If you put gold in wharehouse and they say that you can retrieve it at anytime, and then turn around and give it to others -- how is that not fraudulent? It only works because they hope that not everyone will demand their gold back at the same time, so they can give you other peoples gold.
My issue is only with demand deposits; if you put the money in an account like a CD where you agree to take it out in X amount of time, then they can lend it out.
Your argument seems to hinge on the idea that nobody knows about fractional reserve banking. The fact is, not only is it well-known and fully regulated that banks use fractional reserves, but there is even FDIC insurance and similar programs to guarantee the safety of deposits.
Now, if there was a legally regulated system where you could do fractional reserve banking of gold, complete with a government insurance program, then it would be perfectly fine and not fraudulent at all. As it turns out, no countries have a gold standard anymore.
Comparing some guy with a warehouse of gold who doesn't tell you what he's doing with a publicly insured and regulated system with published reserve ratios is not a particularly honest or fair argument.
I'm arguing against fractional reserve banking, and the continued bailout by the government of banks - FDIC is bankrupt and will need tax dollars or new dollars (inflation). Also, I wasn't using gold because I'm advocating a gold standard (even though I do), I used it because it can be used as substitute for dollars in the example.
The problem we were discussing was one of the points from the article: "requiring higher capital ratios on larger banks to ensure the firms’ safety" I was advocating that instead of tinkering with this system, we should fix it.
Just because the something is legal and "well regulated" doesn't mean that it is not fraudulent.
Just curious, do you have some sort of justification for the idea that a gold standard is somehow better than fractional reserve other than the out-dated idea that your dollar has something 'physical' to back it? Gold is just an object the only value that it gets is the value that humans give it. It's not like gold has some 'inherent' value just for being gold; a value the is constant and unquestionable.
Most people that I've talked to that support bringing back the gold standard only have some vague idea of not wanting their money to be 'just paper' and needing to have something 'physical' that backs it. But their thinking never goes any deeper than that. Most of their ideas come off as lacking in thought. Much along the lines of people that keep all their money in cash in a mattress because they "don't trust the banks;" never mind that it makes it easier for any corner street thug to break your window and steal all your money.
Oh I don't care if it's based on gold or some other physical asset, my only concern is that it can't be created out of thin air. Throughout history governments have struggled to get control of the monetary supply, separate it from anything real (give it a name deutschmark, pound, dollar), and then create more of it out of thin air. In this way they are taxing everyone who holds that currency without there direct knowledge. Eventually the money becomes worthless.
In general people are against central planning when it comes to goods and services, but are in favor of it when it comes to monetary supply for some reason that I don't understand. Throughout the history of central banking in the united states we've had all of the worst financial crises and extreme loss of value (the dollar has lost 98%) of it's value since the federal reserve took over.
I also have a problem with the way the new money enters the system. As it enters the market those who get the new money first are able to use it on prices that are set for the old monetary supply so they get great deals, over time prices will rise hurting those not receiving the new money.
Lastly, I have no problem with banks, but I do have problems with fractional reserve banking -- as I stated above I feel it's fraudulent. I do believe that through fractional reserve and fiat currency, money is produced is such great speed that when investing one must take inflation into account and seek out riskier and riskier investments to try and make any decent return. It adds one more variable to be considered whenever making a decision, for instance Harvard just lost 500Million due to an interest rate swap agreement because they didn't predict the Fed would hold interest rates at zero for so long.
Lastly, if a currency is good it doesn't have to be forced upon you; if people actually believed in fiat currencies they would allow competing systems and abolish legal tender laws.
I'd be more than happy to answer any other questions/clear up any misconceptions about this issue -- It's important to me.
This is a fundamentally untestable hypothesis: there are many currencies that have suffered hyperinflation, yes, but many others which have gone on for decades without any real harm. You can claim that at some point in the future the currency will fail, and no matter how much time goes by you still won't be proven wrong.
As it happens, commodity-backed currencies aren't immune to problems either. The informal use of tobacco as currency in the colonial South led to a vast overproduction of tobacco and what we would today recognize as severe inflation (Friedman, Free to Choose). You need commodities that are inherently difficult to increase the supply of. In the 19th century, the American government had a seemingly perfect solution: a fixed ratio of dollars to silver, as well as a separate fixed ratio of dollars to gold. Long story made short, a silver rush disrupted this system and necessitated a move to the pure gold standard. The gold standard directly caused a lot of deflation though, which was a severe practical problem and a contributing factor to the Great Depression.
"Throughout the history of central banking in the united states we've had all of the worst financial crises and extreme loss of value (the dollar has lost 98%) of it's value since the federal reserve took over."
As it happens, this doesn't cause any real problems. It's ideal of course for neither inflation nor deflation to occur, but the consequences of deflation are so much more dire that, as a practical concern, we err on the side of inflation.
The economic consequences of mild inflation are as follows: there is an incentive to invest or spend money rather than bury it in your back yard, and there is a small degree of information loss in the price system as prices rise due to inflation. The economic consequences of deflation (an incentive to bury money in your back yard) have catastrophic consequences. The main advantage of fiat currencies is that it's possible to grow the currency at close to the same rate as the economy itself, so the degree of inflation or deflation can be controlled and minimized, with a bias towards inflation since that is the less harmful of the two. Any natural commodity has its own fluctuations in value, both natural and artificial, i.e. the Fisk/Gould plot to corner the gold market during the Grant administration.
Finally, some notes about gold in particular. There are a number of reasons gold is an infeasible currency base in the modern day. One is that, were the entire world monetary supply backed by gold, the price of gold would be so high as to all but eliminate the use of gold for any useful purposes. Of course, the whole world wouldn't switch over at once, but any single country that did would run into a lot of problems. A large country would increase the cost of gold to unreasonable levels--a small country would be at the mercy of any other country with significant gold reserves which could, by selling off gold, tactically devalue that country's currency.
"Lastly, if a currency is good it doesn't have to be forced upon you; if people actually believed in fiat currencies they would allow competing systems and abolish legal tender laws."
Legal tender laws predate even the gold standard, and are probably a practical necessity for debt to be enforceable. At the very least, the government has to mandate a specific currency for people to pay their taxes in, and it's probably just as important for the government to mandate a specific currency for legal judgments to be paid in. There is no actual law against you setting up shop and accepting gold as payment, but if someone runs their truck into your shop and you sue them, no court is going to bend over backwards to make the truck driver pay you anything except US dollars. What you're describing is essentially a barter system, where you only accept payment in gold, your neighbor only accepts payment in silver, your friend only accepts payment in chickens, and I only accept payment in portraits of Benjamin Franklin.
So, let's say we have a gold standard. Well, as I intimated above, a gold standard is just as much a fiat currency as a "Ben Franklin portrait" standard: the government up and tells you that something is money, therefore it's worth more than it should be for any practical purpose. Given the choice, a currency that can be managed to prevent serious financial problems is preferable to a currency that can't.
I'd be more than happy to answer any other questions, or clear up any misconceptions about this issue.
1. Bimetallism (mixed gold/silver) caused significant issues due to the fact that they were setting the price of gold/silver. Setting prices never works.
2. The consequences of deflation IMHO are overblown -- eventually people will need purchase goods and stop saving/hoarding. Now of course these days with massive amount of debt everyone has deflation would be horrible. Massive inflation on the other hand, Zimbabwe today, or Weimer Germany (getting paid 3 times each day) are real threats and will rob the life savings of anyone who doesn't have the money invested or converted to real assets. Driving asset/speculation booms.
3 I agree legal tender laws have existed for a long time, but if you advocate competing currencies then legal tender laws will quickly chase the good money out of the system.
4. Anything back by a physical commodity that people want is not a fiat currency:
>>the government up and tells you that something is money, >>therefore it's worth more than it should be for any >>practical purpose.
The government doesn't have to tell you that something is money the market can decide on what it wants to use as a medium of exchange.
5. The US went off the gold standard in the 1970s and gold was still used for things besides money so I don't really see how that argument holds water.
Lastly
>> Given the choice, a currency that can be managed to prevent serious financial problems is preferable to a currency that can't.
Do you mean like how it's currently managed now? how it was managed in the great depression? Manipulation of the primary information mechanism in the world may be able to change people's behavior but only by misleading them, and only for a temporary amount of time.
"The consequences of deflation IMHO are overblown -- eventually people will need purchase goods and stop saving/hoarding."
Eventually, yes, but as a noted economist once said, in the long run we're all dead. The point is that there's a real and significant economic cost to deflation, one that is much greater than the economic cost of inflation to an equivalent degree.
"Massive inflation on the other hand, Zimbabwe today, or Weimer Germany (getting paid 3 times each day) are real threats and will rob the life savings of anyone who doesn't have the money invested or converted to real assets."
I don't see any risk of that happening to the currency in a major country that isn't completely corrupt or totally broke. One thing the Fed is able to do is prevent hyperinflation. Mild inflation, which is what we've had instead, is probably the best long-term target for currency to take.
"I agree legal tender laws have existed for a long time, but if you advocate competing currencies then legal tender laws will quickly chase the good money out of the system."
"Competing currencies", as you put it, is simply a barter system. There's no way that civil law or tax law could even work without legal tender laws, and in any case, going back to barter would be a bad solution to a non-problem.
"The US went off the gold standard in the 1970s and gold was still used for things besides money so I don't really see how that argument holds water."
The US has been cheating on the gold standard since the FDR administration anyway--and there's been enough economic growth since then to create a really big wealth-to-gold ratio compared to what it was back then. If you take the level of M2 in the United States and divide it by the US gold reserves, which is what a US return to the gold standard would require, the resulting price of gold would be orders of magnitude above what it is now and what is affordable for any feasible purpose.
"Do you mean like how it's currently managed now? how it was managed in the great depression?"
As you yourself just noted, during the Great Depression we were on the gold standard. That was actually one of the causes of the Depression.
All money is simply a barter system; money is a commodity that is traded that, there is nothing stopping and in fact many stores do have prices in dollars and euros, etc. So there is no problem with competing currencies, the problem you mention with taxes is easily fixed by specifying in what currencies your taxes will be payable in. Eventually we settle on 1 or 2 currencies, but if there was ever a problem there would not be legal reasons for creating a new one.
"I see runaway inflation as a serious threat to the united states, and I think it is very possible."
Do you have any historical evidence that it's happened in our system or in other systems like ours? The main flaw I see in your argument is your conflation of mild inflation with runaway inflation.
The kicker is, runaway inflation would happen just as readily even under a gold standard if major new gold sources are discovered, or if another major power sells their gold reserves. We have even less control over that risk than we have over the Fed.
"All money is simply a barter system..."
Yes, except you have to have a common medium of exchange that's widely accepted, and a situation without legal tender laws would eliminate that.
The thing is, once you define what currency you accept taxes in and what currency legal judgments are determined in...you have legal tender laws by definition.
1. Your first point is incorrect, when a massive amount of gold is found there will be inflation -- but it won't be runaway, prices will quickly come to reflect expected future increases in the monetary supply whereas when the government prints it there is no limit. That is why people advocate tying it to something tangible. To limit their ability to inflate.
2. You can define that you accept taxes in the following currencies; and then when defining contracts you can specify what you will be paid in. The legal judgements would support that.
It's no secret that banks use a fractional reserve. That's why it's not fraud--it can't be fraud if the way the system works is totally transparent to everyone involved.
That's like saying, "if any other professional did what proctologists do, they'd be prosecuted for sexual assault".