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General Category => General Discussion => Topic started by: AgoristTeen1994 on January 20, 2012, 08:20:04 AM



Title: A question for Free Banking advocates
Post by: AgoristTeen1994 on January 20, 2012, 08:20:04 AM
Hello all. I have a question regarding free banking. I very much tried to figure it out in my head, but I guess I don't know enough about the topic to do so. My question is:
How would an issuer of some currency under free-banking make a profit? The reason I'm asking is that since as from what I can tell there isn't a method for a Currency Issuer to make a profit....in which case what would be the incentive of the majority of those who issue their own currency to issue said currency?


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 08:25:10 AM
Hello all. I have a question regarding free banking. I very much tried to figure it out in my head, but I guess I don't know enough about the topic to do so. My question is:
How would an issuer of some currency under free-banking make a profit? The reason I'm asking is that since as from what I can tell there isn't a method for a Currency Issuer to make a profit....in which case what would be the incentive of the majority of those who issue their own currency to issue said currency?

This depends on the type of currency being issued, and why it is being issued.  I could write a book on this subject.

Considering the way banking is usually done, I could also say it depends on how much fraud you want to commit.


Title: Re: A question for Free Banking advocates
Post by: AgoristTeen1994 on January 20, 2012, 11:04:38 AM
Okay...well are there any books you would suggest I read so that I can find out more? Since I do find it interesting. And I mean aside from Rothbard's "What has Government Done to Our Money" which I'm currently reading


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 11:45:34 AM
Hmm, you know what...  I don't know of a book that teaches that.  Maybe someone else will know of one. 


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 20, 2012, 01:08:38 PM
Imagine you were following Bitcoin's model except you let yourself do a lot of the initial mining, or just gave yourself money to start with. Then if it appreciates against other goods or currencies, you win.

If you want your currency to be a precious metal, people "win" by mining it when profitable to do so.


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 01:15:48 PM
Imagine you were following Bitcoin's model except you let yourself do a lot of the initial mining, or just gave yourself money to start with.

That's the fraud part.  

If you want your currency to be a precious metal, people "win" by mining it when profitable to do so.

Smelting and coining (re-coining) in a mint are industries in themselves.  It can be quite profitable. You can also use a hard currency to use for a paper currency as a receipt.


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 20, 2012, 01:19:22 PM
Imagine you were following Bitcoin's model except you let yourself do a lot of the initial mining, or just gave yourself money to start with.

That's the fraud part. 
Not if this was publicly available information.


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 01:25:34 PM
Not if this was publicly available information.

Why would people wish to participate with a system that was initiated with a theft of value, unless the alternatives were greater theft?  If your passing out money in return for something, and your sitting on a pile from nothing, that inflation is a form of theft, and likely fraud as many people won't realize the problem. 


Title: Re: A question for Free Banking advocates
Post by: Seth King on January 20, 2012, 02:06:00 PM
Why does the bank have to issue a currency? If the currency is Bitcoin, the bank merely accepts deposits and loans them out at interest, and then gives a cut of the profit to the savings account depositors. Nuff said.


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 02:26:13 PM
Why does the bank have to issue a currency? If the currency is Bitcoin, the bank merely accepts deposits and loans them out at interest, and then gives a cut of the profit to the savings account depositors. Nuff said.

The initial reason for banks to issue currency was convenience for customers and easy fraud for more profit.  When people didn't want to cut gold up into tiny pieces, they could get receipts for small amounts of gold as paper.  That of course led to banks issuing more receipts than they had gold.  It also led to the government changing over from weight to a arbitrary number, which further enabled fraud.  

In the case of banks accepting existing currency, they were able to do the same thing.  They would loan out more money than they really should have.  If you have someone on a 30 year mortgage, and people have on demand savings accounts, your essentially betting that they won't ask for the money.  When they asked for the money, the banks don't have the cash and fold.  If they can they will claim the house, and the bank was also betting on the value of the house going up.  Most banks are a house of cards.  

Of course with currency these days being 1's and 0's on a hard drive, they don't even need money in the savings accounts.  They are again enabled by the government to commit fraud.  They essentially are back to printing currency. 

100% reserve banking is what you should look into.  The cash flows in that are different, and still profitable.  They just are not enabled by the government and fraud to increase profits further.  That makes them illegal in many places, and uncompetitive in comparison.  


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 20, 2012, 04:04:42 PM
I don't necessarily think 100% reserve banking is the only way to go, so long as banks are allowed to fail. Then people can take their own risks, and we'll see what the market tells the banks to do.

But I think it's pretty obvious that 10% wouldn't be the winning number.


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 04:06:56 PM
I don't necessarily think 100% reserve banking is the only way to go, so long as banks are allowed to fail. Then people can take their own risks, and we'll see what the market tells the banks to do.

But I think it's pretty obvious that 10% wouldn't be the winning number.

10% is the historically proven number.  Really though when your looking at balance sheets, less than 100% comes out as fraud/theft.  That doesn't mean the bank doesn't do loans, it means they don't create money from nothing. 


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 20, 2012, 08:00:49 PM
I don't necessarily think 100% reserve banking is the only way to go, so long as banks are allowed to fail. Then people can take their own risks, and we'll see what the market tells the banks to do.

But I think it's pretty obvious that 10% wouldn't be the winning number.

10% is the historically proven number.  Really though when your looking at balance sheets, less than 100% comes out as fraud/theft.  That doesn't mean the bank doesn't do loans, it means they don't create money from nothing. 
In free banking, you can't create money from nothing. If there are 100 kilos of gold at the bank, and the bank issues more than 100 kilos worth of "notes" then that's not money, it's a money substitute, right? And, as you mentioned with the balance sheets, since banks would report financial statements, this would be public information. So by banking there, you consent to fractional reserve banking (and "vote" for it on the market).


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 08:12:10 PM
In free banking, you can't create money from nothing. If there are 100 kilos of gold at the bank, and the bank issues more than 100 kilos worth of "notes" then that's not money, it's a money substitute, right? And, as you mentioned with the balance sheets, since banks would report financial statements, this would be public information. So by banking there, you consent to fractional reserve banking (and "vote" for it on the market).

Public knowledge or not, were talking about inflation, which is a form of theft.

You can call it a money, or a money substitute, or credit expansion, or cow dung, it has the same effect.  If you are putting out markers representing more than the 100 kilo's of gold, you are representing a value that does not exist.  You as the creator benefit from it as the market is only representing the 100 kilo's of gold.  You are able to print however many kilo's of gold worth of notes to purchase with before the market realize the place is being flooded with notes that are actually below value.  Everyone else that has notes, believing it represents a kilo of gold actually has purchasing value below a kilo of gold.  You are effectively stealing by creating a false representation of value.  

Everyone knows governments inflate.  That doesn't stop the government from being able to use the money first on the market.  It doesn't stop people holding a representation of value from losing purchasing power.


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 20, 2012, 08:38:14 PM
The ability to opt out matters to me. In a free market, you can opt out of a bank that doesn't hold 100% reserves. You can choose to not accept notes from that bank, since you know they're worth less. If the customers are pissed enough, they can all pull their money and topple the bank.

Opting out of the FRN scheme is not a realistic choice (must pay taxes with it).


Title: Re: A question for Free Banking advocates
Post by: Syock on January 20, 2012, 08:45:46 PM
The ability to opt out matters to me. In a free market, you can opt out of a bank that doesn't hold 100% reserves. You can choose to not accept notes from that bank, since you know they're worth less. If the customers are pissed enough, they can all pull their money and topple the bank.

Opting out of the FRN scheme is not a realistic choice (must pay taxes with it).

And those left holding the bag will have a note saying it is worth X amount of value, when in reality it isn't.  Theft and fraud all around.  If you agree to a contract and get paid in a note that says you will get a kilo of gold from bank A, and go to the bank and they don't have a kilo of gold, the bank has stolen from you and committed fraud by saying it was there.

The only way it is really public knowledge that the value is less than stated is by marking the notes as less value to start with, and return to 100% reserve.  Otherwise your saying it is worth more than it is.  It is fraud. 


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 21, 2012, 12:21:20 PM
The ability to opt out matters to me. In a free market, you can opt out of a bank that doesn't hold 100% reserves. You can choose to not accept notes from that bank, since you know they're worth less. If the customers are pissed enough, they can all pull their money and topple the bank.

Opting out of the FRN scheme is not a realistic choice (must pay taxes with it).

And those left holding the bag will have a note saying it is worth X amount of value, when in reality it isn't.  Theft and fraud all around.  If you agree to a contract and get paid in a note that says you will get a kilo of gold from bank A, and go to the bank and they don't have a kilo of gold, the bank has stolen from you and committed fraud by saying it was there.

The only way it is really public knowledge that the value is less than stated is by marking the notes as less value to start with, and return to 100% reserve.  Otherwise your saying it is worth more than it is.  It is fraud. 
The note doesn't say it's worth 1 kilo of gold, it says it's redeemable for 1 kilo of gold. If done properly, everyone who wants to redeem it can in fact get their kilo of gold. If you hold 90% reserves, no one will be left holding any bag. If they fail to live up to their contracts to redeem the notes for gold, then their business fails.

Regardless of whether their is fractional reserve banking or 100% reserve banking, the depositors can still lose their money.


Title: Re: A question for Free Banking advocates
Post by: Syock on January 21, 2012, 01:26:35 PM
The note doesn't say it's worth 1 kilo of gold, it says it's redeemable for 1 kilo of gold. If done properly, everyone who wants to redeem it can in fact get their kilo of gold. If you hold 90% reserves, no one will be left holding any bag. If they fail to live up to their contracts to redeem the notes for gold, then their business fails.

Regardless of whether their is fractional reserve banking or 100% reserve banking, the depositors can still lose their money.

With 100% reserve banking, there are not more notes claiming to be redeemable than there are actual units that can be redeemed.  They won't lose their money if the bank fails.

If you hold 90% reserves, and 91+% want to redeem, then you have been caught committing fraud, claiming they could redeem, and stolen that contracted unit from them. You can argue semantics, but it doesn't change the result.  By making notes exceeding the actual redeemable quantity, you devalue existing note holders (and note holders of all other types(fraud/theft)), commit fraud about actual redeemable quantity, and commit theft when failing to live up to the contractual promise to redeem.

You're trying to rationalize fraud and theft through the thought that you can do it in a way that won't get you caught.  That doesn't mean it isn't fraud and theft still.


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 21, 2012, 02:41:49 PM
Without fractional reserve, banks couldn't do much other than provide CDs for their depositors. In which case it would still be possible for them to lose their money if the loans were bad.

Fractional reserve banking should not get mixed up and muddled with central banking. Their is a limit on the fractional reserve banks' capacity for creating money. The central bank has no restrictions.

I'm not saying fractional reserve banking is "good." I'm just saying that when people put money in banks, by their current definition, that is what banking is. It isn't a secret that banks do this. If I sell things out of my trunk and I have packaging on them that says "Fake iPods" it isn't fraud. I'm not being deceptive.



Title: Re: A question for Free Banking advocates
Post by: Syock on January 21, 2012, 02:52:25 PM
Without fractional reserve, banks couldn't do much other than provide CDs for their depositors. In which case it would still be possible for them to lose their money if the loans were bad.

Fractional reserve banking should not get mixed up and muddled with central banking. Their is a limit on the fractional reserve banks' capacity for creating money. The central bank has no restrictions.

I'm not saying fractional reserve banking is "good." I'm just saying that when people put money in banks, by their current definition, that is what banking is. It isn't a secret that banks do this. If I sell things out of my trunk and I have packaging on them that says "Fake iPods" it isn't fraud. I'm not being deceptive.

I've been trying to avoid writing a huge post on this.  I was hoping the obvious theft from everyone, not just depositors, would be enough.  I will write more later.


Title: Re: A question for Free Banking advocates
Post by: Martin Brock on January 22, 2012, 01:05:45 PM
If there are 100 kilos of gold at the bank, and the bank issues more than 100 kilos worth of "notes" then that's not money, it's a money substitute, right?
Money is anything that people use for indirect exchange, in lieu of barter, i.e. if I accept something from you only because I expect later to exchange it for something else, it's money. Promissory notes and bills of credit are money if people use them this way. A banknote promising gold is not money because it promises gold. It's money because people accept it only to exchange it later for something else.


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 22, 2012, 01:12:41 PM
If there are 100 kilos of gold at the bank, and the bank issues more than 100 kilos worth of "notes" then that's not money, it's a money substitute, right?
Money is anything that people use for indirect exchange, in lieu of barter, i.e. if I accept something from you only because I expect later to exchange it for something else, it's money. Promissory notes and bills of credit are money if people use them this way. A banknote promising gold is not money because it promises gold. It's money because people accept it only to exchange it later for something else.

Yeah, that's a more modern definition of money. I was using money and money substitutes the way Mises did in Human Action, I should have been clearer on that.


Title: Re: A question for Free Banking advocates
Post by: Martin Brock on January 22, 2012, 02:00:32 PM
How would an issuer of some currency under free-banking make a profit?
At the risk of spamming, I'll address the question with an example.

www.favorati.net

Note: Favorati isn't quite open for business yet. You may join and browse the site at this point, but you should not post or accept offers expecting the records to remain. I'm still developing and testing the site, and it's not my day job, so I can't say exactly when I'll open it officially, but I'm close. I plan initially to market the site in my locale near the University of Georgia, but I won't limit membership.

Favorati is similar to other sites, like Ripplepay, that are operational. Favorati is not based on the Ripple project, but I hope eventually to interoperate with sites based on Ripple.

To answer your question, I expect to profit as people acknowledge the favor I've done them by providing the site. Acknowledging the favor is voluntary, but at some point, I would exclude a person from posting or accepting offers without acknowledging the favor.

Favorati is not exactly a bank, because it doesn't hold capital. Individual members hold the capital. If you require collateral before extending credit, you must work it out with the friend accepting your offer; however, I don't expect people to extend credit on this scale at first. I expect most credit at Favorati to be unsecured, like credit cards.

You could also profit by providing a service in which you insure creditors against loss by holding capital. This service is more like conventional banking. You would charge an insurance premium for the service. You could offer this service through Favorati itself.

I don't offer the service, because it raises legal issues that I prefer to avoid and because I'm not sure that a conventional bank is necessary in the information age. In principle, members could form insurance pools while still holding capital individually.

If I need to earn FRNs to maintain the site, I might use Google ads or something, but I'll never require anything but an acknowledgement for full membership. If these promises are not valuable enough to me to maintain the site ultimately, I'll close it down.


Title: Re: A question for Free Banking advocates
Post by: Martin Brock on January 22, 2012, 02:23:22 PM
I'm not saying fractional reserve banking is "good."
I am saying fractional reserve banking is good, but I also say that "fractional reserve" is misleading. If a bank uses a gold standard, gold in the bank's vault typically is not the reserve securing the bank's notes, even though its notes promise gold; however, the notes are not therefore unsecured. The bank also holds the titles to mortgaged houses for example. These houses have a value in gold. The value of these houses in gold secures the bank's notes promising gold.


Title: Re: A question for Free Banking advocates
Post by: JustSayNoToStatism on January 28, 2012, 12:07:13 AM
http://www.youtube.com/watch?v=YasmmiR0PrM#t=26m19s (http://www.youtube.com/watch?v=YasmmiR0PrM#t=26m19s)


Title: Re: A question for Free Banking advocates
Post by: Syock on January 29, 2012, 12:56:06 AM
Without fractional reserve, banks couldn't do much other than provide CDs for their depositors. In which case it would still be possible for them to lose their money if the loans were bad.

I see no reason why banks wouldn't be able to offer every service they currently offer plus others. 

Fractional reserve banking should not get mixed up and muddled with central banking. Their is a limit on the fractional reserve banks' capacity for creating money. The central bank has no restrictions.

It gets mixed up and muddled because they have the same effect on the economy and are accomplished with similar/same methods depending on the government. 

I'm not saying fractional reserve banking is "good." I'm just saying that when people put money in banks, by their current definition, that is what banking is. It isn't a secret that banks do this. If I sell things out of my trunk and I have packaging on them that says "Fake iPods" it isn't fraud. I'm not being deceptive.

Your not being deceptive of what you call it, but if you were being deceptive of the quality of the fake ipod, that would be fraud.