mjmannino81 Posted January 31, 2014 Posted January 31, 2014 Hello everyone! I've been learning more about the role of the Federal Reserve, I watched tons of videos on YouTube and even read Rep. Ron Paul's "End the Fed" book. I was wondering if someone could take the time and answer some of these questions that I can't seem to get a solid answer for. 1) What caused bank runs and panics prior to the creation of the Federal Reserve? Did the Federal Reserve solve the problems of preventing future bank runs? 2) Was there fractional reserve banking when the US was on the gold standard, prior to the creation of the Federal Reserve? Can fractional reserve banking be sustainable or is full reserve banking the best option for a sound monetary policy? 3) If the Federal Reserve is really a private bank ran stockbrokers and private bankers aren't they aware of the inflation caused by their policies? Aren't they hurting their own agenda? 4) If our currency is considered fiat does that mean our 17 trillion dollar + is fake and shouldn't exist? Thanks for taking the time to answer my questions!
ThomasDoubts Posted January 31, 2014 Posted January 31, 2014 Hello everyone! I've been learning more about the role of the Federal Reserve, I watched tons of videos on YouTube and even read Rep. Ron Paul's "End the Fed" book. I was wondering if someone could take the time and answer some of these questions that I can't seem to get a solid answer for. 1) What caused bank runs and panics prior to the creation of the Federal Reserve? Did the Federal Reserve solve the problems of preventing future bank runs? 2) Was there fractional reserve banking when the US was on the gold standard, prior to the creation of the Federal Reserve? Can fractional reserve banking be sustainable or is full reserve banking the best option for a sound monetary policy? 3) If the Federal Reserve is really a private bank ran stockbrokers and private bankers aren't they aware of the inflation caused by their policies? Aren't they hurting their own agenda? 4) If our currency is considered fiat does that mean our 17 trillion dollar + is fake and shouldn't exist? Thanks for taking the time to answer my questions! Hey, MJ, welcome! Before answering your questions I'll link you to the first of a four part series, "A History of Money and Banking in the United States." You may find this informative, and that it covers several of your questions in addition to many others one might have. Beware, in it's entirety, it's several hours of enjoyment http://www.youtube.com/watch?v=Q8e-e9xtFWA&list=PLDiz2cb2sFmTDhsKg8JPA7w_Gsk5waV7s 1) One of the causes of bank runs would be bad bank management. If the bank starts doing things it's customers disapprove of, they withdrawal their money. The Federal Reserve did not solve the problem of Bank runs: Bear Stearns, Countrywide Financial, Washington Mutual, Wachovia, and others experienced a Bank run between 2000-2010 in the US. If anything, the Federal Reserve created a breeding ground for Bank runs. 2) Yes there was. To your second question: It's open to debate. I take the position that full reserve banking is preferred. I also tend to think of fractional reserve banking as a semi-fradulent, juggling act/ponzi scheme. I will point out though, when you talk about monetary policy, you imply a central policymaker. In a free economy, banks could operate as fractional reserve or full reserve banks, and consumers would decide which they preferred. Runs on the Bank are only possible with a fractional reserve policy; If it's a full reserve bank, there will always be enough money to satisfy depositors, by definition. The worst case scenario would be that you have to wait a few days for money to be geographically moved to your bank, assuming they safeguard the majority of money elsewhere and you want cash. 3) You're not giving them enough credit. They are well aware of the inflationary effects and it doesn't hurt their agenda. By using fractional reserve banking, they can lend out 8-9 times more money than they would otherwise be able to. Who cares about a little inflation when you have the power to create money out of thin air and lend it at interest? 4) I'm assuming you're talking about our 17 trillion dollar national debt. It isn't real in the sense that it's not backed by any hard asset. The reason governments like inflation is that we can pay back 17 trillion devalued dollars. Suppose the money supply doubled; we'd still owe 17 trillion, it would just be worth half as much. Anytime you owe someone a ton of money, you should want inflation. I don't think Fiat currency should exist; it requires laws and the use of force for adoption. Anytime competition is outlawed, it's safe to assume that the reason is it wouldn't win in competition. These aren't the most thorough answers, but hopefully I've given you some good information. Was this helpful?
Magnus Posted January 31, 2014 Posted January 31, 2014 The video cited above is a narrated version of Murray Rothbard's book on the history of money. Another great short book of his on the subject is What Has Government Done to Our Money?
Mike Fleming Posted January 31, 2014 Posted January 31, 2014 Further to what has been said above Yes, bank runs occurred before the federal Reserve. Just as bad businesses have gone bankrupt right throughout history, so too have poorly run banks. It's a fact of life. By protecting banks from bad management the Fed has fostered a general culture of recklessness amongst banks. Why work too hard to successfully run a bank when you have the Fed backstopping you and protecting you from failure? This culture has built up over time, along with bank regulations written by bankers for the most part, to the point where it now threatens to bring down the entire system rather than just one or two banks every now and again. The facts are that if bankers can pass on the risks to a third-party they will do, because the more risk they can take on the more reward they will get. The government is the third-party. Of course the people in government are not themselves responsible and it all get's thrown on the taxpayer ultimately. Because the bank problems have been built up into a systemic problem, it is easier to scare people into bailing them out. Whether full or fractional reserve banking is practiced in a free society is open to debate. One thing that we can be sure of, is that fractional banking in a free society will not be practiced on the scale that it is today because the risks are just too great and the market would find them unacceptable. When you have the choice to put your money in a safe bank or a very risky bank, which would you pick? There essentially are no non-risky banks today due to the federal cartelization of the banking industry through the central bank. Personally I don't have a problem with the Fractional Reserve concept, but I have huge problems with how it is practised today. The government involvement in banking is the problem, not fractional banking itself.
ThomasDoubts Posted January 31, 2014 Posted January 31, 2014 The facts are that if bankers can pass on the risks to a third-party they will do, because the more risk they can take on the more reward they will get. The government is the third-party. Of course the people in government are not themselves responsible and it all get's thrown on the taxpayer ultimately. Because the bank problems have been built up into a systemic problem, it is easier to scare people into bailing them out. Whether full or fractional reserve banking is practiced in a free society is open to debate. One thing that we can be sure of, is that fractional banking in a free society will not be practiced on the scale that it is today because the risks are just too great and the market would find them unacceptable. When you have the choice to put your money in a safe bank or a very risky bank, which would you pick? There essentially are no non-risky banks today due to the federal cartelization of the banking industry through the central bank. Good points Mike. I thought I'd add an important element to what you're pointing out. The FDIC. Nobody cares where they deposit thier money because the government insures all deposits below $250k, and have paid out on claims above and beyond 250k. In a free society, a bank would have to prove it's safety to earn your business. As it is, they don't have to prove anything to customers. They just have to placate bureaucratic regulators. Moral Hazard comes from both bailouts and deposit insurance. To MJ: Check out Magnus' video; I was showing my nerdiness by linking something so long. His is shorter and more to the point. There are also audiobook versions on youtube if you'd prefer that.
mjmannino81 Posted January 31, 2014 Author Posted January 31, 2014 Thanks for the great input so far, it's very helpful.
Mike Fleming Posted January 31, 2014 Posted January 31, 2014 The entire issue really is unrestrained credit creation. There are certain restraints upon how much credit can be created. One of them is Gold. If you say that Gold has to be a certain fraction of a bank's reserves then the bank can only extend credit so far before it comes up against this limitation. The next one is the interest rate. As more credit is extended and the money supply inflates, people naturally demand higher amounts of interest to offset this. This is why the Fed took over the setting of the interest rates. Instead of the interest rate's being set by the market, what happens today is that the Fed creates money and uses it to buy debt in the open market, thus holding interest rates below the point that the market would set. Thus, the two big constraints on credit creation have been effectively neutered. What subsequently happens is that the credit creation becomes so great that the market eventually just says enough basically and you end up with a deflationary financial crisis. Instead of letting it play through, the Fed has gone to insane lengths of money printing to keep interest rates low and keep credit creation going. It's now just a question of whether we get an even larger deflationary crisis than 2008, since debt levels are now much higher than then, or whether the Fed prints the money into oblivion trying to keep interest rates down and hyperinflation ensues. And that's what the big debate on the internet is all about.
Mike Fleming Posted January 31, 2014 Posted January 31, 2014 4) If our currency is considered fiat does that mean our 17 trillion dollar + is fake and shouldn't exist? Are you familiar with Bitcoin? It is not Gold, nor tangible in any way. Does that make it fake and invalid? What about Gift vouchers that you can use at stores? They are just paper. This is a funny thing about money that a lot of goldbugs tend to miss. It is in fact more an abstract concept than a physical thing. Gold has traditionally been used as money because it was a medium that had a limited supply. In this sense Fiat money can work as long as the issuer can be trusted to keep the supply relatively stable. Unfortunately, the trust that people place in government's and by extension, their central banks, has been well and truly proven to be unfounded. But just because money doesn't have a physical backing doesn't automatically make it worthless. Money's value rests in it's utility to people. I think in a free market with competing currencies we probably could have had good private issuers of fiat money. Alas, that wasn't the world that came to be. Governments took over and have pretty much had an iron fist around the issuance of money ever since. The value of money ultimately resides not in the money itself but in the goods and services that can be traded for it. You could have 50 tons of gold, but if you were on a desert island, what good would it do you? Money is tool that facilitates trade efficiently. Ultimately, all humans are working and providing products and services for each other. Which makes the manipulation of money all the more insidious.
Magnus Posted January 31, 2014 Posted January 31, 2014 Whether full or fractional reserve banking is practiced in a free society is open to debate. One thing that we can be sure of, is that fractional banking in a free society will not be practiced on the scale that it is today because the risks are just too great and the market would find them unacceptable. When you have the choice to put your money in a safe bank or a very risky bank, which would you pick? There essentially are no non-risky banks today due to the federal cartelization of the banking industry through the central bank. Personally I don't have a problem with the Fractional Reserve concept, but I have huge problems with how it is practised today. The government involvement in banking is the problem, not fractional banking itself. My position on the subject is this -- if people want to participate in fractional reserve banking, they should be able to do so, by choice. But there needs to be proper disclosure, which is the antidote to fraud. The fraud arises when a bank issues far more "money" in its banknotes than it actually has in reserve. Whether the fraction is 1%, 10% or 90%, the point is that the fractional reserve bank does not have the ability to honor all of its notes on demand, at the same time, even though every note is purportedly a demand note. So, my thought is to fix this problem by simply stating the minimum fraction that the issuer holds in reserve on the face of the note. If it's a note issued from a 10% reserve fund , then the note itself should say so. The fund itself should also be stated -- gold, silver, copper, chickens, tires, iron ore, monkeys, etc. You'd have a "10% Reserve Gold Note" or "50% Reserve Silver Note" or "100% Reserve Platinum Note" or whatever. A bank could issue multiple types of notes, from different funds, and depositors could make deposits into any fund they choose. Fractional reserve funds would pay interest to the depositor, whereas a 100% reserve deposit would likely cost the depositor a fee. That way, the 100% reserve notes could circulate in the economy, trading against each other. In some places, for some people, and at some times, everyone might want 100% Gold Notes. In other times, and for other transactions, a 50% Silver Note from a good bank will be equally valuable. At other times, the fractional note would trade at a discount off the most valuable type of note. Any note that is a fractional reserve note will be payable on demand up to that fraction, with the remainder payable at the bank's option over time (say, a week, a month, etc.). But the amount payable ON DEMAND would always be available, even if there were a bank run, because the fraction in reserve would never fall below the stated percentage (unless a bank wants to commit an outright fraud and be shut down). In other words, the bank should not purport that all its notes are payable on demand, when clearly that's impossible with a fractional reserve. By admitting the fraction on the face of the note itself, the holder of the fractional note is aware of the risk.
ThomasDoubts Posted January 31, 2014 Posted January 31, 2014 Interesting Idea. Basically, for every ounce of gold I deposit, the percentage on the note reflects how much of that gold is guaranteed to be returned to me, right? In essence, you can limit your losses, and risk what you please. That would be my general investment advice to anybody, not that they're asking It's also simple enough for 5 year old. Fractional reserve funds would pay interest to the depositor, whereas a 100% reserve deposit would likely cost the depositor a fee. This illustrates the different purposes a bank may serve. If all I want you to do is keep my money safe from home invaders and fires, that would be a service for which I should pay. On the other hand, if I'm lending you the money knowing you will use it to pursue risk and reward, I've provided the service and deserve to be compensated. Simply put: Full Reserve banking, I am a customer; Fractional Reserve, I'm an investor. I often wonder which system people would prefer if they didn't have to take risk to keep up with inflation. More often than not, people today are already paying a fee for bank deposits, when you account for inflation. The status quo is so preposterous when you think about it that way. A person lends their money to risk taking institutions and are only compensated with a fixed rate of interest that doesn't even break even. What kind of investor does that? When the downsides of a Fractional Reserve bank rear their ugly heads (Bank Runs, Insolvency) the State steps in with a Bailout. "Look, it's a Full Reserve Bank; Your money's still there!" "This is why you need us!" Meanwhile the whacko with gold and cash in a safe in the basement pays for the bailout... Insanity that only free competition can correct.
Magnus Posted January 31, 2014 Posted January 31, 2014 One of the things that really opened my eyes about money was learning about the true meanings of the words "dollar" and "value." They actually have simple and concrete meanings that have been lost through centuries of abstraction and obfuscation. A dollar is, literally, a quantity of silver. You can't stamp a gold coin and call it $30. A dollar is just X grams of silver. It comes from the German word "Thaler," which is from the word "mountain," which is where popular silver high quality coins were made. A dollar bill is just a paper receipt used to claim a dollar from its safe storage custodian. It's easier to just trade the bill rather than carry the metal around. "Value" means the literal, physical, chemical content of a metal. It's a binary measurement -- mass and purity. Because metallic currencies are elements, their mass can be determined very precisely, if it's 100% pure. So, with a given specimen of an elemental metal, one can actually count the number of molecules of that element that are present. All you have to do is weigh it, and assess its purity. That process is called "assaying" a coin (or brick, or whatever), and the resulting conclusion is a determination of its "value." Value is not the exchange rate in the marketplace. The value of a coin is its actual, physical content. With this in mind, it's clear that coinage (and bills as their proxy) cannot, in a sane monetary system, ever lose value. They are what they are. X grams of Y metal will always be exactly that. A government cannot declare their value, any more than they can declare that a kilogram shall henceforth weigh 8 pounds, or that a gallon shall now have only 6 pints. That's why the Coinage Clause of the US Constitution is is the same paragraph as the section on weights and measures. That's what money used to be -- a physical, objectively determined quantity of something.
mjmannino81 Posted February 1, 2014 Author Posted February 1, 2014 Here are some more questions I have about the whole system: 1)With the Federal Reserve system why do we account for the 17+ trillion dollar national debt and yearly trillion dollar budget deficits? 2)What is the purpose of keeping track of the debt and deficits? 3)Should Americans be concerned about the estimated 100 trillion dollars it will cost for future entitlement programs such as Social Security & Medicare? 4)What if President Obama does an executive order or Congress passes a law requiring the Treasury Department to reset the national debt to zero? Will there be any negative consequences to the economy if that ever happened? 5)Could the Federal Reserve create an 17 trillion dollars worth of money out of thin air to "pay off" the debt? I know it's a lot of questions, but I'm interested to know what everyone thinks.
MrCapitalism Posted February 1, 2014 Posted February 1, 2014 http://archive.lewrockwell.com/north/north906.html
LanceD Posted February 2, 2014 Posted February 2, 2014 http://archive.lewrockwell.com/north/north906.htmlThat thing was a pretty long read for what really wasnt a lot of information. I've seen your posts before and they tend to be very good. I wish you had done one of those instead
MrCapitalism Posted February 2, 2014 Posted February 2, 2014 I had actually written a point by point response, but felt that everything I was going to say was already said in that link.
Mike Fleming Posted February 2, 2014 Posted February 2, 2014 Here are some more questions I have about the whole system: 1)With the Federal Reserve system why do we account for the 17+ trillion dollar national debt and yearly trillion dollar budget deficits? 2)What is the purpose of keeping track of the debt and deficits? 3)Should Americans be concerned about the estimated 100 trillion dollars it will cost for future entitlement programs such as Social Security & Medicare? 4)What if President Obama does an executive order or Congress passes a law requiring the Treasury Department to reset the national debt to zero? Will there be any negative consequences to the economy if that ever happened? 5)Could the Federal Reserve create an 17 trillion dollars worth of money out of thin air to "pay off" the debt? I know it's a lot of questions, but I'm interested to know what everyone thinks. 1) The whole financial system is really about who owes who what. What debts are denominated in is not that important at the end of the day. What is important is when you have a group of people who can manipulate the value of what the debts are denominated in. So yes, it is important. People have done work and are owed debts right throughout society. The government is a group in society. 2) See above. 3) Yes. Because all that money will be used to pay for things. If people don't get that money their quality of life will drop. Many people are under the assumption that they will be payed what they have been "promised". Few think about the consequences of this or whether it is mathematically possible or not or who actually gave them these promises (corrupt lying politicians that break promises all the time). There will come a time when the people paying that money (younger people) have to pay astronomical taxes to afford it and will say no. Or else inflation will kill the value of those promises or something like that. One thing we do know is that they won't get the full value they have been promised one way or another. 4) In the short run yes. In the long run it would obviously be greatly beneficial to write off debt because there wouldn't be any need to service it and more money would be available for spending and investment. But many institutions and countries hold those bonds as investments. The value of those investments would drop to 0. Many pension funds hold those bonds also. Imagine if your invested money took a huge hit or even went to 0. I expect also, that if the market got a whiff of it, (Obama wouldn't suddenly do it, there would be consultations with advisers and it would leak out) then the value would start to drop immediately and you would get a crisis before Obama could put pen to paper. 5) Theoretically yes. In fact they are creating billions every month right now. But there will be consequences. Dumping 17 trillion all at once on the market would result in the market convulsing imo. They are getting away with the current amount at least to some degree. Whether that continues remains to be seen... Simply put: Full Reserve banking, I am a customer; Fractional Reserve, I'm an investor. That's a very succinct way of putting it. And also, shows in one sentence how we are all at risk in today's banking environment and also that we have no way of determining what level of risk we want to take. The banks just go ahead with government's blessing and try to make as much as possible with our money.
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