Chapter 12: Money Warehouses
Since in the free market we would use some sort of coins, they would eventually get too bulky to carry around, and warehouses would emerge. We would store our money in a warehouse and carry a warehouse receipt that would guarantee our ownership of the money. Warehouses would probably be even more important with money than other items, since we will always withdraw other items from a warehouse to use. But money has no “use” per se, we can’t consume it, just exchange it. It is just transferred from one person to another, and there’s no need to ever take it out of the warehouse. So the warehouse receipts will eventually come to be used as money substitutes. There’s no reason to withdraw the gold out of the warehouse when you can just use the receipt.
There are three limits on warehouses:
– How much people use warehouses/banks. If some people prefer to use “cash” or the actual gold, then it will be withdrawn from the warehouse.
– The clientele of the bank. If there are lots of banks, it is more likely that one bank will have to move gold from their’s to another bank when one of their clients exchanges the receipt for another item.
– The confidence of the clientele. If the customers don’t trust the bank, they will not store their money in it. The bank must convince the customers that their money will be kept absolutely safe.
Warehouse banking can lead to checking accounts. Instead of carrying a receipt around, person X will have an account at the warehouse that keeps his money. He will then write out a check for ___ amount to someone else, and order the bank to transfer that much of his money to another person.
With all these receipts and money substitutes, has the money supply increased? Of course not. Person X doesn’t use a gold receipt AND the gold itself, but just the receipt. The receipt represents the gold that has been withdrawn from circulation (sitting in the bank vault). The form of money has changed, not the supply.
How would banks make money on 100% reserves?
Just like any other warehouse does. They would charge ___ amount of money to keep your money safe.
How is FRB different than any other business risk?
When a person deposits money in the bank, the bank doesn’t say “we’ll pay this back in 1 year.” The bank promises to redeem the certificate on demand. When other businesses take out loans, they are not increasing the money supply as bankers do with FRB. When a business takes out a loan, money is transferred from the person who saved, to the person who borrows it. But when the bank loans out fake money receipts, they have artificially increased the money supply.
Once a bank engages in FRB, they are bankrupt. The catch is, they can keep on operating until consumers discover this bankruptcies.
Chapter 13: The Summary
All money has originated and must originated from a useful commodity chosen by the free market as a medium of exchange.
Private coinage in the free market is just as legitimate and worthwhile as any other business activity.
The price of money is its purchasing power in terms of all goods in the economy. This is determined by its supply, and by every individual’s demand for money.
If people use more than one metal in the market, these will not be artificially linked, but the ratios left to change according to supply and demand.
Once there’s enough of a good for the market to choose it as money, no increase in the supply will benefit society. An increased stock of the good for non-monetary uses is good, but if it increases the money supply, it dilutes the effectiveness of each unit.
Freedom can run a monetary system just as well as the rest of the economy. There’s nothing about money that makes it so special the gov’t must control it.