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Robust Convertibility

by George Selgin April 6th, 2012 3:06 pm

What determines the extent to which a bank can be trusted to honor its fixed-rate redemption commitments?

The answer that's at least implicit on most writings is that what matters is the nature of the assets backing a bank's IOUs, and especially the extent to which those assets consist of cash reserves. As a bank's reserves approach 100 percent of its outstanding demand liabilities, its ability to meet redemption requests improves, other things remaining equal; and if it actually maintains 100-percent reserves even a systemic run cannot force it to suspend. The case for currency boards, as more robust alternatives to central banks for preserving fixed exchange rates, rests entirely on this simple truth, which is also one of the arguments (but by no means the most important argument) offered by those who favor 100-percent reserve commercial banking over a fractional-reserve alternative.

But while the argument in question is valid so far as it goes, it overlooks a far more important determinant of the robustness of a bank's commitment to convertibility. For if history is any guide a bank's ability to fulfill its contractual obligations matters far less than its willingness to do so. And that willingness depends less upon the state of a bank's cash holdings than on its legal and economic status. Specifically it depends on whether the bank is so privileged as to be able to default on its promises without running the risk of being forced into liquidation, or that of being taken over by its creditors, or even that of losing much business.

A competitive and privately-owned bank, lacking any special privileges, can't default with impunity. It's outstanding liabilities are just that--liabilities--which means that it has to honor them or face legal consequences, including either its liquidation or a transfer of ownership. In earlier times a bank's owners might also have been liable to an extent exceeding the nominal value of there shares, and perhaps to the full extent of their personal wealth, with imprisonment the normal penalty for non-payment.

Moreover even if the owners of a competitive bank might somehow have escaped legal penalties for nonpayment of the bank's debts, they could hardly have avoided the market penalty consisting of the utter ruin of the bank's reputation, and the corresponding, wholesale loss of business to more reputable banks. There would still be no question of the bank's continuing to be a going concern.

For these reasons it is, of course, impossible to imagine a competitive bank "devaluing" its currency. The concept of "devaluation" is strictly applicable to banks having monopoly privileges, and particularly to monopoly banks of issue. By the same token, it is incorrect to equate a competitive issuer's commitment to redeem its notes at an unalterable rate as an instance of "price fixing": a competitive bank is no more free to "adjust" the rate at which it exchanges reserve money for its IOUs than a restaurant cloakroom is free to adjust the rate at which it exchanges coats and hats for claim tickets. It was only once governments awarded monopoly privileges to favored bankers, and then allowed those bankers to devalue their promises, or stop paying them altogether, and to do so with impunity, that what had once been solemn obligations to repay debts devolved into mere "price fixing."

It is, moreover, precisely owing to this devolution of former promises to pay that fixed-rate convertibility schemes are now notoriously subject to "speculative attacks," that is, to runs based upon (sometimes self-fulfilling) fear of an impending devaluation. Notwithstanding the fantasies of Diamond and Dybvig, commercial-bank note redemption agreements were historically far less vulnerable to speculative attacks than modern pegged-exchange rate schemes overseen by central bankers, for the simple reason that commercial note-issuers who failed to keep their promises had a lot more to lose than their modern central-bank counterparts.

A particularly remarkable illustration of a private issuer's tenacity in this regard took place in Scotland during the 'Forty-Five, when, as Prince Charles was marching his way toward Edinburgh, both the Bank of Scotland and its rival, the Royal Bank, took the precaution of placing their cash reserves beyond trouble's reach in the city's relatively impregnable Castle. After the city itself was occupied, the Castle remained in the hands of Royalists, who harassed the enemy (and innocent civilians alike) by raking the streets below with round after round of grapeshot. Still that didn't prevent a white-flagged band from courting death to make its way to the Castle drawbridge one morning. The band consisted of the Royal Bank's cashier, three of its directors, its accountant, and a teller. They had come to get cash to pay notes returned to them from Glasgow the evening before.

Of course, despite the penalty of failure, commercial issuers did sometimes fail to keep their promises. But unlike central banks, which have often resorted to suspension or devaluation or both while still well-stocked with reserves, they never did so if they could help it; in any event the monetary standard survived individual issuers' misfortunes and misconduct. When, in contrast, a central bank is obliged, for any reason, to break its promises, it is necessarily obliged to alter its nation's monetary standard as well.

Considerations such as these explain why the proliferation of central banks would have doomed the gold standard even if wars and depression hadn't taken their distinct toll on it. For central banking tended to reduce that standard to a mere set of official gold price-fixing schemes, with their corresponding vulnerability to speculative attacks. By the same token, they also explain why persons wishing for a revival of the gold standard had better also wish for competitive rather than centralized paper currency.

27 Responses to “Robust Convertibility”

  1. avatar Bill Stepp says:

    You mention the risk of a bank's being forced into liquidation, or of being acquired by its creditors, or of losing business. In additon to the natural market checks on these risks you discuss, another check was one of the vitally important but unsung roles played by clearing-houses. They cleared payments, but also issued loan certificates to banks after payments in species were suspended, as they were in the panics of 1857, 1873, and 1893. These loans stemmed the panics, shortened their duration, and shored up the public's confidence in the banking system.
    With the creation of the Fed in 1913, that function was usurped and monopolized by the new central bank. Clearing-houses--those that were not forced out of business--were then confined to their payments' clearing role, which later expanded to include the clearing of derivatives.

    Today's issue of The Economist has a leader article, "All Clear?", p. 14, which discusses the risk in clearing-houses. It quotes Bernanke, quoting Mark Twain, saying, "If you put all your eggs in one basket, you better watch that basket." Or I suppose you could have more than one basket to put your eggs into.

    Naturally there is more legislative and regulatory tinkering with the clearing of derivatives instead of letting innovation, competition, and the market do this.
    The article concludes: "The more systemic they become, the more tightly clearing-houses should be regulated.... It means agreeing on plans for recapitalising a failing entity without tapping the tax payer." Good luck to the taxpayers on that!

    Maybe the Fed should read up on the history of clearing houses to find a better solution. Any bets on that happening?

  2. avatar Mike Sproul says:

    A bank that has suspended gold convertibility has an important advantage: It is invulnerable to runs. In 1837, private banks across the country suspended convertibility and thus avoided runs. In the 1930's, banks were rarely able to suspend, so they suffered runs and collapsed. A believer in free banking should be willing to allow banks and their customers decide for themselves how strict the terms of convertibility will be, whether it can be suspended in times of crisis, whether it can be delayed for 100 years, whether the bank must redeem in gold or in an equivalent value of something else, etc.

  3. avatar Paul Marks says:

    First a minor point on style - I know that "the 45" refers to 1745, but (sadly) a lot of modern readers will not.

    On the meat of the article itself...

    I think both Bill and Mike have missed the point - "suspension of cash payments" is CONTRACT BREAKING.

    There should be question of "loans from clearing houses" Bill (especially if the loans are just more debt paper - not cash).

    And Mike - the banks and their clients have already decided how strict the obligations should be, their agreement is called a CONTRACT which banks should NOT be allowed to break.

    George Selgin is not an evil space monster like me. He is quite happy for banks to lend out more money than they actually have (i.e. more than people, their "depositers", have actually saved)IF banks HAVE TO KEEP THEIR CONTRACTS.

    Of course Mike is quite correct - people should be allowed to make contracts that allow banks to "suspend cash payments" if they want to do so.

    However, I doubt the "you can cheat me whenever you like" contracts would be wildly popular.

    If people have contracted for gold they want gold, if people have contracted for silver they want silver (and so on). They want what they contracted for and when they contracted for it.

    "I want my money - and I want it NOW".

    This really is not rocket science.

    The George Selgin argument is that "fractional reserve banking" (I do not like that term - as to me a "fraction" of, for example, 30 tenths is weird, I am used to the word "fraction" meaning less, not more, than the total) can work - if people (banker and other such) are HELD TO THEIR CONTRACTS.

    They will still lend out more "money" than was actually saved - BUT they will be careful, as they know that they have to obey their legal (contractual) obligations. They will adjust their behaviour because of the knowledge that they will be held to their contracts.

    Yet two intelligent and knowledgable people (and both Bill and Mike are intelligent and so on) seem to have missed th basic point of the article - that there should be no such things as (legal) "suspension of cash payments" and so on.

    If even Bill and Mike miss the point of the article (and, I admit, I may have minunderstood their comments) then what hope is there that the general population will understand the point that George Selgin is making?

    The point is that there should be no special laws (or "understandings") for bankers - free banking must mean that CONTRACTS ARE ENFORCED.

    No "suspension of cash payments" (as in 1907 and so on) and bankers operating with the knowledge that they will NOT get special treatment.

    Again I am an evil space monster - I hate the very idea of a banker (or anyone) lending out more money they have really got (i.e. for total borrowing being greater than total real savings - which the point of "credit expansion" and boom-busts), George Selgin is a MODERATE - he is willing to go along with that, as long as CONTRACTS ARE ENFORCED (i.e. no suspension of cash payments and other "legal" tricks).

    Yet even this basic point seems too radical for people to grasp.

    • avatar Martin Brock says:

      I think both Bill and Mike have missed the point - "suspension of cash payments" is CONTRACT BREAKING.

      Suspension of cash payments breaks a contract only if a contract specifies that cash payments may not be suspended. As an historian, Selgin has seen the fine print in contracts that banks had with their depositors during the classical gold standard. Have you?

    • avatar Mike Sproul says:

      Paul: Stop being a space monster. If a bank has issued 100 checking account dollars, it's OK for that bank to hold $20 in paper dollars plus IOU's (usually backed by liens on borrowers' property) worth at least $80. It's especially OK if the banker has pledged $40 or so of his own property to cover his checking account dollars, and it's even more OK if his depositors explicitly agreed to the arrangement.

      A contract that covered all contingencies would be too expensive to write. Bill and Martin already did an excellent job of explaining this. You at least agree that suspension clauses are OK if customers agree to it in advance, but I have yet to hear George admit that it's OK for banks to have suspension clauses.

  4. avatar Bill Stepp says:

    Banks do try to adhere to contracts and do try to avoid suspension in a free banking system, just as airlines try to fly passengers safely from one destination to another. But unfortunately, reality being what it is, planes do sometimes crash and banks do sometimes suspend payments. The question is: what system mimimizes these and related problems? A competitive market for air travel is superior to a monopolized one--Aeroflot's safety record is a lot worse than that of private carriers. Similarly, the "safety record" of free banks is a lot better than the Fed's. One of the bulwarks of the former is the clearing-house.
    As Casey Stengel used to say, you can look it up.

    • avatar Martin Brock says:

      ... just as airlines try to fly passengers safely from one destination to another.

      No airline ticket you've ever bought promised to deliver you to your destination on time. If you thought you had this contract with the airline, you were mistaken. Yes, the ticket has a "departure time" written on it, but this fact is beside the point.

      Why would free banks write more restrictive contracts?

      This question is rhetorical, Bill. I know that you get it.

  5. avatar Martin Brock says:

    In earlier times a bank's owners might also have been liable to an extent exceeding the nominal value of there shares, and perhaps to the full extent of their personal wealth, with imprisonment the normal penalty for non-payment.

    You have a typo there. The extent of limited liability for corporate shareholders is debatable, but jailing a debtor is antithetical to libertarian ideals. Who pays for the jail? The creditor who is already out of pocket? [I know you don't propose to jail debtors.]

    For these reasons it is, of course, impossible to imagine a competitive bank "devaluing" its currency.

    I can easily imagine the market devaluing a competitive bank's currency without driving it from circulation altogether.

    Suppose people commonly accept both Bitcoins and Bytecoins. For whatever reason, people expect Bytecoins to become less valuable relative to Bitcoins but not completely valueless, so they raise prices in Bytecoins more than prices in Bitcoins.

    People holding Bytecoins might be tempted to hold Bitcoins instead, but if the rate of inflation is small, other considerations might persuade them to continue holding Bytecoins for short terms. For example, the price of Bitcoins in Bytecoins might rise, and people might fear a correction.

    If people prefer holding Bitcoins rather than Bytecoins, doesn't this preference drive Bitcoins from circulation? Isn't that Gresham's law? Wouldn't the more inflationary Bytecoin currency become the dominant currency, with people holding Bytecoins only for short periods and exchanging Bytecoins for other holdings over longer terms?

    What is the volume of goods consumed or held for less than a month vs. the volume of goods held for more than a year? Isn't "money" essentially in the former category?

    ... commercial-bank note redemption agreements were historically far less vulnerable to speculative attacks than modern pegged-exchange rate schemes overseen by central bankers, for the simple reason that commercial note-issuers who failed to keep their promises had a lot more to lose than their modern central-bank counterparts.

    Free banks operating under a gold standard hold more capital (titles to mortgaged real estate for example) relative to the par value of their deposits and circulating notes, i.e. they require larger down payments and the like. I understand this point.

    But if gold exclusively is the standard of value for extending credit, then if people expect the value of gold to increase relative to the value of other goods, all holders of gold have the same incentive to hold this exclusive standard at the same time. A systemic desire to hold gold seems to defeat a gold banker's capacity to exchange bank capital (like the titles to real estate) for gold to meet the demands of his depositors. The banker wants to sell these titles to other bankers for the other bankers' gold, but the other bankers have the same problem.

    Doesn't this monopoly of gold as the standard of value make the system vulnerable to a speculative run? This theory seems to prevail among economists. What is wrong with it?

    http://video.foxbusiness.com/v/1484348139001/

    In this interview with Stossel, David Barker says around 2:30, "A gold standard is just another government mandated money." Isn't he right?

    By the same token, they also explain why persons wishing for a revival of the gold standard had better also wish for competitive rather than centralized paper currency.

    If we don't want a central bank issuing fiat money, don't we want competitive standards as well as competitive note issuers? Don't we want silver as well as gold? Are two statutory standards even sufficient? [Two political parties clearly are not.] Don't we want any standard that a sufficient number of people choose, i.e. don't we want the market to decide?

  6. avatar Paul Marks says:

    George Selgin's argument was that banking (of the frb sort) could work - IF banks were held to their contracts (and there was no Central Bank to give them a false sense of security - and push folly to ever more crazy levels).

    Because (so his argument ran) bankers would alter their behavour (become more careful) if they knew that they would be held to their contracts - i.e. that governments would not step in to allow them to "suspend cash payments" or indulge in other forms of contract breaking.

    I repeat - the comments miss the point of the arguement.

    As for a contract that allowed the "suspension of cash payments" and so on.

    Well go right ahead boys - draw up such a contract and offer your services to clients.

    See how many of them entrust their hard earned gold (or silver - or whatever is being used as money) to you.

    Just do not ask the state to allow you to break contracts that do not allow you to "suspend cash payments" or other such.

    Mike - this is nothing to do with a special contract.

    It is very straighforward - and easy to write.

    I do not care WHY a bank "can not" pay the cash they have promised - they promised to pay X at a certain time, they did not pay X at that time. Therefore the bank goes into bankruptcy.

    If they do not want to go into bankruptcy they should be more careful. That is the Selgin argument, and it is a MODERATE argument, one that applies to every other trade, why should money lenders get special treatment under special laws?.

    As for me - I have this weird view that borrowing should be from REAL SAVINGS (not credit bubbles).

    But if someone wants a boom-bust...... well there is no accounting for taste.

    Just do not blame "the proprietors" or "the rich" or "the corporations" for the inevitable result of your own desires.

    If you have borrowing greater than real savings then you have credit bubbble - and if you have credit bubble you will have a bust. Of course if the bubble was rather small (due to the bankers being rather careful - i.e. the credit-money expansion being limited, and no Central Bank in existance to push it bigger) then the bust will also be rather small.

    To get back to the comments....

    Bill's second comment makes sense.

  7. avatar Bill Stepp says:

    Add the panic of 1907 to the list of events in which private lenders of last resort were at work.

    http://www.frbatlanta.org/filelegacydocs/wp0623b.pdf

  8. avatar Paul Marks says:

    I have no objection to private individuals or companies (really private companies - not government backed "private" companies) providing loans to banks.

    I formally apologize to you Bill, if I gave the impression that I did object to that.

    In this case these clearing houses do not seem to have been loaning cash (the thing the banks were contractually obliged to privide their cients) they seem to have been loaning out more debt paper (although of a special sort), basically a promise that the gold is on the way (it is in the ships it is just going to take a couple of weeks to physcially get here).

    Well then the ball is in the court of the clients - if they are prepared to accept the promise, that is fine by me. If not then the bank falls - and the government should NOT get involved (by allowing "suspension of cash payments" or other forms of CONTRACT BREAKING).

    If the banks wanted a two week delay in delivering gold - then they should have said (in the contracts) "we promise to hand over gold within three weeks of your making your demand for it", not "on demand".

    Of couse the real problem is that banks (from J.P. Morgan on down) had made a lot more loans they actually had gold (not just gold physically close by - but gold anywhere).

    J.P. was playing a shell game - of about one Dollar in cash for every three Dollars of loans.

    By modern standards Morgan and the others were actually being very careful.

    However, they had sleepless night (and terrible meetings - for example where Morgan locked the door on a meeting of bankers to try and stop them running out in screaming panic).

    This is because the bankers of that time knew what they were doing - they knew they were playing a shell game (playing with smoke and mirrors - whatever metaphor you like). Modern bankers (lost in the mathematical mystical mumbo jumbo and double talk that passes for univerity "economics").

    Morgan (and the others of his time) spoke English (not the cant of the "intellectuals" - most of the top American bankers did not have university degrees). And Morgan's mathematics were not "advanced" enough to convince him that 1+1=68.

    In short Morgan (and the others) knew they were running a con game (that is what "the financial system depends on confidence" actually means), that is why they were far more limited and careful than moder bankers - people who are too "educated" to have a clue what they are doing.

    But it also meant that the Morgan faction (and the rival Rockefeller faction) were terrified the whole game would collapse on them. So they looked around for ways to prevent that happening.

    And "private clearing houses acting as lenders of last resort" did not really satisfy them.

    They wanted a Central Bank (although a disguised Central Bank) that could bail them out (should they need it).

    Thus the Federal Reserve was born.

    However, Morgan and the others were a lot more than conmen - they did many great things (we are not dealing with nonenties like Jamie Dimon here), they just played the game by the rules that existed at the time.

    The law allowed Morgan (and the others) to lend more than they actually had - so if they did not, some other bank would (I am leaving aside the special position of the New York based "national banks" under the National Banking Acts).

    "Paul are you saying if the law of the state allowed rape someone should rape some young girl because if-he-did-not-someone-else-would" - no I am not saying that I am giving an economic explination of why the bankers got into this far into the game playing - not making a moral defence of them. Although I would poiint out that accounting tricks (which is basically what frb actually is) are hardly the same moral level as rape ("the typical downplaying of white collar crime" - accept it happens to be true that treating debts as if they were money, is not the same sort of thing as raping some girl).

    The George Selgin argument is that Central Banking is not needed for frb stuff.

    If bankers know they will be kept to their contracts then they will be careful and limited in the games they play (restricting them to some small scale cheating-at-the-margin, not some economy wide threatening bubble).

    I am not sure that Morgan and the others would have agreed with that - but I do not know.

    A different example to explore would be Canadian banking in the period.

    Some banks in Canada did go bankrupt from time to time (it would be a weird industry where no enterprise failed) and there was no "deposit insurance" or other nonsense in Canada (at that time). But there was no nation wide banking panic....

    Yet there was no Central Bank of Canada (not till 1935).

    The George Selgin argument is that this proves that frb can work without a Central Bank.

    I simply do not know enough to make an informed judgement of that historical question - for example I do not know what informal links existed (or did not exist) between the Bank of England and the Canadian banking system.

  9. avatar JP Koning says:

    "For these reasons it is, of course, impossible to imagine a competitive bank "devaluing" its currency. The concept of "devaluation" is strictly applicable to banks having monopoly privileges, and particularly to monopoly banks of issue. By the same token, it is incorrect to equate a competitive issuer's commitment to redeem its notes at an unalterable rate as an instance of "price fixing": a competitive bank is no more free to "adjust" the rate at which it exchanges reserve money for its IOUs than a restaurant cloakroom is free to adjust the rate at which it exchanges coats and hats for claim tickets. "

    What about the Scottish option clause? Isn't that an instance of a bank adjusting the rate at which it might redeem its IOUs for reserve money within a competitive framework?

  10. avatar Paul Marks says:

    In the physical sciences technical language (and mathematics) are useful for clarifying complext matters.

    However, in economics (and the social sciences and humanities gererally) the use of technical jargon (like the use of mathematical equations) is normally (although not always) a sign that a matter is being obscured - that lack of clarity is increasing, rather than reducing.

    In 18th century Scotland both gold and silver were used as money (there was not the added complication of notes that were just money because the state said so, like the "Greenbacks" which were introduced during the Civil War but which, it is often forgotten, remained "legal tender" after the war - although the amount of them was frozen).

    Privately owned Scottish banks issued pieces of paper which they claimed would be honoured (i.e. have a set amount of metal of certain degree of purity paid) on demand. This, after all, was the definition of terms like a "Pound" or a "Guinea".

    It is alleged (for example by the late Murry Rothbard) that Scottish banks sometimes did not honour their committments. Other writers (such as George Selgin) suggest that such attacks exaggerate the bad actions of private banks (and the government courts) in the Scotish case.

    But let us please avoid terms like banks "adjusting the rate" when we mean banks cheating people.

    Although, of course, a person is free to agree to a contract where he (or she) gives the bank gold in return for a paper note - and when they go to reclaim the gold the bank need not pay them the full amount.

    Ditto someone is free to accept a note (in return for goods or services) knowing that the bank may only pay them part of what the note says the bank will pay them.

    As long as (of course) this is all known in advance - i.e. the banks do not pretend they will honour their notes (in full) and then "adjust the rate" i.e. not honour their notes.

  11. avatar George Selgin says:

    I actually don't think that suspension is necessarily equivalent to default: as some commentators have suggested, and as I argue in my JFSR paper "In Defense of Bank Suspension," banks can arrange contractually to be allowed to suspend under certain clearly-specified conditions. Doing so under such terms would then not imply any failure on a bank's part or any "devaluation" of its IOUs.

    I also agree with Mike Sproul, and disagree with Paul Marks, in believing that a bank that keeps fractional reserves is not necessarily one that lends less than people have saved. On the contrary: since a bank that keeps 100% reserves doesn't lend anything, that bank may accurately be described as lending less than what its customers save.

    Finally, the U.S. clearinghouses were a special case, called for only because of the infirmities of the national currency system. They relaxed the constraints faced by their members by providing both emergency certificates that served to augment clearing reserves temporarily by extending available balances beyond actual gold holdings, and smaller denomination emergency "loan certificates" that actually circulated outside the banking system. The clearinghouses did a fine job; but a healthy free banking system would have been able to make do without involving its clearinghouses in such emergency lending activities.

    • avatar Martin Brock says:

      I promise to pay you so much gold (or whatever) per month for so many years gradually to acquire the title to your house. My promise takes the form of many promissory notes issued by a financial intermediary. Each note promises a portion of the gold I promise to pay for the house. I also promise to pay interest on my outstanding obligation, and each note also promises a portion of this interest.

      Since I pay the interest to the financial intermediary, a holder of one of these notes must return it to the intermediary to claim the promised interest. Failure to return the note to the intermediary forfeits the interest. The intermediary keeps any interest that I pay while someone else holds the note.

      You and I and the intermediary agree to this arrangement. You receive the notes from the intermediary, and you immediately return them to claim the promised interest, i.e. you deposit money in the bank.

      What do you save in this scenario, the gold I haven't yet earned, the promissory notes or the house?

      In my way of thinking, the answer is obvious. The house is the real capital. I buy the house before earning enough to pay for it. Essentially, I buy the house in order to earn enough to pay for it, since my earning capacity is much lower when I'm homeless. Everything else is part of an accounting service. I don't think of an accounting entry as saving. I think of it as a record of saving. The house is what you save.

      We could substitute silver for the gold in this scenario, and little would change. We could even substitute Bitcoins for the gold. Do we really want to say that we save Bitcoins, or do we want to say that Bitcoins held a Bitcoin Wallet represent savings?

  12. avatar Paul Marks says:

    Debt is not money and money is not debt (book keeping tricks to the contrary). And savings are income that one chooses NOT to consume. People who think they can "have it all - and have it now" (the "self esteem" types) do not tend to save much.

    If you want to buy a house you better have the money, or borrow the money from someone who does (say a lot of savers who put their money in the bank for you to borrow). And you had better be able to pay back that borrowed money - on the contractual basis you agreed to, or you lose the house (and you deserve to lose the house).

    As for financing borrowing by credit bubble games - such games have bad consequences.

    But then you already know that Martin (just as well, if not better, than I do) - indeed you are counting on it.

    You will get your wish soon - the financial system will collapse. It is astonishing it has lasted as long as it has - but this COMBINATION of wild monetary policy, the credit-money bubble, and wild fiscal policy, the Welfare State, will bring the economy to its knees.

    And a lot of people (due to the education system and the media) will blame their suffering (which will be terrible) on "the rich" (and so on).

    And we both know that the leftist definition of "rich" is "anyone who opposes us" ("henchman of the kulaks" the doctrine that made it O.K. to kill people who had never owned anything in their whole lives).

    I would ask one favour though.

    Stop the left "libertarian" pose (at least when talking to me) - few people older than college kids fall for that any more.

    Do you think I have forgotten about your dreams of killing the "proprietors"?

    Actually I did not need you to say that - I already knew what you are.

    • avatar Martin Brock says:

      "Money" describes anything that people accept only to exchange it soon thereafter for something else. If people use banknotes signifying the obligations of debtors this way, then these notes are properly labeled "money". Your other labels ("henchmen" and the like) are irrelevant. I repeat this point occasionally for others reading the forum, not for you. You are impenetrable.

      Go back and read the post again. I didn't dream of killing the proprietors. On the contrary, I counted myself among the proprietors. I dreamt of my children killing the proprietors.

      The epic battle between Good and Evil, with you on the Good side, is a grand illusion. Have fun with it.

      • avatar Paul Marks says:

        Simply not true Martin.

        Money need not be "exchanged soon thereafter" - indeed people may keep money for many years (indeed generations), without exchanging it for any goods or services.

        As for "henchmen" that was not my term - that was the term of your own Comrades for people like me.

        It is matter of squareing the circle - how does one pretend to stand to stand for "the poor" or "the workers" when one is killing them?

        Simple - call the nonproperty owners one is killing "henchmen" of the property owners.

        In much the same way Tea Party people (and others) in the United States are claimed to be henchmen of the Koch brothers - even thought they have never met either Charles or David, and have certainly never accepted money from them.

        As for being "on the side of good".

        That is a different thing from "being good".

        I certainly would NOT claim any moral superiority over you, in relation to my personal conduct, back in the "old days".

        I would like to say I had repented - but that would be a lie.

        The flesh may be weak these days (it was never that strong) - but my spirit is as nasty as ever.

        Who knowns Martin - we may end up in the same place after we die.

        Oh well - at least it will be warm there.

        • avatar Martin Brock says:

          Believe it or not, Paul, everyone disagreeing with you on any point is not a Bolshevik.

          The endless dispute over semantics is tiresome, but if you hold a commodity for generations, you are not using it as a medium of exchange, even if other people use the same commodity as a medium of exchange. Again (and again), if I melt gold coins to make an art object, the gold ceases to be money, because it ceases to be a medium of exchange. If I don't melt the coin but only frame it, and do not use it as medium of exchange, it also ceases to be money.

          • avatar Paul Marks says:

            Money is not just a medium of exchange - it also a store of value. Do you not know that Martin?

            What you said was that money was only "what is accepted only to be exchanged soon thereafter" which is not only false, it is absurd.

            You made a mistake (everyone does sometimes) - learn from it, and move on.

          • avatar Martin Brock says:

            The money I have experienced since birth is not a store of value as a matter of historical fact.

  13. avatar Paul Marks says:

    On the comment about "suspension" not being a default.

    If someone agrees to pay gold on demand (or candy on demand - come to that).

    And they DO NOT - then that is contract breaking.

    I do not care if they call it a "suspension".

    The bank (if it is a bank doing it) still goes into bankruptcy. If its creditors choose to put it there (of course they may choose to not put the enterprise into bankruptcy - thinking they will lose less by waiting than by taking legal action to close the place down).

    At least the bank goes into bankruptcy if it "suspends" cash payments (and creditors choose to move against it) in a legal system that is not corrupt.

    Of course finding honesty in a court is a bit like finding chastity in a whorehouse....

    • avatar George Selgin says:

      Paul, what is it about a contract allowing for suspension under specific conditions that you are not able to understand? Obviously this is not the same as a mere contract to pay gold "on demand." No one claims that a bank that fails to pay on demand is in default if it's contracts don't provide for any exceptions. So why continue to belabor a point that isn't in dispute? Is it just for the sake of showing us HOW MUCH you HATE default? I, for one, don't doubt it.

      • avatar Paul Marks says:

        George what is about a contract that does NOT allow for a "suspension" in "specific circumstances" that YOU do not understand?

        If you want to produce a contact that allows you to "suspend" payment in X, Y, Z, circumstances - then do so.

        But that is not what happened in 1907 (or the other times).

        Customers would not tend to sign such contracts.

        But if customers do want to sign such contract - then that is fine by me.

        So it is not me who does not "understand".

        • avatar George Selgin says:

          Paul, I am not against any sort of banking contract. The point is simply that suspension may be consistent with the fulfillment of contracts allowing for it. 'Twasn't I who suggested otherwise. As for customers not tending to sign such contracts, that's not true: they accepted them on Scottish optional clause notes; and today they routinely accept them in signing bank deposit contracts that include "notice of withdrawal" clauses: the latter effectively allow banks to "suspend" payment for a very short period if the payment in question is requested without advance notice. Such clauses are rarely invoked; but they exist and are agreed to.

          • avatar Paul Marks says:

            Good - we are agreed.

            As I have said SEVERAL TIMES, I fully accept your right (and the right of anyone else) to produce a contract that allows you to "suspend" payment, and to try and convince people to voluntarily sign such a contract.

            My objection (which, again, I have stated SEVERAL TIMES)is either the State or Federal government, or the courts, allowing a "suspension" with contracts that do NOT allow that.

            Do I really have to keep typing the same thing again, and again, and again?

  14. avatar Paul Marks says:

    Martin your "historical fact" is counter factual.

    People keep money (even the fiat money of the government) as a store of value - not just as medium of exchange "soon" to be exchanged for goods and services.

    It is called "savings".

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