Quote from clacy:
Typical "gold bug". Always resort to the "you're a clueless sheeple" line as your argument.
I'm quite secure in my understanding of capitalism and finance as I am a managing partner in a multi-million dollar company. When we need financing, we ask for $USD. When we sell our goods to customers, we ask for dollars. When we pay our bills, we pay with fiat. We cannot go to our vendors and pay with gold.
I'm sure you are well-versed regarding internals of the monetary system. However, lots of knowledgeable people take things for granted and don't think beyond what written in text books. No personal offence intended.
As an example, I would like to share an intresting discovery I made recently. It may be obvious to other but it wasn't obvious to me although I had been familiar with how modern banking system workd for many years.
(This paragraph describes how money supply works for the sake of people who are not familiar with the topic.) Every $1,000,000 dollars Fed creates through monetary easying is given to the Government (or rather Goldman Sachs) in exchange for government
debt securities. This money is immediately deposited in a bank account. Given the reserve rate in the US is 10%, the bank can land the remaining 90% x $1,000,000 = $900,000 dollars. The boorower deposits this money in a bank again and the bank can lend 90% x $900,000 = $810,000. As the process repeats itself $1,000,000 "printed" by the Fed adds $1,000,000/(100% - 90%) = $10,000,000 of money to the system.
So, for every $1 mln "printed" by the Fedral Reserve, banking system creates additional $9 mln. Note that for these $9 mln to be created by the banking system, this money should be lent to someone so that they deposit it in their bank account. So, for every $1mln created by the Fed, $9mln of debt created. My discovery was that
90% of the money that exists in the economy is actually
debt. The monetary system as we know it cannot exist without people and companies owing most of their cash to the banks.
Quote from achilles28:
And a precious metal standard is simple.
Implement full reserve banking.
Outlaw banks from issuing bills not backed by physical reserves, punishable with severe sentences (mandatory minimum 10 years).
Note that "fractional reserve" banking and bills backed by a commodity (such as gold) are 2 completely different things.
In particular, fractional reserve system could exist even if the only money in circulation was physical gold. As soon as you deposit 100 gold coins in a bank account (for safekeeping) the bank can lend 90% of these coins to another client. Now you own 100 coins and the borrower has 90 coins. The money multiplier keeps working. Only 100 coins were deposited while the initial depositor and teh first borrower believe they own 190 gold coins between them.
Now, the question is... How lending could exist before the fractional deposit system without geopradising the value of gold?
If you lend gold to someone you are no longer in posession of this gold and cannot use it to pay for goods and services till the borrower returns it. Only one person at a time is in the possession of the cold he or she could use as a payment whilw with fractional reseve system for every gold coin there are 10 people who think they own this coin and keep spending as if they are in a possession of it.
So, if banks were deprived from lending money from the current accounts (100% reserve requirement), lending would not stop at once. Banks would keep lending money they attracted in "time deposits" or via issuing short-term bonds.
Now would 100% reserve requirement stop the banking crisis? Apprently not. A large part of the reason for the crisis is cachflow mismatch between long-term assets and short-term liabilities. For example, British Royal Bank of Scotland financed its morrgage lending in the money market. The idea was that to finance teh mortage book with average duration over 5 years RBS would re-borrow the whole value of mortgages in the money market. Naturally, as soon as people stopped lending to RBS, its mortgage business got into trouble. Now would this happen if RBS issued mortgage-backed securities instead to provide financing for teh whole duration of the mortgages? Aparently, ivestors would get hit but the bank would stay afloat.
