Poverty and the Welfare State Safety Net

Despite all the waste, dependency and vested interests generated by the welfare state, still many people of good will remain in favour of it, from a well-intentioned desire to provide a ‘safety net’ for the less fortunate.

However this desire for government to provide a solution tends to ignore the role of government in causing the problem in the first place.

By far the biggest single cause of poverty and disadvantage in Australia today is the welfare state, for a number of reasons.

Inflation

The economic orthodoxy behind the welfare state includes the belief that deliberate inflation of the currency by government is a legitimate instrument of policy.

However even a low rate of inflation is very very destructive. For example, Australia’s current inflation rate is three percent, which, according to the economic orthodoxy is acceptably low.

You divide 72 by the inflation rate to find out how long your money will last. So even at that low rate of three percent inflation, a hundred dollars saved in the bank today will be eroded to nothing in 24 years.

No wonder there is a problem with the so-called ageing of the population. The problem isn’t ageing – it’s the fact that government, through its inflation of the currency, is systematically filching the life savings of every Australian – twice over – by the time they reach retirement age!

Thus we have the spectacle of hundreds of thousands of aged people, having passed through the greatest period of prosperity in the history of the world, arriving at retirement age destitute and dependent as never before on the government. This phenomenon is then used as a pretext for still more welfare programs.

The minimum wage

The purpose of the minimum wage is to protect the lowest-paid workers from poverty, but ironically this one misguided idea probably does more to cause poverty than any other. The very existence of the minimum wage laws shows a kind of superstitious belief in the powers of government. If it were possible to magically increase someone’s income by merely passing a law, why not make the minimum income a thousand, or a million, dollars a day? Reality is no constraint, apparently.

Government can make it illegal to employ someone at the market rate, but they can’t magically raise the market rate from below the minimum wage, to equal the minimum wage. If the market value of someone’s skills is below the minimum wage, the effect of the law is simply to make that person an economic reject, relegated to unemployment.

Those whom the minimum wage debars from employment are those with the least skills. They are overwhelmingly people of low literacy. (This disproportionately affects Aborigines.) The effect of the minimum wage law is to decree that people with low skills must live on social security. And this to protect people from poverty and promote social justice!

Now suppose the dole is $175 a week, the market rate for a certain low-skilled person is $300 a week, and the minimum wage is $350 a week. How can it be better for that person or society for him to suffer both a lower income, and the hopelessness and degradation that go with being unemployed, than to work and earn his living at the market rate?

Even if the market rate were the same as the dole, how can it be said that there is a need for the public to provide a living for someone, when he is able himself to earn the same amount without public assistance?

The argument for the minimum wage must be that it is better for the public to be compelled to keep a person in a state of dependent hopelessness, than for him to suffer the indignity of actually working to earn his own living by providing a valuable service that people would willingly pay for.

This perverse rationale of the welfare state diverts literally hundreds of thousands of able-bodied people into poverty in Australia today.

The problems that then arise from this depressed class, such as with issues of mental health, drugs and alcohol, relationship breakdown, child abuse or neglect, and so on, are then used as a pretext for the expansion of state welfare services.

Funding these services in turn requires the erosion or destruction of countless other people’s incomes, or businesses which are crushed under the heel of all-knowing government in its morally superior quest for social justice.

This in turn requires productive people at the margins, who would otherwise support themselves and others, to fall into dependence on the welfare state.

So the vicious cycle goes on, destroying wealth, generating poverty, and ignorantly externalising the blame at every turn.

Taxation

Australia’s tax system is complicated beyond imagining. In fact if you asked the world’s top ten fiction writers to imagine a system as complex, they probably couldn’t do it.

So it is difficult to know what percentage of anyone’s income actually goes in tax. But income taxes, fringe benefits taxes, capital gains taxes, goods and services tax, petrol taxes, cigarette taxes, stamp duties, and so on probably combine to make common a tax rate of thirty to fifty percent.

It does not seem to occur to the proponents of the welfare state that confiscating thirty to fifty percent of people’s income might have anything to do with the generalised problem of poverty.

For example, one of the latest welfare schemes is to provide psychological counselling for financially distressed farmers. Most of the relevant farmers would most likely get far more benefit from not having the government’s confiscations making their businesses depressingly non-viable!

Burdens on Earning

Laws which impose a burden on earning actively destroy wealth and cause poverty. These include the requirement to pay for one’s employees’ income tax, superannuation, and workers’ compensation. It also includes myriad other laws such as those requiring occupational licensing, OHS, compulsory insurances, and so on.

The income tax is a tax on the employee’s income. So why should the employer have the liability of paying and administering it? The employees are not dependent children, they are adults. There is no reason why they should not have to pay and administer it themselves.

Similarly, superannuation is to provide for the worker’s retirement. It’s his retirement. He’s a grown adult. Why doesn’t he pay and administer it himself? It’s got nothing to do with the employer, and the only reason the employers have been forced to pay, is because they are a minority whom it is convenient for government to exploit.

Similarly, workers’ compensation is essentially insurance of the income and health of the employee. There is no fair reason why the employer should be forced to pay it. The entire rationale derives from the welfare state’s socialist creed to the effect that employers are in an exploitative relationship with employees, which in turn derives from the errors and ignorance of Marxism.

I recently met a man who cannot read or write and who has worked all his life picking fruit. But now it’s illegal for him to even go into the fields without obtaining a government approval for ‘OHS’ purposes.

Another woman I met has worked all her life as a cook. But now she can’t go into a kitchen without getting a government-mandated certificate for ‘OHS’. (She wouldn’t know how to avoid poisoning her own paying customers, but of course the welfare state, which turns out large numbers of functional illiterates after 10 years compulsory education, knows everything.)

Presumably to address the problem that the population was dying like flies from food poisoning, it’s now against the law for a sandwich shop to make your sandwich without surgical gloves. Why stop there? Why not surgical masks and gowns?

A friend has low literacy and had problems getting employment, so solved the problem by getting a shop. However the state is now in the process of destroying his living because he simply can’t cope with the volume and variety of paperwork that the welfare state imposes on him in his capacity as wicked evil capitalist.

Another guy I met recently is on the disability pension. His disability? He can’t read or write. He gave me a gift, a work of art made of coloured silver paper depicting a parrot. He told me he sells them to tourist shops for $100 cash and they sell them to ‘Japanese tourists’ for $200. How long does it take him to make one? ‘Two hours.’ Two hours? So if he merely worked a normal 8-hour day, he could make $400 a day – more than his weekly pension. He can easily do that. What he can’t do is comply with the tsunami of paperwork the government imposes on businesses. So his earnings are criminalised. His disability is nonsense – entirely an artefact of the welfare state. How many hundreds of thousands are in a similar category?

Another man I met recently cannot read or write much and is on the dole, endlessly frustrated by the formalities of dealing with Centrelink, Joblink Plus, OHS, and all the rest of it. Although he has little education, he can see perfectly clearly that his unemployment is not caused by a lack of employable skills on his part, but by the sanctimonious evil meddling of the clever smart-arses whose own cappuccinos and nice cars are paid for by the state’s disservice in keeping him in a condition of dependence, at the same time funding the comfortable privileges middle class welfare state bureaucrats.

You can’t make money these days as a council stop-sign man, or shooting feral pigs, or pulling a beer, without asking and obtaining the government’s gracious permission. You can’t have your friends’ kids help you on your farm during their holidays, without getting government certification of their competence, and compulsory insurances.

These laws are a disgrace to a free country. But quite apart from that, they marginalise and depress the poorest members of our society, actively destroy wealth and cause poverty, and cause the existence of a class of people whose supposed need of a government ‘safety net’ is overwhelmingly caused by government itself.

Errors of Marxism in the socialist creed of the welfare state

It is important to understand that the project of the welfare state comes out of the socialist belief system. And it is surprising the number of educated proponents of the welfare state who do not understand that the ideas they are putting forward derive from Marxism. These ideas do not work for exactly the same reasons that the great socialist experiments in the Soviet Union, China, Vietnam and everywhere else didn’t work. They do not work in practice because they are mistaken in theory. They do not work because they entail an erroneous explanation, and a mistaken understanding, of capital, profit, employment, and of the causes of wealth and poverty itself.

Just as the practices based on these theories generated poverty and the destruction of human freedom everywhere else they were tried, so they generate poverty and the destruction of human freedom here, and none the less so for the fact that their mistaken adherents are democrats rather than totalitarians.

While ever the state is engaged in these large-scale programs causing widespread, chronic poverty and disadvantage, it will remain illegitimate to plead the existence of poverty as the justification for the intervention of the welfare state ‘safety net’.

188 thoughts on “Poverty and the Welfare State Safety Net

  1. Very interesting article, which I agree with.
    A minor nitpick though, is in your example of the 3% inflation causing the value of $100 to become nothing. Of course, it will always have some value, it can’t become “nothing”. Nevertheless, calculating 24 years of inflation of 3% according to my calculator gives me about half of the original value, which is I think what you meant.

    I’m curious though, where that formula came from.. I’m trying to obtain it myself from first principles and haven’t quite got it.

  2. OK, I’ve figured out the calc. It has to do with the natural log of 0.5 being about -0.70, and the natural log of (1-i) being about equal to -i for small values of i….. Neato.

  3. the fact that government, through its inflation of the currency, is systematically filching the life savings of every Australian – twice over – by the time they reach retirement age!

    Very few people keep their life savings in cash. Those that keep it in the bank are generally compensated for inflation via higher interest rates. Those that keep their savings in other asset classes are generally insulated from inflation all together. And those that are in debt can find inflation to be positively delightful.

    Money is certainly a store of value. This is after all one of the core properties of money. However the erosion of value caused by inflation and it’s subsequent impact on moneys function as a store of value is rather secondary compared with the impact inflation has on moneys function as a unit of account. Principly because when it comes to moneys role as a store of value there are so many numereous and well established substitutes.

    Implicit in your statement is the assertion that sustaining zero inflation is a real possibility. It isn’t. The best that any monetary scheme can offer is price stability in a broad sence. By many measures the current monetary regime certainly fails to deliver as well as some alternatives however no scheme guarantees zero inflation.

  4. As a matter of fact, Gib, I forget where I got the 72 thing from! (he said, wiping egg off face). I’ll have to defer to you on the mathematical side of things.

    Terje, I’m aware that zero inflation would not result even if the gold standard were re-adopted. But I think we can assume it would be a hell of a lot less than under the current dispensation.

  5. I’d agree with Terje that the role of inflation isn’t a significant factor at the rates we have come to expect in recent years. Hyper-inflation is another phenomenon altogether, and this does truly erode savings as people are unable to factor in the time value of money (inflation) into consumption and saving/investment choices.

  6. I can’t agree more on all the perverse laws that stop people doing anything and everything — and restraunts and food is a great example. Many countries have whole cheap food cultures that can’t exist in Australia because of them, and no-one seems to complain about food poisoning in them, which is not of course suprising, since if you poison your customers, you go broke, and if you don’t and sell good food, they come back. Its also worthwhile noting that at the cheap end of the spectrum (which is also the end that employs lots of people with few other skills), you are probably less likely to get poisoned than the expensive end, since they generally work on very high turnover.

    Its not just working either — its everything. There are laws now that seem basically designed to dismantle any type of community event that can occur. For instance, try and help your local school for free in some way, and see what you have to do to do it (e.g., try and run a sporting club). If you want to have even more fun, try and say, help some of the Aboriginal communities that you were talking about some time ago (say, teaching the children English), and you’ll have a whole new set of forms to fill in, a whole new set checks to get (which you will have to pay for, even if there is in fact no possible way you could do anything harmful — e.g., you’re in a classroom with 3 other adults all of the time), even if that was your intention. At my work, some people have the oppurtunity to run these sorts of programs, which would be free for the recipients (and you could get sponsered via the private sector for free too), but almost no-one even considers it thanks to these sorts of problems.

  7. Brendan – I don’t wish to hijack Justins welfare thread with an inflation debate. But briefly let me say that whilst we have low consumer price inflation we don’t have the broad price stability in the way we once did (eg 1950-1970).

  8. Terd of course has an economics degree from Wanniski university which makes him suitably able to talk about inflation and jew hating. Some skill! Wanniski university is next door to MIT.

  9. http://en.wikipedia.org/wiki/Jude_Wanniski

    What criticism can you have of him other than he erred on the side of deficit spending and aledging UNSCOM never found WMD on scant evidence?

    People like Wanninski and Rockwell should be praised. Economics is not a subject many people will sit down and read about, but they’ve changed that a little.

    I am sure that Wanninski would actually agree with Justin’s criticism of the welfare state.

    Terje’s definition of inflation etc. is fairly accurate. It is an important issue when consider the role of asset price inflation and malinvestments lowering total productivity of workers and reducing the demand for labour.

    I cna’t get your frustration at Terje or Wanninski other than you also really dislike Farrakhan or when you started out on Wall Street, Wanninski gave a bad tip in the WSJ.

  10. I don’t have an economics degree. Nor did Jude Wanniski. I do claim some insight into the supply-side economic model, principly because I spent five years online arguing with Jude and I believe I absorbed a lot of the essence of the supply-side ideas. Much of it was formulated by Art Laffer (an economist) and Robert Mundell (a Nobel prize winning economist) but its roots are ultimately just classical economics. Wanniskis role was as a promoter and communicator. People like George Soros used to pay for Wanniskis economic analysis, and Ronald Reagan sought his policy advice. However the presence or lack of formal credentials or references is not a definitive criteria with which the strength or weakness of an argument should be judged. Of course playing the man rather than the ball is often more expedient and I can see that you are a man in a hurry.

    I am likely to request that the word “terd” be added to the list of words that automatically trigger comment moderation (still thinking about it). However please feel free to call me “Ted” if it causes you less cultural angst than my real name. I have no desire to be your enemy because life is too short for grudges. Please move on and desist with the personal abuse.

    Justin – sorry to interupt your topic. I’ll bale out if you think it helps, your call.

  11. JC, be sure to tell Sukrit Sabhlok your ideas regarding English names! I thought libertarianism led to tolerance of differences, not an insistence on one nomenclature to rule them all. Nicholas, my name, comes from the Greek. Should I call myself WinFolk in future?

  12. A further nitpick on the rule-of-72 thing: you’ve accounted for inflation but not for interest.

    The evil of hyperinflation is essentially that inflation devalues saved currency faster than it can earn interest – the growth in the supply of money so far outstrips the rate of increase in productivity that savings are destroyed.

    As I recall Rothbard argued that in an economy with gold-backed currency and free banking, there would in fact be a long term trend toward deflation; that each dollar would buy more and more.

    We have this already to an extent. In those industries with rapid advances in productivity prices fall. Semiconductors are a good example. Computers are cheaper in nominal, real and relative terms every year.

  13. Hey, Jacques, go to another site!. Didn’t you read JC in the Birdcage column? This is for people with Anglo names! And un frenchie will probably be verboten quick-smartie instanto! It doesn’t matter that what you have written makes good sense. If you pretend to be civilised/Anglo-named, we’ll listen to you.

  14. In great Britian from 1800 to 1900 the price level roughly halved. This represented a slow deflation of under 1% per annum. Britian was on a gold standard during this era. Overall productivity per say is of less relevance than the relative scarcity of gold. However a gold standard works to ensure that gold remains relatively rare. Inflation under a gold standard quickly sends gold miners bankrupt and the gold industry naturally contracts if it is causing inflation. It is a self regulating process.

  15. The topic of monetary policy is unavoidable in this subject and elsewhere. David Hackett Fischer wrote a book about medieval price movements. He found that the long inflationary periods (and here the average consumer price increases could be as little as .5%) were correlated with poverty, falling real wages, national and international violence and just generally horrid social conditions.

    Whereas those extended periods that tended to involve falling prices all the time were times of great social progress, relative peace and creative achievement.

    Government does indeed create poverty. They do so whenever they act in such a way as to reduce voluntary capital accumulation. Which is pretty much all the time.

    But nothing rigs things more in favour of the already rich and against upward mobility, then the bogus way that money is created under the current setup.

    People seem willing to fall all over themselves to evade this topic. They suddenly turn all evasive and dishonest. But there is no getting away from it since even if the current monetary system was acceptable, maintaining it would doom all our efforts in the libertarian direction to failure.

    So we may as well resolve it early on rather then have it as an unresolved problem that will likely bugger things up down the track.

  16. Indeed a 100% metals backed system is self-regulating. Since the price of money then becomes the inverse of the price of other goods. Hence more mining will be done when other goods are at a lower price (since the monetary metal is at a HIGHER price) and less mining will be done when other goods are at a higher price (since the monetary metal will be at LOWER price).

    In a productive setup this will usually mean consumer prices falling, but perhaps investment asset prices growing slowly.

    So Terje is right that its self-regulatory. So long as fractional reserve and other debasements of the money are not allowed.

    If money is created only by taking it out of the ground, once transtional problems are dealt with, the self-regulatory mechanism is in place and we need no central bank nor any legal tender. Just the government as auditor and some quality control…. but later on maybe we would find a way to make that side of things private too.

    But there is no self-regulatory mechanism if the banks are allowed to create money via fractional reserve. And the natural way of things and the history of it all is the banks and government getting together to create this extra money……. leading to disaster down the track.

    The only way to stop the government from buggering our money is therefore to wean off fractional reserve and then get rid of legal tender.

    After that it becomes a matter of standardising weights and measures.

  17. But what is a solution? Is Terje right, and we should go back to a gold standard? With silver and platinum as alternative metals of exchange? I think such an idea is plausible, and governments would hate it because they’d have a harder time covering their costs. How can we bring it about- do we individually start carrying metal units of weight, and pay others with that?

  18. The major problem I have with any scheme of moving to a metal-backed currency is that I would like to know what effects it has in a freely floating currency exchange market.

    Otherwise put: does it make any difference to us if we switch to a hard currency while the Federal Reserve continues to multiply dollars like a 6 year old with their first calculator?

  19. What criticism can you have of him other than he erred on the side of deficit spending and aledging UNSCOM never found WMD on scant evidence?

    There’s plenty.
    1. He was a Jew Hater, shown often enough until it got so chronic even Drudge took him off the list for the reason that Drudge was getting so much flak for keeping him on.

    2. He sucked up to any dictator he could lay his hands on, even having numerous discussion with Saddama’s henchmen and taking his word as gospel like the riduclous idea that Saddam wasn’t the one who gased the Kurds. This cozying up to Saddam made me puke.

    3. He tried to suck up to Castro.

    4 Jewish organizations branded him as anti-semitic and rightfully so.

    5 Sucking up to Farrakan and then lying about Farrakan’s anti-jewish leanings.

    There more if you want to go into detail.
    ——————–

    People like Wanninski and Rockwell should be praised. Economics is not a subject many people will sit down and read about, but they’ve changed that a little.

    Rockwell for sure.

    Wanniski argued in his book that the depression was casued by smoot hawely, a ridiculous statement if there ever was one.

    He also advocated tariffs for the US.

    Most of his monetary stuff was stupid.

    It’s great to talk baout economics to the average person as long as they are not sent down the wrong path, don’t you think?

    I am sure that Wanninski would actually agree with Justin’s criticism of the welfare state.

    Yep. Probably would, but he also thought and said that communisum would be a better system if the economic pie stopped growing.
    That he would support communism if the US stopped growing.
    —————————–

    Terje’s definition of inflation etc. is fairly accurate. It is an important issue when consider the role of asset price inflation and malinvestments lowering total productivity of workers and reducing the demand for labour.

    I really don’t think Terje understands what he is even saying to be honest. I don’t think he uundestnads this stuff, and ony thinks he does because he spent time on some online chat thing that Wanniski was running.
    ——————————-

    I cna’t get your frustration at Terje or Wanninski other than you also really dislike Farrakhan or when you started out on Wall Street, Wanninski gave a bad tip in the WSJ.

    Ask Terje

  20. N Gray

    “Hey, Jacques, go to another site!. Didn’t you read JC in the Birdcage column? This is for people with Anglo names! And un frenchie will probably be verboten quick-smartie instanto! It doesn’t matter that what you have written makes good sense. If you pretend to be civilised/Anglo-named, we’ll listen to you.”

    So the multicult thing has gripped you by the short and curlies too hey. Listen if you have an unpronounceable name the right thing to do is change it. Maybe that’s what people did before we multiculted our way into stupidity. Lot’s of Asian people do this. It’s called consideration for others and they understand it.

    Don’t mischaracterize what I said again.

  21. Transitional problems aside we’d do just fine with a metallic currency. Monetising tends to act as a stabiliser to that metals market. And since we would now have a backed currency we would be able to raise funds very cheaply. It would also force other countries to tighten up their act some.

    We’d be pulling in funds from all over the world. Since we’d be the only place in the world where you could bank you wealth in metals AND get an interest rate out of it.

    Suppose you were saving for a deposit on a house. And you are in Mexico and you want to have 20% deposit before buying. But if you try and save in pesos your deposit will be eroding as you are saving, whereas if you put it in silver or Gold you can’t get an interest rate.

    If Australia had 100% backed money then the problem is solved. He goes to his small Australian Bank branch office in Mexico city with his silver and gold coins or his pesos. And sets up a savings account.

    He gets to hold his wealth in proper money and not make-believe paper AND he ought to be able to get an interest rate.

  22. “But what is a solution? Is Terje right, and we should go back to a gold standard? With silver and platinum as alternative metals of exchange?”

    I suggest we have to use all the monetary metals. Gold, Silver, Platinum and Copper.

    Because if we went to gold alone we’d need a helluva high price to maintain aggregate demand.

    And that high price would lead to and undue amount of mining and it would take gold out of its industrial uses. It would cost us because we’d be paying premium price for that gold to foreigners all around the world.

    What we do instead is re-establish our reserve asset ratio for on-call deposits… and then raise it until it gets to 100%. That is to say when the Reserve Bank wants to increase demand it produces cash but when it wants to reduce demand raise the RAR.

    Once we’ve gotten to this process we can, for the most part, freeze new fiat cash being created, and start creating these coins instead.

    There would be two ways to go about the transition:

    1. You take any tax on interest off and hybrid or metallic loan. And then you just let the market sort it out…. or

    2. You run a slow-moving peg for a few years with the AUD devaluing slowly against the other three. People will clearly take up the Gold, Silver, Platinum and Copper coins in that situation. You would want maybe the AUD to come in a fourth-equal or a narrow fifth each year.

    Either of these two options would see a smooth transition. And ought not harm unduly people who are already in debt.

  23. I have no desire to be your enemy because life is too short for grudges.

    ———————
    So I take it the comment you posted on the other thread was supposed to be ironic? You started this grudge thing, so you ought ot at least apologise for the totally imappropriate and misleading comment you made.

  24. I didn’t misunderstand you, and I have no trouble with Terje. Why don’t you just call him Mr. T? And what do you think of Sukrit as a name?

  25. oh, so if you don’t, that’s ok right? As long you’re fine screw everyone else.

    I never said you misunderstood me, dummy, i said you mischaracterized what i said.

    Misunderstood :Interpret in the wrong way

    mischaracterizee : disingenuously describe/ not in a straight foward way.

    Libertarianism never meant multicult, unless of course we’re redefining it.

    And yes, Anglo is spoken here for which no one needs to aplogise. If people find it too hard to adapt they can always hightail it out of the first plane. That’s freedom too.

    If people don’t offer consideration to others they shouldn’t expect any back.

  26. So what consideration are you showing to Mr.T? If people don’t offer consideration to others they shouldn’t expect any back.

  27. Regards inflation – i disagree with your thesis that any inflation is bad. Japan has now experienced a decade of deflation – a far worse outcome than a little 2-3% here and there. Deflation causes people to delay consumption – manna for the EarthHour crowd but not for sane people. Anyway, an Australian with savings can earn a risk-free real rate of return of 3.5% via any bank internet account. Stability is far more important.

    Re Welfare – sure it’s as destructive as crack cocaine, but how would you deal with genuine cases. ie the genuinely unemployed or sick?

    The 30/30 rule? Or 30/40 as it should be?

  28. Graeme,

    Credit in circulation does act as a substitute for currency. As such it dampens the demand side of the currency equation (ie more credit based transactions means less currency based trasactions). So in this sense you are right that credit creation via fractional banking tends toward inflation. However under a gold standard this has the same effect on gold miners as any other inflationary force, which is that it causes a self correcting contraction in gold mining. Credit will displace gold in so far as it is a more effective medium of exchange however it will not ultimately lead to inflation.

    Where is the proof for this claim of mine? It is in the history books and also in deductive logic.

    1. History

    As cited above Britian underwent deflation across an entire century (1800 to 1900) in spite of practicing fractional reserve banking. It had a gold standard but there was no prohibition on credit creation or multipliers or reserve requirements for banks. There are loads of such examples from history and you need to take account of them if you are going to seriously argue that fractional reserve banking is inflationary.

    2. Deductive logic.

    All debt that is denominated in gold must follow the value of gold. An “IOU 100 gold coins” can only lose value if the borrower decides to default or if gold loses value. In the later case a lose of value for gold will be self stabilising anyway because it drives gold miners out of the industry. In the former case (ie borrower default) the reduced substitution effect will be deflationary (ie demand for gold proper will rise and it’s value will tend to also). In fact any fear of collapse in the credit arena will cause an increased demand for gold and hence deflationary tendancies (ie increase demand leads to increased value).

    Even under a fiat system any inflationary effect caused by an upswing in credit creation is readily accomodated via adjustments in MO. Any claim that inflation under such a system is caused by the private banking sector is rubbish because having appropriated the power to create base currency the government owns the inflation outcome and should bear full responsibility. In fact trying to lay the blame anywhere other than at the feet of the government is recklessly deceptive.

    Where the Austrians of the Rothbard school do have a case is in the assertion that demand accounts without 100% backing entail a degree of risk. However these risks are bourne by private parties that assume them freely. Freedom is meaningless if it excludes the freedom to take risks. And the level of government intrusion that would be required to police a 100% backing requirement would be the antithesis of liberty.

    Like the proponents of Islamic Banking the Rothbardians are fearful of borrowers placing themselves in a position where they risk default. In the case of the Islamic Banking proponents they fear that bank customers may be burdened with debts they can’t repay. Whilst the Rothbardians fear that banks themselve may assume a debt to depositors that they become unable to repay. The common thread in both belief systems is a fear of failure. Yet the risk of failure is central to the process of capitalism. To preclude failure is to preclude capitalism.

    Regards,
    Terje.

  29. Japanese deflation occured in spite of increases in MO. It shows the importance of currency demand (foreign and domestic) in any analysis of monetary effects. It is also an apt illustration of the limitations imposed by using interest rates as a management tool. In a deflationary process the 0% bound on nominal interest rates readily leaves monetary policy too tight. The Japanese would have cured deflation much sooner if they had abandoned the interest rate targeting fetish.

  30. JC – I didn’t start a grudge. I criticised your behaviour. Whether you carry a grudge for that act of criticism is up to you. Retaliating with personal abuse in the face of criticism (as opposed to refuting the actual criticism) is petty. You can reject the criticism I offered, simply ignore it or expend energy refuting it, but I’m not going to change my view simple because you have a lot of unrelated criticisms of me, my name and my view points. In so far as any criticism of me is valid then I welcome it because ultimately valid criticism helps me grow stronger. So all I really ask of you is that you do a good job of identifying criticism of me and a good job of articulating that criticism.

  31. Pommygrante,

    If in advocating 30/40 instead of 30/30 you mean that the tax free threshold should be higher then unless you change the structure of the scheme in other ways you are also essentially advocating a larger handout for those that have zero personal income. I’m not sure that this is really what you intend. Please clarify.

    Regards,
    Terje.

  32. JC – I didn’t start a grudge.

    You didn’t? How Ironic then that your response to my suggestion that GB and John should end this stuff by attacking me. I wasn’t the topic of the thread.

    Inserting Quiggins demented threat had a lot to do with the discussion. Not! Especially when most people are not aware of the context in so far as how far back the perferssor and i go.

    You took Quiggin’s loutish threat as somehow supporting your point. I guess I understand that seeing you brown nose him every other day.

    ————————-

    I criticised your behaviour.

    You mean that i give Quiggin back as good a he gives innocent people? Sure I do and I won’t stop unilt he stops or apologises to the many people he has backstabbed and kicked from behind on his bog. It will never stop.

    ————————–

    Whether you carry a grudge for that act of criticism is up to you.

    Oh really! Look dopey, you started it, unfairly so. Again, i ask what relevance did your pathetic attempt at attacking me have to do with the thread?

    —————————-

    Retaliating with personal abuse in the face of criticism (as opposed to refuting the actual criticism) is petty.

    Well. Petty? In whose eyes? Yours? Please. It was as relevant as your attack on me, doofus.

    ————————-

    You can reject the criticism I offered, simply ignore it or expend energy refuting it, but I’m not going to change my view simple because you have a lot of unrelated criticisms of me, my name and my view points.

    Well. I do question how anyone can think of themselves as a commenter spending time with a Jew hater and a economics quack.

    ————————

    In so far as any criticism of me is valid then I welcome it because ultimately valid criticism helps me grow stronger.

    Yea , right everyone likes criticism. Stop being insincere again.

    ——————————-

    So all I really ask of you is that you do a good job of identifying criticism of me and a good job of articulating that criticism.

    I did, but you spat the dummy and ran away by pushing my comment to another site. At the very least you could have asked for yours to be moved over but you didn’t because of your insincerity.

    It’s you that holds a grudge because of the many times I have picked you up on silly things you say that you seemed to have learned on Wanniski’s jew hating knee. That silly comment you made was a side swipe at me. It’s not me that bears a grudge, you simply refuse to admit it because you’re insincere.

    I think one time you made some outlandish comment about how great the EU oblivious to the fact that it is fast becoming a good replacement for the soviet union of old in terms of its poltical structure. Saying dumb things like that has drawn a reaction from me. How a self confessed libertarian could actually hold the EU up as some sort of virtuous structure has to be the most foolish thing I have read in a long time……. so much for liking criticism hey?

  33. Terje, by the way, what is the difference between “broad price stability” and “low CPI”? Can you reconmmend some reading for me on monetary theory (for dummies, of course)? Not that I don’t have a massive reading list already!

  34. Brendan

    He’s leading you up the garden path. CPI and price stability are two different things. We have have high inflation now despite the CPI only showing a 2.8% increase. This time it is being reflected in the price of hard and financial assets.

    CPI is a false measure of inflation as it only measures the cost of consumer goods and services. It doesn’t meausre things like asset price inflation.

    It is also extremely difficult to meausure inflation in an economy and the only way to do so it to examine what has happened to money supply M1 growth over a period of time.

    You don’t really want “price stability” in an economy anyways. What you really want is free prices.

    Prices need to be able to move freely to reflect lots of things happening in the economy.

    He argued earlier that prices of commodities are much more volatile than they were in th 50’s and 60’s. However retail prices are no where near as unstable as commodities. One might say so what if commodities are volatile.

  35. Terje – what was that about hijacking a the thread again? :))

    Hmmm. A valid point. Sorry Justin.

    Terje, by the way, what is the difference between “broad price stability” and “low CPI”?

    Consumer prices do not react quickly to errors in monetary policy. Institutional factors mean that businesses absorb a lot of fluctuation in order to keep nominal prices steady. For instance a landlord does not put rents up and down day to day just because there is more or less money about. A worker does not put their wages up and down day to day just because there is more or less money about. As such it is quite possible for the monetary authorities to make lots of monetary errors without them being reflected in consumer prices. They get absorbed in changing margins and shifting quantities of demand and they do take a toll but it is hidden from view within the supply chain. Only monetary errors that are sustained for long periods of time will be reflected in consumer prices. On the other hand international spot prices like commodities, foreign currencies and overnight interest rates will respond to monetary policy more instantaneously. During the 1950 through to 1970 we were effectively on a gold standard and not only was the CPI price level steady (as it is today) but commodity prices were also stable. There is an indicative chart showing the stability of oil on my private blog:-

    http://terjepetersen.wordpress.com/2006/12/19/price-stability-and-commodities/

  36. Getting back onto the meat of Justins article I think that this paragraph gets more to the heart of the issue.

    Now suppose the dole is $175 a week, the market rate for a certain low-skilled person is $300 a week, and the minimum wage is $350 a week. How can it be better for that person or society for him to suffer both a lower income, and the hopelessness and degradation that go with being unemployed, than to work and earn his living at the market rate?

    In practice I think that the same person will typically find a job at $350 per week, the question is more about how long will they have to wait. Minimum wages don’t stop low skilled people being employed but rather they causes less low skilled people to be employed and the surplus individuals have to join a queue. Lower the minimum wage enough and you elliminate the queue, elliminate the queue and you elliminate the need for the dole. Raise the minimum wage and you lengthen the queue which creates a greater justification for the dole. Government intervention begets more government intervention.

  37. We were not on a gold standard in the 1950&60’s. Get your definitions and information right. We were on a gold exchange standard where governments would make the exchange instead of the public. At least that was theory until it was proved wrong by the frogs. It was a bullshit gold standard as we later learnt when the French tried to attack the US gold window and Nixon went off and floated the green back.

    1. It was illegal to own raw bullion in those days.

    2. We found later the price was set artifically low at $35 as inflation was allowed to rage away at the value of the dollar.

    3 We had exchange controls coming out of our arse in those days. You had to apply to the central bank for permission to buy foreign exchange even for a friggen holiday. There were limits even on how mucgh you could take out of the country. This is how countries got awy with running high tariffs.

    4 money supply was allowed to be loose and not directly tied up to the supply of gold.

    5 Exchange rates were kept in relative check through intervention around (I think) .5% of the band to the central parity. The European snake was its later sibbling.

    It was a bullshit gold standard conceived and brought to birth by Keynes &co. at Bretton Woods NY.

    If people can’t get to the gold, there are exchange controls coming out of a country’s arse and if gold is illegal to own in its raw state, the idea we had a gold standard is astonishinly silly and ill conceived. But wait , it must have been another wanniski idea. Afraid so.

    That’s why i said earlier that it is better not have any discourse rather than bad discourse.

  38. Oh and i forgot. Gold mines had to sell their gold to the central bank at 35 bucks an ounce. The giveaway was that you could mine gold income tax free. However all mining stopped when the gold price became undervalued.

  39. Raise the minimum wage and you lengthen the queue which creates a greater justification for the dole. Government intervention begets more government intervention.

    I think it worse than just increasing the legitimacy of the welfare state, getting into employment early has additional benefits such as gaining experience and skills that are useful later. It also means that employers can be more selective about who they employ since they have a large pool of unemployed to choose from. Those with less marketable attributes will find it harder to find a job, and be unemployed for longer.

  40. “Credit in circulation does act as a substitute for currency.”

    Did I say it did?

    No I didn’t say that credit acted as a substitute for money. So are you circling back to treating CASH as the only money then?

    Are you circling back to pretending that only CASH AND COINS make up the money supply?

    If you need to play word-games to make your argument stick what does that say about your argument?

  41. This is what Mark Hill would do all the time. And now Terge is starting it up. Deliberately confusing the difference between CASH/ CREDIT AND MONEY.

    Terje before you confuse everyone can you get your definitions straight as to what you are calling everything?

    I didn’t confuse CREDIT and MONEY. And I didn’t confuse CASH and MONEY.

    If you are going to use your own personal odd definitions you better spell them out.

  42. JC,

    To be fair, I think Terje was saying that CPI and price stability are different, hence my question:

    …what is the difference between “broad price stability” and “low CPI”?

    I would really appreciate it if you could leave the vitriol alone, because I want to read what you both have to say, not read a shouting match.

  43. Also you want to get your definition of DEFLATION right.

    Monetary deflation means a drop in the money supply. The money supply didn’t drop throughout the 19th century. It increased. Fractional reserve was practised in the 19th century but far less extensively then today.

    So you are rife with definitional confusion and people ought disregard what you are saying until you get your act together in that department.

    Fractional reserve causes the business cycle. It leads to an oscillating money supply as opposed to a glacially growing money supply.

    And we cannot have a viable recession-proof free-enterprise money unless we get rid of it.

  44. We were not on a gold standard in the 1950&60’s. Get your definitions and information right. We were on a gold exchange standard where governments would make the exchange instead of the public.

    Yes you are correct it was a gold exchange standard. Which is one form of gold standard. Not my prefered form but a gold standard none the less.

    At least that was theory until it was proved wrong by the frogs. It was a bullshit gold standard as we later learnt when the French tried to attack the US gold window and Nixon went off and floated the green back.

    Nixon fluffed it. No argument.

    1. It was illegal to own raw bullion in those days.

    In the USA and China it was illegal. It was never illegal in Australia. However the illegality of gold ownership in places such as the USA and China was certainly not optimal.

    2. We found later the price was set artifically low at $35 as inflation was allowed to rage away at the value of the dollar.

    On this I disagree. The notion that the price of the US dollar was artificial is purely subjective. It was what it was. Any other price would have required a different set of policies which would have been neither more nor less artificial. We are after all discussing a fiat currency and there is no objectively correct value for a fiat currency. A fiat currency has the value dictated by the intersection of supply (monetary policy) and demand (market dynamics). With a fiat currency no option is more or less artificial than any other option. What happened was that Nixon changed the policy, if Nixon had not changed the policy then the dollar would have continued to exchange with gold ounces at 35 to 1. However for a multitude of reasons Nixon perceived a benefit in devaluing the US dollar. A major weakness of Brenton Woods (one of many weaknesses) was that it expected the US administration to be forever benevolent and wise.

    We had exchange controls coming out of our arse in those days. You had to apply to the central bank for permission to buy foreign exchange even for a friggen holiday. There were limits even on how mucgh you could take out of the country. This is how countries got awy with running high tariffs.

    Yes our economies were much more closed in the post depression years than they are today (Smoot Hawley was very a big part of that). And it was detrimental in all manner of ways. Anybody who believes in free trade will admit that freely. For instance Jude Wanniski spent much of his life expounding the folly of such trade barriers and restrictions.

    4 money supply was allowed to be loose and not directly tied up to the supply of gold.

    Relative to when? Surely you don’t mean relative to today. Please elaborate.

    5 Exchange rates were kept in relative check through intervention around (I think) .5% of the band to the central parity. The European snake was its later sibbling.

    Sure. It was a very tight buy/sell window. In much the same way in which the Hong Kong dollar is traded within a very narrow US dollar price window.

    It was a bullshit gold standard conceived and brought to birth by Keynes &co. at Bretton Woods NY.

    It wasn’t Keynes first choice but he was in on the act. His first choice was the Bancor. His first choice had a number of systemic problems with it also but that is an entire discussion in it’s own right.

    If people can’t get to the gold, there are exchange controls coming out of a country’s arse and if gold is illegal to own in its raw state, the idea we had a gold standard is astonishinly silly and ill conceived.

    All those things certainly make it suboptimal and I would never promote any of those characteristics. Neither have I ever heard Jude Wanniski promote recriminalising private bullion ownership or the regulation of the demand for foreign exchange.

    That’s why i said earlier that it is better not have any discourse rather than bad discourse.

    You have not raised any counter points. You have merely raised a lot of other points, most of which I agree with.

    Oh and i forgot. Gold mines had to sell their gold to the central bank at 35 bucks an ounce.

    Given that a lot of the gold mines were in places such as the soviet union, Australia and South Africa I don’t think they had to sell it anywhere near the USA.

    However all mining stopped when the gold price became undervalued.

    Interesting.

    If your overall point is that the gold standard of the 1800s was better than the post World War II gold standard then we have no real point of disagreement on this. If your point is that should not have restrictions on the buying and selling of currencies then I also agree. If your point is that in the 1950s through to the 1970s we had excessive tariffs and restrictions on international trade then I agree whole heartedly. If your point is that Nixon fluffed up then I agree. If your point is that the French called Nixons bluff then I agree. If your point is that Brenton Wood was a flawed system then I agree.

    I don’t wish to be argumentative but perhaps we should now focus on the points on which we disagree. So what are they?

  45. You are giving the appearance that the 50’s and 60’s were governed by a gold standard. It was actually nothing of the sort as I said. It was a pretend standard with money supply growth directed by the US. So when it expanded the money supply so did the rest to a large extent. The lock on gold was a mirage proved by Nixon closing the window. MI was growing during those times at an inflationary rate..

    Yes I believe it was also illegal to own gold in OZ if you were a hoarder.

  46. You know birdie, if there is private money fractional wouldn’t be so leveraged, I think otherwise people would simply dump it for more attractive money.

  47. Yes I believe it was also illegal to own gold in OZ if you were a hoarder.

    That is contrary to the evidence I have seen. The following is a quick sample:-

    http://www.perthmint.com.au/gc/depository/depository_layout.asp?url=6

    Have Australian Governments ever confiscated gold?

    No. As a result, a significant number of Perth Mint Depository clients are United States based, who look for a politically and economically stable offshore location for their precious metals given that the United States did confiscate gold in the 1930s.

    It is important to note that The Perth Mint is a State Government body and therefore is not controlled by Australia’s Federal Government or the Reserve Bank of Australia. Confiscation is the preserve of Federal Governments.

    if there is private money fractional wouldn’t be so leveraged, I think otherwise people would simply dump it for more attractive money.

    Spot on.

  48. Terje before you confuse everyone can you get your definitions straight as to what you are calling everything?

    Graeme – when I say “currency” I mean cash and coins. Do you have some other meaning for currency?

    This is what I said:-

    Credit in circulation does act as a substitute for currency.

    I was not saying that this was your assertion. I was saying that credit and currency both act as a “medium of exchange” and as such they are product substitutes. In this sence your assertion that credit expansion is inflationary in tendancy is correct. An increase in credit in circulation will cause a substitution effect and reduce the marginal utility of currency, which would logically be disinflationary because it would tend to cause the value of currency to decline (ceteris paribus).

    Also you want to get your definition of DEFLATION right. Monetary deflation means a drop in the money supply.

    The word “deflation” is a polysemy. That is to say it is a word that has multiple related but different meanings. The word “milk” is also a polysemy (ie verb versus noun). The definition I use for deflation is “a general decline in the price level”. I believe this to be the more common usage. However the definition you use which is “a reduction in the money supply” is also reasonably common. This duality of meaning does of course complicate any discourse on the topic and you are right to highlight it.

  49. “which would logically be disinflationary” should have read “which would logically be inflationary”

  50. Terje

    It’s a separate point and not related to this fascinating discussion on the supply of money, but i think the tax free threshold is set too low at $30k. I sense that $9k p.a. aint enough. The policy has to be marketable as well as ideologically sound.

  51. Pommygrante – okay. I thought you may have been confused but clearly you knew what you were implying. As your concern relates to the marketing of LDP policy more so than the substance of the policy I might discuss it with you outside this medium. I will say however that all significant reform is a difficult political sell. The status quo generally causes far less focused vocal outrage than any given proposal for change.

  52. I can say that, having discussed reform 30/30 with Lefties I’ve found the major turn off point would be the 9K NIT. They think it’s not enough to live on and it’s hard to fight Pathos with Logos.

  53. Terje

    I will say however that all significant reform is a difficult political sell

    No truer word spoken. Did you see the deeply depressing poll results in Policy about how un-libertarian most Aussies are? Uphill battle doesn’t even beging to describe it.

    Nothing a deep and prolonged recession wouldn’t cure though (not that i’m wishing for one, of course).

  54. I really should subscribe to Policy. My guess is that Australians are in many ways amoungst some of the most libertarian people in the world. Certainly they must be in the top percentiles. A pretty scary thought.

  55. Isn’t there an old law about ‘Bad money drives out good”? People hoard the good money, and pass on (spend) the bad. Factional money competing with metal coinage might mean the metals are hoarded, whilst the notes used in factional banking are spent. Perhaps the way to stop a return to factional banking is to refuse notes, and insist on hard currency! A true libertarian society couldn’t stop individuals issuing paper money (which all factional systems seem to use), but other individuals couldn’t be forced to use or accept them, either. In a free society, you would need to choose the hard choices, such as a hard currency. Just as a diet needs to be constantly maintained, so your financial circulation should be guarded against flab, such as soft currency options.

  56. You are refering to Greshams law.

    You could in theory have fractional reserve banking even whilst prohibit all paper currency and mandating gold coin as the only legal tender. I would not advocate this but merely make the point that fractional reserve banking is not dependent on the form that currency takes. You could insist on using goats as the unit of account and still have fractional reserve accounts denominated in goats. Kind of messy but.

  57. Pingback: Club Troppo » Missing Link

  58. I’m not an economist but I’m in favour of a precious metals standard for currency.

    I recently saw a good video on the history of American fractional reserve banking. It’s aimed at non-economists and is produced by the Von-Mises Institue. It’s availabe for free download on google video.

    My question is does the LDP have a policy on phasing out fractional reserve banking?

  59. Terje said:
    ‘Hmmm. A valid point. Sorry Justin.’

    Not at all Terje. I want to learn about the monetary side of things as much as the others do.

  60. “My question is does the LDP have a policy on phasing out fractional reserve banking?”

    Our old policy was stricter inflation targeting and moves to privatise central banking.

  61. There is no LDP policy that seeks to prohibit fractional reserve banking. The LDP is a party of freedom and it is not about introducing new laws to ban uncoerced acts freely agreed to by consenting adults. I don’t think such a ban would be in the spirit of the parties constitution and it would in my view be an extremely dopy policy position for any party to adopt.

  62. Mark, was the old policy safe for kiddlings and pre-gravers? Was it Voter-friendly? Did it come in bright colours?
    Seriously, if that’s the OLD policy, what is the NEW policy?

  63. Tim,

    I’m very strongly in favour of a gold standard. I’d be happy with pretty much any flavour from a hard government issued currency backed 100% by gold through to a fiat system with an exchange rate fixed to gold by open market operations. Any of these would be an improvement, although the latter could be implemented in days whilst the former would be a much more considerable reform. However none of this has anything to do with banning or permitting fractional reserve banking.

    I doubt that there is sufficient enthusiasm within the LDP for it to consider adopting a gold standard policy position. It would be a stark point of differentiation and debate however. Without any advocacy from the banking and economics professions it would be heavily criticised as an out of touch anchronism.

    Regards,
    Terje.

  64. I agree with ultimately privatising the reserve bank and removing the monopoly control of printing currency. So I take it that this would be the approach of the LDP.
    In regards to fractional reserve banking, if someone voluntarily accepts currency unbacked by products of redeemable value I agree that would be fine if it’s their descision to make.

  65. Remove the “Bank Notes Act of 1910” and the private sector could produce private currency as they still do in Scotland (and did in Australia before 1910). It’s worth noting that one of the private banks that issues private currency in Scotland is owned by our very own NAB.

  66. JC, I will only address any comments you make to me if you call me Winfolk, the english translation of my name, dummy.
    Why are you worried what people call themselves over the internet? I doubt if I’ll ever meet Terje, so I won’t need to say his name at all! I can think ‘turgid’ whilst writing Terje, and he’ll never know!
    As for money, I still think that solid, hard currency is best. However, I have heard of a system called ‘demurrage’ money, which is a limited-life paper note. I.e., a 1 Dollar note might only have a one-hundred day life span, losing a cent per day, until it had no redeemable value (meaning you couldn’t trade it in to the Central Bank for it’s face value in gold, or silver). At the time I first heard about it, I thought ‘Great!!’, but now I know it’s another form of fractional money; therefore not as good as metallic coinage would be.

  67. That sounds good to me Terje. I have to educate myself a bit more on economics because as I’m discovering, many libertarians are economists. I actually think this is a good indicator of the merits of libertarian theory.

    The Von Mises institute video I watched blamed “boom bust” cycles on government monopolised fractional reserve banking. ie: instability. Not just inflation.

    But I’d like to clarify this point: Are “Rothbardians” advocating that fractional reserve banking should be illegal?

    I thought most were just saying it was theoretically unsound. For example Hans-Hermann Hoppe states that the possibility of bank bankruptcy is a good thing because it is precisely the reason for banks to operate responsibility.

    I am interested in your comment Terje:
    “And the level of government intrusion that would be required to police a 100% backing requirement would be the antithesis of liberty.”

    I understood the Von-Mises institues’ position to be that the American people were erroneously told a federal monopoly, fractional reserve banking system would stabilize their money system and prevent bank bankruptcies.

  68. JC. I also despise multi-cultrualism, political correctness and racist government policies disguised as being compassionate but:
    What is your justification for the statement,

    “Listen if you have an unpronounceable name the right thing to do is change it”

    Why?

  69. Demurrage is a carrying cost. Gold has demurrage in so far as it costs something to store it. The net present value calculations under a monetary system with demurrage are very interesting and they tend to reduce the rate at which the future is discounted. I don’t see it having anything to do with fractional reserve banking however.

    Tim – I’m all on board with the Austrians when it comes to criticism of the US Federal reserve and the track record of central banking. The masses have indeed been sold a lemon. However this is also quite separate from the issue of fractional reserve banking.

    I don’t know Hans-Hermann Hoppe but I would agree that banks should not be protected from failure by government central banking or government edict. In Australias case (unlike the USA) taxpayers money has never been used to bail out a bank and the government does not guarantee deposits here. However we do share with the USA the folly of central banking.

    Fractional reserve banking is separate to the issue of central banking. You can abolish central banking (which we should do) and still retain the freedom to engage is fractional reserve banking (which we should also do). Fractional reserve banking is nothing more than making promises that entail some risk. And given that promises that entail risk is a central characteristic of commerce I see no merit in prohibiting it just for this select example from banking. One might argue that banks should better disclose such risks to their customers but I think the risk is very low and the existing disclosure more than adequate.

  70. My name is actually very easy to pronounce, you say “Tay-a”. I even routinely include the phonetic version in brackets. It is only in written communication that people get confused and most people that I know don’t meet me first via the written medium so I’ve never felt any inclination to change it. Of course I could follow Joes lead and hide behind initials but that would be boring.

  71. “But I’d like to clarify this point: Are “Rothbardians” advocating that fractional reserve banking should be illegal?”

    Its better to leave Rothbard out of it and just deal with the facts.

    Under current circumstances if we at first don’t get to 100% backing,( at least in transition) we cannot have a stable free-enterprise money.

    Its that simple.

    When you talk about global warming people will go into all sorts of subterfuge to get away from the fact that the energy-deprivation-crusaders have no evidence of their own.

    And likewise in this argument the fractional-reserve-at-all-costs-crowd will try and run away from the reality of the situation by recourse to all sorts of trickery.

    But if you are for free enterprise and you want a smooth transition to a viable and high-performing free enterprise money…….. the first step is to get rid of fractional reserve.

    And there is just no getting around that basic fact of reality.

    But they try. Oh how they try. Just watch them as this debate unfolds. It will become a thread of doom but only because of the dishonesty of the fractional-reserve-at-all-costs crowd.

  72. “You know birdie, if there is private money fractional wouldn’t be so leveraged, I think otherwise people would simply dump it for more attractive money.”

    Yeah thats true. Thats George Reismans basic approach.

    But this consideration is from a starting point of 100% backed.

    We will create a depression if we decide we want to get to free enterprise money via just pulling the government rug from beneath the finance industries feet and waiting for fractional reserve to slowly shit itself over a number of generations.

    This is all under the rubrick of currency reform. Fractional reserve is just one more type of debased currency.

    Yes if everything was running well and people weren’t allowed to cheat fractional reserve, an honest version of it that is, would be a marginal product.

    It would basically be an IOU plus a REDEMPTION PROMISE.

    And that product wouldn’t cause many problems and it would likely trade at a discount.

    Thats what the equilibrium would likely be if fraud was jumped on straight away.

    But things don’t always work out right. You have massive gold strikes… Or you might have a war. And then the nominal interest rate goes way higher then what it could ever do under an hypothetical free enterprise system…

    … Or a leftist government gets in and starts creating an artificial demand for this IOU+REDEMPTION PROMISE product.

    And so there we are off again with our monetary system being debased and being made non-viable.

    So I think what you are saying is a sort of theoretical consideration.

    Because our main job is to protect ourselves from the government. And once we open up fractional reserve thats a constitutional protection that we would then have lost and there is no end to the political risk except it IS no risk but an open certainty that this avenue will be abused.

    Even if we are anarcho-capitalists we have to have the understanding that some regulations must be gotten rid of before others.

    Some back-up spending must stay in place while the rest of the spending is being unwound.

    And we can get rid of the prohibition on fractional reserve when we have airtight and vigilante private enforcement of fraud.

    Or we can get rid of it the Saturday before the Wednesday on which the government is dissolved altogether.

    But the key thing that people will dodge is that:

    “if you are for free enterprise and you want a smooth transition to a viable and high-performing free enterprise money…….. the first step is to get rid of fractional reserve.”

  73. Hiding behind initials? Huh? But then how would you know my name is Joe… if I am hiding.
    Is the this the passive aggressive payback?

  74. JC,

    I’d be interested to know your take on my name. It is interesting that since commentating on blogs, it can be amazing at how quickly I sometimes have been able to illicit schoolyard jibes regarding my surname, which is Dutch by the way.

  75. Deflation causes people to delay consumption

    If this were true, nobody would buy computers.

    The fact is that deflation is ruled by the same time factors as interest rates are: is it better to have an 8 core Mac Pro today or a 16 core one in a year? People will make up their own minds. Most will choose to buy what they with what they have.

    I think the “deflation leads to stagnation” argument is oversold.

  76. Multicultural middle eastern religious name = Joseph father of JC

    Anglo name , as in the peninsula of Angeln (origin of Anglos) where the Petersens of Denmark live = Terje

    Go back to making pizzas Cambria or get on the next boat back to the Solomons and make a few for families who have dead relatives as a result of your gaseous online emissions.

  77. there’s room for a redneck white trash on that boat, steve. You can always act as the toilet paper holder.

  78. Not if I insisted on it being pronounced in Dutch, it wouldn’t be.

    Halfweeg (say hal-ef-vayg)

    Not to mention my middle name Jan (say yarn).

    Having said that, I don’t speak Dutch, was born in Australia, so I don’t mind a anglicised pronounciation of any of my names.

  79. JC. I also despise multi-cultrualism, political correctness and racist government policies disguised as being compassionate but:
    What is your justification for the statement,

    “Listen if you have an unpronounceable name the right thing to do is change it”

    Why?

    How about considertaion for others? Asian people do it mainly because of that reason. The real question is not why. It’s why not. Why wouldn’t want to. How on earth would anyone know that Terje is…. er really tay-a. You couldn’t infer that in a zillion years.

    Lots of Europeans would change their names on coming here in the old days.

    Has Multicult screwed us up so much that even the suggestion of doing something considerate in the host culture is now almost a forbidden thing to even speak about? Fm we really have come a long way haven’t we?

    Would any of you say think it would be perfectly ok to go live permanently in say China and not have a Chinese name in Chinese characters? The first thing people do is actaully get a business card with their name etc. in Chinese characters. It can’t possibly translate to the same thing.

    Look at the idiot above confusing the origins of Aglos with the suggestion that someone ought to change their name so people have no problem with pronunciation in the host culture. The idea is entirely lost on the fool.

    I have no issues with those who don’t want to make a change. But don’t ask me to think it is a considerate thing to do though.

  80. Brendan

    You couldn’t insist on such a thing because people simply couldn’t and wouldn’t abide by it. So your really arguing a strawman. There isn’t a chance in a million years that anyone other than dutch speakers would know the correct pronunciation.

  81. “The idea is entirely lost on the fool.”

    JC, you were the one screaming at Terje to get an “anglo name for christ’s sake”.
    You dont even know what Anglo means or where the Angles come from. Christ was not a Northern German either.

    Unless you mean Anglo as in Los Angeles, in which case mine’s an enchilada with the works Joe.

  82. Steve

    I’m not screaming at him to get an anglo name. I made a reference to it, you fool, which is entirely different. But I guess a silly redneck like you couldn’t tell, which is the reason this issue has blown up.

    I am totally lost as to why you bring up the history of Anglos and it’s /their origins- as though that has an important place in the discussion we are having. You think that we’re discussing a return to the old german dialect? If you are that’s idiotic.

    He thinks the pronunciation of his name in the native descriptive is important otherwise he would be bracketing the correct way of pronouncing it. If he wants to remain as teje than it would be easier all round and more considerate if it rhymed with turgid. Otherwise how the hell is someone going to figure out it is Tay-a. No one could expect a redneck like you to figure that out let alone someone as smart and worldy as me, Steve.

    It’s similar to what some young idiotic people have done to their names of my racial background since multi cult toook a hold of our collective senses. Lawrence/ larry suddenly morphed into Lorenzo. This is another example of Multicult screwing up of society.

  83. Deflation is not falling consumer prices. Falling consumer prices can happen under a growing money supply.

    Deflation rather is a contraction of money and credit.

    To have a definition wherein deflation and inflation are held to be falls and rises in CONSUMER prices alone is to be one-eye-blind towards the massive part of the economy not involved in the retailing of consumer goods.

    This is only a recent change in definitions and it was done for tendentious reasons. These poor and sloppy definitions are the reason why folks tend to get confused in what is a blindingly simple subject.

    “Deflation causes people to delay consumption.”

    Deflation, properly understood, puts people into such hardship that all they can really do is consume. Their savings, insofar as they are held in real assets are devastated. Their net wealth, except for those who have saved all their cash and stuffed it into a matress, has imploded.

    Consumption holds up during monetary deflation. What completely dies in the ass is business investment.

    But falling consumer prices, when accompanied by slowly growing aggregate demand, is a good thing.

    And if it causes people to delay consumption then what we have is the key to ending poverty. Because to delay consumption is to SAVE and to SAVE is to INVEST.

    The demand for capital goods and the demand for consumers goods are COMPETING demands. So the situation wherein aggregate demand is expanding slowly (note: This is NOT deflation) and consumer prices are falling is the ideal situation. We want to get there and stay there.

    When people are delaying consumption in a situation of slowly increasing aggregate demand and falling consumer prices they are building wealth for both themselves and for the community.

    This is the ideal. This is what we want a monetary system to deliver. We want a monetary system to deliver aggregate demand that grows as slowly as possible but never actually drops.

    Whereas with fractional reserve aggregate demand locally and nationally is always oscillating up and down. To prevent aggregate demand from actually dropping suddenly under fractional reserve you cannot have a slow growth rate in aggregate demand. It becomes too painfull as local areas become pummelled with precipitously dropping demand.

    People say that fractional reserve would be OK if we targeted 0% consumer price inflation. Why? Why would it be OK? That means that when the rate of monetary growth oscillated down then aggregate demand would actually tank rather then merely suddenly grow more slowly (the instability is bad enough. But actual sudden downward dips in demand, either locally or nationally is like taking all the small businessmen out in the street and subjecting them to the lash).

    Only 100% backing can get the money supply growing slowly yet without downward dips.

  84. Yes!!
    This is a takeover by the ALS blog by the
    Catallaxy social reject braindead zombie compulsive keyboard manure spreader squad!!

    Watch you property value plummet!
    Probably best just to cut your ALS losses,
    walk away and start again somewhere else.

  85. That’s a green party supporter talking. He sure knows what a zombie looks like. He stares at them at party meetings.

  86. If it were not for brain dead Catallaxy zombies there would be no life around here,
    you know how to get the party started JC!

  87. Who needs a life when we can type for fun? Honestly, JC, unless you meet people face-to-face, you don’t need to know how to pronounce their names! When I see JC I think, ‘could stand for Jabbering Cretin’, but I would never call you that to your face!

  88. “When I see JC I think, ‘could stand for Jabbering Cretin’, but I would never call you that to your face!”

    You could always try, Nic. You could always give it a go and see where it takes us.

    Jabbering cretin?

    You’ve made 9 posts on this thread mostly referring to off topic issues like this one. The one that was on topic was gibberish which clearly shows you have no understanding of monetary economics at all. It was laughably useless.

    All other other comments were about this name thing. So if you’re going to call someone a cretin is look in the mirror.

    Now, try and keep on thread instead of making cretinous comments that have nothing to do with the thread. All I’m doing is responding to yours, you patehtic fool.

    In fact every single one of my comments about this issue has been a response.

  89. To you , my name is Winfolk, JC.
    And a lot of this started because of your comments about names on another issue.
    The Angles were originally a tribe who worshipped the Goddess Ing, which is why England is pronounced Ingland.
    As for multiculturalism, when it seemed to be about tolerance of differences, then I was in favour of it. I am not in favour of other people importing their laws into this country. I do not get upset about names, so long as I’m not asked to pronounce them.
    As for poverty, I think my comments on hard currency are as good as anyone else’s.
    But some people, like Aborigines, have a bad mind-set. They were subject to the randomness of nature, and some still feel that ‘luck’ should be compulsorily shared around, even if a person worked hard for that ‘luck’. We need to correct their poverty of ideas first, then poverty will be easier to rectify.
    As for Juvenile-Commentor, I recall that he first called me a dummy, to which I then responded. He initiated the round, and then complains that he is ‘responding’ to other people all the time. It’s amazing how many enemies you can make when you give no consideration to others….

  90. Part of the article says…

    “Now suppose the dole is $175 a week, the market rate for a certain low-skilled person is $300 a week, and the minimum wage is $350 a week. How can it be better for that person or society for him to suffer both a lower income, and the hopelessness and degradation that go with being unemployed, than to work and earn his living at the market rate?

    Even if the market rate were the same as the dole, how can it be said that there is a need for the public to provide a living for someone, when he is able himself to earn the same amount without public assistance?”

    The last bit in particular seems to be implying a dollar for dollar income test for the dole. I thought the 30/30 thingo ran a lower taper rate than that?

    If you are keen on high tapers, it might be worth noting that under the current system, the dole (sans extras) for a single person cuts out at around $20,500, at which point the Effective Average Tax Rate over the entirety of that income is about 62%. Dole recipients become net taxpayers at about $17,500, at which point their EATR is about 61%.

    Just an FYI thing really.

  91. Nic
    Who seriously gives a shit about the origins you dribbling cretin. We’re talking about assimilating into a culture, you total fool. You are now at you’re 10th comment and still on about the same thing. Dry up your own spit. Just keep to the thread if don’t wish me to respond.

    I called you a dummy because you made a silly comment related to the names thing. I was being honest as it was a dumb comment.

  92. To everyone who is not JC, keep up the good work! Even Graemebird is worth reading, now that he is not insulting people. I find that civilised people are always worth talking to.
    I have always felt that it is incumbent on a culture which wants others to assimilate into it to be so good that others are eager to join. The USA is a culture with names from all over the world, not just Anglo founding names, and it has absorbed plenty from other cultures. Assimilation should not be imposed, or you breed resentment, and resistance, and poor enclaves. This , I believe, is what happened in France. They also had other problems, such as minimum wages that discourage employment, but another barrier is culture- the ruling culture has little tolerance for other cultures, and that breeds resentment. If we were to try impose assimilation then we’d have problems like that.

  93. To everyone who is not JC, keep up the good work! Even Graemebird is worth reading, now that he is not insulting people. I find that civilised people are always worth talking to.

    Shorter Nic: People may not notice what a [cool dude] I’ve been if a praise everyone.
    ———————————

    I have always felt that it is incumbent on a culture which wants others to assimilate into it to be so good that others are eager to join.

    Are others also unable to make head or tail what he is trying to say here? It’s just a tangled up mess of babbling nonsense. Does he mean that the host is always the wrong party to failed immigration?
    —————————–

    The USA is a culture with names from all over the world, not just Anglo founding names, and it has absorbed plenty from other cultures.

    Well yes. And there is also a sense to togetherness too from people who have moved there. Not shared history of course, but shared values.

    ———————————-
    Assimilation should not be imposed, or you breed resentment, and resistance, and poor enclaves.

    Ok. But you can alos kick it along by eliminating cancers llike multiculturalism..
    ———————–

    This , I believe, is what happened in France.

    No, France is statist. It is a statist country that can’t offer enough jobs.

    —————————–

    They also had other problems, such as minimum wages that discourage employment,

    Its labor market is a mess of rules and restrictions, which means the less skilled are unable to find jobs.

    ————————————-

    but another barrier is culture- the ruling culture has little tolerance for other cultures, and that breeds resentment.

    Ok. And the ponit is?

    ————————————

    If we were to try impose assimilation then we’d have problems like that.

    Where have I said we should impose it, you fool. What I said is that new comers should be considerate (like a lot of Asians are) in changing their names so it is easier all round. I haven’t for once suggested legislative interference. You are such a [great guy].

    Edited by admin

  94. JC, you’re more a dick than Graeme and nowhere near as entertaining. Not even Jason acts like such an arsehole.

    What’s JC stands for anyway – Janijerk Cockakowski?

  95. Hey bill just to prove to the audience you’re not a pathetic sock puppet could you just direct us to the last comment you made at this site before this one? I did a quick CTRL F search of your name for the past 20 pieces and bill smith never turned up. What a douchbag.

    ‘What an oxygen thief you are Nic.

  96. JC – I was born and raised in Australia. My parents did not teach me their native language because they thought it important that we integrate and at the time they believed that being multilingual would be a disadvantage. They gave me a Norweigan name (Terje) because they liked the name and that is where my mother came from. They pronouced it “tay-a” rather than the original form because that is much easier on the aussie tongue. As such the pronounciation has already been modified. Now maybe I should have changed my name to Fred years ago to make peoples lives easier. However whilst people frequently state that my name is unusual you are the first person I can ever recall that thinks I should change it. So unless you can get together a petition of many people that think I should change my name I’m not going to give the idea the slightest consideration. I’m extremely attached to my name and it has become rather core to my identity. I do suspect that you make an issue of it purely because you are keen to personalise our disagreements.

    You may call me “Ted” or “Charlie” or “Hey You” if you prefer so long as your polite and consistent. I am reasonably easy going.

  97. I couldn’t care if you wanted to call yourself Rover, Terje, after a pet dog. That’s up to you. However don’t ask me NOT to have an opinion.

    As i said, the issue isn’t about the name as such , it’s about how you seem to want it pronounced when most people would obviously pronouce it to rythm with turgid. Your bracketed “demand” is more than a little enthocentric, don’t you think?

    In any event the crticism of you was more to do with the way you attacked me and automatically sided with the leftist headkicker without even thinking for a second that there is more than a little history there.

    You can of course associate with whowever you like, far be it for me to tell you who you should speak to.

    It’s more than a little rancid that your pathetic attack on me to remains on the other thread while mine is moved out of there. That’s what an insincere dick does. Hell, that’s the sort of thing I would expect from the Quisling when he’s conducting a dishonorable headkicking. Obviously you have spent far too much time at that swamp and learned the art from the master of the personal attack.

    So the primary issue isn’t about your name Terje and HOW you want it pronounced, it’s the fact that tried to stab me in the back and then be all insincere about it. Moreover it’s more than a little strange how you managed to turn this thing about you and your name when it’s more to do with your behaviour and your attack.

    Let’s focus on what I said about the Quisling as it would be more appropriate than talking about how and why you named the way you were. Perosnally i don’t give crap.

  98. (I worship the goddess Yoni.)

    Now. Graeme. Fractional reserve. If it was illegalised, then this would illegalise consensual acts between adults, which would tend to go against libertarian values. I take it what you’re saying is, to transition to a system in which it was permitted, you would first need to illegalise it to get a stable system going in the first place, is that what you’re saying.

  99. Look the real and important issue GB brings up, Jsutin is that no matter how we want to cut it, turn it or burn it fractional banking is inherently unstable. It is and that’s a fact. It’s even more unstable when it’s allowed to rein free with government fiat.

    GB thinks it ios so unstable that it should be allowed to exist and thinks that if we manage our transtion properly and intelignetly it shoudn’t be a problem. There is an argument for that. However there is an equally more valid argument that free banking would get us close to that position anyway so that making it illegal would be redundant.

    Look fractional is unstable. However the market would see to it that it’s unstability would be kept in check far better than the sytme we currently have now….. moral hazard along with massive amoutns of inflation to move it along.

    WHat GB is saying makes a great deal of sense in at least recognizing just how uinstable fractional actually is.

    My bet is that some form of internet money will eventually make government money redundant, but be ready for a huge fight.

  100. JC – I have never demanded anything from you in terms of my name. And you are wrong about the debating tactics employed. I saw your comment and said I would not reply as it was in moderation. As it happens JohnH moved your comment elsewhere, I suspected he would but I did not request it. Perhaps you wanted to focus on the Quiggin issue but you sure did a lot to make the topic about me rather than about my Quiggin comment.

  101. The idea being peddled by GMB and JC is that banning fractional reserve banking will increase price stability. However they cite no historical evidence at all. When was this theory of theirs ever tested and what was the result? They are talking about banning something on the basis of a hypothetical improvement. And yet there is no evidence to support the argument. The best GMB can offer is assertions that permitting FRB is left wing and anti free enterprise. However assertions are not evidence or argument they are just hollow rhetoric.

    In my view the burden of proof should always lie with those that wish to ban an activity. The default position should be liberal.

  102. “When was this theory of theirs ever tested and what was the result? ”

    Well of course its not going to be tested. As if the banker/government nexus is ever going to give up its ability to debase the currency with that sort of attitude.

    We know it works because recessions and booms come in with banking… that is to say fractional reserve banking.

  103. You idiot Terje, you total Doofus. Where did I ever mention banning fractional, you stupid fool? Where did i ever mention it?

    Lets go through and repeat what i said so someone as insincere as you can’t hitch a ride out of it.

    I said that GB makes a valid point in that fractional is inherently unstable. That’s a fact. It is unstable due to the fact that it is a leveraged structure. No ifs no buts but that is what it is.

    I said that we could follow Birdie’s path by making it illegal and avoid problems as the economy deflates by being fleet footed an intelligent as we move away from fractional. That’s possible i my estimate.

    I also said

    There is an argument for that. However there is an equally more valid argument that free banking would get us close to that position anyway so that making it illegal would be redundant.

    You see what an insincere dick you are. I make a point of saying that I prefer one over the other. You must be hoping people don’t read what I said and only focus on your disingenuousness.

  104. JC – I have never demanded anything from you in terms of my name.

    Ok so knock out the brackets. That’s an implict demand.

    ————————–

    And you are wrong about the debating tactics employed.

    You lost me.

    ————————-
    I saw your comment and said I would not reply as it was in moderation.

    Yea, Mr. nice guy. Why didn’t you move you own comment to the other thread where it belonged then.?

    ——————————-

    As it happens JohnH moved your comment elsewhere, I suspected he would but I did not request it.

    See above.

    Don’t blame others.

    —————————–

    Perhaps you wanted to focus on the Quiggin issue but you sure did a lot to make the topic about me rather than about my Quiggin comment.

    I wasn’t focusing on Quiggin, i was focusing on you for being a total dick. You brought up Quiggin in your missive agaisnt me.

    ———————————

    Look, I’m not going to let you have any last word about this because I’m really pissed about what you did, how you did it and what you used to try and screw me over. So you can keep going or finish it right here.

    You screwed up. You tried to screw me over using the pathetic quiggin threat as a hammer. It won’t work because you’re walking over quicksand when you try and use that head kicker as your star wtiness. He’s just gonna get you drowned.

    My honest advice is apologise and move on

  105. Let’s go though it one more time.

    fractional reserve is unstable.

    Fiat with fractional is very unstable.

    Free banking with fractional is less unstable and possibly ideal as it would probably be a lot less

    Fractional is unstable becasue it is a leverage structure. You can’t go broke without debt.

    That’s the evidence right there

    Go away, Terje.

  106. JC,

    “Say tay-a” is not an implicit demand. It’s just shorter than saying “my name is pronounced tay-a so you don’t need to ask me again”. I only started the practice after several people asked me how it was pronounced. If you felt pressured because of it then you have misjudged it’s intent.

    My original reference to Quiggin was in the context of you trying to play peace maker between JohnH and Graeme. My reference was to the fact that your past form suggests that you lack credability as a peacemaker. However your subsequent response makes the need for any reference to past form now almost entirely unnecessary.

    I don’t agree that fractional reserve banking is unstable. However I do apologise for suggesting that you were in favour of banning it. Your latest clarification indicates that I have misunderstood and mischaracterised your position.

    If I now understand you correctly then it is the case that you believe that we should have private currency, free banking and that Fractional Reserve Banking should be permitted. Which is in essence what JohnH, Jason Soon, Mark Hill and I have argued all along. We may quibble about the detail but that is an altogether less severe difference of opinion.

    So Graeme is in fact alone here in arguing for the criminalisation of Fractional Reserve Banking.

    Regards,
    Terje.

  107. I told you earlier up the thread that I’m not really interested how or what you all yourself- only the implicit demand. I’m really not interested in getting your explanation any longer so you’re wasting your time with this stuff. Give it up.

    My original reference to Quiggin was in the context of you trying to play peace maker between JohnH and Graeme.

    huh?

    ———————————–

    My reference was to the fact that your past form suggests that you lack credability as a peacemaker.

    yes, you seem to be in the habit of judging people like you were recently explaining where and how I was correct …..like you were correcting homework.

    ———————

    My reference was to the fact that your past form suggests that you lack credability as a peacemaker.

    see above.

    ———————-

    However your subsequent response makes the need for any reference to past form now almost entirely unnecessary.

    see above.

    What you mean is that defending myself against your spurious attack isn’t acceptable in your opinion. That if I don’t conform to your standards of being nice to head kickers I shouldn’t act as a peace maker between two people I quite like.

    Are you insane?

    ——————–

    “So Graeme is in fact alone here in arguing for the criminalisation of Fractional Reserve Banking. ”

    No. GB is not alone. He has made an excellent obseravtion that fractional is unstable which i agree with. It’s just a matter of how much potential instability vs leverage one is prepared to live with and who manages it.

    Look, I’ve lived and seen how instability through leverage can cause things to go askew. The current system we have now is a super charged fractional system that will come undone at some stage. Trouble is one can’t guess when or how. But we are seeing an example of what happens in the sub-prime housing lending market in the US. A house that sold for $690,000 to years ago now sold for 135,000.

    A financial firm is currently carrying about $2 billion in debt against less than $100 in capital. Some of the capital is IOUs. This is serious leverage. There is no room for error in that kind of leverage.

    I the current super charged fiat system we have is repsonibe for that.

    Don’t underestimate the concern Gb shows against leverage and it’s instability. He has a very valid point.

  108. The problem with fractional reserve banking is that when you put in $100, and they lend out $90, they still tell you that you get get $100 out when ever you like, even though the money simply isn’t there.

    Perhaps a real physical asset provides the best analogy. Lets say you are going overseas for a few months, and you ask me to look after your car, to store it in my garage.

    By rights, you should be able to come back at any time, and get your car back.

    If I have lent the car out withoutg telling you, you obviously cannot come back at any time, and get it back.

    Had I done this with a car, I would have been regarded as a criminal, and my “defence” of leaving a $50 note in the glove box, and refilling the tank would not have held.

    If you wanted a bank to lend out the money you deposited to earn interest on it, you would have made a term deposit. If you wanted it available 27/7, you would leave it in an account you could access at anytime.

    Whether or not fractional reserve is unstable is irrelevant, it is fraud.

  109. Whether or not fractional reserve is unstable is irrelevant, it is fraud.

    I don’t get it. It can only be fraud if they misrepresent the truth, surely. As far as I can see, that’s not happening.

    If I leave my money in a current account, the assumption is I can get it out again at any time. If I put it on fixed deposit, I can’t get it out until the term expires. The banks don’t say or do anything to contradict that.

    Admittedly, the bank takes a chance that everyone won’t want to take their money out at once, but isn’t that simply a market risk? Banks will sometimes get it wrong and fail, like any other business. Why is that the business of the government?

  110. “I don’t get it. It can only be fraud if they misrepresent the truth, surely. As far as I can see, that’s not happening. ”

    I was quite explicit. The bank would be telling you that you have $x on deposit, but they have in fact lent 90% (or whatever) out already.

    “If I leave my money in a current account, the assumption is I can get it out again at any time.”

    Quite true, but if it is lent out, how can they guarantee that you can get it?

    “The banks don’t say or do anything to contradict that.”

    Yes, they do. They loan out a fraction of it, and only leave the reserve requirement.

    “Admittedly, the bank takes a chance that everyone won’t want to take their money out at once, but isn’t that simply a market risk?”

    No it is not. If you leave your money in a current account, accessable at any time, you are asking them to warehouse it.

    “Banks will sometimes get it wrong and fail, like any other business.
    Why is that the business of the government?”

    Because fractional reserve banking is fraudulent.

    It “works” because of government intervention (a central bank acting as a lender of last resort).

    Central banking and fractional reserve go hand in hand, because if the worst comes to the worst, and there’s a run, the central bank prints the money required to pay everyone off.

  111. Legally it’s a typical example of an enforceable contract I would have thought. The bank agrees to keep your deposit and make it available to you on request, and if they refuse, you can demand performance of the terms of the contract.

    Central banking and fractional reserve go hand in hand, because if the worst comes to the worst, and there’s a run, the central bank prints the money required to pay everyone off.

    And this is what the Federal Reserve didn’t do during the Great Depression. According to Milton Friedman they should have bailed many of these banks out because they created the conditions for the run in the first place through incompetent monetary policy. It wasn’t the banks’ shoddy business practice that was responsible for the government’s economic stuff-up, in other words, so the central bank had a responsibility to bail them out. Certainly, you could ban the central bank from bailing out banks that are about to go under because of silly business practice – although I guess it’d be hard to tell.

    Is this what is meant by the ‘inherent instability’ of fractional reserve? Seems like an acknowledgment of a necessary evil (like the need for some limited form of government) really. Wouldn’t free banking get rid of the central bank so there’d be no opportunity for the government to set the conditions as they presumably do under the present system?

    P.S. I only know Year 12 monetary economics.

  112. In history fractional reserve always begins as embezzlement. And then it becomes hardwired into the system. So its not now fraud. And the reason why its not now fraud is simply because it was fraud and they built a system around it so that it would then not be fraud.

    What has happened over the centuries is that all sorts of measures have been taken to accomodate what was originally fraud. The FREE SWINDLERS side of the argument wishes to do away wih these accomodating measures without doing away with the latent fraud.

    But you cannnot do away without all these socialist measures without doing away with the original latent fraud that brought these socialist measures forth over the centuries.

    Fractional reserve might exist in a small way without fraud. But even in that case its likely going to be the result of government action, subtle or otherwise, that gets it going.

    So for the meantime its best to just ban fractional reserve. We’ve got to get used to the idea that some things have to get freed up after others. Fractional reserve ought to be freed up sometime after most of the justice and law enforcement system is privatised and running with high order efficiency.

    That is supposing you don’t think its inherently a swindle that is.

    The freedom to engage in fractional reserve is really only the freedom to swindle. But we moderns don’t see it that way these days because we’ve had banking-and-government power bundled up with eachother since before Cosimo Medici (and during the ‘free banking’ of the Medicis they had waves or mass unemployment as well… and not due to any minimum wage).
    >>>>>>>>>>>>>>>>>>>>>>>

    Here is the best way to define the various terms. Of course some variation is alright. But one wants to have a good reason to use other terms.

    Cash: Notes and coins.

    Monetary Base….

    (1) Under our system those notes and coins held by the banking system. Usually added to that is any cash that each bank can get on-call from the Reserve bank. Which in the textbooks would say something like…. ‘cash’ held with the reserve bank. Whether or not this cash actually exists or does not exist but might be printed if necessary…. the distinction between these two alternatives is not important. Whats important, why we might include this as part of the ‘monetary base’ is that the banks could potentially get more cash from this source on-call.

    So the monetary-base aka ‘high-powered money’ can be seen as that raw material from which the banks are able to PYRAMID ‘FIDUCIARY MONEY’ on top of. Typically they don’t count the notes and coins held by the public in this definition though this is somewhat arbitrary. But it is in recognition of the fact that the banks must have possession of the cash, or have it on-call, before they can start PYRAMIDING the Fiduciary-money on top of it.

    (2) Under fractional reserve gold…. monetary base would be ingots and coins held by the banks only.

    (3) Under 100% backing the concept of “monetary base” would be obsolete. And money would merely be the metals that were in circulation in coin and ingot form.

    THE MONEY SUPPLY.

    1. The money supply, under our current system, is notes and coins held by the public plus on-call promises to supply these notes and coins by the financial system. But they must be on-call-promises that the public thinks it owns. We are not talking here about your unused credit card limit. Because that unused limit is not something you think you own.

    Now why this bizzare ‘you think you own’ talk? Well the reason is that the banking system and the government have gone so far to bolster this fiduciary money, or Pyramid-money or Ponzi-Money that technically and legally you don’t own the cash in your cash-card account.

    Of course in reality you DO own it and this is just legal-overkill to shore up what is an inherently dubious setup.

    In other words the money supply is Notes and coins held by the public plus the on-call Ponzi-money of “OURS” we hold at the banks. In the textbooks we hear these referred to as “Demand Deposits”.

    We don’t tend to add the monetary base to this figure as this would be double counting.

    Other financial instruments counted in the monetary supply figures of M2 and M3 aren’t really money. They are actually just financial instruments. But for reasons too complicated to get into here….. movements in these composite figures are actually a far better predictor of movements in aggregate demand then movements in the actual money (cash and ponzi-bank-money) that these financial-instruments further pyramid on top of.

    It is CORRELATION and NOT causation that leads M3 to anticipate spending patterns better then growth in money (CASH+PONZI-BANK-MONEY) as such.

    2. Under 100% backing the money supply would simply be coins and ingots in circulation. Most of this would be held in your safe at home or by the banks, and you’d have a debit card like with E-Gold to get about with.

    So for the money supply to increase folks would actually have to dig this gold/platinum/silver/copper and other potential worthies.. out of the ground and turn it into ingots or coins.

    Under modern conditions most of it would likely be turned into ingots since debit cards for medium-sized purchases would be easier then coins.

    There is something very righteous about only being able to create money via digging it up. Since when we go to find and dig these needle-in-the-haystack-elements up we find other things in the haystack and increase our resources accordingly.

    When we invest in the capital equipment for drilling and mining to find these needle-in-the-haystack monetary elements we will also, on the side, be increasing the flow of our other mined resources.

    THE MAIN POINT OF THE STORY.

    Ponzi-Money or Pyramid-Money can be rapidly created and it can be just as rapidly be destroyed. In fact if our reserve bank decided to stop printing any more money, and took away any guarantees it has to our banking system….. if it did this the money-supply would collapse and go on collapsing in successive waves.

    Since the bank-created-money is Ponzi-Money it can suddenly collapse either nationally or locally. With a central bank its true that its unlikely to collapse for any great length of time NATIONALLY, but in that case to prevent it from collapsing locally the tendency is to keep the money-supply expanding TOO FAST nationally.

    In any case doing business within the ponzi-money system is always, even if well-managed, akin to attempting to swim in a swimming pool with choppy waves hitting you obscuring what it is you ought to be doing. As opposed to 100% backing where the pool is being filled via two hoses and the water is flat.

    PYRAMID MONEY CAN COLLAPSE. But once a monetary metal comes into being it stays that way. This is something that George Reisman points out. This is why 100% backing is critical, not just to the prevention of inflation, but at least as critically to the prevention of recessions.

    The monetary metals stay in existence once they are pulled out of the ground and turned into ingots and coins…. they stay in existence, for practical purposes FOREVER since they are the least reactive metals to oxygen that there are. They are durable and they don’t get destroyed. Check your reactivity series if you don’t believe me.

    The yearly mining of these metals is but a fraction of the total amount of these metals that has ever been mined in the history of humankind. And so we ensure for ourselves a fantastically stable and slowly growing money supply once we have dealt with transitional problems and so long as we don’t allow the creation of any of this Pyramided or Ponzi-money.

    A slowly growing money supply. But one that never actually collapses. Not nationally, and not locally either. Really the worst you might expect locally would be a slow drain, and this would reflect real economic loss of viability if it happened.

  113. Sukrit, the term ‘necessary evil’ is a misnomer. Evil has always been interpreted as ‘morally wrong; wicked; harmful’. As a moral choice, it relates to individual actions. If you have to put up with something, if there is no choice, and no chance of escape, then personal choices don’t enter into it. Perhaps it could be called a ‘necessary consequence’, or a ‘necessary weakness’. And all living systems, unlike communist systems, are unstable, so I would settle for ‘necessary consequence’.

  114. Birdie

    There are some US banks that operate a little like that. US Trust is a manger/banker of the super rich and I don’t believe it actually lent long and borrowed short. Think is was recently taken over very recenlty by Bank of America. Not sure though. You had to have 3 million in liquid deposits to set up with them and the banker knew the client on a first name basis.

    There are a few other trust banks that don’t operate on fractional.

  115. Pingback: Stationary Orbit » ALS on the Welfare State

  116. Right.

    You see all the banks would be like that under 100%. They’d borrow short and lend shorter. Or borrow long and lend not quite so long.

    Without government guaranties, including the guarantees of money-printing (which itself is theft/embezzlement) nobody would willingly lend to anyone who did otherwise.

    But the banks always cheat. It wouldn’t matter how righteous the individuals were. Without policing they will cheat. And its like no other fraud for it doesn’t only defraud the individuals, but it debases the currency of third parties as well.

    And once they start cheating that leads from one disaster to the next accumulating special interventions for the banks along the way.

    Whereas if we could arrest that historical process and keep it at the point of 100% backing then we would have the best of all possible monetary systems.

  117. I still don’t get it. It seems we are talking about choosing between two forms of government intervention:

    1. The government acts as guarantee of last resort for banks caught by a run on their cash reserves. This guarantee is what allows them to lend more than they hold on deposit.

    2. The government bans fractional reserve lending.

    Why is one any better than the other? Please explain!

  118. The second one is far better from a technical monetary point of view. And is far more natural. Since no-one wants to deposit his money at the bank on-call and then suddenly find that he can’t get it on-call. Which is the history of banking when fractional reserve actually happened without special government privelidges to shore it up.

    The history of banking is a history of ripoffs, disasters, depressions, bubbles and people losing all their money.

    This is why its not natural to agree to the banks lending your on-call money long without the government guarantees. You might see it as natural. But you haven’t lost all your gold and silver and heard your father and grandfather talking about losing all his gold and silver also.

    It would not be natural of you to agree that they could do this with your property. Since the unprotected banks who did this would lose all your property and you would not get your money back unless you were first in line at the door at the mere smell of trouble.

    Because these inevitable failures affect so devastatingly third parties its better that the inevitable fraud be pre-emptively stopped in the first place.

    Because once its allowed to start…even a little bit it becomes an organic growing problem. Since its really a subset of Greshams law… The bad money drives out the good.

    But if fractional reserve has no part of your system, and in a situation of no socialist government guarantees, the market works properly and better money drives out the less good.

  119. From a technical monetary point of view, the inflationist version of Gold. That is to say the idea of a free market that just said…. “Hell you bankers do what you like…. Let the buyer beware” well if those people who hold that view actually expect approvingly that there will be a great deal of ponzi-bank-money around…

    ..From a technical monetary point of view this is the most ridiculous and indefensible of any monetary system.

    In actual practice bitter experience would lead to high effective reserves of 40% or more until such time as we forgot the lesson of the last lot of bank failures and a bubble brought the reserves down to 5% ahead of another total collapse… possibly not just of the banking system but of society more generally.

    Why go through all this?

    It matters not that we can comfort ourselves ideologically with the idea that the ‘government is to blame’. The very act of allowing fractional reserves sets up the political risk.

    Most people who push the technically-nonsensical idea of Gold with massive amounts of ponzi-bank-money are really pulling your chain.

    What they really want is to maintain fiat, the central bank and all the regulations. And its just their way of dividing and conquering libertarians for them to suddenly put on the libertarian purist hat.

    The alleged libertarian purist hat that is. Because always in the beginning fractional reserve starts as embezzlement.

  120. “I still don’t get it. It seems we are talking about choosing between two forms of government intervention: ”

    I am doing nothing of the sort.

    “1. The government acts as guarantee of last resort for banks caught by a run on their cash reserves. This guarantee is what allows them to lend more than they hold on deposit.”

    What would happen if the government did not do this? The banks that engaged in fractional reserve practices would fail. The banks that did not would not fail.

    Those who suggest that a lender of last resort is necessary are saying that those who commit fraud should be enabled, and that the victims of fraud should be made whole not by those who committed the fraud, but by those who did not commit the fraud (the taxpayers in general).

    “2. The government bans fractional reserve lending.”

    How is banning fraud outside the field of what government should be allowed to do?

    Is banning murder a form of government intervention intolerable in a libertarian society?

    I will make it simple: if you wanted the banks to lend your money, you would have asked them to.

    If you made a contract with the banks to warehouse your money until you needed it, then the bank has absolutely no right to lend out the money it is claiming to keep on call.

    There is no such thing as non-fraudulent fractional reserve banking. I would have thought this simple: fractional reserve lending literally involves people saying that they have kept something available to you when they have actually lent it out to someone else.

    “Legally it’s a typical example of an enforceable contract I would have thought. The bank agrees to keep your deposit and make it available to you on request, and if they refuse, you can demand performance of the terms of the contract. ”

    They have agreed to keep your deposit, but under a fractional reserve system, they are not keeping your deposit. They are lending most of it out, and only keeping the reserve requirement, while at the same time telling you that they are keeping your full deposit. My bank statements don’t say “We’re only keeping 10% of your money, the rest we lent out.”, they say “Here is all your money”.

  121. OK, but, when I put money on deposit with the bank, I know they will lend it out. I have some on call and some on term deposit. I get more interest for money on term deposit, and know I can’t get it back when I want it, but I never suffer under the delusion that the bank is just holding my deposit money for when I want it and paying me interest for the privilge – If I want my money untouched I’d keep it under my bed. I put it to you that eveyone who puts money in a bank knows, or should know, were they sane adults, that the money will be lent, and, barring a run, will be available on call. The interest is the premium for the risk of default. Without central reserve banking, the only thing that would change is the risk premiums would be higher.

    Short answer – you haven’t convinved me yet. Try harder, don’t tell me I’m being frauded when I knowingly put my money into a bank. They’re not keeping it for me just for my pleasure…..

  122. “I have some on call and some on term deposit.”

    You aren’t reading what I am writing. The money you have on call, beyond the reserve requirement, is lent out. That is fractional reserve banking. They also continue to tell you that the money they have lent out is still in the bank, accessable at any time. It is not the same as a term deposit.

    “I’d keep it under my bed. I put it to you that eveyone who puts money in a bank knows, or should know, were they sane adults, that the money will be lent, and, barring a run, will be available on call.”

    Any sane adult knows that if he leaves his car unlocked in Woodridge, it will get stolen, and more than likely torched. That doesn’t make the car thief any less criminal.

    A bank run is problematic because under fractional reserve banking, a bank is generally insolvent. That is, if everyone shows up to take out all their demand deposits, the bank does not have the assets to meet their demands.

    “They’re not keeping it for me just for my pleasure…..”

    No, they’re charging you fees for it, which is quite fair.

  123. Yeah, not convinving me. I’m reading what you’re writing. I know when I put money in the bank it will be lent. I know in a run it won’t be available. (I also know with our current system the reserve will bail it out – that’s why I accept less interest for it). Nobody thinks the bank is just keeping it in the vault for them.

    If I got no interest I would store it myself. My farm is big, I can bury it in lots of places. You just talk rubbish when you say the bank fraudulently claims not to lend it. It is never claimed so. They just calculate so much demand for on call funds and have that percentage aviailable. We all know this. There is no fraud.

    Call me an anarcho-capitalist, Graeme,but I won’t replace one system of government regulation with another without proof it is better. I believe that in a free banking system banks would still lend out money they had on deposit. Really, it’s why they take the deposits in the first place. Money inb a bank is not gauranteed risk free. It is why sane people spread their investments. And get higher return for riskier investments. Remove the government regulation, and it will only work better in the long run.

    More generally, in a free market, removing the lender of last resort, we would probably have less on call money, more short term depost – hours days and weeks, all graduated to prevent runs. None of this “the bank is holding my money because they really like me” business. We’d still have fractional banking.

  124. Whether I convince you or not is irrelevant since your own alternatives are totally nonsensical. For you to object to the level playing field of 100% backing, and then to accept the rampant socialism and brute force of legal tender, bank subsidy and bank regulation, and runaway lending of short-money backed up and made possible only by the mitigation of rampant counterfeiting makes no sense at all. Its drooling retard talk.

    I wasn’t hassling you for putting the anarcho-capitalist hat on man.

    I was hassling you for putting it on here and taking it off again straight away.

    Why does this one regulation loom so large? Surely its less offensive then regulations telling folks which side of the road one must drive on. And it protects our savings and gives us the best monetary system possible.

    And in point of fact its only protection against recession, inflation, fraud and embezzlement.

    What monetary system are you advocating? And if you are advocating the utterly crazy free-ponzi-money-gold then do you understand monetary economics?

    If you are advocating a central bank and legal tender why did you hypocritically put on the anarcho-capitalist hat for that one nano-second?

    All you and the bank have to do under 100% backing is to decide whether your money is on-call or under a time-deposit. Thats not any sort of dictatorial regulation. Rather its a regulation to do with clarity in property rights.

    Just as when you sell or buy a house and land, what it is you are selling and buying involves the titles office and the law so the clarity is there and the matter is not subject to endless disputations.

    In the monetary matter this clarity means that the bank cannot issue false warehouse receipts and swindle third parties or cause recessions.

    Since without legal tender cash-money is just a warehouse receipt for Gold or another commodity and cannot be any sort of other document.

    In fact with todays technology we likely wouldn’t even have cash that went onto be traded. We’d have the metals and a debit card.

    What we are asking you to do here is use some imagination and try and transport yourself to a world without legal tender, without the government creating any demand for paper money via the compulsion of taxation and without the government favouring or discriminating in any way against bank licensees…. where there in fact WERE NO bank licensees.

    Under that situation fractional reserve is clearly fraud. Being as that any one of us could start banking activities tommorrow.

    You will then see that if paper money is only a warehouse receipt then clearly fractional reserve is fraud.

  125. “I know in a run it won’t be available.”

    It should be available. That is what an on-call deposit is. Money that is kept available for you to use at any time you want. Lending that money out without telling you is fraud. If they debited your account to the amount they lent, it wouldn’t be a problem, but they don’t. They keep it at the same level.

    “Nobody thinks the bank is just keeping it in the vault for them”

    That is precisely what the bank tells you.

    I will put it simply: You put x dollars into your immediate access account. The bank tells you that you can immediately access x dollars at any time. The bank then lends most of that money without telling you.

    If the system were not fraudulent, the bank would tell you that you could only get 10% of your money whenever you wanted it.

    The fact that you realise you are being defrauded (and seem content for the taxpayers to bear the costs of it) doesn’t mean you aren’t being defrauded.

    “You just talk rubbish when you say the bank fraudulently claims not to lend it.”

    No I don’t. You put $100 in, they tell you that you can get $100 out at any time. They do not tell you that $90 has been lent out.

    “None of this “the bank is holding my money because they really like me” business. ”

    Where have I asserted that this would ever be the case? A bank would warehouse money for a fee. That is how a free banking system would work with regard to on call deposits. To claim otherwise is to claim that under free banking, a bank has the right to embezzle.

  126. 1. Australian banks are not required to maitain a given reserve requirement. They decide for themselves how much cash to keep on hand just as every business does. And as with any business their credit rating and reputation is mud if they can’t manage cash flow (except that for many other businesses a good credit rating is a less decisive factor).

    2. Money deposited with Australian banks are not guaranteed by our government or by the central bank. If the bank defaults you pursue it in the courts just as with any contract breach. And this is as it should be because the taxpayers do not owe banks or their customers immunity from risk. USA law and USA policy does not apply in Australia.

    3. Many of you here seem to have never read the contract you have with your bank (which seem quite unwise). They do not agree to warehouse your money like a car in storage and that is a daft analogy because it is not the service banks offer (unless you get a safe deposit box). It is a strawman argument because it pretends that banks are being deceitful when they are in fact providing exactly the service they agree to provide.

    4. Australia is more than 100 years old. We have always permitted Fractional Reserve Banking. In all that time we have had only one bank default on it’s debt to depositors and ultimately they all got their money back after the bank was liquidated.

    5. If you want to set up a cash warehousing business please go right ahead. It is still mostly a free country.

    6. It is silly to focus blame for price instability on banks when the culprit is the government that has monopolised control over the nature, form and production of base currency and has imposed this onto you, me and the banks.

    7. With a warehouse service the currency can only be withdrawn at the place it was warehoused. As soon as a warehouse business allows you to withdraw at an interstate branch or even across town it creates a risk that some branches on some days may run out of cash. So a warehouse business entails risks also unless it is mostly useless. Which would probably explain why most people don’t keep their money with Storage King or any of the other providers of storage services. But if you really want storage I can give you the phone number for Storage King.

  127. Yeah. What Terje said. Except I’m sure I remember from way back that the reserve bank is gauranteeing non-business deposits up to $20,000 or some such amount in banks but not other financial institutions. Maybe it was $10,000?

    By the way, Chris, my bank doesn’t charge me fees on my on call account, they pay me some nominal interest. Probably not enough to match the inflation rate, but better then putting it in a hole. If you’re copping fees on your accounts I’d suggest you switch banks. Bendigo, anyone?

    The bank lets you get your money when you want it, provided not everyone wants it at the same time. As people almost never do, there isn’t a problem. Not fraud. Not fraud. Not fraud. It’s what we sign up for. I take offence at suggestion that I’m stupid enough to be drfrauded every time I put my money in the bank.

    I’m not really advocating any system, graeme, I’m not a money expert, I just ry to think how it would work without government and how to move toward it. I just can’t see what the big problem with banks lending money is, though I’ve been reading these posts for a while, and took objection to people chucking round the word fraud last night. On the other hand, I’m sober now, and probably won’t continue to engage in the argument, just sit back and soak it in.

  128. “..just as every business does..”

    That’s not right. If any other business acted like a bank it would be quickly facing prosecution for fraud. Thats why you have bank licenses.

    “Money deposited with Australian banks are not guaranteed by our government or by the central bank.”

    Yes they are. They are backed by the printing press. They’ll send helicoptors out if they need to.

    “Australia is more than 100 years old. We have always permitted Fractional Reserve Banking. In all that time we have had only one bank default on it’s debt to depositors and ultimately they all got their money back after the bank was liquidated.”

    Right. So the banks NEVER closed their doors and refused to issue cash?

    “They do not agree to warehouse your money like a car in storage and that is a daft analogy…..”

    Alright. Now I see what’s going on here. Now I see your modus operandi. You are back to the same silly and dishonest tactic that you were doing before when I told you off at BBB.

    This gets annoying after you pull this same deceitful trick about ten times in a row.

    Fractional reserve is NOT NOW FRAUD….. DO YOU UNDERSTAND THAT?

    Its fraud under free enterprise conditions. Its inherently fraudulent but its not now fraud because of the licensing system with all its attendant regulations, if you get rid of the legal tender, the government paper and the legal regulations thats when it will be natural to think of it as fraudulent.

    BECAUSE THATS WHEN THE WAREHOUSING THING IS NO ANALOGY BUT THE ACTUALITY OF HOW THINGS WORK.

    Now you’ve got to stop doing this dishonest two-step. I’ve pulled you up on it before at BBB.

    Forget about how things are now.

    Fractional reserve is socialism now. It ought to be more naturally thought of as fraud under free enterprise conditions.

    Free enterprise conditions means no demand for paper from the government. No demand for fractional reserve money. No discount rate. No buy-back of debt with printed money. No government loan insurance. No bank licensing so that I and anyone else can issue notes with promises on them. No easy money since people will go for hard things which retain their value like Gold, silver or platinum.

    It means very little debt by todays standards. And much more wealth tied up in gold/silver/platinum… and for most people comparatively less wealth tied up in land.

    So you’ve got the better part of your life savings being recycled by the banks for loans to buy capital goods.

    If any of these guys start lending out their on-call stuff it puts into jeopardy not only the on-call stuff but in fact most of your wealth.

    Terje just stop it man. We aren’t talking about licensed-socialist Australia when we refer to fractional reserve being by its nature fraudulent.

    So why were you talking about the history of licensed banking in Australia.

    You ought to have been talking about the banking families of Florence or the Venetians to get a valid understanding of what we are saying here.

    Now repeat after me. Fractional reserve is SOCIALISM under our system…. Fraud under free enterprise.

    People. As time goes on we will see others try and pull this exact same stunt many times over. You will see any amount of obstruction and trickery when it comes to this subject.

    Its like religion. Its just one of those subjects.

  129. Yes , we do have deposit insurance.

    If those who think fractional isn’t destabilizing, would they mind telling us at which point do they think leverage is too high. Banks are currently 16:1. Would they think 5o:1 to one is too high?

  130. Tim, drink more often. You made sense to me.

    I also find the fraud argument absurd. The Beverley Hillbillies had an episode where they all turned up at the bank to have a look at their money. I may not be an economist, but I ain’t a hillbilly. I know they are lending the money out to others. If I know that before I put my money there, how can it be fraud?

    Many of you here seem to have never read the contract you have with your bank (which seem quite unwise).

    OK, I’m unwise. What have I missed?

    If those who think fractional isn’t destabilizing, would they mind telling us at which point do they think leverage is too high. Banks are currently 16:1. Would they think 5o:1 to one is too high?

    If we asked 10 economists I’m sure we’d get 20 answers. So what? It’s a matter for each bank and the market. If one of them gets it wrong, it will go belly up and the others will eat its lunch. That’s capitalism. If the government fixes a ratio, that’s socialism.

  131. Right. But you wouldn’t want them to be lending the on-call money out under free enterprise conditions. Only under socialist conditions and conditions of bank licensing.

    And the fact is that in the fullness of time these guys will cheat and lend out your money fraudulently even under free enterprise conditions.

    Thats what we are talking about here.

    Thats how fractional reserve always starts and it means we cannot have a functioning free enterprise money.

    Think of the other alternatives? Which do you favour? Do you favour the interventionist alternative? Or the dysfunctional one where you have booms, busts and you loose your life savings?

  132. David

    My comment was to highlight the fact that fractional is potentially destabilizing. There’s no way getting round that. When your very leveraged you can end up in he can.

    I have said earlier that the current system is actually a Turbo charged for instability. The reason is that there is implict government support through publicly funded deposit insurance , LLR and public supervison of the banking system. The RBA uses the banking system to inflate away the currency through large additions to the money supply0 M1 has increased 350% over the last 15 years. Most banking these days is conducted through moral hazard principles.

    I support a private system with little or no government supervision. The market will then decide the level of leverage that is optimum. My guess is that it wouldn’t be anywhere near the level it’s now.

  133. The market will also decides if it wants a commodity backed currency or simply uses a private Fiat system.

  134. I think that people ought to be called upon to tell us the monetary system they favour and why?

    I’m only telling you what the best one is. But it appears to be being judged in some sort of abstract vacuum.

    Does everyone seriously here favour no bank licenses, no legal tender, no government money BUT WITH TONS AND TONS OF FRACTIONAL RESERVES??????

    Think of the implications of this. I can start up a bank. Take all your gold bars, spend them or lend them to anyone I want. And I cannot be charged with fraud??????

    This is just bizzare.

    And on the practical level how can you justify all the speculative bubbles and depressions that go along with it?

    THERE ARE THREE ALTERNATIVES HERE FOR THE LIBERTARIAN.

    Think about which one you are taking.

    The other alternatives mean a constellation of compulsions including many of the following:

    1.Thousands of bank regulations, not excluding capital requirement. Currently capital requirements are reducing peoples independence and sovereignty as the American banks are trying to export their own restrictions. Since we allow fractional reserve and have bank licenses the only way you stop these banks from over-extending themselves is by capital requirements and government backing.

    2. Legal Tender laws…. another series of unacceptable compulsions.

    3. Government money.

    4. A central bank in the counterfeiting business.

    So I mean what is all the fuss about with ending fractional reserve. Its one regulation or a very few, with some auditing….. As opposed to many hundreds of regulations… Bookloads of regulations.

    5. Banking licenses and barriers to entry.

    Now the fact of the matter is if you take all these compulsions away fractional reserve will be eventually seen to be fraudulent.

    And its the most pernicious of frauds because it affects everyone and not just the defrauded party.

  135. Compulory deposit insurance is a bit daft because banks are big enough to be able to self insure. Risk management is supposed to be one of their areas of expertise.

    I am reasonable certain deposit insurance is optional in Australia (I’ll happily concede otherwise if somebody cites a credible source. However reserve ratios are not compulsory and government ceased guaranteeing deposits when the Commonwealth bank was privatised.

    The risk of a bank run is not just about all the customers wanting their money back at the same time. A cash flow crunch can also occur if a large subset of the customer base wants the cash from one particular branch and that branch does not have the cash on hand. However having read the “terms and conditions” of my bank account I can see that my bank already gives itself a lot of contractual freedom to handle such situations. Essentially they don’t promise to perform the impossible. Still if you don’t like their terms I still have the phone number for Storage King.

    The notion that in order to get to an ideal end point of freedom we need an interum prohibition of Fractional Reserve Banking seems to me to be a problematic “ends justifies the means” sort of argument. We can use such arguments to argue that we should lock up communist sympathisers, impale a few moral conservatives and burn a few churches. However if freedom is an enemy of freedom what is the point of the exercise.

  136. “Compulory deposit insurance is a bit daft because banks are big enough to be able to self insure.”

    Terje. Of course they cannot self-insure.

    They don’t have a printing press.

    Only the printing-press can back up fractional reserve.

    Who could they self-insure with?

    Harrods? Other banks?

  137. “Still if you don’t like their terms I still have the phone number for Storage King.”

    Right. So if you place you Gold in storage with Storage King. You place it with them on-call. And they lend it out is that fraud?

  138. Right. So if you place you Gold in storage with Storage King. You place it with them on-call. And they lend it out is that fraud?

    Probably not. Fraud is a criminal offence requiring intent beyond a reasonable doubt. Assuming plenty of other people’s gold is stored there too and we don’t all demand it back at once, my gold will be available when I want it. There is no intent to deprive me of my gold, and in fact I haven’t lost anything just because it was lent out.

    From a civil perspective, provided Storage King mentions in its terms and conditions that it will lend it out, there is neither conversion nor breach of contract.

    I admit economics is a long way from my area of expertise, but so far you guys are not convincing me.

  139. This is the whole point.

    Now let us not get fooled by Terges talking about the situation AS IT IS TODAY. Since we are after a free enterprise alternative.

    When people took their gold to the banks for safe-keeping, on those cases where banking resumed anew…. It was always a STORAGE KING scenario that we were talking about.

    Thats all we are talking about here. We are not saying that TODAY EACH BANK IS COMMITTING FRAUD.

    They are not committing fraud since they have their cartelisation legislation in place, their barriers to entry, their printing press backing, their government money, new bushels of it coming online each year or each time the banking industry is looking a little stressed.

    Terje or someone else will pull this trick any number of times, start talking AS IF we said fractional reserve was fraudulent in the HERE AND NOW.

    You don’t believe me. But I’m telling you he will attempt to try and do that again. Talk AS IF we were saying fractional reserve was fraudulent under current conditions.

    Even after I’ve told you he will do it…. It doesn’t matter that I’ve tipped you off or anything. He and others will try this trickery yet again.

    Going back to the original free enterprise conditions of banking means going back to the Storage King scenario.

    Thats the only money supply system that works. Banking as warehousing is NOT an analogy. Under free enterprise the on-call stuff would indeed be money-warehousing.

    Every step along the way to the current reductio ad absurdem of fractional reserve lay government action.

    We don’t need to go through all that again.

    3 basic systems.

    Only one of them works well and is consistent with human freedom.

  140. Well if you put your gold in Storage King and they lent it out. And you took your Gold to E-Gold and they lent it out and on that basis you lost your life savings then there is something wrong with the law.

    Now look. There is only 3 essential systems to choose from and two of them are really bad.

    No-one would ever have taken their Gold to e-gold if egold was lending there on-call stuff out.

    They’d be mad to. Think of free enterprise conditions. You wouldn’t do it.

    The whole basis of them getting your money is that you’ll get it back. They can get it back to you if its fiat with government backing and licensing, barriers to entry, and the constant printing of money every time there is trouble.

    History tells us that they cannot do it without the socialist backing.

    No-one can point to a time of free enterprise with the banks practising fractional reserve where there wasn’t one banking crisis after another due to their ponzi-money fraud.

    So which system are you choosing in preference to the one we know will work superbly?

  141. “Does everyone seriously here favour no bank licenses, no legal tender, no government money BUT WITH TONS AND TONS OF FRACTIONAL RESERVES??????”

    Yeah, sort of. Don’t really see why not. Probably wouldn’t switch straight to it in a big bang reform though, give people time to get used to all the different choices involved and the risks entailed.

    “Think of the implications of this. I can start up a bank. Take all your gold bars, spend them or lend them to anyone I want. And I cannot be charged with fraud??????”

    You need to get my gold bars first. I’m hardly going to give them to you if I think you’re going to spend them or give them to anyone you want. I give them to you on the basis that you will pay me interest on them. I only give them to you if you have a reputation I trust. You default on your contract and I sue you, but you won’t default, because your reputation is your most valuable asset. I don’t see the problem. Keep in mind the old motto – a fool and his bars of precious metal are soon parted…

  142. “Yeah, sort of. Don’t really see why not. Probably wouldn’t switch straight to it in a big bang reform though, give people time to get used to all the different choices involved and the risks entailed.”

    Well then you are in favour of recessions, depressions, monetary collapse, people losing all their money and free enterprise money being discredited for centuries to come.

    We cannot be stupid or flippant about this people???!!!???

    A monetary collapse is not a FUN THING.

    It leads to ruined lives, war and more socialism.

    Can you all attempt to be serious about this debate. This is not the least important issue its the most.

    Rampant interventionism cannot long survive the death of fractional reserve. Its all part of the same ponzi-scheme if you look at it from an historical point of view.

    Whereas if we cannot get this measure through the rest of the free enterprise agenda is doomed to failure.

  143. What I can’t understand in this debate is this. Suppose there were no government regulation of banking. Some lent money fully-backed by gold and paid the appropriate interest rate, and others lent money fractionally backed and paid the appropriate interest rate. And all other variations of on call, term deposit, and so on.

    As long as the terms are made explicit and the people entering into the contract know what they are, I can’t still can’t see why it’s the government’s business.

    It’s only fraud if there’s a misrepresentation involved. It’s not intrinsically fraudulent to offer to take money on terms that you can lend out more than you can pay back at any given time; and then to do so.

    You might say fractional reserve is not fraudulent now, because it’s backed up by an array of government supports. But even if it were not backed up like that, under free enterprise conditions, it still wouldn’t be fraudulent for you to deposit money with a bank, knowing that it is only fractionally-backed. Again, only if they told you it was, and it wasn’t – that would be fraud. But that’s not the issue, and in any event, it’s already illegal, and so it should be.

    You might say that if fractional reserve is permitted, the ‘system’ will be bad because unstable, and we’ll get bubbles and busts, and so on. That may be so, but is that the strength of the case against fractional reserve?

    Since government has been interfering since time immemorial, if the market were left to its own devices, would not the market sort out the good from the bad in time?

    The argument ‘think of all the bad things that might happen if people were free to do what they want’ looks suspiciously like the one that gets used all the time for every other restriction of liberty.

  144. It wouldn’t be like you are saying Justin.

    Rather, if we went to free enterprise without getting rid of fractional reserve there would be a depression.

    Then the banks would stop practising fractional reserve.

    Then they would start cheating after a period of time.

    We would wind up with a boom. And then a bust. And then a boom and a bust.

    The banks wouldn’t tend to offer these two stark choices at all.

    They would cheat, there would be a bust. And the government would bail them out.

  145. What Justin said.

    Come on dismal scientists (qualified or amateur). I am not being argumentative here, I just don’t get it. How do you justify preventing someone doing what they like with their own money or gold, or whatever?

  146. Yeah. In a total free market there would be fractional reserve banking. There would also, I suppose, be warehousing. There would be lots of different degrees of fractional reserve. The more lent out, the higher the rate of return would be. The riskier the bank the higher the rate of return would have to be. The better the credit rating, the lower the return would need to be. The warehousers could charge negative interest for the total security. Individuals would find what suited them. What degree of risk they were willing to take for a given return.

    I don’t see why this would be inflationary. Presumably it would settle into a balance with total credit supply a given multible of gold in storage, depending on the net preferences of the money owners for their fractional needs. Well, perhaps it would oscilate in the short term. But it would settle down in the long run. If everyone is as keen on security as Graeme seems to suggest, the multible wouldn’t be very high.

    Do you people have no problem with banks loaning out term deposits? Surely these make up the majority of funds available to banks today? Well, that is what I would suppose, without any evidence.

    Really, I’m open to conversion to your point of view if you can be convincing. Maybe if you can show me exacty what is wrong with fractional reserve as now practiced I’ll get where you are coming from.

  147. “Yeah. In a total free market there would be fractional reserve banking. There would also, I suppose, be warehousing. There would be lots of different degrees of fractional reserve. The more lent out, the higher the rate of return would be”

    No that wouldn’t happen at all.

    The banks would offer to warehouse your cash. Then they’d cheat. Then the cheating would get hardwired into the system.

    Thats how it always happens.

    When have you heard of the alternatives that you speak of? When have you heard of them in the last 3,000 years?

    It doesn’t happen that way.

  148. Justin, David & Tim are correct. And they are repeating what the libertarian economists in this debate (Jason, Mark, myself) + Terje have been saying. A free market would involve fractional reserve banking and this is not a bad thing.

  149. What I don’t understand is why Graeme gets so excited over this particular topic, out of all others. Getting rid of fractional reserve would be THE most important libertarian reform apparently. Someone should have told Milton Friedman.

  150. Graemebird, whilst it’s true that banks have always, in the past, been able to use the system to their advantage, nobody has tried a fully libertarian society, either. In a fluid system, where you couldn’t limit the number of banks by law, and thus couldn’t create anything like a cartel, they wouldn’t be able to stymie competition, which is always a good anti-corruption measure.
    (P.S. I propose that the term ‘Libertopia’ be used as a shorthand for ‘libertarian society’)
    John Humphries, how many magazines do you write for? I buy Policy and IPA Review. Should I look for others?

  151. GMB said:
    ‘The banks would offer to warehouse your cash.’

    Some banks would offer to warehouse your cash; others would offer to take it on terms that you accept a higher risk (from them not being able to answer for all deposits at all times) in exchange for a higher interest rate. The choice would be the consumer’s. So far no breach of libertarian principle.

    ‘Then they’d cheat.’

    Assuming they did cheat by saying your money is available on call when it’s not, that is now and would continue to be illegal. The consumer would have an action against them for breach of contract. So far no breach of libertarian principle. (And the market might tend to select for those who didn’t cheat.)

    ‘Then the cheating would get hardwired into the system.’ This would and could only follow from the meddling of government. There is the breach of libertarian principle. The problem arises not from liberty, but from governmental meddling.

    So if we’re in the business of proposing or making laws to remedy the problems we have identified, the appropriate activity to restrict is the governmental activity of legalising fraud by banks; not the liberty of individuals or firms to decide whether to leave their money with someone on whatever terms they agree.

  152. DavidL — Mark, Jason and I (and other economists) have been involved before but have stopped responding to each post as the debate is too fringe to spend so much time taking seriously.

    nicholas — I don’t publish too regularly, but when I do it has been with Policy, IPA Review & Quadrant. Mostly with Policy in the past but I’ll do more with IPA in the future.

  153. “Assuming they did cheat by saying your money is available on call when it’s not, that is now and would continue to be illegal.”

    But it wouldn’t Justin. And its not true that they would offer this differentiated-backed variety. Since the illicit comes from cheating. Not from transparency.

    And the banks don’t tend to differentiate their level of backing (for technical reasons most of them can’t really do this. They tend to get further in-the-hole AS A GROUP).

    What must be understood is that:

    1. You wouldn’t accept any fractional reserve under hard-money free enterprise conditions. You’d be mad to.

    2. The banks will cheat and they will tend to do so en masse.

    3. The consequences of setting things right after such cheating is so onerous, and particularly onerous to elites and government, that allowing them to cheat in the first place WILL LEAD TO THE ALTERATION AND CORRUPTION OF THE LAW.

    4. What we have today is the result of such behaviour and the only way that we can cure it is bring it back to 100% and set up a bright-line-hair-trigger.

    5. From that hard money backing there will not be much call for HONEST fractional reserve (ie and IOU + redemption promise)… That is until the government wants to create a boom. Then it will take measures to promote whatever little fractional reserve is there.

    6. That the honest side of fractional reserve would, in theory, in the perfect libertarian society, would do absolutely no harm whatsoever (as I think you correctly point out here) will not salvage the situation. Since if it is allowed at all the government and the banks will take advantage of that. Its better, to protect us from such corruption of the currency, to not dangle this temptation in front of the government and the banks.

    7. Ergo since the honest side of fractional reserve would in ideal conditions be such an unimportant feature and since it is so open to abuse…. Its better that we ban it outright as a constitutional protection. And watch the banks like hawks.

    9. Once the cheating has begun no government of the day will force the banking system back to 100% backing. To do so means the loss of power and mass unemployment.

  154. DavidL – is you left your gold with Storage King and they subsequently lent it out it would be fraud because the only service they offer today is storage. Likewise if e-gold was to lend out the gold they retain it would be fraud specifically because they have promised not to. Storage King is analogous to allocated storage in the bullion business. For instance you can store numbered gold bars with the Perth Gold Mint and when you want them back they give you the exact same bars that you submitted for storage. Lending gold that is supposed to be in allocated storage would be fraud because under allocated storage they promise to secure the specific gold bars that were deposited. The Perth Mint also have a service akin to unallocated storage where they promise to back all promises (under that product category) with gold (ie 100% reserve) but they don’t promise to return the exact set of bars you handed to them in the first place. E-gold is like unallocated storage in that they are 100% backed but you don’t get the same bars back again.

    In the past some Banks have commited fraud. But this is mostly irrelevant. What Graemes account of history lacks is tangable examples. He relies on the idea that at some point in distant antiquity fractional reserve banking was uncommon. Well it probably was uncommon in antiquity but so was insurance and morgages and stock options and futures and all manner of financial arrangements. Over the last 400 years however examples of fractional reserve banking have been common enough. And it existed under the gold standard enacted by Isacc Newton, the Brenton Woods gold standard, the modern floating fiat system and all manner of currency systems from very hard to very soft.

    We could have hard money next month without all the gloom Graeme predicts. We would do it as follows:-

    1. Repeal the bank notes act of 1910.

    2. Define through legislation for the “australian dollar” as a legal term in contracts to mean 40 milligrams of gold. This would be for all future contracts as well as legacy contracts. In essence the Australian dollar would be a measure of mass applied to gold.

    3. Make the RBA redeem Australian notes in circulation at 40 milligrams of gold to the dollar as and when the public desires and make the RBA cease the issue of any new Australian currency. This step would necessitate abandoning the practice of interest rate targeting.

    Australian RBA notes would linger in circulation for years but in time they would be replaced by private alternatives. The settlement function performed by the RBA could in time be privatised.

    The RBA does not have sufficient gold to redeem all Australian notes but it probably would not have to redeem all notes over night (they would still be popular) and in any case it owns sufficient liquid assets to procure enough gold as and when required.

    Between steps 1 and 2 it would be better to have a delay of about 12 months to allow banks time to properly organise the printing process for promisory notes and to get up to speed on the mechanics of the private currency process (which they haven’t been familiar with for 97 years).

    In any case there would not be the widespeed collapse that Graeme predicts. What there would be was some adjustment pain on the margin just as there is with any major reform. Of course if you fluffed the defined contract value for the currency as Churchill did in 1925 (when he took Britian back onto the gold standard) then you could create a complete mess. So the 40 milligram definition is based on what we would choose if we reformed today (rather than if we reformed ten years from now). And if we chose to roll the clock back overnight and fix at the one gram to one dollar rate that we effectively used in 1966 then we would get pervasive and almost immediate economic collapse. You couldn’t roll back 40 years of price rises in an instance and not cause problems.

  155. Graemebird, in a free economy, how would you stop factional banking? You wouldn’t be able to, surely?
    Terje, rather than rolling the clock back, libertarians could start the ball rolling by trading with each other in gold and silver weights, and introducing metal money to the rest of society. It could be gradually done, so everyone has plenty of time to adjust.

  156. Nicholas,

    Supplanting the Australian Dollar as the dominant “unit of account” would be like trying to supplant English as the national language by converting this website to French whilst leaving the nations laws and all of government business operating in English. Or perhaps it would be more like trying to get people to incrementally move to driving on the right hand side of the road. The point is that government policy in a multitude of areas has a huge pull on this economic factor and would do even if the government was a tenth of the size it is today.

    Whilst I think we can and should have private currency I don’t think that a truely free market emergent “unit of account” is at all achievable. In order to get government neutrality on the question of the “unit of account” you would need to redraft the tax code at three levels of government and modify nearly every law that stipulates a government charge or benefit. It is not likely to happen ever. And like stipulating that laws should be in every conceivable language so that society can freely adopt whatever spoken language it prefers it would not ultimately be a sane thing to pursue.

    The best I think we could hope for would be a redefinition of the Australian dollar in terms of a metalic/commodity reference and a delegation of currency production to the private sector. However this would still entail a government imposed “unit of account”.

    In Zimbabwe the local dollar is very low quality. It loses value on a massive scale every month. And yet it still exists as a major “unit of account” because of the power of lock in laws.

    Nations have changed their national language (eg Scotland) the side of the road they drive on (eg Sweden) or the national “unit of account” (eg Spain) however I don’t know of any nation that has ever done any of these things free from government influence. And I find it very hard to imagine or conceive that any nation could make these things a purely free choice to be resolved by individuals without any government bias.

    At the end of the day the “unit of account” that government conducts it’s bussiness in and formulates it’s laws and policies around is the one that will generally prevale in the market place. This is one area where I think less government is so unachievable that our goal is better framed in terms of good government rather than small government.

    Regards,
    Terje.

    Footnote: Scotland actually changed language under the influence of many cultural vectors (including government) over an extended period of time. Some of the African nations that adopted English or French under colonialism are perhaps better examples however they were not nations as such prior to colonialism so the metaphor needs to be applied rather casually. However I think my point should still be clear enough. Government can not easily be neutral on such things.

  157. P.S. In terms of simple reforms that move us in the right direction I believe that repealing the Bank Notes Act of 1910 is a necessary first step and an extremely simple reform to implement. If you can’t sell that reform then the rest is pretty much hopeless anyway.

  158. “What I don’t understand is why Graeme gets so excited over this particular topic, out of all others. Getting rid of fractional reserve would be THE most important libertarian reform apparently. Someone should have told Milton Friedman.”

    Someone did tell Milton Friedman.

    Milton Friedman early in his career wanted 100% backing.

  159. Very interesting, Terje. Why don’t you write a post on the reforms you recommend, and the reasons? How did you find out about all this?

  160. Justin – I learnt what I know about money primarily by reading, thinking and debating. In 1997 I noticed that whilst I had a pretty good grasp on economics there was a major gap in my understanding in terms of money so I started buying books and pursuing answers. The person who seemed to have already asked and answered many of the same questions that I had was a Canadian economist by the name of Robert Mundell. However I’ve since pursued answers down many avenues. Like most things it is not hard to learn if you have the motive although I have no real clue where the motive comes from. I may write a post dedicated to these reforms, however I think we might take a break for a while.

    DavidL – other than a wedding ring and a few grams in an e-gold account I don’t own any gold. And a gold standard does not lift the price of gold but actually fixes the nominal price. Owning an asset that is stable in value is not overly exciting from an investment perspective but it is a useful reference from an accounting perspective. 🙂

    Current gold prices for those that are interested:-

    http://dgcsc.org/goldprices.htm

  161. I really don’t know how Graeme would stop fractional reserve.

    Islamic Banking gets around it’s own rules by rewriting contracts in a very convoluted way, and superannuation funds, insurers etc. also count as depository institutions. He would have to produce a code of law more complex and draconian than Australia’s five metre tall tower of tax legislation.

  162. It presumes that credit creation is the preserve of banks. Banks are certainly specialists but any business can create lines of credit and many routinely do. Accounts Receivable found in the books of most businesses is an obvious example. The fact that we generally outsourse this task to a trusted institution called a bank is mostly a technicality. Although specialisation is a central trait of capitalism.

  163. Justin,

    Sorry but this is a meta comment.

    Graeme actually has some quite civilised responses currently held up in moderation (intersperced with some uncivilised feral abuse leveled at the moderators and almost guaranteed to keep him in permanent moderation for quite some time). These responses may not answer your question directly but they do indicate that Graeme still has lots more to say on this topic. I suspect that you have the relevant power to selectively release Graemes more civilised comments from moderation because you did create this article.

    Regards,
    Terje.

  164. Justin and others, The lead article is wasted on a blog! I’ve mentioned before that I leave my Toastmasters club magazine lying around in public places as extra advertising. If the ALS had a magazine, with articles like this one on poverty, and with a pretty woman on the cover, because it’s a fact that female faces appeal to both sexes (perhaps we could routinely interview film and TV stars about taxes and OHS regulations as a reason for getting them on the cover), then we’d be able to widen our audience and mass appeal! One of the main drawbacks of Policy and IPA REVIEW is that the articles are not very personal, but if Justin expanded on some of these histories of people trapped by regulations, then you’d have a broader audience.

  165. Publication is an expensive business and building a circulation involves a consistent commitment over a long period of time. I don’t think the lead aticle is good enough for a magazine such as Policy however I do think that Justin is capable of crafting an article on this topic that is. He would have to apply some more scholarly standard and a less anecdotal approach however. John Humphreys is published in the latest issue of Policy although I have not read his article yet (I subscribed to Policy online last night so I should get a copy soon).

    I spent many years in Toastmaster and I think it is a truely amazing organisation. It represents some of the best ideals of civil society and helps build better people. I was first involved in high school via a Toastmasters youth club and I joined a Toastmaster club with my girlfriend (now wife) after I finished university. Obviously it is apolitical but if you have the time and can find a club you are comfortable with then I would recommend it highly to everybody. It’s fun, you meet good people from all walks of life and with all types of view points and you get to polish the finer points of verbal persuasion, verbal entertainment and thinking on your feet.

  166. Another excuse to toss your cookies over Ron Paul- The Mises Economic Blog has a piece on a book he co-wrote years ago, supporting a Gold Standard! I’ll bet Terje will vote for him now!
    I bet Policy would sell more copies if they could think of a reason to put a picture of a pretty woman on the cover! And if the items were also more personal- by interviewing people affected by whatever policy they are reviewing.
    Terje, did you ever use your TI magazines as advertising for Toastmasters? Are you still a Toastie?

  167. I stopped being a Toastie once my house got some pitter patter.

    I have been following Ron Paul casually for at least five years. I have long known about his views on Gold. The annual grilling he used to give Alan Greenspan were always very entertaining. And the fact that Alan Greenspan was a vocal advocate of gold (and a friend of Rands) in the years before he crossed over to the dark side made it even more interesting. Google should let you find Alan Greenspans early essays on the topic of gold as money as well as the annual Q&A between Ron and Alan.

    It is surprising how little Australian liberarians know about the gold standard and private money. Amoungst US libertarians it is almost a rite of passage. As a self proclaimed libertarian Ron Paul could hardly avoid discussing the topic and as a constitutionalist he could hardly avoid what the US constitution says about gold and money.

  168. Thanks Nicholas. I’ve figure you how we could fit the pretty woman into the theme. We have a picture of said pretty woman and underneath ‘This is one of the people we want to be free!’

  169. Before you all start attempting it,
    what they have not mentioned is that 100% backing
    can be painful in some positions for GMB and his angel JC.

  170. Terje, it’s a shame you don’t get the Toastmasters Magazine, called Toastmaster. They have comics now. A recent issue had a husband summarizing something he’d read in the paper- “Many people believe that laughter is the best medicine, so the government has declared a ban on all laughing until further studies can be done.”

  171. Yes, that’s the way to go, Justin! Either a good-looking, scantily-clad unknown on the cover, whose lack of clothes you blame on government interference in the workplace, or a good-looking well-known actress, who won’t be able to afford a mansion at Darling Point/Point Piper, because of excessive levels of taxation! The public, who are the people we want to reach, are fascinated with pretty faces. So long as we have some sort of excuse for the cover-photo, we’d attract attention! Why do you think even women’s magazines have Female faces on the cover? And if more mothers start thinking libertarian thoughts, they’ll influence the next generation! A whole generation enslaved to libertarian thought! Tomorrow, Australia, after tomorrow, the world!

  172. There are two great book about money.

    * The Theory of Money and Credit by Ludwig von Mises.

    and

    * Money, Bank Credit, and Economioc Cycles by Jesus Huerta Se Soto.

    Study these carefully and save a lot of time doing personal theorizing.
    See

  173. There is a big difference bwteen what Hayek and Mises say, and what Rothbard and de Soto say.

    Mises, Hayek and the mainstream economic literature point towards the validity and benefits of free banking practices.

  174. As alluded to in the RBA document in the “Bank Notes Tax Act 1910” discussion there are multiple schools of thought within Free Banking. Mark and I have been over some differences of of opinion before (but I’ll briefly recount my position again) about whether a government can in practice be neutral in selecting a national unit of account. I don’t think it can be even if it stays out of the currency creation business entirely. Ultimately my most liberal position is:-

    1. Medium of Exchange: let the private sector do it exclusively.
    2. Unit of Account: make sure the government chooses wisely because it can not readily avoid having a very big influence on this decision.

    If we had Free Banking and if the government wants to set the tax scales in terms of gold grams and if tax debts are settled in gold grams then I think it is near impossible for silver grams to gain a foothold in the market as a prevalent unit of account. Likewise with any rival unit of account. The government dictates by virtue almost of governing and only a massively pedantic free banking government could avoid exercising any bias in this activity. There is a quite powerful Nash style equilibrium process at play. It would be like if all military vehicles drove on the right hand side of the road but the government claimed it was taking a neutral position on left-hand versus right-hand driving. Basically it can’t be neutral unless taxation is zero and government spending is zero. And if it can’t be neutral then it needs to choose wisely.

  175. IMHO the effect of banking arrangement on poverty is insignificant in comparison to taxation, welfare and minimal wage.

    While welfare (direct redistribution) is hard to abolish outright, indirect redistribution (such as subsidies) can go immediately, significantly reducing a tax burden.

  176. Bullshit Mark. Mises was against fractional reserve. Free banking is just the freedom to swindle.

    PART 1

    “DavidL – if you left your gold with Storage King and they subsequently lent it out it would be fraud ……….

    ……….E-gold is like unallocated storage in that they are 100% backed but you don’t get the same bars back again.”

    This whole screed of Terges’ is just magnificent. I’m going to save it somewhere . Because it shows PRECISELY how the monetary system was meant to evolve in terms of what sound monetary policy without government intervention would have been like.

    The way things work under fiat-fractional-reserve is so complicated that billions of dollars in salaries and bonuses are payed out every year.

    We have many dozens of financial products. From interest rate swaps, currency-hedge products, futures, all sorts of different bank accounts.

    And the financial firms pay many of their finance workers well. Untold 7 and 8 figure salaries scattered about promiscuously.

    Government fretting over balance of payments figures and any amount of other activity.

    So a great deal of resources go into the financial system and it doesn’t make anything tangible. And they aren’t even doing a very good job of what would normally be their role in the financial system.

    In the 70’s it was said in South America that if you got a flat tire on your way to the bank you would go broke. So much was it the case that the real economy was having to support the financial economy and that people who were not part of the banking system were having to charge about on account of the financial systems dysfunction.

    You would have basically three ways of dealing with unspent cash. Your stash of coins and bars at home. Your bars and coins at the bank on-call….. with a debit-card attached.

    And the third main category would be term loans.

    Of course all those other financial products would exist as well. But there just wouldn’t be a whole lot of call for it. And the banking industry wouldn’t employ so many people. And it surely wouldn’t pay these huge salaries for doing things (when viewed through the prism of 100% backing) that are pretty useless and wasteful activities.

  177. But monetary inflation IS A TAX ig1. And its not insignificent in comparison to the other things. In fact a fully-backed metallic system would eliminate, for the most part, those other things since it would get rid of the delusion that government can produce anything. They would have to actually take your gold off you to be able to buy anything. They could not hide the spending via the fractional reserve creation of extra money.

    Whereas those other things syphon resources from capital accumulation, monetary inflation and instability totally distorts the whole capitalist system.

    PART 2

    “RISK MANAGEMENT” is a fine-sounding phrase which thieves from the prestige of the entrepreneur. But in the context of banking its really just akin to the writing of a whole lot of dud cheques and then attempting to walk the tight-rope of this passing of dud cheques and not get busted.

    Under 100% backing the key activity of the banking system would simply be to lend people money to buy things that make the borrower more productive and therefore easily capable of quickly paying back that loan.

    If the bankers are charging about all worried about RISK MANAGEMENT they aren’t focusing on what ought to be their core business… IE recycling savings into their most productive use for the highest interest rate they can get.

    “In the past some Banks have commited fraud. But this is mostly irrelevant. What Graemes account of history lacks is tangeable examples.”

    Here Terge is totally missing the point.

    Fractional reserve ought to have been fraud then. And its not fraud now. It was fraud then or it ought to have been considered to be fraud then. But its the same activity. Creating Ponzi-bank-money.

    The consequences of the fraud on the rest of the people and most particularly on the wealthy were so severe what would naturally have been fraud is now no longer fraud. Its been licensed, accomodated and protected.

    The fraud is now LICENSED, ACCOMODATED and PROTECTED.

    So what ought to have been fraud is fraud no more.

    Banking is now a cartelised industry organised on statist grounds much like our TV broadcasting industry is.

    But we can make fractional reserve fraud again. Its not ACTUALLY fraud its NATURALLY fraud. And in making it fraud again we get ourselves clarity in property rights. A better, fairer society, protection from one form of raiding our wallets, and a free entreprise money and banking system that works well.

    We can’t analyze this in a vaccumn. The free enterprise setup that I want WORKS. Works really well and gets rid of inflation AND recessions.

    Whereas Terges setup doesn’t work and his transition-process would cause the worst depression the country has ever seen.

    Terges system will work even less well then it did before, now that we are in the computer age.

    “What Graemes account of history lacks is tangeble examples.”

    This must be some sort of ‘free bills” mantra. What would be the point in me listing all the bank failures in history? You can fill pages with just summaries of 1 bank failure after another. The preceding boom and the following bust. From the Medicis on. And earlier if you can dredge up the Roman and then Venetian information.

    The fact is that fractional leads to bank failures and depressions. Always… Except for since about 1982…. Where the balancing act of a few of the central banks is such that they’ve been able to avoid these recessions for quite a few years at a time.

    Our guys here in Australia have managed to avoid a recession since “the recession we had to have”. Thats going 14 years or more. Thats a pretty good record to beat. With 100% backing we can beat it and get rid of the inflation.

    But you free things up under gold fractional reserve the whole financial sector will crash like its never crashed before and it will take society with it.

    It will crash like it COULD never crash before… Like it COULD never crash before the information age.

    Not all versions of liberty are entirely identical.

    And not all of them work.

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