What is the Objectivist alternative to the Federal Reserve?


Derek McGowan

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Okay, help me out. I just recently listened to a refresher on the creation of the federal reserve and I'm not seeing what the alternative is. The alternative is not "we would have a bunch of competing currencies in an open market" That answer sounds a little too theoretical and not enough applied. Why? because that would only assume that the government is somehow the one entity that keeps us on a greenback standard. According to the history, the government created two national banks that ran for 20 years a piece many years ago but their charters were not renewed. Many years after that it was the banks themselves, not the government, led by JP Morgan (one of the few who was properly rocking the monopoly mustache) at Jekyll Island who decided to form this central bank using their government lackeys to enforce their decision.

So you say, there, you have government involvement and that is bad. But I say that they didn't really need government backing to still become the de facto standard especially not today. The top ten banks today control 50% + of the market share. http://www.fool.com/investing/general/2013/10/02/10-biggest-banks-by-deposits.aspx

If today the fed was dissolved and banks were able to print their own currencies and the top ten said that they would establish a standard among them (and why wouldn't they since it was their idea in the first place), I don't really see many other banks not following their lead especially when the smaller banks (having much much smaller deposit bases) would have to borrow from the larger banks and would have to use the standard for efficiency or for contractual reasons. In this case we would have almost the same system as we have now.

There are many de facto standards that are in the world today that were not established or enforced by the government. Starting with currency, the world standard is the dollar. That was not established by the United Nations and it is enforced by a matter of efficiency in trade. The CD standard, the DVD standard, the two and three prong power cord/ outlet standard, the language in the local area that you live, base 10, etc. Many times we get upset if you need to fix something or find something and the store layout is different from you local one or the parts don't fit your specific brand. Simplicity is desirable.

Yes there are competing standards to may things in the world. There is the Mac vs PC thing but when you have Windows at a 90% market share of desktop operating systems, then Windows is the de facto standard. http://en.wikipedia.org/wiki/Usage_share_of_operating_systems

Currency today has many competing forms to the dollar. Where I live we have the local B-Note. I've never used it. Why, because everyone doesn't take it. In Boston they have the Boston Bean, they have the BerkShare in Berkshire. We have Bitcoins and Litecoins. But the de facto standard is the dollar.

Ask yourself. If the fed was dissolved tomorrow and the top 10 banks decided to continue printing greenbacks (that didn't say Federal reserve on them) wouldn't you continue to use them? And if the majority of Americans continued to use what ever the big banks used, how would that be substantially different from the Fed today? There would still be inflation. There would possibly be even more cronies operating in the world. The big banks definitely wouldn't return to gold and they probably would increase the fractional reserve ratio by quite a bit (secretly because they would not be required to reveal that sort of information)

So what is the practical alternative? Or maybe I have my history wrong...

ps. led by JP Morgan (one of the few who was properly rocking the monopoly mustache) maybe Wyatt Earp did as well : )

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Like slavery or wife beating, fractional reserve banking depends on a legal system that permits it. Some Objectivists and libertarians have defended as moral the practice of issuing certificates of ownership of the same specific quantity of gold to two or more people simultaneously. I and others regard that as fraud. A thing cannot be exclusively owned by one person and then a second person at the same time. It is not new property that is being created; it is new titles to the same property. Note: this is not the same thing as two people sharing ownership of, say, a vacation condo. Mr. A owns half. Mr. B owns half. So far, no fraud. But Mr. B cannot then print out additional property titles that state "The Certificate Represents Half Ownership of Condo B-4" and sell the certificates to Messrs. C, D, E, F, G, H, I, and J.

You can say it is not the government but banks that are creating new money (with diminished value). But if government treats the issuance of new certificates as legitimate and not as fraudulent, then the government is supporting through its legal monoploy an involuntary transfer of wealth. Just as Mr. C's certificate of half ownership of B-4 is diminished in value, if D, E, F, G, H, I, and J own it also, a dollar bill representing a certain fraction of an ounce of gold falls in value if additional and identical certificates are printed and issued without a proportionate increase in the gold backing.

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The government supporting or acting against the practice of fractional banking requires some sort of oversight and regulation. If we take government out of the fed then there would be no oversight. Then the only way for the banks to be held to the fraud is if a customer went to get there money out and it wasn't there. Only then would they even be aware of the practice of fractional banking. Only then could they sue the bank. But just as today, most people don't run to the bank all at once, therefore the bank always has enough currency on hand to satisfy demand. Also even if they didn't, they could always print more each morning.

Just because it is fraud doesn't mean they could be accused of it unless there was active oversight and active oversight is not what we are looking for

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Derek, I recommend you read this ebook version of Bagehot's Lombard Street: A Description of The Money Market (1873)

 

It's not necessary or desirable for banks to keep 100% reserve against demand deposits, no matter what Francisco thinks about it. Banks and bill brokers make money by lending. The very most conservative bank keeps 30-40% reserves in specie and bonds, which restricts its ability to pay share dividends. Most joint-stock and country banks kept a 10-20% reserve in the early days of private deposit banking. Modern "Tier 1" rules are slightly more liberal, but if governments repealed deposit guarantee insurance like FDIC, reserves would have to rise again to the 10-20% historic private bank reserve ratio.

 

Deposit banking, discounting bills of exchange, and fractional reserve lending is an engine of economic growth. Before people deposited coin in a bank to earn interest on their deposits, private banks issued notes to raise loanable funds. There is nothing inherently wrong with competing "currency" of bank notes, and in fact that's precisely the situation today. Dollars, rubles, euros, yen, bhat, and yuan fluctuate daily. I keep an eye on Australian dollars because I have a "carry trade" hedge. Keep in mind that bill brokers (commercial paper, letters of credit) handle tens of billions daily. Shadow banking rehypothecation ("leverage") is vastly greater than commercial bank loans.

 

Bagehot is an authoritative, easy to understand source for understanding bank history, still applicable today. The Federal Reserve Open Market operations have little to do with bank funding or interest rates, despite what anyone thinks or says about it. Their sole concern is Treasury funding and "prime dealer" liquidity to float more government IOUs. Federal Reserve notes (dollar bills in your pocket) are a very small sliver of the money (M2, M3, total liquidity L) in circulation. Most money is credit extended by commercial banks and hedge funds.

 

Parenthetically, the great problem today as in the 1930s is collapse of velocity, i.e., how many times money changes hands.


Excess reserves are rising
Excess.png

Velocity fell sharply, stagnated
VM.png
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I've heard free banking, but I'd like to ask: why do we need an alternative to it? This is just a general question. I mean, I sure as hell am not interested in an alternative to, say, censorship. That aside, the idea of "competing currencies" still doesn't make sense to me.

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Like slavery or wife beating, fractional reserve banking depends on a legal system that permits it. Some Objectivists and libertarians have defended as moral the practice of issuing certificates of ownership of the same specific quantity of gold to two or more people simultaneously. I and others regard that as fraud. A thing cannot be exclusively owned by one person and then a second person at the same time. It is not new property that is being created; it is new titles to the same property. Note: this is not the same thing as two people sharing ownership of, say, a vacation condo. Mr. A owns half. Mr. B owns half. So far, no fraud. But Mr. B cannot then print out additional property titles that state "The Certificate Represents Half Ownership of Condo B-4" and sell the certificates to Messrs. C, D, E, F, G, H, I, and J.

You can say it is not the government but banks that are creating new money (with diminished value). But if government treats the issuance of new certificates as legitimate and not as fraudulent, then the government is supporting through its legal monoploy an involuntary transfer of wealth. Just as Mr. C's certificate of half ownership of B-4 is diminished in value, if D, E, F, G, H, I, and J own it also, a dollar bill representing a certain fraction of an ounce of gold falls in value if additional and identical certificates are printed and issued without a proportionate increase in the gold backing.

Aha! Rothbardian sophistry! I knew I had you pegged for one. If they tell you in advance and you agree, then it's not fraud by any sensible definition of the term since they're not fucking LYING to you.

FRB does not create new property titles. It's a goddamn currency system. If you had your way, then in-game credits, gift certificates, and Bitcoin would be outlawed as "fraud".

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The government supporting or acting against the practice of fractional banking requires some sort of oversight and regulation. If we take government out of the fed then there would be no oversight. Then the only way for the banks to be held to the fraud is if a customer went to get there money out and it wasn't there. Only then would they even be aware of the practice of fractional banking. Only then could they sue the bank. But just as today, most people don't run to the bank all at once, therefore the bank always has enough currency on hand to satisfy demand. Also even if they didn't, they could always print more each morning.

Just because it is fraud doesn't mean they could be accused of it unless there was active oversight and active oversight is not what we are looking for

Does a legal system than bans the forging of checks require a Federal Bureau of Check Protection? Why isn't that a matter to be handled by the same police department that enforces other laws against fraud?

And why does financial oversight have to be a government matter? There is no reason why independent agencies that check the books, verify the integrity of gold reserves and other assets, and provide deposit insurance have to be staffed by people receiving a tax-funded paycheck.

I believe this is just another version of "How can we make sure the drugs we take are safe unless we have the FDA?"

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It always puzzles me that folks expect laissez faire to be safer and easier than government regulation.

I know, right? It's like they feel that they need to say/believe that in order to justify laissez-faire whether to themselves or others. Where are the people who will just bite the bullet and admit: "Yes, there is a possibility that this could be more complicated, bit that's just the price of freedom."?

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Like slavery or wife beating, fractional reserve banking depends on a legal system that permits it. Some Objectivists and libertarians have defended as moral the practice of issuing certificates of ownership of the same specific quantity of gold to two or more people simultaneously. I and others regard that as fraud. A thing cannot be exclusively owned by one person and then a second person at the same time. It is not new property that is being created; it is new titles to the same property. Note: this is not the same thing as two people sharing ownership of, say, a vacation condo. Mr. A owns half. Mr. B owns half. So far, no fraud. But Mr. B cannot then print out additional property titles that state "The Certificate Represents Half Ownership of Condo B-4" and sell the certificates to Messrs. C, D, E, F, G, H, I, and J.

You can say it is not the government but banks that are creating new money (with diminished value). But if government treats the issuance of new certificates as legitimate and not as fraudulent, then the government is supporting through its legal monoploy an involuntary transfer of wealth. Just as Mr. C's certificate of half ownership of B-4 is diminished in value, if D, E, F, G, H, I, and J own it also, a dollar bill representing a certain fraction of an ounce of gold falls in value if additional and identical certificates are printed and issued without a proportionate increase in the gold backing.

Aha! Rothbardian sophistry! I knew I had you pegged for one. If they tell you in advance and you agree, then it's not fraud by any sensible definition of the term since they're not LYING to you.

FRB does not create new property titles. It's a goddamn currency system. If you had your way, then in-game credits, gift certificates, and Bitcoin would be outlawed as "fraud".

If the bill says, "This certificate represents 1/10 of an ounce of gold held at the First National Bank," and the bank issues more than one certificate for the very same 1/10 of an ounce of gold, then it is fraud. If the bill says, "You may redeem this certificate for 1/10 of an ounce of gold held at the First National Bank until we run out because we issued 20 other certificates for the exact same quantity of gold," then it is not fraud.

Now since it is your habit to make statements that cannot be verified by any reference to reality, I do not expect you to be able to provide any proof that "my way" would mean banning gift certificates or Bitcoin.

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Like slavery or wife beating, fractional reserve banking depends on a legal system that permits it. Some Objectivists and libertarians have defended as moral the practice of issuing certificates of ownership of the same specific quantity of gold to two or more people simultaneously. I and others regard that as fraud. A thing cannot be exclusively owned by one person and then a second person at the same time. It is not new property that is being created; it is new titles to the same property. Note: this is not the same thing as two people sharing ownership of, say, a vacation condo. Mr. A owns half. Mr. B owns half. So far, no fraud. But Mr. B cannot then print out additional property titles that state "The Certificate Represents Half Ownership of Condo B-4" and sell the certificates to Messrs. C, D, E, F, G, H, I, and J.

You can say it is not the government but banks that are creating new money (with diminished value). But if government treats the issuance of new certificates as legitimate and not as fraudulent, then the government is supporting through its legal monoploy an involuntary transfer of wealth. Just as Mr. C's certificate of half ownership of B-4 is diminished in value, if D, E, F, G, H, I, and J own it also, a dollar bill representing a certain fraction of an ounce of gold falls in value if additional and identical certificates are printed and issued without a proportionate increase in the gold backing.

Aha! Rothbardian sophistry! I knew I had you pegged for one. If they tell you in advance and you agree, then it's not fraud by any sensible definition of the term since they're not LYING to you.

FRB does not create new property titles. It's a goddamn currency system. If you had your way, then in-game credits, gift certificates, and Bitcoin would be outlawed as "fraud".

If the bill says, "This certificate represents 1/10 of an ounce of gold held at the First National Bank," and the bank issues more than one certificate for the very same 1/10 of an ounce of gold, then it is fraud. If the bill says, "You may redeem this certificate for 1/10 of an ounce of gold held at the First National Bank until we run out because we issued 20 other certificates for the exact same quantity of gold," then it is not fraud.

Now since it is your habit to make statements that cannot be verified by any reference to reality, I do not expect you to be able to provide any proof that "my way" would mean banning gift certificates or Bitcoin.

My God, you seriously believe "represents" means "exactly substitutable for" to? It "represents it" in the way that it's redeemable for one tenth of an ounce of gold. Swallow your own medicine: if you don't like it, then shop somewhere else.

Gift certificates work the exact same way as gold certificates because they, in your terms, "represent" some amount of power to purchase.

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I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery.

That depends on them viewing taxation as robbery, which most people don't.

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My God, you seriously believe "represents" means "exactly substitutable for" to? It "represents it" in the way that it's redeemable for one tenth of an ounce of gold. Swallow your own medicine: if you don't like it, then shop somewhere else.

Gift certificates work the exact same way as gold certificates because they, in your terms, "represent" some amount of power to purchase.

You obviously know nothing of the history of gold certificates in banking.

To repeat, if a bank wants to issue certificates and makes it clear that such paper does not necessarily correspond to anything of value held by the bank, then no one has been deceived. The same is true of gift certificates. Either they are or are not redeemable for something of value at the issuing institution.

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I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery.

That depends on them viewing taxation as robbery, which most people don't.

You might as well say that the number of justices currently serving on the Supreme Court depends on what the majority of people think. If people give to Washington on April 15 out of the servility of their own hearts, they are not being robbed.

The next time you poll the populace on whether or not taxation is robbery, ask them if they would send the IRS a check for less than billed if they were legally allowed to do so.

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If the bill says, "This certificate represents 1/10 of an ounce of gold held at the First National Bank"...

I have an unallocated certificate from the Perth Mint, denominated in ounces, a claim (one among many thousands) against their gold ore and refining inventory. For a very reasonable fee, I can ask them to convert it to coin, which I've done in the past with other certificates. However, it is not dead certain that they can redeem all outstanding certificates in coin during the same week, month, or year. It depends on how much gold they have on hand. This limitation does not deter people like me from buying certificates. They aren't assignable to anyone else, banks won't take them as collateral, and my investment amounts to a bet that Perth Mint will continue to redeem gold certificates when I (and many thousands of other people) ask them to.

Same thing with bank deposits, stocks, bonds, mortgages, paper money -- you name it. There are no risk-free securities of any kind.

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I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery.

That depends on them viewing taxation as robbery, which most people don't.

You might as well say that the number of justices currently serving on the Supreme Court depends on what the majority of people think.

I'm not saying that because most people taxation is theft makes that true. I'm saying you can't level the charge of irony at people who don't believe taxation is theft with the possible exception of some minarchists.

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If the bill says, "This certificate represents 1/10 of an ounce of gold held at the First National Bank"...

I have an unallocated certificate from the Perth Mint, denominated in ounces, a claim (one among many thousands) against their gold ore and refining inventory. For a very reasonable fee, I can ask them to convert it to coin, which I've done in the past with other Perth Mint certificates. However, it is not dead certain that they can convert all outstanding certificates during the small week, month, or year. It depends on how much gold they have on hand. This limitation does not deter people like me from buying Perth Mint certificates. They aren't assignable to anyone else. Banks won't take it as collateral, and my investment amounts to a bet that Perth Mint will continue to redeem my gold certificates when I ask them to.

Same thing with bank deposits, stocks, bonds, mortgages, paper money -- you name it. There are no risk-free securities of any kind.

You'd think that this would be obvious, but it's amazing what people can make themselves believe when they put their minds to it. I promise to get a cake to someone who orders and on the way to delivering it I'm robbed of it. Doesn't that make me guilty of fraud? No, of course not. I'd be no more guilty of fraud than I'd be of being a coconspirator to commit robbery.

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I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery.

That depends on them viewing taxation as robbery, which most people don't.

You might as well say that the number of justices currently serving on the Supreme Court depends on what the majority of people think.

I'm not saying that because most people taxation is theft makes that true. I'm saying you can't level the charge of irony at people who don't believe taxation is theft with the possible exception of some minarchists.

I'm not charging people with irony but with moral inconsistency. If I cannot legally force a man to give me a portion of his income, why should a government employee have that right?

Furthermore, I do not have any recent poll numbers on how many people do not regard taxation as theft. Therefore, before you go further with this argument, back up what you claim.

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...ignores the safeguards of its own founding document and is financed by robbery.

Lost me. Which "founding document"? -- the U.S. Constitution as duly amended 27 times? Supreme Court case law?

You know, the one that says something about the right to keep and bear arms.

How does the 2nd Amendment pertain to taxation?

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If the bill says, "This certificate represents 1/10 of an ounce of gold held at the First National Bank"...

I have an unallocated certificate from the Perth Mint, denominated in ounces, a claim (one among many thousands) against their gold ore and refining inventory. For a very reasonable fee, I can ask them to convert it to coin, which I've done in the past with other Perth Mint certificates. However, it is not dead certain that they can convert all outstanding certificates during the small week, month, or year. It depends on how much gold they have on hand. This limitation does not deter people like me from buying Perth Mint certificates. They aren't assignable to anyone else. Banks won't take it as collateral, and my investment amounts to a bet that Perth Mint will continue to redeem my gold certificates when I ask them to.

Same thing with bank deposits, stocks, bonds, mortgages, paper money -- you name it. There are no risk-free securities of any kind.

You'd think that this would be obvious, but it's amazing what people can make themselves believe when they put their minds to it. I promise to get a cake to someone who orders and on the way to delivering it I'm robbed of it. Doesn't that make me guilty of fraud? No, of course not. I'd be no more guilty of fraud than I'd be of being a coconspirator to commit robbery.

A certificate that entitles the bearer to receive a certain number of ounces of gold in a bank is not the same as a stock certificate, which does not warrant the return of the investment. The baker that gets robbed on his way to a wedding is not absolved of his fiduciary responsibility to the purchaser of the cake.

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...ignores the safeguards of its own founding document and is financed by robbery.

Lost me. Which "founding document"? -- the U.S. Constitution as duly amended 27 times? Supreme Court case law?

You know, the one that says something about the right to keep and bear arms.

How does the 2nd Amendment pertain to taxation?

I wrote, "I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery."

To guard their freedoms, many people place their trust in the very institution that is the greatest violator of rights, specifically to keep what they have peacefully acquired and to bear arms in the defense of those acquisitions.

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How does the 2nd Amendment pertain to taxation?

I wrote, "I'm always surprised that some people think that the institution that is best able to guard against force and fraud is the one that ignores the safeguards of its own founding document and is financed by robbery."

To guard their freedoms, many people place their trust in the very institution that is the greatest violator of rights, specifically to keep what they have peacefully acquired and to bear arms in the defense of those acquisitions.

"Like most rights, the Second Amendment right is not unlimited. It is not a right to keep and carry any weapon whatsoever in any manner whatsoever and for whatever purpose: For example, concealed weapons prohibitions have been upheld under the Amendment or state analogues. The Court’s opinion should not be taken to cast doubt on longstanding prohibitions on the possession of firearms by felons and the mentally ill, or laws forbidding the carrying of firearms in sensitive places such as schools and government buildings, or laws imposing conditions and qualifications on the commercial sale of arms. Miller’s holding that the sorts of weapons protected are those 'in common use at the time' finds support in the historical tradition of prohibiting the carrying of dangerous and unusual weapons" [machine guns, nuclear bombs, chemical weapons, explosives]. District of Columbia v. Heller, 554 U.S. 570 (2008)

"It is axiomatic that the power of Congress to tax is extensive and sometimes falls with crushing effect on businesses deemed unessential or inimical to the public welfare, or where, as in dealings with narcotics, the collection of the tax also is difficult. As is well known, the constitutional restraints on taxing are few... The remedy for excessive taxation is in the hands of Congress, not the courts." United States v. Kahriger, 345 U.S. 22 (1953)

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