Ep. 141 Do You Want the Crankish Monetary System We Have Now, or This Other Crankish Monetary System?

2 June 2018     |     Tom Woods     |     7

It’s one thing to find problems with the current monetary system. It’s quite another to recommend an alternative. Switzerland has establishment commentators going berserk over its own proposal — why, this would return us to the “Dark Ages,” warns Business Insider. We’re less interested in Switzerland than we are in figuring out what changes would move us in the right direction, and what changes would amount to the cure being worse than the disease.

Articles Mentioned

Switzerland is about to vote on whether to send its financial system back to the Dark Ages in a referendum to ban banks from creating moneyFiat Money and the Euro Crisis,” by Will Martin
Popular initiative ‘For crisis-safe money: Money creation by the National Bank only! (Sovereign Money Initiative)’” (The Federal Council of the Swiss Government)

Professor Herbener’s Congressional Testimony

Separation of Money and State

Related Articles

Is Our Money Based on Debt?,” by Bob Murphy
What Does “Debt-Based” Money Imply for Interest Payments?,” by Bob Murphy
Why Fractional Reserve Banking Poses a Threat to Market Stability,” by Bob Murphy

Episode Mentioned (Tom Woods Show)

Ep. 269 End the Fed, Then What? (Jeff Herbener)

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  • DMS

    I think the argument against fractional reserve banking can be shown to be wrong on its own terms, at least as presented here. Specifically, it is not fractional reserve banking that results in banking instability, but rather poor underwriting and/or liquidity mis-management. Specifically:

    1. Bob concedes that there would be no issues if, rather than checkable deposits, consumers bought Certificates of Deposit (CDs). See 15:30 mark.

    2. Assume all consumers put 10% of their money into checkable deposits and buy 5-yr CDs with the rest of their funds. Assume the bank keeps the 10% in vault cash (or the equivalent – deposits at the Fed), and loans the other 90% out to worthy creditors, also for 5 year terms. Presumably no issue presents itself given point #1 above.

    3. Assume instead that the same type of arrangement exists as above, but that the matched durations are instead 3 years each. Also, presumably no issue arises.

    4. Now instead assume the matched durations are one year. Again no issue exists, as would continue to be the case by assuming durations of 6 months, 3 months, etc.

    5. Now, finally assume that the CDs are immediately redeemable, and that the matching loans issued by the bank are immediately callable. It simply makes no sense to speak of this situation as “creating money” let alone “creating money out of thin air”, nor would it be correct to consider it unbacked lending, i.e. not from previously saved funds.

    And yet, the final scenario above is precisely the situation of real-world fractional reserve banking, except that the deposits are of zero duration, while the bank loans are not. That doesn’t make anything “fractional” – it just means the balance sheet of a bank has unmatched durations for assets and liabilities. Again, putting aside bad credit underwriting, it is clearly the issue that mis-matched duration is the source of any potential banking risk, not the mathematical articulation of “fractional reserve” banking. By the way, this is precisely what banks are designed to accomplish in the market (other than mere warehousing), which is to borrow short and lend long. This banking need exists because the overall market seeks the opposite, which is to lend short and borrow long.

    Perhaps the central confusion arises because the pricing offered to the customer should differ between vault cash and loaned funds, but the customer is presented with a single blended price (or return). For example, a given customer might pay a fee for his/her 10% vault cash, but earn a rate of return on his/her immediately redeemable CDs. But bundling the two into a single price (which can be done because all the accounts are fungible and held in the same 90/10 ratio) does not magically make anything “fractional”.

    Banking instability occurs when there is poor management of the inherent risk of mis-matched durations, i.e. liquidity. It is NOT because 90% of a bank customer’s funds are arbitrarily labeled “deposits” rather than “immediately redeemable certificates of deposit”, nor because the separate pricing of each is hidden in a single blended rate.

  • http://2vnews.com 2VNews

    What would happen if the only things that changed were that gold, silver and cryptocurrencies were treated as as legal tender (not as assets) for tax purposes and tax collection?

  • ProfessorBernardoDeLaPaz

    Fie on Greenbacks and Greenbackers! I prefer the Wheatback, myself, backed up by both Hard Money and United $tate$ Legal Tender. Trade ’em with your friends! For example:
    https://thegreigharea.com/2017/12/23/im-beginning-to-appreciate-verbal-easements/

  • Charles Rosa

    I’m about halfway through this podcast….awesome. I love when you guys discuss fractional reserve
    banking….

  • Charles Rosa

    This was a great podcast. I would recommend this to anyone wanting to better understand money. Great job!

  • Bob_Robert

    I only disagree with the “plain inflation doesn’t cause business cycles” because we have an example of it happening.

    During the Spanish Empire period, so much gold and silver was imported into Spain from its slave-labor mines around the world, they entered a HUGE boom period, with all that same mal-investment which, when it busted, took Spain into the backwater of history for hundreds of years.

    • Bob_Robert

      I can also see un-due downward pressure on interest rates because of competition between lenders and the “free” money from the central bank.