Isn’t not allowing a bank to lend money in a certain currency more or less the opposite of the libertarian position?
And how, exactly, are we tied to the U.S. dollar by the use of force? I use it because I can buy stuff with it, whereas my local liquor store doesn’t take gold, or chickens, or butter. (but I will note, I have never seen a treasury agent in my liquor store, holding a gun to my head and saying “use dollars, or else”)
And to pre-empt the answer of “taxes, which the government makes us pay”–I can spend my whole year using gold for transactions. Then, on April 14th, I can sell enough gold to pay the taxes on my income in U.S. dollars. Doesn’t seem that tied to me.
Cite for how this is illegal with Grain? I can go down to the chicago futures market, and buy a contract to purchase grain a year from now from someone who doesn’t have any grain now, and doesn’t farm grain.
But even assuming that that’s true, If his argument is just “it’s illegal”–and he defines illegality based on what the government says to be illegal, it’s patently silly. Observe:
(1) DDAs are illegal.
—Why?
(2) Because this kind of contract is defined as illegal in other contexts.
—Who says it’s illegal?
(3) the government
—But doesn’t the government also say that fractional reserves are legal in the context of banks?
(4) Yes, but we shouldn’t listen to what the government says is illegal HERE–instead, let’s look to what the government says is illegal ELSEWHERE, in order to overrule what the government itself is saying HERE
If the justification for rejecting fractional-reserves is that the government says it is illegal in other contexts, how do you get around the response of “yes, that’s true–but the government says it is legal in this context–and you’re pointing to them to define what is and isn’t illegal”
I thought Rothbard’s argument was that the transactions were fraudulent (which also isn’t true, and is argued by many using the incorrect explanation of fractional-reserve banking that Expano Mapcase has presented–what he proposes is fraud–it just doesn’t have anything to do with fractional reserves.).
The government borrows in dollars, and creates other obligations in dollars, which are in the same units that I hold and for which I must be taxed to pay for.
and see if a Google Books result comes up, with a reference (from the 1860s). If not, post back here and I’ll see if I can dig up a hardcopy somewhere.
I’m not sure I see what you mean–that’s an argument that the government uses dollars, (true), and that you pay for the government (True). But how does that tie you to using dollars?
You also note you hold dollars. Does the government make you? I contend that it does not. Again, I haven’t seen a treasury agent forcing me to be paid in Dollars. Have you?
The government does make you pay your taxes in dollars–but again, I don’t see how that ties you to using dollars in your daily life–you can simply use your currency of choice, and then at tax time, use it to buy dollars, or gold, or cattle (if the government wants its taxes in the latter two), and pay them.
It’s your citation, not mine–so I should push (especially as it was easy to google)-but I will note that Rothbard doesn’t offer a citation in his book, “the case against the fed”, at 38.
But anyway–here, we see Rothbard’s principal error. He equates bank deposits with warehouse receipts. If you reject that (silly) assumption, his argument is without merit.
A warehouse receipt is like a safe-deposit box. You’ve deposited something with the bank, and they give you a receipt for it.
Is a bank deposit like a safe-deposit box? No. You’re loaning the bank money. That’s why you don’t need to pay for your account. (I don’t argue that a bank account must be so–but that there’s nothing fraudulent or wrong when it is so). An analogy would be a grain futures contract (not a great one–they’re not that similar, but it will serve–since it’s a way to trade in grain without the other side actually owning any when I make the contract).
Rothbard is using the assumption that bank deposit=warehouse receipt to try to argue to argue that bank deposits should be like safe deposit boxes. (i.e. that full reserves are required)–which is assuming the conclusion to his argument as a premise. He only has a point if there is no such thing as a grain futures contract, or a bank deposit that isn’t a safe-deposit box.
If bank deposits are like safe deposit boxes, then yes, lending out your money is fraud.
But bank deposits are not like safe deposit boxes, or warehouse receipts. Rothbard simply fails to support that premise–and without it, his argument falls apart. He just doesn’t show why a bank deposit has to look like a safe-deposit box, or a warehouse receipt.
But more importantly, so what?
The government says fake warehouse receipts are fraud. The government says bank deposits in a fractional-reserve system are neither fake nor fraud.
It’s just ridiculous to rely on the government’s statement of what is or is not illegal in one context to show that the government is wrong about what is illegal in a different context. He’s using the government’s determination of what is illegal to try to rebut the government’s determination of what is illegal in a different context–he just can’t consistently rely on the first without accepting the second.
Hmmm. I think we’ve reached the point in the Debate (even though this is in General Questions, and not Great Debates) where we stare at each other in a Mexican Standoff, and agree to shake hands and part friends.
You are correct. That is exactly what Rothbard says.
You say that you are ‘loaning’ the bank money.
Those two things are not equivalent, and cannot be equivalent in the world of DDAs and the FDIC.
A ‘loan’ implies some risk of loss. It also implies you cannot ‘loan’ somebody something, and then simultaneously claim that you want it all back, immediately (that’s a DDA), even after they have loaned it out to someone else, via fractional-reserve banking. That is what Rothbard claims is fraudulent.
Rothbard argues that you can have a loan, or a bailment. But not both. I’m not sure what you are arguing.
We’re only at a standoff if you care to be in one–to my mind, this is just getting interesting–as we’re really getting down to the fundamental assumptions. (and although some of this is a debate, I see it more as GQ–addressing the arguments made by you (and rothbard) that fractional reserve banking was inconsistent with the gold standard.
I’m also serving the GQ-purpose of trying to demonstrate what fractional reserve banking is. I think that’s important.
And that, to me, is where Rothbard, to my mind, really misses the point.
I do. And it’s my money. Why shouldn’t I be able to define what I’m doing? Also, the bank says my bank deposit is a loan. The FDIC says my bank deposit is a loan. My contract with the bank (in all that paperwork they send me with my account) says it’s a loan.
So why can’t we do this?
Firstly, who says a “loan” implies what Rothbard thinks it implies?
Does there need to be a risk of loss?
You can have very safe loans (say, my bank account, or lending Bill Gates a quarter).
You can have very risky warehouse receipts (Say, Big al’s Warehouse and den of thieves).
Further, there is a risk of loss on a guaranteed bank deposit–it’s just further away–since to lose my money, the government, not my bank, has to go broke. It can.
If the government didn’t guarantee my bank account, I’d still want some other guarantor for my bank account. Is there something wrong with a guarantee on a loan?
Rothbard’s argument is I can’t have exactly what a rational economic actor wants for their deposit–a guarantee by a very reliable and solvent entity. That doesn’t make sense.
Further, he argues that a “loan” can’t be on demand. Why not?
Because it creates a risk of non-payment? (hang on, I thought he just argued my bank deposit was safe!).
Because it’s fraud? I know perfectly well what the bank is doing with my money–it’s what I want. No fraud there.
A true libertarian wouldn’t have a problem with that–he’d just price it in. (as banks do–they give me more interest on a CD than they do on my checking account).
I am agreeing that one can have either a loan or a bailment. I disagree with his using the premise that a bank deposit must be a bailment to argue that a bank deposit is a bailment.
In particular, I also disagree with Rothbard’s weakly-reasoned argument that my bank deposit, which walks like a loan, quacks like a loan, and has feathers just like a loan, cannot be a loan. Especially when everyone involved in the transaction calls it a loan.
It doesn’t tie me to using dollars in transactions, as long as I don’t mind paying massive transaction costs to switch in-and-out of gold/dollars on a minute-by-minute basis.
It also would create huge costs to my business investment, when I could (in theory) plan and forecast in units of grams of gold, but plan to transact with other parties and the government in dollars.
So yes, along those lines, it theoretically doesn’t restrict me from conducting business in grams of gold…as long as I don’t mind paying the massive transaction costs from switching in-and-out and simultaneously planning in grams of gold and dollars.
What it DOES DO, however, is loosen the constraint on the government to borrow. Because the government no longer needs to promise the Chinese, or the Arabs, a certain amount of gold to back its loans. It can just promise ‘dollars’ at a certain rate of interest, and once it needs real assets to make those obligations whole, will take actual wealth from me and you.
So in theory, we could all hold 100 grams of gold as a store of real value and switch in and out of dollars on a minute-by-minute basis to conduct transactions.
But if the gubmint borrows 100 grams of gold value from the Chinese, and it doesn’t have that in the vault when it comes time to pay it back, it’s going to come with a gun and take it from you and me when payment comes due.
Or else, default. Which will have its own consequences.
Well, sure. Gold and silver coins. Fuck that paper shit! Except, what’s the difference between paper money that’s redeemable (in theory) for a fixed amount of gold or silver, and paper money that’s redeemable (in fact) for today’s spot price of gold?
If money==gold and gold==money, then paper is worthless because it depends on the governments fraudulent promise to repay it. Gold and silver you can bury in your backyard and hide them from the tyrants. Coupons that the government claims are worth X amount of gold and silver, not so much. So go ahead and buy gold and bury it in the backyard while waiting for the collapse. But don’t pretend that declaring that a dollar is worth a fixed amount of gold is going to change anything.
And the notion that fiat currency inevitably collapses after 40 years is kind of funny. What major fiat currencies have collapsed during that time? The pound? The euro? The dollar? The deutschmark?
The dollar experienced a massive round of inflation in the 70s, as we were coming off the gold standard, and all the gold bugs howled that permanent massive inflation was an inevitiable consequence of fiat currency. Well, that round of inflation was over by the 80s, and we’ve had almost no inflation for the past 30 years. How was that possible?
What the gold bugs really hate is paper money. Paper money “backed” by gold is as much of a sham as fiat money. So go back to trading lumps of metal for your goods and services if you want. But it’s retarded to believe that abstract forms of money are fradulent, and only actuall key goods are real money.
Fiat money is nothing more than a store writing down that you purchased X units of stuff, and rather than requiring you to hand over X units of gold for that stuff, they promise to take X units of anything. In fact, they don’t even need the stuff now, they just need a record that you owe them X units. And if you’ve got a record that Bob next door owes you X units, you just hand over the record that Bob owes you X units to them, and you walk out of the store with X units of goods. Then it’s Bob’s headache to repay them. And one way to keep track of this is a little slip of paper that says it’s worth X units, and then we can trade the slips of paper without having to trade the goods. And we don’t even need to trade the paper reciepts, we can just keep track of how much each person has with various computer databases. No lumps of metal need to change hands.
This is how countries used to “trade” gold. No gold would be shipped anywhere. Instead they’d go to the gold warehouse, and enter into the ledger books that the gold on Row X Shelf Y was no longer the property of France but was now the property of Austria-Hungary. They didn’t even move the gold to another shelf, they just changed the record of who owned the gold. Well, if you do that why the heck do you even need the gold?
Gold isn’t money. Gold is just a good that can be used as money, just like cigarettes or cacao beans or cowrie shells. If your promise to repay a debt isn’t good, then a promise to repay with a number of metal lumps isn’t any better. Either you’ll keep your promise, or break your promise. Unless you’re bartering with lumps of metal and handing over the lumps of metal at the same time you take the goods you want, you’re still making a promise that’s worth only as much as your promise. You make credit card purchases with nothing more than a promise to repay. The fact that the credit card isn’t back by gold means nothing, what matters is that you promise to repay the credit extended to you. You don’t need to promise to repay in gold, you just need to promise to repay. And you don’t even repay with federal reserve notes, you pay by telling your bank to lower a number in your database record and raise a number in the credit card company’s database record.
Interesting editorial that came out yesterday. It doesn’t directly answer a lot of the questions in the thread, but I’m posting it here because it’s timely, and talks about the gold standard in the second half.
Including how FDR forcibly expropriated wealth from US citizens and devalued the dollar in one fell, brazen swoop.
Thanks for the post. You’re obviously well-read on the subject, but make some interesting self-contradictions…sometimes within the span of the same sentence.
P1. The point self-evident, is it not? When paper currency is tied to gold, is it equivalent to a fixed weight of gold, in grams. Therefore, a $20 bill is equal to one ounce of gold, for example. That $$ to weight ratio never changes.
A piece of paper being equal to the spot price of gold is a circular definition…it isn’t fixed to anything. It’s like saying a $20 bill is equal to $970…no, wait! It’s equal to $930…no wait! It’s actually $1,030.
A gold standard fixes the US$ to a weight of gold, in grams or ounces. It doesn’t fix the value of gold to a monetary figure. This is a bit of conceptual confusion that I find quite prevalent in gold standard discussions.
The US Treasury doesn’t dictate what an ounce of gold is worth, in dollars. It’s the other way around…it dictates what a dollar is worth, in weight of gold
The backwards way is the classic definition of ‘fiat money’…simply declaring what your currency is worth. Sort of like Robert Mugabe declaring that the Zimbabwean dollar is worth 1:1 to the US$, but the black market rate on the street is 1:1,000,000,000.
P2. Well, what is your definition of ‘collapse’? I would say they all have collapsed to some degree during that time. What was the price of a gallon of gasoline 40 years ago? Or a new car? Or a ticket to a Cubs game?
What is it now? The answers to those questions should immediately make clear that the currency cannot be used as a store of value. You would be a pauper if you tried to store your wealth from 1969 in dollars.
Here’s an interesting link that compares the price of oil to the price of gold. Essentially, how many ounces of gold it takes to buy a barrel of oil. Note how similar the ratios are between the present decade, and the 1970s. Interesting, huh?
P3. Paper money backed by gold is not a sham. It’s a convenient way of conducting business, whilst keeping a tie to the gold standard. I don’t understand what you are trying to say here.
P4. Agreed. Which reinforces my point in P3, above. I don’t understand what you are trying to say here.
P5. No. Yes. But those are the same thing…they are both ‘money’. I don’t think you understand the definition of money. An interesting paragraph. You are correct in that your promise is as worth as much as your promise…
as long as your counterparty has the confidence he can convert your ‘promise’ to gold, if need be
He may not choose to do so, since it can be inconvenient (as you correctly point out). Or he may.
But once he loses confidence in his ability to do so, you can bet he will want to do so. Make sense? And then all bets are off, and you have FDR invoking arbitrary seizure all over again.
So because of normal inflation in the past 40 years and the oil embargo, the Deutsche Mark, the pound and the Franc collapsed? Really? Maybe in your world, but not in reality. Yes, gasoline costs more today in absolute terms, as does one egg or one bread roll. But in real terms, that is, how many hours does the average skilled worker have to work for it, many prices have sunk. Other prices have still risen, like gasoline, because of factors that domestic economy has no influence on.
I really don’t understand why a dollar has to be redeemable for gold in the first place, but that’s probably because we went of the gold standard after WWI, and nobody reasonable has clamored for it since then. I wonder at how people who are supposed to be experts in economics cling to a worthless metal as being better than a government backed paper.
I wonder what the gold-backed believers think about our talent tradingsystems? Unlike the Euro, the talents aren’t even backed by the state; it’s simply a record of who owes or possesses how many talents, backed by trust. It works quite well.
If you try to exchange gold, but I don’t want to take it, then nobody guarantees it. If it’s an Euro note, then the governments guarantee it to be redeemable at the central bank at least. Just because many people like gold now and would accept it, doesn’t mean it will stay that way. If the economy tanks, like now with the banking crash, and people loose confidence, then gold itself also looses worth. If you want to buy a loaf of bread with gold, but the other person needs a bottle of water, he may refuse gold and wait to barter directly.
Fractional reserve banking and the gold standard co-existed for many years. They could do so again. It’s impractical to the point of absurdity, but not impossible.
The problem is that a gold standard would jack up the price of gold relative to other goods and services, for no especially good purpose. Since the US left the gold standard, gold prices haven’t increased nearly as fast as the prices of actually useful goods.
Even with relatively fixed quantities of gold, people don’t demand that gold as much as they do other stuff. To return to a gold standard would be to jack up the price of gold (relative to other goods) just to use it for currency. This would make it prohibitively expensive for its other current non-monetary uses. And why? To replace a fiat currency with a standard that’s been dropped worldwide? It’s not impossible, no. It’s just silly.
This is completely illogical.
The Fed was created to help with monetary stability. This is a matter of historical record, with the last impetus being the 1907 financial rumbling. They wanted more financial stability. They did not manage to achieve this stability in the 1930s. But the fact that the Fed failed during the Great Depression does not magically change the motives of its founders. It just means that the institution they set up, as it originally existed, did not work as they thought it ought to work. But over time the Fed itself has changed in response to its former failures. And the Fed’s extremely strong response to the present economic crisis is, in all likelihood, the primary reason that this recession will be known as the Great Recession and not the Great Depression II.
Were there other, ulterior motives at hand in its foundation? I’m not a historian, so I’m not going to summarily deny the possibility. But nor am I going to ignore the continual attempts over the entire early history of the Republic to find some way to deal with the Panics that occasionally came about, and the eventual solution in the early 20th century to create the Fed.
One might just as easily expect a long, slow, gradual inflation of unit prices with a stable currency. This was the case in the US since Fed chair Volcker whipped the inflation from the 1970s and early 80s until the present crisis.
Even with a stable money supply, there are other variables at work that can alter price levels to create an inflationary or deflationary whiplash. The value of money can be distorted not only through changes in the stock of money but also through changes in the velocity of money and real economic output.
This is key- regardless of whether paper currency is backed by an item of supposed intrinsic value or not, it’s still only worth as much as the promise of the government backing it.
If you have little enough faith in a government that you think its currency is of dubious worth, how much faith would you have in the same government’s promise to give you some gold when you ask for it? Presumably, very little… whether that’s because you think the government is lying about having enough gold to cover all the currency in circulation, or because you think if the economy collapses and you need to cash in your chips, some corrupt bureaucrat will have run off to Antigua with the nation’s money supply.
The price of gold relative to a single dollar wouldn’t change if a successful peg was instituted. What would change is the price of gold relative to all other goods and services. Just because one dollar would always get you a guaranteed quantity of gold wouldn’t mean that that same amount of gold (or the paper dollar backed by that gold) would get you a fixed quantity of groceries your next visit to the supermarket.
