Tilted Forum Project Discussion Community - View Single Post - The money and banking system

host · 01-01-2007, 12:25 PM

Quote:

Originally Posted by Dragonlich

Fractional reserve banking IS good. It allows banks to make some profit, allows the economy to grow (more), and does not automatically lead to inflation.

Inflation is caused by many different variables, often interconnected. In the context of this discussion, inflation occurs when there's more money than the economy needs. Creating too much money with "fractional reserve banking" is bad (inflation), creating too little is bad too (slows down the economy), creating enough is good. And enough is not necessarily the amount dictated by a government's stack of gold/silver.

Total government control over the printing of money is simply not needed. You can control inflation by setting the total amount of money. One way to control "fractional reserve banking" is to set the percentage cash vs. loans, as I've explained. If a government or central bank dictates that banks can only loan, say, 10 times their amount of cash (= savings), you have effective control of the amount of money. I suggest you read some books about Keynesian economics, which should explain the principle.

Yes it is natural, and it's not only because of evil banks. Just look at the oil crisis of the 70's, which was caused by an essential commodity (oil) getting more expensive. It had NOTHING to do with "fractional reserve banking".

Or look at the hyper-inflation and depression in Germany in the 30's, which was caused by a government printing excess money to pay *external* debts. The cause there wasn't fractional banking, it was the external debt. It was either printing more money, or defaulting on the debt; that had led to France's occupation of German industrial areas in previous years, so was not an option.

Total government control of the money supply is not a solution to the US' economic problems. A sound fiscal policy and overall economic policy is.

(I have to admit I didn't have the time to read your quotes, nor watch the documentary. I'll see if I can do that today. But I doubt that would change much about my statements here. I do know what I'm talking about.)

I'll attempt to explain von Mises theory briefly and simply. It boils down to the effect of expectations (psychology)....expectations which are distorted by the influences of credit availability that are a consequence of fractional reserve banking and fiat currency.....currency that is imposed by "fiat", i.e., government decree, rather than by the preference that a free market (the paychology of the free market) always chooses....gold and silver...

Quote:

http://www.mises.org/story/1333
The Origin of Money and its Value
By Robert Murphy
Posted on 9/29/2003

....Moreover, it is simply not the case that the owner of a telescope is in the same position as the owner of 1,000 units of wheat when each enters the market. Because the telescope is much less saleable, its owner will be at a disadvantage when trying to acquire his desired goods from other sellers.

Because of this, owners of relatively less saleable goods will exchange their products not only for those goods that they directly wish to consume, but also for goods that they do not directly value, so long as the goods received are more saleable than the goods given up. In short, astute traders will begin to engage in indirect exchange. For example, the owner of a telescope who desires fish does not need to wait until he finds a fisherman who wants to look at the stars. Instead, the owner of the telescope can sell it to any person who wants to stargaze, so long as the goods offered for it would be more likely to tempt fishermen than the telescope.

Over time, Menger argued, the most saleable goods were desired by more and more traders because of this advantage. But as more people accepted these goods in exchange, the more saleable they became. Eventually, certain goods outstripped all others in this respect, and became universally accepted in exchange by the sellers of all other goods. At this point, money had emerged on the market.....

The Contribution of Mises

Even though Menger had provided a satisfactory account for the origin of money, this process explanation alone was not a true economic theory of money. (After all, to explain the exchange value of cows, economists don't provide a story of the origin of cows.) It took Ludwig von Mises, in his 1912 The Theory of Money and Credit, to provide a coherent explanation of the pricing of money units in terms of standard subjectivist value theory....

......Mises eluded this apparent circularity by his regression theorem. In the first place, yes, people trade away real goods for units of money, because they have a higher marginal utility for the money units than for the other commodities given away. It's also true that the economist cannot stop there; he must explain why people have a marginal utility for money. (This is not the case for other goods. The economist explains the exchange value for a Picasso by saying that the buyer derives utility from the painting, and at that point the explanation stops.)

People value units of money because of their expected purchasing power; money will allow people to receive real goods and services in the future, and hence people are willing to give up real goods and services now in order to attain cash balances. Thus the expected future purchasing power of money explains its current purchasing power.

But haven't we just run into the same problem of an alleged circularity? Aren't we merely explaining the purchasing power of money by reference to the purchasing power of money?

No, Mises pointed out, because of the time element. People today expect money to have a certain purchasing power tomorrow, because of their memory of its purchasing power yesterday. We then push the problem back one step. People yesterday anticipated today's purchasing power, because they remembered that money could be exchanged for other goods and services two days ago. And so on.

So far, Mises's explanation still seems dubious; it appears to involve an infinite regress. But this is not the case, because of Menger's explanation of the origin of money. We can trace the purchasing power of money back through time, until we reach the point at which people first emerged from a state of barter. And at that point, the purchasing power of the money commodity can be explained in just the same way that the exchange value of any commodity is explained. People valued gold for its own sake before it became a money, and thus a satisfactory theory of the current market value of gold must trace back its development until the point when gold was not a medium of exchange. *

Quote:

http://www.mises.org/story/1298
The Anatomy of Deflation
By George Reisman
Posted on 8/18/2003

....Indeed, what creates the need for a sudden, substantial increase in the demand for money for holding is the preceding artificial decrease in the demand for money for holding brought about by credit expansion. Credit expansion leads businessmen to believe that they can substitute for the holding of actual cash the prospect of easily and profitably borrowing the funds they might require. It also encourages a reduction in the demand for money for holding by means of the seeming ease with which inventories can be profitably sold in the face of the rising sales revenues it fuels, which makes it appear better to hold more inventory and less cash. The rise in interest rates that credit expansion serves to bring about in the course of its further progress, as rising sales revenues raise nominal profits and thus the demand for loanable funds, also serves to reduce the demand for money for holding. This is because the higher interest rates serve to make it worthwhile to lend out sums available for short periods of time that it would not have been worthwhile to lend out at lower interest rates. To these factors must be added the influence of any prospect of rising prices that credit expansion may create. And finally, the loss of capital that credit expansion engenders, as the result of the extensive malinvestment that it causes, serves to make credit less available and thus to create a still further demand for money for holding.[5]

Avoid inflation and credit expansion, let the demand for money for holding be high, let prices and wages be adjusted to that fact, and the economic system will be secure from sudden increases in the demand for money for holding thereafter.

Quote:

http://blog.mises.org/archives/001558.asp
Posted by: Walt Byars at February 15, 2004 6:09 PM

DSpears,

As long as the currency is in the control of The State -- that is, as long as The State has a monopoly on issuing currency -- there will be problems. When we had a "real" gold standard, problems occured because The State debased the gold coins. See What Has Government Done to Our Money? at http://www.mises.org/money.asp and Taking Money Back at http://www.mises.org/rothbard/moneyback.asp. Alternatively, problems could occur because The State simply confiscated all of the money.

Your assertion that "all money is fiat currency", that is hogwash. Gold (and silver) are the monetary standards that the free market has chosen, when given the opportunity. Hence, as it is the money that the free market chooses, it is not fiat. Why you seem to think the standards chosen by the free market are "fiat" is incomprehensible to me, unless, of course, you think people had no good reason for choosing Gold and Silver as the monetary unit. Yet, there are many good reasons. For starters, you can't print out gold or silver, they have to be discovered, which takes work. Thus, they are relatively buffered against inflation. Other qualities include maleability and divisibility, as well as a high value per unit weight.....

Conclusion: A free market evolves, by the collective experiences of all participants, to a point where the most easily exchanged items, easy to divide, to personally carry in your pocket, difficult to produce, or to duplicate, become the most LIQUID.

Wheat is more easily exchanged than a telescope, but gold and silver are much easier to exchange in quantities small enough to be carried, than wheat is, and are rare enough to command the exchange of a multitude of items.

In 1980, there was a week when an ounce of gold, at $800 was sufficient exchange value for purchase of one share of each of the 30 stocks in the Dow Jones Industrial Index (DJIA). Since that time, central banks have attempted to flood the market with gold, or short selling of gold, to create a psychology that values the DJIA at $12,500 and gold at $610.

This manipulated psychology has recently influenced a perception that an asset with high carrying, tax, and maintenance costs, and traditionally poor liquidity....real estate, is more liquid, more likely to appreciate in value, a sound investment at any price....until it isn't, and then the psychology will change. The change of psychology will result in the malinvestment, the waste evident in the resources that are expended in building an excess of real estate units temporarily demanded from the interest generated by the availability of credit produced by fractional reserve banking....and they are still at it:

Quote:

Fannie Mae Expnads Interest Only Loan Options
Expansion of Interest-Only Mortgage Loans Eligible for Delivery to Fannie Mae, and Elimination of the InterestFirst™ Product Name. In 2001, Fannie Mae ...
http://www.mortgagebankers.org/Newsa...News/47124.htm - 27k - Cached - Similar pages

2006 Lender Announcements and Letters
06-26, 12/20/06, Expansion of Interest-Only Mortgage Loans Eligible for Delivery to Fannie Mae, and Elimination of the InterestFirst™ Product Name ...
http://www.efanniemae.com/sf/guides/...6annlenltr.jsp - 25k - Cached - Similar pages

If psychology of the expectations as to the value of the future purchasing power of the most liquid mediums of exchange, i.e., "money" are not influenced by central bank schemes like selling and leasing their gold stores, raising and lowering interest rates, or by issuance and printing in excess, fiat paper currency, sentiment would be much more constant, and malinvestment would have little incentive to occur.