Last night, I attended a very entertaining Adam Smith Insitute event at which Eamonn Butler and guests talked about Austrian economics. Mr Butler has a new book out and it is an excellent, succinct summary of what this form of economics is all about. And he touches, very briefly, on the issue that seems to be getting some people worked up into a tizzy: fractional reserve banking. FRB is an issue we have already had a good working over on at this site and a good comment thread. A brief summary of my view is that I don’t think many forms of FRB would be able to survive in a pure free market without bailouts, “too big to fail” protections, government deposit protection, etc. But it should not be banned: if folk want to take the risk of depositing money in an FRB account, then that is their business, like smoking, off-piste skiing and unprotected sex. With currency competition and removal of legal tender laws, such FRB banks would have to be run with ruthless attention to risk control. So I don’t see the need for any restrictions.
However, what annoys me about the reaction of fellows like this is that they seem to be supposing that the current banking system, the system that has recently been brought almost to its knees, with such shining examples such as Northern Rock, the Dunfirmline Building Society, Bradford & Bingley, HBOS, etc, etc, is somehow basically okay. Riiiight. They are saying that those pesky Austrians, with their “loopy” ideas about how two people cannot simultaneously hold the same claim to the same money at the same time (which strikes me as a perfectly sensible view, in fact), should shut up. Well, they are not going to shut up.
I have to say I find the sheer gall of these “why don’t these guys shut up?” line of analysis to be pretty unedifying. If FRB – at least as it currently operates – is so splendid, and if banking really is about “borrowing short and lending long”, then maybe the defenders of the current form of banking could explain to the taxpayers of the UK quite why we have had had to spend hundreds of billions of pounds in the recent banking clusterfuck. Just asking.
Didn’t we just all go around this mulberry bush, Johnathan?
The point is that FRB doesn’t create money, and FRB on its own was not the problem, it was central banking and interest rate control and fiat currency and so on. That’s not the same thing as FRB.
The annoying thing about this is it is just a slogan. Where does this “cannot” come from? It is meant to imply some law of the universe, some immutable fact about reality, but it is no such thing. As Laird said so delightfully, money is fungible. Nobody has claims to particular units of currency. All they have are a contract to get some number of units of currency if they ask for it.
My ISP (a very good one, Zen Internet, I like to plug them when I can) sells more “claims” to bandwidth than it has core bandwidth to supply. It does so in the reasonable expectation that not all the customers will max their connections at the same time. Cheaper ISPs have less core bandwidth and their connections can often be very slow; Zen have a lot per customer, and the connection is always sizzling fast, and I pay more for that, because I’m a nerd who understands markets. THe point is, all sorts of businesses apply diversity by (electrical grids is another example) by selling more of what you call “claims” than they can supply simultaneously. There is really nothing wrong with that.
It wouldn’t make any sense to say “two people cannot simultaneously hold the same claim to the same data packet” because data packets are fungible too. It’s just a slogan. It doesn’t actually mean anything. I know it’s supposed to be a kind of “ah-ha, get out of this!” smackdown, but it doesn’t work that way because it isn’t actually true.
Sorry to just modify that last post-
What I should have said is that the problem was that the banks had lost their customers’ deposits through malinvestment, which was the core problem. The money the customers had loaned to them was gone. It would have been gone if it had all been timed deposits. It was a cluster of malinvestment into property loans that couldn’t be paid back.
Ian, the reason is that if you deposit a pound in a bank, and 90 pence of that has been lent to me so I can spend it, with only 10 pence available to you at any time, then that means you have two people using the same amount of money. That effectively means that 90 pence has been created. The Austrian view is that money is a claim on real resouces (not just physical things, but also human skills, time, etc), and that it is logically impossible for two people to lay ownership of the same claims at the same time.
Simply going on about fungibility does not really answer that point, I am afraid.
But like I said, and as you seem to agree, the far bigger problem is central banking, fiat money, legal tender and the rest. Remove these, and I’d wager that many current forms of FRB would be obliterated, and with good reason.
That’s not the case. Across the system as a whole, any particular penny can only either be spent or in a bank; it isn’t in two places at once. The system creates the illusion that you can lend and spend at the same time because most of us won’t do so. No spending money has been created.
“If FRB – at least as it currently operates – is so splendid, and if banking really is about “borrowing short and lending long”, then maybe the defenders of the current form of banking could explain to the taxpayers of the UK quite why we have had had to spend hundreds of billions of pounds in the recent banking clusterfuck. Just asking.”
Sure: well, we haven’t just spent hundreds of billions, we’ve risked hundreds of billions by making guarantees.
But leave that aside. The answer is that by borrowing short and lending long banks perform maturity transformation. We like this, really, we do. Because it means that the short term bits and bobs of money we’ve got lying around the society can be transformed into long term investments in productivity and wealth creating investments (as IanB says, if it gets splurged on stupidities then we’re less enamoured but this is true of any banking system).
And we like that, because it means that we’re all vastly richer than we would be if we didn’t have maturity transformation.
This is analagous to something I know you understand: the value of secondary markets in bonds and shares. Precisely because you know you’re able, should you so wish, to sell the investment at any time you’ll demand a lower return on the investment (the flip side of which is cheaper capital for those making productive investments).
Indeed, things like liquid secondary bond markets are doing this maturity transformation as well. IBM might issue a 30 year bond but that doesn’t mean you have to hold it for 30 years. You can sell after 10 and buy your annuity. IBM’s got its 30 year money by us offering a series of shorter term loans.
It’s possible to imagine a world in which all maturity transformation is done that way. By buying and selling in such secondary bond and commercial paper markets. But I think we all know what would happen. Up would spring intermediaries, offering to bundle the investments of millions, tens of millions, employ a few experts to do all that wheeling and dealing and charge a cut of the returns for having done so. After all, no one really wants to spend 20 minutes a day working out what the needed budget for the day is, how much 24 hour paper he should buy, how much 7 day, how much 14 day because the rent’s not due until the 25th…so intermediaries there will be.
And we already have a good word we could use to describe those intermediaries: banks. So, we’ve just, by assuming away the existence of banks which borrow short and lend long, reinvented banks which borrow short and lend long.
And paying hundresd of billions to clear up that mess of maturity transformation? Cheaper than the wealth lost by not having maturity transformation at all.
Well Tim, it may be we are risking these billions, and we’ll eventually get that money back, but that is hardly a great advert for the system as it currently stands, I humbly submit.
And that really is the point of my article; I can accept that some think FRB is fine as it is, or at least that some of the attacks on it are unwarranted or miss the point. But what galls me, and should worry any serious free marketeer, is the idea that the system is basically fine, nothing to worry about, please let’s all move on, etc.
On the maturity transformation side, it strikes me that this sort of maturity transformation can only occur in its current form if you have the whole paraphernalia of central banks, government guarantees, legal tender laws, etc, etc. Take that away and I think that some of this transformative activity would not happen to the extent it does. It would not necessary go completely, but I think it would be reduced quite a bit.
Anyway, if I deposit money in an interest-bearing account which does not give me instant access but requires a notice period of say, 6 months, then obviously I must be willing to run a risk of the borrower defaulting, and get a higher rate as part of my reward for bearing this risk. This is how it is and should be. But I think that when banks are using money in instant-access cash accounts to fund long-term borrowing, that would be surely nuts. And of course absent all the various government measures we now have, this would not happen anyway.
“any particular penny can only either be spent or in a bank; it isn’t in two places at once”
This simply isn’t the case. Not only can the bank lend on 90p in the pound but if JP then deposited his 90p the next bank could lend on 81p and so on.
This is having a genuine impact on the money supply or rather the credit supply.
The Fed and the B Of E actually use the levers of capitalisation ratios etc to manage the Money supply (credit supply) as they recognise that most of the money in the system is actually credit.
Back here again so soon? Truthfully, I’m burned out on this topic. (I’m surprised that the redoubtable IanB isn’t too, but he seems to be indefatigable.) I’ll just say that I agree with the point that if we eliminated the legal tender laws (and, I would add, government-subsidized deposit insurance) the world would be a better place.
And to add to that your point about creating a system where cheaper capital is available for making “productive investments”.
The whole point about having honest money is that investments are valued on their, you know, value.
Where you seek to create a system that cheapens capital (or credit as it really is in this system) you get mal-investment in things like property and derivatives and look what happens to the business cycle when artificially cheap capital is made available to buy these things so that they get over priced…………….
Your argument for making us “vastly richer” is no different from saying that interest rates should be kept lower by government so that everyone can afford to buy a house or afford to make “productive investments” making us “vastly richer”.
As JP has said there is no need to ban the practice of FRB but it should be acknowledged, people given choice and this alongside the abolition of legal tender laws giving us honest money would mean the the risk of FRB or “maturity transformation” would be properly priced into the market, therfore eliminating the problems it causes the business cycle.
Unless you are advocating govt. intervention (price controls) on “maturity transformation” for the benefit of society…..
And if lend you my lawnmower, you can lend it to somebody else, and she can lend it to somebody else…
That doesn’t mean there are actually more lawnmowers in cirulation.
Exacty, there is only one lawnmower.
But you are not lending me a lawnmower you are lending me a piece of paper that I can redeem for the use of your lawn mower for one day.
If I want to use your lawnmower twice a week then you might give me 100 lawn mower use IOUs. If I deposit these in a FR Bank for lawnmower IOUs and the bank lends out 90 and the next bank 81 and the next bank 72 and the next bank 65 and the next bank 58 then even if we stop here there are now 466 days of lawnmower use loaned out but as you say there is still only one lawnmower and only 365 days in the year so the IOUs are not backed by genuine value.
Now the utility and the cost saving of of an IOU over an entire lawnmower may still mean that I am willing to take the risk of buying an IOU despite there being the chance that I might not get to use the lawnmower every time i need it. The point is that this risk should be priced into the market not ignored to inflate its true value.
I didn’t loan you an IOU Rob, I loaned you an actual lawnmower.
The problem is people keep conflating fiat money, central banking, etc, with the fractional reserve system. You can have fractional reserve under money system entirely consisting of gold pieces, and I think it’s better to consider FRB in that Dungeons And Dragons economy in order to separate it out from the sins of fiat, state central banks, legal tender laws, etc etc.
If a bank lends Fred a million dollars to build a factory, isn’t Fred promising to create a million dollars in new wealth (via the factory, presumably, but by any means at his disposal) to pay back the loan? The bank hasn’t created money (the assets and liabilities cancel out), but rather it has created a temporary environment (surfeit of cash *here*, a deficit *there*) in which Fred can create new wealth. Once the loan is repaid, the only “extra” cash floating around is that which Fred’s activities created.
I’m just an engineer, not an accountant; feel free to point out the error in my thinking.
Ian, I agree with you on the lending-forward on the lawnmower, I don’t really believe that there’s much of an issue with the banks loaning on money. Adding 90p+81p and so on and hoping to come up with a number which has some kind of meaning is a fallacy. If this number is actually used for anything in real life, that’s obviously a problem.
Where I do part company on agreement with you is that there is no problem at all with this because the major problem is that the original lender, in the current system, still believes they have full access to the lawnmower at any time. What happens when he goes to Dave to get his lawnmower back and the lawnmower is lent to Sue? Or is broken?
Now, if lawnmowers were fungible like cash (per your protest), this would be ameliorated somewhat. Until it turns out that quite a lot of people have been lending their lawnmowers to Arthur who has been taking them out into the channel on a boat and throwing them off the side. Suddenly there’s not enough lawnmowers to go around.
The government only makes this worse. They guarantee that everyone will get their lawnmowers back. This encourages people to lend their lawnmowers to Arthur without fear of consequence and at least to not ensure that the lendee won’t then go on to lend their lawnmower to Arthur. So now Arthur is buying a bigger boat to throw the lawmowers overboard at an increased rate. All of a sudden, there’s no lawnmowers, everyone needs to mow their garden. The government has promised everyone will have their lawnmowers so has to start hitting people up for cash to pay for them. People can now mow their grass but can’t afford the rent anymore so move to a flat in a hi-rise.
Richard, in the other thread Paul Lockett put it very well; that to ban FRB would solve the liquidity problem, but not the credit problem. I think people confuse the two issues.
FRB opponents say that there should only be timed deposits; so you lend the bank your money for six months kind of thing. That solves the problem of everybody wanting their lawnmower back at the same time, but not the problem of the lawnmower getting loaned to somebody who can’t/won’t give it back.
The liquidity problem is in fact the minor issue. A bank run is a liquidity problem, but under normal circumstances everybody doesn’t ask for their money back at the same time. A bank run occurs when (ususally for good reason) the depositors think their money has been lost by malinvestment, so they all rush to get what they can before the bank runs out of funds as it collapses. In other words, it’s a symptom of the credit problem; the lawnmower has been lost and isn’t coming back. That can happen regardless of the terms on which money is loaned. If the bank indulges in an orgy of malinvestment, it’s going to fail anyway. You can only address that issue by either telling people to accept they’ve lost their money, or the State offering some kind of insurance. The same problem affects either system and it’s not specific to FRB.
A bank with a good portfolio hit by an irrational panic can simply borrow liquid funds from another bank until the panic is over. In general a bank run occurs because the bank really is in a mess. The liquidity crisis is simply a symptom of the credit crisis; as with the recent crash.
Ian, exactly my point. If people want to invest in some kind of interest bearing account, it should be made very clear to them that they may see a negative rate of return (even up to the full amount of their deposit) and if the bank doesn’t have the money on hand, they may be told to come back later.
Of course, even if you pay the bank to lock your cash up in a deposit box, as it’s a fiat currency, the government can (effectively) steal it from you anyway. But that’s a different discussion.
The fact is that there are lots of people with a claim on that money and if they all claim it at once then then at the very least there is a liquidity issue.
When a bank lends money it is written down as an asset for the bank. When you deposit in a bank, which is effectively lending, the bank also writes this down as an asset for the bank. So the money is counted as an asset twice, once for the depositor and once for the bank.
Carswells and Bakers 10 minute rule bill is designed to highlight this.
The point is that there is a risk in FRB, just as there is a risk in choosing an ISP that pushes things a bit far leading to poorer service. You are willing to pay more for a better service. So would people be willing to forgo interest in return for safety – hell they do it everyday when making any investment. However, the laws that give the ownership of deposits to banks FORCE FRB on all depositors. It is simply a govt. sponsored legal privilege to entrench an advantageous way of managing money for the banks.
Neither JP or I have suggested that FRB should be banned, just that it should be priced by the market not propped up by iliberal corporatist laws.
If you want to explain to the taxpayers of assorted countries why banks needed bailouts, why not ask the governments who did the bailing-out? It’s not like the banks just walked into Parliament and voted themselves hundreds of billions, after all.
Rob, if that is the case, it’s a problem with accounting practices, not FRB per se.
Couldn’t we just solve all our problems by charging people who belive in fractional reserve banking a land value tax? 😉
Tim Worstall above claims “we’re all vastly richer than we would be if we didn’t have maturity transformation.” Not true, and for the following reasons.
MT certainly involves long term investors collaring short term deposits, which means more investment than would otherwise be the case. But there is catch, as follows.
Investment involves forgone consumption. The total amount of investment in a country is optimised when the “pain” caused by forgone consumption equals the benefit derived from investments. (Or to put it in something nearer correct economics jargon, investment is optimised when the marginal disutility of forgone consumption equals the marginal utility of investments.)
And this optimisation would occur where those forgoing consumption to make investments were quite clear about what they were doing: i.e. where all investments expected to last say ten years were funded by people prepared to lock up their money for ten years.
However MT “short circuits” the above optimisation. Under MT (as its advocates never tire of telling us), investors get their money more cheaply than they otherwise would. And that sounds great. At least it sounds great to the naïve folk who think that investment is an end in itself.
While MT DOES result in more investment, it does not get round the brute and inescapable physical fact that investment involves someone somewhere sacrificing current consumption. So who are these “somebodies”? I’ll explain.
Assume a closed economy and that MT is not allowed. Assume full employment. Assume that MT is then allowed. Interest rates for long term investors will drop and interest rates for short term depositors rise, all of which sounds nice.
But additional investment is an injection, as it points out in the basic economics text books. That is the additional investment is an addition to aggregate demand, which is not permissible given full employment (else inflation ensues). Thus demand from consumers has to be paired back to make room for the demand stemming from the additional investment.
Thus while households and others making up the ranks of small depositors gain more interest, the entire community has to forgo consumption. That is, the entire community takes a standard of living cut to enable the “more than optimum” investments. The ADVANTAGES of MT are obvious, while the drawbacks are more subtle.
The banking system is an evil corporatist mess that has many problems, but FRB isn’t one.
Money is loaned in the knowledge that it is then lent out to a third party. Yes, in principle, everyone can’t demand their savings back at the same time, but this isn’t a problem because people don’t enter the agreement with such an expectation. There’s nothing wrong with that. Outlawing this purely voluntary interaction seems to be rather the non-libertarian approach.
So it’s morally permissible, but is it in practice harmful? No. It’s just another low-ish risk investment. Maybe people think it’s a zero risk investment (and govt guarantees make it somewhat so). But that’s a problem with peoples’ ignorance and the govt guarantees, not FRB.
Some more responsible suggested targets:
– Fiat currency/legal tender laws.
– Central banks.
– Limited liability.
– Govt bank guarantees, inc. the bailouts themselves.
Ralph Musgrave:
Austrianism yes, but Keynesianism on Samizdata? What is the world coming to?
Could you explain something to me, because I find it genuinely baffling: how does investment reduce consumption when the borrower (ie. the recipient of the investment) consumes the money he borrowed?
Thanks.
Mdc: there is no sharp dividing line between consumption products and investment products. One could say that anything that lasts less than a year is a consumption product, but the one year dividing line is arbitrary.
But wherever the line is drawn, the important point is that if a country consumes more investment products, it must, other things being equal consume less consumption products.
Re borrowing, I don’t think this is relevant because where a household or firm spends money on a product (consumption or investment) the money can be borrowed or come from the firm/household’s savings. Whichever of the two latter options is chosen, it won’t get round what might be called the above “brute physical constraint”, that is, if a country consumes more consumption stuff, it will have to invest in or consume less investment stuff.
The only way round the constraint is to borrow from abroad, but let’s keep things simple and assume constant “borrowing from abroad”.
An investment is anything that lasts longer than some arbitrary length of time, such as a year? My toothbrush is an investment? That’s strange.
Wouldn’t it at least make some kind of sense to define an investment as something that produces more goods and services? A production line, for instance?
What possible help can it be in understanding the economy to define toothbrushes as investments?
Ralph Musgrave:
Let me explain my take on the situation, and you tell me what you think is wrong with it.
– Person A doesn’t feel like spending some of his income.
– Person A loans this money to Person B.
– Person B spends the money on widget machines.
The aggregate demand is the same as if Person A spent the money on booze and porn, as the Keynesian would argue is preferable. The only difference is that Person B is responsible for more of the aggregate demand and Person A is responsible for less. The transfer of consumption is fully internalised to Person A and Person B, and doesn’t affect wider society, unless they happen to make booze, porn, or widget machines, and there it only acts to transfer workers from the booze and porn industries to the widget machine industry.
So you could argue that I am simply denying there is any difference between investment and consumption. In fact, I would tentatively say that I do believe that.
I would say that at least by Ralph’s definitions of investment and consumption, there is certainly rather than tentatively no difference.
“When a bank lends money it is written down as an asset for the bank. When you deposit in a bank, which is effectively lending, the bank also writes this down as an asset for the bank. So the money is counted as an asset twice.” – Rob
This is absolutely wrong. Deposits are carried on the bank’s books as liabilities. Only the actual cash in the vault is an asset. That way the loan assets + the cash assets = the liabilities. Accountants and accounting policy can be rather strange at times, but they are not that stupid!
Ian B: Agreed. But there are possibly better definitions.
Ian B:
Here’s an article that performs this exact intellectual exercise (complete with a D&D setting!), and the conclusions are disturbing, to say the least. Highly recommended:
http://unqualified-reservations.blogspot.com/2008/01/straightforward-explanation-of-present.html
Laird, thank you. I believed that to be the case but did not have the wherewithall to back it up.
Most of the bad press FRB seems to have got appears to (originally) stem from the mistaken belief that it means lending out more than has been deposited. I was under this misapprehension for a long time. Heinlein even describes FRB in painstaking detail using this incorrect understanding in “For Us, the Living.”. Also one of his more socialist stories (though not without merit) too.
Banks are intermediaries. Instead of A lending his money to B, A deposits it in a bank and the bank lends it to B. This is a perfectly straight transaction, there cannot be anything wrong or fraudulent about it. There is nothing mysterious here, no new money creation, no shadowy deal.
It’s like buying your groceries from a Tesco instead of the farmer who produced them. You enter a store and see so many wares that you might be tempted to think that it’s impossible that farmers produced all this, therefore, maybe Tesco added some fake products on the shelves. The banks cannot create fake money any more than Tesco can create fake groceries.
Central banks (government banks) are another beast, they give the name “bank” a bad connotation. Since they are another thing they should have another name. Maybe “highway robbers”.
No, there’s an existing name – it is ‘mint’.
Ian B: I like your point about your tooth brush – very witty. But take houses: they are consumption items, costing usually over £100k each. Houses are usually classified as investments.
One could split investments into consumption investments and production investments, but it doesn’t make any difference to my basic point, which is that MT results in artificially low interest rates, which in turn results in a non-optimum split of spending and resources as between investments and other types of spending. Put another way, the result is over investment in housing just as much as in factories.
Mdc: I like your point about booze and porn – even better. The points you make about person A and B are correct, far as I can see. But the catch is that the “A & B” scenario you set up does not involve a bank, or at least it needn’t. As soon as banks come into the picture, you tend to get MT, i.e. lots of people making short term deposits, which banks lend long term. And that I think results in over investment.
“if you deposit a pound in a bank, and 90 pence of that has been lent to me so I can spend it, with only 10 pence available to you at any time, then that means you have two people using the same amount of money.”
If you are putting it into a bank, in what sense are you using it? It’s not even like a field let to lie fallow, it’s not improving with age.
And in any case, if you want to, you can put your money into a safe deposit box which you pay rent on. No risk from FRM there…
…Also none of the usual benefits.
No, there’s an existing name – it is ‘mint’
Alisa, you have insulted the mint. A mint is a honest institution, where you bring your metal (gold, silver) and they mint it into coins.
A mint doesn’t take your gold and deliver tin coins (claiming they are gold) unless it’s a government mint. Same as “bank” and “central bank”.
I was talking about a government mint, Jacob. It’s just a more honest name to a dishonest institution.
Tom Perkins writes:
Very droll, but misses the point I was making. When I am talking about a cash deposit in a no-notice account, that is cash that I want to be able to extract at any time, with no notice. This sort of cash deposit has historically never received much of an interest payment; in fact, customers typically pay the bank for storage of their cash. It is, in fact, a sort of safe deposit box, but most people prefer to let someone else take care of it rather than buy a safe.
If people want to earn interest on money that is lent out to others for say, 6 months, then they obviously cannot get access to that money during the 6-month period.
My point is, that money held in a no-notice cash account cannot be all lent out unless those putting in the money are told this, warned of the risks, etc.
As I said, get rid of government bailouts, legal tender, etc, and we’ll see just how smart current banking practice really is, won’t we?
Johnathan Pearce is right.But why not just nationalise the banks and be done with it in the Greenbacker/Greenshirt manner? That way the Guv could pay for the public services out of credit it has created itself,instead of paying the banks interest to create credit the way it has been doing for centuries.( BTW even gold coins were fiddled.Promissory notes were issued for travellers to pick up like numbers of coins abroad;soon the notes were being used as money and a scant number of people were redeeming them in gold or silver coins.The road to FRB >).
Tell you the truth : I don’t see much wrong with FRB provided a) it is publicly owned as it one of the “commons”; b) a land value tax is in place to block cheap credit escaping the productive loop and being hedged into landed property.
That’s what I love about LVT. It’s a sort of magic tax. No matter what the problem, LVT cures it!
I haven’t the faintest idea what that is supposed to mean – Greenshirt? What, is this some sort of green mass political movement?
Fancy doing some TV?
That also makes no sense. How is FRB part of the “commons”? What the heck are you blithering about?
And of course, as Ian B notes, you guys seem to regard LVT (ie, nationalisation) of land as a sort of solution to all ills, like a magic bullet. Which of course is arrant nonsense – not even Henry George believed that. If governments flood the market with cheap money, then if all land values rise, and the tax revenues are pumped back into the system, then other things, such as movable goods, wages, etc, will skyrocket in price. Money, remember, is a claim on resources, not just physical, but also things like labour, etc.
@JP
I made the mistake of assuming you might have heard of the well-known American Greenback movement ( starting off with Abraham Lincoln who refused to borrow off the banks to pay for the War between the States) and the similar, but less well-known, Greenshirt movement in GB in the Thirties ,fronted by John Hargrave I believe,which saw the creation of money in the same terms as Major Douglas (and later by Murray “Its a swindle by the banks”Rothbard).
The reference to ” commons” is an attempt to equate the right to access the money supply with the right to access land.
I am not the one making a fuss about LVT but if you can think of another way of stopping cheap money going into real estate rather than production I would be interested to hear.Your contention that governments alone flood the country with money is nonsense.George was writing many years before the US had a central bank when California was I believe awash with money from a Silver Rush .The idea that governments throw huge sums of money at the populace is also nonsense: loans in the last global bubble were called forth for property; before the calls were made, the money did not exist.Loans create money remember> Rothbard on FRB.
Your idea that if new money does not go into land it will go somewhere else is fair enough,but these are more susceptible to ordinary inflation controls.The watchword might be: put more money into the economy until it reaches full capacity then stop.
If you have not heard of Greenshirts , Greenbackers , the commons etc it is perhaps best to look up wikipedia or something rather than cover ignorance by arrogance.
Who brought it up?
1) By itself, is “cheap money going into [insert daily bugaboo here]” a problem that needs to be ‘stopped?’
2a) Stopping central banks from loaning at artificially-low interest rates for political purposes…
2b)..and letting other banks carry the risk themselves of making bad loans, rather than nationalizing such risk. If they don’t get their risk-taking subsidized, then they’ll charge the price (via interest) to cover that risk, meaning less cheap money.
This assumes that central banks will continue to exist.
And BTW, why is it that you LVT people remind me so much of traveling medicine shows? Will LVT fix my sprained ankle and clean the gunk out of my bike’s carburetor? And why is it that your answer to “how to advance liberty” is always to nationalize stuff?
Thanks for explaining what Greenshirts meant, DBC. It does not advance your core argument, however, which is still nonsense.
To talk about the “right to access the money supply” makes no sense. Money is a means of exchange; if you have something to exchange, and can persuade others to trade with you, then you agree on a payment amenable to both sides. This has nothing to do with the “right” to access the supply of a particular kind of money.
Under legal tender laws, for example, one is currently forced, by law, to accept payment in a form of money even if, for example, you happen to regard that money as worthless or downright dangerous. We do not have a genuine free market in that everyday thing, hard cash. It is about time we did.
YOU raised the issue of LVT, as you do on almost every single comment I have ever seen by you. It is your consuming obsession. Great, I hope it makes you happy.
But back to your argument: if a central bank inflates the money supply – as in recent years – and land is taxed, then money raised by this tax goes back into the economy, to inflate the value of other things besides land. Money, like water, finds its natural level. If you print too much of it, it will have an inflationary effect, LVT or no.
And what “ordinary inflation controls” might those be, pray? Wage and price controls? Something else?
Land price bubbles can ge bad, but the 20th Century has had many examples of inflation of goods and labour where land was not the main issue.
What Sunfish said.
@JP
Far from making a fuss about LVT ,I only mentioned it as a condition of continuing with FRB ,which will be very hard to stop,in the sense that loans are always going to run ahead of reserves.I do not consider LVT a cure-all and only adduced it in the very narrow context of blocking cheap credit going into property,since we were talking about the creation of credit.
The fact that you had never heard of the Greenshirts
and made the jibe “What it is it some kind kind of green mass movement?” shows an embarassing lack of background and a fundamental failure to understand the tradition of reforming credit in this country (exemplified by the Social Credit movement) which called for the Government to create its own credit and ,among other things ,distribute it as an unearned income for all called a National Dividend.It is this that underlies the concept of the common ownership of credit creation and “the right to access the money supply “.
Talking about obsessions,all you ever get from Samizdata and similar blogs is :”the government/central bank inflates the money supply and prints loads of money”(See above)No it does n’t .The banks make injudicious loans, too many of them to property (70 %of them in the US according to Michael Hudson) and this inflates the money supply.The money does not exist before the loans are made.
‘Let the banks compete and the good banks will drive out the bad.” Right so plenty of bank runs and with no deposit insurance (Rothbard is right about this,it just triggers credit creation by the government but this is no bad thing from the Social Credit point of view) loads of people will lose their savings and this wealth will have been totally destroyed.Sooner or later you will only have one bank left standing or a non-competing cartel .As with all monoplies, these are better in public control.
Then we have all the fuckwittery about legal tender. Reformers in the nineteenth century spent a lot of time stopping employers paying staff in tokens (only useable at the company store as Merle Travis? famously put it.)Then,if you are owed money by somebody who can only pay you in notes issued by a dodgy bank you are screwed .This happened in the US during the pioneering period because people would have their savings in bank notes issued by an eastern bank only to find banks out west would not accept them.
“Gold is the answer”.No it is n’t: you cannot force the economy to fit the invariant amount of money supplied by some kind of mythical gold system (where notes are never issued to cover the gold).This is what the “cross of gold” speech was all about, another historical milestone that modern headbangers have never heard of.
It would be a help if people knew more history ,particularly of monetary reform .Greenshirts who are they? Shame on you!
DBC, the legal tender point – which is simply to advocate choice in currency – is hardly “fuckwittery”, unless you are really making the weird argument that people should be forced to accept payments in a form they don’t like. Why is the idea of having a choice such a problem for your point of view? Why is money any different, in your outlook, from anything else, such as electric plugs, software, cars, or whatnot? We need to demystify the idea that money is somehow too important to be left to the market.
As for the idea of land value taxes being a necessary condition for FRB not to be bad, I’d rather we avoided the odious LVT concept and instead put our money on a sound footing, with the removal of legal tender, removal of state bailouts and deposit protection, and all the rest. With honest money, there is no need to try and micro-manage the supply and demand of factors of production via taxes, as you guys attempt to do.
For sure, a world without legal tender would create its problems in some places, but strong, highly rated currencies would, as a sort of “race to the top” gradually take hold across an entire region. Everyone would want to be paid in the best, most solid money.
“‘Let the banks compete and the good banks will drive out the bad.” Right so plenty of bank runs and with no deposit insurance (Rothbard is right about this,it just triggers credit creation by the government but this is no bad thing from the Social Credit point of view) loads of people will lose their savings and this wealth will have been totally destroyed.Sooner or later you will only have one bank left standing or a non-competing cartel .As with all monoplies, these are better in public control.”
No, because without state-backed deposit insurance, people would have to be far more careful about their choice of bank; and most would choose to bank with more than one bank, to spread the risk. And the idea of state controlled banks ignores the dangers of politically-influenced lending to favoured groups, corruption, and not to mention the problems with all monopolies, ie, the temptation by governments to debase the coinage and hence rob savers to suit the borrowers.
If you really care about the destruction that asset bubbles cause, you should be a natural ally of a hard-money school of thought, not an advocate of this sort of statist pov.
I should add that I am not a gold advocate as such; I am open to suggestions about the right base for money. Gold is simply one of the more tried and tested forms of money, with a track record that is rather more impressive than the forms of banking as recommended by our supposed “mainstream” economists.
Better call it a day on thi one,as this argument is going nowhere.
Your claim to be advocating “choice in currency” is more than usually naive and unworldly.It is not I that it is so “weird” as to argue “that people should be forced to accept payment in a form they don’t like”.It is you that would give the employer the right to pay people in a form the employees don’t like e.g. tokens.Would you as a Tesco’s employee like to be paid in Tesco’s vouchers?Given the choice of medium this is what the employer might very well pay with.
Your devil take the hindmost attitude to banks (competition being always and indeed absolutely beneficial in all situations) is that customers will have to hedge their bets by putting their money in a spread of banks.Not much good if your income is so small it can’t be divided up. You want to make it the norm for banks to go out of business from time to time?Won’t people stop using the banks completely?
I do not understand your idea of “strong highly rated currencies” within a country.If they are competitive and by definition do not have a monopoly they cannot be considered a currency in the usual sense of the word.
You finish with the conventional/obsessive use of the word “statist”.We live in a state which is characterised by and effectively controlled by private banks and private property in land. The government is not the state ; a country’s leading institutions are the state.
You seem fazed by the idea of choice in currency and find it weird. That is only because in our lifetimes we have always been used to government issued money that is a monopoly. Alternatives strike you as “weird”. Well, they don’t strike reputable economists such as FA Hayek or Kevin Dowd as odd. Dowd’s recent analysis of the credit crunch was, in my view, quite brilliant. Go and order a copy.(Link)
DBC, it is not “devil take the hindmost” – rather, it is the view that it is better to spread risk and encourage a “let the buyer beware” sort of vigilance, rather than create a situation where the taxpayer is on the hook for the various disasters to which our current system of banking is prone.
None of my arguments should be meant to imply that my kind of market economy would not have its scary moments; but on the other hand, I think it is honest to be upfront about this sort of issue. The last few decades have surely taught us that it is lethal to privatise risk-taking and yet socialise losses; it creates a moral hazard that becomes overbearing in the end.
On currencies: think of it like this – in a world of competing currencies, one version might become so well regarded that it has a sort of de facto monopoly; but – and this is the crucial point – there is always the threat of competition if, for any reason, the currency issuer starts getting lazy and takes the eye off the ball. The threat of competion is often as effective as the actuality of it.
What is really weird, and which strikes me as the knockdown argument from my side, is to argue that we should give to a state bank the monopoly power to issue money, and then not expect, as a reasonable assumption, that it will not abuse that power. To assume otherwise is to set one’s face against basic human nature and the weight of history.
Your arguments about governments and the state draw no distinction between private and public; you are, in short, a corporatist – if not a socialist – as your arguments about nationalising banks, LVT (a de facto form of nationalision) make quite clear.
I wonder if DBC Reed does not like choice in currency, because if that existed and his model state tried any of that Social Credit “create money and spend into the economy” nonsense the currency they try to do that with will be abandoned and would implode. Not that it would not get into massive problems rapidly with a legal tender monopoly anyway, rather it would have far less scope for thieving the stored wealth of others if we had free banking.
BTW, can we shoot this canard of “dual claims on money” stuff about FRB? When you deposit, you lend to the bank and your claim on that money is not much stronger than if you had lent to Bob the Builder down the road. No money is created from thin air, forks and spoons, milk bottle tops or old cardboard boxes covered in sticky-back plastic. The problem with trying to describe FRB in terms of Goldsmiths and their IOUs is that when you deposit at a bank, unlike a Goldsmith, you do NOT get an IOU, you get a monthly statement of your lending to the bank, worth, approx, diddly-squat.
I would be very happy to go over how FRB does not “create money from thin air” with anyone in Central London willing to provide a whiteboard and coffee.
Tim, agree with your first paragraph, but I am still not sure I can fully concede the rest. If I deposit cash on deposit for instant access – so I am basically just storing money, not lending it anyone – then I fail to see how it can be wrong for me to object if the money is lent out for say, 3 months. There is a clear time mismatch here. Now of course, I think that in a free market for banking, this should be allowed to happen so long as the customer understands what is going on. Caveat emptor, etc.
Johnathan,
When you deposit, you do lend, even if you are not aware of it.
Making this clear to current account holders should be demanded out of basic need to avoid misrepresentation, but FRB is very clear about the fact it does on-lend on-demand deposits while they are not being used.
The whole FRB system is dependent upon the observation that not everyone will demand their money at the same time. Therefore, you can just keep issuing as much money as you like, as long as you have enough liquidity to cover a certain proportion of the lending – usually 10% – set by a Central Bank or Government.
FRB is used, specifically, to increase the money supply. It is, by definition, the means to expand credit without the hard currency/assets to underpin the obligations. The 10% reserves ‘rule’ is specifically designed to limit the amount of money creation, preventing runaway inflation.
Other than printing currency, it is the primary mechanism for creating money. So, to me, it is an entirely untenable position to say that it doesn’t “create money from thin air”. That is, arguably, its sole purpose. It may be ‘virtual’ money, created through the issuance of loans, but it is money nonetheless.
The amount of loaned money within the system will always be greater than the actual hard currency held in reserves. Whether that is a ‘Good Thing’ or a ‘Bad Thing’, is up for debate, but it is a fact.