What is the Objectivist alternative to the Federal Reserve?

[Francisco Ferrer]

I'm always fascinated when modern judges discover that what the Founders meant by "the right to keep and bear arms" is actually the "not unlimited right to keep and bear arms."

[Wolf DeVoon]

I'm always fascinated when modern judges discover that what the Founders meant by "the right to keep and bear arms" is actually the "not unlimited right to keep and bear arms."

Let's drop the Constitution, please. It was a charter of power from the start, power expanded by amendment, legislation, and not entirely illogical Supreme Court case law. You're complaining about the handiwork of majorities, universal suffrage, frequent and fair elections.

Much better to start over from scratch:

Ayn Rand had the right idea. The guiltiest of men are the natural oligarchs...This is the moral meaning of inequality.

When the men of brains collaborate with a mob of dullards, it's unfair to blame the resultant calamity on a crowd of

pickpockets and cheerleaders. [Laissez Faire Law, p.41-42]

This post edited for clarity

[Francisco Ferrer]

I'm always fascinated when modern judges discover that what the Founders meant by "the right to keep and bear arms" is actually the "not unlimited right to keep and bear arms."

Let's drop the Constitution, please. It was a charter of power from the start, power expanded by amendment, legislation, and case law.

Much better to start over from scratch:

"Ayn Rand had the right idea. The guiltiest of men are the natural oligarchs... Instead of giving Harry Truman the atomic bomb,

it could have and should have been developed in a laboratory at Galt's Gulch." [Laissez Faire Law, p.41]

I'll drop the Constitution as an example of fraud and hypocrisy as soon as government and its defenders admit that it is merely the velvet glove that conceals the armored fist.

[Samson Corwell]

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.

For the same reason you can't punish someone else's kids, organize your own kangaroo courts, paint your neighbor's house, or pirate software: differing positions/roles in the social web. If we took "initiation of force" in the strictest sense, then we wouldn't be able to have property, public or private.

[Wolf DeVoon]

I'll drop the Constitution as an example of fraud and hypocrisy as soon as government and its defenders admit that it is merely the velvet glove that conceals the armored fist.

It's not denied, but openly acknowledged, no fraud or hypocrisy involved. It's the law of the land, duly constituted, widely supported.

[Samson Corwell]

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.

Actually, he is. Sane people don't punish people for things beyond their control. And besides, the contract certainly doesn't say he can be punished. Similarly, X can't be fraud if there is no intent to commit it. Oh, and you really ought to pick up a legal dictionary before you use legalese so haphazardly. It's an initiation of force against my sensibilities, don't you know?

[Wolf DeVoon]

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.

Perhaps I was unclear. The gold certificate is not payable to bearer; it's a contractual claim on Perth Mint's net assets. Likewise, a share certificate is part ownership of a company and all of its net assets. I have a company that issued shares. The fact that I hold a majority of shares doesn't disenfranchise other shareholders. They have a right to quarterly reports and recourse if the company is mismanaged.

[Wolf DeVoon]

The baker that gets robbed on his way to a wedding is not absolved of his fiduciary responsibility

Fiduciary

A person legally appointed and authorized to hold assets in trust for another person.

Grantor

All trusts have a grantor, sometimes called a "settler" or "trustor". This is the person that creates the trust and is the one who has the legal capacity to transfer property held under the trust.

Trustee

The trustee of the trust can be any legal individual or corporation that can take title to property on behalf of a beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document, and must do so in the best interest of the beneficiary. This person may be the grantor, the spouse or adult child of the trust or a third party. It is important to note that the trustee must be prepared to be held accountable to the grantor and/or beneficiaries.

Beneficiary

The beneficiary is the person benefiting from the trust. The beneficiary can be one or multiple parties. Multiple trust beneficiaries do not have to have the same interests in the trust property. An interesting thing about trust beneficiaries is that they do not have to exist at the time the trust is created.

[investopedia]

[Derek McGowan]

Just got back in from seeing Dawn of the Planet of the Apes....

Francisco, you have not answered my initial question and since Samson and Wolf seem to be responding to your remarks, I'll ask you again-

What is the reality based practical alternative to the Fed, taking into consideration that the de facto standard and the consolidation of power (majority of market share) is a desired outcome of the big banks?

In my mind, either we have the Federally backed private reserve that controls the supply of Dollars (not the other currencies as Wolf has pointed out) or we have the Privately backed private reserve that controls the supply of Dollars. Whats the difference?

[Selene]

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

Haven't even scanned this yet - Looks a tad Eurocentric to me...

http://mises.org/books/History_of_Banks_Hildreth.pdf

[moralist]

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.

I believe the banks do that now, as every bill clearly declares that it is legal tender for private and public debts, while making no claims of representing anything of intrinsic value. So it is only a medium of exchange as long as the buyer and seller agree that's what it is. This tacit agreement however ethereal, seems to be quite durable in actual practice.

Greg

[BaalChatzaf]

Just a question: How would a capitalistic industrial economy grow without an expanding money supply. If more and more is being produced and the money stock is fix and money velocity is pegged then eventually prices will fall. When that happens people will hoard money and in effect reduce the stock. It sound like some kind of "future money" must be introduced to increase productivity through innovation and capitalization. Future production will "redeem" the future money so that it actually has something to buy. Prices will remain stable or increase slowly which will decrease the impulse to hoard money.

[syrakusos]

What is the reality based practical alternative to the Fed, taking into consideration that the de facto standard and the consolidation of power (majority of market share) is a desired outcome of the big banks?

In my mind, either we have the Federally backed private reserve that controls the supply of Dollars (not the other currencies as Wolf has pointed out) or we have the Privately backed private reserve that controls the supply of Dollars. Whats the difference?

Derek, I am sorry that I did not see this earlier and save you from a lot of wasted effort. First of all, bank clearing houses began in London England in the late 17th century. In those days, runners went from bank to bank with bills ("checks" or "drafts") to get them "cleared" i.e. paid. But boys being boys, they stopped off at coffee houses. There, they met. There, they exchanged their bills of credit, their drafts, or "checks." That was one tap root or tendril...

The era 1811-1857 in America was a time of almost pure laissez-faire in banking. (Some state-level licensing was required.) Boston banks faced a problem: rural banks in outstate Massachusetts issued notes (banknotes, "paper money") payable in faraway places. So, the Suffolk Bank of Boston organized a process. They gathered these notes and sent couriers on horseback to redeem them for hard money. The Suffolk System was touted by Murray Rothbard in A History of Money and Banking in the United States.

You seem to be looking for a "banker of last resort" a so-called "banker's bank." Again, Suffolk was that, however limited. In fact, you need to look at the Clearing Houses during the Panic of 1893. If you browse with Google Images for "Clearinghouse Scrip 1893" you will see many artifacts of ad hoc currency created by banks for banks to tide them through an emergency. The clearinghouses were ad hoc bankers of last resort, i.e., banker's banks. That seems to be the path you are pursuing.

I apologize for grinding an old ax, but these libertarians know nothing about money. If you want to study money, you need to discover numismatics,.

Numismatics: the standard of proof in Economics on my blog.

Numismatics Informs Economics on my blog.

Scripophilly: the Study of Stocks and Bonds on my blog.

[Brant Gaede]

The alternative to the Federal Reserve is the separation of banking and money from government.

--Brant

[syrakusos]

The alternative to the Federal Reserve is the separation of banking and money from government.

Brant, you are so totally full of libertarian ideological silliness that I must ask you something:

Are you allowed to create your own money?

http://www.michigancoinclub.org/articles04.html

Are you allowed to create your own bank?

Why is the Federal government prohibited from these?

Can the government not create its own money?

What prohibits the government from having its own painters? ... or its own bank?

Unlimited Constitutional Government here.

Another Example of Unlimited Constitutional Government

I hereby call on the Federal government to create liquid assets.

[Derek McGowan]

Brant, that doesn't really answer the crux of the problem.

Marotta, I thought numismatic was just the collecting of money not the history. I'll definitely be reading your links in the morning

[Samson Corwell]

What is the reality based practical alternative to the Fed, taking into consideration that the de facto standard and the consolidation of power (majority of market share) is a desired outcome of the big banks?

In my mind, either we have the Federally backed private reserve that controls the supply of Dollars (not the other currencies as Wolf has pointed out) or we have the Privately backed private reserve that controls the supply of Dollars. Whats the difference?

Derek, I am sorry that I did not see this earlier and save you from a lot of wasted effort. First of all, bank clearing houses began in London England in the late 17th century. In those days, runners went from bank to bank with bills ("checks" or "drafts") to get them "cleared" i.e. paid. But boys being boys, they stopped off at coffee houses. There, they met. There, they exchanged their bills of credit, their drafts, or "checks." That was one tap root or tendril...

The era 1811-1857 in America was a time of almost pure laissez-faire in banking. (Some state-level licensing was required.) Boston banks faced a problem: rural banks in outstate Massachusetts issued notes (banknotes, "paper money") payable in faraway places. So, the Suffolk Bank of Boston organized a process. They gathered these notes and sent couriers on horseback to redeem them for hard money. The Suffolk System was touted by Murray Rothbard in A History of Money and Banking in the United States.

You seem to be looking for a "banker of last resort" a so-called "banker's bank." Again, Suffolk was that, however limited. In fact, you need to look at the Clearing Houses during the Panic of 1893. If you browse with Google Images for "Clearinghouse Scrip 1893" you will see many artifacts of ad hoc currency created by banks for banks to tide them through an emergency. The clearinghouses were ad hoc bankers of last resort, i.e., banker's banks. That seems to be the path you are pursuing.

I apologize for grinding an old ax, but these libertarians know nothing about money. If you want to study money, you need to discover numismatics,.

Numismatics: the standard of proof in Economics on my blog.

Numismatics Informs Economics on my blog.

Scripophilly: the Study of Stocks and Bonds on my blog.

Or law, really.

[syrakusos]

Brant, that doesn't really answer the crux of the problem.

Marotta, I thought numismatic was just the collecting of money not the history. I'll definitely be reading your links in the morning

Numismatics is the art and science that studies the forms and uses of money.

Many numismatists collect not a coin, but prefer to read (and collect) books:

http://www.coinbooks.org/

Just one of many...

[Brant Gaede]

Brant, that doesn't really answer the crux of the problem.

Marotta, I thought numismatic was just the collecting of money not the history. I'll definitely be reading your links in the morning

The problem is what are the top ten banks to do? Well, if any survive the transition they'll do what they want to do/can do, avoiding criminal fraud, of course, money and all. Their money, your money, my money--we can all make money, use money, trade money, burn money. In a world of all kinds of money it's hard to have big-way funny money.

--Brant

oh--the poor government, not making money any more!--well, it could, I suppose and I suppose back it with the (stolen) assets of the Federal government (mafia money)

[Selene]

Seems like banking goes back a tad earlier than some are assuming...

Culture of Jinshang

The term Jinshang is a tribute given to merchants from Shanxi Province for their achievements in building China's commercial culture. Jin is the shortened form for Shanxi Province. Although they lived in closed residences, their sense of business possibility was not restricted. It was the Shanxi merchants who first established the Piaohao trade exchange shop in China.

Early in the Spring and Autumn Period (770-476BC), China was still an agricultural society with an undeveloped commodity economy. Salt, at that time, was a necessity in people's daily life; moreover, it was the most important commodity. The abundant salt produced in Shanxi gave rise to the earliest Shanxi merchants.

However, it was during the Ming (1368-1644) and the Qing (1644-1911) dynasties that the Jinshang reached their period of great prosperity. Their footsteps not only covered China but also reached Japan, Southeast Asia, Arabia, and Europe. Their business interests ranged from salt, iron, cotton, silk, and tea to various financial endeavors (including pawnshops, private banks, and account bureaus).

Shanxi merchants were the earliest Chinese dealers trading with Russian merchants, and with the greatest number. The branches of Shanxi-based banks (Piaohao or Piaozhuang) covered not only China but also stretched into Russia, setting up in such cities as Moscow and Petersburg. Shanxi merchants' trading activities were also prosperous in Korea and Japan.

But in a society deficient in efficient commercial regulations, it was not easy for just a few people to achieve great success in their business. What held Shanxi merchants together and made them a strong force was their common adoration of Guan Yu, a respected general of the State Shu in the Three Kingdoms period (220-280). In the commercial halls established by Shanxi merchants, a place to worship Guan Yu could always be found. They adored Guan Yu not simply for his military talents but for his loyalty and honesty, which were two crucial virtues for doing business

[BaalChatzaf]

Brant, that doesn't really answer the crux of the problem.

Marotta, I thought numismatic was just the collecting of money not the history. I'll definitely be reading your links in the morning

Numismatics is the art and science that studies the forms and uses of money.

Many numismatists collect not a coin, but prefer to read (and collect) books:

http://www.coinbooks.org/

Just one of many...

Money in its fullest sense and operations goes beyond coins and hunks of metal. It is abstract.

Any general unit of exchange whose quantity and velocity is properly correlated with the goods and services available for sale can be money.

Unfortunately when governments create such an exchange unit they invariably mismanage its quantity with respect to things that money can buy so we often end up with price inflation.

[Wolf DeVoon]

Just a question: How would a capitalistic industrial economy grow without an expanding money supply. If more and more is being produced and the money stock is fix and money velocity is pegged then eventually prices will fall. When that happens people will hoard money and in effect reduce the stock. It sound like some kind of "future money" must be introduced to increase productivity through innovation and capitalization. Future production will "redeem" the future money so that it actually has something to buy. Prices will remain stable or increase slowly which will decrease the impulse to hoard money.

Let's follow the supposition of a finite money supply, without any "peg" of velocity, for the simple reason that velocity rises and falls according to the expansion or contraction of credit. It's not at all implausible that the base money supply should be finite, if it was gold, for instance. There is a finite amount of gold in the world, most of which has already been mined (165,000 metric tons) compared to new production (2,500 metric tons annually). Traditionally, silver and other precious metals like platinum and palladium are used as money, too. In a pinch, copper and titanium could be traded.

But I like the gold standard, and let's suppose that all other precious and valuable assets are quoted in gold, because bankers want it that way, and in fact there was just such a banking prejudice before it was smashed by The Legal Tender Cases. Gold is most definitely the best of all possible money, and infinitely better (for lenders) than fiat greenbacks, or a sudden flood of cheap silver at a legislatively decreed and confiscatory rate of exchange.

A fixed amount of gold base money (165,000 metric tons worldwide) constitutes the best possible reserves and most widely accepted payment. Jokingly, it's sometimes said that "the golden rule" is: He who has the gold makes the rules! But gold doesn't just sit idly in one place. Quite a lot of it has recently piled up in Japan, Saudi Arabia, Russia, and China. How did that happen? -- by production of goods and services that people wanted and were willing to pay for in scarce gold. Quite a bit piled up in Swiss numbered accounts, too, but that's a fluke of trying to evade taxation and asset forfeiture for stuff like crimes against humanity.

In any case, let's suppose we're primarily concerned with what happens in the United States. There is a fixed amount of gold. Banker A has 20%, Banker B has 15%, Banker C has 10% and so forth. Little community banks have practically no gold reserves at all. John and Mary Doe have never seen a gold coin and mostly trade in silver certificates and copper coins. Banker C is approached with a proposal to finance a very expensive project (say, for instance, a railroad or spaceship, something big). He can't possibly pledge all his reserves, so Banker C syndicates the loan with Banker A and Banker B, each of them pledging as much or as little gold as necessary to cover the massive new proposed enterprise of tomorrow.

Why would they do that? -- because (1) they are convinced the massive new enterprise has positive net present value, and (2) it will generate positive cash flow to make regular interest payments, and (3) it is backed by adequate collateral in the event of miscalculation and/or default on (1) and (2). Very standard lending criteria. What's the collateral, if not gold? -- assets brought into being by the money loaned, plus everything else the project owners pledged as additional guarantee (houses, skyscrapers, factories, equipment, patents).

Next question, in what manner are the proceeds of the loan received by the entrepreneurs? -- a checking deposit at Bank C, backed by syndicate A+B+C reserves. No gold is paid out. The entrepreneurs write gold-denominated checks to their suppliers and workers, who in turn deposit them in Banks A, B, C, D, E, F, etc, creating more deposits (increased velocity of money). When banks lend, the multiplier effect quintuples money in circulation and stimulates growth throughout the economy. It increases demand for whatever the entrepreneurs were building (railroads are too old fashioned, let's say spaceship travel, like Richard Branson's project). That makes it easier to pay loan interest and whittle down the principal.

So, how come nobody wants to be paid gold in hand, by cashing a check? Some will, of course. But most people don't feel comfortable having a pile of gold coins under their mattress, so they deposit them in a bank for safekeeping and to earn deposit interest. Clearing checks between Banks A, B, C, D, E, F, etc is usually a wash -- no bank gains much or loses much net cash -- and, if Bank E gets into trouble by making non-performing loans, it will end up with impaired reserves, perhaps a candidate to be wound up or acquired by a stronger bank. If it's wound up, Bank E's remaining reserves, property, collateral, shareholders, and creditors get whacked first, ahead of depositors. But it's possible that depositors could lose, too, in the event of a "run" on troubled Bank E, with all depositors suddenly and simultaneously demanding payment in gold coin. If there's a big natural disaster, or war, or revolution, most banks would be in trouble, no matter how large their reserves or the quality of their portfolios of pledged collateral.

Bottom line: Peace and fair weather allow banks to lend without losing gold reserves. Wars and disasters impair their ability to make loans, because creditworthiness and cash flow of borrowers is impaired. Historically, banks have loaned much more freely to governments than to private enterprise, during "gold standard" days of yore, until they got schtupped by The Legal Tender Cases -- after which, they pretty much stopped lending altogether to private customers, without some form of government guarantee on mortgages, student loans, and industrial ventures like Solyndra and Tesla.

It might be difficult to get them back on the gold standard. Bankers have lost the knack for -- uh -- banking.

[moralist]

While enjoying reading this entertaining and informative discussion, it struck me that no one here (including me) has any power to change what is being discussed. There are some great suggestions for solutions and creative alternatives... and yet everyone here is utterly powerless to actually do anything that could effect banking policy even one whit.

Greg

[Wolf DeVoon]

While enjoying reading this entertaining and informative discussion, it struck me that no one here (including me) has any power to change what is being discussed. There are some great suggestions for solutions and creative alternatives... and yet everyone here is utterly powerless to actually do anything that could effect banking policy even one whit.

Yes and no. I was involved in a project that attracted quite a bit of capital, but it failed for lack of transparency and requisite banking skills. There's nothing to stop anyone from combining, borrowing, leasing, or lending gold. I know of several gold depositories and gold lenders.

I wouldn't bet too heavily on the ever expanding pyramid of paper dollars.

[moralist]

While enjoying reading this entertaining and informative discussion, it struck me that no one here (including me) has any power to change what is being discussed. There are some great suggestions for solutions and creative alternatives... and yet everyone here is utterly powerless to actually do anything that could effect banking policy even one whit.

Yes and no. I was involved in a project that attracted quite a bit of capital, but it failed for lack of transparency and requisite banking skills. There's nothing to stop anyone from combining, borrowing, leasing, or lending gold. I know of several gold depositories and gold lenders.

But did it actually cause any change in banking policies?

No.

I'm in exactly the same boat as everyone else. I'm completely impotent to affect the actions of banks or of the Federal Reserve.

But there is one thing that the banks are powerless to stop me from doing... they cannot prevent me from becoming my own bank. I accept my own deposits, and then loan myself money from my own reserves to fund new ventures. Then I pay off the loans to myself from the profits so that the reserves are available to be loaned out for the next project.

No one can prevent you from making financial transactions with yourself.

Greg