actions of the Federal government in 1933, in voiding gold clauses, were both criminal and a direct violation of the oath to uphold the Constitution of the United States).

    Still, to return to economics, if the bank does not actually have the gold it is promising - then its notes are no better than notes I might print myself.

    So if it is colored bits of paper the house owner wants - then I have no need to go to a bank (I can produce them myself). And if it is gold the house owner wants - then the bank better have that gold it is promising.

    Huerto de Soto.....

    His argument is really two arguments.

    The first is based on Roman law concepts - which George Selgin can reject (why should he follow Roman Law - it has never been the basis of law in Geordia).

    But their is also an economic argument (although as with Hayek and Mises - indeed as with Carl Menger and Franz Brantino, it could be aruged that there are indications of the same sort of deductive reasoning in the argument that, in another context, Roman law philosphers traditionaly used, although it can also be found in some preRoman thinkers).

    This economic argument is that (for example) one can not lend out more money than has actually been really saved - and that there are consequences for trying to break this rule.

    I do not mean consequences in the sense of criminal punishment (jail time and so on), as the criminal law may be written (or made by Common Law judges) so that fraud is not fraud (and thus carries no legal punishment). I mean consequences in terms of ECONOMICS.

    It is this that George Selgin denies. George Selgin believes (just as the Keynesians do) that more money may be lent out than was really saved (i.e. credit may be "created" by various book keeping manipulations - all quite legal, of course) without any negative consequences, indeed that the economic consequences will be positive - not just in the short term, but in the long term also.

    "So what is the diffence between George Selgin and the Keynesians?". Actually there is a differnec and an important one. It is a question of SCALE.

    In spite of the talk of "free banking" what George Selgin really wants is the same as the "Banking School" of economist wanted in the 19th century.

    I.E. credit expansion (more money being lent out than is actually really saved), but only on a limited scale. For the "needs of trade" (or whatever form of words he might prefer).

    In practice this means that only a few people and enterprises get the sweetheart (artificially low interest) loans and so on. Booms and bust still occur - but not on a scale that actually destroys civil society.

    Again the truth has to be faced - and the truth is that J.M. Keynes actually did want the credit expansion (credit money creation) to be on such a scale that traditional civil society would be destroyed.

    Keynes did not support the print-stuff-and-hand-it-out-to-everyone methods of the "monetary cranks" - but this rejection was on tactical grounds (that policy is just not going to pass), not because he had more moderate aims (if anything the aims of Keynes were more radical than those of Major Douglas and the other monetary cranks).

    He really was a Cambridge and Bloomsbury man. Not a Marxist (like the next generation of Cambrige intellectuals), but only because (to Keynes and his friends) Marxism was too rigid (and too vulgar). The utter hatred of the traditional principles of civil society (such as thrift, hard work and self denial) is passionate in Keynes and his friends (the work of Hunter Lewis "Where Keynes Went Wrong" is just the latest in a long line of works exposing what the real Keynes was like - under the "gentleman" mask that all these people used so well).

    The attitude of Keynes to Nazi Germany is similar - he praises the state control of the economy (see the introduction to the German edition of "General Theory..."), but he does not accept the ideology of National Socialism (any more than he accepts the ideology of Marxism). Much like the American "Pragmatist" school of philiosophy (William James and the rest) Keynes rather despises claims of objective truth - to him "truth" was always anything that suited his purposes and those of his friends, and so arguments could vary from day to day (often with basic contradictions of former statements). Not because "the facts had changed" (the dishonest defence), but because the tactical situation had changed - so "the line" changed. And the aim?
    Destroy "conservative" civil society. It really is as basic as that.

    Economic advice may be "value free" - but would you really take economic advice from someone who hates you (although he only shows it in "humour" - as with Philby and the others, if you ever came straight back at them you got the "it was just my little joke - why are you so serious" defence) and wishes to utterly destroy you?

    Indeed a school of people - for Stiglitz and Krugman may not share the private practices of Keynes (although it must be stressed that to Keynes and his friends their homosexual acts were POLITICAL a principled rejection of a society they despised) but S. and K. and other leading Keynesians hate conservative civil society, the "Babbits", - perhaps not to the same extreme as Keynes, but the hatred is there.

    "And you would know about hatred" - yes I do not deny that, indeed (in many situations) hatred has been all that has kept me going (when all else failed). I would like to say it was love of humanity, or faith in a higher power that kept me going - but at bottom it was often just plain hate (hatred of the enemy - just as I despise those who do not understand that the ememy are the enemy) that kept me putting one foot in front of the other, when everything else in me just wanted to lay down and die. But I do not smile at people I hate - or pretend to be their friends - or to have the best interests of something at heart (when I want to destroy that very thing).

    Still - again back to economics.

    I stress again that (strictly speaking) this is not really about "fractional reserve banking" - i.e. banks taking in X amount of real savings and leanding out 90% of it (or whatever).

    No.

    It is really about banks lending out MORE than there actually is real savings.

    Not lending out a "fraction" of it - but creating credit money (in various complex ways) and thus creating boom/busts. Whether small ones (as with George Selgin or Banking School) or big (indeed terminal) ones (as with the Keynesians).

    Challenge specific points - such as how people can lend out there savings and still have the money (to buy stuff), or such as total lending being greater than total real savings - and you will not get real replies.

    What you will get is references to articles and books - that do not acutally deal with the real challenges.

    • avatar Martin Brock says:

      I agree with you - so the bank (or whatever) better actually have the gold when he goes to get those notes honored, ditto if the notes promise silver (or whatever other commodity that is being used as money in the contract).

      If the notes promise gold on demand, then the banker needs enough gold in reserve to satisfy demands; however, the home seller does not sell the house for gold. He sells it for promissory notes. If he doesn't understand the difference, he should speak to an attorney or other financial advisor.

      After all the contract did not say "bits of colored paper" it did indeed say gold ...

      How do you know the contract says? We're discussing my bank, not yours.

      Still, to return to economics, if the bank does not actually have the gold it is promising - then its notes are no better than notes I might print myself.

      The bank holds the title to the seller's house. If you don't hold this title, then notes you print yourself are not equivalent.

      This economic argument is that (for example) one can not lend out more money than has actually been really saved - and that there are consequences for trying to break this rule.

      Banks don't lend deposits. Banks extend credit. Deposits only provide liquidity.

      A homeowner may extend credit for the purchase of his house himself, without any financial intermediary. He may divide the equity into shares for example, entitling the holder of a share to a dividend, a portion of rent paid for the house.

      A renter of the house may own some of these shares himself, and he may purchase additional shares each month in addition to paying the rent. That's the essence of a "rent to own" arrangement, and it's much closer to what banks do than "lending deposits".

      A homeowner may instead outsource this credit accounting to a bank. He may also pay the banker to accept various risks associated with the transaction.

      Banknotes essentially are negotiable shares of capital held by the bank. Gold on deposit is only one form of this capital. Under a gold standard, gold is not the only thing of value represented by banknotes. It is only the standard of value, a yardstick against which the value of other things is measured (subjectively by a market).

      And yes, my notes do explain the business model or at least refer to an explanation of the model that note holders or potential note holders may examine. Extending credit is a risky business, and note holders share this risk, but I have no interest in defrauding anyone.

      In spite of the talk of "free banking" what George Selgin really wants is the same as the "Banking School" of economist wanted in the 19th century.

      I want what Selgin wants, but I'm not interested in schools of thought. I'm not an academic economist. I want a free market in valuable financial services.

  17. avatar Paul Marks says:

    My typeing is a bad as ever - but I would be lying if I said I really care.

  18. avatar Paul Marks says:

    Does a circulating note have to be legal tender? No it does not.

    As for corporations.....

    Universities (an early example of corporations) are a useful opening here.

    Sir William Hamilton (the rival in philosophy circles to John Stuart Mill - although I found reading the political philosophy of both men a let down) actually defines a university as something established by the STATE (my stress) and then goes on to write about what a unversity does.

    Historically what Sir William Hamilton wrote was false - many universities had not been set up by the state (they had been set up by the Roman Catholic Church) and, even in his own day, what he wrote was false - as in the United States many different churches were setting up universties, indeed a group of non religious people set up a college in London in the 1820s (although, yes, they did seek government recognision).

    Sadly, like J.S. Mill, Sir William Hamilton had read too much German philosophy - so his de fault mode (almost without him knowing it) was to think of "the state" in terms of hushed awe. This poisoned 19th century liberalism in Britain - the endless talk of "freedom" and "liberty" by people like J.S. Mill hides the fact (and it is fact) that their practical influence tended (overall - not in everything) to towards a bigger government not a smaller government. And even when they were free market (as with free trade) they were careful to say that such matters were nothing to do with basic morality - which, actually, they are (for example, contra Mill - restrictions on sellers are just as much liberticide as restrictions on buyers).

    Still back to universities as examples of corporations......

    Let us say a State has a rule that any group of people wishing to set up a university have to get State permisssion - even if they do not want a Dollar of subsidy.

    Would you say that such a university was "not really private"?

    It is the same with any other corporation.

    Let us say I (and some other people) wish to set up a money lending service.

    This trading enterprise will take in savings from people and pay them X per cent interest - and lend out those savings at a higher rate of interest to various borrowers (me and the other shareholders in the enterprise hope to profit from the difference).

    We are quite open and honest with everyone - saying that we (the shareholders) have each put a certain amount of money into the enterprise, but that if it goes bankrupt (if the people we lend money to do not pay us back - so we can not pay the original savers) we will only be liable for the stake we put into the business.

    We are not offering to put out homes (and so on) at stake.

    Now, remember we TOLD everyone this in advance.

    If a saver puts his money in our money lending enterprise he can not, honestly, complain if it goes bankrupt - but we (the shareholders) only lose the stake (the investment) we put into the enterprise. He never had to do business with us - and we TOLD him (in advance) that we were only risking our investment in the enterprise (not everything we owned - our homes and so on).

    What is unlibertarian about any of the above?

    Now the complicating factor is if a government demands that we have to have its permission (its "charter") before this "bank" can do business.

    But how is that our fault?

    Again we are only lending out savings that savers have given us (plus our original investment in the enterprise - the investments that we, as shareholders, have made).

    Also we tell everyone, in advance, about the nature of the business - there is no deception, no claim that we are covering the savings of customers with all our personal assets (houses, cars and so on).

    • avatar Martin Brock says:

      Let us say I (and some other people) wish to set up a money lending service.

      This trading enterprise will take in savings from people and pay them X per cent interest - and lend out those savings at a higher rate of interest to various borrowers (me and the other shareholders in the enterprise hope to profit from the difference).

      Let us say, "Go ahead." Let us also say, "Compete with other trading enterprises.". For example, I'll set up a credit outsourcing service, as described above.

      Your business doesn't stand a change against mine for reasons we can discuss, but I would never try to forbid your business. On the other hand, in the real world, my business model is not so easy to establish, because the state effectively monopolizes credit and imposes a "money lending" model superficially more like yours, to socialize the losses of nominal "creditors", who are really title holders in the state's business model, which is collecting protection money.

      What is unlibertarian about any of the above?

      Nothing. I'll also incorporate my business to protect some personal assets, but I won't exclude all of my assets from entrepreneurial risk, because I love the game and the benefits that flow from it, for myself and for everyone else in the market.

    • avatar RickDiMare says:

      Paul, because the framers of the Constitution were heavily influenced by John Locke (1632-1704), the protection of property is considered to be the primary role of government, and nothing affects property rights like money, so I don't see how free banks can get away from being chartered by Congress, whether liability is limited ("Ltd.") or unlimited ("Unltd."). What you describe might work if, like the clear warning on a pack of cigarettes, depositors are informed and continually updated.

      But I'm more in favor of full transparency and unlimited liability on banks that want to engage in fractional reserve practices. On page 29 of Larry White's "Free Banking in Britain," he refers to unlimited liability as "one of the most remarkable features of Scottish free banking," and on page 38 he raises a huge legal issue by noting that the enforcement of liability against the shareholders of a failed bank "was facilitated by Scottish bankruptcy law, which was stricter than English law. In England only the personal estate of an insolvent debtor could be attached. A Scottish creditor was legally entitled to the debtor's real and heritable estate as well."

      It almost sounds like banking systems are most stable when bankers are treated like latent criminals, but I think that's the nature of the game.

  19. avatar Martin Brock says:

    What is property, according to John Locke? Is a Treasury note proper? How about a title to nobility? Title to Buckingham palace? Title to a thousand acre estate?

    • avatar RickDiMare says:

      Words like "property" or "proprietary interest" at bottom merely mean "important stuff" that the government's legal system will help to limit or control access by others, including the power to limit or control access from government itself.

      So, I think Locke saw property more as a negative right, or power to exclude, rather than as a positive thing that one can possess, even though tangible property like cars and real estate often feel like they can be owned or possessed. They are really just things we have legal power to exclude others from taking or trespassing upon.

      So, for example, when Locke states we have a property right in our minds, bodies, AND THE LABOR THAT COMES FROM THEM, and then, following Locke's lead, Jefferson and Madison create two classes of taxation, one of which (the direct-tax class) conditions government's access by making it follow rules of apportionment and proportionality, this gives a "natural person" a potential property right in his/her labor under the U.S. Constitution.

      Likewise, when Jefferson and Madison create a fully publicly-owned entity called the federal government, and then give that entity a power to create its own fully-public currency, we have a potential property right in claiming Treasury-Direct currency, not because it's something tangible we can eat or hold, but simply because it gives us legal power to exclude the privately-owned central bank's currency. So, when I say we have a right to claim title to our money at U.S. banks under McCulloch v. Maryland (1819), I'm merely saying we have a Constitutional right to exclude the Federal Reserve's controlling influence over our money.

      • avatar Martin Brock says:

        ... "important stuff" that the government's legal system will help to limit or control access by others, including the power to limit or control access from government itself.
        That's Locke? Property is just any stuff that government permits to be controlled only by a particular individual or group?

        ... Locke states we have a property right in our minds, bodies, AND THE LABOR THAT COMES FROM THEM, and then ...

        He does, but one's mind, body and labor are not the only things that government permits to be controlled only by a particular individual or group. Again, what about a Treasury note? What about a thousand acre estate?

        I'm still not sure what Treasury-Direct currency has to do with anything. The Treasury Secretary is a former head of the Federal Reserve Bank of New York. He presumably meets with Ben Bernanke on a regular basis. The two organizations are inseparable. Both are part and parcel of the state.

  20. avatar Paul Marks says:

    John Locke held that property is created by a person either "mixing their labour" with something, or buying, inheriting or just being given stuff by someone who had "mixed their labour" with it.

    For example, a person comes to an unhabited bit of land - to Locke just saying "this is mine" is not enough. The person has to (for example) build a fence round what he or she is claiming (or do somthing else like this). Some of this thinking went into American Homestead Law. It is also important to remember that this is a labour theory of ownership - NOT a labour theory of ecnomic value (we are not off in David Ricardo land).

    However, there is a complication - oddly enough (well perhaps not "oddly enough" as nearly all politican and economic thinkers were deeply interested in theology before the 20th century) a theological one.

    John Locke held (like Samual Pufendorf - the German philosopher) that God had given the Earth to humanity as a whole (the people generally) that the world was not unowned till a particular indivdual claimed a particular bit of it. How did Locke square this with private ownership?

    Locke reconciled the two with "as much and as good left for others" (the so called "Lockian Proviso") this does not really mean that Locke only supported private ownership if there was other land for other people. Actuall it is, at base, an ECONOMIC argument that Locke is advancing - i.e. that people are better off because there is private property (even if they do not own any land themselves) indeed that most people alive now (in in the 1600s when Locke was writing) would die if the institution of private property was destroyed.

    This is (to use a word that was not used at the time) an argument from utility (odd from a thinker most closely associated with natural rights - but the great distiction in our time between natural rights or natural law thinkers and utilitarians, was not nearly so sharp in the past).

    By the way the alternative view is that God did not give the world to humanity AS-A-WHOLE and that property (such as land) may be justly claimed without worrying about Lockian Provisos and what not.

    This view of property (the anti Pufendorf view - i.e. the view that sees the property as unowned till someone makes a claim) is associated with such people as (for example) the Dutch thinking Hugo Grontius.

    Of course this view is much closer to the philosophy behind Roman legal thinking.

    The Roman tradition of legal philosophy (jurisprudence) is also deeply interested in how land can be violently stolen in the past (and nearly all land has been violently stolen - if one goes back far enough) and yet be justly owned by some present occupying (not the violent thief of course - but someone long after that event took place).

    Common Law also (de facto) assumes that there can be just ownership now even if (long ago) there was violent take over (original owner murdered and so on), but does not go into WHY this can be so, and how justice (in the context of civil society) can return to a land that was (at one time) reduced to blood soaked chaos or tyranny. How just ownership does NOT need an unbroken chain of "just acquistions" going back to an original owner - but still be just.

    I despise many aspects of Roman law as a working system - the end of juries (they really fell with the Republic) and the rise of "putting the question" (torture - a practice that became common under the Empire, but carried on as part of the legal system till the 18th century) and the special awe that Roman law (as a working system) payed to the state.

    There is nothing like (for example) the "feudal" Edict of Quierzy (France 877) that held that even a King of France could not take a fief of land away from the children of owner of the fief and give it to someone else.

    The web of limitations that "feudal" law placed upon the King (and everyone else) actually meant that whilst (in theory) land was not privatly owned under this system - in practice private ownership was better protected than it had been under the Roman Empire (where, basically, an Emperor could do what he liked - for all the lip service that was paid, in legal theory, to private property).

    However........

    The basic way of thinking in Roman law, start from first principles and then reason from them, appeals to me far more than the way of thinking of "feudal" or "common" law (which is basically, start from random judgements and customs in all sorts of cases, and then try and apply them to new cases - even though the judgements and customs are often as clear as mud and actually contradict each other). But this does mean you have to get the first princples right - for if you do not everything falls apart.

    Common Law is a mess - often one does not know how a judgement will go (which is a bit of a problem for a legal system), and even after the judgement the explinations of the judges are often utterly confused and contradictory.

    However, with Common Law there will always be "another one along in a minute", not another bus or train, but another case.

    For all the talk of "precedent" Common Law judges can basically do what they like - which means (if one is on the losing end of various judgements) there is always hope for the future. For example, in American context, more pro free market judges may get appoined and start ruling our way (Common Law judgements do not have to be clear examples of jurisprudence - bascially if a judge or judges want a certain outcome they can always find some case or some custom or some whatever... to get them where they want to end up).

    But with the Roman law tradition - once a certain line of thinking has gained a stranglehold it is much harder to change this way of thinking. Which is fine if it is good - and not fine if it is bad. Ironic for a system that (supposedly) rejects "precedent" - it rejects the precedent of a particular case, but not of a way of thinking (a way of understanding a legal concept).

    "You seem to be sitting on the fence between the two legal systems" - yes, I hope I do not get splinters in sensitive regions of my anatomy.

  21. avatar RickDiMare says:

    No, government doesn't permit the property right to exist. Such rights exist under natural law theory. All government can do is to create disincentives for the intruders and trespassers.

    Regarding the Treasury note, I disagree that "a particular individual or group owns it," no more so than a particular individual or group owns a federally owned and controlled national park.

    Finally, if you don't see a difference between the legal structure of the Federal Reserve corporation and the Treasury Department, I can't help you, because you'd be right, there's no hope and the Constitution is a failed effort.

    • avatar Martin Brock says:

      A particular Treasury note has a particular owner. This owner is entitled to tax revenue. I am not entitled to the interest and principal due on the note and payable from tax revenue. Only the owner is entitled to this tax revenue. Does this ownership constitute Lockean "property"? It certainly is "property" by law in the United States, but we can distinguish lawful "property" in the U.S. from what Locke called "property". Describing two things with the same word doesn't make the two things the same.

      The Constitution is a failed effort, but I have all sorts of hope.

      • avatar RickDiMare says:

        A Treasury note (assuming you don't mean a Treasury Coin Note) is a publicly-owned note subject to income tax regulation, and the Lincoln administration started this regulatory taxation in 1862. So, yes the Treasury Department "is entitled to tax revenue," but I wouldn't call the Treasury Department the "owner."

        No, I wouldn't consider tax revenue received by the federal government from currency regulation to be Lockean property. Maybe "public property" is a better term for revenues received via taxes, fees, penalties, etc.

        The Federal Reserve note, whether redeemable for current coin or not, is a privately-owned note subject to the same income tax regulation as the irredeemable Treasury note, and this regulatory taxation began in 1935-1937.

        Current U.S. coin is publicly-owned currency which does not need to be regulated by income taxation.

        The Federal Reserve note is presently the default currency, the one we get automatically if no demand is made for Treasury notes or current coin.

        So, maybe it's incorrect to say we have a right to claim title to publicly-owned currencies (either coin or irredeemable notes), but we do have a right to use only Treasury-Direct currencies and to reject central bank currency.

        I'm not sure if this is the point you're trying to make, but yes, it's probably more accurate to say we have the legal power to choose the Treasury-Direct currencies, rather than say we have a property right in them.

        • avatar Martin Brock says:

          I'm not making myself clear.

          I buy a ten year Treasury note. I give the Treasury $950, and the Treasury gives me a note that I may return to the Treasury in ten years in exchange for $1000.

          This note is my property, not the Treasury's property. I may hold it or sell it to someone else at an agreeable price.

          If I hold the note, when I return it to the Treasury in ten years, the Treasury gives me $1000 out of current tax revenue (or additional borrowing).

          The note is definitely property under U.S. law. It is my personal, private property. It is "property" in a Lockean sense?

          • avatar RickDiMare says:

            OK, I think I see why we're misunderstanding. I'm talking about Treasury notes that are used for circulation (and there are none right now), while you're talking about Treasury notes used for investing (probably the ones available at http://www.treasurydirect.gov, which are not for circulation).

            But in either case, and even in a Lockean sense, I don't believe the Treasury note can ever be your "personal, private property."

            Under Locke's view, the Treasury note always belonged to the public, i.e., "to men in common."

            The thing that was really "yours" (that you "owned") was the labor you used to acquire the investment capital (the $950), unless you inherited the money, found it legitimately, "rolled it over" from another investment, etc.

            In other words, the publicly-owned Treasury note is really just a Constitutionally-protected conduit, or a legally safe way to transfer the property that originated with your labor to other modes of ownership, which modes (land, food, machines, etc.) are always lesser modes of ownership than your labor.

            Incidentally, after you pay an income tax on the $50 you earned as interest, that money now represents your personal property.

          • avatar Martin Brock says:

            I'm not sure what "not for circulation" means, but a Treasury note is a negotiable security. I suppose I can exchange one of mine for your car if we're both willing.

            I agree that labor and its fruits are property in Locke's sense, but to "transfer the property forward" ten years in time, the state subjects others to confiscation of their property, so I'm not sure that Locke would call the Treasury note "property", with or without an interest payment.

            A proprietor might instead lend his property directly to my children expecting them to employ it productively and ultimately thus to return the investment from the fruits of their labor, assuming that my children are willing participants in this transaction. This Constitutionally protected transference avoids their consent, so it doesn't seem very proper to me, and I prefer that it not be Constitutionally protected.

          • avatar RickDiMare says:

            Martin, if your children's wages were deposited in current U.S. coin, that coin represents their Constitutionally-protected personal property. It is not income.

            However, nobody who employs the labor of others is Constitutionally protected. This was one of the great historical, revolutionary achievements of the Civil War, i.e., that someone becomes liable for tax simply because he/she controls the labor of another. For example, the employer portion of the Social Security tax, authorized by the Supreme Court during "the revolution of 1937" in Helvering v. Davis, was levied on the employer/employee relationship or simply because of someone "having individuals in his employ."

          • avatar Martin Brock says:

            I doubt that the IRS agrees that wages paid in U.S. coin are not "income" (if that's what you mean), and I suppose the Federal government's judges and their armed agents will go along with the IRS, but even if this theory were operative, I'd still oppose any monopoly's coin as a legal tender for the payment of taxes or any other debt. If my children don't agree to exchange X for Y, then X is not the tender. Any other tender is a passage to slavery that any leviathan can comfortably traverse.

          • avatar RickDiMare says:

            Yes, Martin, that's what I mean.

            Stated as simply as possible, wages earned by those who exclusively transact in current U.S. coin or coin notes are entitled to have their labor and wages regarded as PROPERTY, and therefore Constitutionally protected against disproportionate taxation under the Direct Tax Clauses, but wages earned by those using other currencies must continue to allow them to be treated as INCOME and submit to a regulatory income tax on their wages under the Commerce Clause.

            As you say, "I doubt that the IRS" agrees, and I don't suggest claiming a property right in one's labor until the IRS does agree, but that's my conclusion after decades of studying this issue.

  22. avatar Paul Marks says:

    Treasury Sec T.G. and Federal Reserve Chairman B.B.

    If I gave my honest opinion of these men and their actions (for Tim G. - his actions as head of the New York Fed also) ......

    Well there would be so much "Anglo Saxon" language in the comment it would have to be deleted. So I will limit myself to saying I do not regard these men as just being representives of a different school of thought. People of good will, with whom I disagree.

    My actual opinion of them (which I hold to be well grounded in evidence) is very different to that.

    As for where I come down in the Roman law (way of thinking - not "Roman law" as a workign system) and Common law divide.....

    I can understand Scots law - because it starts from principles and then reasons from them. But English Common Law just seems like a collection (if people do not like the word "mess") of judgements. I might not like where a Scots Law judge ends up - but at least I can understand how he got there.

    Of course both systems are now dominated by statutes (even more confused and arbitrary than the worst judgement by judges - after all statutes are made by politicians and officials), so the distinction is less important than it once was.

    Still - practical example.

    As a libertarian I do not believe Congress should run a post office or build post roads.

    So I might be expected to try and "interpret" the Constitution of the United States in order to forbid them - but, I would not.

    Article One, Section Eight - the Congress can, if it wants do (i.e. it has the power to) establish a post office and build post roads.

    End.

    I do not start from the conclusion and work back to find arguments that will lead me to the place I want to end up.

    I start from first principles (and I do my best to make sure those first principles are true) and if they lead me to a place I do not like (for example allowing the Congress to establish a post office) that is just unfortunate.

    By the way I FULLY ACCEPT that historically I may be doing Common Law an injustice.

    For example, it is quite clear that (for example) Chief Justice Hewart had principle and tried to live by them in the law (see his protest against the modern state "The New Despotism" 1929).

    And Common Law even established principles.

    For example, the interpretation of contact (in Common Law) was from the words on the page, whereas the Roman (or Scots) approach is from the intentions of the writer or writers (a harder thing to establish).

    However, I find if difficult to grasp the process by which principles emerge in Common Law - as it is not deductive (induction is simply something my mind revolts against).

    And, of course, modern Common Law (both in England and in the United States) has long moved away from what merits it once had.

    Modern Common Law is just about as bad (or as "flexible" if one wishes to be more neutral) as I have described it above.

    Certainly justice can be done (and is done) - if there are good judges.

    But I find a system that depends on good PEOPLE (not good PRINCIPLES) not to my taste.

    To be blunt "who is the judge going to be?" is a question that should not matter much, one should be able to (from the principles of the legal system) work out what the judgement will be - regardless of who the judge or judges are.

    But that is, I admit, a position that shows a strong "civilian" bias.

  23. avatar Paul Marks says:

    My apologies for not dealing with the specific question of bankruptcy law.

    It is quite true that Scots law takes the principle to its logical conclusion - it does tend to.

    One can argue about whether this is the right principle - but once the principle is settled upon, Scots law takes it all the way.

    The most well known case is that of Sir Walter Scott.

    He invested in a publishing house (the house that published his books - if must have seemed the natural thing to do), but he did not run the publishing house, he was nothing to do with managing the firm (few investors have any say in how a business is actually managed) so when it went down he was astonished.

    And totally exposed - for, yes, Scots law said he owned nothing anymore (apart from the clothing he stood up in - for reasons of public decenceny).

    Anyway his creditors were fairly kind - they (for example) let him stay in his house while he tried deperatly to write his way out of debt (by producing more and more books and so on - the effort killed him), but they could have just tossed him out into the fields.

    Now the principle here is not accepting limited liability - i.e. not accepting that someone is liable just for the stake they put into the trading pot (not for money he never put in the trading pot in the first place).

    One can argue both ways on the principle (I would argue that IF THE THING IS ANNOUNCED IN ADVANCE) people should be allowed to set up limited liabilty trading enterprises - after all no one has to trade with them if they do not like this contract. But, if one rejects the principle, then YES the Scots courts ruled correctly.

    However, they were less good at something else (or so it is alleged).

    It is alleged (by Rothbard and others) that Scots courts did not act to make Scots banks pay up the gold of depositors when those depositors asked for it (or when some one else came with a claim upon physical gold). Allowing banks to delay (when the words of the contract gave them no right to delay) and even to palm people off with bits of paper rather than the physical gold they were promised.

    Now is this charge true or not?

    And please (Geoge Selgin) do not palm me off with a book reference - I was not born yesterday (sadly I was born a very long time ago now) and I know perfectly well that if someone just says "read my book" when asked a simple question, reading that book from cover to cover is not going to produce any straight answer.

    If the charge is false say it is false, if the charge is true then admit it is true.

    Actually I would not be astonished if the charge was false - Rothbard did have a record of twisting the historical record to make a point.

    But if the charge is false - then say so.

  24. avatar Paul Marks says:

    "Why is it a problem for" me if someone wants to accept ten ounces of gold every year for ten years, rather than one hundred ounces of gold now - in return for the house they own.

    No problem for me.

    But then what is the bank for?

    Clearly I am paying the owner directly.

    I only need a bank (or other such) if the owner demands all the gold up front.

    And then the bank better have the gold.

    If the house owner does not want all the gold up front (he or she just wants payments spread over ten years), then the bank serves no purpose.

    • avatar Martin Brock says:

      The bank provides an accounting and collection service to the seller and may also provide a risk sharing service to many sellers coinsuring one another against default.

      Why do you need accountants? Why does Walmart accept Visa? It could issue its own credit card, like Kohl's, instead.

      Why do you need insurance companies? If you have a term life policy, the insurance company doesn't really pay your beneficiary when you die. People with the same policy who didn't die pay your beneficiary. You could visit all of your neighbors until you find enough of them interested in coinsuring their lives.

      The answer is division of labor.

      You don't need a credit accounting service if the seller demands all the gold up front. You need so much gold. Suppose a bank lends gold this way. You deposit a hundred ounces of gold in the bank, expecting the bank to lend the gold and share the interest with you. The banker gives you a deposit receipt. The bank lends this gold to me, and I pay it to the seller of a house.

      The seller of my house deposits the gold back in the bank, and the bank also gives him a deposit receipt. The banker does nothing fraudulent here. He doesn't even know that the new depositor obtained the gold from me, and the seller of my house has as much right to deposit the gold in the bank as you had.

      The banker now lends the gold to George to buy another house from another seller. His seller deposits the gold bank in the bank, and the banker lends it again and so on.

      Eventually, a dozen different people have deposited this gold in the bank, all have deposit receipts for it, and a dozen different people owe the bank so much gold.

      Is this the banking model you have in model?

  25. avatar George Selgin says:

    Paul, the charge you ask about is not true. Scottish courts did recognize the validity of option clause notes prior to 1765--that was the only exception to the rule of "summary diligence," and it was contracted for up front. After 1765, the clauses were outlawed, so there were no exceptions to the rule of summary diligence. Scottish banks never got away with not honoring their obligations, despite what Rothbard asserts, except perhaps for very rare instances in which banks delayed payment and the courts let them get away with it during crises--1797 comes to mind. Even allowing for these the only losses suffered by their note holders, and these were relatively slight, were ones connected not to any such delayed payments but to unrelated bank failures. In any event had the option clause been allowed the emergency steps wouldn't have been necessary. It's the usual case of one bad intervention warranting another.

    As for not recommending books, you must appreciate that I don't have time to repeat all that needs to be said on free banking topics in response to very question. There's a reason wy the books are there, after all. Why, I could spend my whole professional career just refuting over and over again a handful of Rothbardian claims about free banking. On the Scottish system in particular insist that, if people decide to read Rothbard, they must read White's response. No point reinventing the wheel each time.

  26. avatar Paul Marks says:

    George.

    You have given your reply - i.e. that when people asked for physical gold from a Scottish bank they were given it.

    So I must choose whether to accept your reply or call you a liar.

    I have no evidence that you are a liar - so I must accept the truth of your reply.

    I am satisfied Sir.

    • avatar George Selgin says:

      Paul, there's no reason for your resort to the term "liar" in this string, even if only in a statement purporting to exonerate me. Were it in fact the case that I was mistaken in my claims, it would hardly follow that lying, as opposed to innocent error, was at play. In any case I don't like finding myself in the docket within my own forum! It is rather like having a dinner guest complain about the service.

  27. avatar Paul Marks says:

    Martin.

    Either the bank has the gold the house owner is asking for, or it does not.

    If the bank says "we do not have all the gold right now - but we will get you one tenth of the gold every year for ten years" that is not unlibertarian (AGREED). Howwever, the house owner might as well deal with me direct - rather than paying the bank a cut.

    The point of going to a bank (or a thrift or whatever) is they can provide all the payment to the house owner RIGHT NOW - not in bits over ten years (or twenty years - or whatever).

    Of course the American housing market is a twisted mess - with government backed entities (such as Fannie Mae and Freddie Mac) standing behind most mortgages, and the Federal Reserve (and the rest of the regime) standing behind these entities, backing them with its credit money.

    I think we can all agree that this is not a satisfactory state of affiars - indeed the true price of anything (such as real estate, but everything else also) can not even be known in an economy as twisted this - it will go.

    The only question is - will it go before November 2012 or afterwards. Not "will there be a collapse", but "when will the collapse take place".

    On my e.mail account (although it had not shown up on this comment list) there is a comment about how the Constitution of the United States does not protect employers - even a claim that there is some difference between taxing an employee and taxing an employer (as if a tax on a employer did not get passed on - even J.S. Mill understood that it did, and he [under the influence of his wife] was very much into workers coops and other such).

    This would be very odd - as all the writers of the United States Constitution (John Adams, Ben Franklin, Hamilton and the others - the fact that I am naming people who were not slave owners is deliberate) were employers (being an employer is NOT being a slave owner).

    As for a supposed Constitutional change in 1937 - there was no Constitutional Amendment in that year, and the Supreme Court has no amending power.

    A Constitutional Amendment can only be passed by either two thirds of both House and Senate followed by three quarters of the States (or by a Convention called by two thirds of the States and then its new Constitution sent out to be ratified).

    The Constitution of the United States can not be changed by F.D.R. leaning on the Chief Justice of the Supreme Court in 1937. One might as well say it is constitutional for the government to steal people's gold and violating the gold clauses of private contacts, because two Supreme Court judgements in 1935 say it can.

    As for citeing court judegments. This defending an error (actually "error" is much too mild a word) by citing other errors is a Common Law habit I find rather annoying. One might as well say government officials can hold you down and sterilize you - because eight out of nine Supreme Court justices in "Buck V Bell" said they could, even when this violent assault was punishment for no crime what-so-ever.

    Eight out of nine Supreme Court justices - what a strong "precedent".

    And, for their next trick, the Supreme Court declares that 1+1=78.

    No - David Ricardo's labour theory of value (either in its original form - or in the Marxist form so beloved by the "libertarian left") is not in the Constitution of the United States, and taxing (or regulating) an employer is no different from taxing (or regulating) an employee.

    No different in economic consequences - the economic consequenses of doing either are bad (the costs of taxes and regulations get passed on, and so they should be).

    And no different in constitutional principle either.

    • avatar Martin Brock says:

      Either the bank has the gold the house owner is asking for, or it does not.

      The former house owner has the gold that you deposited, because the bank lent this gold to me and I bought the house with it. Is this business model what you have in mind or not? I'd like to compare the model I describe to whatever you have in mind.

      If the bank says "we do not have all the gold right now - but we will get you one tenth of the gold every year for ten years" that is not unlibertarian (AGREED). Howwever, the house owner might as well deal with me direct - rather than paying the bank a cut.

      The house owner prefers to deal with a financial intermediary, rather than deal directly with you, for the reasons listed above.

      If I want to borrow gold to purchase a house from someone requiring gold in hand, I may also deal directly with people lending gold. Why does anyone with gold need a bank?

      The point of going to a bank (or a thrift or whatever) is they can provide all the payment to the house owner RIGHT NOW - not in bits over ten years (or twenty years - or whatever).

      The point of dealing in money is that, unlike a house, money is easily divisible. I can create as many notes representing the value of my house, in as small a denomination, as I need.

      Of course the American housing market is a twisted mess - with government backed entities (such as Fannie Mae and Freddie Mac) standing behind most mortgages, and the Federal Reserve (and the rest of the regime) standing behind these entities, backing them with its credit money.

      That's true. It's a mess because countless people expect bailouts, from bank depositors to Mortgage Back Security and Treasury Security holders to Federal Reserve Note holders. Even holders of gold and silver want states declaring their holdings legal tender, so that my children must obtain it to pay taxes and other forcibly imposed rents. Everyone wants to the state to protect their profits and socialize their losses. It's the oldest story in the statutory book.

      The only question is - will it go before November 2012 or afterwards. Not "will there be a collapse", but "when will the collapse take place".

      I'm not betting on catastrophic collapse myself, but the financial future is unprecedented. Seventies-style stagflation seems more likely in the U.S. than collapse, if only because other fiat currencies are so much worse than the dollar, but history rarely repeats itself. In the seventies, baby boomers were entering the labor force. Now, they're exiting. The dynamic is very different. I expected the stagflation at this point, many years ago, but I didn't expect high unemployment, and since I have three children in college at the moment, the unemployment worries me a lot.

      The difference is even more stark in Europe and Japan than in the U.S., and although China has a much younger population, its population is aging much more rapidly. According to a Census Bureau study, China's labor force will peak in this decade. The U.S. labor force will grow much more slowly than it has in the past, but it's still growing.

      http://www.newgeography.com/content/001463-labor-force-growth-population-growth-age-15-64-2000-2050

      Of course, China is still less developed, so the productivity of its labor could continue to grow more rapidly.

      As for a supposed Constitutional change in 1937 - there was no Constitutional Amendment in that year, and the Supreme Court has no amending power.

      Tell it to the judge. I wish you luck, but I'm not holding my breath.

      No - David Ricardo's labour theory of value (either in its original form - or in the Marxist form so beloved by the "libertarian left") is not in the Constitution of the United States, and taxing (or regulating) an employer is no different from taxing (or regulating) an employee.

      I'm a convinced marginalist and reject the labor theory of value; however, as Mises, Simon and others note, when it comes to satisfying human wants, human labor (including human ingenuity) is consistently the most valuable resource, so the labor theory of value is a decent, first-order approximation.

  28. avatar Paul Marks says:

    On coin.

    What matters is the weight of the coin and purity of the gold or silver that the coin is made of.

    Ordinary American coins stopped being made mostly of silver in the early 1960s. They are money because the government says they are - not because people CHOOSE to use these coins.

    As for the special coins that the govenement mints (to attract investors) people who want to (for example) own gold coins would do better to buy nonAmerican coins (you get a better deal - and the government does not know you own gold coins).

    By the way, modern technology may one day be helpful - should a real coinage ever be restored.

    The coin could be enclosed in transparent plastic - thus protecting it from wear and tear.

    As for private money....

    As I have said before....

    Before Congress banned the practice in the 1850s, private mints in the West used to be given gold or silver by those who mined it and then (in return for a small percentage of the gold or silver) produce coins.

    There is no economic reason for government involvement in the production of money (let alone having a legal monopoly of it), the reasons are political (as one would expect of "Uncle Sam The Monopoly Man").

    "But I do not like gold or silver".

    Fine - then convince people to trade with you in something else.

    If people wish to trade with pieces of colored paper, that is fine by me.

    • avatar Martin Brock says:

      The Treasury minted copper Cents and Half Cents from the first Coinage Act in 1792. These coins were legal tender and promised no exchange for silver or gold, and since a loaf of bread cost a penny, copper cents were the common medium of exchange.

      "But I do not like gold or silver".

      Fine - then convince people to trade with you in something else.

      If people wish to trade with pieces of colored paper, that is fine by me.

      I trade with little else myself. Trading with Kruggerands seems much more challenging to me. Every tried it at Walmart?

      I'm all for private money, but I don't want gold or silver as a legal tender.

  29. avatar Paul Marks says:

    Martin when have I ever said I am in favour of legal tender laws?

    Although, under Article Ten of Section One, no State may make anything other than gold or silver coin "legal tender", copper is not listed.

    But if people value copper - fine (totally fine). That does not commit me to supporting the concept of legal tender laws.

    Walmart likes bits of paper - well that is fine also.

    I will print some up and go shopping there - it is called "Asda" round here (but that is not important).

    "No - they want GOVERNMENT bits of paper".

    Now Martin - that would not have anything to do with government taxing power, now would it?

    As for extending the government power to things like the Federal Reserve system - well we agree on that (it is vile - disgusting).

    But I would say that any effort to extend government stuff to the banks is no good.

    Whether it is the National Banking Acts, or the First or Second Bank of the United States - or the "pet" State banks of Andrew Jackson.

    Remember these local private banks played inverted pyramid games with government tax money - even more than the Bank of the United States had.

    Given the chance banks will do that with anything - they will even play inverted pyramid games on a "capstone" that does not exis (for example the pyramids of credit based on mortgage securities - when the securities themselves were bascially just an illusion, if you package bad debt and call it "securities" it remains just bad debt - it is the same as getting a piece of excrement and putting it in nice wrappng paper, basically it is still just excrement).

    Martin Van Buren had this right - the government should take in tax money (real money) and then pay it out to fund its spending (real pay-as-you-go). No links with the banks - he was a banker himself (so he knew that banking is not something the government should be backing or involved in).

    • avatar Martin Brock says:

      I don't say that you favor legal tender laws. I only emphasize that I don't favor them ... for what it's worth ... which ain't much.

      Article One, Section Ten clearly limits the authority of the States distinguished from the government of the United States. For example, Section Nine states, "No Title of Nobility shall be granted by the United States." Section Ten then states, "No State shall ... grant any Title of Nobility." If Section Ten applies to the United States, it is repeatedly redundant.

      Section Seven does not mention gold or silver when granting the Congress authority to coin money, and Section Ten does not mention money when forbidding the States to make anything but gold or silver a legal tender. In fact, Section Ten explicitly forbids the States to coin money.

      Now Martin - that would not have anything to do with government taxing power, now would it?

      It has everything to do with taxing power. I completely agree with Georg Knapp in this regard, but I certainly don't share his reverence for the state.

      Remember these local private banks played inverted pyramid games with government tax money - even more than the Bank of the United States had.

      I basically oppose all borrowing (sale of entitlement to tax revenue) by states at every level, but I'm not holding my breath.

  30. avatar Paul Marks says:

    Private money.

    What is "private money" if it is not a commodity - gold, silver, yes (if people want it) copper...

    If "private money" is not a commodity (not "based on" a commodity - the commodity itself, no "gold STANDARD" shell games) then it is really a con, and a government backed con (sorry "confidence based system") at that.

    By the way Hayek's late-in-life idea of "index money" (where you get various commodities and produce a currency that is the index - not any one commodity) was refuted - by the very Austrian School economics that Hayek understood in his younger days. Such an index money would not work - the money could not be the index.

    It reminds me of the one of the Adam Smith problems - the so called "paradox of value" that so confused Smith as a old man (and led to words that David Ricardo developed into a fully fledged labour theory of value) was understood to be no paradox at all by the younger Smith.

    One does not trade all "water" for all "diamonds" - one trades a specific amount of water for a specific amount of diamons at a specific time and place.

    There is no paradox of value.

    Going back to money....

    Money can not even be "both" gold and silver - it can be one, or the other, or NEITHER, but it can not be "both". As many attempts, by many governments, to rig (sorry "fix") the exchange rates of gold and silver have shown.

    One can have competing currencies (gold competing with silver, and so on - and people choosing which to use in their contracts), but a single currency can not be "both" silver and gold with some rigged exchange rate.

    As for getting all major commodities and trying to get a money that was all of them.....

    Such an index could not even be real (efforts to do so are really illusions).

    If a bank wants to issue gold money, or silver money, or copper momey .... that is fine.

    But they must actually have the commodity they say they have.

    If they do not have it, the practice may not be "fraud" (especially if judges and politicians connected to the banks are making the laws), but it is a house-of-cards.

    • avatar George Selgin says:

      Paul, several points. First "private money" most certainly can be something other than a commodity. Every time you write a check or use a debit card you are making a payment using private money. Second, Hayek never envisioned a system in which holders of private currency got back "various commodities." His was a scheme for irredeemable private paper currency. Indeed, he has been faulted for imagining that such a scheme could work, by Lawrence White among others. Third, money certainly can be "both gold and silver." The very first known coins, those of Lydia, were in fact composed of electrum, a naturally-occuring gold and silver alloy.

  31. avatar Paul Marks says:

    Martin.

    Yes the failure to list what the coins would be made from actually in Article Eight is a clear flaw - the Founders condemned the Articles of Confederation for allowing the government to print its not-worth-a-Continental-notes, but did not clearly rule out things like debasement of the coinage (the old trick of the Roman Empire).

    So whilst things like Dollar bills are clearly unconstitutional (as the first Greenback case rightly declared - before the government appointed new people to the court and then came the second Greenback case) base metal coinage is not clearly unconstitutional.

    There is room for government to declare "you must accept our coins AS IF they were gold or silver" - that may not be what was intended, but YES that is a way the words could be interpreted.

    George Selgin.

    Yes I know Lydian coins were electrum - as you know perfectly well I was not talking about an alloy, I was talking about RIGGED EXCHANGE RATES saying that this gold coin was worth ten silver coins (or whatever).

    "Checks and debit cards are private money".

    Oh for Pete's sake we are not back to that again are we?

    Either the private bank has the money (the gold or the silver or YES the electrum, or the copper or whatever commodity the contract is in) that they say they have or they do not.

    Calling a check or a debit card money only makes sense in a statist system. In a private enterprise system a check is just a PROMISE of money, it is not the money itself.

    Next you will be saying that banks can take cheques (and other such) and treat them as "deposites" and make loans on the basis of them - which is an obvious fraud.

    Still at least we agree that Hayek's late in life index money idea was crazy.

    • avatar Martin Brock says:

      Neither gold nor silver are ever money in my way of thinking, and money is never anything but a promise of something else; however, I understand your point about fixing the price of gold and silver separately (as U.S. statutes have).

      Standardizing the price of gold at one dollar per gram and the price of silver at one dollar per ounce is not the same as standardizing the price of one gram of gold and one ounce of silver at two dollars. The latter standardization permits the metal prices to float, but a banker paying a bit more than a dollar for a gram of gold must pay a bit less than a dollar for an ounce of silver.

      I don't know the details of Hayek's index money idea (if he had one), but I've pondered the idea of index money, and it doesn't seem crazy to me. I suppose an index of grains is a better standard. Notes might promise so many calories in a basket of grains of standard quality for example.

      • avatar George Selgin says:

        Martin, between you and Paul it seems nothing is or ever has been "money"! Surely someone is wrong. My own view is that you both are, that is, you both make sweeeping statements that aren't valid. Both comodities and promises to pay have served as money in the past, or at present. A conversation in which either party denies this is bound to be one that never arrives at a happy consensus!

        It would help,,l at very least, if you defined the term "money" and took it from there. I suggest doing so with reference to the definition favored by the vast majority of monetary economists, to wit: any generally-accepted medium of exchange.

      • avatar Martin Brock says:

        I speak only for myself, but "money" describes a theoretical abstraction as well as an historical reality. A word can mean different things in different contexts without any speaker being wrong. I tried to define "barter" and "money" as I use the words earlier. I'll try again.

        In my way of thinking, "barter" does not involve "money" by definition. The two are mutually exclusive. "Barter with money" is a contradiction in terms.

        Barter involves the exchange of goods for other goods without money. I accept money in lieu of goods that I would obtain the future.

        Money is a record of entitlement to goods, as opposed to a good itself. It has no intrinsic value.

        Money is an accounting entry. It can exist in a computer's memory. It is information.

        In the past, we used paper money because we didn't have ubiquitous computers and communications networks. In the more distant past, we bartered with gold, and we called gold "money", but that was then.

        Since gold is a good with intrinsic value, it is not only a record of entitlement to goods, so it is not the "money" of a monetary system comparing the value of other goods to the value of gold, subjectively through a market. It is the standard of value. I understand that historical usage is more ambiguous. I don't dispute you on this point.

        Gold is not a generally accepted medium of exchange in my neck of the woods, so gold is not money by this definition here and now. I've never personally experienced gold as a generally accepted medium of exchange.

        Historically, people use the word "particle" in various ways. Physicists use the word in a much more specific sense, and twentieth century physicists use it in ways unrecognizable to nineteenth century physicists as well as most people alive today. The usage of "money" changes similarly.

        I'm not trying to set a trend, but I am trying to be understood. I wish to distinguish a promise of things from the things promised, so I call the former "money" and the latter "goods". This "money" is practically the only usage I've experienced in my lifetime, so it seems very natural to me.

        I repeat myself only because I wish to be understood.

      • avatar Martin Brock says:

        I'll add that money is the record of a non-specific promise, a record of entitlement to unspecified goods of a specified value. Of course, the market value of a good is subjective and subject to change, so money's promise of goods of a specified value refers only to the current value of goods, thus "currency".

        Precisely how we specify the value of goods is a separate issue, but under a gold standard, we value all goods relative to gold. If I would exchange my house for a hundred ounces of gold, then the value (price) of my house is "100 ounces of gold". Of course, you may subjectively value my house, relatively to gold, differently, but traders ultimately agree on values in a market.

        By this definition, people generally agree that the value of a hundred ounces of gold is also "100 ounces of gold", but when I accept a promissory note entitling me to goods with this value, I am not accepting a promise of gold specifically.

  32. avatar Paul Marks says:

    Martin.

    The Labor Theory of Value is not a decent first order approximation - it is FALSE (period).

    There are certain individuals in the United States who are fond of citeing (even quoting - out of context) Mises and the others, who support the Labor Theory of Value (and a lot of other stuff) for a collectivist agenda.

    Although, as yet, the influence of these American individuals has been greater in Britain than in the United States. For example, the British "Libertarian Alliance" is now basically a "false flag" organization.

    • avatar Martin Brock says:

      Every approximation is false, but approximations are sometimes useful. I could also say that Newtonian Gravity is a decent, first-order approximation to General Relativity for example.

      I don't have a collectivist agenda. I'm practically an individualist anarchist, but since "anarcho-capitalism" and "property anarchy" are contradictions in terms, I can't quite go all the way. I also favor constraints on forcible propriety (like a progressive consumption tax and title expiration) that self-described anarcho-capitalists would not endorse, but these constraints are not collectivist. They only limit the most central authorities in what I'd call the authority market, and they're well within the classically liberal tradition (Locke, Smith, Hayek, ...).

      The U.K. has two Libertarian Alliances, the result of a schism in the 80s, presumably over something silly. The LA forum at Yahoo Groups was one of my regular haunting grounds for a while, but I haven't posted there in years. By chance, I was looking at David Steele's book on Mises only yesterday.

      I resist rigid ideologies and "false flag" talk. Both LA groups seem well within the libertarian fold. If being a "libertarian" requires a long list of purity tests, I'm not interested. Objectivists can be particularly obnoxious in this regard, and George also accuses Rothbardians of being cultish. Disagreement is healthy, but schismatic obsession destroys free, cooperative associations.

  33. avatar Paul Marks says:

    George.

    I said that if I had disputed your clear statement that physicial gold was handed over (when customers demanded it) I would be calling you a liar and I was NOT prepared to do that.

    You seem to object to my very use of the word "liar" even in the context of me saying you were NOT one.

    Perhaps you have been in academia too long - if ordinary language offends you.

    As for being "mistaken" - such a word does not fit the case.

    You have studied this matter ("free banking" in the Scottish context) you know the facts - it has NOT been a special study of mine.

    Either the gold was handed over or it was not.

    You know whether it was or not. I have taken your word that it was.

    So "mistaken" would not be the right word.

    For example, if I were to say "I live with my parents" when (in fact) they are both dead, I would not be "mistaken", I would be a liar.

    That is how people use language - and it is correct that they should do so.

    • avatar RickDiMare says:

      Paul, for an intelligent guy, you're remarkably rude and caustic.

    • avatar George Selgin says:

      Paul, you have an exaggerated view of the degree to which even experts can be familiar with a subject's every detail. I can assure you, since I've been in it "too long," that if every academic who got his facts wrong on some matter related to his own specialty were to be classified as a liar, the entire academy would not be able to produce even a solitary, completely "truthful" person.

  34. avatar Paul Marks says:

    George Selgin.

    Either the gold was handed over or it was not. I was not trying a "gotcha" question (I am not going to be like a cat with a mouse if I find that, once or twice, there were cases were it was not - I mean generally, most banks being straight, not every single bank in Scotland being straight). I did not know the answer (so it was not a trick question) - one man told me one thing, and another man told me something else.

    You have given me your word that the gold was handed over. I have accepted your word.

    RickDiMare - yes I am "remnarkably rude and caustic" if you mean I carry on till I get the truth. I do not like evasion or the use of double talk (such as academic jargon). I assure you that I treat everyone the same way (apart from the very young, the very old, or people who are ill) - which means (by one defintion - although not others) I am actually am gentleman.

    I have not used curse words, and I have not hit anyone - nor do I intend to. If you read Ben Franklin you will find (by the standards of Englishmen of my, rather low, social background) I am astonishing moderate in my conduct.

    Remember I have provoked (in this comment thread) several times.

    Most recently by the claim that a cheque is a private currency - which would mean that there is no such thing as "bouncing cheque" (i.e. a cheque that there was no money to cover), and that the clearing process did not take place.

    In an honest system when someone uses a "debit card" he does not create "private money" he draws down the money in his account.

    And in a honest system when someone writes a cheque he also does not create a "private currency". The money goes from his account to the account of the person he is writing the cheque to.

    That would mean (if the accounts were in two different banks) a van would take the government notes (as we no longer use gold and silver coins) from one bank to the other.

    "But most money is now bank credit".

    Please note that I used the word "honest" above. I know a little (more than I can sometimes sleep at night knowing) about "broad money" games.

    I repeat - in an honest system if I use a debit card I have NOT created money, I have taken existing money from my account and handed it over to the account of the person I am doing business with. And when I write a cheque I am not "creating money" (not in an honest system), I am offering existing money from my account to the account of the person I am doing business with.

    If I do not have existing money to cover the cheque - it BOUNCES.

    George Selgin is not an idiot - he most likely has an IQ much higher than mine. Also money and banking is his area of special study (he does not work as a security guard or sell car parking tickets)

    So the man is both more intelligent than I am, and this is his life - he works at it every day (rather than in the jobs I have done for many years).

    So I am to assume he does not know the above? Stuff some childen who are six years old know - stuff like a cheque is not some special "private currency" (you have to have money in your account - or the cheque bounces).

    Of course George Selgin knows all the above. So who was REALLY being rude? I may use straight language (although, I repeat I have not used curse words here), but I never talk "down" to people and I do not tolerate them talking "down" to me. No matter who they are.

    And then there was the stuff about how currency can not be more than one commodity at the same time (the attack on rigged exchange rates) - because the coins of Lydia were made of electrum.

    Did George Selgin really misunderstand what I was saying so radically?

    Of course he did not.

    The same with so many things since the start of the thread.

    So "caustic" - yes most likely I am (and I am NOT saying that this is a good thing to be). "Rude" - that depends if people regard honest speaking as rudeness.

    Of course I can make mistakes.

    For example, many years ago I mistook the word "tendentious" for "mendacious", in regards to comments on a piece fo work I had written (a piece that had taken years of head research to produce - do not fear, I am not going to start playing the violin and go for the sympathy vote, it is just context).

    I was still being insulted (the piece of work I had written was not tendentious), but I assumed I was being accused of telling lies ("mendacious") and "went off the deep end".

    Perhaps what (deep down) really angered me was that the person (yes an academic) I was dealing with obviously expected I would what not know what the words he was using meant - so that he could say anything, and I would sit there baffled if he was speaking Ancient Greek.

    "And in this case he was right - you did not know what the word meant, in the sense that you misunderstood it".

    Yes - that is why I told the story (against myself).

    I do not believe I have made such a mistake here.

    But, if I have, I certainly apologize for that.

  35. avatar Paul Marks says:

    "have provoked" was meant to be "have been provoked" - but, of course, it could be argued that my words I actually typed were also true.

  36. avatar Paul Marks says:

    An obvious provocation would be (for example) to say "are you saying that every time an individual writes a cheque a van should take notes from one bank to another".

    That is not how a clearing process world work (even in a honest system) - physical money (such as government notes) would only be moved at the end of a working day (or whatever) to cover the transactions made.

    You do not send a different van (or whatever) for each individual transaction as it happens.

    Of course electronic means can also, now, be used. And before electronic means there were ledgers (account books) to transfer ownershop of existing (physical money) between parties, without having to move the physical money itself.

    As long as ownership of existing (not "new") money is moved - then there is no problem.

    A person buys something - money no longer belongs to him, it now belongs to the person he bought the thing from.

    "But what if the person buying has no money?"

    Then either his cheque "bounces" or he has got a loan (such as an "overdraft").

    A loan is a TRANSFER (not a creation) of money from one person or organization to another person or organization.

    Someone saves money (earns it - but chooses not to spend it, to make it available to be loaded out instead).

    And another person (or organization) borrows the money (hopefully to pay it back later).

    Money moved from saver to borrower - net money creation, zero. Of course this is NOT what happens....

    I am totally certain that every word I have just written is already know to everyone on this thread.

    That is what angers me.

    Not a real misunderstanding - or a difference of opinion.

    But the strong belief that games are being played.

    If people who accuse me of rudeness knew how hard I am working to suppress my anger (right now), they might think better of me.

    • avatar Martin Brock says:

      That is not how a clearing process world work (even in a honest system) - physical money (such as government notes) would only be moved at the end of a working day (or whatever) to cover the transactions made.

      I have two problems with this statement. First, "note" abbreviates "notation". A notation is a record, an accounting entry. It is not a physical (material) entity. I may write a note on a piece of paper with ink, but the paper is not the note. Neither is the ink. I may record the same note in a computer's memory. I may even record it in my head, as a mental note, and nowhere else. A note is information, not matter. It is a representation of material things and relationships between them, not a material thing itself.

      Second, you write "honest" followed by "government notes", seeming to suggest that the former might describe the latter. This bit of information confuses me.

    • avatar RickDiMare says:

      Paul, for people who are sensitive to inadvertently creating "new" money, in your opinion, what can lawyers realistically do to assure that no new money is created when dealing with banks? Or, as I think Martin suggested previously, are we to be expected to always take physical possession of coin, bury it our back yards, use only safe deposit boxes, etc.?

      My view is that it's ridiculous to assume that the Constitution gives Congress a power to create coinage without a corresponding power to move it around, and that this is a clear circumstance under which the Necessary and Proper Clause should step in to allow free movement of coinage, without us taking physical possession, and without causing banks to act as if new money was created. In other words, it would be "unnecessary and improper" for the legal system to impose a requirement on us that we not bother banks with the chore of moving coin around.

      Another remedy may be for the Treasury Department to expand upon the TreasuryDirect system (www.treasurydirect.gov) to both provide us with coin-only accounts, as well as an electronic means to freely receive and pay in coin-only. It should be easy for the Treasury Department to expand upon this system because it's already very easy to attach a TreasuryDirect account to any savings or checking account.

      • avatar Martin Brock says:

        ... are we to be expected to always take physical possession of coin, bury it our back yards, use only safe deposit boxes, etc.?

        If you want to deal exclusively in gold, you can easily carry the gold you need for daily transactions in your pocket. Why not leave the rest in a safe deposit box? Because you want the bank to lend it? You want the bank to collect its rental value for you, as it collects the rental value of a house for shareholders as described below?

        What is the rental value of gold exactly? What use do I make of gold as I rent it from you? I live in a house more comfortably and productively then I could live outside of a house, so I understand the value of a house, but I don't understand the value of gold in the same way. Gold can be a medium of exchange, but I already have shares of this house, and other people also understand the value of houses and will exchange goods for the shares, so I don't need gold exclusively as a medium of exchange.

        You don't want people with guns to their heads compelled to collect gold however they can, to pay the gunmen to refrain from pulling a trigger, so these people will continually seek your gold. I know that's not it. Gold you dig from the commons is your property in a Lockean sense, but nothing else about this valuation of gold seems proper to me.

        What is property? Property is theft but only in a manner of speaking. In another manner of speaking, property is freedom. I prefer the latter manner of speaking, but I cannot deny the former.

    • avatar Martin Brock says:

      If I own a house I have built, I may rent the house to others on agreeable terms. I am entitled to the rent. I suppose we agree to this extent.

      I may divide entitlement to this rent into a hundred shares. The holder of a share is entitled to one percent of the rent.

      You decide to rent the house from me, and you also wish to purchase a share of the house each month, in addition to paying the rent, until you own the house. I'm happy with this arrangement.

      One July, you are short of other goods, so you choose not purchase an additional share of the house from me. Instead, recognizing the value of shares you already own, you exchange a share for a month's groceries. The grocer happily exchanges the groceries for a percent of the house and corresponding entitlement to a percent of the rent, because he is nearing retirement.

      Since you do not purchase a share of the house from me in July, I decide to sell a share to someone else. Demand for these shares is high, because many people are nearing retirement, so I have no trouble finding a buyer.

      The exchange of house shares for groceries and other things becomes common, so according to George, they are money.

      Who creates this money? You and I do.

      Suppose I never decide to divide my house into shares this way. Is my house still money? No. It is not a common medium of exchange, so it is not money.

      Suppose you finally purchase all shares in the house and decide no longer to circulate the shares. Do these shares cease to be money? Yes.

      What happened to the money? You destroyed it. Destroying money this way is not a problem, because others may create their money as they need it, just as you and I created ours when we needed it.

      • avatar RickDiMare says:

        Martin, I'm playing the devil's advocate here, and looking at your scenario from the U.S. government's perspective, I see you as infringing upon my money-creation powers (my monopoly), so I want to tax and regulate your activity as INCOME under the Indirect Tax and Commerce Clauses (because in my view, you are clearly affecting the ability of me and my central bank to regulate interstate and international commerce).

        As long as you keep your "house" (& we could probably substitute "labor" for "house"), and you don't "divide [your] house into shares this way" and distribute them, then we don't have a problem.

        However, even if you retain full ownership of your house, I can still tax it as PROPERTY under the Direct Tax Clauses (but I probably won't because the Constitutional rules governing direct taxation are a pain in the neck).

        But, the bottom line is that when you maintain full ownership of your house/labor I don't feel the need to tax it because of its aggregate affect on the money supply. In other words, if I'm allowing you to divide and distribute the rent from your house into hundreds of shares, then I'll have to allow this activity for millions of other home owners who will do the same thing, and in the aggregate, this really screws things up for me. (I'm referring to the 1942 Wickard v. Filburn case I mentioned earlier.)

  37. avatar Martin Brock says:

    ... I want to tax and regulate your activity as INCOME ...

    I am shocked, shocked that you want to tax and regulate my activity this way.

    ... I can still tax it as PROPERTY ...

    You can incinerate a hundred thousand innocent men, women and children in the blink of an eye, and I know you will, because you have already done it. I don't give a s**t about your blessed Constitution, because you don't give a s**t about it yourself. Left is right, up is down, black is white, slavery is freedom, and property is theft. That's all I know about politics, because I have no other experience of it.

    ... this really screws things up for me.

    I don't dispute this point. I describe my preference here, not the will of armed men.

  38. avatar Martin Brock says:

    Sorry about that. I can't correct the post, so I'll repeat it.

    ... I want to tax and regulate your activity as INCOME ...

    I am shocked, shocked that you want to tax and regulate my activity this way.

    ... I can still tax it as PROPERTY ...

    You can incinerate a hundred thousand innocent men, women and children in the blink of an eye, and I know you will, because you have already done it. I don't give a s**t about your blessed Constitution, because you don't give a s**t about it yourself. Left is right, up is down, black is white, slavery is freedom, and property is theft. That's all I know about politics in reality, because I have no other experience of it.

    ... this really screws things up for me.

    I don't dispute this point. I describe my preference here, not the will of armed men.

  39. avatar George Selgin says:

    Martin and Rick, I'd like to suggest that you arrange to continue privately what has in effect become a debate between yourselves. The comments section is intended for comments on particular posts, rather than for ongoing debate on more general or fundamental issues.

    • avatar Martin Brock says:

      Rick may use the email address in my profile if he wishes.

      I have little to add to your post, because I can't dispute it.

      You asked me earlier to define "money", so I take a stab at it above. Since you asked, a reply seems topical. I don't dispute "generally accepted medium of exchange", but this definition isn't very specific.

      Also, I'd like to know if you think that Bitcoins violate laws against circulating notes. I'm not trying to change the subject to Bitcoins, only trying to understand these laws.

      I'm usually trying here to counter mistaken assumptions behind opposition to "fractional reserve" banking. Chief among these assumptions is that "money" describes some sort of material substance, obeying a law like the conservation of mass, and that banks simply accept deposits of this substance and then lend the deposits to others. People commonly use the word this way, but the idea seems very mistaken to me.

  40. avatar Paul Marks says:

    Martin - yes "government notes" are a bit hard to connect with "honesty".

    After all Bank of England notes (although not Federal Reserve notes) still say "I promise to pay the bearer..." something that, in Britain, has been a lie since 1931 (and was deeply rigged even before then).

    However, even I (intolerant, and quick to rage though I am) can see some possible honesty in a government note system.

    For example, when Richard Nixon admitted that American money had nothing to do with gold and had had nothing to do with gold since 1933 (which he did in 1971) this was a moment of honesty. Yes Nixon was terrible in many ways (Price Controls, wild government spending, endless government regulations, crawling to the largest scale mass murderer in human history..... Mao) but he did have honest moments and this was one of them.

    Remember the Milton Friedman line - freeze the monetary base (the government fiat notes and coin) and live it at that.

    As an Austrian School fiend I might not support that (I do not like fiat money) - but there IS an honesty to it.

    By the way the old Chicago School (back in the 1920s and 1930s) were deeply hostile to book keeping tricks by banks.

    To them the monetary base should be the same as monetary base plus bank loans - as the bank loans should be from the monetary base.

    In short - MB would be the same number as "broad money" (M2, M3 etc) in their world.

    I might argue with these men about many things (I might even have lost my temper and hit them [although I hope not] - in which case, being of a previous generation of Americans, they would have just hit me straight back, knocked me on my b... and then bought me a drink to show there are no hard feelings), but they were as honest as the day is long. And I mean a midsummer day.

    The old Chicago was a strange town - the political system was as corrupt as it is now. But there was also Colonel McCormack at the Chicago Tribune (then perhaps the greatest newspaper in the world) and many great people at the University of Chicago (there still are a few - such as Epstein).

    Still I had better get on I have a long walk (about two hours) to get to a meeting this evening.

  41. avatar RickDiMare says:

    Martin, Paul, & others who want to explore this subject matter further, with due respect to George and others here (of whom we are guests), unless you have another blog site to recommend, I have one at http://lockeanliberty.org.

    Martin, you're reaction to the federal government's desire to tax your rental activity as INCOME was similar to the one exhibited by victorious landlords and employers in Pollock v. Farmers' Loan (1895), wherein the Supreme Court struck down an 1894 income tax law. Their winning argument was that a tax on their activity was not an (indirect) tax on income, but a direct tax on their property (real estate and paid out wages), and therefore the tax was unconstitutional because not apportioned and not proportional as required by the two Direct Tax Clauses.

    Justice Harlan, the dissenting judge, was livid because he wanted desperately to tax former slaveholders and employers on their profits and paid-out wages. In his dissenting opinion, Harlan stated, "we can not too soon amend the Constitution," and he spent the rest of his life fighting for the 16th Amendment. He died two years before it was ratified, but the rest is history. We now tax landlords and employers without a second thought, and a tax on their activity is not considered to be a direct tax on "property because of ownership." (But this tax was never intended to be levied on workers, at least not on workers who knew their Constitutional rights.)

    This is my final word in this thread.

  42. avatar Paul Marks says:

    Rick.

    The 16th Amendment (I am not going to go into the endless arguments about whether it was correctly ratified - the problem, supposedly, being that the wording that various States ratified differed) does not apply to just "employers" and "landlords".

    It applies to all income - indeed the vast majority of income tax is from EMPLOYEES.

    This class warfare stuff about "employers" and "landlords" is nothing to do with slavery. The South was bankrupt after the Civil War and the wild spending governments of the "Reconstuction" period, so there were not many folks down there who were going to pay much in income tax.

    The balk of income tax revenue after 1913 came from people in a handful of northeastern States - most notebly New York State (then incredibly economically powerful) Pennsylvania, Ohio and Illinois (I know this line of States has drifted from the northeast to the midwest, I am just doing them in order of importance) - i.e. the very States who had crushed the South in the Civil War. In the book by Woodrow Wilson's "other self" (Colonel House) "Philp Dru: Administrator" it is these eastern states that are under the thumb of the evil capitalists - and are defeated, then Philip Dru goes on to establish a totalitarian state (this is held to be a good thing - by this "Progressive classic" book).

    All these States were in 1913 (and in 1894 - and in 1860 for that matter) dominated by what you would describe as "employers" and "landlords". You know - like the people who actually wrote the Constitution of the United States. Nor was John Locke opposed to "employers" and "landlords" - so I will not be going to your site. Why would I when I can read the real John Locke - the friend of Earl Shaftesbury and the other powerful estate owners (and City of London traders) who opposed King James II.

    SubMarxist stuff is actually more Confederate - for example the classic defence of Southern slavery, George Fitzhugh's "Cannibals All" (1854) which argued that the Northern critics of Southern Slavey were hypocrites because they practiced "wage slavery" and because of the labor theory of value - an utterly false theory believed in by both George Fitzhugh, and by John C. Calhoun himself.

    And, of course, the Confederacy had the higher "Progressive" income taxes during the Civil War, and the more regulations on industy and commerce, and more fiat money "stimulus, and ended up nationalizing industry and transport.

    Still the above is all history and George Selgin wants economics (which is fair enough).

  43. avatar Paul Marks says:

    Martin you are not going to get an arugment from me about whether money started as commodities.

    I am an Austrian School man - I go along with Carl Menger's Principles of Economics.

    However, the issue is not so simple - it does not stop there.

    George Selgin could rightly reply - "why should something not evolve over time?"

    Money is a medium of exchange and store of value.

    Could not government fiat money (i.e. notes that are unredeemable in any commodity) not serve these functions?

    I doubt they can, in the long term, but George Selgin could come straight back at me - "why not?", "what do you mean by long term?" and so on.

    All perfectly legitimate counter attacks. I can not (honestly) deny that.

    The debate would go on and had gone on (in long books on both sides and so on) and will go on till when (and if) the fiat money system collapses.

    So, although I am "anti empirical" in my view of what the subject of economics actually is - I must concede that, de facto, it is an empirical question.

    As for fractional reserve banking.

    Again we are dealting with two different things.

    A bank that takes in real savings and lends out most of them out (I wish savings that are lent out were not called "deposites", because they are not actually in the bank). And something else.

    The "something else" is banking (or financial system) that lends out more (not a "fraction" of) than there actually are real savings.

    Now, for example, "six fifths" may indeed be a "fraction", but it is a weird one.

    Ditto I suppose 101% or 1000% is still a "percentage" but it is a weird one - just as "one thousand tenths" is a weird "fraction".

    How does a financial system get to lend out more (many times more) than there is real savings?

    By book keeping tricks - incredibly complex book keeping tricks (created by people who are vastly more intelligent than me), but still at base, book keeoing tricks.

    Although they may indeed not be "fraud" - as long as the judges and legislators are kept sweet (they create the criminal law).

    However, the consequnces of ECONOMIC LAW are not so easy to dodge - no payments to politicians (or whatever) is going to let you dodge them (Carl Menger right - German "Historical School", and Richard Ely and co, wrong, in the "war of method", there IS such a thing as "economic law").

    Sooner or later every credit money bubble (every effort lend out more than you have really got - every effort to make "broad money" bigger than the montary base) is going to lead to a bust. The bigger the bubble the bigger the bust - and efforts to put off the inevitable, just make everything worse in the end.

    On my better days, I am not really angry if someone disagrees with me - even if they defeat me utterly in argument (and make me look like a fool).

    Only two things really anger me - being talked down to, and dishonesty (false flagism).

    For example, I became an enemy of the British libertarian allience when I found out (over time - with my first knowledge that something was wrong going back as far as 2006, but it taking my think head years to work out what was wrong) the group had come under the influence of disguised Marxists (actually American ones).

    People who cited Ludwig Von Mises and Hayek (and on and on) but out of context - and were really followers of a thinker they were careful to avoid directly mentioning in their writings (Karl Marx).

    In short collectvivists - although though (even when exposed) they would call themselve "mutualists" rather than Marxists (in much the same way that Noam Chomsky denies being a Marxist and claims to be a [communal] anarchist - see the "Anti Chomsky Reader" for this.... interersting person), and would say they were not against private property just against "unjustly acquired private property" (and it just so happened that all large scale private property.......).

    Sounds rather obvious (it is rather obvious), but it took me years to work it out.

    Perhaps my father was right - "Paul I am afraid you take after your mother's side of the family - you are an Irish peasant, big feet, big fists, think neck and a thick head".

    I did not like it at the time - but I sure wish he was still here to say it.

    • avatar Martin Brock says:

      Paul,

      I agreed to continue my conversation with Rick elsewhere, but I'll reply to you here.

      Money is a medium of exchange and a store of value, but people with a fetish for gold often seem to misunderstand how value is stored.

      If you bury a gram of gold in your backyard, you have stored the value of your gold, but this literal "storage" is not productive. Neither you nor anyone else uses the gold while it's buried.

      If you give me an ounce of gold and I promise to return 1.01 ounces of gold a month from now, you again store the value of your gold. I can't turn my own body into gold to create another 0.01 ounce, but I can exchange your gold for raw materials, make goods with my labor and sell the goods for 2 ounces of gold, 1.01 ounces of which I return to you. If gold is the only medium of exchange that my supplier freely accepts, that's all well and good.

      But suppose we have no gold. You help me paint my kitchen this week, and I promise to mow your lawn next month. I write this promise on paper. You have stored the value of your labor, because you agree that your effort painting my kitchen is as valuable to you as a mowed lawn next month. For a month after painting my kitchen, you possess only a piece of paper, but this paper is not the store of your value. I am the store of your value.

      I am also the store of your value in the first transaction. So are my suppliers. So are my customers.

      Is my note promising a lawn mowing service "fiat money"? No. I do not force you to accept my promise. You accept it because you want your lawn mowed and you trust me.

      Fiat money is valuable because a state credibly threatens to harm people who do not collect the money to pay taxes and other forcibly imposed rents. Paper money need not be fiat money, and fiat money need not be paper money. Gold bullion itself can be fiat money in this sense, and it often has been. When gold is a legal tender, it is fiat money no less than paper money playing the same role.

      I don't know the details of your interaction with the Libertarian Alliance, whichever LA you mean, so I can't comment. I try not to make enemies. People who disagree with me are not my enemies. Only people who threaten to harm me are my enemies.

      I sometimes call myself a "mutualist", but I do so largely because the term is little used. If a large "mutualist" movement ever develops, I'll likely look for another label, because I am not a large movement myself, and I don't want people associating me with ideas that I don't accept. If you want to know what "mutualism" means to me, you need to ask me.

  44. avatar Paul Marks says:

    Perhaps I have a fetish for gold Martin - I would have to have some to find out (actually, come to think of it, I do own some gold - but very little).

    I can not really deny it - any more than I can deny I have a fetish for brothels. I have never been in one - but if did visit one, perhaps I would really like it (who knows?).

    I do not care if people choose gold (of a certain purity) or silver (ditto) - or even bits of coloured paper, as the currency they are specify in their contracts (well I do really care about the bits of coloured paper thing - largely because the government sends people to prison for producing bits of coloured paper that look, and ARE, just the same as its bits of coloured paper - I have never heard of the owner of a gold mine sending the owner of a rival gold mine to prison).

    What I care about is that people actually pay in what they said they were going to pay in, and actually have what they say they have.

    Also I care that people do not play book keeping tricks, such as thinking that a cheque is private money (rather than a promise of money - a promise that "bounces" of there is no money in the account) or that a debit card is money (rather than a way of moving money from one account to another) - or claiming a debt is an asset.

    Sometimes it is really wacky - for example this week's "Economist" magazine (I always call it a magazine since I found out that to do so annoys them) said that General Electic is the biggest "non financial sector" company because its debt is so big.

    I sware I am not making this up - it was NOT even the thing of a bank thinking that a loan is an asset, this was just a big debt (money that GE owed - not money that people owed it) the Economist Oxbridge crowd thought that GE owing a lot of money made it a big company (bigger than companies that owed less money - even if they had more assets and sold more stuff, and horror of horrors, made bigger profits).

    In short if owned zillions of Dollars (money that I had borrowed - and then blown betting on number 13 at the wheel) I would be a really wealthy person, to the Economist magazine.

    Of course that is an extreme example (so I am being unfair) - but mainstream "finance" is often not vastly more sane.

    Get a load of zero worth mortgages (home loans lent out to people who are never going to pay them back) package them as "securities" and then base a whole inverted pyramid of debt upon them (via vastly complicated dealings and mathematics).

    Basically you have still just got a load of worthless mortgages - but you have made things vastly worse (not better) by building the inverted pyramid of debt upon this base.

    It really does not matter how clever people are - or how complex the mathematics is, if you start with waste it has to be (at the end) still waste.

    The piece of excrement in a nice piece of wrapping paper is still (when you unwrap it) still a piece of exrement.

    Of course even if it was NOT excrement - even if the vast inverted pyramid of debt (with the home loans as the capstone) was built on mortgages that were 100% sound (i.e. the people were all going to pay back their mortgages), the idea STILL WOULD NOT WORK. You are still trying to get out more than you put in - a sort of perpertual motion machine (accept it speeds up - by the way a perpertual motion machine that speeds up would destroy the universe, so perhaps it is good thing the idea does not work).

    The "small" point that is often overlooked.

  45. avatar Paul Marks says:

    Anyway I got away from what you said.

    O.K. you believe in a sort of labour ticket money.

    That has been tried many times - and never worked. But I have objection (no objection whatever) to you trying it.

    By the way it is useless for "painting the kitchen" to be as valuable as "mowing the lawn for a month". For trade to take place you and me would have to disagree on the relative values.

    For example, if I thought "painting the kitchen" was more valuable than "mowing the lawn for a month" and you thought the opposite - then trade would take place. I.E. I would mow your lawn for a month, in return for you painting my kitchen.

    Barter - rather than labour tickets.

    Actually labour tickets are fairly useless because they are not exact (as well as for many other reasons).

    The further we get away from "you do this if I do that - O.K.?" the more the system breaks down.

    By the way these are both services ("mow the lawn for a month", "paint the kitchen"- not very good as stores of value. Labour itself is (of course) not value - it is just the means we have to use to make something we value (a very different thing). After all a diamond I find lying on the grass is not worth any less to me than a diamond I have spend a day digging out of the rock.

    Anyway - I repeat I have no objection to you doing that.

    You would offer me a labour ticket in return for (say) some apples - and I would say NO (which I would say - because I do not like the idea of labour tickets), but you might find someone (with apples) who said YES - and that is fine.

    "Mutualist" - I did not mean to pick on you, I was thinking of someone else

    The name of the someone else was Kevin Carson.

    Which L.A.

    The one that used to be run by Chris Tame (and his old ally Brian M.) - before he got cancer and died (having first left ownership of a majority stake of the organization to Dr Sean Gabb - a man I oppose on many things).

    Oddly enough I also know the "other L.A." (or did) - of course both claim to be the "real" one.

    Popular Front of .... or ..... Popular Front.

    By the way I agree that someone who really does "deposit" his gold (or other commodity - you can not really "deposit" labour services, not very well anyway) in a bank and inists it not be paid out SHOULD PAY THE BANK LOOKING AFTER THE MONEY.

    After all that is what a safe deposit company demands - you just dump this stuff on us and say we can do nothing with it, well then you PAY us to look after it.

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