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A free banking gold standard versus other gold standards

by Kurt Schuler January 7th, 2012 10:49 pm

Discussion about the gold standard often has advocates and critics talking past one another. One of the reasons is that there are members of both groups who do not know or, during the heat of argument, do not acknowledge that there have been many varieties of the gold standard. A free banking gold standard differs in important respects from other varieties of the gold standard. Here are key questions about the details of a gold standard, and the answers as they apply to its free banking form.

What is the legal foundation for payment in gold? Ordinary contract law. Government may establish a definition of a currency unit in terms of gold, but if so, under free banking the unit (say, the dollar) is merely a convenient name for the weight of gold, rather than saying that “a dollar is a dollar” no matter how much the gold content changes.

Is gold the only legal form of payment? No; payment can occur in any commodity or currency that people wish to use. This contrasts with the practice in some countries under various other forms of the gold standard, in which certain payments were only legal if made in national currency.

Who offers payment in gold? Anybody may do so. This means lenders and borrowers may agree to "gold clauses" in contracts. In many countries, governments have nullified such clauses after abandoning the gold standard or after moving to a more restrictive form of the gold standard where people have less freedom to own and pay in gold.

What forms of money and credit are payable in gold? Any that the issuers of those forms wish to offer.

Is production of any of these forms a legal monopoly? No; in particular, under a pure free banking system there is no legal monopoly of notes or coins, so they are competitive in the same way that deposits are competitive. In most historical free banking systems, issuance of notes was competitive but issuance of coins was not.

Who can demand payment in gold? Anybody who holds a liability that an issuer has made payable in gold. This contrasts with the Bretton Woods gold standard as it existed in the United States, under which Americans were prohibited from owning gold bullion.

Are there restrictions on the purposes for which people can demand payment in gold? No, there are no exchange controls or like restrictions. Again, this contrasts with the Bretton Woods gold standard, under which most countries on the standard imposed exchange controls.

What legal penalties exist for people or organizations that break their promise to pay in gold? The standard penalties applying to breach of contract. Observe that this differs from a central banking gold standard, in which the central bank cannot be sued for breach of contract if it devalues.

Is fractional reserve banking permitted? Yes; so is 100% gold reserve banking, but as George Selgin commented in a post some time ago, there have been no historical cases in which 100% gold reserve banking has dominated in competition with fractional reserve banking. I would expect there to be some 100% gold reserve banks, appealing to people who did not trust regular banks and were willing to forego interest, but I would expect such banks to hold less than 1 percent of all banking assets. 

Are taxes only payable in gold? Perhaps. It should not make much of a difference if a free market in foreign exchange exists.

Is accounting in units other than gold permissible? Yes, but perhaps everything has to be converted into gold units for tax purposes. This is an area where I think more work is needed to explore whether there are important implications for monetary freedom.

115 Responses to “A free banking gold standard versus other gold standards”

  1. avatar Mike Sproul says:

    So what happens when a bank and its customers agree that the bank's dollars don't need to be convertible into gold? Would you prohibit that? If so, turn in your libertarian badge. If not, turn in your gold standard badge.

  2. avatar Gormadoc says:

    Mr. Sproul, Mr. Schuler can correct me if I'm wrong, but I believe that he is posting these points to appeal to the pov of a gold standard supporter, to demonstrate that banks can freely issue notes on the basis of gold, not from his own view, in which I believe he advocates that it's the bank's and customers' choices. Besides, even if he did advocate this policy, it would be more likely as a stepping to a more libertarian

  3. avatar Gormadoc says:

    Free banking system, making the attack on his libertarian 'badge' both unneeded and inaccurate. Attacking his gold standard 'badge' is beside the point, if I'm correct on his views.

  4. avatar Bill Stepp says:

    Why would a bank or its customers enter into such a restrictive agreement? After all, markets work by expanding the range of choices of consumers and investors, in this case consumers of banking services. Banking is all about having good products (and services), in this case banknotes, and gaining market share. Issuing bank notes that could not be converted into gold would be a good way to recreate the banking equivalent of the Edsel.

    • avatar Mike Sproul says:

      Bill Stepp:

      Banks usually suspend convertibility as a result of insolvency. Customers usually don't agree to it in advance, but any subsequent customers presumably dealt with that bank knowing that convertibility was suspended. The practical advantage of suspension is that the bank becomes less vulnerable to bank runs. If a bank has issued $100, with each dollar convertible into 1 oz. of gold, then that bank's assets had better be worth at least 100 oz. of gold. If the bank's assets are worth only 90 oz, then a bank run happens, since everyone knows that the last $10 in line will get nothing. But with suspension, the $100 is still backed by the 90 oz. of assets, but they are not instantly convertible into physical gold. Thus each dollar falls in value to .9 oz. Customers aren't happpy about the loss, but it's better than a bank run.

  5. avatar BillWoolsey says:

    Sproul:

    The answer is implicit in the above. Banks can issue deposits or notes redeemable or irredemable as they see fit according to "free banking" as described above.

    In some ways, calling such a system a "gold standard," is a misnomer. As a matter of economic "prediction," (along the lines of Stepp,) I would expect such a system to be implemented by an existing central banking implementing redeemability at some fixed price of gold, and a transfer of all existing dollar debts into gold at that price. And then, having the government back out of the monetary order. In the future banks and other debtors and creditors do as they choose.

    In that scenario, it is likely that the resulting monetary order would remain based upon gold or whatever commodity was introduced. On the other hand, it would only be the economics--of network goods, really--that would keep the system tied to gold. While I think irredeemable bank deposits are very implausible, switching to another base money would be possible. By far the most likely scenario would be something akin to dollarization. Say, for example, switching to Chinese (or a "world") fiat currency. Suppose that Sweden went to gold. It might end up with the Euro under free banking.

    • avatar Mike Sproul says:

      Bill Woolsey:

      Calling a free banking system a "gold standard" is not just a misnomer in some ways. It is a misnomer in every way. As a good free banker, you correctly say that banks should be allowed to suspend as they see fit. But once they suspend they are no longer on the gold standard.

      And why should the central bank, having tried the gold standard and faced the inevitable bank run, have to return to it? Why not just let each central bank issue money as it sees fit, but also allow customers to use any money they see fit, including foreign moneys?

      Also, private banks in the US universally suspended convertibility of thei bank deposits in the panic of 1837, and about every 10 years thereafter. There's nothing implausible about it. For all we know it was only misguided laws that forced private banks to maintain convertibility in normal times.

    • avatar Martin Brock says:

      Converting all existing dollar debts into gold by statutory decree, retroactively, without the consent of individuals holding dollars or owed dollars or owing dollars, is hardly my idea of "freedom". That's call "dictatorship". The resulting banking regime is not my idea of "free banking" either.

      A free banking system has no single standard of value. Most people may use a single standard at a given time, but individuals may always change their standard, and the most common standard can change over time.

      • avatar BillWoolsey says:

        Here is how you go to a gold standard.

        The Fed begins redeeming Federal Reserve notes with gold at a fixed price.

        Now, all existing dollar debts are, in effect, payable as amounts of gold.

        There is no restriction on freedom (or breaking of contracts) because the Fed was not promising to do anything else but "good deeds."

        Now, the Fed closes down, so there are no longer any Federal Reserve notes. Does that mean that all existing contracts are void? That debtors all default?

        I think it is reasonable for the new system, with no Fed, to just skip the Fed step and have all of the contracts that were in dollars, which meant Federal Reserve notes, which were tied to gold by redeemability, to now just be directly settled in gold.

        As those old debts come due and are paid off, then any new debts can be settled how people want. For bank liabilities, they are "due" continuously, and so, banks can switch to a new scheme as they want. It is like a new policy. We will pay off your deposits in gold as agreed for the next week. After that point, anything left will be paid off in... whatever the bank wants to promise. IF you don't like it, take your money out and find another bank.

        Or, of course, a bank can offer a variety of contracts. Gold deposits, silver deposits, Euro deposits, etc.

        And, of course, banks can develop whatever option clause they choose. (If we cannot pay you as promised when demanded, we will pay you some penalty interest (bonus to you) until we can.)

        In my judgement, there is little chance of a variety of standards in parellel or a new standard replacing the existing standard.

        I agree, however, that if there is some large and sudden change in the relative price of gold, and so all the banks exercise their option clauses, that it is then that an alternative regime might occur. Otherwise, it would be more like a grandual takeover by a neighboring monetary system.

  6. avatar RickDiMare says:

    I don't know if it's intended or not, but it seems to me that making vague promises about gold redeemability distracts from the more central issues, which are:

    Will we be allowed access to Treasury-Direct money that can discharge debt?

    If so, how can we get it and use it practically in the marketplace?

    And where the money does represent debt, will we be allowed: to reject debt owed to the shareholders of a central bank or other private parties, and to prefer debt that is owed directly to the Treasury Department?

  7. avatar Bill Stepp says:

    Mike Sproul,

    I made the Edsel reference because I thought you were considering a new bank model in which a bank would cater to people who disliked gold. Your crack about turning in your gold badge overlooks that the customers of a failing bank that suspended convertibility would simply move to a stronger bank.

  8. avatar Kurt Schuler says:

    As I remark in my post, in a pure free banking system, people are free to make payment in any currency or commodity that is agreeable to both the debtor and the creditor. This also implies that they are free to devise various types of escape clauses, like option clauses or the force majeure clauses that sometimes exist in bonds or in commodity supply agreements. Historically, because of the advantages of a common unit of account, payment in nongold units was rare in the historical free banking gold standard systems with which I am familiar.

    • avatar Martin Brock says:

      If payment in non-gold units is rare, I wonder whether people are effectively free to promise another standard. A common currency is valuable as you say, and if the single most powerful trader "market participant", the state, promises to pay in gold, gold is practically guaranteed to be this common currency. This outcome has nothing to do with the operation of a free market. It has everything to do with a state commanding its chosen currency to circulate.

    • avatar Mike Sproul says:

      Kurt:

      So why even speak of a gold standard? The defining characteristic of a gold standard is physical convertibility of currency into gold on demand. If you agree that banks and customers should be free to choose what kind of convertibility to maintain, or whether to maintain it at all, then you are not advocating a gold standard; you are advocating free banking. I think most of us here on this blog favor free banking, but we need to recognize that a gold standard is, on its face, a violation of free banking.

      • avatar Martin Brock says:

        An exclusive gold standard, either mandated by the state through an explicit legal tender law or effectively encouraged by the state's exclusive use of gold as a standard, violates free banking. If I choose gold as my standard and employ a bank accounting similarly, my bank and I don't violate free banking; however, I don't believe that gold ever was or naturally would be the most common standard of value in an ideally free market. Gold is too easily concentrated in the hands of a powerful few, and "powerful few" is just another way of saying "the state".

        Many monetary theorists seem to assume that a scarce, durable commodity with inelastic supply is the ideal standard of value. The opposite seems more nearly true to me. A very common (but nonetheless valuable), highly perishable commodity with elastic supply seems the ideal standard of value for extending credit.

        What good is running on a bank issuing notes promising milk? What would you do with a hoard of milk? Storing milk is very costly, and milk eventually spoils even with the costliest storage. Even if people redeem notes promising milk only to destroy the milk, replenishing the supply of milk by increasing production for a while is relatively easy, and later lowering production is also relatively easy. Yet milk nonetheless has enduring value.

        • avatar Mike Sproul says:

          Martin:

          Land banks overcome the durability problem, and a bank could promise to hold a bundle of several other durable assets (copper, coal deposits, etc) so as to stabilize the value of the currency.

          • avatar Martin Brock says:

            Land holding is fundamentally decentralized, so it's less subject to the hoarding problem, but land is not a commodity. A standard of value is a commodity relative to which people value other things. Each unit of a commodity is as valuable as another unit. A bank need not hold much of the standard as long as it can exchange its capital for the standard as needed to meet the demands of its note holders. Most of a bank's capital may be real estate, but real estate is not the bank's standard of value.

            Copper could be a standard of value, if its weight per unit of value didn't make it impractical; however, I don't know why the standard needs to be a durable commodity at all. I suppose a non-durable commodity, like an agricultural commodity, is a better standard. If you imagine "saving" the commodity, a non-durable commodity might seem a poor choice, but your bank never actually saves any standard of value, even if it's gold. If you want literally to save gold, you should bury it in your back yard.

  9. avatar Martin Brock says:

    Are taxes only payable in gold? Perhaps. It should not make much of a difference if a free market in foreign exchange exists.

    An obligation to pay taxes in gold makes a huge difference in practice, but more important than an obligation to pay taxes in gold is the state's obligation to pay its own bills (particularly its creditors) in gold, because it must raise so much gold from its subjects regardless of their preference for a different standard.

    If subjects choose to be paid in silver and the state taxes income 10% of income, 10% of subject income must pay the state's bills in gold at the prevailing silver-gold exchange rate. If it doesn't, either the tax rate must change or the exchange rate must change. These two variable are not independent. The state commands one of them, and if subjects prefer silver, the state itself, collecting so much tax revenue in silver, dominates the market for gold in silver.

  10. avatar Paul Marks says:

    I am largely in agreement with this article.

    If buyers and sellers agree to pay each other in gold - then that is fine.

    If buyers and sellers agree to pay each other in silver (or any other commodity) that is ALSO fine.

    As for the private production of money.

    The private production of coins worked well in the West - till Congress banned it (for no good reason - although YES they had the Constitutional power to do what they did) in the 1850s.

    The private production of notes (or credit cards or.....) rather than carrying physical gold (or physical silver or physical....).

    Also fine - as long as the bank (or other note issuer) ACTUALLY HAS THE GOLD THEY SAY THE NOTES REPRESENT - the physical gold of the weight and purity they say they have.

    And if they do NOT have this gold - then they can issue notes (or.....) representing the silver (or the copper or the.....) they have.

    And their can be a free market exchange rate (which would fluctuate) between different commodity currencies (gold, silver.....) as there was in the early 19th century in the Kingdom of Hanover (or Hannover - I am not going to get into that).

    History suggests that people would tend to prefer one or two currencies (not many) and that there would tend to be two currencies (gold and silver) or just one (gold). However, that is something that can emerge via the market process - although YES what government demands its taxes are paid in matters (it matters A LOT).

    However, (word of warning) special names for the currency (the "Dollar", the "Pound" and so on) must be avoided at all costs - as these would (over time) be used as a smoke screen to transform the currency from a commodity (i.e. a free market currency) to a non commodity currency - which would be (whatever some people say) a government fiat currency.

    If the currency is gold then prices should be quoted in terms of certain weights of gold (of a certain purity).

    If the currency is sliver then prices should be quoted in terms of certain weights of silver (of a certain purity).

    And so on.

    NO SPECIAL NAMES FOR THE CURRENCY.

    • avatar RickDiMare says:

      "YES what government demands its taxes are paid in matters (it matters A LOT)."

      Yes, I think it does matter a lot; it matters more than what metal is used in the underlying base money coinage; and it's the primary supporting mechanism for irredeemable currencies.

      I would even go so far as to say that the main reason the United States exists today is that the Lincoln administration imposed a strictly-enforced income tax to regulate Greenback distribution between 1862-1872, whereas the Confederacy didn't do the same for its Continental currency (or if they did, the tax was ineffective).

      • avatar RickDiMare says:

        CORRECTION: the Confederacy did not issue Continentals, but Confederate Notes ... which, incidentally, it never made a legal tender, "a monetary/military error of great magnitude" Steven Zarlenga, "The Lost Science of Money"

  11. avatar Paul Marks says:

    It is true that the Confederates expanded the money supply more than the Union did in the Civil War.

    However, the Confederate income tax was actually HIGHER (and more "Progressive" - i.e. it had higher rates on the wealthy) than the Union income tax.

    Also the Confederates went in for much MORE general economic regulation than the Union did - indeed ending up nationalizing industry and transportation.

    It astonishes me that some people (for example some people connected to the Ludwig Von Mises Institute) imply that the Confederates were the good guys.

    Even if one excludes the issue of slavery (and I would NOT exclude it) the Confederates were far more (not less) statist than the Union.

    Of course Lincoln oppposed a peace time income tax. He had his faults (he was indeed a Henry Clay Whig in his economic ideas), but he was no "Progressive" - those people came in the next generation (the vile followers of collectivist ideas broght to America, from Germany, by Richard Ely and co - and taught to T. Roosevelt on the Republican side and Woodrow Wilson on the Democrat side).

    However, when a peacetime income tax was imposed (1913) the vast majority of taxpayers were in northeastern States.

    Hardly anyone in the South had a high enough income to pay income tax - not as it was in 1913.

    • avatar RickDiMare says:

      That's interesting. So, you're saying the Confederates DID have an income tax, but didn't have legal tender laws requiring payment of taxes in the irredeemable Confederate Notes?

    • avatar RickDiMare says:

      "However, when a peacetime income tax was imposed (1913) the vast majority of taxpayers were in northeastern States."

      Paul, this comment reflects a widespread misconception of income tax law evolution that I'm on a mission to correct: The 16th Amendment only removed doubt about taxes on "income derived from property sources" (land, labor, capital).

      The kind of currency-regulation income tax we're discussing here doesn't need support from the 16th Amendment. In other words, taxes on "income derived from non-property sources" were always Constitutional, even when Lincoln imposed them.

  12. avatar Paul Marks says:

    The vast majority of income tax (from whatever source their income came from) came from the North Eastern States in the 1913 - because they were richer than everyone else. For example, the term "Empire State" (for New York State) was not a joke in 1913 - New York State was actually a powerhouse (back then) economically. It was more important (even on its own) than all the former Confederate States put together.

    As for Lincoln and the income tax - I do not know what you mean by a "currency regulation" tax.

    The Civil War income tax was to RAISE REVENUE - not to regulate the currency.

    Neither the income tax or the Greenbacks were intended to last after the Civil War. They were emergency measures (like locking up suspected Confederate supporters without trial - the limiting of Civil Liberties was an emergency wartime measure also and the Constitution DOES allow for that in cases of "rebellion" Article One, Section Nine (people who complain about Lincoln violating Habieas Corpus have simply not read the Constitution - Habieas Corpus is not combatible with all out WAR, however the moment the rebellion ends the suspension of Habieas Corpus must end also).

    We know that (the money stuff) not just from Lincoln but also from the "slaves lawyer" Salmon P. Chase (the man I would have backed at the 1860 Convention - but that is by the by). Who was the Treasury Sec who imposed the income tax and introduced the Greenbacks (their only link was that they were emergency wartime measures - indeed war of an extreme type, as the United States was more damaged and more threatened by the Civil War than by all other wars PUT TOGETHER).

    It was, of course, Chase who (as Chief Justice of the Supreme Court) ruled that the Greenbacks were unconstitutional. Although this judgement was later overturned by new judges being added to the Court (the first and second Greenback cases).

    • avatar RickDiMare says:

      "The Civil War income tax was to RAISE REVENUE - not to regulate the currency."

      When currencies are coin or redeemable-on-demand for coin, then yes, income taxes are levied to raise revenue, but otherwise there is no need to raise revenue through taxation because the money issuer can create whatever money it needs, and in this latter circumstance (like that of Civil War greenback era) regulatory income taxes are needed to (centrally decide) where money should go.

  13. avatar Paul Marks says:

    I do not know if the Confederates had legal tender laws or not - I should check.

    However, I do know that the legal system broke down in the Confederacy - apart from in North Carolina where the (oft mocked) Governor Vance insisted that something like the rule of law be maintained (for people who were free and white anyway). Governor Vance had enough equiped men (North Carolina having factories) that his opinions had to be respected (the Vice President of the Confederacy was also a rule of law man - but he had no power, as was shown when he tried to stop what was going on at Andersonville, lowly government officials had more real power than the Vice President of the Confederacy, basically because Jefferson Davis would not back him).

    People who attack Lincoln for the violation of the rule of law in the Union should have a good hard look at the sort of horrors that went on in the Confederacy.

  14. avatar Paul Marks says:

    Yes a government can cover its spending via just printing money and spending it - rather than borrowing money (even money that it itself as just created and lent out).

    Why do they (normally) not do this? Because it tears off the mask off the government fiat money scam.

    If government just printed money and then spent it (rather than doing X, Y, Z) it would be obvious to everyone that the state had become just a criminal enity.

    Of course to Rothbardians all states are criminal entities - but a print-and-spend state would be an obvious criminal entity.

    • avatar RickDiMare says:

      The Constitution makes Congress a legitimate money-issuer, whether it's issuing coin under the Coining Clause, issuing its own non-coin currencies under the Borrowing Clause, or chartering federal bank(s) to issue non-coin money through its McCulloch v. Maryland implied powers.

      So, I wouldn't call Congress a "criminal entity," unless it blocked our access to Treasury-Direct coin or non-currencies, which Congress is not technically doing, but effectively that is what's happening. (Try to find a lawyer who will help you object to privately-owned central bank money, and claim your right to use only Treasury Direct coin and/or non-coin money!)

  15. avatar Paul Marks says:

    A govenment (a Congress, a King, whatever) that financed its own spending by issuing more money would be criminal - and there is not a single Founder (not even Hamilton) who would say different.

    However, what modern governments do (create more money, lend it to banks and borrow it back again - at a higher interest rate of course)is at least as criminal.

    If a government wants to spend money it should have the honestly to levy taxes to cover its spending - no dodges, quick fixes or magic wands.

    And the government should not even give a surplus to banks to "look after" for awhile.

    It should be strict pay-as-you-go (real - not just the slogan) with the tax money kept in a real "independent Treasury". No pet national banks - and no pet State banks either.

    Martin Van Buren O.K.

    The only President to have actually been a leading banker - and, therefore, very careful to keep them at arms length from governement (just like a safe cracker is going to have a really good safe himself).

    • avatar RickDiMare says:

      But the government is not doing the alleged criminal or ultra-vires activity you're complaining about, which ties into your comment above about Lincoln refraining from a permanent post-Civil War income tax and irredeemable Treasury-Direct Greenback.

      Lincoln's successors knew they were stretching the bounds of their borrowing power under the Borrowing Clause by keeping the Greenback irredeemable, so that's likely why we had the Specie Resumption Act of 1875, and why subsequent issuers of irredeemable peacetime currency would need to be privately-owned federally-chartered banks (or singular central bank after 1913).

      Federal Reserve lawyers go to great lengths to assure that the central bank maintains itself as legal entity that is separate from the U.S. government. If I'm not mistaken, the U.S. government sits on the board of directors of the Fed, which is just enough involvement to require the Fed's chairman to report to Congress, but not enough involvement that would cause the Fed to be legally regarded as the government itself. (I know this probably seems like legal trickery to you, but all corporations are merely conceptual "legal fictions," including the federal gov't itself, so we must often attempt to understand their structure anyway.)

      But, it's common knowledge today that the Fed is not the government, so the million dollar question is: Why do we continue to use its currency, and fail to demand Treasury-Direct money? Is the Fed providing something we unconsciously want or need, but resent at the same time? (Like a teenager who, after screaming at his/her parents for being too controlling, asks the parents if s/he can have the keys to the family car.)

  16. avatar Paul Marks says:

    On the transformation of debts...

    Martin I trust that you also condemn the transformation of gold debts (clearly stated as gold in contracts) to de facto fiat Dollar debts in 1933.

    As for the present debt structure.

    The United States government debt is presently (even excluding all Enron style unfunded mandates) is over 15 trillion Dollars.

    The student loan debt is over a trillion Dollars.

    The housing debt is.... (think of a number and times it by a hundred).

    And on and on - with things like local and State government bonds.

    Do not worry about the present debt structure Martin - because it has passed far beyond the wit of mortal man to do anything about it.

    The whole vast credit bubble economy is going to COLLAPSE.

    That is settled now - "baked into the cake".

    The real question is "will the totalitarians take advantage of the chaos?" - and I swear to you (swear on my life and upon my imortal soul) that they are planning to do just that.

    The economic breakdown and the chaos can not, now, be avoided (people will suffer - people will suffer a lot) - but what comes out of it is not predetermined.

    Human freedom and civil society still have a chance.

    • avatar Martin Brock says:

      Ideally, a court should enforce a contract explicitly specifying gold; however, if a state decrees gold a legal tender for all debts or effectively establishes gold as the most common tender otherwise, people will contract this way regardless of their preference for another standard. If contracting in gold is not a free choice, a libertarian principle does not apply.

      Still, I'll condemn the confiscation of gold in 1933. I also condemn the abandonment of silver in the coinage act of 1873, but I don't much want the Congress deciding what anyone uses for money or favoring one standard over another, least of all the least common standard.

      I don't much expect an economic collapse, but the present predicament seems worse than the seventies, which was the worst period of my lifetime thus far.

      • avatar RickDiMare says:

        "Ideally, a court should enforce a contract explicitly specifying gold;"

        Martin, yes, but if the contract is for "dollars" a U.S. court should enforce the contract no matter what metal the dollar is redeemable for, or even if the dollar referenced in the contract becomes not redeemable for any metal.

        This was the message from the New Deal era and the 1933 confiscation of gold, which is that we can deal in whatever commodities we wish, but if the contract is for dollars, then the contract is satisfied by the receipt of whatever Congress currently declares to be a dollar.

  17. avatar Paul Marks says:

    The contract said GOLD Rick, and it was not "Congress" anyway it was that rich kid F.D.R. who never did a day's work in his life. And who was such a good judge of character than he described Joe Stalin (without irony) as a "Christian Gentleman".

    Do you really think that ANY of the Founders would have accepted gold confiscation? Any of them?

    Not just Jefferson, but Hamilton (any of them) would have "given lead to anyone who DEMANDED their gold". People can ASK for privately owned gold (if they really need it), but the owner must always have the right to say "NO".

    If you want to know then read "The Founding Fathers Guide to the Constitution".

    George III would never have dreamed of doing stuff like this (or justifying it with legal double talk) - not even when he lost his mind and went about talking to trees.

    • avatar RickDiMare says:

      Paul, if Martin was discussing gold bullion, I stand corrected, but he appears to be talking about U.S. gold coins, or notes that are redeemable for U.S. gold coins, in which case he would have no right to contract with others in "dollars" and then expect courts to guarantee a dollar in a certain weight in gold.

      No, I don't think the founding fathers would have tolerated gold confiscation, nor would the fledgling federal gov't likely have tried (because it was not yet worthy of charging significant "seignorage" when issuing money).

      But the post-Civil War federal gov't is a completely different animal, and it was only after proving itself that it gained enough credibility or "full faith and credit" to expect a remarkable degree of seignorage (which private bankers have been riding the coattails of, ever since the Civil War).

  18. avatar Paul Marks says:

    Rick and Martin - I apologize if I misunderstood what you were saying.

    As for what the other gentleman says.....

    Well it was also privately owned gold (apart from wedding rings and so on) that was taken by the government in 1933 - it really was as if an invading army had come to the Republic and looted the citizens. This(or rather the court cases of 1935) was the death of the "rule of law" (as opposed to just have lots of arbitrary "laws").

    But still, this is water under the bridge now.

    "What is to be done?" As a certain Russian aristocrat said (sadly a wealthy estate owner who was also a follower of the Marxist cult).

    To return to gold (in terms of contracts) not would raise the obvious question HOW MUCH GOLD?

    The only logical reply would be to get the amount of gold the government actually has (not how much gold it would be nice for it to have - but how much gold it ACTUALLY HAS) and divide it by the number of Dollars.

    This would mean that the Dollar was actually worth a TINY amount of gold. However, it would fit in with PHYSICAL REALITY (which is rather important). Contracts would then not need to changed.

    People would be either be able to continue to trade in their paper Dollars or hand them back to the government in return for a TINY amount of gold (the paper Dollar given to the government would be destroyed - as the gold that "backed" it had been given to the person who had presented the Dollar for the gold).

    So IF people want to go to a gold currency (without changeing existing contracts and so on) it can be done.

    But people would be shocked by just how little gold they got for their Dollar.

    • avatar Martin Brock says:

      I don't need (or want) the Federal government to divide some quantity of dollars by a quantity of gold, because I don't want to exchange my dollar holdings for gold, and I don't want to exchange my obligation to pay dollars for obligations to pay gold. I don't even want your obligation to pay me in dollars converted to an obligation to pay gold by statutory fiat.

      If I want to exchange dollars for gold, I may do so now. If I want to promise gold to a creditor, I may do so, but I wouldn't choose to do so.

      If I freely promise you a quantity of gold (U.S. coin or otherwise) in the future, then a court should respect our contract and order me to pay you gold and nothing else but gold. If I cannot pay you any gold I owe, you receive nothing from me. The court may order me to sell other goods for gold at the market price, but it may not order me to pay you anything other than gold. Right?

      That said, if I must pay debts in gold and accept gold myself, because courts order payment in gold regardless of contractual terms, or if the state commands me to pay taxes exclusively in gold and pays its own creditors exclusively in gold, use of gold as a standard of value for extending credit is not a free choice.

      • avatar BillWoolsey says:

        Martin:

        Step one: Fed makes Federal Reserve notes redeemable in gold.

        Step two: the Fed makes private banknotes legal.

        Step three: the Fed stops printing Federal Reserve notes.

        Step four: The Fed stops redeeming reserve balances with Federal Reserve notes. It only redeems them with gold.

        Step five: The Fed accepts deposits of Federal Reserve notes (by banks) at a 1% premium for one month, and says that after that time, it will be at a 5% discount for an another month.

        Step six: The Fed gives a date after 30 days after which it will no longer accept Federal Reserve notes for deposit.

        I presume that some people would keep some Federal Reserve notes, but they would be demonetized. The only paper money would private banknotes.

        As long as they continue to clear through the Fed, they trade at par to one another. Because reserve balances at the Fed remain redeemable for gold, all the banknotes are tied to gold.

        You own a 30 year corporate bond. Three years after the above process is complete, you insist on payment in Federal Reserve notes. Is the debtor obligated to find some?

        You seem to assume a scheme by which the Fed closes down, while leaving a fixed quantity of paper currency oustanding.

        Now, in my story above, the Fed is still allowing banks to clear using reserve balances that are redeemable for gold. But it is pretty simple to get rid of those as well, so that the banks clear with gold or else set up a private clearing house in place of the Fed and clear with balances at the clearinghouse. All the Fed needs to do is charge for keeping balances an amount greater than the storage cost for gold.

        And now there is free banking and a gold standard.

        • avatar Martin Brock says:

          Making FRNs redeemable in gold effectively makes all dollar debts payable in gold. I would never agree to this retroactive, coercive imposition, and I certainly don't call it "free banking".

          All else being equal, I don't want the Fed to stop issuing notes. I first want the Treasury to stop selling securities, and I then want the Fed to issue as many notes as necessary to purchase existing securities. Then I want the Treasury to default. The dollar inflation doesn't concern me, because I want a currency to emerge freely in the market. If you don't want to hold dollars in this scenario, don't hold dollars. Switch to another currency. You then hasten flight from the dollar and toward currencies emerging in the market.

          The Fed can't make private banknotes legal. If private notes are illegal, only the Congress can make them legal. Free banking doesn't require any action by the Fed, and the Congress must only cease favoring FRNs over other currencies.

          I would never agree to a central monetary authority commanding the use of gold as a standard of value for extending credit or to nominally "private" banks issuing notes promising gold in an environment in which other standards are effectively excluded by the state's preference for gold.

          Yes, if you hold a bond promising dollars, you are entitled to dollars and to nothing else. If your obligor can't find the dollars to pay you, he's bankrupt, and you get what you can from the bankruptcy court. The same goes for gold, and I don't expect common people freely to promise gold when seeking credit for this reason. If gold is such a great standard of value for extending credit, it doesn't need the state's encouragement.

          I hope for a scheme in which the Fed does whatever it wants but I'm not obliged to accept its notes unless I've already promised to do so or to pay taxes in its notes, and its notes remain backed only by Federal power, and Federal power becomes increasing worthless.

      • avatar RickDiMare says:

        "If I freely promise you a quantity of gold (U.S. coin or otherwise) in the future, then a court should respect our contract and order me to pay you gold and nothing else but gold. If I cannot pay you any gold I owe, you receive nothing from me. The court may order me to sell other goods for gold at the market price, but it may not order me to pay you anything other than gold. Right?"

        Martin, my opinion is that here you are describing a barter transaction, not a transaction for money. You're mentioning "U.S. coin," but only referring to its gold content, not the coin's "seignorage" and its capacity to transact as money, and your hypothetical contract can be satisfied, not only by the gold contained in the coin, but by any other gold.

        • avatar Martin Brock says:

          No. A note promising gold bullion can be money, because the note's holder may exchange it for anything, not only for gold. The note promises gold, because people freely using the notes understand that when the exchange it for something else, they get something that others value similarly. If courts impose some other settlement, the whole idea of valuing other things relative to the value of gold is meaningless.

          Money does not require a state coining any metal or issuing notes of any kind. Coiners of gold can earn seignorage because people trust their coins to contain the advertised quantity of gold, but this fact has no bearing on my obligation to you when we contract for a specified quantity of gold.

          • avatar RickDiMare says:

            Martin, your response reminds me I need to be more precise with my terminology.

            When I say "money" I mean legal tender, money that courts will accept in payment of judgments and governments will accept in payment of taxes. Barter and labor credits, claim checks, warehouse receipts for precious metals, gift certificates, etc. may act like money, but I don't consider them money.

            Even coins and notes issues by "free banks" I would not consider to be money if government wouldn't accept them in payment of taxes and court judgments.

            I know you want to cut the state out of money-creation business, but I don't believe that's possible. Even in a pure anarchy situation, some money-creation authority would eventually arise and dominate, and become "the state."

            Also, when I say "seignorage" I mean political seignorage, not the profit that a trusted private coin maker may earn.

          • avatar Martin Brock says:

            Rick, I am not quite an anarchist, but in my way of thinking, you confuse an honorable fee for an honorable service with the monopoly rent that a monopoly coiner of money may charge by writ of a statutory monopoly.

            Admittedly, the word "seigniorage" derives etymologically from feudal roots ("seignior" being a French/Latin equivalent of "lord"); however, still earlier roots of the word only suggests "older", not "more authoritative" or closer to the most central authority in a hierarchy of authority claiming an exclusive right to impose its will forcibly.

            I'm off the road to serfdom myself, but I still respect my father. I also understand the word "patriotic" in terms of loyalty my father, who governed me properly in my youth by virtue of his greater wisdom, not loyalty to any "fatherland" or similarly fascistic notion.

            Barter is the exchange of one specific thing for another specific thing, like an exchange of milk for flour. Modern money is not a specific thing at all. It is the promise of anything available in a market with a value comparable (in the subjective opinion of buyers and sellers in the market) to some standard of value. The money promises this standard only because someone accepting the money seeks something else of comparable value.

            When I accept money from you for something you want, I'm primarily concerned with what others will accept, because others have specific things that I want other than the non-specific money. I'm concerned with what the state will accept only because the state has something that I want, specifically the absence of a bullet in my head. The state makes money by refraining from shooting people.

            Some authority over anything and everything could arise and dominate and become the state. Only you know why you draw the line at money. I don't draw the line there, and I refuse to call your system of money "free", and I also refuse to call any system of credit with your money as a standard of value "free". I'm still mostly free to choose my own words in the United States.

          • avatar RickDiMare says:

            " ... you confuse an honorable fee for an honorable service with the monopoly rent that a monopoly coiner of money may charge by writ of a statutory monopoly."

            The current Federal Reserve system is definitely rent-seeking (and leeching off the Treasury Department's legitimate seignorage). No argument from me there.

            But the "monopoly coiner" is not the Federal Reserve (though it encourages that myth), but rather it is Congress' Treasury Department under Article 1, Section 8, Clause 5, and under that coin-issuing power the "monopoly coiner" is not a rent-seeker.

          • avatar Martin Brock says:

            But the "monopoly coiner" is not the Federal Reserve (though it encourages that myth), but rather it is Congress' Treasury Department under Article 1, Section 8, Clause 5, and under that coin-issuing power the "monopoly coiner" is not a rent-seeker.</blockquote.

            An act of Congress created the Fed, and every state is always in the rent-peddling business. As a minarchist, I only hope to minimize it.

  19. avatar RickDiMare says:

    Yes, Martin, an act of Congress created the Fed, but depending on how we use the Fed as currency-users and depositors, as a quasi-public privately-owned legal invention the Fed can play two very different roles, one that involves lending and rent-seeking, and the other that invokes its role as "fiscal agent," which is not a rent-seeking role, and one that merely serves its master/creator (Congress). Examples of the latter role are when we use the treasurydirect.gov service, purchase Series EE Savings Bonds, use current coin, use or deposit Postal Money Orders, etc.

    • avatar Martin Brock says:

      Purchasing a Series EE Savings Bond or any other Treasury security is itself an act of rent seeking. Rather than extend credit to another individual and accept the risk of loss, you pay the state forcibly to confiscate the produce of others in the future. The difference you expect between the yield of extending credit to an individual, accounting for the risk, and the yield you expect from the state is the forcibly imposed monopoly rent that you seek.

      • avatar RickDiMare says:

        OK, Martin ... did the best I could ... maybe someone else listening in gets it ... good luck with your stateless society ...

        • avatar Martin Brock says:

          I'm a minarchist, so I don't advocate a stateless society; however, since a state need not monopolize money and credit, a minimal state should not.

          A central bank could play a regulatory role that does not involve rent-seeking, in theory, but I don't expect reality much to reflect this theory. The fact that the Fed has so many Treasury securities on its balance sheet is clear enough evidence that the theory is specious.

  20. avatar Paul Marks says:

    I am not a nanarchist either (even a real anarachist - let alone those phony black flag "anarchists" who just want to RENAME the state "the people" and be even more collectivist than ever). But many nonanarchists oppose a Central Bank - indeed there was no Central Bank in the United States till 1913, and Canada did not have one till after 1935.

    A central bank could paly a regulatory role..... - could but SHOULD NOT. Such regulations (even if administered by Saints - which they would not be) would do great harm.

    Banks, and other such, should be under the normal laws of contract - not some special set of regulations of a Central Bank.

  21. avatar Paul Marks says:

    Martin - "I do no want gold for my [paper] Dollar".

    No one would force you to accept gold for the note Martin.

    You could keep the note - if you wanted to do that.

    My point was that government notes are only worth, in terms of gold, the amount of gold the governmnet actually has - which is not much (if divided by the number of notes). And there really is not any other way to restore any real value to the Dollar than by saying "we will give you IF YOU WANT IT the amount of gold we have" i.e. the amount of gold the paper Dollar represents (if one divided the gold reserve of the government by the number of paper Dollars).

    Of course most "Dollars" are not even paper - they are just credit that exists on computers (created by dishonest accounting tricks - tricks so wild they make Enron look straight).

    Loans made by institutions that actually do not have the money they claim to lend out.

    Not even paper Dollars.

    • avatar Martin Brock says:

      The material of the note is irrelevant. A note is only a record of something else. Most of my notes are electronic as you say. They don't represent gold or a promise of gold now, and I don't want the state summarily changing what they represent. Changing what the notes represent changes what people owing dollars owe, retroactively. It changes the terms of contracts with the consent of the parties.

      A bank doesn't loan money provided by depositors. A bank notes the value of a good for which it extends credit. These notes themselves are money, because people choose to use them as money.

      If a bank wants to note the value of goods relative to the value of gold and to accept the promise of gold when extending credit, that's fine with me, but people owing dollars now did not promise gold. After a century of inflationary monetary policy, prices accepted in long term credit agreements reflect inflationary expectations. Changing the terms of these contracts retroactively robs the people who accepted these prices.

  22. avatar Paul Marks says:

    Presently the "Dollar" (like the "Pound" and so on) does not represent anything.

    None of the Founders (not even Hamilton) would have accepted this situation - because it is a farce.

    And it is farce that will come to an end a lot quicker than most people expect.

    However, because there has been zero preperation for getting out of the fiat money mess, the end of the farce will be terrible.

  23. avatar Paul Marks says:

    "It changes the terms of contracts without the consent of the parties" - on the contrary (if you are talking about what I was talking about), if someone wanted to pay his debts in paper Dollars they would still be free to do so. So no change in the contract.

    It is just that the creditor would be then be able to go to the Federal government and get a small amount of gold for those paper Dollars. The paper Dollars would then be destroyed (as the government would no longer have the gold they represented).

    The price of the Dollar (in terms of gold) would be established by dividing how much gold the government has (as it is the government that issues paper Dollars) by the number of Dollars.

    One would find that the amount of gold per Dollar was actually TINY.

    • avatar Martin Brock says:

      Dollars are not pieces of paper. A one dollar Federal Reserve Note is not a dollar, i.e the piece of paper is not a dollar. It's a record of a dollar. The same dollar can later become bits in a computer's memory, and dollars routinely change form this way. Confusing the paper with a dollar is like confusing the title to a house with the house itself. One is a legal document recording a legal relationship. The other is a house.

      If converting all dollars to promises of gold does not change the terms of contracts, then why not change all dollars to promises of water?

      You essentially assume that every dollar that anyone possesses represents gold held by the Federal government. The idea is nonsense. No U.S. gold standard ever operated this way. Everything in a dollar denominated market has a value in dollars, not only the gold.

  24. avatar Paul Marks says:

    Martin if a Dollar is not even a piece of paper - then we had best forget about it. If we are just talking about records.... - well then Cass Sustein (and co) can just take over everything and forbid cash transactions and any real freedom at all (as is already happening in Italy - after constitutional governent was overthrown, with hardly anyone even noticing, last year).

    If money is just records (not physical at all) - then techocratic totalitarianism (totalitarianism with a smiley face) is inevitable.

    Nor did I say that a Dollar Bill represented X amount of gold the government held - I said it COULD do (if the system was changed).

    As for the gold STANDARD (as opposed to gold as money) I have been attacking that practice for DECADES.

    Of course the gold STANDARD was a con - I have know that longer than (I suspect) you have been alive.

    For example, the vast inflation (increase in the money supply) of the late 1920s came under the gold STANDARD - it could not happen if each Dollar was a specific amount of gold.

    This was pointed out (by a few economists) AT THE TIME.

    I.E. BEFORE the crash.

    Actually using special names like "the Dollar" and "the Pound" is the first (and most fundemental) mistake in any monetary system.

    By the way - if you wish to use water as money (and can find people willing to trade with you on this basis), I have no objection to that.

    • avatar Martin Brock says:

      A title to property is only a record, so let's forget about titles to property too?

      No. I'm not a totalitarian. I'm an individual who keeps my word, so my word, which is only a record, is as valuable as my ability to keep it.

      I definitely don't want my money representing anything held by the government. I can hardly imagine a less trustworthy banker.

      If you want to deal in specific amounts of gold, you don't need dollars. Historically, dollars were specific amounts of silver anyway. Why do you want gold instead?

      I don't want water as money. I want to know why anyone wants debts now payable in fiat dollars suddenly and retroactively and without the consent of debtors to become payable in gold instead

      No. I don't really want to know. I know perfectly well already who wants this forcible imposition and why they want it.

  25. avatar RickDiMare says:

    "Of course the gold STANDARD was a con - I have know that longer than (I suspect) you have been alive.
    For example, the vast inflation (increase in the money supply) of the late 1920s came under the gold STANDARD - it could not happen if each Dollar was a specific amount of gold."

    Paul, this is the point I was trying to make. Usually "gold standard" is pitched to the public, as though it will sooth what ails us, but the real purpose of advancing the "standard" is to allow further manipulation of the economy for the benefit of the powers-that-be, through exclusive interbank dealings using exclusive currencies that are not available to the public.

    For example, gold standard advocates often point to Nixon's closing of the gold window in 1971 as the source of our monetary problems, but as far as the common depositor was concerned, the real problem occurred in 1964-5, when the Federal Reserve Note became purely fiat and purely irredeemable for coin.

  26. avatar Paul Marks says:

    I agree with you on the gold STANDARD Rick - indeed it is part of larger problem in political philosphy (yes I said political philosphy - not just economics). If someone adds an extra word to a concept WATCH OUT.

    If someone says "I want gold as money" one can agree or disagree - but at least one knows what he is talking about.

    Add the word "standard" (as in "I want a gold STANDARD") and he could be saying just about anything. A fog of confusion has come down.

    It is much the same with the word "justice".

    If a person says "I want justice" it is clear what is being said "I want what is mine - my money back, and punishment for someone who attacked me..." Justice (in criminal and civil law) being about PROPERTY RIGHTS (to one's own body - and to ones possessions).

    But if someone says "I want SOCIAL justice" - who knows what, specifically, he is asking for.

    On the point on coins.

    It is true that silver stopped being used in both American and British coins in the early 1960s.

    I suspect that (because of the general inflation of the money supply) the silver in the coin was starting to be worth more than the currency value (in terms of Dollars or Pounds) of the coins.

    Of course an alternative policy would have been to STOP INFLATING THE MONEY SUPPLY (so that the part silver coins would not have been worth more than the currency value of the coin) - but govenrments do not like to stop inflating the money supply.

    Whether it is Roman Emperors (and so many other tyrants) debasing the coinage, or (far worse) modern governments with their printing press, and credit ledgers.

    Of course even with a "base metal" coinage hyper inflation would not be possible.

    This is because even a steel Dollar coin takes resources to produce. There could be lots of inflation (lots of steel Dollar coins - one coin, of a certain size and weight of steel, being a Dollar), but not hyper inflation.

    However, if a "Dollar" is just a bit of paper, or (even worse) just an entry in a computer ledger - then hyper inflation is only too possible.

    • avatar RickDiMare says:

      Paul, agreed.

      Although base metal coinage is not my preference, it does do the job; it is Constitutional Treasury-Direct money under Article 1, Section 8, Clause 5 that we have a right to demand; it is U.S. money that discharges debt; and it does prevent hyper-inflation.

      Not bad for a lowly "base metal."

  27. avatar Paul Marks says:

    Martin has just written a reply to me - I can not see it on the screen in front of me (so I will have to reply from memory).

    Yes Martin a title deed is a title deed to real property - that proves MY point, it DISPROVES yours.

    If a Dollar is a "title deed" then WHAT IS IT A TITLE DEED TO? If it is a title deed to gold then SHOW ME THE GOLD. If it is title deed to something else - then SHOW ME that specific bit of some other commodity.

    Please do not reply (like the Jacobins in the French Revolution - who NONE of the Founders wished to follow in economic policy) about how the paper money is a title deed to the "full faith and credit of France" or "the productive energies of the French people" - or other such meaningless waffle.

    When pressed the French Revolutionaries claimed their paper money was a "title deed" (to use your language) to LAND (land they had stolen from the Church and from private individuals they did not like - for various reasons).

    The natural statement then is - "show me the specific piece of land this piece of paper money is a title deed to".

    The French Revolutionaries replied to this by executing anyone who asked this question (or anything like it).

    "I am not a totalitarian".

    I NEVER SAID YOU WERE - unless your real name is "Cass Sustein" (and I think it is likely that he has other things to do rather than hang around here).

    The American reply to worthless paper money (the "not worth a Continental") was to get rid of it - and go back to gold and silver coins (with, yes Rick, copper coins also being used).

    That was one of the principle reasons the Constitution was written in the first place - because the existing (Continental dependent) government was going BANKRUPT - and its currency (legal tender laws or no legal tender laws) was being rejected by everyone.

    However, your position is acutally WQRSE than that of the Continental Congress or the Jacobins in France.

    Your position is that the Dollar is not a specific amount of gold or silver that the government must actually have (remember "Dollar Bills" only came, Civil War aside, with the Federal Reserve) and it is NOT even a bit of paper.

    No - to you a "Dollar" is not even a piece of paper, it is just a "record", a "title deed".

    A "record" of NOTHING, a "title deed" to NOTHING.

    Will you PLEASE look at what is happening in Italy right now?

    Do you really think that Cass Sustein (and so on) are not planning similar sorts of actions in the United States next year (as an "Emergency" action - which "we did not plan this in advance - this Emergency took us totally by surprise....").

    WAKE UP Martin - please WAKE UP.

    Post Script....

    As should not need saying (but, sadly, does) what is a nonsense for government to do is also a nonsense for private banks to do.

    Just as a government that produces bits of paper and declares them "title deeds" AND THEN CAN NOT PRODUCE THE STUFF THEY ARE SUPPOSED TO BE A TITLE DEED TO, is engaged in sillyness (at best), so a private bank can not produce "something for nothing" either.

    For every Dollar (or whatever) a bank lends out someone should have SAVED a Dollar.

    Lending ("investment" - or lending for more consumption) must be from REAL SAVINGS - i.e. part of someone's income they have chosen to NOT consume.

    A bank can not create something from nothing (not without terrible consequences - i.e. a boom-bust event) no more than a government can.

    Otherwise we could all live in fairy castles in the air.

    Newsflash - WE CAN NOT.

    Efforts to make lending bigger than real savings FAIL - they lead to a credit bubble "boom" followed by a "bust". And the bigger the "boom" (the more that lending is greater than REAL SAVINGS) the bigger the "bust".

    Sorrry but there is no quick fix - no way out of "thrift, hard work and SELF DENIAL [REAL SAVING]" if you want real economic growth - not just a phony "boom" followed by a "bust".

    At least when banks play these stupid games they do not have the power to create totalitarianism - the game "just" collapses (as "booms" before 1913 always did).

    However, when the GOVERNMENT stands behind these "credit expansion" or "low interes rate - cheap money" games, the temptation of totalitarianism is always there.

    Forbidding large cash transactions, forbidding taking large sums of cash out of the country, freezing bank accounts (and on and on). Price controls - and, again, on and on.

    The full preperations for totalitarianism.

    Think it can not happen?

    If so - you are mistaken.

    • avatar Martin Brock says:

      Yes Martin a title deed is a title deed to real property - that proves MY point, it DISPROVES yours.

      I don't know what your point is exactly, but you don't disprove any point of mine.

      A title to property records the title holder's claim to a specific item of property, like a specific parcel of land.

      A promissory note for an ounce of gold does not record the holder's claim to a specific ounce of gold. It records a claim to any ounce of gold than a promiser can obtain to satisfy the claim.

      If a Dollar is a "title deed" then WHAT IS IT A TITLE DEED TO?

      I never assert that a dollar is a title deed. You only confuse yourself here.

      If it is a title deed to gold then SHOW ME THE GOLD.

      If a banker issues promissory notes for gold to the seller of a house, to extend credit to a buyer, the notes represent the value of the house, not the value of gold. The notes promise gold, because the house has a market value in gold. The banker holds the title to the house, so the banker can the title for gold if need be to satisfy the notes' promise of gold.

      If it is title deed to something else - then SHOW ME that specific bit of some other commodity.

      It is not a title deed to something else. It is a note promising gold. It's a simple idea. I don't know why you refuse to comprehend it.

      My position is that a dollar is not a specific amount of gold, because a dollar is not a specific amount of gold as a matter of fact. A U.S. dollar has never been a specific amount of gold in all of U.S. history.

      Under the gold standard, a dollar promises anything with the same market value as a specified quantity of gold. The promise refers to the current market value of gold at the time that the promise is enforced, rather than the time that the promise is made. That's why the note is a "currency".

      A dollar does not now promise a specific amount of gold either, and I don't want the state now, suddenly, retroactively and without the consent of individuals holding, owing or owed dollars to convert dollars into notes promising gold.

      Historically, dollars were silver coins and dollar bills promised silver. U.S. dollars effectively became promises of gold exclusively only in 1874, only four decades before the creation of the Fed.

      I am not defending fiat money here. I am opposing a forcible imposition. I prefer that people abandon the fiat dollar in favor of other money, but I oppose the state imposing notes promising gold as an alternative.

    • avatar Martin Brock says:

      Lending ("investment" - or lending for more consumption) must be from REAL SAVINGS - i.e. part of someone's income they have chosen to NOT consume.

      When a bank issues notes promising 100 ounces of gold to the seller of a house in exchange for title to the house and simultaneously accepts a buyer's promise to deliver 100 ounces of gold plus interest in the future, the real investor is the home seller (who then deposits his banknotes in the bank).

      The real asset that home seller invests is the house. The seller does not consume the house himself, because he invests it in the buyer instead. This investment is risky because it is a real investment.

      By contrast, depositing gold in a bank vault is not a real investment.

  28. avatar Paul Marks says:

    Martin - no one is suggesting a "forcible imposition". If you wished to use paper Dollars (NOT gold) to pay your debts (if you have any) you would still be able to do so. The person you paid would simply be able to take the paper Dollars to the government and get a little (very little actually) gold for them. These (NOT all paper Dollars) paper Dollars (that had been paid it to the government for the amount of gold they represented) would then be destroyed - as the government gold they represented had been paid out.

    "Dollars are not even bits of paper" - see my previous comment.

    "A Dollar is not a title deed to gold it is...." - actually it is presently nothing to do with gold (as you know).

    "A Dollar used to b a NOTE PROMISING GOLD it is a SIMPLE idea. I don't kmow why you refuse to comprehend it".

    Actually I comprhend it perfectly well (you do not) and it is a B.S. idea (it really is).

    Before 1913 a "Dollar" was actually a gold coin (of a certain weight and fineness) - back in the day (when the word "Dollar" was first used) a "Dollar" was actually a silver coin (minted by the Hapsburg monarchy - but used in all 13 colonies) of a certain weight and fineness.

    Indeed up till 1933 a "Dollar" was a certain weight (and purity) of gold - indeed (for overseas governments although NOT for private citizens) it continued to be so till 1971.

    "No you do not understand a Dollar was a PROMISE".

    No YOU do not understand - it was defined IN LAW as a certain amount of gold of a certain weight and purity.

    Of course the Federal Reserve system issued lots of "Dollars" for which it had no gold.

    And Ben Strong (of the New York Fed) encourage the banks to issue (in credit) TEN TIMES more loans than they even had in paper Dollars.

    So the banks went from lending out twice or three times what they had in gold Dollars before 1913 (even that system was hopeless - with J.P. Morgan basically haveing a nervious breakdown trying to keep the scam going) to a system where they lent out more than ten times even the amount of paper Dollars by 1929.

    This is NOT some clever "promise" system Martin.

    This is FRAUD - MASSIVE FRAUD.

    Of course it ends in a bust - it can not end any other way.

    Yet you think this is some clever "promise" system.

    I repeat my previous request to you.

    WAKE UP.

    You can only HONESTLY lend out money YOU ACTUALLY HAVE.

    Lending out more "money" than there is in REAL SAVINGS creates a boom-BUST.

    There is no clever way to prosperity.

    If gold is the money and you have 1000 ounces of gold then.....

    You can only issue 1000 ounces of gold notes.

    NOT 1001.

    What you call a "promise" is, in fact, a SCAM.

    It was why Sir Robert Peel (in the British case) passed the 1844 Banking Act (forbidding most banks from issuing notes for which they did not have the gold).

    The great error of Sir Robert Peel was that he did not understand (and the "Currency School" in general did not fully understand) two things.

    Firstly that banks can issue credit (without haveing REAL SAVINGS) without issuing "bank notes" (there are all sorts of other cons banks can, and do, play).

    And also that the heart of the boom-bust problem he was trying to deal with was the BANK OF ENGLAND itself.

    True various Governors of the Bank of England might have resisted Walter Bagehot style demands that they bail out private banks.

    But the very EXISTANCE of the Bank of England distorted the system.

    Just as the "National Banking Acts" distorted the system in the United States - indeed led to the unstable system that J.P. Morgan tried to sustain (although it was nothing like as bad as the system that exists now).

    Of course even before the Civil War American banks (in various States) were unstable - that is why there were "busts".

    They kept trying to find clever ways to lend out "money" that no one had really saved.

    That is the heart of the problem.

    Money is NOT a promise.

    It is not that "I do not comprehend it" it is that it is WRONG.

    Money can not be a "promise" - it must be a thing, it can originate in no other way.

    Read Carl Menger's "Principles of Political Economy" (there are some good English translations now).

    Then come back to me.

    Do not come back to me till you have.

    "Promise" is no different than Bernie Madoff.

    He "promised" the Moon and the Stars.

    What you "promise" is not important (in terms of provding a form of money) it is what you have actually GOT (what actually EXISTS) that count.

    If you have 100 ounces of gold you can isse notes representing that 100 ounces.

    If you have 100 ounces of copper you can issue notes representing that 100 ounces.

    And so on.

    NOT 101 (or 1000 ounces).

    A "promise" in this context, is just a SCAM, a CON.

    It is both dishonest AND it leads to terrible economic results - the phony "boom" and then the BUST.

    Your basic idea (the idea of the "promise" system) is that you can have more than 100 Dollars worth of loans from a 100 Dollars of real saving.

    And YOU CAN NOT - NOT WITHOUT TERRIBLE CONSEQUENCES.

    Every Dollar loaned must be from a Dollar (a real Dollar - not a "promise") that has been saved - i.e. that a person (a real person) has decided NOT to consume (no matter that he SWEATED BLOOD TO EARN IT).

    You can not have REAL economic development without SACRIFICE without SELF DENIAL.

    It is a very "simple" point, I am astonished you do not "comprehend" it.

    "Promise" money (with no actual stuff to back the promise) is a scam - a fairy castle in the air.

    So go live in your fairy castle.

    Step off a tall cliff - and step into the fairy castle that you "promise" me is there.

    After all physical EXISTANCE does not matter (so you tell me) only your "promise" does.

    • avatar Martin Brock says:

      Martin - no one is suggesting a "forcible imposition".

      The post explicitly suggests taxes payable in gold, so yes, someone is suggesting a forcible imposition, even if you are not.

      Before 1913 a "Dollar" was actually a gold coin (of a certain weight and fineness) ...

      No. It wasn't. Gold had a price in dollars fixed by statute. The Federal mint coined gold, and its coins carried the statutory price tag. Before 1873, silver also had a statutory price, but the Federal mint then ceased coining silver and stamping the coins with a statutory price.

      In fact, after the American Revolution, a "dollar" was a silver coin. The statutory price of gold in the U.S. dollar was based upon the market value of gold in silver dollars at the time of the first U.S. coinage act. Anyone bothering to learn the history will discover the truth of this statement.

      A bimetallic standard fixing the price of gold in silver (and vice versa) was never a great idea, but that's what we had until 1873 when creditors preferring gold as an exclusive legal tender captured the political process and effectively excluded silver. The exclusive gold standard was a political development, not a market development. [I oppose any exclusive legal tender. I want markets free to choose among competing standards of value for extending credit.]

      Read Carl Menger's "Principles of Political Economy" (there are some good English translations now).

      I haven't read Menger's book, and I'm back anyway, and you'll go on replying to me. Menger's chapter on Money doesn't discuss credit or bills of credit and promissory notes, but people do use these notes as money as a matter of historical fact.

      "Promise" is no different than Bernie Madoff.

      No. My promise differs very much from Bernie Madoff's promise, and I suppose your promise also differs. Conflating all of these promises is incredible.

      In a free credit market, without a state socializing losses by exchanging promissory notes for entitlements to tax revenue payable in gold, I would care about the difference, and I would police the banknotes that I accept as money accordingly, and so would you. Our policing would ensure that Madoff's promises do not circulate widely. That is free banking.

      Money is NOT a promise.

      Money is anything that people use as a medium of indirect exchange in lieu of direct barter. People routinely use bills of credit as a medium of exchange as a matter of fact. People do not use gold coins as a medium of exchange similarly and never have. Gold coins have always been used only very rarely as a medium of exchange. In the early U.S., when paper bills were also less common, copper coins were far more common than gold, and copper is not one of the legal tenders permitted the states.

      If you have 100 ounces of gold you can isse notes representing that 100 ounces.

      If you have 100 ounces of copper you can issue notes representing that 100 ounces.

      If you want to follow these rules yourself, that's fine with me, but as a matter of historical fact, gold, silver and copper all had a statutory price in U.S. dollars, and the U.S. mint stamped this price on coins made of these metals, and banks issued notes promising dollars.

    • avatar Martin Brock says:

      ... and banks issued notes promising dollars even though they didn't have corresponding gold or silver of even copper in their bank vaults but held titles to other valuable property, like real estate, instead, and people used their notes as money as a matter of historical fact. People like you were free not to use these notes as money, but since most other people did, people like you found fewer opportunities to trade.

  29. avatar Paul Marks says:

    If a Dollar is defined as gold of a certain weight and purity then it must either be present in the coin called "a Dollar" or be present in the vaults of the institution (private or government) that issues a note called a "Dollar".

    I remind you that before 1913 Dollar "notes" were not about. And even in Britain (which had a Bank of England) most people had never even seen a "White Fiver" up to 1914 - they might have seen a Sovereign (a one Pound coin), but not a White Fiver.

    Even up to the early 1960s (as Hayek points out) a silver sixpence might be given in change on a bus (and silver coins were still in use in the United States). Of course ORIGINALLY "a Pound" was a measure of silver (as a Dollar was) - in the 19th century things slipped around.

    So your claims that people did not use gold and silver coins as a medium of exchange are simply FALSE Martin. Nor was it always a government thing - after all a "Dollar" was oringially a Hapsburg coin (not an American one), and there were also PRIVATE mints in the West of the United States till the Congress banned them (for no good reason) in the 1850s.

    I will go further and state that I believe that you KNOW your claims are false. But repeat them anyway.

    Just as you repeat the stuff about "bymetallism" even though you know perfectly well the problem is FIXED EXCHANGE RATES.

    Even if you did not know that yourself - I have explained the matter to you (several times). Choice in currency is NOT "bymetallism" - bymetallism is about FIXED EXCHANGE RATES.

    You mention "promise".

    Obviously a government (or a private issurer) must actually have the stuff they are "promising" - otherwise their notes are a FRAUD.

    You also mention real estate.

    Well I will ask the question that critics of the French Revolutionary money asked.

    "If this note is supposed to represent land - HOW MUCH LAND, and SHOW ME THE LAND THAT THIS PARTICULAR NOTE REPRESENTS".

    Of course the Jacobins responded to such questions by executing anyone who asked them.

    I trust you would not try that.

    However, mass murder did not work.

    Hyperinflation happened anyway - in spite of all the price controls and the executions for increasing prices.

    Notes based on "promises" are not a good idea - unless the government (or whoever is issuing the notes) actually has the stuff they are promising.

    As for banking......

    If a banker (or anyone else) says "I have X amount of money to lend" then they must (if honest) be able to SHOW THIS MONEY.

    Presently this is NOT gold (or real estate) it is Federal Reserve notes (and government coins)

    As, contrary to you, a "Dollar" is presently a Federal Reserve note (totally UNCONSTITUTIONAL of course - but let us leave that aside) or a government (base metal) coin.

    If a banker (or any other person) says "I have X amount of money to lend out" and they do NOT have the notes and coins - then they are NOT honest money lenders, they are FRAUDSTERS (whatever the technicalities of the statutes may say).

    Now are you saying the bankers actually have the notes and coins (the MONEY) their loans supposedly represent?

    Could they SHOW THIS MONEY?

    Or is there a vast credit bubble - with each actual Federal Reserve note or government (base metal) coin the bankers have being used (via various complex scams) to supposedly back some ten Dollars (or more) in loans.

    This is not really "fractional reserve banking" - this is not taking a "fraction" (say nine tenths) of the notes and coins saved by people and enterprises and lending them out.

    This is lending out MORE money tnan was ever really saved - sometimes ten or twelve times more (back in the days of J.P. Morgan he used to wake up in a cold sweat - and he was only playing a three for one scam [often only two for one], not a ten for one scam).

    This is not a "promise" - not a real one, because the people involved (such as Jamie Dimon head of J.P. Morgan Chase) KNOW they have not got the money to cover their loans, they KNOW IT.

    What is a promise when the people who make the promises KNOW they can possibly honor the promises?

    Such a "promise" is (to the nonlawyer at least) a FRAUD.

    What the Federal Reserve system has done is allow such credit bubbles to be VASTLY BIGGER than they used to be.

    Walter Bagehot in Britain or J.P. Morgan in the United States (in spite of all their faults) would not support the current sytem - they would scream the house down over it (indeed in the case of Morgan there would be violence - he would smash people's heads against walls and so on, if he could see what the bank that carries his name does every day).

    "But Paul I would be different - I would honor my promises".

    Trouble with that Martin is that it is PHYSICALLY IMPOSSIBLE.

    Unfortunately for you (and for the rest of us) the universe is OBJECTIVE.

    Just because you want to do something does NOT mean you can do it.

    And produce "cheap money" (i.e. lower interest rates) WITHOUT CREATING A BUBBLE (via all the above scams) is NOT POSSIBLE.

    Your true opponent is not me.

    If I was true opponent your cause of action would be simple - just put a bullet in the back of my head and I would trouble you no more.

    Your true oppenent is REALITY - and you can not do anything about that.

    No "cheap money" - no "investment" without self denial (i.e. not consuming the income you invest).

    Sorry the scam does not work - it just produces a phony "promise" boom and then a BUST.

  30. avatar Paul Marks says:

    By the way.....

    When Jamie Dimon (and all the rest - Goldman Sachs, Bank of America, Citigroups and....) get into trouble they expect government aid (freshly created money - money created from NOTHING like the 485 billion Euro Christmas present the European Central Bank gave the banks a few weeks ago).

    This goes back to Walter Bagehot and so on (then OPPOSED by the Governor of the Bank of England) - but the scam started off, relatively, small.

    Just playing at the margin - and when things went wrong (as they inveitably did - as every credit money boom must produce a bust) the damands they made on the Bank of England were small - just a bit of cheating at the margin "to save not just us - but the economy" (sound familar?).

    But it never stops there - it gets worse and worse. Till one ends up with the bad-joke "financial system" we all have now.

    The "paying back" is a nonsense also - as the banks (in various ways) lend the money the Federal Reserve "lends" them back to a (different branch) of the government - at a higher interest rate.

    So the taxpaypers end up "paying themselves back" (accept.....)

    Nor does the scam give any REAL benefit even if it says small.

    As even a small credit money expansion must end in a (small) credit money BUST.

    The overall economy is WORSE (not better) than it otherwise would have been - as the messing up of the capital structure is NOT a zero sum game it is a negative sum game, and it benifits the wealthy (and politically connected) at the expense of the poor (and unconnected).

    Richard Cantillon knew that back in the 1700s.

    How did Cantillon know?

    BECAUSE HE PLAYED THE GAME HIMSELF Martin.

    Ever heard of John Law? (by the way - never trust an economist whose first name is "John" - John Hales, John Law, John Keynes, J.K. Galbraith..... just kidding).

    Well Richard was his partner - and (unlike John) he got away (although he may have had a bad end back in Britain - but perhaps he faked his own death, hard to say).

    Anyways......

    People like Richard Cantillon know it is NOT POSSIBLE to honor the promises.

    The real estate (or whatever) that is their notes-loans supposedly represent is not in their possession.

    It is all a vast SCAM.

    And it always was a scam.

    The trick is to have an "exit" before the general public work it out (and arrive with a rope).

    However, these days (thanks to "arguments" like yours Martin) one does not even need a get-a-way plan.

    As one can stand there (with a straight face) and say....

    "This is not a fraud - this is a system based upon promise notes, and one does not need to actually have the stuff one is promising for the following reasons....." (que lots of mathematics as well as verbal dodges).

    Of course none of that would work - without the GOVERNMENT standing behind it (i.e. without a lot of armed men, to stop anyone using a rope and nearby tree).

    Why do you think that many people in the finance industry mostly give money to DEMOCRATS Martin?

    And when they do give to Republicans it tends to be to RINOs.

    Why would they do that?

    Surely as "big businessmen" they would favour lower taxes and less government spending.

    Unless (perish the thought) that the game they are in is not a real business at all - but is a vast scam and they are actually paying PROTECTION MONEY, to the likes of Barney Frank, Chris Dodd, Barack Obama (and so on).

    I repeat I have NOTHING against honest money lending - at interest (so called "usury") - go ahead do that as much as you like.

    Either your own money - or the money entrusted to you by clients.

    100% of it - if you want to (and they agree).

    No problem with any of that - make yourself a zillionaire.

    Good luck and God's blessing be upon you.

    AS LONG AS YOU ACTUALLY HAVE THE MONEY YOU ARE LENDING OUT.

    But if it is really a "promise" (i.e. magic Pixie dust, mixed with Moonbeams) - then there is a problem.

  31. avatar Carlos Novais says:

    About:"as George Selgin commented in a post some time ago, there have been no historical cases in which 100% gold reserve banking has dominated in competition with fractional reserve banking."

    This is the important discussion: would this be true if the property title of 100% RB and FRB notes were perceived as different and not fungible? Is it not the case that the secrecy and the lack of understanding of fractional reserve (a claim to physical gold) banking at the time (and even today) created the conditions for the fractional reserve banks to be a sort bad money driving good money away just because the less quality money (a claim to gold) is accepted as good as 100% banking (a property tittle in physical gold)?

    If in the modern world, law should protect the disclosing of the contract: 100% RB as a property title in gold, and fractional reserve banking as a "promise of payment". These 2 contracts are not fungible.

    • avatar Martin Brock says:

      A bank issuing (paper) notes promising gold to extend credit should explain the practice to people accepting the notes. These days, the notes could contain a web address where you'd find the explanation. Most money is electronic these days anyway.

      Needless to say, many people would not read these details. People accept FRNs without understanding the Federal Reserve system. People accept art objects, even gold coins, without knowing the provenance. Watch an episode of Antiques Roadshow. Government cannot solve this problem. If you want confidence in your holdings, you will always bear the burden of your own due diligence.

      At $1600/ounce, why would you want to carry around a title to property in gold stored at a bank anyway? Does transferring the title require a signature? If so, you essentially carry a check rather than money. If not, why not carry the gold itself?

      • avatar Carlos Novais says:

        We already have Goldmoney as 100% reserve bank on gold and silver.

        Why would I exchange a value in gold in Goldmoney for the same nominal amount in a fractional reserve service on gold at par value?

        Why would someone selling something would accept a "promise of payment" (FRB note) at par value with a 100% Reserve Note?

        First thing to notice is that a 100% reserve Bank cannot accept a FRB note or credit this amount in a 100% reserve current account.

        Of course, the reverse is true. A FRB is more than happy to receive a 100% reserve note and credit in a client FR current account.

        In a modern environment FRB titles and 100% reserve titles would not be fungible and the market would sort a discount.

        In my opinion, in this case, good money would drive bad money away and FRB would become minimal.

        The true money would allways be physicall and notes and current accounts with 0% credit risk (or should we say, 0% bank run risk).

        • avatar Martin Brock says:

          Why would I exchange a value in gold in Goldmoney for the same nominal amount in a fractional reserve service on gold at par value?

          I don't know anything about Goldmoney, but a banknote can pay interest while you must pay someone to secure gold for you. You hold the banknote for this reason. The interest on a banknote reflects the rental value of goods, like mortgaged houses, held by the bank as collateral while extending credit. Gold in a bank vault has no similar value.

          Why would someone selling something would accept a "promise of payment" (FRB note) at par value with a 100% Reserve Note?

          Because of the potential to earn interest. Of course, Federal Reserve Notes are disgraceful. I'm not defending a central bank extending endless credit to a state or an entrenched system of "too big to fail" banks here.

          In a modern environment FRB titles and 100% reserve titles would not be fungible and the market would sort a discount.

          Yes. Markets discount inflationary expectations.

          In my opinion, in this case, good money would drive bad money away and FRB would become minimal.

          Gresham's law asserts the opposite. Good money leaves circulation (and thus ceases to be money). That's the problem with it.

          The true money would allways be physicall and notes and current accounts with 0% credit risk (or should we say, 0% bank run risk).

          True money is anything that people accept only to exchange it later for something else. Something that depreciates slowly in value is ideal for this purpose, because I expect to exchange it for something else before it depreciates very much anyway. If something appreciates in value, people are more inclined to hold onto it rather than exchanging it for something else, but if people typically hold something, it is not money. It's a security or an inflation hedge or something, but it's not money.

          • avatar Carlos Novais says:

            Please check it on http://www.goldmoney.com. You are able to have a current account of 100% reserve gold (or Silver).

            "Because of the potential to earn interest."

            Not a good argument. The interest is paid in equally FRB note, the interest itself has credit risk. But someone lending physical gold (or an equivalent 100% RB note or current account) would demand interest paid in physical gold (or equivalent).

            "Yes. Markets discount inflationary expectations."

            You are missing the point. It´s not inflationary risk, FRB is "money" with credit risk (the risk of not being able to deliver physical on demand ). 100% RB per definition has no credit risk.

            "Gresham's law asserts the opposite. Good money leaves circulation (and thus ceases to be money). That's the problem with it."

            Gresham's law asserts that if law distorts the value of money imposing bad money at par with good money, the good money will disappear. But my point is this: if law demands that the two contracts (fractional reserve as a “promise of payment of gold” and 100% RB as good as physical gold) are different and not fungible contracts (so, no fungible current accounts), the credit risk money (FRB) must have a discount to money (100% RB). In this condition, good money (no credit risk money) would drive bad money (credit risk money) away.

            The historic argument of George Selgin does not take into account that in the modern world and full disclosure, markets and rules of accounting would differentiate Fractional Reserves tittle from 100% titles.

          • avatar Martin Brock says:

            The interest is paid in equally FRB note, the interest itself has credit risk.

            Yes, interest income is risky. Income potential still exists. Gold in a bank vault offers no similar potential. Please acknowledge reality.

            But someone lending physical gold (or an equivalent 100% RB note or current account) would demand interest paid in physical gold (or equivalent).

            Lending physical gold is also risky.

            When a bank issues promissory notes backed by collateral, the bank holds the title to the collateral. Unless a house burns down, it's there earning rental income, and loss of a house to fire or a similar disaster is a reasonably insurable risk. Theft of gold by someone borrowing gold is arguably riskier and less insurable.

            And if you lend gold as you imagine, you don't avoid fractional reserves. You deposit a hundred ounces of gold in a bank and receive a deposit receipt. The bank lends the gold to me to buy a house. I buy the house. The seller deposits his gold in a bank, and the bank lends it again and so on. Dozens of different people end up with deposit receipts entitling them to the same gold. Right? Please acknowledge this reality.

            100% RB per definition has no credit risk.

            It has no credit risk before you lend it. Duh. If you don't want credit risk, you don't need a bank extending credit. You need a safe deposit box. You can have one of those now, but you must pay for the service. You avoid credit risk, but you don't avoid the cost of securing the gold.

            Gresham's law asserts that if law distorts the value of money imposing bad money at par with good money, the good money will disappear.

            You simply ignore my point. People hold appreciating assets and sell depreciating assets. Right? Do they or don't they? Money by definition is something that buy only to turn around and sell it for something else.

            ... if law demands that the two contracts are different ...

            Markets can distinguish the contracts, but you simply ignore a pertinent difference. The banknote backed by collateral with a rental value can pay interest, and the gold in a bank vault cannot. If the gold is not in the bank vault, because a bank has lent it out, then depositing it in the bank does expose the depositor to credit risk.

  32. avatar Carlos Novais says:

    "The banknote backed by collateral with a rental value can pay interest, and the gold in a bank vault cannot. If the gold is not in the bank vault, because a bank has lent it out, then depositing it in the bank does expose the depositor to credit risk."

    I think you are arguing a case against money as a pure asset-mean-of-exchange without any liabillity. But that is a constradiction.

    Money is the thing people need to exchange for other goods. Lending money to earn an interest is another action. Saying that money is useless because it earns no interest is a contradiction. Interest comes from the credit risk of lending something without credit risk because is the thing itself.

    As demand for money is not the same as demand for credit, demand for gaining an interest giving credit to a bank is not the same as demand for possessing money.

    The reason why there is something like a Keynesian "liquidity trap" is because today money is credit money. When a bubble burst people begin to make sure that the credit money (because of fractional reserve) is not at risk.

    Today, only notes and coins and reserves in the central bank is actually money in the true sense of an asset without credit risk.

    In the FRB debate, what we must ask, is that there is a demand for money as a free credit risk asset because it’s like owning the physical thing.

    And those property titles are not the same as fractional reserve notes or current accounts. Only a bad law could make it the same in which case i agree, bad money will drive good money away and so George Selgin would be right. But with non-homogeneous non-fungible titles (one is a "promise of payment" with credit risk, the other is the thing itself) prices tend to be different… in terms of the underlying thing.

    "And if you lend gold as you imagine, you don't avoid fractional reserves. You deposit a hundred ounces of gold in a bank and receive a deposit receipt. The bank lends the gold to me to buy a house. I buy the house. The seller deposits his gold in a bank, and the bank lends it again and so on. Dozens of different people end up with deposit receipts entitling them to the same gold. Right? Please acknowledge this reality."

    No. in order for the bank to lend you, someone had to lend it to the Bank. The seller of the house will receive the money and could lend it to the bank again or not. If it lends it to the bank will cease to have it in the demand deposit (100% reserve banking).

    • avatar Martin Brock says:

      I think you are arguing a case against money as a pure asset-mean-of-exchange without any liabillity. But that is a contradiction.

      Regardless of what you think, I have never argued against money without liability; however, money is whatever people choose to use as a medium of exchange. If people choose to use risky or depreciating banknotes as a medium of exchange, then these banknotes are money. If you want to use gold coins as money, that's your business, but your preference for this medium of exchange does not imply that others using banknotes as a medium of exchange are not using money.

      Saying that money is useless because it earns no interest is a contradiction.

      I have never said that money is useless if it earns no interest. You're constructing a straw man simply to assert these contradictions.

      Interest comes from the credit risk of lending something without credit risk because is the thing itself.

      That's true, but nothing prevents me from using banknotes with a value subject to credit risk as money. I do so every day, and so do you.

      As demand for money is not the same as demand for credit, demand for gaining an interest giving credit to a bank is not the same as demand for possessing money.

      First, I don't want to possess money, not for long anyway. I accept money in trade only to exchange it for something else.

      When I deposit my money in a bank, I essentially exchange it for an interest in the bank's holdings. At this point, I don't really have money anymore. I have an interest in the bank's holdings. We speak of "money in the bank", but this nomenclature is misleading. Accepting your usage, if I really had money in the bank, I could expect no interest.

      You may use anything you like for money, but if I'm using banknotes and you refuse banknotes, we don't trade. If you insist on using gold and only gold as money, you find few opportunities to trade.

      Today, only notes and coins and reserves in the central bank is actually money in the true sense of an asset without credit risk.

      Money is not an asset without credit risk. Money is anything people use as a medium of exchange.

      http://www.merriam-webster.com/dictionary/money

      Where do you see anything about credit risk in this definition of "money"? If you don't like this dictionary, link another. Words mean what people commonly mean by them, and money is what people commonly use as a medium of exchange. That's all.

      Only a bad law could make it the same in which case i agree, ...

      I'm not discussing what politicians and attorneys say about money.

      ... bad money will drive good money away ...

      Gresham's Law has nothing to do with any statutory system. Bad money drives out "good money" because people hold the "good money" and thus do not exchange it for other things. They instead exchange the bad money for other things, and what people exchange for other things is "money" by definition. The "good money" that people start holding when the bad money appears is not money at all thereafter. It ceases to be money. See? It's not about any politician passing a law. It's about the fundamental logic of money.

      No. in order for the bank to lend you, someone had to lend it to the Bank. The seller of the house will receive the money and could lend it to the bank again or not. If it lends it to the bank will cease to have it in the demand deposit (100% reserve banking).

      The point is that you bear credit risk when you lend the gold to the bank expecting the bank to lend it to the buyer of the house. Your 100% reserve bank is a safe deposit box. You can have one of those now if you want one.

      • avatar Carlos Novais says:

        "Of course if one wants one's money to just stay in the vaults (litterally "on deposit" "

        "The "good money" that people start holding when the bad money appears is not money at all thereafter. It ceases to be money."

        It ceasesto be money because the law enforces that bad money equals the exchange value of good money, so of course I will use the bad money and keep the good money. This is the all point of Gresham's Law.

        "Money is not an asset without credit risk. Money is anything people use as a medium of exchange."

        There is much confusion in saying that liquid interest bearing notes (on gold) is money as gold itself because people accepts it as a medium of exchange. It could be the case that people use it but they are always entering in a credit relation and a market for discount such bills for money (gold) will appear.

        The point of my argument is that people should be able to use whatever they find useful as medium of exchange and in the case of Free Banking, Fractional Reserve Notes and 100% Reserve Notes, should be correctly labeled and the accounting must differentiate both. One is a promise of payment of an asset (gold) the other is the asset itself.

        • avatar Martin Brock says:

          Gresham's Law usually refers to currency debasement, but you're simply ignoring my point. If an asset appreciates in value, people hold it. If an asset depreciates in value, people sell it (if they don't consume it). Right? If you'll acknowledge the point, the conversation can progress.

          Suppose you have two goods, a gold coin and a banknote. The gold coin slowly appreciates in value, and the banknote slowly depreciates, but the current value of the two is the same.

          I have something you want, and you wish to trade either the gold or the banknote for what I have. I fully understand the difference between the gold and the banknote. I know that the gold is appreciating and the banknote is depreciating; however, I don't intend to hold either asset. I intend to exchange the asset I accept for something else almost immediately, so only the current value concerns me.

          Of course, if an asset depreciates too rapidly, I will not accept it in trade, but I'm not discussing this scenario.

          Under these circumstances, which asset do you offer me, the gold coin or the banknote? Which asset do you carry to market? Which asset circulates as money?

          No state forces anyone to accept anything at any rate of exchange in this scenario. You just don't carry your gold to market, and you do carry your banknote to market, and since the difference doesn't concern me, we trade. We trade, because only the current value of the banknote is significant in our trade.

          I'm not trying to be flippant here, but money is called "currency" for this reason. Currency is not a depreciating asset because of a government policy. It's a depreciating asset because we hold appreciating assets and sell depreciating assets. We accept depreciating assets (other than consumption goods) in trade if we expect not to hold them for very long.

          The point of my argument is that people should be able to use whatever they find useful as medium of exchange ...

          Right. My point is that people find depreciating assets more useful as a medium of exchange. Money is like a hot potato, because it is money. The idea that modest inflation "destroys savings" is mistaken, because people do not save money. People trade money. Money is what people trade by definition.

      • avatar Carlos Novais says:

        "The point is that you bear credit risk when you lend the gold to the bank expecting the bank to lend it to the buyer of the house. Your 100% reserve bank is a safe deposit box. You can have one of those now if you want one."

        No, the demand deposit and checking account is a credit relation to the bank. Demand deposits should have 100% reserves.

        If people wants to lend money to the bank to earn an interest, banks should have overnight time deposits account.

        • avatar Martin Brock says:

          You can deal with a bank holding 100% reserves for demand deposits if you like. I'm happy for my bank to hold a smaller reserve (of a standard of value like gold) even for demand deposits, as long as depositor demands are reasonably stable.

          Of course, I expect my bank's other assets to exceed the value of its liabilities, including its deposits. My bank may extend credit by issuing notes promising gold, but it holds <many assets other than gold.

          I don't expect my life insurance company always to have enough cash on hand to pay all policy holders if they all die on the same day. I don't need a life insurance company operating this way. Such a company is useless to me.

  33. avatar Paul Marks says:

    "A banknote backed by collateral with a rental value can pay interest".

    What on Earth is that supposed to mean?

    Carlos there has never been a paper money currency that was REALLY backed by land ("rental value").

    Money that was SUPPOSEDLY backed by land (such as the French Revolutionary notes) were not REALLY backed by land - it was all a CON, a SCAM, a SWINDLE (get the picture?).

    Ditto with John Law (almost a century before) and so on.

    "Gold in a bank vault can not pay interest".

    I never said it could.

    The banks could (however) LEND OUT the gold - or whatever else is being used as money (including bits of paper called "Federal Reserve Board Notes") and the BORROWER pays interest. The saver gets the money back when and IF the borrower pays up. Remember basic logic - two different parties can not have the same money in different places at the same time (if it is LENT OUT it is NOT IN THE VAULT till when and IF it is paid back).

    Of course if one wants one's money to just stay in the vaults (litterally "on deposit" - as it a Safe Deposit establishment) then one should NOT expect to be paid interest.

    Indeed one should pay the establishment for looking after the money.

    • avatar Carlos Novais says:

      Well, this should be the definition of a demand deposit / checking account - not a credit relation with the bank. So the bank will not be able to lend it. To be able to lend it, the client must agree to lend it to the bank at interest and with a date (time deposit). This is the 100% reserve requirement.

      FRB allows the bank to create "promises of payment" in order to lend it. My argument is that a "Promise of payment" is not the same property title as a 100% reserve note or demand deposit. They are not fungible and no 100% Reserve Bank will accept it.

      So, only in the case law or bad information or judgment will FRB money be fungible and in the end priced at par with 100% RB money.

      In these conditions, good money will drive bad money away.

      • avatar Martin Brock says:

        To be able to lend it, the client must agree to lend it to the bank at interest and with a date (time deposit). This is the 100% reserve requirement.

        If you want to deal with a financial institution this way, you're free to do so, but banks don't lend money lent to them fundamentally.

        I have a house. You want a house, but you don't have $150,000 lying around. I agree to mortgage the house to you. You promise me a hundred ounces of gold, plus interest, over 20 years. You make this promise in the form of 10,000 promissory notes each promising a hundredth of an ounce of gold plus interest. Any holder of one of these notes may claim the interest payment; therefore, the notes are valuable, and people will accept them in trade. Since people will accept the notes in trade, they become money.

        No one lends these notes to you before I accept them from you. You and I create the notes through our contractual agreement, and other people then make money of them by accepting them in trade. Every party to this arrangement is a free agent. No one is compelled to go along with it.

        A promissory note is also called a "bill of credit". A "dollar bill" is a bill of credit. Dollar bills are money because people use them as money and for no other reason.

    • avatar Martin Brock says:

      "A banknote backed by collateral with a rental value can pay interest".

      What on Earth is that supposed to mean?

      What it says. Money in the bank can earn interest only because the bank extends credit for the purchase of houses and the like. Houses and other real property have real value, because people make productive use of them and thus can pay their marginal value to the bank. We call the rent "interest on a mortgage", but this distinction makes no difference.

      Where else do you think "interest on money" comes from? The gold fairy?

  34. avatar Paul Marks says:

    My apologies for misunderstanding you Carlos.

    As for fractional reserve banking - one of the problems (as has often been stated) is what is meant by this term.

    If one means a "fraction" as an ordinary person would understand the word (for example - nine tenths of savings, or 90%) there is no boom-bust problem.

    However, what is normally meant by the term "fractional reserve banking" is that MORE (not a "fraction") is lent out than was ever really saved. Not (for example) nine tenths - but (say) ninety tenths (not 90% of what was saved but many hundreds of percent of what was really saved).

    Back in the days of J.P. Morgan a leading "National Banker" (as the term then was - after the National Banking Acts) would lend out two or three times MORE than had ever been really saved with him.

    This (of course) was very dangerious (and caused Morgan and other much loss of sleep - and so on). However, after the Foundation of the Federal Reserve system (which, supposedly, gave bankers a "lender of last resort" to get out of trouble) the game went from two to three times what had been saved to TEN to TWELVE times what had been saved (by 1929).

    The problem with the Federal Reserve (and all Central Banking) is not invents credit bubble finance and boom-busts - but that it MAGNFIES

    • avatar RickDiMare says:

      Paul, do you think it's possible that the entire phrase "fractional reserve banking" is misleading?

      In other words, maybe the central bank's power to dictate the bank's lending capacity through a fractional reserve ratio has nothing to do with the bank's actual "reserves" (if indeed a fully fiat paper or electronic money can even be called a reserve).

      Maybe the loan-origination bank is actually creating new money out of thin air, and so the central bank is establishing a fractional reserve ratio, not really based on a fraction of anything, but just as a way to control, limit or regulate how much funny money the bank is being allowed to inject into the monetary system.

  35. avatar Paul Marks says:

    but that it MAGNIFIES the problem - it takes a very serious problem, and turns it into a vastly more serious problem.

    Now Martin (like others) makes the point that that what he calls "fractional reserve banking" (really far MORE than a normal "fraction" of course, see above, as say "one hundred tenths" is not what most people think of when someone says the word "fraction")offers a better return - and "outcompetes" other forms of banking.

    This is TRUE.

    But, of course, only because a FRAUDSTER (and lending out MORE MONEY THAN YOU HAVE REALLY GOT is fraud - as an ordinary NONLAWYER would understand the word "fraud") will always offer a better return than an honest man can (till the scam collapses).

    To say that a fraudster "outcompetes" an honest person is like saying that thief "outcompetes" a person who works for a living - true IF fraud and theft are made "legal" (by government courts and government statutes).

    Where there were no special "bank holidays" and no special court judgements (for example saying that people who deposited gold can be paid back in paper - REGARDLESS OF WHAT THEIR CONTRACT SAYS) things would be rather different.

    However, bankers can also be DEFENDED.

    For example, the language used in this area is misleading - horribly so.

    Just as "fractional reserve banking" does NOT mean (in modern practice) what an ordinary person would think it means (see above), so a "deposit" is NOT really a deposit.

    As we have all agreed money that was really "deposited" (in the same way that farmer "deposites" corn and so on) could not pay interest.

    Only money that is LENT OUT can offer interest - when and IF the borrower pays up.

    So we should not say that a person "deposted money in a bank".

    We should say a person "INVESTED MONEY WITH A BANK FOR THEM TO LEND OUT".

    Obviously a person does NOT have money in a bank if it has been LENT OUT. The money can not be with two different parties in different places - AT THE SAME TIME (basic logic - but often overlooked).

    What the person is doing is INVESTING money with the bank - in the hopes that borrowers will pay the money back (with interest).

    Money that people want to stay in the bank - can not pay interest (as we all agree).

    Indeed a person should PAY THE BANK for looking after such money.

    To repeat....

    If one wishes to avoid boom-bust events (and as Richard Cantillon pointed out centures ago - such events are NOT good for the poor and of for real long term economic development) then one must avoid lending out more money than was ever really saved (no matter how clever the smoke-and-mirrors game is). There is no "short cut" or "quick fix" for real economic development - only thrift, hard work and self denial (Say's law is true - "expanding demand" is Fool's Gold).

    But such "expand demand" OR "expand credit" schemes are NOT always of the same size.

    If banks are just left to themselves such schemes are very unlikely indeed to reach a size where they can actually threaten to destroy civil society. Although there will be phony "booms" and then BUSTS.

    Only massive government intervention (for example the creation of a Central Bank - such as the Federal Resevrve) can cause these "cheap money", "low interest rate", "credit expansion", "get rich quick" schemes to reach that sort of size.

    By the way any scheme that offers lower interest rates for borrowers and higher interest rates for savers (investors) is obviously deeply weird.

    Although it is surprising how many otherwise intelligent people fall for such "Philosopher's Stone" or "Perpertual Motion Machine Accept It Speeds Up" schemes.

  36. avatar Paul Marks says:

    Yes Rick - I do think that the term "Fractional Reserve Banking" is misleading even if there is no Central Bank (for the reasons I have explained).

    But once there is a Central Bank then ALL BETS ARE OFF (all logic and reason go out of the window - totally).

    For example, look how much the Federal Reserve has increased the "Monetary Base" (by its defintion of that term) since 2007.

    No banker or group of ordinary bankers can expand the MONETARY BASE (they can only play credit bubble games with it once they have got it).

    Or look what the Bank of England has done over the last few years - and is still doing even as I type this.

    Or look at what the "conservative" European Central Bank did just a few weeks ago.

    As I have mentioned before - on top of all its recent money creation, it gave the banks a 485 billion Euro Christmas present.

    Sorry a three year "loan".

    With money it created from NOTHING - and at virually zero percent interest.

    See what I mean?

    Once there is a Central Bank (such as the Federal Reserve) in the mix - then off we go.

    To Hell in a handcart.

    And (of course) the future breakdown is now unavoidable (what has already been done has committed us to it).

    It is now "baked in the cake".

  37. avatar Paul Marks says:

    I should reply to something that Martin said.

    Houses have "real value" and gold does not - simply not true. Subjective theory of value understanding of which goes back centuries - but the modern form goes back to Carl Menger "Principles of Economics" 1871. I must STRESS that by a subjective theory of value Menger was NOT claiming that physical reality (that the universe) was subjective. Nor was he claiming that money could be (wisely) cut off from physical reality (quite the contrary).

    Not do people repay their mortgages by the "productive use" they make of their homes. Some people do run a business from their homes - but the vast majority of people do not. Rating mortgage backed securites "Triple A" because they are based on things that have "real value" (houses) is silly (to put the matter mildly).

    People can only repay a mortgage if they have a good job (or some other source of a good income), the failure to understand this basic point (i.e. the fallacy of the "affordable homes policy" - i.e. the government policy that the poor should buy houses) was one of the factors that led to the housing crises. See Thomas Sowell's "Housing: Boom and Bust" and (for the other factors leading to the general economic crises - i.e. the demented "cheap money" or "easy credit" policy) see Thomas Woods "Meltdown".

    As for money.....

    An example has occured to me.

    Under Rick's system money need not be gold or silver - but it must be physical coins (although they may be made of copper or steel).

    Under Martin's idea (at least so it appears) a "Dollar" is not a physical object at all - not even a bit of paper (a Federal Reserve Note).

    How would this play out in practice?

    The example that occured to me is the 485 billion Euro Christmas present (sorry "loans") that the European Central Bank gave to the bankers a few weeks ago (on top of all its other recent money creation).

    Now, before anyone says it, I know that the bankers will "spend some of the money on hookers and cocaine - but, sadly, just waste the rest". But my interest is (presently) in the practicalities of how this would have been done - under the different systems of Rick and Martin.

    Under Rick's system the European Union would have had to have minted 485 BILLION Euro coins (most likely out of steel - the least costly alternative) and physically transported them to the banks (via security vans and so on).

    Under Martin's system all that needs to be done is for the European Union people to bang a few keys on a computer keyboard.

    "And that is why my system is better" Martin might say.

    No Martin (if you choose to say that) - that is why your system is terrible, utterly terrible.

    You see it is a BAD THING for government to "expand the money supply" (whether to bail out the banks or to prop up some other crazy scheme - such as the "affordable housing policy") the fact that it would be impratical under Rick's system (because people just would not stand for the government minting 485 billion Euro coins and transporting them to the banks) is a PLUS not a MINUS.

    The very PHYSICAL fact of people SEEING 485 billion Euro coins being produced and transported as a Christmas present to the bankers(if that is even possible) would let the public know that such an "expansionary monetary policy" is INSANE - and it, therefore, would not happen.

    Whereas under the "money is not physical" idea - a few hits on a computer keyboard and the job is done.

    Indeed the "loans" were handed out to the banks in one day - and without most of the public even knowing what was happening.

    Now let us look at things without a Central Bank (or some such).

    A banker says "I have X amount of money to lend".

    Under Rick's system the banker should then be able to SHOW X amount of Dollar coins (that he has to lend out). OF COURSE there would still be credit cards and debit cards (ATM machines) - but there would still have to be PHYSICAL coins (somewhere) for all this.

    Under the "money is not physical" idea - the banker can basically say anything (he need have no connection to reality).

    But REALITY BITES BACK.

    Bankers can lend out money they never really had (money that no one ever really saved) - but this will lead to a phony "boom" and then a BUST.

    This is why "expanding demand" or "cheap money" or a "low interest rate policy" does not work - as the Classical Economists (the Say family, Bastiat and so on) explained.

    Of course as a classic "hard money" man - I would prefer money to be gold or silver (which was used depending on private contracts - and with no rigging "fixing" of exchange rates), I suspect that gold would become the main currency, but I do not know that for sure.

    However, under Rick's system (steel coins) there would still be a physical limit to what the govement could do - the steel itself and the act of making coins.

    Under the "money is not phyiscal" idea (i.e. credit bubble finance) there is no limit to what government (and the pet bankers) can do at all - other than total economic collapse.

    Which, I fear, is what is going to happen. Because every time the credit money bubble looks like it is going to collapse (i.e. go back down to something closer to the monetary base) the Central Bank (the Federal Reserve in the case of the United States) rushes in to "save the financial system" by pumping up the "monetary base" even more. Thus making the real problem (the distorted capital structure) WORSE AND WORSE.

    See such works as "Paper Money Collapse" (which should really be "Credit and Paper Money Collapse) by Detlev Schlichter.

    Now Rick could reply to Schlichter - "Under my system there would still be a physical limit on what government (and the bankers) could do - the steel coins. So my system DOES NOT NEED GOLD" (and they could argue).

    But the "money is not physical" people really have no argument at all. They are "away with the fairies" (no sexual smear intented).

    Again I repeat that money being physical does NOT mean no credit cards or ATM machines (and so on) - it just means that there is physical money behind these instruments (that they are directly linked, LIMITED, to physical reality).

    For example, if a person saves one tenth of an income of ten thousand Dollars and invests this money by giving it to a bank (to be lent out).

    ONLY one thousand Dollars (or less) can be lent out.

    One can lend out nine tenths of the income the person has saved (which, in this example, would be nine hundred Dollars), but not 100 tenths (which, in this case, would be ten thousand Dollars).

    OF COURSE one can play shell games and smoke-and-mirrors tricks to try and pretend that one thousand Dollars in savings can produce ten thousand Dollars of lending (i.e. lend out one hundred tenths of the money) - but such an action has CONSEQUENCES (the phony "boom" and the BUST).

    Government then has a CHOICE - it can let the bust run its cause (and the last time the American government did anything close to that was when Paul V. was at the Federal Reserve back in 1982) or it can expand the monetary base to "save the economy".

    This seems to "restore prosperity", but only by making the BASIC PROBLEM (the distortions) WORSE AND WORSE over time.

    Reality bites back.

    And the more one tries to put off or avoid reality - the worse the eventual consequences are.

    As we will all shortly see.

    • avatar RickDiMare says:

      Paul, I basically agree, but might add that, as was the case in Lincoln's day, under the Borrowing Clause the Treasury Department would always have power to expand the overall money supply in advance of expanding or re-valuing the coin supply.

      In other words, playing off your example about bailing out Europe, if the Treasury Department had been directly in charge of the big bailouts over past several years (instead of letting the Federal Reserve do it), then the Treasury would also have been able to take immediate action without issuing physical coin (though I suspect the Treasury would have allowed more corporations to fail or forced them to re-organize than the Federal Reserve did).

      The only difference is that when the Treasury does an extraordinary thing like a massive bailout, they'd have to change the "weights and measures" of the coinage at some reasonable time afterwards. So, for example, instead of a current coin stating "one dollar" on it, after the "specie resumption act" (in whatever form it takes) the same coin may state "two dollars" or "five dollars," etc.

      But, yes, the monetary system always bears a meaningful relationship to human labor--i.e., the production of a physical commodity--and the currency is not so "elastic" that it's produced by a few keystrokes and "away with the fairies."

      Also, yes, we would still have credit cards and ATM machines, which I think would largely be products offered by the free banks.

      Finally, I think you implied this, but whenever possible the coinage should be produced by laborers from the (European) country in which the coin is distributed. (The only role Congress would have in this circumstance is to establish the standard of weights and measures under the Coining Clause.)

  38. avatar Paul Marks says:

    There is a reason that conditions in "skid row" (in various cities) were as bad as they were - that was all the people there COULD AFFORD. They were not in these places for fun - the only other option (if cheap, and nasty, accomidation is destroyed) is THE STREET.

    Pull down skid row (as was done, for example, by "Radical Joe" in the English City of Birmingham - to make way for impressive public buildings in the late 19th century) and you do NOT improve the life of the poor (you just force them further away from their places of work).

    The "Federal Bulldozer" (Martin Anderson - 1965) with its destruction of slums and building of public housing projects, does NOT make things better than they otherwise would have been - it makes things WORSE than they otherwise would have been. The public housing projects (in France and Britain just as in the United States) are no-go-zones for jobs (and, therefore, for hope). They may make the poor "invisible" (by clearing them out of the centre of towns and cities) - but they also cut the poor off from any hope of NOT BEING POOR in future years.

    Conditions can improve (and do improve). - but only by the slow work of economic development over time.

    As for "promise notes" (or whatever) to help people buy houses that they can not afford - it depresses me that AFTER the housing crash (at least after stage one of the crash) people are still comming out with this stuff. "Montetary expansion" ("easy credit", "cheap money", "low interes rates" - call it what you will) is a BAD IDEA.

    Money to loan out must come from REAL SAVINGS (not "promise notes" - i.e. magic Pixie Dust mixed with Moonbeams).

    People loan out their savings to people who are likely to PAY THEM BACK (with interest).

    First there must be REAL SAVINGS (i.e. income that is NOT consumed - but is lent out).

    And it must be lent out to people who are likely to be willing and ABLE to PAY THE MONEY BACK.

    Of course the same money can not be with the savers and the borrowers at the same time - it MOVES from savers to borrowers. It only moves back when and IF the borrowers pay back the money. That is why a loan is NOT an asset (although bankers pretend that loans are "assets" and play games with these "assets"). You only make REAL money on a loan when and IF the borrower PAYS YOU BACK.

    It (the promise to repay from a borrower) is like a ticket from a bookie. This is only really an "asset" IF THE HORSE HAS WON THE RACE (i.e. if the borrower has paid back the loan). To treat the bit of paper as an asset (which one can raise a loan upon) BEFORE THE RACE HAS BEEN RUN, is unwise.

    As for treating the reciept from the bookie (i.e. the bit of paper he hands out as a reciept for the money you have betted with him - on the horse race) as "money" with which one can build a pyramid scheme "banking loan enterprise" upon....

    "Words fail me Conscript Fathers - I can find the words to fully explain the degree of folly, the threat, that this represents to the Senate and people of Rome" (or anyplace else).

    And interest rates should be determined by TIME PREFERENCE of savers and borrowers. Not by "monetary expansion" or other such folly.

    All of the above is really basic stuff - but utterly ignored by the government, the bankers (and some people here).

  39. avatar Paul Marks says:

    Rick.

    Yes sadly the Federal Reserve already subsdizes European banks (and has done for years - with its sweetheart loans).

    Yet another reason why the Fed should be abolished.

    • avatar RickDiMare says:

      Paul, this is a delayed reaction (I seem to be having more of them as I age), but I respectfully disagree.

      I think it would be much less disruptive to just let the Fed keep doing what it's doing. Ultimately it will go bankrupt, re-organize and be merged with the Treasury Department.

      But by all means, freely allow people to disengage from the Fed's system (which is their Constitutional right under McCulloch v. Maryland anyway), and stop obstructing and discouraging depositors from claiming their right to Treasury-Direct currencies at their local banks!

      • avatar RickDiMare says:

        Paul, this is a follow-up on what I said here about keeping the Fed in tact, not abolishing it.

        Today, on Facebook from Ross Kenyon I learned about a link to a 20 minute 1997 lecture by Randy Barnett of the Cato Institute that better describes what I was trying to say, i.e., that we need a schizoid organization like the Fed, which is both a monopoly enforcer of its own currency in partnership with the IRS, but yet is also a liberating gateway (in its subservient role as "fiscal agent") to non-income-tax-regulated, Treasury-Direct, coin-based, debt-free currencies, the use of which provide legal opportunity to claim self-ownership, including ownership of one's labor/wages as one's property, not income.

        Barnett never specifically mentions the Fed or the IRS, but near the very end of the video clip, he states: "What we need is both a way to have [monopoly] force and still contain it."

        http://www.libertarianism.org/media/video-collection/randy-e-barnett-structure-liberty

  40. avatar Paul Marks says:

    Rick I think (for reasons I explain above) that it does not much matter now. Whether the Federal Reserve is abolished today, or is allowed to carry on creating money (from NOTHING) till it is finally done away with (it can not actually "go bankrupt" as it can just create money) does not really matter now - BECAUSE THE DAMAGE HAS ALREADY BEEN DONE.

    The left know this well - and they are actually counting on it.

    If Obama wins the election and there is a economic collapse - a perfect excuse for Emergency rule (the Centre for American Progress, and so on, already have the plans all prepared), and if Romney wins the election - well then the greedy "1%" Republicans will be blamed for the economic collapse. And the left take over (quite democratically) in the midterm elections of 2014 and the Presidential election of 2016.

    Romney is a Progressive (although a "Progressive Lite" as Glenn Beck would say) - he will not have a clue what to do when the **** hits the fan. He will just do establishment things (such as go for an "expansionary monetary policy" and be amazed when establishment things do not work - indeed make things even worse).

    So how is collectivism defeated and freedom restored?

    Well Glenn Beck trusts in divine providence - but I do not agree with that theology.

    I think in political terms - and I can see no flaw in the plan of the left.

    They win the election - they win.

    They lose the election - they still win.

    And if America falls the rest of the West can not stand.

  41. avatar Paul Marks says:

    Rick I, respectfully, disagree.

  42. avatar Carlos Novais says:

    The question remains:

    If 100% Reserve Bank titles are able to call themself “notes and demand deposits” of gold and fractional reserve banking must clearly identify that its "notes and demand deposits" are "promises of payment" of gold (stating just that), and both must then be clearly differentiated including in accounting of companies using both, why on earth will both circulate at par as if physical gold (or 100% RB certificates) and a promises of payment of gold would be valued the same?

  43. avatar Paul Marks says:

    Carlos I have objection to technical language if it helps an examination of matters of interest - in any subject.

    However, in economics techical language often obscures rather than illuminates.

    As for notes.....

    If a bank issues notes they should have the gold they say the notes represent. IF they say the notes represent gold.

    If they say the notes represent silver - then they should have the silver.

    And if they say the notes just represent themselves (i.e. bits of paper witn ink on them) - then they need have NO commodity in their vaults what-so-ever. Of course if they say that one pice of paper (for example a "cheque") represents other pieces of paper (for example Federal Reserve or Bank of England or other Central Bank notes) then they must actually have these pieces of paper (these Central Bank, government, notes) they say the "cheque" (or other such) represents.

    It should, of course, be up to people (buyer and sellers) whether they wish to use such bank notes or not.

    And, also of course, the above should also hold true for government notes - I am leaving aside Constitutional issues here (the United States Constitution gives no power to the American government to issue notes - or to have others do so for the government) and just dealing with the basic economic question (and, deliberatly, without the use of technical language).

    As for bank lending.....

    If banks wish to lend out pieces of paper with ink on them (that they themselves have printed) that is fine by me - as long as they TELL PEOPLE exactly what they are lending out.

    However, if they claim they are lending out gold (or silver or......) and that paper documents they are lending out represent this - then they must actually have the commodity they claim to have.

    Not a "promise" of it at some future time - but the actual commodity (whatever it is) that they claim they are lending out.

    Of course most bank lending is not even bits of paper with ink on them - it is, in fact, just numbers written in computer ledgers.

    A pure credit bubble - nothing more.

    As should be (but sadly is not) unnecessary to say....

    Loans are not "assets" (although banks insist on treating them as if they were - and basing complex financial instuments upon them) - a loan may be paid back, but it also might NOT be paid back. One does not call a reciept from a bookie (a person who takes bets) an "asset" and try and base a financial system upon such "assets". The reciept from the bookie is only of true value IF the horse (or other such) that one has bet upon wins the race AND IF the bookie actually has the money to pay the winnings.

    So it is with a loan - only of the borrower PAYS BACK the loan is it of true value (I am leaving aside the matter of interest payments here - although, YES, they are nice to but it is the paying back of the loan itself that is the VITAL matter).

    I repeat that most bank lending is not even pieces of paper with ink on them - it is, in fact, just numbers on computer screens.

    At least it is till this system totally collapses, which (in spite of the vast interventions of Central Banks) will not take many years now.

  44. avatar Paul Marks says:

    Banks often have very limited assets - a few buildings, the contents of the buildings (tables, chairs and so on), company cars.... and so on.

    However, they claim to have zillions in assets - because they count every loan they make as an "asset". This not only assumes that the loans will actually be paid back (with interest), but that they could (if the bank got into trouble) all be paid back INSTANTLY (which is obviously absurd).

    Actually some other forms of enterprise try something similar - by counting their "order book" as assets. In short - taking every promise to pay for goods that the company makes as an asset (as if the people and enterprises who have bought X, Y, Z, have actually already PAID FOR the goods).

    This is not a good practice - but at least most ordinary enterprises (I am not going to bother considering the Enrons of this world) do not build vast fairy-castles-in-the-air on the basis of various promises to pay for their goods.

    To say (as some do) "we are owned X amount of Pounds [or Dollars or....] therefore we can lend out X amount of Pounds [or Dollars or....] on the basis of this" is very bad indeed.

    One can only lend out what one ACTUALLY HAS.

    For example, if your house was on fire and you wanted to borrow a firehose from me....

    I ether have GOT THE FIREHOSE or I have NOT GOT IT.

    To say that "I lent out the firehose to Mr Jones - but the loan of the firehose is an asset, so I can lend you the firehose as well [without Mr Jones first handing in the firehose]" is not just absurd - it is insanity.

    Ditto with Federal Reserve Dollar notes (or Pounds or.....).

    Either I have these notes or I have not got them.

    If I have lent out the Dollars (or the Pounds or the .....) to Mr Jones I can not TILL I HAVE GOT THE MONEY BACK FROM MR JONES lend the money out to you (or to anyone else).

    At least not without leaving a rational universe and entering insanity.

  45. avatar Paul Marks says:

    Martin - you AGAIN fail to understand the difference between a "fractional reserve bank" that (for example) lends out 90% of the real savings that are invested with it, and a "franctional reserve bank" that lends out 900% of the real savings that are invested with it.

    If 100 Federal Reserve Dollars are put into a bank by savers then the bank can (honestly) lend out no more than 100 Dollars.

    No amount of clever smoke and mirrors tricks and shell games, can make lending out (for example) 900 Dollars (when there are only real savings of 100 Dollars) sensible.

    I repeat a "fractional reserve" of (say) 10% when one has 100 Dollars in notes means lending out 90 Dollars NOT 900 Dollars.

    If a bank says "we have X amount of money to lend" they should be able to SHOW this money - NOT figures in a ledger, the ACTUAL MONEY.

    A life insurance company does not claim to be lending out money - so your example is simply not relevant.

    If "broad money" (M2, M3 etc - i.e. bank credit) is vastly bigger than the Monetary Base then then there is a scam (a massive scam) taking place.

    A "fraction" of real savings is not being lent out (at least not a "fraction" as a normal human being would understand the term). MORE than real savings is being lent out.

    Indeed this is the whole point of an "easy credit" or "low interest rate" policy.

    The point of such a policy is to increase lending beyond the level of real savings - and to substitute interest rates determined by TIME PREFERENCE between REAL savers and borrowers, with interest rates determined by CREDIT EXPANSION instead.

    Commercial banks can only do this to a certain extent - and every "boom" is followed by a BUST.

    However, with the intervention of CENTRAL BANKS (whether formally owned by governments or not), the Monetary Base can itself be expanded - in order to try and "save the financial system" (i.e. save the credit bubble).

    This allows the distortion of the capital structure (the misallocation of resounces) to get bigger and bigger (VASTLY bigger than the worst ordinary banks would ever be able to do on their own) - till (IF the policy is continued with) the entire economic structure collapses.

    I repeat if someone (called "a bank" or anything else) says "we have X amount of money to lend" they should be able to SHOW THE MONEY, NOT numbers in a ledger - the ACTUAL MONEY.

    And nor should they have to say "hang on - we will just get the Federal Reserve to produce (from NOTHING} some money so we can show it do you".

  46. avatar Paul Marks says:

    On G.s law.

    Obviously this only applies if EXCHANGE RATES ARE RIGGED ("fixed").

    If free exchange rates are allowed (i.e. if people are allowed to REFUSE to accept debased coinage) - there is no G.s law.

    • avatar Martin Brock says:

      People hold appreciating assets and sell depreciating assets (other than consumption goods). True or false? It's a straightforward question, and all I want is a straightforward answer.

    • avatar Martin Brock says:

      I might accept a depreciating good from you in trade for two reasons. First, I expect to consume the good before it depreciates much. Second, I expect to exchange the good for another good before it depreciates much.

      In the second scenario, the depreciating good is money by definition. It is money (and currency) because I accept it, based on its current value, only to exchange it for something else.

      The money doesn't depreciate because someone forces me to accept your depreciating good. The money depreciates because you and I choose to use a depreciating good as money.

  47. avatar Paul Marks says:

    "I want a straightforward answer" - to WHAT Martin?

    Your "question" is not relevant to the matter under discussion.

    I have explained the matter (the matter that one can only honestly lend out WHAT ONE ACTUALLY HAS) repeatedly - so I am forced to the conclusion that you do not WANT to understand. Your ignorance is simply a POSE.

    • avatar Martin Brock says:

      I ask a straightforward question, and you again refuse to answer it. Here's the question again.

      People hold appreciating assets and sell depreciating assets (other than consumption goods). True or false?

      I fully understand your point, but again (and again), a creditor does not lend out what others lend him, so your premise is irrelevant.

      If I own a house worth $150,000 to you but you don't have $150,000 lying around, I may extend you credit by allowing you to occupy the house while paying me in installments over a period of time. Following this agreement, you occupy the house, and I hold your note promising to pay me principal and interest for a specified period.

      The note entitles me to your payments, so it is valuable to me, and I may bargain with it. If my neighbor accepts it in trade, it is money.

      No one lends this money to us before our transaction. We create the note to formalize our credit agreement, and the note becomes money if others then accept it in trade. We may also create smaller notes from the large note to facilitate their use as money.

      Of course, no one should force anyone to accept these notes in trade, but if someone refuses to accept them, they may not bargain with you as I do.

  48. avatar Paul Marks says:

    "I may entend you credit" to buy a house.

    NO - you may only lend me the money to buy a house IF YOU HAVE THE MONEY TO LEND ME.

    And you only get the money back when and IF I pay it back.

    Of course you may let me live in a house YOU ALREADY OWN - and hope that I pay you for the house ("in installments") over time. But if you want to buy a house you must have the MONEY to buy the house - and if you want to lend me money to buy a house (from someone else) you must HAVE THE MONEY TO LEND ME.

    Otherwise things go badly. If this does not answer your "question" then you asking the wrong "question".

    Martin you are writing not only as if you knew nothing about political economy - but also as if you have been asleep during the current housing crises.

    You are like one of those people who rated "mortgage backed securties" "triple A" - when, in fact, they were worthless junk.

    The people at Moody and S&P have some excuse - real economics is not taught at most universties (although that did not stop the people at Fitch understanding that a vast scam was going on - and refusing to rate this stuff, as Fitch is based in Paris the American government, with its "affordable housing policy", found it harder to put pressure on them).

    However, you are writing AFTER THE EVENT Martin.

    You just have no excuse for writing stuff like this.

    • avatar Martin Brock says:

      NO - you may only lend me the money to buy a house IF YOU HAVE THE MONEY TO LEND ME.

      I may extend you credit to buy my house, unless you threaten me for doing it.

      I do not</em. lend you money when I extend you credit on my $150,000 (or 100 ounces of gold) house, because I don't have $150,000 (or the gold) lying around either. I have a house worth $150,000, but I don't have $150,000, so I exchange the house for your promise to pay me in installments over time. Your promissory note is clearly valuable to me; otherwise, I don't exchange the house for it.

      If the note is also valuable to others and negotiable, it becomes money, i.e. it becomes something that people accept in trade only to exchange it later for something else. Dollar bills were always money of this kind. That's why they're called "dollar bills", because they were part of the bill for something else, a house in this case.

      You write as though you know nothing about money outside of a Rothbardian fairy tale. The housing bubble was a consequence of inflationary credit policies that I don't expect in a free market. In a free market, creditors want a down payment and other assurances, and people accepting banknotes also want assurances. A homeowner does not want notes promising more than his house is worth, because he is the first recipient of the notes himself, and he must persuade others to accept them in trade at face value.

      The problem with our monetary system is that a monopolistic monetary authority essentially guarantees that every banknote is equally valuable, regardless of a particular bank's credit practices, so market forces that would otherwise constrain these practices do not exist.

      You are like one of those people who rated "mortgage backed securties" "triple A" - when, in fact, they were worthless junk.

      No. I'm not at all like those people. You simply conflate apples with oranges to score meaningless rhetorical points.

      You just have no excuse for writing stuff like this.

      I have a long history of using banknotes as money myself, and so do you.

  49. avatar Paul Marks says:

    Nothing to do with "bank notes" Martin.

    You said "extent credit" as if it was different thing from "lend money".

    If the money is Federal Reserve Notes then "lending money" is lending Federal Reserve notes - nothing to do with gold (or silver or....).

    However, it is still LENDING MONEY.

    If I ALREADY OWN a house and let you live it, I have NOT "extended credit" to you, I have let you live in my house. If you pay for me the house ("in installments") that is fine - but you are NOT paying off a loan (because there has not been a loan. You are paying for a house in installments - and that is all you are doing.

    If, however, I am lending you money to buy a house - then I should HAVE THE MONEY TO LEND YOU.

    Ditto if I BUY a house (to sell to you) I must first HAVE THE MONEY to buy the house.

    Trying to lend money that DOES NOT REALLY EXIST is the root of a boom-bust event.

    That is what you mean by "extend credit" - i.e. lend out "money" that NO ONE HAS REALLY SAVED.

    Such a "cheap money" or "low interest rate" policy (generated by credit-money expansion - i.e. expanding the supply of so called "broad money") is the heart of the distortions in an economy that are called "boom-bust".

    What Central Banks do is make the above vastly WORSE - by expanding the monetary base in order to prop up the bank (or other such) credit expansion.

    This may prevent the bubble collapsing for awhile - but it is also makes the distortion of the economy vastly WORSE. I.E. The bust (when it finally does come) will be much worse.

    And if you try and prevent the credit bubble bust by endlessly increasing the monetary base - then you eventually get TOTAL ECONOMIC BREAKDOWN.

    First read Human Action (by Ludwig Von Mises).

    Then go on and read more modern works such as "Meltdown".

    If you are not prepared to read anything....

    Then at least try and remember the years when Alan Greenspan caused the current crises (by, again and again, "saving the world" by increasing the money supply).

    Or were you asleep during the Greenspan years?

    • avatar Martin Brock says:

      Extending credit is different from lending money. Again, I have a horse, and you want a horse, but neither you nor I have its value in dollars (or grams gold or ounces of silver or whatever). Maybe no one within a thousand miles has any dollars or gold or silver.

      I let you have the horse in exchange for your promise to pay me in installments over time. This transaction is what "extending credit" means. No one lends you dollars or gold or silver to pay for the horse. No financial intermediary separates us. I am your creditor directly myself. At one time, on the American frontier for example, this practice was very common. Your grocer was your creditor. You didn't "borrow money" to pay him. Later, he might go to a bank obtain dollars using his accounts receivable as collateral, but very often, his account book was the only money he had.

      If I ALREADY OWN a house and let you live it, I have NOT "extended credit" to you, ...

      You have. You've only forgotten. Most of us have forgotten. My sister is a veterinarian in private practice. She still remembers.

      I have let you live in my house.

      You do more than let me live in your house. You enter into a contract with me. By this contract, I make specified payments, and when I've made all the payments, I own the house. You may not evict me as long as I make the payments, and I gradually accumulate equity in the house. Since you may not evict me, the only thing as valuable as the house that you still control is my obligation to make installment payments, and you can bargain with this asset.

      If you pay for me the house ("in installments") that is fine - but you are NOT paying off a loan (because there has not been a loan.

      You loan me that part of the house that I don't yet own. If I make a 20% down payment, I own 20% of the house immediately. You loan me the other 80% until I make my first payment, and I pay you rent on this portion of the house. After my first payment, I own a bit more, and you loan me the rest until I make my next payment, and so on.

      You are paying for a house in installments - and that is all you are doing.

      Right. I pay for the house in installments, because you extend me credit, but you extend me credit for the entire house. I govern the entire house after our transaction. You may not evict me because you are a majority shareholder in the house. For this reason, we might want a third party to hold the title for the duration of the mortgage. A bank is this third party.

      That is what you mean by "extend credit" - i.e. lend out "money" that NO ONE HAS REALLY SAVED.

      I've done much better than "save money" (which is a contradiction in terms). I have saved a house. A house is real property. Look it up.

      Money is something that I obtain only to exchange it for something else. If I bury gold in my backyard to save its value, it isn't money anymore, because I'm not exchanging it for something else.

      First read Human Action (by Ludwig Von Mises).

      I have read Human Action, but I don't need to read a long list of books you specify to prove my bona fides here. You only avoid questions this way, so the conversation cannot progress. People hold appreciating assets and sell depreciating assets (other than consumption goods). True or false?

      I'm not discussing central banks. I oppose central banks. I want free banking, not a central bank. You repeat points that I repeatedly concede and ignore points that I repeat.

  50. avatar Paul Marks says:

    People do indeed use the expression "lend me a horse".

    And you can "lend me a horse" and I can (if I have a good income) pay you for the horse in installments.

    But to "lend me a horse" you must first OWN THE HORSE.

    What you are talking about is NOT someone "lending me a horse" or "let me live in their house till I can pay for it and then it will be my house".

    No, you are talking about banks lending out "money" to people to pay for OTHER PEOPLE'S houses (or horses, or .....).

    When we first encountered you I would have assumed your above post was a genuine (innocent) mistake - I no longer assume that.

  51. avatar Paul Marks says:

    "You can not evict me because I am the majority shareholder in the house".

    I will leave aside the B.S. about "extending credit" - which is a silly way of describing me letting you stay in a house I own till you can pay for it.

    If I own a house and let you stay it in on condition you pay 1000 Dollars a month - then I can and will "evict" you if you do not pay the 1000 Dollars a month.

    You made the agreement.

    If you did not like it you should not have signed the contract.

    In fact I would rather see the house destroyed than have you steal it from me (with some nonsense about being the "majority shareholder" or whatever).

    A bank (or thrift or ....) only comes into the picture if I want to be paid the full amount up front.

    I sell the house, for money from the bank, and they let you live in it till you have paid them for it.

    The bank can evict you because that was in your mortgage agreement.

    If you are too lazy to read your mortgage contract that is your problem.

    Of course the above assumes that the bank HAS THE MONEY to pay me for the house.

    As for the modern housing crises (and general economic crises) - I have cited works you could read on it (and works you could read on general economics).

    You will not read any of them. Not even something specifically on the modern crises (such as Thomas Woods "Meltdown") or something that is specifically about the housing crises (such as Thomas Sowell's "Housing: Boom and Bust").

    Your lack of knowledge is NOT innocent - your ignorance is DELIBERATE.

  52. avatar Paul Marks says:

    Agreed.

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