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Money and Banking

Posted by dbhalling 3 years, 9 months ago to Economics
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In this post I show that fractional reserve banking does not cause inflation and does not "create money out of thin air" as suggested by the Austrian (Austrian Economics)
SOURCE URL: https://hallingblog.com/2017/01/02/money-and-banking-intellectual-capitalism-part-3/


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  • Posted by RobertFl 3 years, 9 months ago
    I have a problem with some of this.
    "Currency" is a token of "work". Just like Bitcoins, when a bitcoin is mined there is "proof of work" to its existence.
    Gold, is proof of itself, it had to be physically mined for it to come into existence.
    I trade my labor of raising beef, for your labor of making bread - both proof of work.
    We can assign value to each, and use the other as a means exchange.

    "Dollars", exist because the Federal Reserve wills its. When they print more, backed by nothing, it devalues/dilutes our labor.
    There is no "asset" the federal reserve backs the dollar with (other than faith and credit).
    When the Federal Reserve creates new dollars, they are tokenizing future labor, not realized labor.
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    • Posted by 3 years, 9 months ago
      True, but you do not want gold. If you had a ton of gold on a deserted island all that "proof of worth" is worthless. The same would not be true of a boat or a fishing net, for instance.
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      • Posted by RobertFl 3 years, 9 months ago
        I agree with you, "worth" is different than "value".
        If I have no one to trade with, you don't need a means of exchange.
        Currency doesn't exist for my sole use. I think the deserted island analogy isn't valid.
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  • Posted by GaryL 3 years, 9 months ago
    I can see this discussion spiraling downward quick!
    Who is to say what anything is worth?
    I have thought a lot about the SHTF condition and what I would be able to carry. It keeps going right back to guns and ammo. I think every body and his brother are going to want what ever you have, gold, money, water, food and shelter so you better have a gun and some ammo to protect it. No one here is still alive who has ever seen it in this country but put yourself with your family in the middle of Aleppo and then think about what you really need.
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    • Posted by Blanco 3 years, 9 months ago
      Well said, and I totally agree! Stockpiling ammo for those guns is critical too. The police will not protect you if anarchy comes.
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      • Posted by term2 3 years, 9 months ago
        the police dont protect you now. they just come after the fact (eventually) to clean up the mess and spend money trying to catch the perps. whatever you have lost, you lost.
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    • Posted by starznbarz 3 years, 9 months ago
      There are two SHTF worlds, self sustained and dependent on utilities for the basics - unless you have the proper equipment, drinking out of streams, etc. is a bad plan. Live in town - decide what to carry and how far you must carry it to a defendable place. Live in the country with a well and alternative power, then youre already where you need to be with what you need to stay there. The folks in the former situation have big problems - remember the helicopter footage from the L.A. riots after "cant we all just get along"? This piece I wrote a few years ago touched on the issue - http://4thestatemedia.com/?p=269
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      • Posted by GaryL 3 years, 9 months ago
        Nice write up in your attached link! I would not have been in the freaking basement and anyone kicking my door in is in serious trouble. Cops have guns not to protect us but to protect themselves! Better than half the cops running around on our streets belong to the gang that can't shoot straight so just duck for cover.
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        • Posted by starznbarz 3 years, 9 months ago
          Glad you liked it, sad truth is most city folks wont have a clue how to take care of their families if the grocery stores are closed more than 3 days, or the streets arent safe to be on. I was in Ft. Lauderdale when cat 5 hurricane Andrew came through in 93, lots of folks were just waiting for someone to help them cause they did`nt know how to help themselves. Hurricanes and bad guys are very much alike, both will test your survival skills.
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          • Posted by GaryL 3 years, 9 months ago
            Yup, We went through 9 days off the grid after Irene blew through. Forget going to the stores, there was no fuel station to even get gas if the roads were clear enough to drive on. We had a very full freezer and generator plus 25 gallons on stand by and had a blast feeding half the neighbors who had nothing. Nice and warm with the coal stove and gas stove top to cook on. Those dependent on electricity from the lines were screwed. After the many dinners we sat and watched the TV via the satellite just like nothing ever happened.
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  • Posted by $ CBJ 3 years, 9 months ago
    Re: “Since all money is essentially an IOU, all money is created by a debt, i.e., a claim to future goods and services.”

    I dig some gold out of my mine. I take the gold to a private coiner, who turns it into gold coins, keeping a small portion of the gold as a coining fee. I then take the coins to a merchant and exchange them for goods and services. Where’s the debt? Who owes who what? The fact that the gold coins can now be traded by the merchant for other goods and services doesn’t make them a claim against anyone for anything.
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    • Posted by 3 years, 9 months ago
      The gold you have kept is not money yet. Money is a medium of exchange. Now once the gold is used as a medium of exchange, then the person taking it is only taking it because they believe it will be a claim against future goods and services. They have no other need or use for the good. That is exactly what a generalized IOU does.
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      • Posted by $ straightlinelogic 3 years, 9 months ago
        Who is the I in IOU? Who owes? By your definition of debt, anything that can be exchanged for anything else is an IOU. A debt is a contract, a promise to repay in the future for money, goods, or services extended today. Just holding gold does not give the holder a "claim" against anyone for future goods or services, unlike a debt contract. The term "generalized IOU" is meaningless. One cannot have an IOU against everybody, especially when nobody has explicity recognized that claim and nobody has received anything for which they have chosen to recognize that claim.

        I know I am going to regret posting this.
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        • Posted by $ TomB666 3 years, 9 months ago
          I hope you don’t regret this as you make an important point.

          Money came about in two phases. Initially the idea of having something that was a store of value for later trade drove people to collect that store of value until such time as there was something needed. Dale’s example of the rancher, baker, and butcher etc. show the need for something that could facilitate trade (a medium of exchange) that also would serve as a store of value because you might not want all your bread right now. The third function of money, being a unit of account, happens because people come to agree that so many sea shells are worth a loaf of bread and if a loaf of bread is worth 1/300th of a cow, we can figure how many sea shells it would take to exchange for the cow.

          People gradually began to use gold as money because of its scarcity. It took actual work to bring gold to the market and that is quantifiable. I do not mean to imply that everyone figured out that 40 hours of digging would produce 1 oz of gold so 1 oz of gold was worth 100 loafs of bread – those sort of valuations evolved over time based on people’s preferences.

          If we used gold as money we would still have to account for both fractional reserve banking and velocity. There was fractional reserve banking even when gold was money. The amount of money in circulation is also nudged along by the velocity with which it changes hands. If you keep yours under your mattress there is less circulating then if you spend it as soon as you get it.

          Where it goes wrong now is the government issues paper receipts instead of gold and there is no practical limit to the supply of paper. Until Nixon took us off the gold standard completely, paper currency used to say it was redeemable for legally defined money (i.e. gold or silver). If you can find a silver certificate or an old Federal Reserve note you will see an explicit statement of its redeem-ability. Pre Nixon, Federal Reserve Notes had this statement in the upper left, just above the designator of which bank issued the note:
          “THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNTIED STATES TREASURY, OR AT ANY FEDERAL RESERVE BANK.”

          Post Nixon the text was enlarged so as to occupy the same space on the note and a period was placed after private. i.e.
          “ THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE.”

          This is when paper money became an IOU without a claim on anybody – the “I” was the Treasury or the FED, but now there is no “I” so you really can not say the paper in your wallet is an IOU. The redeemers of paper currency are the stores, service providers, etc. who accept it in exchange for their goods and services. In other words, our government has perpetrated the greatest Ponzi scheme of all. It works because we need something to make the everyday exchanges we need to survive and the transition was accomplished so stealthily that only a small percentage of us are aware it happened. So keep this to yourself. If everybody figures it out people will start demanding something of real value!
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        • Posted by 3 years, 9 months ago
          As I show in the article an IOU becomes generalize when people are willing to generally accept it. That is all banknotes are an bearer IOU.
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          • Posted by $ straightlinelogic 3 years, 9 months ago
            An IOU can become a medium of exchange if someone will accept it in exchange for a good or service. However, what distinguishes an IOU is how it is brought forth into existence: it is a debt instrument in which one party agrees to repay in the future for something he has presently received, on terms agreeable to his creditor. It is the contractual debt formation, not how the debt is subsequently used, that makes an IOU an IOU. There is no contractual obligation on the part of anyone to the holder of unencumbered gold, silver, or any other commodity, thus they cannot be part of an IOU debt-contract, although many people may stand willing to accept them in payment for their goods and services.
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          • Posted by $ blarman 3 years, 9 months ago
            True, as long as there is also confidence (speculation, really) in the issuer to redeem the note at face value. The difference between a note and a physical item is the presence or absence of that confidence versus an actual utility - thus the controversy between fiat and non-fiat currency.
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      • Posted by $ blarman 3 years, 9 months ago
        But isn't the act of prospecting and mining the gold in the first place also such an act of speculation? The difference is that the person doing the mining actually expends effort to obtain the gold. Thus the gold actually becomes a symbol of expended work - not merely a claim on future work. I would also point out that a claim on future work is either speculation or usury. Purchases only involve a trade of value for value - past work for past work.
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        • Posted by 3 years, 9 months ago
          True, but you do not want gold. If you had a ton of gold on a deserted island all that "proof of worth" is worthless. The same would not be true of a boat or a fishing net, for instance.
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          • Posted by $ blarman 3 years, 9 months ago
            I would caution against making an overly broad statement and assigning your values to the values of others. How one chooses to apply one's time is wholly an act of faith/speculation in how valuable such an act will be - not only in the future to someone else but also to that person individually.

            If the person who is alone on an island spends twenty years mining gold and stockpiling it, it is only wasted effort in the mind of someone else if he could not eventually trade that wealth with someone else. What you overlook is that there are some simple joys that come merely in the expenditure of effort without necessarily anyone else exchanging value for such. I take the example of one who enjoys gardening and caring for plants. It is unquestionably less efficient than the production of a professional farmer. Art is another such example. I would venture to say that nearly every human being has a hobby or diversion of some sort out of which they derive little or no pecuniary satisfaction yet which they would not give up because of the personal satisfaction they derive from such!

            When we have an exchange, we come to an agreement about the value equivalency of some past effort. We may weight that value according to the sunk costs involved and assign some moderating factor as to the expediency of acquisition (or retention). We see such in the after-holiday sales of candy at the local supermarkets: they have gauged the stocking costs of maintaining the inventory past a given day to devalue the actual production cost. We also see consumers (often called "early adopters") willing to pay huge premiums for something that is "new" or "novel" regardless of its true value - for example in clothing (especially shoes) but also in technology with smartphones. Are these people universally foolish for paying premiums or foregoing revenue? I think the issue is nowhere as clear-cut as you contend.
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      • Posted by $ CBJ 3 years, 9 months ago
        There is a subtle but real difference between something one accepts in exchange because he believes it will be of value to someone else in voluntary trade, and something one accepts because it is a debt instrument – a claim for goods and/or services against a specific legal entity (such as a person, corporation or nation). A debt requires a creditor (one who owns) and a debtor (one who owes).

        In your example of the rancher who pays the doctor with the baker’s IOU, the baker’s IOU is in this instance a medium of exchange. But this does not lead to the conclusion that all media of exchange are IOUs. The fact that gold and IOUs can both be used as money does not mean that gold is a type of IOU. Most people accept money because they believe it can be exchanged for other goods and services, not redeemed for them. Exchange and redemption have some attributes in common – redemption is a form of exchange – but they are not equivalent concepts.

        “Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter.” -- Ayn Rand, “Egalitarianism and Inflation”.
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        • Posted by 3 years, 9 months ago
          Not quite. If you had a ton of gold on a deserted island all that "proof of worth" is worthless. The same would not be true of a boat or a fishing net, for instance.
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          • Posted by $ CBJ 3 years, 9 months ago
            The entire concept of money, IOUs or otherwise, would be meaningless for a single individual on an otherwise deserted island. The concept "medium of exchange" presupposes the existence of other people to exchange goods and services with. Your article dealt with the nature and function of money within a social context, not on a deserted island, and that is what I and others are addressing in our responses.
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            • Posted by 3 years, 9 months ago
              Which means that it is a claim on future goods and services, an IOU.
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              • Posted by $ CBJ 3 years, 9 months ago
                It's not a claim on future goods and services, it's an item of value that under normal circumstances can be exchanged for future goods and services. A claim requires a person or legal entity that is required to fulfill that claim. No one is legally or morally obliged to honor your "claim" for their merchandise if they don't wish to exchange it for your gold coins. A gold coin is not an IOU, it is a tangible entity with an owner.
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                • Posted by 3 years, 9 months ago
                  Then it is worthless, because the owner of the gold coin has no interest in it. I already proved that by the deserted island example.
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                  • Posted by $ CBJ 3 years, 9 months ago
                    What, exactly, does your deserted island example prove? As far as I can see, it does not prove that gold is an IOU – an actual claim on someone else’s goods or labor. It does not prove that gold is merely a medium of exchange. It does not prove that gold has no value other than its use as money. It does not even prove that gold is worthless to a person on a deserted island – for example, it may have aesthetic value to a lone individual, even if it has no utility as an immediate survival need. All the deserted island example appears to show is that gold (or anything else) cannot be exchanged for other goods if there is no one to exchange it with.
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  • Posted by mspalding 3 years, 9 months ago
    This covers the first level of fractional reserve banking. But then the bank has the farmer's deposits to loan to the next guy. That guy then deposits his loan and the bank can loan it out again. I have seen calculations that show with a 10% reserve, the bank can expand the original amount to 9 times that amount. That would seem to add enough money to the supply to have inflationary effects.
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    • Posted by term2 3 years, 9 months ago
      I agree. At any given time there is more "money" out there than there was before. The amount of goods that the money can buy meanwhile stays the same, so the prices go up. inflation....
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  • Posted by chad 3 years, 9 months ago
    I refer you to the second article on definitions. Rising prices with a fractional reserve fiat currency based on worthless paper is not inflation, it is devaluation of the currency. By using the incorrect word it causes people to look in the wrong place for the problem. The sheeple then suspect (because they are directed to do so by the fiat bankers) that the fault of rising prices is because of the corrupt businesses and the failing of the free market system, not their corrupt system of currency, where people can charge whatever they want. 50 Years ago I got the idea to compare prices in costs of ounces of gold. My dad could buy a house for $10,000 dollars (standard 1200 square foot home) and he made $4,000 a year from the gas station he owned. Gold was $35.03 an ounce. The house cost 285 ounces of gold, similar home in similar small town today is $250,000 or 215 ounces of gold. The price has gone down! Similar comparisons were done with durable goods, not only has the price gone down (in ounces of gold) the products are better than what could have been purchased in 1955. My dad earned a little more than 114 ounces of gold per year. If I were to earn the same amount and have the same purchasing power I would have to earn $132,500 per year. Before being 'retired' by the recession I was earning $85,000 a year, which when compared to my dad's income of $4,000 sounds like I was making a lot more, when compared to actual costs and amount of buying power earned (73 ounces of gold) I made far less. Any money (as opposed to fiat currency) needs to be based on some type of commodity that is not destroyed or consumed to be the most effective. Salt was used by the Roman armies (salis - salary) as money. It was a recognized needed commodity no matter where they were. Once used though its value diminished greatly. Oil is a commodity, once burned it would be difficult to trade. Gold and silver became popular for money because of their qualities. Keeping gold or silver does not make you wealthy, it merely stores the value of your labor to be spent later. Fiat currency can be devalued while you hold it, bury it, keep it in a vault or be declared worthless by the issuer. I see this article posted occasionally here and it distresses me because its assumptions are completely false.
    My late friend noted that it seems that we understand the value of something in that the cost of things does not change much when compared to how much gold would be needed for the purchase, but we fail completely to understand how fiat currency is manipulated and used to steal our labor and efforts away.
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