A Four Legged Paper Stool
A Four Legged Paper Stool
My last article was about the natural stability of the triangle, both as a structural element and as the basis for a sturdy, three-legged stool. If you cut one or two legs clear, the three-legged chair becomes unstable. However, adding an extra leg to a four-legged stool also affects the stool’s natural stability.
If the ground is uneven, or if one leg is longer or shorter than the other three, a four-legged stool will wobble. This is a pretty good analogy for how the “classic gold standard” works. “Rocking” can be seen in recurring “booms,” “panics,” and “recovery” experienced during the nineteenth and early twentieth centuries. This “rocking” of the economy between overheating and collapse is commonly referred to as the “business cycle”.
This name is very misleading; What is the correlation between the cycles of different companies that make up the economy? What correlation exists between an apple orchard and a hair comb manufacturer … or between a shoe store and a shipping line? In fact, there is only one; Money or more accurate credit.
Credit is the only factor that affects all businesses. The so-called “business cycle” is actually a credit cycle. If we look at how credit affects the entire business, we can see that there is not only correlation, but also causality between the availability of credit / surplus credit and the boom / bust credit cycle.
The roots of the credit cycle date back to seventeenth-century England. At that time, English customary law set the damaging precedent that if someone pays money to a bank, that money is no longer the property of the depositor but is considered the property of the bank! Remember, the depositor does not sell or trade his money to the bank, but merely pays it. This precedent was confirmed in 1811 by another British jurisprudence; Google “Cobdencentre Carr 1811” for a report on this court decision.
This legal decision is staggering. Consider what happens to your furniture when you deposit it in a warehouse. Does it become the property of the storekeeper, as it suits him? Suppose he sells your furniture or lends it while in his warehouse …? I think if you show up to reclaim your furniture and find out that they have been sold, but it has other furniture that is “just as good”, you would not be a happy camper. Or suppose it has been awarded and will not be available until next month … why you can call the police and have the camp warden arrested.
In addition, you have the right to the side. When the warehouse company went bankrupt, the insolvency administrator separated the stored furniture from the warehouse and its equipment, such as the forklift or the building … and sold the warehouse after returning all deposited furniture to the rightful owners to settle property with creditors. As a depositor of furniture in a warehouse, you are not considered a creditor, but a customer … and every stored property belongs to you and other depositors … and not to the warehouse. Why is money different?
Oh, you say money is fungible, and every coin of the same weight and fineness (we’re talking about real money, gold, or silver) is as good as any other … so you’re not entitled to a specific coin or coins. .. and that is true. Just like a granary; If a farmer stored 100 bushels of hard red winter wheat with a grain store, he clearly would not get the same grains back. but he will get back 100 bushels of hard red winter wheat … not corn or oats, and certainly no excuse for selling or RENTING the grain!
Why is money different?
Is it just a coincidence that the Bank of England was a franchise about the time this precedent was created? In fact, this violation of property rights is a journey back in time. England was a leader in the recognition of property rights … the house of an Englishman was his castle, and even the King of England had no rights there. The Magna Carta was written in England not long before that time. More significantly, the industrial revolution began in England and not elsewhere.
Sure, England had coal … but also France and the rest of Europe. England had scientists … but the continent too. The main reason for the beginning of the Industrial Revolution in England is that property rights in England have been extended to both intellectual property rights and physical property rights. James Watt brilliantly understood how to radically improve the efficiency of the Newcomen steam engine. But Watts’s years of effort to develop and manufacture the condensation engine that triggered the industrial revolution required a lot of capital and endurance.
This capital became available only through the newly written patent laws. Profits for inventors … who are not bureaucrats backed by scientists or the government, but entrepreneurs who compete on a free, capitalist market … were only made available through recognition of the inventor’s intellectual rights. The tremendous energy boost devoted to improving the machinery of the Industrial Revolution resulted from this new recognition and respect for intellectual property rights.
Why on earth did property ownership take on money … in the same country and at about the same time?
It is no coincidence that this was also the time when the Bank of England was chartered. Had this violation of property rights not been legalized, the classic gold standard would have remained a three-legged, fully stable system … and the current catastrophic collapse of the world financial system would have been anticipated. So critical is the legal precedent regarding money, property rights and banking.
With the unethical transfer of ownership to the banks, banks could legally do what they wanted with the money, with the depositor having only one claim against the bank … but no control over what the bank does with the money it deposits. Banks are inevitably lending short-term cash deposits at long-term interest rates. The notorious and illicit practice of borrowing for short and long loan periods is thus legalized … rather than being ostracized and punished. This practice leads to the creation of excess credit, the credit cycle and banking transactions. A run occurs when depositors reclaim their money, but the deposit money no longer exists. it was lent in the long term.
The so-called inverted yield curve, in which short-term loans have higher interest rates than long-term ones, is a very unnatural event if you realize that longer maturities involve a higher risk and require higher interest rates to compensate for the result of illicit practice, loans for short to long time to borrow.
Had the depositor’s ownership rights stayed where they belonged, the banks would be required to ask each depositor exactly what the depositor would like to do with HIS money. The selection is simple but critical. The banks could offer a safe-deposit service, as the warehouse manager does. This service would cause storage costs for the depositor, but his money would be fully guaranteed, separate, insured, etc … as safe as possible, perhaps safer than storage at home. After all, banks have serious safes and guards, alarm systems, etc., to protect their assets.
Alternatively, they could offer a fully liquid demand deposit account. This account offers the payer a small, but not zero, return. Cash paid in this way would be available in the form of bank-drawn sight notes and would only be balanced in the banking portfolio by truly liquid short-term assets. The assets behind the demand coupons can only be cash, gold, silver or real bills maturing into gold in no more than 91 days. In fact, before World War I, German banks were expected to withhold 1/3 gold and 2/3 notes against their demand notes. Real bills are a profit object … the face value or maturity value is higher than the current or discounted value … therefore the depositor would receive a modest but rewarding return.
If the depositor has agreed to tie his money for a longer period of time, the bank could offer interest based on prevailing interest rates and always higher than the discount rate. The amount of money available to lend is therefore determined by the time preference of the individual depositor.
There can be no run on the bank, as all debt securities are backed by liquid assets and only long-term deposits are available for longer-term loans. The term structures automatically adapt perfectly. A simple example of this is the assumption that 10 depositors appear at the bank, each with 100 monetary units to deposit.
The first depositor decides that he wants to keep 20 units on his sight account, the rest on time. To keep the numbers simple, we assume that all ten payers choose to do the same. 20 pieces of sight deposit, 80 pieces long term. The result is that the bank will end up with 200 cash on its sight account and 800 on its term account.
Now it is perfectly legitimate and appropriate for the bank to borrow the 800 units. After all, that’s what the owners of the money want. Thus, 800 monetary units are available for circulation … and the borrowers of these 800 units also decide what they want with their new borrowed funds. Put some in sight deposits, some in term deposits.
If the ratio using new depositor is the same, namely 20% demand and 80% time, another 640 units can be borrowed in the next cycle of this iterative process … 80% of the 800 are 640 Then another round, 80% the 640, etc … This is the famous “reserve part” process … but without “printing money from the air”, without arbitrary “reserve rates” and without a central bank would be required to try to improve banking.
Deposits come and go, and money owners are constantly deciding on the split between sight and deposit. If we simply add all time deposits and sight deposits throughout the banking system, we can get a single figure: the ratio between demand deposits and demand deposits, as determined by the countless bank customers.
Today this number is called Reserve Ratio! However, there is a huge difference between a natural number determined by market participants and an artificial number set by interested parties such as greedy bankers and politicians seeking power. The difference is polar, as well as the difference between debt and money. The two numbers are 180 degrees apart.
The power to influence the entire economy now lies with one authority; the central banker. The credit cycle is controlled by one party, the central banker. The minimum reserve ratio no longer meets the wishes of the population. Think about it for a minute. The economy is solid, there are many jobs, the future looks peaceful and bright. As a result, most depositors would be willing to keep a modest amount in their sight deposit and more in fixed deposit to recover the higher interest available. The minimum reserve ratio would therefore remain low. Maybe only 15% of all deposits would be on the sight account.
Assuming that the economy is tense, labor markets look less positive, and the future looks riskier. Depositors would of course like to have more money at hand, just in case. and the relationship would automatically grow to reflect that concern. It is not necessary for someone in power to adjust or adjust this ratio. All economic figures such as prices, interest rates, discount rates, etc. … in a truly free market … regulate themselves. The reserve requirement ratio is optimized through simple but important market feedback mechanisms.
Today, these natural feedback mechanisms have been cut off and replaced by “authority”. In fact, the ‘numbers’ are set at the discretion of the powerful, in the interest of the powerful … and the entire economy suffers the consequences. The instability of the four-legged gold standard was caused precisely by this; The reserve ratio has been set at the discretion of the central banker. The interest of the banker is to create more credit than the market needs or can support. to gather more interest.
The government supports this policy because the government needs more and more money to gain and retain power. The only place where they can get more and virtually unlimited cash is the central bank. The instability and the destruction of money are increasing rapidly. Excessive credit is being force-fed … and as soon as debt reaches a level where debt repayment capacity is exceeded, the artificially-induced boom suddenly goes into bankruptcy. After the collapse, the destruction cycle begins again.
In order to achieve Economic Nirvana, a stable and honest monetary system, we must first restore ownership. Then central banks can close their doors, and market participants can regain their legitimate power over minimum reserve rates, interest rates, money … on all economic “aggregates”. The three-legged stool of the Unadulterated Gold Standard has only three legs … Really!
Cash Gold and silver (money), bonds and real bills are the necessary three legs. For banknotes in circulation there is no basic need; However, if banknotes are to be used, they must be spent against money in the vault of the issuer and against real notes in the portfolio. Not against long-term promises … especially not against promises without the intention of being honored. Such false promises as background notes were the “fiduciary” component of the classic gold standard, the fourth stage causing instability. No fiduciary money, no surplus credit; No credit surplus, no credit cycle. As simple as that.
The infringement of property rights is a slippery slope; Today, not only the money of the customers, but also their futures contracts are mixed with the capital of the depositaries. MF Global’s “furniture” was used by the responsible criminals to keep their own bacon. This theft shows where we are going; The smell of burning sulfur is getting stronger every day! Unless we establish a genuine, stable gold standard in the world economy, our civilization is doomed to fail.
Rudy J. Fritsch
editor in chief
The Gold Standard Institute
Rudy J. Fritsch was born in Hungary in 1947 and fled socialist tyranny during the Hungarian Revolution of 1956. His family had lived through World War II and the associated Hungarian hyperinflation, which is why he is familiar with financial destruction.
As an engineer and entrepreneur, he ran a successful family business in Canada for decades, employing over 100 people at his peak, until the economic turmoil destroyed the profitability of North American manufacturing. Displaced from business life, he decided to study economics to find the cause of this unfortunate circumstance.
Since economics “The Dismal Science” made no sense for him, he finally studied Austrian economics, the only business school that builds on the realities of human action. When he discovered the work of Professor Antal Fekete, he admired her and pledged to preserve and spread the professor’s legacy.