Finalmente consegui expor adequadamente (penso) a minha argumentação que em Free-Banking mas com distinção entre notas/depósitos de Bancos com 100% de reservas e os outros... "good money [100% reservas] will drive out bad money [reservas parciais]".
No LvMI Blog no post The Legitimacy of Loan Maturity Mismatching: Bagus & Howden vs. Barnett & Block, by Stephan Kinsella
Carlos Novais:
Honest Free Banking requires that:
- 100% Reserve Banks are able to label Notes and Demand Deposits.
- Fractional Banks must instead label and disclosure “Promises of Payment with a minimum x% reserve policy”.
And so Fractional Reserve Banks “Promises of Payment” would trade at discount against Notes.
And this would mean that good money (100% reserve notes or demand deposits) would drive out bad money.
But I think that even in a 100% reserve banking system, Mismatching between time deposits and assets of the bank would be an honest business decision but would also require some order of Reserves to cover the risk of the mismatching (time deposits expiration turning into demand deposits which requires immediately 100% reserve in balance).
For this, I usually say that a 100% Reserve Banking requires >100% of Reserves.
TGGP:
As a libertarian, I do not countenance requiring the tobacco or junk food companies to put any specific information on their product. I will say the same thing for banking, though if a bank is deemed to have defrauded a customer they should be held responsible. My question for Carlos is why can't we just rely on the 100% reserve banks labeling their notes as such and informing the public about their superiority to fractional reserve banks? Based on historical experience, I think the result would NOT be to drive out fractional reserve banks because customers would continue to patronize them anyway.
Carlos Novais:
TGGP
Fractional Reserve "promises of payment" (equivalent to notes and demand deposits buy labeled as "promises") would trade at discount by arbitrage. One thing very important is that there should be no restriction for owning and exchanging as legal tender physical gold and silver coins and bars.
So, why would I deposit 10 gold coins in a fractional reserve bank receiving a “promise of payment” (stating a policy of a minimum 25% reserve) instead of going to a 100% Reserve Bank and receiving a “note”?
Imagine also that I would go to a Fractional Reserve Bank to get a loan that would constitute a credit expansion by expanding the “promises of payment” that I would use to buy at par “notes” from a 100% Reserve Bank. Or even worse, imagine that the fractional reserve bank itself would create “promises of payment” (that some people as you day would be happy to exchange at par) and simply buy gold coins at par. Would this make any sense?
TGGP:
Carlos, you are talking about what "would" happen. We don't have to guess about hypotheticals, we can look at the actual history of free banking to see what happened.
"So, why would I deposit 10 gold coins in a fractional reserve bank receiving a “promise of payment” (stating a policy of a minimum 25% reserve) instead of going to a 100% Reserve Bank and receiving a “note”?"
Because the fractional reserve bank pays interest while the 100% reserve bank requires you to pay them a warehousing fee.
"Imagine also that I would go to a Fractional Reserve Bank to get a loan that would constitute a credit expansion by expanding the “promises of payment” that I would use to buy at par “notes” from a 100% Reserve Bank."
If the promises of payment did indeed trade at a discount then the 100% reserve bank could sell you their notes, and then demand a greater amount of coins from the fractional bank than they bought the promises for. This would inhibit the willingness of the fractional bank to issue too many promises.
Carlos Novais:
TGGP
“Carlos, you are talking about what "would" happen. We don't have to guess about hypotheticals, we can look at the actual history of free banking to see what happened.”
History tell us that (Rothbard) “money-brokers” that tried to arbitrage discount fractional reserve notes of distresses banks buying them at discount and requiring delivery of physical gold or silver were more or less forbidden directly or indirectly of doing it. But discounts did happen.
History tells us the contractual analysis innocently or conveniently was deficient. The traditional banking secrecy served the cause for the general public to not realize the money expansion feature. Even today with so much consumer protection never we see a proposal for real time disclosure of reserve of banks or for instance the banks identities involved in central banks injections or loans.
The fungible feature at par it’s a requirement for bad money to drive out good money but that it´s only possible if the system provides anonymous money creation and circulation, making the appearance of bad money (today would be the demand deposits in riskier banks) being the same as good money (demand deposits in less riskier banks).
This crisis established finally in the minds of public, that every single demand deposit is equal to another because it will be always guaranteed in full by states and central banks.
"Because the fractional reserve bank pays interest while the 100% reserve bank requires you to pay them a warehousing fee."
Correction: Pays interest in the form of more "promises of payment" of gold.
Credit in the form of “promises of payment” would be contractually different form credit in the form of 100% Reserve Notes. Certainly the person that makes a loan in physical gold wants to receive an interest and nominal in physical gold or will ask a premium for a different thing.
I can imagine contracts that could be delivered in bonds not money, but that does not make “Bond” a form of money, because bonds are settled has promises of money.
“This would inhibit the willingness of the fractional bank to issue too many promises.”
And this would be the process of good money driving out bad money. Physical gold and 100% reserve notes and demand deposits would be the money against all other quasi monies would be priced against.
Promises of payment would carry an additional risk that must be priced and which carry a cost of gathering information.
TGGP:
How were people forbidden from engaging in arbitrage in Scotland? And what work by Rothbard are you referring to?
"History tells us the contractual analysis innocently or conveniently was deficient"
What? I don't understand what you are trying to say.
"Pays interest in the form of more "promises of payment" of gold."
People that actually tried to redeem those promises got their gold. But back then the promises were deemed essentially good as gold.
"This crisis"
What are you referring to? The recent recession?
Carlos Novais:
TGGP
"A History of Money and Banking in the United States", Murray N. Rothbad pp 78-79:
"One effective, if time consuming, method of enforcing redemption on nominally specie-paying banks was the emergence of a class of professional “money brokers.” These brokers would buy up a mass of depreciated notes of nominally specie-paying banks, and then travel to the home office of the bank to demand redemption in specie. Merchants, money brokers, bankers, and the general public were aided in evaluating the various state bank notes by the development of monthly journals known as “bank note detectors.” These “detectors” were published by money brokers and periodically evaluated the market rate of various bank notes in relation to specie.47
(...)
During the panic of 1819, when banks collapsed after an inflationary boom lasting until 1817, obstacles and intimidation were often the lot of those who attempted to press the banks to fulfill their contractual obligation to pay in specie.
(...)
” Yet two days after this seemingly tough action, it passed another law relieving banks of any obligation to redeem notes held by money brokers, “the major force ensuring the people of this state from the evil arising from the demands made on the banks of this state for gold and silver by brokers.” Pennsylvania followed suit a month later. In this way, these states could claim to maintain the virtue of enforcing contract and property rights while moving to prevent the most effective method of ensuring such enforcement."
Carlos Novais:
Facts:
1-There were discounts between private notes (not homogenous money).
2-There were arbitragers between notes and the delivery of specimen (and redeem of notes were suspended to protect fractional notes when most required).
3-Strangely there was not notes labeled has 100% reserve ones.
I think we can conclude that:
All banks practiced profitable fractional reserves.
The jurisprudence and the economic profession did not make the distinction and so did not required proper labeling (“promises of payment” versus true “Notes” or Demand Deposits” or “Receipts”). Conveniently we could add.
In bad time (busts), contracts were not enforced and redeem of notes (actually just “promises”) was suspended.
And so “bad money” was able to drives out “good money” in the sense that never a full condition of free banking with honest competition and labeling was set. But if this happens it will be good money that will drive out bad money.
David Hillary:
Carlos Novais, you make me laugh. A note is a promise to pay, by definition!
Demand obligations cannot trade at a discount, since they are redeemable at the issuer at par.
Carlos Novais:
David Hillary - "A note is a promise to pay, by definition!"
If it is the case it is my English and I apologize. By “note” I was meaning the pure warehouse receipt which could be labeled as such.
If a note is a promise of payment without 100% reserves it should state that clearly (maybe including a minimum reserve policy). The not so clear status of such notes including the jurisprudence and regulations (and economic analysis from who should no better) not enforcing a distinction is what drives out good money (100%reserves).
Now, you are free to exchange “promises” at par with “receipts” at your own risk. But then an arbitrager could sell short (promises) at par and buy the asset (receipts) at par and wait till some crises of confidence happens.
But discounts are a fact of history, like discount in debts are common, because discount is a price of risk.
Receipts that carry a cost for warehousing could have a small discount too depending of the particular method of charging but that wouldn’t constitute a discount of risk.
Comparing two alternatives:
Action 1: I have receipts of gold that costs me money but I lend them in “short-time money-market” (or a time deposit in a 100% reserve bank) receiving an interest in more receipts.
Action2. I own fractional reserve “promises” if the form of demand deposit (of “promises”) and receive an interest (in more “promises”, not physical gold or receipts) from the average balance as banks do today.
We are still talking about two different economic assets. The story of supposed free banking is one were bad economic and law analysis benefit the fractional banking which drives out good money, because there is the appearance of homogeneous money.
Beefcake the Mighty:
Great posts, Carlos. BTW your English is fine and your statements very clear. David Hilary is just being a cunt (as usual).
# posted by CN : 1/12/2010 05:15:00 PM
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FT:" Thirty global financial institutions make up a list that regulators are earmarking for cross-border supervision exercises, the Financial Times has learnt."
Não terá passado pela cabeça dos nossos queridos reguladores que tão bom trabalho fazem a assistir às bolhas de inflação de crédito, que acabam como sempre acabaram em crise financeira para não dizer falência técnica dos seus preciosos Bancos, que declarar estes ou aqueles como dentro da sua própria classificação de risco sistémico é como declarar que serão sempre e em qualquer situação, protegidos de incumprimentos.
O que por outro lado levanta a suspeita que outros não o serão.
O que levanta a dúvida se não será melhor passar a trabalhar com os primeiros.
O que vai conduzir a problemas com os segundos.
Porque como se sabe, todo e qualquer banco está sujeito ao risco sistémico fomentado pelos reguladores, no sentido que chegará que cerca de 5% dos depósitos sejam objecto de pedido de transferência para outra entidade, e o Banco em questão entrará em incumprimento.
# posted by CN : 12/01/2009 09:15:00 PM
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Murray N. Rothbard
[This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith.]
The causes of the great depression of western Europe can be summed up in one stark phrase: the newly imposed domination of the State. During the medieval synthesis of the High Middle Ages there was a balance between the power of Church and State, with the Church slightly more powerful. In the 14th century that balance was broken, and the nation-state came to hold sway, breaking the power of the Church, taxing, regulating, controlling and wreaking devastation through virtually continuous war for over a century (the Hundred Years' War, from 1337 to 1453).[1]
The first and critically most important step in the rise in the power of the State at the expense of crippling the economy was the destruction of the fairs of Champagne. During the High Middle Ages, the fairs of Champagne were the main mart for international trade, and the hub of local and international commerce. These fairs had been carefully nurtured by being made free zones, untaxed or unregulated by the French kings or nobles, while justice was swiftly and efficiently meted out by competing private and merchants' courts. The fairs of Champagne reached their peak during the 13th century, and provided the center for land-based trade over the Alps from northern Italy, bearing goods from afar.
Then, in the early 14th century, Philip IV, the Fair, king of France (1285–1314), moved to tax, plunder, and effectively destroy the vitally important fairs of Champagne. To finance his perpetual dynastic wars, Philip levied a stiff sales tax on the Champagne fairs. He also destroyed domestic capital and finance by repeated confiscatory levies on groups or organizations with money. In 1308, he destroyed the wealthy Order of the Templars, confiscating their funds for the royal treasury. Philip then turned to impose a series of crippling levies and confiscations on Jews and northern Italians ("Lombard's") prominent at the fairs: in 1306, 1311, 1315, 1320 and 1321. Furthermore, at war with the Flemings, Philip broke the long-time custom that all merchants were welcome at the fairs, and decreed the exclusion of the Flemings. The result of these measures was a rapid and permanent decline of the fairs of Champagne and of the trading route over the Alps. Desperately, the Italian city-states began to reconstitute trade routes and sail around the Straits of Gibraltar to Bruges, which began to flourish even though the rest of Flanders was in decay.
It was particularly fateful that Philip the Fair inaugurated the system of regular taxation in France. Before then, there were no regular taxes. In the medieval era, while the king was supposed to be all-powerful in his own sphere, that sphere was restricted by the sanctity of private property. The king was supposed to be an armed enforcer and upholder of the law, and his revenues were supposed to derive from rents on royal lands, feudal dues and tolls. There was nothing that we would call regular taxation. In an emergency, such as an invasion or the launching of a crusade, the prince, in addition to invoking the feudal duty of fighting on his behalf, might ask his vassals for a subsidy; but that aid would be requested rather than ordered, and be limited in duration to the emergency period.
The perpetual wars of the 14th and the first half of the 15th centuries began in the 1290s, when Philip the Fair, taking advantage of King Edward I of England's war with Scotland and Wales, seized the province of Gascony from England. This launched a continuing warfare between England and Flanders on the one side, and France on the other, and led to a desperate need for funds by both the English and the French Crowns.
The merchants and capitalists at the fairs of Champagne might have money, but the largest and most tempting source for royal plunder was the Catholic Church. Both the English and French monarchs proceeded to tax the Church, which brought them into a collision course with the pope. Pope Boniface VIII (1294–1303) stoutly resisted this new form of pillage, and prohibited the monarchs from taxing the Church. King Edward reacted by denying justice in the royal courts to the Church, while Philip was more militant by prohibiting the transfer of Church revenue from France to Rome. Boniface was forced to retreat and to allow the tax, but his bull Unam Sanctam (1302) insisted that temporal authority must be subordinate to the spiritual. That was enough for Philip, who boldly seized the pope in Italy and prepared to try him for heresy, a trial only cut off by the death of the aged Boniface. At this point Philip the Fair seized the papacy itself, and brought the seat of the Roman Catholic Church from Rome to Avignon, where he proceeded to designate the pope himself. For virtually the entire 14th century, the pope, in his "Babylonian captivity," was an abject tool of the French king; the pope only returned to Italy in the early 15th century.
In this way, the once mighty Catholic Church, dominant power and spiritual authority during the High Middle Ages, had been brought low and made a virtual vassal of the royal plunderer of France.
The decline of Church authority, then, was matched by the rise in the power of the absolute State. Not content with confiscating, plundering, taxing, crushing the fairs of Champagne, and bringing the Catholic Church under his heel, Philip the Fair also obtained revenue for his eternal wars by debasement of the coinage and thereby generated a secular inflation
# posted by CN : 12/01/2009 08:25:00 AM
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