A Black Hole In Economics: Money Creation And Its Consequences, Session Four
Good Money Creation: The Capitalist Money Factory
Welcome to Session Four of my course on money creation and its consequences. Due to the holiday season, I won’t publish next Friday. So, the next course installment will be on Friday, January 5.
The subject of this lesson is “good” money creation, by which I mean money creation that enables productive, non-inflationary economic growth. The theme is that sound money production springs from free market-based decisions by bankers and borrowers guided by the profit motive. Today, I aim to demonstrate that even an imperfect but mostly free banking system can produce sound money, that is, money that is widely accepted and holds its value over time.
As usual, a manuscript with detailed notes and references is attached for those who would prefer to read the content or examine my sources, all of which are fully documented.
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HardmoneyJim
December 22, 2023
With respect to the acceptable limits of credit in a sound banking system, some rather long winded thoughts on a hypothetical fair gold-backed, banking system.
I consider that for any money to be sound it must necessarily be linked to productive activity, that it in fact equates to deferred spending, an IOU on the market system or as Ayn Rand brilliantly put it, frozen effort. If such were the case, every dollar held and not yet spent could legitimately be used by another for investment purposes. Yet the true owners of those funds would, for a myriad of reasons, baulk at gambling with their nest eggs.
With the current system as i understand it, bank deposits are technically repayable on demand. Bankers in turn, knowing seldom will all depositors want all their money back at the same time, gamble and lend out as much as they dare. But what if we were to inject honesty into the system?
As individual we all have varying time horizons for our unspent dollars. someone with a weeks worth of reserve wouldn't likely have need for a bank, whereas the the guy with 25 years of reserve spending most definitely would appreciate having a safe place to put that 4000 oz. of gold.
The above thinking was derived from an argument about Ayn Rand and marginal lending and my reading of Hernado DeSoto's book, "The Mystery of Capitol." I'm guessing you are familiar with his book, but he brings up the point of how difficult it is, in the developing world, to leverage real assets into collateral for bank loans. He writes about regulatory impediments and inability to attract micro loan as the factors that continue to impoverish the third world.
As an aside, he has a very informative look at the way legal issues were dealt with in the American gold rush, essentially discussing how common law works.
Back to the hard, gold as currency era. You make the point that when a loan is repaid the paper certificate is erased, but I wonder if that is the case . If for example, the bank did have a leger that separated available and on loan gold holding with limits placed on minimum reserve holding I could see that happening if loan certificates were name dedicated and not transferable. If the bank gold was held in a common pool I wonder if those paid loans would just wind up being added to the banks balance sheet as diluted the value of money.
That's my short take on early money but the point I want to make is that I see that it's logically valid to lend out all assets not needed for immediate use. If there were no artificial spending methods outside of productive exchanges there still would be a truly phenomenal quantity of investment capitol. The idea that the money would be 'owned' by people that worked for it would be a great incentive to look for high quality loans, as opposed to government boondoggle loans a market system would reject.
The marvel of our modern money system would take a volume to describe but while etransfers and micro credit card transactions are highly valued by me, I hold little confidence in the trustworthiness of giving up on physical money, the Canadian government seizure of Trucker Protester's bank accounts without warning or warrant being my wakeup call as to the fragility of security when an all powerful government agency pits itself against a private citizen.
And a final point, it is well know and has often been implement in times of war, adding counterfeit paper to a country's money supply is destabilizing to that country. I still wonder how we ever got to the place where no one seems to recognize that doing so to your own country is tantamount to committing suicide.
My final comment pertains to your line:
'Look at history where the fiat reserve system produced money that stayed relatively sound for
nearly 50 years. Sound means it is accepted everywhere in commerce and retains its purchasing
power over time.'
Do you really want to phrase this statement this way? Do you really mean what it says?
A hard money guy might really wince seeing the devaluation of the USD since 1971 till today and hear you say that the current system has allowed the USD to 'retain its purchasing power over time'. Allowed the USD to 'decline gracefully (mostly)' might be more like it.
Or, are you OK with historical post 1971 devaluation? (serious question). It would be ok if you were --- some economists argue that a low, say annual 2% devaluation allows businesses to 'claw back' 'excessive wage grants' over time (because wages are 'sticky' and no one likes to receive an absolute lowering of wages even if such a lowering is necessary and market priced --- 2% devaluation allows for gradual 'wage correction to market' to occur over time). It's ok if that is what you are saying / supporting, but if you are not implying support for this position, well then be careful what you are writing here.
Overall, this phrasing sounds too 'generous' to the system we have today (if you are a hard money advocate) and not 'clear enough' as to 'why 2% debasement is good' if you are Neo-Keyesian.
Anyway, not trying to bore you with comments but if you were looking for someone's feedback on the current 'draft' of your opus, there it is. With much respect, Go Army Beat Air Force