Posted by: graemebird | April 6, 2007

Short Argument In Favour Of 100% Backing

Getting rid of fractional reserve backing appears to be the sound and prudent thing to do regardles of whether you retain fiat, or retain the central bank, or whether you wish to transition to precious metals as currency.

But somehow the various monetary cranks from across the spectrum manage to bugger the debate. They never come up with any valid points. But they always manage to hinder the debate.

So it from here on in comes down to ring-craft.

Earlier I came up with what I called the 3 devastating arguments for fractional reserve….. the chief one being that the fractional-reserve-at-any-cost crowd will put on the “anarcho-capitalist-hat” though they themselves are not anarcho-capitalists. And the hat will magically dissapear again when they want to go quiet and passive on the maintenance of the central bank and all its obvious depredations.

Now take a phrase that I just dropped in there:”fractional-reserve-at-any-cost-crowd”

I think this is a worthy phrase to be throwing about the place as ring-craft. I don’t think its too deceitful like when the alarmists refer to anti-alarmists as “denialists”.

It just shows the hypocrisy of them singling out this one regulation when in point of fact they tend to be pretty weak on government regulation more generally.

Now if a true anarcho-capitalist, like David Friedman, shows up… thats another matter. Such a person is not arguing from a position of bad faith.

And in such a case I would simply be pointing out that in the transition we really need to go to 100% backing in order to be able to handle the changes without causing a recession and therefore discrediting the idea of free entreprise money.

In any case I’ll include various posts I’ve made on 100% backing to give other people who realise how important this is, a bit of ammunition as to how you go about arguing for the cause without the fractional-reserve-at-any-cost-crowd tripping you up and distracting third parties.

Here are 2 such post from “Thoughts On Freedom”:


“You know birdie, if there is private money fractional wouldn’t be so leveraged, I think otherwise people would simply dump it for more attractive money.”

Yeah thats true. Thats George Reismans basic approach.

But this consideration is from a starting point of 100% backed.

We will create a depression if we decide we want to get to free enterprise money via just pulling the government rug from beneath the finance industries feet and waiting for fractional reserve to slowly shit itself over a number of generations.

This is all under the rubrick of currency reform. Fractional reserve is just one more type of debased currency.

Yes if everything was running well and people weren’t allowed to cheat fractional reserve, an honest version of it that is, would be a marginal product.

It would basically be an IOU plus a REDEMPTION PROMISE.

And that product wouldn’t cause many problems and it would likely trade at a discount.

Thats what the equilibrium would likely be if fraud was jumped on straight away.

But things don’t always work out right. You have massive gold strikes… Or you might have a war. And then the nominal interest rate goes way higher then what it could ever do under an hypothetical free enterprise system…

… Or a leftist government gets in and starts creating an artificial demand for this IOU+REDEMPTION PROMISE product.

And so there we are off again with our monetary system being debased and being made non-viable.

So I think what you are saying is a sort of theoretical consideration.

Because our main job is to protect ourselves from the government. And once we open up fractional reserve thats a constitutional protection that we would then have lost and there is no end to the political risk except it IS no risk but an open certainty that this avenue will be abused.

Even if we are anarcho-capitalists we have to have the understanding that some regulations must be gotten rid of before others.

Some back-up spending must stay in place while the rest of the spending is being unwound.

And we can get rid of the prohibition on fractional reserve when we have airtight and vigilante private enforcement of fraud.

Or we can get rid of it the Saturday before the Wednesday on which the government is dissolved altogether.

But the key thing that people will dodge is that:

“if you are for free enterprise and you want a smooth transition to a viable and high-performing free enterprise money…….. the first step is to get rid of fractional reserve.”


Deflation is not falling consumer prices. Falling consumer prices can happen under a growing money supply.

Deflation rather is a contraction of money and credit.

To have a definition wherein deflation and inflation are held to be falls and rises in CONSUMER prices alone is to be one-eye-blind towards the massive part of the economy not involved in the retailing of consumer goods.

This is only a recent change in definitions and it was done for tendentious reasons. These poor and sloppy definitions are the reason why folks tend to get confused in what is a blindingly simple subject.

“Deflation causes people to delay consumption.”

Deflation, properly understood, puts people into such hardship that all they can really do is consume. Their savings, insofar as they are held in real assets are devastated. Their net wealth, except for those who have saved all their cash and stuffed it into a matress, has imploded.

Consumption holds up during monetary deflation. What completely dies in the ass is business investment.

But falling consumer prices, when accompanied by slowly growing aggregate demand, is a good thing.

And if it causes people to delay consumption then what we have is the key to ending poverty. Because to delay consumption is to SAVE and to SAVE is to INVEST.

The demand for capital goods and the demand for consumers goods are COMPETING demands. So the situation wherein aggregate demand is expanding slowly (note: This is NOT deflation) and consumer prices are falling is the ideal situation. We want to get there and stay there.

When people are delaying consumption in a situation of slowly increasing aggregate demand and falling consumer prices they are building wealth for both themselves and for the community.

This is the ideal. This is what we want a monetary system to deliver. We want a monetary system to deliver aggregate demand that grows as slowly as possible but never actually drops.

Whereas with fractional reserve aggregate demand locally and nationally is always oscillating up and down. To prevent aggregate demand from actually dropping suddenly under fractional reserve you cannot have a slow growth rate in aggregate demand. It becomes too painfull as local areas become pummelled with precipitously dropping demand.

People say that fractional reserve would be OK if we targeted 0% consumer price inflation. Why? Why would it be OK? That means that when the rate of monetary growth oscillated down then aggregate demand would actually tank rather then merely suddenly grow more slowly (the instability is bad enough. But actual sudden downward dips in demand, either locally or nationally is like taking all the small businessmen out in the street and subjecting them to the lash).

Only 100% backing can get the money supply growing slowly yet without downward dips.


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