Hillary:
>It's not theft to provide a liquidity service. fractional reserve banking
> provides liquidity and is a free market credit configuration. Although
> it is possible that depositors will have a delay in redeeming their
> deposits or suffer a capital loss on their deposits, they are
> compensated for these risks by the payment of interest and the provision
> of liquidity. Fractional reserve banking economiese on the moneyary base
> and slightly reduces its value, but this loss of value is analgous to
> any commodity where users economise on its use, i.e. any commodity
> whatsoever. Economising on gold for monetary use is no different from
> any other cost-minimisation and transaction cost minimsation market
> process.
I'm just a simple country boy. The way I look at it is like this:
It doesn't matter what commodity you're talking about, if you have an 1000
units inventory of X, and you sell receipts for certain quantities of X to
the public, then total quantity of all the receipts issued should be less
than or equal to the 1000 units of X in your warehouse. If you knowingly
issue receipts for more units than you have for any good other than money,
it is legally considered to be fraud in almost all jurisdictions.
Fractional reserve banking constitutes selling receipts for more units of X
than you actually have.
If you define another good, Y, that is made up of 25% X, and 75% something
else. That's fine. Sell it all day, just make sure you call it 'Y'. But
when you sell 25%X and call it X, it ain't X. The market now has to
determine the difference between real X and your stuff that you are calling
X, but isn't really X. By using the same units you are deceiving the market
into thinking that YOUR receipts for 1 unit of X are equivalent to 1 unit of
X, when in fact, they are only equivalent to 0.25 units of X.
The following scenario would be fraudulent in the US: You have a house,
free of all encumbrances, and you want to get an equity loan. You apply to
two banks at the same time and their credit checks both go through close
enough that neither is aware of your application with the other. You then
sign deeds of trust with both banks, with neither knowing about the other.
You thus successfully use the same house for full collateral with two
different lenders at the same time. I know a guy who did this. If the
banks ever figure it out, he will probably go to jail. Why? He sold two
100% receipts for the same house. (I am not talking about a 2nd mortgage.
Both deeds of trust say they are a 1st deed of trust. Obviously the lawyer
for the second bank that filed the trust deed didn't do his job.) Why is
this legal for money when is considered unethical and illegal for anything
else? Answer: because bankers are powerful and have been selling this
schtick for 300 years.
Back to fractional reserve... The following examples makes the assumption
that DigiGold invests the 75% of the e-gold deposits by creating new
DigiGold receipts and issuing them to borrowers. They may do it completely
differently, but for the sake of this example, we'll assume they lend out
DigiGold.
Bob pays DigiGold 1 gram of e-gold for 1 gram of DigiGold. DigiGold credits
his account with 1 gram of gold. DigiGold then lends 3 grams of DigiGold to
Bill at interest. On DigiGold's books there are now receipts issued for 4
grams of gold. But there is only 1 gram of real gold (e-gold) there. If
the market considers DigiGold to be the same as physical gold then the "gold
supply" has just increased by a tiny fraction of the world total. The
scarcity of gold relative to other goods and services has just decreased by
a tiny fraction because the market cannot tell the difference between the
receipts for real gold and the receipts for gold that does not exist. So by
creating the 3 grams of ethergold, DigiGold reduced the value of real gold
by (3 grams/TOTAL GLOBAL GOLD INVENTORY). It is an infitesimal amount, to
be sure, but everyone who owns real gold was slightly hurt by the creation
of the fictional gold. If a whole banking industry develops that does this
then holders of real gold will see their gold decrease in value relative to
other goods and services, because the market treats paper receipts for gold
as if they were real gold. Thus, interest rates in gold rise to account for
the inflation that results. The inflation causes a negative feedback loop
that pressures gold holders to invest their gold in a fractional reserve
institution at an interest rate high enough to account for the inflation
caused by the fractional reserve system.
The problem is not "using money efficiently". The problem is selling or
lending more units of money than you really have. Lending at interest with
a fixed time contract, such as a CD, does not create more money because it
is listed as a loan (non-liquid asset) on the balance sheet of the creditor,
but is listed as a liability on the balance sheet of the borrower. The
title to the actual asset is now held by the borrower. No new gold is
created on paper but the gold is able to be used efficiently. The problem
only arises when both the lender and the borrower EACH have in their hot
little hands a tradeable instrument giving them title to the same distinct
piece of gold. Now there is more gold on paper than there is in reality.
My whole argument assumes that stealing is ethically wrong and that the
state has a legitimate interest and authority to punish stealing. It would
seem from VC's post that consistent libertarians do not believe in any
ethical standards other than cause and effect? I've read Atlas Shrugged,
but I am not up to date on libertarian ethics. That would make a great
discussion.
HK
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