Right. Not necessarily explaining fractional reserve banking here, just How you can increase the money supply in various ways that also aren't the BIGGEST SCAM IN HISTORY.
Unfortunately, I would have to agree that the fiat money-fractional reserve system is the biggest scam in history. The relevant quotes from numerous historical figures and former central bankers like Josiah Stamp, bear this out.
Understood. No I wasn't describing fractional reserve banking, just a way that I can increase the money supply through a loan/debt agreement. The other parable is more relevant to specifically Fractional Reserve Banking. Of course it's still silly and simplified.
As per your example, you weren't increasing the money supply, but merely issuing private debt. Bonds, while generally liquid investments, are not money, and cannot circulate as money because they have different yields and maturities. You would only be creating money if you created corn-receipts, AND if these receipts were widely accepted. You would be creating fractional money if you issued more receipts than you had underlying commodity to deliver.
I don't think it's based on a fraud. AFAIK, banks are allowed to store as much of other people's money as they want, and disclose all of it. Is it not true that there is a minimum reserve required by law, and not a maximum? If you believe it's unethical, then don't bank with them. I'm sure that some banks have a higher reserve ratio that you might deem more ethical. But it makes the world go around, and it's a voluntary and transparent transaction between depositor and banker.
The fraud rests on the logical impossibility of redeeming all of the deposits at the same time, the inflationary aspects of FRB, and perhaps most importantly the systemic risk that is introduced by allowing it. If you support fractional reserve banking, then you support "too big to fail", implicitly. Anything else is just self-delusion.
If banks loaned their own paid-in capital, and used certificatates of deposit as their only form of "credit intermediation", the above problems would be solved. Our economic growth would be both sustainable, and equitable, and our economy wouldn't be dependent on and held hostage by banks that are deemed "too big to fail".
True, but I did increase the money supply, by issuing these bills. You're right that they aren't liquid, but my goal was really just to show a way in which you can create money "out of thin air."
You didn't create money, you created a promissory note. There is a difference.
Which is true, and you're not required to deposit money in a bank if you so choose. There is also a presumably more risk to carrying around $20,000 in your wallet, or investing it in even less liquid investments of your choosing.
Whether people should be allowed to use alternate currencies is a different subject entirely, by the way.
You may not be required to deposit money in any one particular bank, but you're required to deposit money in the
banking system if you want to participate economically, and if you want to partially avoid the punitive inflation tax. As far as risk is concerned, fiat money-FRB increases it. Whereas you may be personally disinclined to lend $20,000 towards a subprime loan for the crackhead down the street, your banker isn't. Especially if he can profit by the transaction, and then immediately sell it to Wall Street where it is then sold back to you as a collateralized debt-obligation, and then ultimately loot the taxpayer when the whole system implodes.
I think it is. The tickets have become currency. Money is worth what people say it's worth. If the shopkeeper trusts that the corn will be produced, and he voluntarily accepts the ticket for a pair of shoes, then that ticket has become a form of currency.
Again, it would only be currency if it were fiduciary money, ie: a corn-receipt payable today, AND if it were widely accepted. Your example described nothing but private debt.
Right. But it doesn't really matter, as I'm just illustrating a way that the money supply can be increased. As long as people are in fact not requiring immediate checking on demand of all notes they carry, then the money supply increases.
In your given example, corn is money. Therefore, the money supply only increases as more corn is produced. The only thing you've increased are promises to pay corn, which may or may not be consistent with reality, and which shouldn't be confused as money.
Your argument seems to be based on the evils of fiat currency more than fractional reserve banking. Am I wrong? Would you rather all money be backed by gold? Would you rather banks be required by law to hold 100% reserves?
I think it should be up to the free market to decide what is money, and since a free market requries the abolition of fraud, 100% reserve banking. I recognize that perpetually devaluing fiat currency is nothing more than a regressive tax, and that FRB results in an unstable economy subject to the business (boom-bust) cycle, the bust which we're about to experience now. The gold standard failed, and would fail again in the context of fractional reserve banking, and in the context of money representing merely a fiduciary promise to pay gold.
Again, they are analogous only in that they are both examples of using the odd fact that we don't have 100% demand on notes, and we can use that fact to increase the money supply in various ways.
If by "we" you mean the government, they can increase the money supply because it has little to no intrinsic value at all, and because it is forced into circulation by the laws that require you to pay your income taxes in Federal Reserve Notes. I'm only pointing out that your example has neither of these characteristics, and isn't an example of money creation in any practical sense. You attempted to create an analogy using corn, something wholesome that most of us like to eat, in an effort to ridicule/deflect criticism of the money and banking system.
