Can Banks Really Just Create Money? – Paul Tustain
The segue, how to get from here to there, has been a major part of my thoughts regards Libertarianism. One area is the issue of Sound Money and how to get away from a fiat system.
The route is well trodden: Free Banking, sound money and, ideally, gold-backed offerings.
Free Banking – the ability for entities to set up their own currencies and offer currency competition is basically the beachhead against a de-facto fiat currency geographic monopoly. In addition, banks should not be allowed to get away with the sleight of hand that is the fractionally-reserverd “demand deposit” account, however, without telling customers that their bank statement is just a record of lending to the bank and that the bank cannot guarantee to repay that amount on demand. This is basically down to an issue of misrepresentation, of basic contract fraud.
In all honesty, I do not believe enforcing transparent contracts in itself will solve anything. People will be blind to it. “Free” bank accounts offering near-current services will be offered and life would return to “normal”.
So, Free Banking in itself is likely not to be enough on its own. There needs to be Sound Money, even better, a fully-backed gold currency.
While a State-run gold currency can be a tempting option, it flies in the face of consistent Libertarian reasoning. If it will be viable, other entities will try, so State involvement is a distortion. If it is not, how to justify and fund a loss-making endeavour? Either way, it is still none of the State’s business. The only exception might be if the State decides to set up its own currency for the storage of its own wealth, so as to be independent of privately-run vaults. It would need good justification for doing so, but cannot be dismissed out of hand.
But what of migrating the existing currency from fiat to gold? As discussed many times, and most recently for me, here, the shift of a particular currency from fiat to gold has many obstacles. Apart from the basic logistical ones of conversion, pegging, convertibility and bank runs during the transition, the very concept of Free Banking and/or hard currencies are anathema to the State. It prevents governments from practicing invisible taxation via inflation and of pushing spending today onto the earnings of children as yet unborn.
Logistics are trifles compared to the politics of hard currency backed by gold that strips the State of arbitrary, opaque power. The State will not let go of such power unless it is prised from its cold dead hands.
There is no point just moaning about this or dreaming that the State will suddenly not think of its own narrow vested interests – solutions are required. Well, I want a solution, even if nobody else does!
A Taoist Approach
Taoists have been said to be the worlds first Libertarians. We need to not just think of a frontal assault, but work around the problem to achieve our goal. Not the end of fiat money, but an end to being forced to use fiat money and thus robbed by its controllers.
Setting up a new currency requires Free Banking and that, in turn, requires, I believe, a Libertarian victory in the polls or the overthrow of the State, for the reasons I have given above. Before even a chance of that, we are likely to descend into chaos if, or it is increasingly looking to be, when, the fiat money system collapses in on itself. I fear that the replacement of our existing system will not be kittens and cushions. It is as likely to be disorder, corruption and risk of a “Strong Man” gaining power to bring “order”. We have seen how Libya and Egypt have turned out. We saw how a convulsing Russia panned out from 1917 and Europe a few years later. In other words, it is unlikely to be very pretty.
But what if we could allow people to use gold as a store of wealth without all the downsides – risk of counterfeiting, storage and transportation? Something that applies to individuals, banks and to international and national trade alike.
One Potential Solution
I envision a series of vaults containing gold reserves accessible via a charge card.
As with currency reserves now, entities would conduct transfers between each other at a series of central clearing and settlement vaults, netting off transactions unless absolutely necessary, by electronically re-allocating the ownership of the gold intra-vault and inter-vault. Of course, lending of depositors’ gold to satisfy short term inter-bank or inter-vault shortfalls is not an acceptable mechanism unless the depositors are aware of the limitations on access and, one would suspect, commensurately rewarded. All parties would work to ensure as little lending as possible is needed, so as to reduce the need to secure sufficient time deposits of gold in advance. To lend without permission, to say gold is on demand when it was not, would be fraud and theft.
There would be no notes or specie in general circulation. The accounts would be accessed via a charge card. Just as a Sterling or Dollar-denominated credit card can buy goods in another currency, your gold card could buy goods denominated in any currency. All the apparatus for charging and conversion exists already. We have the means here and now to handle such operations.
All transactions can be performed in gold. If the seller wants to redeem in currency, then they have the option to do so at the point of exchange. It would smooth the adoption of the system if the seller could know precisely how much they would get in fiat currency, if that is what they wanted. Therefore, the option to have the sale performed by the buyer at that moment should be provided.
And what has Peter Schiff of First Pacific Capital done?
Peter Schiff has, via First Pacific Capital Bank, created a “real” gold and silver card, which is linked to a personal gold or silver trading account. It requires you to first buy your gold in this account, then sell your gold or silver to charge up your card in a particular currency when you wish to purchase something with it.
Half-way is better than no-way
The First Pacific Bank does not function as a clearing and settlement operation for gold exchange, and so its Gold Card relies on fiat currencies for the actual transaction. Each account is just for buyers, so direct buyer-seller transactions are not supported. However, the logical progression is there for all with eyes that see and wits about them. Introducing this card will stimulate others, who are in a position to do so, to make the logical steps necessary and provide more integrated services.
The vision of transferring wealth denominated in gold, electronically, from anywhere to anywhere, to use it to buy goods almost universally, has made a big step forward. The ability to be free from rapacious controllers of monopoly fiat paper currency gets closer.
Peter Schiff should be applauded.