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L. Neil Smith's
Number 540, October 11, 2009

"The gun is a symbol of freedom, not tyranny"

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A Defense of Fractional Reserve Banking and other notes etc.
by Warren Tilson

Attribute to The Libertarian Enterprise

In regards to Russell D. Longcore's "Secession and the Gold Standard" I would like to point out a few things. These comments all concern the last third of Mr. Longcore's article starting with:

"In my opinion, the best solution for a new nation would be to allow every individual bank to issue bank notes based upon its deposits of gold and silver."

There is no need for "nations" or laws at all to be involved in the provision of currency. It is an in-demand product and would be produced regardless. So a "nation" would not need to "allow" anyone to engage in providing currency. Of course you may be interested in creating "nations" while I am not.

Assuming when you said "every individual bank to issue bank notes" meant that each bank issued it's own particular product I respond with:

While anyone, not just banks, could provide currency it would probably fall to specialists and the market would likely be dominated by just a few providers. As long as there is no violence-based (monopoly creating laws) barrier to entry and no one in a given area is forced to use any particular currency (legal tender laws) there would be enough competition between even two or three currency providers (CPs) to keep them all honest.

There might well be only one "national" provider and several regional providers but this too would provide enough market discipline to prevent any one provider from corrupting their product. Back before the creation of the US government monopoly on currency issuing there were thousands of tiny currencies being issued. Bankers even had reference books so that they could keep up with what was out there. I'm sure this was a pain in the ass and had some costs associated with it. If this were repeated, the market being what it is, would find a way to reduce those costs and this would lead to a great winnowing of CPs.

So lets not fall in love with some ideal that there must be 1000s of CPs. Also this trend would strengthen because why produce currency if you can get it from some other source cheaper? So even if I owned a smallish to medium sized bank or chain of banks I would just subscribe to a currency being produced by someone who is better at it than me. That way I can focus on running a bank and they can focus on providing currency. The division of labor strikes again!

Regarding fractional reserve banking (FRB): There is nothing inherent in FRB that violates the NAP or is un-libertarian. However it is un-libertarian and does violate the NAP to threaten, assault, and kidnap folks who are peacefully engaging in (FRB).

Mr. Longcore wrote "Fractional reserve banking (legalized counterfeiting) should also be made illegal so that money cannot be created out of thin air."

In other words, if some folks prefer a different sort of provision of currency than you do you advocate pointing a gun at them to make them stop or even kidnapping them, taking them from their family and friends and making them live in a little concrete box? I do not know how you could morally justify this.

As long as the FRB currency provider is up front about it's reserves and folks willingly patronize them, no one, you, me, or anyone else has a say in the matter.

It is your right to choose or found another provider but you have no right to prevent me from choosing or founding mine.

I think the desire to prohibit FRB is due to how governments go about it. With their inflation and devaluing and other shenanigans. These things, with private FRB, under the discipline of a free-market are very unlikely to happen.

And if a 100% metal backed currency is superior to a FRB currency then it should not have any problem defeating the FRB money in an open and free market.

As to the necessity of a 100% backed currency there is little point to digging up a bunch of gold and then reburying it in some vaults. There is simply no need for in-bank (even if the storage is outsourced to reduce costs) 100% gold reserve currency. There might not even be enough gold in the world to do this. As long as the CPs' are respected and their products are valued, people (gold sellers) will exchange the currency for gold on the open market. In that way your money is backed with gold and so a CP's product really doesn't need to have any in-house or outsourced on-contract metal backing at all. Blows the mind, doesn't it? Though for conveniences sake they would probably keep some gold on hand.

Again, you can choose to be or use a different sort of provider.

The value of the currency does not come from how much gold is backing it but by it's utility and the reputation of it's issuer.

Yes, pegging the value of your base currency unit to gold is a wonderful idea. But there is no need for a "nation" to do it. It can be handled in the free-market. Those CPs that choose their value wisely will succeed and those that choose unwisely will not.

Finally, bimetallism is a just bad, bad idea. I would only be interested in a currency pegged to gold. Your view may be different. Gold is the King of Value and has beaten every challenger, including silver, to it's reign over it's 6000 year history. So, for me silver can remain a commodity I have no interest in it being money. Having silver paired with gold as money is like having an asthmatic, 97 pound, near-sighted kid being Roger Federer's doubles partner at Wimbledon. A disaster waiting to happen.

I would recommend people looking to really understand gold based currencies to read Nathan Lewis' Gold: The Once and Future Money.

In Gold I Trust!


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