antboy

antboy

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14 years ago @ no third solution - What's Better Tha... · 1 reply · +1 points

I did nothing for my airline miles and hotel points? Hmm. I spent large sums of money, in part relying on the value I hoped to receive redeeming those points. I paid more than I would have paid had I not been offered points. In some cases, I PURCHASED POINTS DIRECTLY, to get up to a threshold for redemption.

I want to stick to the point. I believe I demonstrated that Neverfox is correct, and that a token system tied to nothing specific can arise without government support or fraud. It COULD be expanded into a full monetary system, and some plans are significantly transferable, but I suspect the Federal Reserve System would stop any system that became a complete replacement. Otherwise, I could see a Google Point monetary standard emerge on the free market!

And why should it be redeemable in Federal Reserve Notes to qualify as a monetary system: wouldn't that be begging the question? You and I are Neverfox are opposed to legal tender laws, so the limited redemption possibilities of points and miles are consistent with free market money: some people may not accept gold or silver in a free market money system of the future.

By the way, I don't actually predict that the monetary system which will develop on the free market will lack a hook to a commodity: I'm just saying that a consortium of businesses dependent on reputation for survival has proven itself sufficient to create a pure token system within the current society, and such a consortium would have LESS incentive to abuse a fiat system than the government, as it wouldn't have a coercive monopoly linked to legal tender and tax payments.

14 years ago @ no third solution - The Fractional Reserve... · 1 reply · +1 points

The history of ALL banking is full of examples of redemption refusal: this is not an argument against FRB per se.

Even accepting your characterization of the Restrictionist period of 1797 to 1821 (it would take too long for too little benefit to argue it), the full period typically cited as the Scottish Free Banking Era extends from 1716 to 1844, or 128 years, so even excluding that period as not being an example of true free banking, we have over a century of FRB in a reasonably unregulated environment. If I'm limited to perfect periods in history, we might as well end all historical discussion of all libertarian topics!

There are 27 examples of competitive note issue cited by Kevin Dowd in THE EXPERIENCE OF FREE BANKING, and FRB won out over 100% Reserves in every single case, because of the cost differential. FRB advocates are NOT arguing that FRB is risk-free, but that people willingly accept the risks for the benefits. It is true that IOU banking is riskier than Warehouse banking. It is also true that it has won out in competition every time.

The 2nd edition of White's book on FREE BANKING IN BRITAIN is available for free online, and chapter 3 discusses in detail all the criticism of his representation of Scottish banking in the 1st edition. Too long to repeat. Not too long is a comment by George Selgin yesterday during a debate at mises.org. The nature of the post is he is responding to is obvious, so I'll just quote Selgin:

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DixieFlatline writes: "I hope we see the day when FRB can be exposed to all methods of banking and warehousing in a free market, and then the theoretical debate can be settled with market action." Well D-F, there has _never_ been a law outlawing warehousing banking; the only government regulations concerning reserve ratios have been ones imposing _minimum_, not maximum, ratios. What's more, there have been instances when banking was free of any substantial government regulations, and particularly of regulations that might have served to favor fractional reserve banks over 100-percent reserve banks, including mandatory deposit insurance. In short, the "day" you look forward to seeing has already come and gone--in Scotland from 1765 to 1845; in Canada from, say, the mid-1800s to 1914 or so; and in several other places, as surveyed in Kevin Dowd's _The Experience of Free Banking_. In these instances the debate was in fact "settled by market action"--and that action declared fractional reserve banking the winner, while dealing the warehouse-bank alternative a thorough drubbing.

And before you shout out, "fraud and deceit!" bear in mind that in those days only relatively well to do and therefore financially savvy people dealt with banks at all--people, in other words, who were just as smart as you. A few might even have been smarter! In any event, they were certainly smart enough to figure out that their bankers weren't paying interest on their "deposits" instead of charging warehousing fees to maintain them out of the goodness of their hearts. The Scotch have many virtues, but munificence isn't one of them!

Finally, for all those who raise the "fraud" argument, the free bankers have responded at some length to it, in its various forms, in a number of different publications, for which see Walter Blocks bibliography, available on this site. "

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The bibliography is on the Mises site, of course, not this one. Anyway, I'm glad our conversation here is free of the nastiness of the Mises debate from which I cut and pasted Selgin's comment (not by Selgin but several others).

14 years ago @ no third solution - The Fractional Reserve... · 3 replies · +1 points

You've been too respectful in this debate to deserve anything but similar treatment. Feel free to make preliminary statements you may later want to clarify or revise. I certainly am doing so.

That said, I'm concerned that we're headed for the same impasse that always ends these discussions, in which FRBers are accused of passing off promissory notes as warehouse receipts. The history of free banking makes clear that people knew bank notes were merely promises to pay gold or silver on demand, and they SAID SO on their faces. It was also clear that FRB banks won out over 100% reserve banks every time because of the substantial extra costs of the latter.

Still, I look forward to your fraud case, when you have the time.

14 years ago @ no third solution - What's Better Tha... · 3 replies · +1 points

1. What happens when the person who agreed to sell you stuff in exchange for those tokens decides he’s no longer interested in tokens?
2. What happens when the person who created those tokens mints a Trillion more of them, overnight?
3. Haven’t you been definitely injured?
4. Would you have agreed to play the game if you knew the other party could change the rules on a lark?


I already participate in many such schemes, involving airline miles or hotel points of uncertain value in which the sponsor explicitly reserves the right to change the rules or discontinue redemption. I do it because I'm willing to accept some risk in exchange for greater value. I rely on their desire to maintain a reputation essential for their survival as a business, and usually, but not always, am right. Such systems are sustainable.

So, having established that pure token systems exist, do you support the criminalization of business point and miles programs? Can I sue for fraud?

14 years ago @ no third solution - A Belated Reply on Fra... · 0 replies · +1 points

I think you may be right: some free banking advocates of the Selgin/White position believe we will end up with a system in which gold is the unit of account but never actually used, and that the money supply will expand through the creation of notes until it drives the price of gold down to its use as an actual commodity (eliminating any exchange value premium that a 100% reserve system would produce), thereafter being as stable as the commodity itself.

Keen's article is too much of a parameter shift for me to absorb without a great deal of thought. I asked a dear friend of mine who is an economist with a special interest in the history of money and banking (and a supporter of the Selgin and White free banking point of view) if he could look at the Keen article when time permits, and I hope to offer some substantive thoughts eventually, though I can't promise when that will be.

I do think that some angry debates on money can turn out to be semantic disagreements: the definition of money is obviously ambiguous, as evidenced by the different measures of money used in public discourse.

14 years ago @ no third solution - On the Record: Thought... · 0 replies · +1 points

Not rebuttals, since you noted you're just thinking out loud, but some of my own unprocessed responses. I suspect this will be a useful way for all of us to get a little smarter on money and banking. Anyway, here goes:

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My hunch is that nobody, anywhere, ever, has had an interest-bearing deposit account that, for any chosen time interval, has outperformed durable commodities. (I’ll admit that I’m shooting from the hip with this argument.)
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Well, you admitted you were shooting from the hip, but even if we assume deposit accounts paid no interest ever, they would have outperformed durable commodities in all the periods that saw durable commodities drop in price (duh!). If you bought gold at the end of 1980 at $590 (not its peak that year), you would still be waiting to get back to even a quarter century later, at the end of 2005. And unless you were insane enough to keep the gold unprotected and uninsured, you would STILL be behind a deposit account that didn't require incurring any costs for storage and protection (and paid interest that was far higher than 0.25% in most years). If we assume that the interest on one-month T-bills approximates the rates paid by accounts with checkwriting privileges, deposit accounts clobber commodities over most long time periods. Crude oil also sells for a lower price today than 30 years ago, even though we're supposedly running out of it.

In real terms, commodities have dropped in price over time as technological efficiency has increased, a point made by Julian Simon in many of his writings, and the basis for his famous bet with Paul Ehrlich in 1980. Obviously, the REASON Simon won the bet was that the basket of durable commodities chosen by Ehrlich dropped in value that decade (even in nominal terms, as it turned out).

Needless to say, those of us who advocate free banking expect that private bank notes are likely to be redeemable in some commodity, and this will place a limit on the amount of inflation of the money supply that results, as anything that would reduce the price of gold below its opportunity cost as a pure commodity will result in mass redemption for guaranteed profits.

It is really hard to understand what a fractional reserve system based on fiat money even means, although it is worth noting that Somalia, which has a private fiat system, saw inflation until the value of the largest Somali note dropped to the cost of the paper and ink required to produce it, then stabilized with no inflation thereafter! [h/t Benjamin Powell] So even IT turned out to be commodity-based, with the commodity being the inked paper.

Obviously, a banker won't be PERSONALLY liable if the bank is incorporated, but even ignoring liability, no bank will survive that isn't able to honor withdrawals. Unless you've read the many works on the history of free banking, you're really talking out of the top of your hat to assert that bank failures were a significant problem.

In a totally free society, reputation becomes the most valuable asset. Even absent legal liability, there are many reasons to expect a sound monetary system to develop, because of the immense profits available for being a reliable bank.

I don't think many of us are arguing that we aren't getting hurt by inflation under the present system, but what keeps me from getting hurt is having the overwhelming majority of my assets in equities and real assets. If the banking system were based on a commodity, I might keep more assets there (especially as I got older and, perhaps, more conservative about short-term fluctuations), but only if I trusted the bank, which I never would under a government central bank system.

Anyway, my comments are as disjointed as your post, so forgive me. I look forward to your future thoughts.

14 years ago @ no third solution - A Belated Reply on Fra... · 0 replies · +1 points

I didn't mean to misrepresent your views: I see we have some significant differences in our perspective.

1. I hope semantic disagreements don't make the discussion unclear: there are so many different definitions of money in a fiat system that people can often talk past each other. I think both your perspective and David's can be intelligible, and how I debate depends on what definition someone wants to use. Obviously, if we define bank deposits as money, lending in a fractional reserve system creates more of it.

2. I think FDIC insurance is a major source of the problem, both in the 1980s and now. There is no incentive for bank customers to care about prudent behavior. But I do think legal tender laws play a major role in giving the government a free hand to inflate, and the runaway Fed is a major source of the current disaster. Who is supposed to regulate the regulator who acts like a chicken with his head cut off?

Recent history is of a heavily-regulated system, so it doesn't show how a freed market would operate. The writings by White and Selgin that I mentioned in earlier posts show that markets produce enormously stable banking systems when unregulated. I would also emphasize that enforcement of laws against fraud is not the same as regulation, and that reputation becomes of primary importance in a system without a central bank or government insurance, so that the potential for fraud is significantly reduced. This isn't merely conjecture: free banking has existed in several different countries, often for very long periods of time, and its disappearance was usually because governments like having a way of creating revenue for themselves. There is extensive literature on the topic for those who want to make a sincere investigation.

3. I'm not prepared to draw any conclusions about the cause of business cycles, but I think the overinvestment theory is untenable. There is no limit on human wants, so investment can never be excessive. Keynes had no appreciation for the fact that "capital" is not a fungible good. I think there are problems with Austrian malinvestment theory as well, although they might be resolvable. I'm also prepared to believe that cycles are a matter of human nature going to extremes of optimism and pessimism, but the times when "everyone" stops investing are typically associated with government behavior that panics businesspeople and makes it difficult to plan for the long-term future. I have to say, however, that behavioral economics, to date, seems to be a series of anecdotes and psychological observations rather than a coherent system. It may be on the right track, but I remain an agnostic on the cause of business cycles. I just don't know.

14 years ago @ no third solution - A Belated Reply on Fra... · 0 replies · +1 points

Fair enough: a bank note or deposit created to satisfy a "loan" approval (I put it in quotes to keep you happy) is actually just an IOU from a bank promising to redeem in money. It is not money. Only money is money. As long as they redeem such notes and deposits in money when requests are made, they are completely honoring their obligations, and have defrauded nobody. Scotland operated for well over a century that way. Canada also had a stable FRB system without bank failures right through the entire Great Depression.

As for the argument that the widespread acceptance of bank notes and created deposits reduces the value of money, so what? Nobody is entitled to have the value of their asset maintained, only to have the asset itself maintained. If I come out with an improved product that causes demand for yours to drop, you can't sue me for damages, and certainly not for fraud.

So if you're going to argue (quite reasonably) that banks aren't lending out deposits, then they have committed no fraud against depositors or anyone else holding money. If people choose to accept "money substitutes" because of their enormous convenience, you have no right to complain that this reduces the value of your money.
In other words, you are entitled to your 87 ounces of gold, but not what that will buy you in terms of other goods and services.

It's the fraud argument I find wanting. You can make a reasonable argument about business cycles (although Austrians have by no means convinced the mainstream economic community), and I will simply say that there are enough advantages to FRB to make cycles acceptable, if that is the price to be paid. If you want to claim that 100% reserve banks will outcompete FRB banks in a free market, you have to fight the evidence of history. Lawrence White and George Selgin, both Austrians, have written plenty on historical examples of stable FRB systems with notes trading at par to money, and 100% reserve banks didn't emerge and overwhelm them, because they had to charge fees.

If you haven't read the 2nd edition of FREE BANKING IN BRITAIN, you really should.

I look forward to your next post. I understand that these arguments can get pretty detailed, and appreciate the respectful manner in which you make your case.