Ted Schlater

Understanding the Gold Standard

32 posts in this topic

[#1]

...At that time, they [banks] were to keep a certain amount of gold in reserve, payable to the bearer on demand, period. No exceptions...

What is the problem? This a typical contract involving exchanging goods and/or promises.

The bank customer allows the bank to use his gold for a while in exchange for the bank's promise to pay him interest and to give the gold back at a specified time or under specified conditions. HOW the bank handles the gold and what they do with it is generally not specified and it doesn't have to be ask long as the bank pays the interest and returns the gold when they should.

A banking contractual relationship is different than a warehousing contract where the warehouse agrees to hold the depositor's particular gold coins, bars, etc. safe in their warehouse in exchange for the depositor paying the warehouse for the service of keeping his gold.

Share this post


Link to post
Share on other sites
What is the problem?  This a typical contract involving exchanging goods and/or promises.

Just that the depositors had no legal recourse to hold the banks accountable for their gold that was not delivered as promised. This was primarily the fault of government intervention coupled with the economy of the early depression that caused the 'bank runs' and the fact that the government protected the centralized banking legislation in the Courts (before FDIC). But I also think the concept of fractional banking is flawed and this was part of the problem. With 100% backing who cares about 'bank runs'. They are only possible with a fractional system, with or without government intervention. I am back to my original unanswered questions from the previous post that no one is answering directly. What about the property rights of the depositors, and when, if ever, are they superceded by some greater "common good" (e.g. - Economic efficiency)? I say never. My goal is understanding, if I appear adversarial this is not my intention.

The bank customer allows the bank to use his gold for a while in exchange for the bank's promise to pay him interest and to give the gold back at a specified time or under specified conditions. HOW the bank handles the gold and what they do with it is generally not specified and it doesn't have to be ask long as the bank pays the interest and returns the gold when they should.

But I think the HOW does matter, else how can I, a rational individual, make an informed decision about the value and interest a bank can provide. I must know what they plan to do with my gold and how they are going to do it. These should be enumerated in a banking agreement/contract so I can make my informed decision.

A banking contractual relationship is different than a warehousing contract where the warehouse agrees to hold the depositor's particular gold coins, bars, etc. safe in their warehouse in exchange for the depositor paying the warehouse for the service of keeping his gold.

True, I am not disputing this.

Share this post


Link to post
Share on other sites

David,

Depositors do have legal recourse if banks are illiquid, under free banking.

Do you understand the difference between illiquidity and insolvency?

Do you understand why and how the business of banking was created?

Banks, like any other business, can potentially become illiquid or insolvent. You have several times insisted something to the effect that this possibility is somehow instrinsically immoral or fraudulent.

I think that if you really want to understand banking, then you should try to come to a non-rationalistic understanding of the banking and finance industry. For someone who is looking for no return and low risk, the mattress or safe deposit box is always available.

I think that Salsman's "Breaking The Banks" is your best bet for an introduction to the problems of central banking vs. free banking.

Share this post


Link to post
Share on other sites
But I think the HOW does matter, else how can I, a rational individual, make an informed decision about the value and interest a bank can provide.  I must know what they plan to do with my gold and how they are going to do it.  These should be enumerated in a banking agreement/contract so I can make my informed decision.

That's one option, but there are others.

When you buy insurance, how do you know if the the company will pay you if you make a valid claim? You can look at how they do business, examine their assets, look at their track record for paying claims, ask their customers, or consult a rating service like AM Best that ranks and rates insurance companies.

Evaluating a bank isn't all that different.

Share this post


Link to post
Share on other sites

Anyone interested in this topic should check out Richard Salesman's "Ask the Experts" section. The three topics that relate to this thread are "Austrian Economics", "The Business Cycle", and "Questions about free banking and the gold standard".

Share this post


Link to post
Share on other sites
But I think the HOW does matter, else how can I, a rational individual, make an informed decision about the value and interest a bank can provide.  I must know what they plan to do with my gold and how they are going to do it.  These should be enumerated in a banking agreement/contract so I can make my informed decision.

There is one simple way. If you don't like the banking contract because it doesn't specify the fractional reserve, simply don't sign it. No-one is forcing you to accept the contract the bank provides. If you do sign it, you are accepting the risk. :)

Share this post


Link to post
Share on other sites