We, at Call4Reform, look forward to working with such MP’s in order to highlight the problem of money creation. A draft legislation created by ourselves can be found at http://www.bankofenglandact.co.uk whilst our campaign movement can be found at http://call4reform.org

Whig, do not be pessimistic; we are not here to do nothing. We are the first major grouping of people to get together to challenge this. There are more MP’s more think tanks coming around to our way of thinking (plus Congressmen, former Presidential candidates and MEP’s noted academics). We are here to succeed. Remember in 1968 you would have been considered as a wide eyed mad man if you thought that the state should not produce your car or provide your fuel or water. This fiat system will collapse at some point in time as we refuse to address the crisis of 2008/08. We socialised the massive credit created debt and now we are having sovereign debt problems. What now? As some point it will collapse and we need to be presenting answers and the way forward.

At this point in time, all I would ask is that wherever possible you promote us and make other people aware that we exist. Write for us as well if you have something to say. There is much reason for hope.

Thank you for joining the debate.

You say “That means however, that whenever the demand for money rises then there will be a recession. And similarly, whenever the demand for money falls there will be a boom.”

That is correct.

You say “I think though that your point is different. As I understand it you are critical of flexibility per se. Would you be against “land banking” even though it’s 100% reserve?”

I do not like to get involved in hypothetical otherworldly conversations.

If society chooses money to be backed by a commodity as for the vast majority of time we have been on this planet it has been, it would more than likely be some metal. If more metal is demanded and more is supplied, then so be it. This natural ebb and flow is unavoidable. In fact it would need to be as a miner would be relying on a price signal i.e. that there is more money demanded for him to dig / process more metal to get that profit. If the metal is precious enough then it is rare to have massive inflationary finds. When these have been, the have been well documented in history but they are actually seldom and few and far between. With moderate increases in the commodity production, purchasing power can still grow as productivity gains are greater than the increase in commodity supplied.

My proposal to “fix” is an interim measure until we can then get consensus to go back to commodity money.

Music Festival

The court would apply the 5 key tests on what forms a contract and look at case law to interpret. Currently banks when you deposit give you can undertaking to pay you back on demand, so a court would not be able to say “well they did not really mean on demand at all of the same time.” Therefore this is what they will need to do. They can’t in bank run situation. Contract law is in conflict with accounting law. It needs to be resolved.

Property rights are diminished as when I deposit, I place immediate access purchasing power with a promise to give me that purchasing power back when I want it. In reality, when push comes to shove, I may not get that back at all as we know. This is a weakening of my property rights.

No option clauses exist in current bank contracts. Historically I am familiar with the work of White.

I have never anywhere said FRB is fraudulent. That is your imputation. As I have written many times before and the banking survey gives evidence to this, at best the relationship is very confused and law makers need to explicitly sort this out.

Your last point, if they do maturity match, then of course there would never be a problem as there is not a problem with any 100% reserve company (all non bank companies unless they go bust). So in your telephone example , if all had agreed when phones get passed back, then fine, they would be 100% reserved and the system would work fine. Welcome to the world of supporting 100% reserve banking Current.

I’ll read your paper and De Soto’s book in the future.

I generally think though that we have to deal with interest rates and the money supply. I don’t think the interest rate can be sidelined.

> because the monetary equilibrium theory is not robust and
> adjustments in credit and fiduciary media take time , time
> enough to let boom and bust happen.

Of course adjustments take time. However, I’m not sure how you can use that to claim that “monetary equilibrium theory is not robust”.

As I said earlier the boom and bust in Scotland doesn’t really invalidate the theoretical case because Scotland’s economy was so closely tied to that of England.

> With a 100% reserved environment, you cannot have a
> money inflation or a money deflation.

That means however, that whenever the demand for money rises then there will be a recession. And similarly, whenever the demand for money falls there will be a boom.

Also, with a 100% commodity standard you can have money inflation and deflation. Let’s suppose silver is used for example. When the demand for money rises it’s price rises so silver from stockpiles and industrial uses will be directed towards minting. Similarly, if the demand falls then new supplies of silver will not be directed towards minting, and coins may be melted down for their silver content.

I’ve been discussing this over at the Mises blog with a bunch of 100% reserve advocates. What’s interesting is that there are really several different reasons for supporting 100% reserves.

For example, the commentator “Beefcake the Mighty” over at the Mises blog is mostly worried about interest rates. He thinks that fractional-reserve free banking could lead to artificially low interest rates. But, he isn’t against flexibility.

I gather from your comments that you are against monetary flexibility. This is really a quite different position.

To illustrate I’ll give an example I gave on the Mises blog. Let’s suppose that a government institute land-based money. The government specify that the unit of currency is a “weighted acre”. One weighted acre is capable of delivering a particular amount of crops per year. A set of private land-banks are formed. It is stipulated by the government that these banks must be 100% backed by land. The banks create accounts and issue notes that are certificates/titles for a particular amount of land in weighted acres. A customer may go to the bank and redeem his or her land. Or he may leave the land in the hands of the bank who will operate it for the customer. The banks could take a cut by selling the crops grown on the land.

The point of this rather peculiar example is to show that monetary flexibility isn’t connected directly to fractional reserves. The land banking system I describe would be highly flexible in monetary equilibrium terms (at least if the country had enough agricultural land). If the demand for money were to rise then the private land-banks would expand by buying more agricultural land from normal farmers. Similarly, if the demand for money were to diminish then people would bring their land money certificates for redemption.

“Beefcake” says that this system would be fine by him because the land-banks couldn’t really influence the interest rate. His argument is really against backing money using debt, which is effectively what FRB does. His point (which is from Mises) is that if normal FRB banks expand lending together then they bid down the rate of interest. A banking cartel could make the following calculation: “I know this debt isn’t worth as much as we’re paying for it, however, if we all pay this price for it then we’ll expand the money stock and with it the demand for money so overall we’ll win”. I agree with this but I don’t think such a cartel could really be formed. A set of private land banks however can’t do that because it must buy a “real” asset – land. That is, in my land banking example the price of land is exogeneous to the land banking system but in a debt-based FRB system the price of debt is somewhat endogenous.

I think though that your point is different. As I understand it you are critical of flexibility per se. Would you be against “land banking” even though it’s 100% reserve?

For this gig the promoter hasn’t promised any particular acts except himself. Which I think is quite a good business decision on his part.

Anyway, your claim is that my example isn’t comparable to banking. Certainly it isn’t exactly. But, my point was to draw out the reasons for redemption and the discuss the legalities behind it.

Let’s suppose my friend offers a full refund on all tickets. Now, some would say that is a current liability and so, under normal accounting rules it should be kept whole. That means that my friend cannot spend any of the money from ticket sales until after the concert has occurred. Under a law like that if he had insufficient cash to cover his ticket sales until the gig then he would be breaking a law.

However, I doubt that a court would look at it that way. You write: “The Music Festival goers, expects to get a refund if the act does not turn up etc.” Exactly. Suppose my promoter friend offers these tickets and someone accuses him of breaking the law. The court were told that the promoter had taken sufficient steps to ensure that the acts do turn up and that the festival will go ahead as planned. In this case would the court condemn him because he had not kept his ticket liabilities whole? I think not because he would plead that he had reasonable grounds for believing that the ticket-holders would not call on their option of refund.

The same is true of money. You write: “when someone deposits, they ALWAYS expect to get their money back when they want it.” That’s true, but it doesn’t mean they all want their deposits back at the same time. The bank can quite reasonably presume that only a proportion of account holders will want to redeem at any particular time.

> I personally have no problem if people want to place
> money in casino type operations in the knowledge that
> their property rights are being diminished

I don’t think that the property rights of a creditor necessarily are diminished. The idea of loans (as opposed to rents) are that the lender gives up the right over a piece of property. That action doesn’t diminish that persons “property rights”, it is an exercise of those rights.

> with the risk that they will get a much bigger return,
> but that they may loose allot as well. This is gambling
> or financial betting.

All businesses are, all of human life is. There is no hard-and-fast line between an entrepreneur and a speculator.

> Our Cobden Centre survey that we did at the back end of
> 2009 with 2000 people, conducted by ICM, shows 74% of the
> people believe they are the owners of the deposit and 16%
> thought the bank was. Also they said they place for easy
> access (16% for straight forward safe keeping) i.e. on
> demand or there or there about for 67% of them. This is
> why the examples you and indeed the great body of
> defenders of either the existing fractional reserve free
> banking with a central bank or just fractional reserve
> banking, are very irrelevant and misleading. I believe we
> will publish in full this week.

I agree that many people today don’t understand what a bank account is. I think the reason is mostly that deposit insurance and central banking have made banks so safe to the ordinary customers (though dangerous to the wider economy) that the ordinary customer doesn’t really have to know.

But, this lamentable situation doesn’t mean that FRB is fraudulent *by nature*, or that FRB causes business cycles.

> I do not know about option clause banning so cannot
> comment.

It’s in White’s book. It’s important here because the option clause meant that legally speaking a banknote was a timed debt. It gave the bank an option of too different ways to redeem. The bank could redeem in gold, or it could redeem after a period of time at a special penalty interest rate.

> Duplicitous: Savings to most implies that your goods have
> been lent to someone once, not many times

Let’s say I deposit 10 ounces of gold in a fractional reserve free bank. Now, the bank keep 1 ounce of my gold as reserve. They then lend out 9 ounces of gold. They negotiate a bill for those 9 ounces of gold from the borrower. Then the borrower has 9 ounces of gold, he may open an account in that FRB free bank or another. Either way some of that gold will be lent out again. But, there is nothing illegitimate about this since there is another bill created for that debt.

The situation is not much different to that for ordinary debts including timed debts. I may lend my mobile phone to Sarah for a week who then in turn lends it to Tim for a day.

> and therefore
> they can never be there at an instant.

Of course they can be. All the bank needs to do is to make a sensible estimate of the amount of redemptions it will receive in a particular time. It can then use a fractional reserve. As long as the bank has made a reasonable provision there is no trickery involved.

You may or may not be aware that current contributions to the Austrian Theory of the Business Cycle (ATBC) , such as myself and my co author A Evans never mention the interest rate at all. It is the size of the money base or monetary footprint itself that leads to boom and bust. You may find this paper of interest

http://www.cobdencentre.org/?s=heterogeneous+entrepreneur ,

http://mises.org/journals/qjae/pdf/qjae11_2_1.pdf .

You may also like to read Huerta De Soto’s Money, Bank Credit and Economic Cycles, there is no mention in all 900 pages of the interest rate being a trigger for the ATBC,
http://www.cobdencentre.org/literature/download/ – last down load on this page.

So the ATBC is 100% about a credit induced boom, this is driven by the private credit creation mechanism of the banking system that can be edged very clumsily by the central bank one way or the other with varying time lags. This is not to say that interest rates do not play their role in time co ordination, structure of production misallocations etc , but the emphasis is more on the size of the credit creation itself (the monetary foot print) and where it enters the system – Cantillon effects etc .

The reasons why under fractional reserve free banking in Scotland for example, there was still plenty of boom and bust in the following years, 1770,72,78,93,97, 1802-03, 1809-10, 1818-19, 1825-26, 1836-37, 1839, 47, is because the monetary equilibrium theory is not robust and adjustments in credit and fiduciary media take time , time enough to let boom and bust happen.

With a 100% reserved environment, you cannot have a money inflation or a money deflation. Booms and bust may well happen for other reasons, one off adjustments to this system, technological, harvest failure massive commodity price fixing, government socialisation of large sectors of the economy and a whole host of other things, but a credit induced one = no for sure.