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Tuesday, January 10, 2006

Another recommended read

Over at Austro-Athenian Empire (which by the way, is the home of a great library of links to stuff you really ought to read), Roderick Long happens to make a clarification in the fractional reserve banking issue that I think makes many good points, and an expansion of some things Brad Spangler and I kind of breezed over:
Platonic Bailments

In response to this post, I sent an email, which I'll quote here:
I agree that fractional reserve banking in and of itself is not objectionable, from a (natural/common) legal standpoint. I.E. there's no reason to ban it legally.
On the other hand it is taking advantage of the gullible on some level. If the level of reserves is high enough that there is a reasonable chance that you will get your money back when you need it, it's not so
bad.
In some ways it's kind of a form of gambling.


The big problem is fractional reserve banking under a fiat currency, because under a fiat system, currency is relative, a kind of zero-sum game. Price levels float to adjust to the amount of currency in the economy because there's nothing to "check" the currency against.
As Big Bill Haywood sagely put it "For everyone who gets a dollar they didn't sweat for, there is someone who is sweating for a dollar they won't get". I think
he meant it in a different context, but it really applies amazingly well to the problem of a fiat currency economy.
For instance, if I get paid 5 "dollars" to do a certain amount of work on the free market, ostensibly I've created 5 dollars worth of value. (or no one would pay me that much) So everything evens out.
If I get paid 6 dollars, my extra bidding power is driving up the price of everything I spend it on, and everything the recievers spend it on, and so on.
Because there's only 5 dollars extra value in the economy, but 6 extra dollars.
Under a commodity-backed currency, these situations quickly correct themselves because someone somewhere will at least threaten to redeem their currency.


PS - I recommend that everyone who is interested in this thing of ours, and has some spare time, read Murray Rothbard's A History Of Money And Banking In The United States. Prof. Long's post is to some extent in reaction to Rothbard's idea of bailment.
But the book is a marvel in its clarity and focus on history within a theoretical frame. You will learn some really cool stuff you probably didn't know about, like the Suffolk Bank.

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