I’m really not an alarmist, and I see a different problem with fractional reserve banking than most others do (it’s the government’s fiat monopoly on money creation and centralized policy, dummy—not that loans, per se, create new money based upon fractions and multipliers).
In very brief, fractional reserve banking can and has been carried out in a completely private manner, and money can, in a manner of speaking, be “printed in the back room” in order to make loans (create new money) based solely upon any bank’s own standard of risk, and the faith or trust of its depositors (customers). The catch is, there’s no central authority (nor ought there be) to force policy upon the bank or its customers; nor is there anyone (nor ought there be) to bail out the bank if they get it wrong and fail.
If the bank comes into hard times, then they first increase their self-imposed reserve requirement—all the way up to 100% if necessary—necessitating that they have to make their money by charging customers the true cost of banking, and not by means of earning interest on loans backed by debt risk (money creation, again). If that’s not enough, then the bank might have to sell assets, lay off workers, reduce overhead, or, borrow from another private bank (presumably, at commensurate high interest rates).
Occasional bank failures would be good and healthy. People would learn not to keep all their money in a single bank, just like they don’t keep their investment portfolios in a single stock. And, rather than an FDIC, people could purchase their own insurance (new business opportunity), at a price that bears the full cost of the risk plus a profit to the insurer.
This is economics, banking, and sound business practices 101 in a Free Market—which is why it doesn’t exist in The Land of the Free, nor about anywhere else. …Because, we live in lands dominated by thieves, run by parliaments of whores.
But what about a Gold Standard (or any commodity, or bundle of commodities)? In principle, it’s the same as with any national monetary system: force-backed authority trumps market forces. Duh. This has been my eternal quibble with “libertarians” for over two decades. It’s. State. Force. Stupid. Don’t forget that the gold standard was in play during the great depression. In fact, business and monetary shocks are amplified in a gold standard. Why? Not because of the idea that currency is backed by some commodity (fine, knock yourself out), but because it’s just a different set of “rules” the state uses to manage its imposed monopoly on money. In essence, it’s a tradeoff between inflation (little under a gold standard, lots under fiat) and central bank flexibility to manipulate markets (little under a gold standard, lots under fiat). It’s just a different rule book is all, with associated pluses and minuses for each given the landscape of a monopoly State—but completely the same in principle: force-backed monopoly currency. Also, don’t forget that inflation originated with both governments and individuals clipping coins minted in precious metals, like gold and silver.
Coin debasement is the act of decreasing the amount of precious metal in a coin, while continuing to circulate it at face value. This was frequently done by governments in order to inflate the amount of currency in circulation; typically, some of the precious metal was replaced by a cheaper metal when the coin was minted. But when done by an individual, precious metal was physically removed from the coin, which could then be passed on at the original face value, leaving the debaser with a profit. Coin debasement was effected by several methods, including clipping (shaving metal from the coin’s circumference) and sweating (shaking the coins in a bag and collecting the dust worn off).
In a free market (including money and currency), you’d be welcome to do business with any “money warehouse” or bank that you wish. Contrary to so much ignorance that prevails, a 100% reserve is not really a bank. It’s just a warehouse and your tradeable “notes of currency” are just receipts for your gold (or whatever) in storage, and you have to pay them to keep your money in safe keeping—just like you have to pay the local U-Stor-It place for years to keep all the junk you haven’t needed for years. Banking implies a fractional reserve. But, in a free market you don’t have to. You can cut your risk to nothing and just pay for storage services.
If you ask me how it could work if we had dozens or even hundreds of different currencies in the U.S., all issued by different private banks, I’ll answer with a question: how does it work on planet earth at large? You have currency exchanges, businesses that make their money on the buy/sell spread. And, you also have currency trading such as FOREX, where arbitrage is possible.
…It’s often claimed that new money created by means of loans made in a fractional reserve system isn’t backed by anything, contrasted with gold as a reserve. I disagree and have always disagreed. In meta-terms, new money is backed by humanity itself, it’s generally good nature, creativity, productivity, and good will. Principal elements include:
- Fixed assets owned by people and businesses taking out loans (houses, cars, boats, airplanes, land, capital equipment, commercial buildings, etc., etc., etc.)
- Track records of success
- Ideas and well-laid plans
- FUTURE LABOR (in the simplest sense, taking out a personal loan is to sell your future labor and productivity now, at a discount that equals the service you pay on the loan)
- A PROMISE TO REPAY (in general, humans are pretty good on their word and by far and away, most loans get paid back according to the terms of the contract)
You could go on and on, if you thought about it. Or, think of it this way: unless most humans that have ever existed were net economic values to themselves and society over the full course of their lives, we could not exist and for damn certain, not at the levels of population and opulence so many now enjoy—with increasing numbers getting on that train all over the world every day in developing countries.
I capitalized points 5 and 6, above, for this very reason: the quite remarkable value of human beings to themselves and others, per se, over the course of a lifetime. Unfortunately, we live in a world where a minuscule less-than-1/100th of a percent of “elected” rulers take credit for every good and lay blame elsewhere for every wrong.
I’ve been paying attention to Doug Casey, on & off, for over 20 years. I encourage you to take 45-minutes to watch these two videos; the first, a 15-minute interview about the documentary, then the documentary.
You’ll have to provide an email to watch the 30-minute documentary for free. You don’t even have to subscribe to the ongoing email/newsletter list, and they vow to not sell or divulge your email. I did this yesterday and have yet to receive any email from them.
If you’re still not convinced, they have three 1-2 min clips of the documentary on their YouTube Channel.
Pay particular attention to Casey’s admonitions to not waste your time trying to “fix the system.” It’s unfixable. Rather, learn to profit from it as is. So, that implies sound, diversified investing. But he also admonishes you to “diversify politically.” Pay attention. That’s my primary personal objective, currently.