Posted by: graemebird | September 21, 2008

Why Not Competitive Private Unbacked Paper Monies?

What is wrong with that seemingly off-the-cuff Hayekian idea? Well nothing really but its not likely to happen. What COULD happen is that the commodity and sharemarkets could have their purhases micronised. And you might use a smart-card for transactions that made a sale of micronised shares or non-monetary commodities in order to buy something. The important thing for sound money in that case is that it all be done on the basis of 100% backing. Perhaps the deal would be that a provider who wanted to supply this 100% backed service would be able to avoid taxes on his revenues. Since the supply of money ought not be taxed.

But putting this sort of thing aside for the moment the idea of all this unbacked paper getting about and maintaining value through buybacks and competition is all a little bit silly. Its not likely to get off the ground and wouldn’t lead to stability if it did.

Here is a bit of an explanation why. From a comment elsewhere on this blog:

There is a theoretical idea that if every single person had a banking license that would be the same as nobody having a banking license.

And there is a theory that if every single person could print up their own currency than all the currencies would be worth nothing so we would get to sound money via that route.

Now thats alright in theory. But there has never been such a situation. And we can never get there by this sort of passive idealism. Its inevitable that such an approach throws us into the hands of the crony-socialists who are, in reality, quite at home with socialist money.

Whenever we think of this sort of surface extremism, usually masking complete happiness with the status quo, we are asked to look at a snapshot as if we have no past and no need to make a smooth transition.

We are asked to believe that 70,000 pages of cartelisation-regulation in the US (for example) is just sweet, but the specific regulations, which would amount to 1 page of principles and a small booklet…… well these would be just too offensive to contemplate. The proponents of this sort of scheme don’t appear to be FOR massive deregulation nearly as much as they are in favour of fractional reserve. It is fractional reserve that really does it for them. That turns them on. As if the freedom to practice fractional reserve was amongst the most important freedoms.

The adversary in this case always puts on the anarcho-capitalist hat when in sober reality he is likely to be centre-left on most things and centre-right on economics.

In the democratic era its inconceivable that a proper market would come out of a sort of series of crises that lead to that snapshot picture of the theoretically sound fractional reserve system and competing currencies system that Hayek came out with….. decades after he turned his pen away from monetary matters.

Hayek always tried to make compromises. I didn’t know where he was driving at when I read what he had to say about this subject not long after he got the Nobel. I didn’t read it then. I read it about two years ago. But after two years of being witness to absolute lunacy whenever this topic was broached I now must surmise that this was a compromise of sorts.

People just go apeshit when you attack fractional reserve. I’m famous for threads of doom on this subject. But each and every one of them were caused by people who just didn’t want to know about monetary economics. Acted like they knew everything when they knew nothing, and were absolutely in love with fractional reserve as a sort of magic elixer.

So I suspect that Hayek came up with his impractical notion on the basis of just being slapped around for decades by folks who have this mysterious relationship to fractional reserve. And he figured he had to come up with a second-best solution. Milton Friedman never liked Gold. But he started off advocating 100% backing and then came up with his second-best solution of stable monetary growth. Its no solution at all. Its a failure. But prior to it actually being attempted it was fair enough to think of it as being a second-best solution to 100% backing.

Now supposing we were to say that if no government authority ever accepted fractional reserve as payment. This is what Andrew Jackson did with the Federal Government. But that still leaves local and state government willing to accept fractional reserve. And there goes the notion that the free market will sort it out allowing this inherently fraudulent and deceptive practice to be carried out but in a moderate and restrained fashion.

Since once you have even one of these guys accepting fractional reserve as payment thats enough of a hook for the practice to take off, start a boom, get that government re-elected, and set things up for unsound money.

So the theoretical idea that the market, debauched by fractional reserve, will sort it out, while it could possibly be true if we’d have the last 50 years in perfect anarcho-capitalism, is in realtiy just untenable. The only people who insist on this are folks who want to subvert the argument since they really dig paper money, or pure-bread anarcho-capitalists, or people who really don’t understand the situation.

Nothing but a total prohibition (after a phase-out) will do. Since anything short of that is a liability waiting to happen. A constant temptation for folks who don’t need to be tempted in the first place. A temptation to corrupt behaviour by people who think of fractional reserve as a fountain of wealth-creation and something-for-nothing.

Also fractional reserve introduces an advantage to market share that no other industry has. Which of necessity must destroy sound money eventually but from the start completely buggers what investment and banking is about.

The thing is that a bank can create money in proportion to its market share.

Supposing I go to buy some capital equipment. I borrow the money from the biggest bank in town. They lend it to me, and I buy that equipment. The supplier puts his winnings…….. in which bank?

Well its more likely to be the biggest bank in town than any other bank. And that probability drives cartelisation in a way that does not make the same sort of economic sense that Standard Oil or De Beers diamond makes. The biggest bank doesn’t need to be doing the best job. He just needs to be the biggest bank and he gets to create more money and benefits from that creation just as a counterfeiter would.

Thats why St George bank and other small banks are of a higher quality than the larger banks who have more counterfeiting subsidy given to them by the wider community. That the small bank survives at all means they have to be that much more efficient but the inefficient are getting the subsidy. Thats why also that before the democratic era bankers of immense political power emerged all the time….

…The Medicis, the Rothschilds, the Morgans…

But here is the thing. If you are concentrating on bigness to score superior counterfeiting (ok then… pyramiding) ability, and if the industry at large is doing this then there is no chance that we are getting the most powerful brokering of savings money that we would be getting otherwise.

The basic, fundamental notion of wealth-creation through the use of debt (under sound money) is the following…..

… Someone has a cash-flow….. He sees a clear and present opportunity to increase his cash-flow via the purchase of a capital good… He gets in line, probably on the basis of how quickly he can pay off the loan… And the debt therefore is used to expand productive power.

Some of these NGO’s and lefty outfits doing third world micro-loans…… I hate to say it… are probably closer to that model than our freaking banks. Who are focused on simply creating money, pocketing that as profit (both principle and interest) when they get paid back, and doing that to the extent that they can get away with it.

So while the germ is planted to destroy hard money from the start with fractional reserve…………. while that is planted right from the getgo…. in practice the cartelisation might take decades.

However right from day one the productive nature of turning savings into wealth-creating temporary-debt is utterly subverted. Subverted further with the inevitable waves of horrendous asset appreciation… and its just inconceivable that anything short of a phase-out, then total prohibition, will stop this cycle from kicking in.

The tipping point in this case begins right at the start of the process. The worm grows up with the apple tree and migrates to all the fruit.

Perhaps on a different planet where the brains of the ruling species were wired differently and they had not this fascination with fractional reserve… perhaps the prohibition wouldn’t be all that necessary. And on this planet anarcho-capitalism was hard-wired into the genes and there was not the knowledge of government… Perhaps on that planet merely full-disclosure would be sufficient.

But I doubt it since as soon as you have fractional reserve you have the cartelisation-momentum building and getting so big that it will swallow all things.

Even all the above doesn’t fully show the impracticality of getting worried about this theoretical anarcho-capitalist proposal of hoping that fraud banking will lead to a positive outcome. We still have to worry about the transition. And no sound transition, forsaking all booms and busts, could be had without at first re-introducing a small but growing reserve-asset-ratio. Such a notion is simply untenable. No-one alive could give me a credible notion of how this could be done.

And why worry about all this fuss in the first place? The Americans have 70,000 pages of regulations according to JC. And what I want to do is reduce that to a small booklet. So why are people getting dirty about the booklet?

Its just crazy-talk.

The other thing that comes up is that the courts ought to judge it all. It ought to be judged by the common law. They site a common-law decision that allowed fractional reserve and didn’t hold the banks liable for non-payment.

But this was the bloody bleeding house of lords???? An interested party and hardly a model of the people voluntarily submitting to the counsel of wise men without duress.

Hayek might have had this common-law superstition on the go. Somehow equating it with free enterprise. But this is no good. The mistake I think comes with the fact that all good things came out of the common-law after the dark ages, and the Roman law really early on.

Or you had other laws that came out of a period of no-law. Of effective war-lordism and extreme theology. The slate is wiped clean. The traders have to deal with eachother and not get into a fight lest the war-lords law takes over. So you get good law building on itself. And the good things flow from that.

But its pure superstition to think that we leave it to the courts in 2008. The magistrates are paid by the state. The whole thing is enforced by state power. Its a make-work scheme for lawyers at the expense of the people. Its not free-enterprise. The number of cases is infinite so its really a matter of lawyers being fancy-pants and clever and making it all up as they go along. The place stinks of compulsion and leftism. And there is so much overhead to it that to submit business regulation to the common-law with 2008 as your starting point would be an absolute disaster.

Supposing you show up at the bank and they won’t pay up?

When do they get closed down? Do you call a policeman and if he shows up what can he do? Afterall the money that was created has dissapeared? What about the executives earning counterfeiting wages for the many years prior? Are they liable? Or do they merely do a runner and start another bank?

What about THEIR creditors? Do THEIR creditors have to pay up? And we now see that if so…… this is contrary to the principle of equality before the law that their creditors must pay but their debtors won’t get the money. If neither the creditors or debtors need to pay up the economy will implode since the money has dissapeared.

Are all these matters to be decided in court? If so how will you contest the matter with all your cash gone? You see it will be ALL!!!!your cash gone as well. Since under hard money you only give them your gold/silver/oil-backed-notes/Platinum on-call if you absolutely need access to it. There is very little interest involved under hard money. And you would either get superior interest in a term loan or you would have the cash in your house or buried somewhere. You don’t need banks to maintain the value of your money. So you only deposit on-call money with them that you truly need to get by. Not to be left high and dry.

So this idea of leaving it to the courts… starting point 2008 is simply a way of locking in unproductive rich slobs. And what is needed is not common law but natural law. Using the older common law as a guide sure. But common law is no way to regulate banking with the Courts the way they are in 2008.



  1. Ha ha ha. There is Soon over at thoughts on freedom. Pulling this fantasy that he’s in favour of competitive private unbacked currencies again. And showing complete obliviousness to the damage done by inflationist policies.

    Thats an example of the switcheroo these guys are always pulling on us. This is why the fantasy of competitive unbacked paper is always trundled out. Its fakers attempting to run down hard money by rolling out a completely unworkeable system, since they are in favour of the status quo.

    We have so many liars trying this on. But you must treat them like a global warming freak throwing a spanner in the works. It is fractional reserve that leads to all the other regulation and that makes everything unstable.

    Fractional reserve is not the same as leverage. The two concepts must be dissaggregated..

    When someone is a monetary crank like Soon you can be talking money for two years and he’ll not learn a damn thing.

  2. “Paging Andrew Reynolds”

    For the Love of Reason Jason. Reynolds is an idiot. And it was his risk management crowd running things that got the Americans into this mess in the first place. Didn’t you listen to Taleb speaking on Cato’s link.

    The mere fact that you think Reynolds has even the slightest understanding of whats going on is a confession of ignorance in monetary-economics.

    What gets me about dummies like you and JC is that you cannot even get things right in retrospect. Here I was talking about how unsound the banking system was and all aspects of it. And Ron Paul too. And everything goes in accordance with our understanding of it.

    The banking system employs an army of know-nothing risk management types like Reynolds. And now they are falling like flies and all would fall but for bailouts. And you somehow think that Reynolds understands something.

    You ought to have actually learnt your material. Rather than merely finding out which alleged expert to hide behind. Learning your material might have at least helped you figure out which was the better alleged expert to hide behind. Its not the idiot Reynolds.

  3. Humphreys is banning my posts at thoughts on freedom. Here are some of them:

    The thing is that JC makes his money from financial instability. He would do just fine under sound money but even suggesting sound money is bringing aspersions to bear on his subconcious for making all that loot.

    Here we have him decisively proved wrong and Ron Paul soundly vindicated and he just cannot accept it. Notice he had to conflate good monetary economics with a whole slew of conspiracy theories in order to even make his schtick fly even to himself.

    Comment by graemebird | September 21, 2008

    “the amount of money in circulation needs to be regulated by our own elected officials”

    err, no that’s exactly what we don’t want. The choices are
    1) a politically independent central bank
    2) free banking

    Many people here are not happy with no. 1 but they then need to accept that (2) is the only alternative. As long as 2 isn’t politically possible, we will have to live with 1 however imperfectly it is implemented.

    Comment by Jason Soon | September 21, 2008

    Soon reckons you need to accept special favouritism to banks as the only alternative. Face it Soon. You are in fact an idiot and a crank.

    Notice also what I’ve been saying. Soon using the utterly ridiculous idea of unbacked competing paper as a way to support fractional-fiat and central banking.

    Are you talking about the absolute fantasy of competing private UNBACKED currencies Jason. Like the Gimby versus the JaSoon.

    Central banking redistributes wealth to the superrich and to the financial industry via fast and unstable money creation.

    Its not like we haven’t gone over this a great deal before. Who gets rich when there is an inflationary asset boom? Not people who cannot buy assets.

    If you borrow money and flip houses you can make a ton of money without doing anything productive. The banks who create the money for this process aren’t doing anything much productive either.

    They call it the financialisation of the economy. Where all sorts of productive industries are getting wiped out, the making of things is going offshore because of financial imbalances, and the finance industry is becoming a massive part of the economy. Most of it essentially unproductive and parasitical work.

    All going back to the central bank and fractional-fiat.

    Comment by graemebird | September 22, 2008

    JC the central bankers came out of the cartelisation of the banking industry which becomes inevitable under fractional reserve.

    The American central bank came out of the meetings at Jekyl Island which have become infamous as a conspiracy against the public interest.

    Its just cartelisation. You are part of it too. Since you are advocating a no investor left behind policy of inflattionism, fractional reserve and central banking.

    Its just feathering your own pocket. But its not nearly as bad as the central banks which always come out of some sort of desire to fleece the public.

    Comment by graemebird | September 22, 2008

    Jason if there is a counterfeiting racket going on surely you are not saying that there is nothing to lose from that. You and I both know that your protestations in favour of competing currencies is nonsense and you are in fact in favour of the status quo. There is no need to start all that sort of lying again.

    Are you meaning to say that one person can create money and there is just no downside to that? Or that we can wind up with big trade deficits and there is no losers to this loss of industry?

    You wonder why people are saying this. Well the answer for you was to learn monetary economics and not just pretend that you already understood these matters.

    Comment by graemebird | September 22, 2008

    There is not much point denying that the setting up of central banks is a crony-socialist conspiracy. Andrew Jackson knew this and succeeded in closing down the central bank of the time and he made the federal government only accept gold in payment and pay gold out in spending. But the logic of things is that alwsys there will be someone else conspiring to set up a new central bank unless you can get rid of fractional reserve.

    People are just fascinated with funny money. They never let go of this fascination. It makes it very hard to kill these things once they get started. As soon as you talk about it we have the same sort of smugness that we get with global warming. The people in favour know nothing, have no argument, will lie all the time and so forth. But they will never get rid of their quasi-religious fascination with this ponzi-scheme.

    Comment by graemebird | September 22, 2008

    Jeez, sometimes it can be mighty depressing being in libertarian company. this is a good post by jc, who has highlighted an important point – the Fed and the Treasury have so far done a reasonable job of trying to fix an impossible situation.

    it baffles me that some people here are so certain as to what needs doing. this is a problem of mammoth complexity.

    Comment by pommygranate | September 22, 2008

    It baffles you because you don’t understand monetary-economics.

    There is no confusion as to what needs to be done. The ponzi-money needs to be replaced with cash. Which implies a reserve-assets-ratio. When this process is over than the cash needs to be replaced with gold and silver and when thats nearly done the whole deal needs to be privatised. The central bank can be trashed early on in the deal.

    But even if you weren’t going that far there is no mystery as to how to handle this in the short-term. You just add cash to the situation and a RAR so that the new cash won’t lead to more bank money-creation.

    If we know what to do why would we not be certain of what to do pommy?

    Its not a complicated subject. Its not a problem of mammoth complexity at all. For you to say this instead of simply saying “I don’t understand monetary economics” is dishonest and a barrier to you learning anything.

    Comment by graemebird | September 22, 2008

  4. Do you see Jasons immaculate conception of the need for a central bank. He puts up two ludicrous monetary systems, and claims that the second one isn’t going to happen.

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