.... snip: long description how banks work in a **paper dollar** system > but the fundamental point is that > it is *possible* to get liquidity from sources other than reserves, i.e. > from selling assets.
In a paper money system it is *possible*, yes. But not in fixed money supply 'gold only' economy. > > So, they are not able to redeem the 8000oz of deposits, no matter how much > > assets they want to liquidate. > > There is simply no way out. > > No one bank will have the world's total gold reserves, rather, it will be > distributed between many banks, each with a small proportion of total bank > demand deposits. Any withdrawal demand therefore will either transfer those > gold reserves where they are demanded, if one bank has the demand, or > transfer reserves out of the banks if all the banks have the demand. It doesn't matter whether it is one bank or many banks. It doesn't matter whatever creative ways you propose for the banks to liquidate reserves. If there is only 1000oz of real gold on your planet, then it is impossible for 8000oz of deposits to be withdrawn in real gold. Simply because 7000oz of real gold cannot be created out of thin air by liquidating reserves. That's a reality we cannot avoid. > > As I said, these banks (or the government in this country) will sooner or > > later be forced to announce that deposits can no longer be redeemed for > real > > gold, just like the USA did in the 70's > > Or as you put it so nicely: they will 'suspend withdrawals' pending an > > orderly wind up. > > At least something we agree on. > > This is not a correct treatment of the arguments made. > > Firstly, the banks have assets of 9 000 oz and 8 000 oz in liabilites, in > the example I have offered, but each bank has 550 oz in assets and 500 oz in > liabilities. So each bank is capitalised and no bank has more liabilities > than the total stock of reserves. Fine, but still they cannot cough up 8000oz of real gold since there is only 1000oz on the planet. They can liquidate some assets or reserves, but once they have collected 1000oz of real gold there is nobody left to pay a single ounce for the rest of their assets. The market value of the capital stock will drop to zero if your try to sell any more assets, effectively bankrupting all banks at once. snip.. story of banks failing one by one.. > The increased interest rate acts right away to reduce capital prices and > kill investment demand. It also acts to bankrupt the remaining banks since they have made loans at low interest rates before the crisis, and now they have to pay high interest rates to their depositors themselves, causing them to work at a loss. If they made loans at adjustable rates, it will bankrupt the borrowers, leaving the bank with non-performing loans (also causing them to go bankrupt) What we need here is lower interest rates, so that the banks can recover. But to create lower interest rates you need extra money, and that's only if you are able to print it.. > It's no longer profitable to develop and construct > new capital and to develop land. This reduces demand for all factors and > goods, and reduces wages, rents and prices. Uses of capital and labour based > on low interest rates and low gold prices are liquidated and resources are > allocated to uses based on high interest rates and high gold prices. There is no such thing as 'high gold prices' if gold itself is the medium of exchange. > Gold mining firms see this correction developing and increase mining output. > Gold consumers find gold more expensive compared to other goods and reduce > consumption. The surplus of mining output over consumption increases the > stocks of gold for use as bank and non-bank reserves. Aha, now the gold mining firms have to work overtime inorder to bring the available gold supply from 1000oz to 8000oz. That's going to take a while.. And who will pay them, with what? Btw, if you increase the gold supply 8fold, you are likely to see some really good inflation too. Weren't we talking about avoiding inflation? > Weak borrowers have defaulted and liquidated, leaving strong and profitable > borrowers. Credit quality is improved and risk premiums decline. Reserves > move back into the banking system, the interest rate falls, capial prices go > up, and investment and lending activity increase. No, people will swear never to put their gold in the bank again, no matter what the interest. > > But this orderly wind up will never come, and the suspension of > withdrawals > > will be more than just temporary. > > Why won't a liquidator carry out his professional duties and effect a speedy > and effective liquidation of the bank? He can liquidate all banks if he want. At the most he will collect 1000oz of real gold. Next he will be able to give every depositor 1oz of real gold for every 8oz he had on deposit. Meanwhile the entire economy is wrecked. Very 'effective' and 'professional' job he did... If that is your definition of an 'orderly wind up' ? > > The only way to engineer an 'orderly wind up' would be by suspending all > > further borrowing until all loans are paid back (which could take 30 years > > or more, depending on what terms the loans were made). > > Once all loans are paid back, there is again enough gold to redeem all > > deposits. > > Nonsence. The banks assets are liquidated, i.e. sold for cash. Sold for which 'cash' ? There is only 1000oz of 'cash' in the system. And the depositors are demonstrating in the streets asking for their gold: 8000oz of it... In a paper economy you can do it because you print the cash if needed. But you cannot print more gold. And the problem was not that your banks where not well capitalised. In your example the banks actually own half of the capital stock, which is very high. 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