asleeper

Returning to a Gold Standard Is a Bad Idea

On Jan 03 04:08 AM Jim Myrtle wrote:

> "A borrower from a goldsmith would have signed something akin to
> a “loan document” just like a modern borrower. The borrower would
> have received a gold receipt of some kind and promised to repay it
> with interest just like a modern borrower"
>
> The most important difference being the goldsmith was printing receipts
> for multiples of his gold deposits. Modern banks can only loan their
> deposits less their reserve balance. Because they don't print FRNs.

If the money the bank "loans" is redeposited in the bank, cannot the bank continue to lend until the total loans are a multiple of the original deposit, the original deposit being the "base" the multiples are built on, the same way that multiples of gold receipts are built on the original gold deposit in the goldsmith's bank? And, both multiplying effects cause inflation?


> "Correct. One point to you. I didn’t bother doing looking up the
> formula and doing the math precisely. $900/(1-0.9) = $9,000. Doesn’t
> change the argument"
>
> Your math is still wrong. A $1000 deposit with a 10% reserve allows
> the bank to create exactly $900 in loans, not $9000.

We went over this before. If the $900 is redeposited in the bank, the bank can lend $810 more, and so on, until it can lend a total of $9000 with $10,000 on deposit, including the original $1,000. You agreed to that, even corrected my math on the total credit being $9,000 instead of $10,000.

> "The restaurant, at least in theory functioning as a bank, could
> obtain FRNs ultimately from the Fed which asks the Treasury to print
> them"
>
> If the restaurant wanted to wire money to the Fed, they could get
> FRNs. Not sure what that has to do with your story.

I felt you were quibbling about banks not being able to print FRNs, forcing me to revise my story to stay on point, which was that a handwritten IOU does not increase the money supply because it isn't equivalent to legal tender, and a bank loan does increase the money supply because it is equivalent to legal tender..

> "After which you would continue to owe the restaurant for the meal,
> because the FRNs were a "loan". Meanwhile the FRNs would begin circulating
> in the economy, increasing the money supply, until you pay off the
> loan"
>
> Now you owe the restaurant and the Fed, still not clear where you're
> going with this.
>
> "The salient point is that securitization of IOUs as legal tender
> increases the money supply.."
>
> Borrowing increases the money supply. Are you proving what I've said
> all along?

I've been saying all along that banks create money and increase the money supplying by the process of securitizing loan documents. That the act of securitizing the lenders promise to repay by the bank is the point of money creation by banks, referring to that act as issuing credit. And, I've been under the impression you been denying that. Apparently, there has been a "failure to communicate" all along arising over different assumptions about who meant what kind of money and what-not. And, maybe I've not been using banking industry-consistent jargon.

Sorry, but that cracks me up. One of my favorite sayings is that the strangest thing about communication is the illusion it has been accomplished.

> " If the accounts receivable consist of dollar equivalents such as
> credit card payments in process or checks, they can certainly sell
> the"
>
> They wouldn't sell credit card payments, they'd sell IOUs.
>
> "Restaurants cannot sell an IOU because the IOU hasn’t been securitized
> by a bank"
>
> You can sell an IOU that a bank hasn't touched. Suppliers that need
> cash can sell an IOU from WalMart (just an example) if they need
> the money now, instead of in 60 days (just an example).

Can your local corner restaurant really sell your handwritten IOU? Now, I'm not sure. Can he take it to the bank and use it to borrow money or exchange for FRNs as he could a check? if not, then I would say the IOU cannot increase the money supply.


> Don't confuse the money supply with FRNs. MZM, which includes FRNs,
> is narrow money. M1 is broader money. He can lend all day long and
> increase M1. He can't increase FRNs.

Yes retail banks can increase M1 but not FRNs. Modern money is rather slippery and has several definitions. But I've been referring to broader money measures than just FRNs, measures that banks can increase..

> "I’ve been saying that a bank can turn a promise to pay into legal
> tender"
>
> Legal tender? Like FRNs? A bank can sell your promise to someone
> else, for legal tender but can't turn on the printer in the vault
> to turn it into FRNs.

What I mean by "turn into" is that a bank can take my signed promise and physically hand me FRNs. Since my promise is not legal tender but my bank has given me legal tender for it, as far as I'm concerned, the bank has turned my promise into legal tender.

> "there is a real difference between $1,000 in FRNs and a signed loan
> document on which a debtor promises to pay $1,000 FRN’s plus interest?
>
> Of course there is a difference. One is very liquid, one is less
> liquid.
> One pays interest, one doesn't. One has risk of default, one doesn't.

Also, one is legal tender and the other is not. So, which one is money, the loan document on file at the bank or the credits in the borrowers account?

> "that a bank is able to turn a promise to pay $1,000 FRNs into the
> legal equivalent of $1,000 in FRNs?"
>
> I don't know your definition of "legal equivalent".

Dollar credits in the borrower's account. I say they are legally equivalent to FRNs because I can ask the bank to give me FRNs based on bank account credits and they must do it unless they don't actually have any FRNs on hand that day.


> "that creation of FRNs by the Fed and banks by securitizing promises
> to repay is the source of inflation that caused the FRN to lose approximately
> 95% of its value since 1913? "
>
> I don't dispute that the growth of high powered money and subsequent
> growth of M1, M2, M3 etc over and above the growth of GDP causes
> inflation.

Thank you. We agree on that and probably more if not for the communication gap. I'm curious, are you a banker, a teacher or neither? I'm a math teacher and ex-engineer.