[extropy-chat] Free Banking FAQ

[Mike Lorrey]

--- Technotranscendence <neptune at superlink.net> wrote:

> I've updated my "Free Banking FAQ" to such an extent that I now
> consider it no longer under construction.:)  This, of course, does
not mean I'll never ever revise it.  The result can be found at:
> 
> http://uweb1.superlink.net/~neptune/BankFAQ.html

"What about deposit insurance?

Private deposit insurance would most likely not exist under free
banking. The ability to switch banks for consumers and investors and
the ability for banks to branch and diversify would lessen the need for
such insurance than under current systems. This makes it less likely
for a free banking system to need or develop such insurance"

Not true. Private deposit insurance already exists and banks use it to
insure deposits in excess of the FDIC limit of $100,000.00. FDIC
provides SUBSIDIZED insurance on deposits under $100,000.00. ANY
society in which bank robbery, embezzlement, or swings in the market
value of leined collateral exist will require deposit insurance.

Deposit insurance DID exist before the FDIC, but was expensive because
of the prevalence of bank robbery and the lack of accounting standards
and open books requirements. Banks tended to self-insure with their own
security staff, investing in secure facilities (which is why old banks
look like fortresses), and lobbying for election of 'law and order'
politicians, sheriffs, etc.

"Gresham's Law only applies to legal tender systems, since under such
systems the legally mandated money can drive out competitors"

This is not true either. Gresham actually saw gold and silver
certificates as the 'bad money' he was speaking of, versus
coin/specie/boullion, which is what he was referring to as 'good'
money. Gold and silversmith warehouse receipts came into such vogue
during Gresham's age that smiths frequently over-issued such notes
which occasionally resulted in panics and runs on empty warehouses.
Fungible money is a recipe for capital flight.

He was also referring to coin which was minted with less than its face
value of precious metal. Money changers of the Baroque period often
dickered with customers over the value of individual coins based on the
year they were coined (as metal content waxed and waned based on the
fortunes of the monarchy at any given period), and the weight of the
coin, as the edge ridging had not been invented yet so people tended to
shave metal from the edges of their coins.

The sort of money we refer to as 'cash' today, paper reserve notes,
were not considered 'money' per se but were considered as good as money
depending on the credit of the individual or body issuing the note. I
highly recommend reading Neal Stephenson's trilogy The Baroque Cycle to
get a greater understanding of money and finance as it was before the
advent of reserve banking and legal tender laws.

You are also conflating fractional reserve banking versus full reserve
monetary policy. The two are entirely different phenomena. US statute
requires the Federal Reserve Bank to hold 100% of the value of the M1
money supply in other assets (made up of gold certificates, US T-bills,
and other assets). I encourage you to look into the true value (not the
statutory value) of the gold certificates held by the Federal Reserve.
Also, the debt notes they hold as reserves are a claim on future tax
receipts and are collateralized by land and other property in federal
hands (it is an interesting study to watch how the expansion of the US
national park and forest system accompanied growth in that governments
need for credit, and belies the true purpose that system serves).

As compared to this full reserve *compound money* system (FRNs are not
fiat currency, despite what detractors say, it is backed by a basket of
gold and land-backed debt. True fiat currency is currency issued by an
entity that has no assets to collateralize the notes.) the fractional
reserve banking system is one in which private deposits vs deposits
kept in reserve describe a ratio that also equals the ratio of money
spent into the economy by borroers versus the amount of private
deposits. The reason this system can function (which are described by
the M3 money supply minus the M1 money supply) so well is that the
money borrowed by borrowers is really their own future earnings. The
reserve ratio is adjusted over time by bankers to reflect future
expectations of economic growth. When growth is expected to be low, the
reserve ratio is lowered and loans are called in. When growth is
expected to increase, the ratio is increased and banks can lend out
more of the borrowers own money to themselves.

You might at this point be a little confused. When it comes to private
and commercial borrowing, a bank really only acts as an institute of
verification to certify the likely future earning ability of a
potential borrower, as reflected by past credit and income reports. In
this respect fractional reserve banking uses Bayesian techniques to
maximize the availability of money, minimize interest rates and
potential losses, and maximize potential economic growth through the
fuelling of a consumer economy.

A banking system in which people cannot borrow their own future
earnings today is in no way a 'free banking' system. It is really a
system that enslaves workers and consumers to silver and gold miners.

One way in which our current banking system can be made more free is
merely to eliminate the monopoly of the federal reserve system,
allowing banks to form their own reserve associations as they see fit.




=====
Mike Lorrey
Vice-Chair, 2nd District, Libertarian Party of NH
"Necessity is the plea for every infringement of human freedom.
It is the argument of tyrants; it is the creed of slaves."
                                      -William Pitt (1759-1806) 
Blog: http://www.xanga.com/home.aspx?user=Sadomikeyism


		
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