inventor

GOLD MONEY VERSUS FRACTIONAL RESERVE BANKING

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TFFARF:

I've been a designer of manufactured products and buildings all my career. In the USA the investments in new projects have dramatically dwindled since the 1970s. My inventions and designs should have been well received, however, today's venture capitalists have little money, and with money being scarce the returns they require are super high at approximately 33 percent per year.

I am searching for answers.

Objectivist economists, legislators, and businessmen have not come up with a program for a gold-based, inflation-proof, secure-value currency and economy, or program of legislation. I may have missed something, however, being an Objectivist from the era of the 1960s I still see the possibilities for a workable program.

I have developed an opinion that the traditional economic concepts that I have listed have been violated or been disregarded by (the Leftist and Progressive-based) Pragmatist lawmakers and the judiciary, and that without these concepts the economy of the USA has resulted in ruin. A return to objectivity is needed.

The basic concepts:

GOLD:

Gold metal should be the basic money in use in the USA.

Gold may be traded directly in the form of coinage.

Coinage used for money should only be coined by the Govt. of the USA.

The value of each coin should be stated by the weight of the coin that is also stamped on the coin, e.g., ten grams.

Gold bullion, US gold coins, and US paper (gold redeemable) currency may be traded in the open and free markets, and such free trade shall not be impeded by the Govt. in any way.

MEASUREMENT UNITS:

The Metric system, that is, S.I., should be used for all USA money.

The S.I. system will enable engineering and business calculations to be facilitated.

PAPER CURRENCY:

Paper currency of unique USA design that functions according to the principle of warehouse receipts may be traded for gold.

Paper currency that is used for money shall only be issued by the Govt. of the USA.

Units of paper currency shall be stated by weight printed on the bills, and in the denominations that correspond to the same units of coins.

The paper shall be sold by the Govt. of the USA for the same units in gold.

The govt. of the USA shall keep the gold in storage and may not lend money or other material or intellectual wealth against it.

Free commerce in USA paper currency and USA gold coins shall not be obstructed by the Govt. of the USA or by law.

COMMERCIAL BANKING:

The assets of banks for lending purposes shall be comprised only of gold bullion, gold coinage, and US (gold redeemable) paper currency.

The assets of banks shall not be comprised of monies borrowed or otherwise obtained from the Govt. of the USA, or lesser governmental entities, or of the paper currencies of other governments.

There shall be no USA Govt. bank. All USA coins and USA currency shall be traded at the window of the USA Treasury Dept., which only shall coin and print money.

Private banks shall make loans to customers only on a one-to-one ratio of paper currencies loaned and gold bullion, or gold coin assets, that it has on deposit.

Banks shall make no loans on the basis of a Fractional Reserve ratio of assets to loans.

Lending and deposit interest rates shall be determined without govt. intervention by the free contractual agreement of the bank and its customers. The definition of "Freedom of Association" stated in the U.S. Constitution shall be "freedom of contractual relationships and association by individuals or their concerns."

Commercial banks shall be organized as stock corporations and these assets may be the basis of 1:1 ratio lending to customers.

INVESTMENT BANKING:

Banks may at their discretion maintain ownership positions in shares of stocks or equity regarding their customers or customer's business enterprises.

Banks that function as investment banks, may own physical assets of real estate, buildings, manufacturing enterprises, businesses, intellectual property, stocks, metals, for example gold bullion, art or unique objects, as investments, or they may own equity or percentage interests in business enterprises.

Lending by investment banks shall be based upon the non-gold money assets, and shall have USA gold coinage or USA paper (gold redeemable) currency as the medium of exchange.

Investment banks shall be organized as stock corporations and these assets may be the basis of 1:1 ratio lending to customers.

The operations of commercial banks and investment banks shall not be conducted in common nor their assets be held in common; although they may trade with one another and may have common ownership.

FOREIGN EXCHANGE:

The Govt. of the USA shall only deal with foreign nations by means of gold bullion, USA gold coinage or USA paper (gold redeemable) currency as the medium of exchange.

Private business transactions or with all Govts. shall be cleared in terms of gold bullion, USA gold coinage or USA paper (gold redeemable) currency as the medium of exchange by the Govt. of the USA.

..................

One of the over-riding principles that I see is that there is a basic contradiction between the real existence of a gold redeemable currency and the fictional liability-money basis of the current “fractional reserve banking system.” The private property rights necessary to the former cannot co-exist with the statism of the latter.

I don't claim to know all the complexities of the US Laws, business or banking systems.

The observations of Objectivists would be welcome.

If the observations could be integrated to form the basis of a simple system of principled law regarding money and banking, we may all be the wealthier and happier for our thoughts.

What philosophy and program do you offer?

Inventor

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I've been a designer of manufactured products and buildings all my career. In the USA the investments in new projects have dramatically dwindled since the 1970s. My inventions and designs should have been well received, however, today's venture capitalists have little money, and with money being scarce the returns they require are super high at approximately 33 percent per year.

I'm surprised to hear that. There has never been so much capital allocated to risky investing, from VC to mezzanine, at every stage of the company life cycle. A 33% IRR is not that high - a typical VC would be looking at a 60% IRR (which allows them to cover the losses on the 2/3 of businesses that will fail in their portfolio). There's actually a huge shortage of good management talent and ideas, even post-crunch.

(If you are interested in why, it is because David Swensen, the manager of the Yale endowment, came up a few decades back with the idea of investing a fair amount of the endowment into then pioneering VCs and private equity groups; the returns he gained from those pioneers were so high other large asset managers immediately copied this method, pouring billions into the asset class - even 0.5% of a 100 billion USD fund is a lot of money when deals rarely reach a million. When there is demand, supply catches up quickly, so VC and PE are now strongly overfunded, and returns as everybody knows have been lacking for anybody not "top quartile".)

The problem may be that VC is now focused on very high growth, non capital intensive businesses (basically, internet and some hard tech), which your businesses don't fit in. VC is now run by MBAs who worked at Goldman IBD effectively lying for a living. Those guys are interested in stuff they can flip quickly and have destroyed the kind of innovation that real VCs like those who backed Google are able to produce - stuff that takes 10-15 years to bring to market, but really changes the paradigm, as opposed to making the way you read news online 15% more efficient. But look at what the real VCs, the former entrepreneurs now investing, have to deal with: http://seekingalpha.com/article/166344-sto...us-green-shoots

I'm sure you have a great chance, provided you find a real VC - somebody willing to take risk with his own money and wait a long time for the returns to come (as is the case with any hardware business).

You should approach private equity groups whose investment focus is in hard assets and manufacturing and see whether one of them would like to back you. A great list of most of the world's PEGs and VCs is here: http://www.private-equity.org.uk/ - going through all the entries will take you weeks but might be worth it?

If you're looking for the opposition, check out this piece by His Socialist and Bearded Majesty Krugman (one of the most ridiculous Nobel "prizes" in economics ever awarded): http://www.pkarchive.org/cranks/goldbug.html

Not the most convincing piece, and factually incorrect (the proportion of gold used by industry is minute compared to that which is in storage).

I do think, however, that fiscal discipline can now be imposed via markets (which were not sophisticated nor global enough at the time you were first introduced to Objectivist ideas). The system of multiple reserve and base currencies that is being developed will mean traders can short USD to their heart's content, finally imposing discipline on a profligate government. I bet the administration is shaking at the mere thought.

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TFFARF:

The basic concepts:

GOLD:

Gold metal should be the basic money in use in the USA.

Gold may be traded directly in the form of coinage.

Coinage used for money should only be coined by the Govt. of the USA.

PAPER CURRENCY:

Paper currency that is used for money shall only be issued by the Govt. of the USA.

Inventor

Why should the government be involved in the production of money? And why on earth should the government have a *monopoly* on money? Is not the latter socialism in money? And is not the former a government intervention into the economy? Why not let everybody decide for themselves what to use as money, with laws against fraud of course? Would not good money outcompete bad money if everyone was free to choose, without their choices being skewed by government compulsion? Also, and this is more fundamental, is it not a violation of individual rights to circumscribe the citizens freedom to decide for themselves what to use as money?

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You want centralized money because it increases liquidity and transparency in markets. That's basically it.

It's a good thing that we no longer barter in cows or have to worry about the gold % in the gold coins.

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Why not let everybody decide for themselves what to use as money, with laws against fraud of course?

V. high enforcement costs, amongst other things. There's 300m Americans and they transact many times a day.

Would not good money outcompete bad money if everyone was free to choose, without their choices being skewed by government compulsion?

It already does. Check out the USD over the past year. It's on its way down for a long, long time... the other problem is that there is no good money. All governments are printing except for the island tax havens like Singapore and HK.

Also, and this is more fundamental, is it not a violation of individual rights to circumscribe the citizens freedom to decide for themselves what to use as money?

Nobody stops you from inventing your own currency. A London borough actually did it: http://article.wn.com/view/2009/09/17/Lond...ost_local_econ/

Perfectly legal. Unfortunately you need to convince the guy on the other side that your currency will be accepted. That's easy with gold and say GBP or USD, because the guy knows that he will find takers afterwards - those are liquid markets. Not so much for the Henrik Krone, since for all the shopkeeper knows, you're the only person who will accept them.

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TFFARF:

--------------

Can you please elaborate on this?

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Why not let everybody decide for themselves what to use as money, with laws against fraud of course?

V. high enforcement costs, amongst other things. There's 300m Americans and they transact many times a day.

What enforcement costs? People already choose how they will pay and what they will accept as payment. Their options include cash, various credit cards, checks drawn on thousands of different banks, barter, foreign currencies, etc. As long as there is no fraud, there is no reason for the government to get involved.

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THE FORUM:

Inventor

Why should the government be involved in the production of money?

GOLD

The USA Government would standardize money in several ways. It would provide a standardised system of units of exchange for coin and paper money, and it would provide a window or windows for the universal applicability of the standards. Standardised locations for exchange windows would be provided, or provided to private firms or individuals via licensing. A schedule of denominations and weights would be set. Universal weights and measures would be set for coins and paper (or other types of?) currency, based, for example, on the [Metric System) S.I. unit, e.g., the gram.

The US Gold Dollar would be re-named to be a 100GM Gold Redeemable Certificate, for example.

Existing old Dollars would be recalled and replaced. They might be recalled as taxes until they are gone. More ideas are necessary regarding that matter.

The printed term, God, on the money would disappear and be replaced by the term, Gold, e.g., "In Gold We Trust".

The price of a gram of gold in current terms would be considerable. By an open public process and the free markets the relative values would be discounted, and a ten year process may be allowed or limited for clearing purposes.

Creativity would then be come a wealth creating process.

Special laws for inheritances would be needed to protect the estates of the citizens, for long term investments, and for other specific purposes.

Sure, wherever there is fraud, the FBI or appropriate USAG police agency and the courts would be called into action.

And why on earth should the government have a *monopoly* on money? Is not the latter socialism in money? And is not the former a government intervention into the economy? Why not let everybody decide for themselves what to use as money, with laws against fraud of course?

The USA government would set standards, however, all money would ultimately be owned by individuals or their business concerns. Your posession of a one gram US Gold Certificate would mean that you have, on account, one of gold, in bullion or coinage, at a repository of the USA government.

Private firms would not be excluded from producing their own coins or backed deposit certificates, however, The standard concept of what is the standard unit of exchange would be set by the USA government. Since everything in all markets would be echanged for standard gold-redeemable currency the USA government money would be universally present and available.

Private firms could issue coins, and, for example, Polaroid Corp could conceivably create and issue a new type of gold backed coinage that would be more convenient, longer wearing, and have more desireable practical and appearance characteristics. The new "PC" may be more popular than the USAG money, however, it would always be tradable on the free private exchanges. Note that gold coins that have beautiful appearance characteristics, e.g, the One Troy Ounce U.S. Twenty Dollar Gold Piece, are often prefered to bullion even thlough customers pay a premium for the coins.

Who knows, possibly, someone will invent a new type of electronic money that has gold deposits for backing. They would probably find themselves in the banking business I would say.

Any object or comodity could be traded as a form of money or medium of exchange in an individual rights and property rights-based society, however, in the proposed gold-redeemable money system, the USAG would always provide the scientific and quality standards by which all other units may be measured and exchanged in open martkets.

Would not good money outcompete bad money if everyone was free to choose, without their choices being skewed by government compulsion? Also, and this is more fundamental, is it not a violation of individual rights to circumscribe the citizens freedom to decide for themselves what to use as money?

The proposed system of gold redeemable currency would enable anyone to buy gold using USA paper currency, and they could store their own gold, or use it for any purpose. A firm could store gold for others and issue printed warehouse receipt certificates. The public may prefer to hold and trade those certificates. Always the USAG money would be the common, available, basic and uniform standard.

The USAG would not be involved in the regulation of the uses for the money, and they would only regulate the currency by setting the standards and total amount. Congress would set the amount of USAG gold-redeemable money to be placed in circulation, and to do so it would have to print a certain number of weight-based gold certificates that would be warehouse receipts. To issue the certificates it would have to buy gold bullion in the open markets and keep it securely. Honesty, precision, and security would be required by the government.

The citizens could trade in any form of money, and the USAG would always have available its standard units of exchange that could be traded in the open markets.

When people would prefer electronic money equivalents, banks would keep the appropriate gold deposits on hand to cover all moneys in all forms, or notes, that they may have distributed for whatever purposes.

The term, "WHATEVER", would take on a new meaning that is quite different from the current Pragmatist catchword, "whatever," that means, "Oh what's the use?", or, "Whatever works."

Whatever would mean what it used to mean in America, that, "It's as good as Gold."

Would not good money outcompete bad money if everyone was free to choose, without their choices being skewed by government compulsion? Also, and this is more fundamental, is it not a violation of individual rights to circumscribe the citizens freedom to decide for themselves what to use as money?

The Gold money system here proposed would provide the best money available, and the money could be exhanged for all types of special purpose forms of exchange, gold bullion, or other goods and services freely and where deemed appropriate, by the citizens.

The current fraudulent system of fractional reserve banking that distributes more money than the issuer actually possesses on deposit would be illegal. What would replace it would be the necessity of the bankers to be more technically involved in the business affairs and know-how of their customers. Bankers would all act more like investors and venture capitalists than the curent Pragmatist "bottom-linists" who are only interested in the return of and on their investments with no care whatsoever what the causes of the necessary creation of wealth would be.

Absolute 1:1 honesty is necessary for the creation of new wealth. Wealth is that created by the ideas and activities of citizens that made be traded in the free and open markets for money units of exchange.

Thank you.

Inventor

GOLD

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What enforcement costs? People already choose how they will pay and what they will accept as payment. Their options include cash, various credit cards, checks drawn on thousands of different banks, barter, foreign currencies, etc. As long as there is no fraud, there is no reason for the government to get involved.

Well, I just think that as you multiply the number of currencies or forms of money, you multiply the chances for a fraudster to go undetected. With gold currency, it would be fairly easy to say cut the gold quality and inject cut or thinner coins into the system. Whoever enforces this would spend their time checking the quality of the gold, the weight of the coins, etc. Give me a standard engineering lab, some fairly high quality plaster or other moulding material, an oven and some bullion and I could probably extract a couple more coins out of the lot in half a day.

Whereas if you want to fake a $100 bill, you're facing huge barriers to entry.

I think pure honesty, throughout the population, only exists in Galt's Gulch - in our real world, there is a small percentage of people who are natural criminals.

I may be wrong, and the enforcement costs would of course be much, much smaller than e.g. what is spent on Social Security or Medicare (and what is about to be spent on healthcare). But we are Objectivists, we believe in caveat emptor - do you really fancy checking every gold coin you receive for weight and quality, or every Florida Dollar against the accepted pattern? Can't really have government bailouts of people who end up with fake currency.

However, the arguments for liquidity are far more important in my view. If the US have 50 different currencies for each State, each is 1/50th as liquid, which makes life more expensive for everybody in FX, markets less transparent etc.

As an example of an illiquid, not very transparent market, look at real estate. There is barely any standardization, the assets can't be moved, are expensive, and there is no central marketplace or clearing house.

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TFFARF:

--------------

Can you please elaborate on this?

The Forum For Ayn Rand Fans : TFFARF .

However, from the top-left of this page I've learned that the acronym should be, THE FORUM.

Thank you.

Inventor

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Why should banks have to keep a 1:1 ratio? I see nothing wrong with bank that only operates on a 0.3 to 1 ratio, as long as it honours the peoples contractual withdraw requests.

I find it odd that an Objectivist would propose initiating force on banks who do not do business the way how he wants, because if you don't trust fractional banking, in a free society, you are free to choose not to utilise their services, so why force others?

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Why should the government be involved in the production of money?

The USA Government would standardize money in several ways.

The question is not how a government might be involved in the production of money, but whether they should be involved.

The only necessary and proper function is to set an objective legal definition of the unit of money just as they set the legal definition of an inch or a gallon. Such a definition would be "A dollar is (a specified weight) of gold." That's the way it used to be before we went off the gold standard.

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What enforcement costs? People already choose how they will pay and what they will accept as payment. Their options include cash, various credit cards, checks drawn on thousands of different banks, barter, foreign currencies, etc. As long as there is no fraud, there is no reason for the government to get involved.

Well, I just think that as you multiply the number of currencies or forms of money, you multiply the chances for a fraudster to go undetected. With gold currency, it would be fairly easy to say cut the gold quality and inject cut or thinner coins into the system.

The same can -- and has -- happened with government money. Remember silver dollars and quarters and copper pennies?

When coins have been privately minted, the issuer stamps his brand on the coin and its value is his reputation. That was the origin of "branding." In addition to the identifying proprietary designs on coins, gold coins have a milled edge of evenly spaced indentations that makes the shaving of gold off the edges obvious.

When money is privately issued, you have the option to refuse money you think is fraudulent or bring suit if you can prove fraud. When the government issues money you have to accept it whether you want to or not. That's what fiat money means.

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Why should banks have to keep a 1:1 ratio? I see nothing wrong with bank that only operates on a 0.3 to 1 ratio, as long as it honours the peoples contractual withdraw requests.

I find it odd that an Objectivist would propose initiating force on banks who do not do business the way how he wants, because if you don't trust fractional banking, in a free society, you are free to choose not to utilise their services, so why force others?

Believe it or not, George Reisman opposes fractional reserve banking and considers it inherently fraudulent.

If the depositors are informed that's the way the bak does business, where's the fraud?

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Why should the government be involved in the production of money?

The USA Government would standardize money in several ways.

The question is not how a government might be involved in the production of money, but whether they should be involved.

The only necessary and proper function is to set an objective legal definition of the unit of money just as they set the legal definition of an inch or a gallon. Such a definition would be "A dollar is (a specified weight) of gold." That's the way it used to be before we went off the gold standard.

I don't even see the government as necessary for even that purpose. There is no reason that I can see blocking trade in grams and milligrams of gold. In Australia, people work with those measurements quite easily for weight for other things, so I see no mental disadvantage in using them for a currency vs dollars and cents.

If people choose their own currency to have 1 quasar = 10mg of gold, or 1 zonk to be 50 grams, that is upto the money issuer.

The only area where I see the government getting involved, is if someone tries to be deceptive about the value, such as 1 zonk is equal to 1 gram* with the star being some tiny small print on the back of the terms and conditions of that bank saying *1 gram as specified in this document is defined as 3 scientific milligrams. in which a reasonable man could easily be misled. But that to me is a form of deception which would fall under the governments fraud laws.

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Why should banks have to keep a 1:1 ratio? I see nothing wrong with bank that only operates on a 0.3 to 1 ratio, as long as it honours the peoples contractual withdraw requests.

Michael:

You have brought up two great questions:

Why the 1:1 ratio of deposits to loans?

What is the role of contacts in a system of money and banking?

Your question bears upon the essential contradiction of the material principle of gold money and created paper money.

For example, if all gold on deposit in a bank is gold coin, and the banker lends out the gold, what are the numbers? E.g., if 10GM of gold is on deposit, and if a borrower receives 10GM in gold in exchange for paper WRs, the bank now has on deposit the paper loan agreements that are a form of WRs that are promises to pay in gold that have specified repayment and interest terms.

Where does the bank get the deposits to make further loans to its customers? Gold metal is gold metal, and it has a specific identity and location. The specific items of gold cannot be both in one place and another at the same time and respect. (Aris.)

If the bank held 10GM of Gold Redeemable Paper Currency, and it made a loan in the amount of 10GM of Gold Redeemable Paper Currency to a customer, the customer is obligated by the loan agreement to repay the principal (with interest at a certain time) in a certain form. The customer will repay the loan in gold or its equivalent determined by the terms of the agreement, say, 10GM of gold, either in gold metal, gold coin, or in Gold Redeemable Paper Currency.

Nor can 1GM of gold metal or 1GM of Gold Redeemable Paper Currency become 2GM of same.

Hence the 1:1 principle of gold banking.

I find it odd that an Objectivist would propose initiating force on banks who do not do business the way how he wants, because if you don't trust fractional banking, in a free society, you are free to choose not to utilize their services, so why force others?

Nowhere did I, the Objectivist in question, propose the initiation of force upon anyone. Lets get that question out of the way.

Nor is our society free to the extent that it has a fiat money system. Quite the reverse. The economy of the USA is currently failing due to the increasing excesses of USAG fiat money and fractional reserve banking. The excesses of fiat money are causing a national economic emergency of a scope that the primary exponent of fiat money, Karl Marx, could have never imagined. Although, he did say that the fastest way to destroy capitalism is by debasing its currency. He is getting his wish.

On the other hand the arguments endorsed by free-enterprise economists in opposition to fiat money are widely endorsed and in print in the Objectivist world. In fact a gold redeemable economy is the honest system; and it is the only volitional system.

Some examples:

If the loan agreement requires the customer to repay the 10GM gold loan with 15GM of gold that isn't money creation or fractional reserve banking; that is principal with 5GM of gold in interest. That is a nice loan at a 50 percent interest rate, and that would be a fine profit for the banker.

[Recall the principle that in a gold economy gold functions to create wealth when used by inventive customers at a far faster rate than loans made in a fiat money economy wherein money has progressively less and less buying power.]

In a different case the banker keeps the gold on hand and issues a paper loan agreement repayable in gold, the terms may require that the loan be repaid in gold. What if he does that ten times, and the ten customers want cash from their loans in order to conduct their businesses and benefit by the addition of temporary funds? Where does the bank get the cash to fund the loans?

If they print money or coin fake gold coins that's counterfeiting, and if they write checks that's fraud.

If the banker receives the promised funds from the customers he receives ten times 10GM in gold plus interest. The question still remains. Where did the customers, numbered two through ten get their cash from the loan agreement with which to work?

If the banker can create 100GM gold where there was 10GM of gold, or can create 100GM Gold Redeemable Paper Currency where there was 10GM Gold Redeemable Paper Currency, he is creating money where there was none. That is fraudulent.

In a gold redeemable economy it would be impossible for a banker to have 1GM of gold on deposit and still payout 1GM Gold Redeemable Paper Currency for the same gold. The gold would have been purchased by the USAG and placed on deposit. The USAG would have issued Gold Redeemable Paper Currency in the appropriate amount by weight. If the banker loaned the cash to a customer he would have no gold in his vault, and what he would have would be the original loan agreement.

The value of the monies in all contacts in a Gold and Gold Redeemable Paper Currency economy would always be a constant, and that constant is the standard value provided by specific weight units of actual gold metal. The amount of gold in the economy is finite at any given time, and so would be the amount of Gold Redeemable Paper Currency. In that type of economy there can be no more money in circulation or on deposit than there is in gold.

When the USAG sells gold for Gold Redeemable Paper Currency the currency is stored as inactive or is destroyed. Only gold exists.

In a free economy gold is the potential measure of all property, and that measure is actualized in market trades.

As wealth is being created in a free economy, and if the supply of gold and gold ,money at a given time is constant, the money required to purchase items of wealth is less and less. The price of everything is less and less in a gold redeemable economy. and is more and more in a fiat money fractional reserve banking economy.

The contracts in the commodities markets would work the same in that a certain weight of gold or equivalent Gold Dollars (WRs) would buy a certain amount of pure magnesium at a certain time according to the freely negotiated prices of a market trade.

The banker who lends out more money than he actually has is conducting a fraud. Sure, the customer is free to deal with that banker, and as long as other banks and businesses will accept the banker's and the customer's checks the scheme may continued, but sooner or later the customer's or the bank's checks will bounce. At that point a crime or crimes will have been committed.

All bankers from the U.S. Federal Reserve on down to the retail level who advocate and participate in the current USA fractional reserve banking system are committing a fraud on a giant scale. The citizens of the USA are the unwitting and coerced participants or victims of the fraud. Politicians, in addition to the fiat money bankers, have become criminals.

Who is being forced by the collusion? The American Citizen.

Who stands to gain from the honesty? The American Citizen.

Inventor

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The current fraudulent system of fractional reserve banking that distributes more money than the issuer actually possesses on deposit would be illegal. What would replace it would be the necessity of the bankers to be more technically involved in the business affairs and know-how of their customers. Bankers would all act more like investors and venture capitalists than the curent Pragmatist "bottom-linists" who are only interested in the return of and on their investments with no care whatsoever what the causes of the necessary creation of wealth would be.

Fiat money is not a literal, legal fraud as long as the bank that issues the fiat money (and it should be a private bank, so that no taxpayer is forced to foot the bill if the bank fails) is open about the fact that the money is not backed by any real value, such as gold.

The government should not attempt to protect people against themselves. So if an adult is to stupid that he wants to shoot heroin, the government should not stop him. And for the same reason, if a person is so stupid that he wants to use fiat money, the government should not stop him. Now, what about fractional reserve banking? If the money consists of gold, but a bank issues notes that are only partially backed by gold in its vaults, then those notes are, as I see it, a combination of gold money and fiat money. If the notes are only backed by gold to a 50% degree, for example, then each dollar of that money is like 50 cents of gold money and 50 cents of fiat money. Now, if a person is to be permitted to use a 100% fiat money, if he is that stupid - why should he not also be permitted to use a money that is 50% gold and 50% fiat? The important thing is that the government should forbid fraud, so any bank that engages in fractional reserve banking should be required by the law to make it public information what, if anything its money is backed by. Personally, I would not touch money that is not backed by gold to a degree of 100%. I would not want to take any risks. But if other people want to take risks by using paper money, for example, in order to earn some extra interest, they should be permitted to do so. After all, its *their* money.

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Why should banks have to keep a 1:1 ratio? I see nothing wrong with bank that only operates on a 0.3 to 1 ratio, as long as it honours the peoples contractual withdraw requests.

I find it odd that an Objectivist would propose initiating force on banks who do not do business the way how he wants, because if you don't trust fractional banking, in a free society, you are free to choose not to utilise their services, so why force others?

Believe it or not, George Reisman opposes fractional reserve banking and considers it inherently fraudulent.

If the depositors are informed that's the way the bak does business, where's the fraud?

I don't see the fraud either, if depositors are informed. But I also see fractional banking as having a very valuable role in the economy.

I am hoping that I explain this next bit clearly, since I have had trouble communicating this in the past, so bear with me if I make some mistakes in communication. :D

If a bank lends out 70% to someone else which ends up in the persons savings, which then gets 70% of it lent out again, multiple times as per the fractional banking theory states, even tho the total money supply has severely increased, there is no problem with that until people choose to spend it.

This is where interest rates come into play. If people start spending money like crazy and the bank thinks it is going to run out of gold to honour the people it made promises to, interest rates increase to put a huge penalty on spending *now* for people it has lent to. That is a price attached to current consumption. But the interest rates also reward savers who instead of buying that new car right now, they choose to give up consumption for a future time.

This is where I would like to make up a new monetary economic measurement tool of money supply in use which I consider far more valuable a statistic than total money supply. If the total money supply in use, is equal to the current production level, then no inflation or deflation occurs, no matter how much total money supply there is.

If a bank has its money supply in use greater than its store of value backing it up, it runs out of gold when people cash it in for trade and thus it goes bankrupt so it has to very carefully manage that.

But if you contrast that to fiat money like we have today, there is no hard asset that the government has backing its money, so if it starts running out of money, it prints more, which leads to the money supply in use being greater than the current production which is more commonly known as inflation.

I see fractional banking to be just one more tool to manage competing values, and to transmit information as to who is wanting to purchase money with something right now and how much they are willing to trade for that ability, vs someone who is willing to give up his share of production(his store in gold, whether he earned it or borrowed it) to get the benefit of more of his values in the future.

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I guess in a way, to reduce it to essentials, fractional banking is a group of people sharing the same batch of money, in which the bank micromanages through interest rates who gets to use it when, each person repaying, or giving up the use of it for a time for mutual self benefit.

A bank that does it well, succeeds. A bank that screws up, fails.

It is the same type of organisation in my mind as insurance, in which a group of people are pooling their money to share risk with each other in which the insurance company manages it by pricing risks so the pool doesn't get exhausted by people spending it.

Fractional banks do that by pricing consumption now, vs future consumption. :D

There is always a certain point where someone says "I love that car so much, but I am not going to pay that extra amount in interest penalty for it right now" or "I love that car so much, but if I postpone buying it, I will get it + more in 1 year!"

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Why should banks have to keep a 1:1 ratio? I see nothing wrong with bank that only operates on a 0.3 to 1 ratio, as long as it honours the peoples contractual withdraw requests.

I find it odd that an Objectivist would propose initiating force on banks who do not do business the way how he wants, because if you don't trust fractional banking, in a free society, you are free to choose not to utilize their services, so why force others?

Believe it or not, George Reisman opposes fractional reserve banking and considers it inherently fraudulent.

If the depositors are informed that's the way the bank does business, where's the fraud?

I don't see the fraud either, if depositors are informed. But I also see fractional banking as having a very valuable role in the economy.

You have not addressed the basic contradiction that exists between a gold redeemable money free-enterprise economy and a fractional reserve fiat money economy.

If you think that both can co-exist in the same economy you are asking for a mixed economy. That's Fascism. That's what the USA has now, and its a dismal failure.

Regarding the results of a fractional reserve banking system in which banks can issue checks drawn on fictional reserves to more than one loan customer, you must reckon with the possibility that once the checks are received by the loan customer, they may be cashed at the teller window. With all those claims on deposits where then are the bank's reserves?

If the banker has borrowed from the Federal Reserve Bank he gets a free ride that no other type of business can get: the banker gets to create fictional moneys and use those monies to make a profit prior to retiring the fictional money and repaying the Federal Reserve Bank in a fraction of the amount that he had virtually borrowed from the Fed. Fractional reserve lending is a sweet deal.

No other businesses get that type of free ride. I say that what you base your banking business on is a form of legalized favoritism and fake money.

Can't the banker make a living on the basis of his own ideas and resources, and create his own wealth rather than borrow freely from the Fed. and profit by the legalized favoritism?

With a 1:1 (gold deposits : loans) ratio no Pragmatically legalized phoney deposits can exist, and the amount of calculable money in supply in the USA remains a knowable constant. The Federal Reserve Bank is in that honest system totally unnecessary, and should be abolished.

With the inflationary fiat system that you suggest that is implemented by the banks, wherein they are all required by law to participate the amount of money being used in the economy is a guessable unknown. Why is that important? A business manager or building contractor during the early 1950s used to be able keep in mind all the price values for every component of his business, and he could make informed decisions accordingly. Today that is impossible, and business managers operate in a sea of guesswork. The managers literally cannot place a number on projects until the actual costs are paid. Business these days is a matter of anybody's guess and not of rational facts. I say that with a 1:1 gold redeemable currency money and banking system facts will once again be on the side of the innovator and businessmen.

Do businessmen think 20 years in advance? In their dreams. Large scale projects for example mines, refineries, algae DNA development projects, and algae oil production facilities commonly take longer than 20 years to reach completed development and profitability. By then the 20 year terms of their patents will have expired. What businessmen are complaining about that? The term of 20 years is an impediment to serious calculated technological advancement.

Instead of fact based investments in long-term projects, e.g., moon telescopes, 100% space vacuum biological and chemical manufacturing, or mining ventures on the moon, the USAG has proposed the spreading of the human germ throughout the solar system via space travel (GWB). That's a religionist's smoke screen used to cover up the facts that, in a chain of reasoning, phoney fiat money is at the base. You can forget private gold fact-based investment that is required to create the fabulous projects that the inventors have in mind. Let the experts at the NIH, NASA, and their socialist ilk come up with the projects.

A fractional reserve banking entails fiat money. The controls that are necessary to regulate the excesses of imaginary money necessitate massive legislation. The USA is failing economically due to that type of socialism.

I say, return America to an honest 1:1 GOLD UNIT lending system of banking, trading, and economics. Let us free the thinkers to calculate their own projects realistically of long spans of time in a realistic and steady social economic context.

And, one last idea. While we are at the task of freeing the economic system from the ought-less banking Pragmatists, the regulation of the USAG, and the Federal Reserve Bank, we should extend the length of the term of a patent to 50 years plus the life of the inventor.

Free the inventors, businessmen, and innovators, and retire the Pragmatists.

-------

Regarding the transparency debate, I say that a fraud can be conducted even if you see what's happening and can or cannot do anything about it. A fraud can happen and a person may actually benefit by it. That doesn't make it right. Somewhere, in the greater system of checks and balances someone suffers. Recall that the Roman Empire failed. The greatest government in history to that time collapsed. It failed because the Platonists had created too high taxes, a welfare state, gross favoritism of state spending, and they reduced the amount of silver in their coins systematically from 100% to 0%. Consensus drove them to failure. and they failed. The USA is failing due to the same consensus driven notions.

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Inventor, please specify the post where I proclaimed support for the government forcing people to use its fractional currency.

There is no such post because I expressed support only for fractional banking, but in no place did I specify that the government has control over that fractional banking system, or express support for the government controlling the fractional banking system.

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Inventor, please specify the post where I proclaimed support for the government forcing people to use its fractional currency.

There is no such post because I expressed support only for fractional banking, but in no place did I specify that the government has control over that fractional banking system, or express support for the government controlling the fractional banking system.

Michael:

I apologize for my remarks that implied or stated that you endorsed coercion. I was wrong.

Volition is an important principle to be maintained in a system of money and banking, and honesty should be the standard.

Referring to your statement that you do not support, "or express support for the government controlling the fractional banking system," would that mean that you would not endorse a government central bank, for example, the U.S. Federal Reserve Bank, that would lend funds to retail banks?

There are strong opinions in the USA public opinion and press worlds that the Fed. is harmful to the banking system and is unnecessary. Those elements want to have the Fed. abolished.

The fractional system here is intertwined with the Fed., and without the fractional system the Fed. would have little or nothing to do.

The Fed. is the primary resource for US banks that is used to create fictional assets. One dollar borrowed from the Fed. by a bank is at once legally re-classified to be an asset of the bank that can be used as a demand deposit against claims by its customers. By increasing the bank's assets by one Dollar a bank may lend out several Dollars to borrowers. That's where the fictional money occurs.

Without the Fed. the liability-become-asset doesn't exist, and the bank is writing checks to borrowers without the resources to answer claims.

Coercion as a form of fraud does exist at that point because laws are necessary to give the bank a legal monopoly on fractional reserve lending and money creation. If there is no monopoly there is no coercion. Without legalized monopoly privileges that would mean that all types of businesses could lend money in amounts exceeding their resources. A building contractor could lend money to prospective home buyers and not have deposits on hand to back the loans, for example. The contractor could lend money to a subsidiary to provide funds with which to cover construction costs. That's cool, however, what happens when a borrower cashes a check drawn on the contractor's account?

I suspect that the ethical principle that is involved is a Postulate that could easily be derived from The Law of Contradiction (Aris.). That principle would state as a basic principle of a subscience of money, of the greater classification of ethics,, for example, that, "A unit of physical money can only exist in one place, attribute, or time, and cannot be in two or more places, have different attributes, or have different times of existence, simultaneously."

That principle would be the foundation of the science of money. Postulates are the foundation principles that identify and separate the sub-sciences from the greater sciences.

A postulate, in the Aristotelian sense, and not the Platonic sense, is "an axiomatic principle or corollary to an axiom that may be demonstrated in logic or in actuality." In this sense an axiom is a demonstrable principle, and it is not an axiom. [My definition. This definition is in concord with the express and implicit definitions in writings by Aristotle and Euclid.]

Somewhere, in that chain of thought, there may be the basis of the concept of honesty, and the postulate that defines the basis of the science of ethics.

The issues of money bubbles, fractional reserve banking, claims upon fictional deposits, bad checks, inflation, and fiat money is the failure of philosophers of science to define the factual and logical underpinnings of their sciences, here, the sciences of money, ownership, and economics. The issue is a matter of "Either-Or".

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Correction:

The sentence in the third from last paragraph, "In this sense an axiom is a demonstrable principle, and it is not an axiom," should read,

"In this sense a postulate is a logically demonstrable principle, and it is not an axiom."

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Referring to your statement that you do not support, "or express support for the government controlling the fractional banking system," would that mean that you would not endorse a government central bank, for example, the U.S. Federal Reserve Bank, that would lend funds to retail banks?

I strongly want the Fed abolished and to get the US government out of the banking system.

In my own little essay post, I had this line in it.

But if you contrast that to fiat money like we have today, there is no hard asset that the government has backing its money, so if it starts running out of money, it prints more, which leads to the money supply in use being greater than the current production which is more commonly known as inflation.

I consider inflation very harmful. But I don't consider fractional banking to be the cause of it. As noted in my mini essay, any private company that tried it without government edict, would go bankrupt. Inflation is only possible with a government bureaucracy forcing people to accept the money.

Fractional banking started long before fiat currency did in the US, in which gold warehouses noted that people only utilised about 1 third of their gold at a time on average, so it was possible to lend out the rest of the balance without it impacting the peoples ability to handle their own banking, and there was generally very few problems with this until government decided to get involved with their own currencies.

If you want to get the US government federal reserve abolished, then we are in agreement and allies on that.

If you want to prosecute people who fraudulently label a bank as a gold warehouses(which have no chance of a bank run), then we are in agreement and I would support prosecution of people who fraudulently claim that.

But if you wish to ban or regulate financial instruments such as fractional banking, in which their nature is disclosed so a rational person can decide for himself, then you and I are in disagreement in that issue.

You are free to choose not to partake in banking, and restrict yourself to gold warehouses, but I will continue to avail myself of the benefits that a fractional bank has to offer. (Carefully researched of course, to make sure they maintain gold reserves that they won't go under).

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I suspect that the ethical principle that is involved is a Postulate that could easily be derived from The Law of [Non-] Contradiction (Aris.). That principle would state as a basic principle of a subscience of money, of the greater classification of ethics,, for example, that, "A unit of physical money can only exist in one place, attribute, or time, and cannot be in two or more places, have different attributes, or have different times of existence, simultaneously."

That principle would be the foundation of the science of money. Postulates are the foundation principles that identify and separate the sub-sciences from the greater sciences.

A postulate, in the Aristotelian sense, and not the Platonic sense, is "an axiomatic principle or corollary to an axiom that may be demonstrated in logic or in actuality." In this sense a [postulate] is a demonstrable principle, and it is not an axiom. [My definition. This definition is in concord with the express and implicit definitions in writings by Aristotle and Euclid.]

Somewhere, in that chain of thought, there may be the basis of the concept of honesty, and the postulate that defines the basis of the science of ethics.

The issues of money bubbles, fractional reserve banking, claims upon fictional deposits, bad checks, inflation, and fiat money is the failure of philosophers of science to define the factual and logical underpinnings of their sciences, here, the sciences of money, ownership, and economics. The issue is a matter of "Either-Or".

[...]

THE FORUM:

This is a little starter item regarding postulates that should develop into greater discussions regarding the basis of philosophical sub-sciences.

Also, the Law of Non-contradiction is the founadation principle of money in economics.

Following is a reference quotation from Aristotle posted on the reference website: "NON-CONTRADICTION.COM". Read it slowly for comprehension and enjoyment.

"Aristotle and Aristotelianism

He who examines the most general features of existence, must investigate also the principles of reasoning. For he who gets the best grasp of his respective subject will be most able to discuss its basic principles. So that he who gets the best grasp of existing things qua existing must be able to discuss the basic principles of all existence; and he is the philosopher. And the most certain principle of all is that about which it is impossible to be mistaken... It is clear, then, that such a principle is the most certain of all and we can state it thus: "It is impossible for the same thing at the same time to belong and not belong to the same thing at the same time and in the same respect."

-Aristotle, Metaphysics, 1005b12-20

Formulation for the Law of Non-contradiction "

Glorious writing.

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