News & Analysis
Should Public Banks Print Money Without Holding Reserves?
The Giant Banks Are ALREADY State-Sponsored ... So Why Not Create Public Banks to at Least Share the Gains, Help Out Main Street, and Grow Our Local Economies? ... Economist Steve Keen writes today: Neoclassical economists do not understand how money is created by the private banking system – despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers. This is bizarre ... – Washington's Blog
Dominant Social Theme: If we could just print as much money as we want, everything will be OK.
Free-Market Analysis: Just yesterday we presented an article from Washington's Blog on US false-flag manipulations of the public. It was a bold summary of a dominant social theme that provided additional support for reports that have long appeared here. But we are somewhat disappointed with this recent financial article (see excerpt above) that also seems to us a kind of dominant social theme.
Now we know that Washington's blog does not purposefully purvey power-elite memes, but the views expressed in this article are likely nonetheless satisfactory to Western elites. It is a kind of elite meme, in fact, because it argues for state control of money. Dominating state processes are what elites are good at doing. Such a process is called mercantilism.
Those who believe that the "people" will be able to maintain control of public banks are probably being naïve in our view. This is one reason we argue for a free-market solution. A CLEARER remedy in our view is a fully established system of PRIVATE money. The relationships between people in government and the private sector are inevitably opaque. It is a lot more convenient to use free markets because it is relatively easy to determine if the public sector is encroaching on the private one.
Anything that confuses people about money and banking is probably helpful to Anglosphere elites in their quest to keep their Money Power franchise intact – which in turn funds their quest for a new world order. Recently, various blogs that have sprung up espousing "public money" – blogs run by individuals that seem to have some affiliation to the US military and intelligence establishment. No coincidence in our view as the "public money" movement continues to grow. (We are NOT referring to prominent public banking advocate Ms. Ellen Brown here.)
Washington doubtless has no relationship to any of this. Like many others in the alternative news community, he is a true believer in the idea that money should be under the control of the state. How he can believe this while writing about the numerous false flag events that the US government is responsible for is puzzling to us. But he seems to be able to juggle these two disparate notions.
Anyway, the point of the article is certainly that printing money should be done by individual states in the US, not by the Federal Reserve. This is what we call a "Brownian" perspective, and while we have had long discussions with Ms. Ellen Brown about these approaches we continue to disagree.
Money, from our point of view, is gold and silver and the way gold and silver should be introduced into the economy as money is through money competition as offered via free-banking. We call the underlying assumptions on which Washington's suggestions are based "neo-Keynesian" and most recently wrote about it here: Rise of the Neo-Keynesians?
Washington makes the same point as ones discussed in the article above. The banking system, he writes, only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. We pointed out that this was an incorrect way of looking at the problem. The issue was one of monetary demand and velocity. Banks cannot lend if no one wants to use what is available.
But there is a deeper issue as well. The Brownian perspective is that the amount of money to be offered by banks is commensurate with community needs. Presumably, the borrower may be required to put up some property or other assurance so that the money is not lost. This of course is an altogether artificial system. Anybody with collateral can gain a loan. If collateral is not necessary, we would argue that makes things even worse. Anybody can take out a loan if they can convince the bank that their project is viable.
In this system, money, and the process of dispensing it, is entirely uncompetitive. Washington and others attempt to get around this by claiming that demand precedes supply when it comes to currency circulation, but how does one determine what projects and home loans are viable and what are not? Didn't work out very well earlier this century did it?
Contrast this to a money system featuring gold and silver. If too much gold and silver is available, then the value for these money metals goes down – mines shut down as well and hoarders continue to hoard. After a while, a scarcity becomes apparent, mines open back up and hoarders dishoard.
This is how the free-market deals with the issue of monetary circulation. There is a delicate balance between money available, its price and the ability of the entrepreneur and merchant to gain funding for particular projects. The free-market itself adjudicates this ratio. It is a competitive system not an artificially competitive one.
What Washington and Brownians (and others) want to do is substitute the judgment of the banking class for the market itself. Inevitably, this will lead to various forms of monetary disaster including corruption and serious inflation. There is almost no operative example of this kind of system working, nor could it work. It would need considerable regulatory strictures and would simply fix the price of money. Price fixes always distort the market.
These schemes are a failure at the federal level (see China and India) and will not be anymore successful elsewhere. There are plenty of proponents that will cite massive amounts of history to show that such systems can operate far more effectively than private money, and that they have in the past. We always return to the bottom line verity: a public money system is constructed via regulation and is bound to distort the market.
Washington and his allies are not discouraged. This is why it is so important to establish that loan-demand precedes deposits. One can justify public banking then, because it seems to be market driven. He quotes such luminaries as Ph.D economist Steve Keen on this issue and adds in addition that, "two Nobel-prize winning economists have shown that the assumption that reserves are created from excess deposits is not true: The model of money creation that Obama's economic advisers have sold him was shown to be empirically false over three decades ago."
A final thought: One of the most interesting points in the article that Washington raises has to do with the idea that bank reserves are unnecessary in a modern economy. (Ben Bernanke has mentioned this concept as well.) We agree with him, but for a different reason: Modern money has been divorced from the underlying gold and silver that used to back it. At one time, it was very important for a bank to have reserves as customers would demand money metals in exchange for the a given bank's certificates. But these days money is not what it used to be. Money is merely paper – and actually a debt obligation as well.
This is why the stress tests so beloved of regulators are of little value. Banks, they insist, must hold a certain amount of reserves on hand, but the reserves themselves are worthless. They are nothing but paper promissory notes. And they can be printed at will, relatively speaking, by the central banks that regulate them.
The solution that Washington (and others have come up with) involves banks (large or small) owned by the government and issuing out money (with or without collateral) and without reserves. With all due respect, this is madness. One might as well set up a copying machine in the basement and begin churning out currency.
Money in our view is gold and silver because history shows that it has been a reliable store of value and fulfills the various criteria that people have for money. Of course, we have often pointed out that the best way to determine what money is involves money-competition, including free-banking.
Conclusion: One thing we are almost sure of, however: The model of government owned banks issuing out paper money in massive quantities backed by nothing at all is probably not a winning formula in anybody's money competition. It is however a tremendous recipe for inflation and the destruction of wealth and future prosperity.
Posted by PotomacOracle on 06/24/11 10:49 AM
TDB would do well to review and comment on Thomas Greco, Jr., "The End of Money and the Future of Civilization."
He writes, "With the proper implementation stategies and the application of sound financial principles, direct mutual credit clearing is an unstoppable technological advance that has the power to ameliorate myriad economic, political, and social problems and establish a solid foundation needed to enable civilization to make a major leap toward a harmonious, sustainable way of living.
The necessary steps in achieving that transformation are:
1. to organize mutual credit clearing exchanges that transcend the priviledged creation of conventional checkable bank deposits and the monetization of government debt;
2. to network those circles together into a worldwide payment system based upon a web of trust; and eventually
3. to define and utlize a nonpolitical, concrete standard of value and unit of account that cannot be manipulated to the advantage of any particular bank, cartel, government, or individual." p.108
The issue boils down to who controls the quantity of gold, silver or fiat paper money. He who controls the money controls the world. In a world of credit clearing their is no money. The value of goods and services are defined by the definition and use of an objective, concrete, international standard unit of account.
The need to borow is a contrivance of bankers to trick society into the acceptance of perpetual debt. A credit clearing exchange eliminates the act of borrowing and interest bearing credit.
We never really needed money once we perfected electronic clearing houses.
Posted by Zenbillionaire on 06/22/11 10:11 PM
"Those who believe that the "people" will be able to maintain control of public banks are probably being naïve in our view."
And why is that? Is it that the people can't be trusted, or that the banks aren't public?
I would argue the people, as a large group, can be trusted. Individuals? No. The people? Yes, assuming they have complete knowledge. People compete with each other, so they're good at whistle blowing but for a self-policed system to work, it must be incorruptible itself. If "the people" don't (or can't) know the game is rigged, they can't blow the whistle on criminals. Transparency in the creation of currency is paramount.
The quality of a sound currency lies in the difficulty of forging it and the expectation that it is and will remain in some fixed, well known, supply (i.e. is "scarce"). A tertiary quality would be for it to have some intrinsic value but that's really very minor. In a perfect world it would be anonymous; it would have no memory and no history.
Gold is difficult to find and forge and the supply of it is assumed to be fixed. The exact amount of gold on the planet isn't known. Stakeholders in the gold mining industry may be lying about the size of their holdings, just as stakeholders in the oil industry might lie about theirs. Who knows? There's some risk in assuming that gold is as scarce as some would have you believe. In that respect, gold may not be a perfect choice as a currency.
Gold has no memory as long as its traded by weight. Any quantity of gold can be marked, but it can also be melted and re-marked without losing value. This is a benefit.
Gold has limited practical use. It's "intrinsic" values are that it is an excellent conductor, it's impervious to almost all corrosives, and it looks good on women. As many have pointed out, you can't eat it. In this respect it's not much better than sea shells.
What qualities does gold have that make it a poor choice as a currency? It's heavy. It takes up physical space. It's difficult to conceal.
What else is scarce and difficult to forge? Certain patterns of information. The bitcoin is an example of currency that "the people" control in the sense that there is no central authority in charge of issuing bitcoins or validating their authenticity. They exist in a mathematically precise, well defined quantity that can never be increased. For all practical purposes they can't be forged. They have no weight or physical presence at all. they're easily exchanged electronically.
What are some of the problems with bitcoins? They're inherently deflationary as is any currency issued in a fixed amount. As an economy grows, bitcoins must become more valuable to compensate for growth. This naturally results in deflation.
They require computers. They're purely digital, so a large scale social disruption makes them useless. A person's wealth could be wiped out permanently by a software error. Pretty scary.
There must be more advantage and disadvantages to be discussed, these are just a few thoughts off the top of my head. I'd love to hear some open debate on the subject.
Posted by bionic mosquito on 06/20/11 10:16 AM
I thank you for the discussion as well. Perhaps we are closer in view than I previously understood, and I look forward to another opportunity to explore this.
Posted by WD on 06/20/11 05:27 AM
"I want ONLY market regulation."
So do I. When I speak of regulation, I am speaking of market regulation. My purpose is to suggest ways in which market regulation can be immediate and transparent. I do not think relying on the courts system to punish bankster fraud would be timely or effective enough to allow free banking to compete with banksters. They'll just buy the courts system too.
By suggesting ideas, I do not mean that government should enforce them but that the market should offer them. Never the less, banksters will use every means at their disposal to keep their fraud alive. They have a hundred years of ill gotten gains to do it with, too. They only own 99% of government and the media. Assuming you could end central banking, I think it still would be an uphill fight for 'free banking' to succeed given the accumulated wealth power of the banksters.
The next question is, how can the government be divested of regulatory and licensing power when the banksters/accumulated wealth are using them to secure their monopoly position? Even though the banksters are bent on elimination the middle class, half of the middle class supports them. My guess is things will have to get much worse before the middle class wakes up to the fact that their existence is threatened.
This has been a great discussion. Thanks and
Posted by bionic mosquito on 06/18/11 08:47 PM
"It appears to me that you are advocating banking without regulation of any kind, either from government which we both agree is not only an abject failure but has compounded the problem by creating false credibility, or from any market driven regulation."
It seems I have not been clear. I want ONLY market regulation. High bidder wins, lowest seller wins, if you can't turn a profit you go out of business. That's about the extent of it.
"Do you really expect that banksters are going to suddenly become non criminals because you have removed all regulation?"
Again, I have addressed this: I don't expect utopia; I expect some actors will act badly.
"I submit that they will collude among themselves to do privately exactly what they have done with the help of government."
I will suggest it will be impossible for banks to do what they have done absent sanction and protection from the government. This should be obvious on its face. Your own statements about the bankers getting the Fed in place prove my point and confound yours.
"I submit that they will collude among themselves to do privately exactly what they have done with the help of government."
Let them collude all they want, as long as the government does not offer protection to the colluders in terms of legal tender, lender of last resort, squashing competitors, FDIC insurance, etc., even those who collude cannot long escape from competition.
"So far, you have not demonstrated that 'free banking' would be any different."
By definition, free banking is different. Once the government steps in to act, it is no longer free banking. Once the line is crossed, it is no longer free. So I would certainly expect businessmen in all industries will continue to look to the government for preferential treatment. The whole point of free banking is to say that there shall be no preferential treatment.
"It is unearned, and for all practical purposes, unlimited if the reserve fraction is in the control of bankers who are able to keep their fraction secret."
Impossible, unless the customers of such banks desire it this way. There will be many competitors who see that transparency is a feature that many customers would desire.
"You argue that the absence of government insurance of 'free bankers' would keep them honest."
I never argued that they would be kept honest. I argue that they would be regulated by the market. Read Human Action, Chapter 17, section 12. For a summary, see the following:
Click to view link
Click to view link
And especially this on dubious banknotes:
Click to view link
"Are you oblivious of Enron and many others I could site?"
Again, try the exercise I propose: list the 100 worst atrocities...you know the rest. And remember, there is no utopia.
"You say the Enrons are only a small part of the market and wouldn't put the system at risk."
Yes, I say this. Please prove otherwise. You cannot prove it with Madoff, and you cannot prove it with Enron. However, we are living through the proof of it with government regulation.
"I submit that to allow banksters free reign is tantamount to either being an agent of theirs or a death wish born of extreme naivete."
Please explain to me who will regulate (if not the "market" as I suggest) and how the regulators will be kept in check, once they have power. Consider the failure of such dreams in the past. And then ask which of the two of us is being naive.
"So Enron didn't happen then?"
What does this have to do with my statement. Life as we know it IS based on faith. Unless you grow your own food and produce your own energy, you take it on faith that someone is doing so for your benefit. They deliver every day.
"The Rothschilds didn't manipulate our economy to get the Federal Reserve Act passed?"
I do not understand how you use government intervention in banking as an argument FOR your position and AGAINST my position. My whole point is against allowing or begging the government to intervene, yet you continue accusing me with it.
"So what exactly is wrong with complete transparency in banking other than it would make it impossible for banksters to defraud any but the insanely irresponsible?"
How would you enforce it? Your answer to this question should end the discussion.
Posted by WD on 06/18/11 11:41 AM
@ bionic mosquito
"But I do not suggest chaos."
It appears to me that you are advocating banking without regulation of any kind, either from government which we both agree is not only an abject failure but has compounded the problem by creating false credibility, or from any market driven regulation. Do you really expect that banksters are going to suddenly become non criminals because you have removed all regulation? I submit that they will collude among themselves to do privately exactly what they have done with the help of government. They will use their already ill gotten assets to manipulate the money supply exactly the way they did to get the Federal Reserve act adopted. Do you not recall that around the turn of the last century the Rothschilds, through JP Morgan became the 'lender of last resort' to bail out the US from a depression they caused by sucking money out of the system in the first places? Do you not recall that we were under a gold standard then? So far, you have not demonstrated that 'free banking' would be any different.
"Where would this "free money" come from?"
Free money is money earned from the interest on fractional reserve loans. It is unearned, and for all practical purposes, unlimited if the reserve fraction is in the control of bankers who are able to keep their fraction secret. This is the Achilles heel of 'free banking'. You argue that the absence of government insurance of 'free bankers' would keep them honest. I submit that it would do no such thing. Are you oblivious of Enron and many others I could site? You say the Enrons are only a small part of the market and wouldn't put the system at risk. Did the Rothschilds not use JP Morgan to manipulate the system? What exactly would prevent them from doing it again and again under 'free banking'?
"If you are looking for a life without risk or want, you will not find it on this planet."
I am not expecting a life without risk. That does not mean I choose one of maximum risk, especially when history shows the certain criminality of banksters. I submit that to allow banksters free reign is tantamount to either being an agent of theirs or a death wish born of extreme naivete.
"Life as is constituted today depends on faith. Fortunately, that faith is served by the self-interest of my fellow man. I can depend on that self-interest of my fellow man to fulfill the faith I place in him."
So Enron didn't happen then? The Rothschilds didn't manipulate our economy to get the Federal Reserve Act passed? Are you serious? I submit that it is your kind of faith that made Rothschild (include all the City of London banksters) manipulation possible long before there was a Federal Reserve.
"I know that in a system of centralized power I have no escape. This is knowledge that does not rely on faith."
I agree completely. What I do not buy is that the elimination of government power eliminates centralized power. Accumulated wealth is centralized power. I agree with you that government is only a tool of accumulated wealth. I am with you on removing that tool from the control of accumulated wealth by maximum decentralization of government. I don't expect to eliminate accumulated wealth. I think it is naive to expect that accumulated wealth will not continue to use all means at their disposal to live like parasites off the rest of us. If you think they will not do the same with 'free banking', I believe you are being set up for another round of the same old servitude.
So what exactly is wrong with complete transparency in banking other than it would make it impossible for banksters to defraud any but the insanely irresponsible? I submit that freedom and prosperity can not exist without true transparency and that the banksters will continue to live as parasites on the rest of us until transparency is achieved, even under 'free banking'.
Posted by bionic mosquito on 06/17/11 06:15 PM
"The chaos you suggest will not be any better."
But I do not suggest chaos.
"The problem is, with enough free money, anything can be bought."
Where would this "free money" come from? Are you sure you understand what is meant by the term "free banking" and what competition in any industry looks like?
"Perhaps we should be talking about how to avoid that chaos."
If you are looking for a life without risk or want, you will not find it on this planet.
"I submit that faith in the free market is every bit as destructive as faith in government."
Life as is constituted today depends on faith. Fortunately, that faith is served by the self-interest of my fellow man. I can depend on that self-interest of my fellow man to fulfill the faith I place in him.
"Do either of you have any productive suggestions?"
There is no better way to police my fellow man than through the market. It is not a perfect solution, but there isn't one better. Once an entity has privilege backed by monopoly of force, the game is over.
This IS a productive solution. It is a solution for the real world, one populated with imperfect men. Do you believe a Tim Geithner or Ben Bernanke could do as much damage if they were in private business as they are doing in the government sphere? Neither is qualified to run a corner store, and would be bankrupt within a few days.
You avoid dealing with my Bernie Madoff comments, let me try something else. List the 100 worst atrocities committed in the world in the last 100 years - these could be financial, social, whatever. Now, lay blame - government or private induced? It is no contest.
To live in a modern society requires faith. I will place my faith in a system of decentralized power, a system that offers escape hatches if I so choose.
I know that in a system of centralized power I have no escape. This is knowledge that does not rely on faith.
Posted by WD on 06/17/11 03:58 PM
@ DB and bionic mosquito
You assume I trust government. First, I never suggested trust in government or regulators. You're right, the deliberate failure of government regulation is half the reason we're in this mess. The other half is, due to the size of the illicit gains available, banking attracts the most clever and destructive criminals. Banking is better and safer than drug dealing and, as presently constituted, depends on the same government and lawyers.
Market regulation of direct and immediate consequences for fraud in banking is necessary if we are to avoid ending up in the same place again as a result of the same kind of collusion that will certainly be exercised by 'free banking' devoid of public scrutiny.
The restrictions/regulations I suggested for free banking are going to have to be enforced, one way or another, if we are going to avoid another round of banker takeover under the guise of free market laissez-faire, which, it appears to me, you are suggesting.
I prefer that the market itself enforce such restrictions and do so proactively. I submit that without such proactive regulation the market might eventually come to the necessity for proactive regulation, but only after multiple crashes as bad or worse than the one we have now.
We agree that government can be bought and is therefore not the answer. The chaos you suggest will not be any better. The problem is, with enough free money, anything can be bought. Perhaps we should be talking about how to avoid that chaos. I suggested real time public auditing, as a possible solution. Do either of you have any productive suggestions?
I submit that faith in the free market is every bit as destructive as faith in government. Can we talk about solutions that do not depend of faith that will certainly be exploited by banksters.
Posted by bionic mosquito on 06/17/11 08:44 AM
"Don't you assume that 'free bankers' would not be the crooks central bankers are, or that at least they would be discovered before Bernie Madoff was?"
I make no such assumption. However, no one in private industry is capable of doing the damage that someone with a government enforced monopoly can do.
And why the focus on Madoff? Were you harmed by him? I would guess the list of his victims is not more than a few hundred people. Yet you want to place faith in the hands of the same people that actually HAVE harmed you and countless millions of others. Please, this is silly.
"You advance nothing but faith that at least not all free bankers would be crooks."
I advance no such faith. There will be crooks, just as there are in every field. I only know with certainty that the damage will be far more limited in a free banking world than in a government regulated world. You yourself provide the evidence. The worst villain you can conjure is Madoff. What did he do? Swipe a few billion? Compared to the Fed and Treasury? Compared to Social Security and Medicare? Please, put on your thinking cap.
"They would not have to be examined by anyone they have not hired for the purpose. My, hasn't that worked out well? Unlike Bernie, you would not even know there was anything suspect until long after multiples of the owner's and depositor's assets had been lost and the creditors closed in."
You assume there would not be a market for transparency. In fact, it is under today's government regulatory scheme where there is no such market for transparency - it is a monopoly provided by the government, the same government you place your faith in. All of the investors with Madoff "assumed" that the SEC was on the job. How did that work out?
And what of the transparency of the Fed? And when was the last time any government agency was transparent about its activities. How you can defend this system is baffling.
"Never the less, I think free banking could work under some conditions."
This is funny. You could support free banking, only if it wasn't free banking. Even funnier, one of your conditions is "Of course, taxpayer bailouts must be prohibited." All I can say to that, in the most eloquent term I can conjure, is "DUH." Do you even have a comprehension of the concept of free banking, that you would offer up such a prohibition?
And somehow your rules are better than the ones the market would figure out on its own.
I will ask: if you had to rely only on your expertise to live, what would your life be like? You had to grow your own food, build your own home, make your own computer, etc. You receive such enormous benefits in life from "faith" in your fellow man, yet you despise the efforts of the market that provide you with these benefits.
I can't go on with the rest of your post. This is enough for now.
Posted by WD on 06/17/11 01:29 AM
@ bionic mosquito
You say "So now, perhaps you could explain why such competition would not be effective (not perfect, but effective). It is effective in every other industry if the industry is reasonably free, so the burden is on you to demonstrate why it could not work in the market for money, currency, and credit. It would be the first time"
Don't you assume that 'free bankers' would not be the crooks central bankers are, or that at least they would be discovered before Bernie Madoff was? You advance nothing but faith that at least not all free bankers would be crooks.
Free banking, being private, would have all the protections Bernie had. They would not have to be examined by anyone they have not hired for the purpose. My, hasn't that worked out well? Unlike Bernie, you would not even know there was anything suspect until long after multiples of the owner's and depositor's assets had been lost and the creditors closed in. Under that system, even if you were a bank examiner and had the expertise to evaluate the solvency and trustworthiness of a bank, you would not have the privilege.
Never the less, I think free banking could work under some conditions.
1) They must not be allowed to be corporations and have corporate protections. Owner's private assets must be liable to any and all losses before customer's assets are. Of course, taxpayer bailouts must be prohibited.
2) They must submit to independent public real time audit to insure they are not risking more than the value of the bank's assets at any time. Computer systems could easily adjust the audit in real time with every bank transaction so customers could easily see if their bank was misbehaving.
3) They must not be allowed fractional reserve banking. They must not be allowed to risk money or assets they do not have. No one's judgement as to what is a safe reserve fraction is reliable under all conditions. Additionally, this would prevent the creation of money not backed by actual savings and prevent the boom - bust cycle being exponentially worsened by banksters.
These restrictions would not prevent banks from using depositor's money. It would only prevent bankers from undisclosed and irresponsible use of depositor's money. It would also prevent bankers from creating inflation by buying government bonds with money created out of thin air. Anything less than 100% reserve requirements would just perpetuate that fraud.
Unlike 'every other industry', banking is much more conducive to collusion and the formation of cartels owing to the universality of their product. Other industries have proprietary skills, knowledge and assets that make universal collusion much more difficult.
Crooks in 'every other industry' do defraud their creditors and go out of business regularly, only to resurface under disguised ownership and another corporate name. Unlike banking, they don't get away with it for long as their suppliers/creditors get wise quickly. Unlike banking, 'every other industry' is only allowed to risk their owner's and creditor's assets, while banks risk their customer's assets.
It is only the uniqueness of 'every other industry' that keeps them from becoming the general and serious scourge that banking has become because of it's general ubiquity. For all practical purposes, banks have no suppliers except their customers, a far easier, less savvy and more numerous sample to defraud.
You will argue that accounting firms will make 'free banks' transparent. History shows that accounting firms and rating agencies are bought off regularly and actually help with the fraud. You will argue that any public audit, real time or otherwise, is subject to the same collusion. I agree that auditing is the weak link and must be done by adversarial organizations, not hired by the fraudsters themselves.
Are these banking restrictions unworkable or unfair? I submit that they are only if you think banks must be able to defraud everybody in order to survive.
Reply from The Daily Bell
Such comments as WD are very sad. Governments throughout the West are in the process of defrauding their citizens of their life savings, but WD somehow believes that only the government can save the people from the private sector, even though in reality the market itself will provide a reasonable disinfectant over time. Why the sympathy for government regulators, and for, presumably, the US government in particular?
Posted by John Danforth on 06/16/11 10:49 PM
So you pass the ball one extra time and that makes it different?
So the bank notes are not even backed by gold, but by real bills. They are not gold and silver coin, so making them legal tender is blatantly unconstitutional in the first place.
I don't have any problem understanding how the real bills market works. Let it work without monopoly power granted by government to certain banks.
Other forms of 'not-credit' (I'll pay you Tuesday for a hamburger today) can also be used as currency on a small or large scale.
Posted by bionic mosquito on 06/16/11 02:13 PM
"REAL BILLS ARE NOT BACKED BY GOLD. REAL BILLS ARE GOLD, almost."
Man can create gold if there is not enough to be found. Interesting concept.
"The courts decided that BANK NOTES BACKED BY REAL BILLS, which promise to deliver gold whenever ask, are constitutional, as long as the government insures that the creators of redeemable bank notes are in fact able to meet their promise to redeem."
Justification of Constitutionality comes because the courts say so? Do you advocate for this power in all court decisions? It is a low standard. In fact it is NO standard, and not conducive to maintaining rule of law. Kind of like what we have today.
Posted by Bischoff on 06/16/11 01:23 PM
Real Bills are NOT BACKED by Gold. Real Bills are ALMOST gold. Why...???
The process of drawing a Real Bill is as follows:
A supplier furnishes real goods and materials to a lower order producer or wholesaler/retailer.
He obtains a signature for the value of the goods and material on a "Real Bill" from the lower order producer or wholesaler/retailer.
In turn for obtaining the signature on the Real Bill, the supplier releases all ownership and title rights to the goods and materials furnished, and he is also released form any and all claims against him for insufficiency of these goods and materials.
The instance the supplier obtained a valid signature on the "Real Bill", the "Real Bill" is negotiable (validity of a signature on a Real Bill is covered by English-American commercial law). It can immediately be exchanged for gold, albeit at a discount.
Why is a "Real Bill" almost as secure as Gold...???
As the production of a consumer goods move through the production process, the come closer to being finished, take on greater value, and thereby become more desirable. The producer or retailer closest to the consumer has finished goods in his possession which are greatly desired by the consumer, and therefore are immediately salable.
It must be understood that the higher order supplier has less "power" in bringing a "Real Bill" into existence than the lower order producer or wholesaler/retailer. The supplier cannot make the lower order producer or wholesaler/retailer accept a Real Bill by demanding signature upon it. Because of competition in a "free market", the producer or wholesaler/retailer does not depend on any particular supplier for the goods and materials he needs to stay in business.
I know this is counter intuitive in a world where only "credit" exists. However, the fact is that by accepting goods and materials and giving a valid signature on a Real Bill in return, the lower order producer actually does the supplier a favor. He enable him to stay in business.
Not until this is understood, can the nature and function of Real Bills be understood.
However, this should not be too difficult to grasp. First, consider that Real Bills can only exist in a "free market" environment where gold circulates. Second, realize that suppliers of higher order goods need to find producers of lower order goods to whom to sell their goods in order to stay in business. Third, understand that since there is unfettered competition in a free market economy, suppliers must do business as the market demands.
A supplier has a warehouse full of goods and materials which do him no good sitting in a warehouse. He can try to sell these goods to a lower order producer for gold (cash in form of redeemable currency), but the lower order producer will decline. The lower order producer can get the same goods and materials from a competitive supplier who will readily draw a Real Bill on him for 90 Days.
The supplier insisting to sell his goods for "gold/cash only" will be forced out of business by market competition.
Does the supplier who draws a Real Bill for the goods he supplied extend credit...??? No, absolutely not. He merely EXCHANGES a "real asset", which are physical goods and materials, for another "real asset" a Real Bill, which he can turn into gold/cash the instance a valid signature is obtained.
So why is are Real Bills almost as secure as gold...??? Because the goods and materials covered by Real Bills end up as finished goods which are immediately salable in the consumer market. The demand by the consumer for these products is so strong and immediate, that their sale is assured. (Every one needs to eat and drink to survive). Therefore, the proceeds with which to cover the payment on the Real Bills are guaranteed and are actually obtained prior to the Real Bills achieving maturity.
Only willful neglect to meet the obligation entered into by giving a valid signature on a Real Bill can causes default and total loss. However, any business which deliberately dishonors a Real Bill is immediately ostracized from the Real Bills market, and as a consequence will lose his business.
Understand this.....Real Bills are "Real Assets" as long as they have a valid signature. They are negotiable and can be immediately turned into gold. It is immediate consumer demand for the finished products covered by Real Bills throughout the production process which gives security to Real Bills, and it makes them almost as secure of an asset as gold.
Real Bills are marketable and are an asset greatly desired by banks, other businesses and individual investors. The discounting of Real Bills provides an opportunity to earn an income on an asset (Gold) which otherwise would not provide a return.
REAL BILLS ARE NOT BACKED BY GOLD. REAL BILLS ARE GOLD, almost.
However, being almost gold is not good enough to let them circulate as legal tender in payment of debt under Section 10.
The courts decided that BANK NOTES BACKED BY REAL BILLS, which promise to deliver gold whenever ask, are constitutional, as long as the government insures that the creators of redeemable bank notes are in fact able to meet their promise to redeem.
Please take a little time to let what I just wrote sink in. It does require however a complete change of paradigm in your thinking.
You must leave the world of debt and credit, of managed economies with government involvement in markets, and of cheister lawyers who will sue at the drop of a hat.
To understand Real Bills, you must see things from a stand point of "free markets" sans any material restrictions by government, from the stand point of the "work ethics", and from the stand point of honorable business dealings where "your word is as good as gold".
Posted by bionic mosquito on 06/16/11 09:09 AM
"You may not like government involvement. True libertarians are known for their love of the word "free". However, we live in a real world with Natural Law and Human Nature to consider. In such a world, some government is nessary."
It seems Ingo envisions a world where government is not populated by humans, or at least humans that are not also subject to "Human Nature".
It is an interesting fantasy, one sadly believed by a great majority of the population living in dreamland. It is a fantasy that delivers the rest of us into bondage.
Perhaps Ingo can explain where we find these saintly humans, but I am afraid he will ignore this query as he has a habit of doing when the going gets tough.
Posted by bionic mosquito on 06/16/11 08:59 AM
Perhaps if you consider that more than one currency would circulate, and more than one type of bank or financial institution would evolve, and that there would not be a government backing for failure....
You might conclude that a poorly run institution would not affect you if you did not do business with it or utilize its form of currency, and you might conclude that a poorly run institution could not grow to be too big to fail.
Or you might not conclude this. Whatever you conclude, it is not fair to state "Perhaps the DB could address these risks of 'free banking'. It would be the first time." Both DB and certain feedbackers have written this type of response to such queries countless times.
So now, perhaps you could explain why such competition would not be effective (not perfect, but effective). It is effective in every other industry if the industry is reasonably free, so the burden is on you to demonstrate why it could not work in the market for money, currency, and credit. It would be the first time.
Posted by John Danforth on 06/16/11 07:23 AM
By your description here, it appears that bank notes backed by real bills are flatly unconstitutional (in a previous message you have stated that real bills are actually only fractionally backed by gold).
Posted by Bischoff on 06/16/11 03:01 AM
"And if we do return to "free banking" or "real bills" I would bet that banks will choose legal tender for government debts be it gold (Lord forbid!) or pure fiat for their reserves (liquidity)."
With this statement you might have swerved into something that makes sense. I have nothing against "free banking". Have all you want. However, it won't work the way everyone assumes it will work. Whoever wants to put his money of "free banking", please be my guest.
On the other hand, Real Bills are the tried and true instruments to let businesses facilitate production and to create jobs. However, Real Bills will only come into existence, if they can be discounted with Gold. Therefore, no Gold, no Real Bills. It doesn't matter wether you can "buy" Gold with fiat money in the precious metal market. If Gold doesn't circulate Real Bills will not be drawn. As long as the entire world only has "legal tender" currency, gold will not circulate. There will not be Real Bills until "legal tender" protection is stripped from the Federal Reserve Note.
As for currency backed by "real bills", why on earth should I accept your currency? What's in it for me? If "real bills" are a form of "store coupon" then what need is there for bank currency? Can't the manufacturer simply issue his own currency backed by his "real goods"? And who defines what is "real"?
These particular questions are quite astute. They go right to the heart of the matter of redeemable currency created against Real Bills.
Real Bills are the most secure assets next to gold. However, the use of Real Bills as currency is retarded by the fact that they carry a 90 day experation date. Furthermore, the value amount on Real Bills is often very large, making them unsuitable to by a loaf of bread or a gallon of milk. Banks came into business to make the use of Real Bills more efficient. They took gold to buy up Real Bills at a discount to earn the difference when paid the face amount upon maturity. They sometimes didn't want to hold these Real Bills until maturity. Instead, they wanted to rediscount them to other banks or to individual investors and businesses. However, to match the experiation dates and face amounts to meet the specific demands in the Bills market was extremely difficult.
The banks solved the problem by taking the value of the un-matured Real Bills in their possession and issueing uniformly denominated bank notes against them. Banks, businesses and individuals started to use these bank notes to settle their debts until the legitimacy of these bank notes was questioned in the courts. Section 10 of Articles I of the U.S. Constitution requires that the States shall not make any Thing but Gold and Silver legal tender in payment of debt. If the state, i.e. the courts agreed to let the bank notes circulate as legal tender, evenso they were backed by the most secure asset next to gold, it would still amount to giving permission to violate the U.S. Constitution. Since the value of Real Bills as backed the bank notes, and since Real Bills are almost as good as gold, the courts decided that as long as the bank notes carried a promise that they could be redeemed by the issuing bank at any time when requested, the bank notes were "legal tender" to conform with the prohibition set forth in Section 10 of Article I.
However, the courts also decided that the banks which issued redeemable bank notes must prove that the ability to redeem for gold in fact exists. Since the States must follow the Constitution, the courts decided that any bank which wants to issue a redeemable bank note must make application to the state to obtain a bank charter which spells out the rules on how redeemable bank notes can be created and kept in circulation, and much gold must be on hand to meet redemption requests.
You may not like government involvement. True libertarians are known for their love of the word "free". However, we live in a real world with Natural Law and Human Nature to consider. In such a world, some government is nessary. Screeming "free us from government" in response to any reasonable, necessary redulation by government is not a solution which makes any sense to me.
Libertarians must decide if they can accept some role of government, or whether they are really just anarchists.
Posted by Bischoff on 06/16/11 02:59 AM
You are totally confusing me. Did you understand anything I wrote?
My point is that Gold is Money whether the government says so or not, because the decision cannot be made by governments. Only a market as large as the entire world population can make the decision as to what Money is. There, is no larger market then the world's population..
The lowliest street vendor in Zimbawe knows that Gold is Money, the reindeer herder in northern Siberia knows that Gold is Money, the coal miner in China knows Gold is Money, the housemaid in India knows Gold is Money..........
All these people don't wait for the government to declare Gold to be legal tender, they know they can pay their debts with Gold, and everyone would accept it. Why would they need the government to tell them that it was legal tender...???
"Then you should have the courage of your convictions and INSIST that government NOT recognise gold as money. But if you do insist that government must recognise gold as money then you are a hypocrite."
This comment proves that you didn't read my comments or there is a disconnect in your thinking process. Where did I ever mention that government must recognize gold as money...???
I do appreciate your willingness to discuss my comments, but I must ask you to read them, and not quote something back to me that is totally bogus. You allow yourself a judgement about something you think I said, but you cannot prove that I said it, because I didn't say what you alledge.
I will make the point again. The U.S. Constitution does not require the U.S. government, nor any of the States to declare that Gold is legal tender. (I think the States like Utah, etc., which have recently declared Gold to be legal tender, are off their rockers.)
I said that the framers of the U.S. Constitution knew that Gold (forget silver for now) was Money for as long as 3,000 years. They also knew from history that governments throughout the ages have tried to interfere with the use of Gold as Money, but It never worked. Government interference with the free decision of people in a market as large as the entire world was always defeated, eventually. Governments can outlaw gold and force people to accept fiat currency, but they can never change the fact that Gold is Money. Gold may be in hiding and may not circulate, but it never ceases to be Money.
The framers of the Constitution knew all this. Therefore, in Section 10 of Article I of the U.S. Constitution they told the States, and I am using language here so that you may understand what they actually said.
I paraphrase what they actually said in Section 10: "We the framers of this Constitution know that Gold is Money, we also know from history that governments have again and again tried to outlaw the use of Gold as Money to no avail. Gold as Money won out over government edict every time. We the framers of this Constitution tell you the separate, independent States not to make the mistakes other governments made in the past. Therefore, we prohibit you from declaring anything legal tender which is not Gold (and silver).
In order to help your thinking process, I will point out to you that the wording of Section 10, Article I EXCLUDES gold (and silver). It does in no way say that State governments shall declare Gold (and silver) legal tender. Gold (and silver) did not need to be declared legal tender. It had been Money over millennia. People for thousands of years knew that Gold is Money, and they did not need government sanction to use it to settle transactions. That's why states like Utah are actually countering the intent of the U.S. Constitution when they declare Gold to be "legal tender".
So, when people talk about "constitutional money", they don't know what they are talking about. The Constitution DOES NOT declare Gold (and silver) to be Money nor to be legal tender.
"But more importantly, to restrict money creation to the mining rate of gold is not only absurd it is also tyranny."
Again, this is another totally absurd statement in response to what I said. It becomes frustrating to deal with your interpretation of my comments. However, you were willing to engage me, and I owe you to respond.
The DB article made the point that gold production was subject to gold demand. My point was that they were wrong. To support my statement, I cited in a link the figures of the Goldsheet Directory to make the point that the annual production of gold has varied very little over the years.
"...to restrict money creation to the mining rate of gold is not only absurd it is also tyranny."
Talk about an absurd statement........ Yes, money creation is restricted to the annual production of gold. That derives from the fact that Money = Gold and Gold = Money.
However, the point I made is that nobody, nor anything restricts the production of gold, not even "market" demand. Gold is produced at a constant maximum rate. If production varies at all, it has to do with the world price of Saudi crude. (I will not try to explain this statement. I did explain it to the DB somewhere in this thread). So where tyranny comes into all this, I simply don't understand.
Posted by WD on 06/16/11 02:02 AM
Free banking? Ha!
As long as 'free bankers' can hold fractional reserves, it matters not that gold and silver are the only legal or accepted money. They will manipulate the money supply by manipulating their reserves and whipsaw the economy to their advantage the same as the Fed does now. Free bankers always say the market will correct these kind of abuses. Ha! The market will never know about these abuses until the banksters reach insolvency. At that point, they will hide behind the corporate veil to protect their personal assets and re incorporate for a new round of fraud, of course, after they have trashed the whole economy once again in their quest for illicit profits. Perhaps the DB could address these risks of 'free banking'. It would be the first time.
Posted by Zenbillionaire on 06/15/11 06:41 PM
"Ellen, get off it. Now."
Has it occurred to you Cat that you make threatening written "commands" like this, yet you have no ability to physically back up your threat?
You are the worst nightmare of those of us who built the internet. You're an intellectual bully who depends on the very social graces you claim your opponents lack. There are, unfortunately, people who will give you the benefit of the doubt on these anonymous interest groups. I seriously doubt Ms. Brown is one of them, but still you attempt to quell debate with your "Get Out Now!" threat gestures.
How could we help you find a center? You seem like a person who is frustrated and angry about the situation the world has found itself in. While we were all going to work, raising our families and building our legacies, crows moved in, stole our nests and ate our children. We're wounded, but maybe not as much as you are.