Tom Woods On Money

This is a great talk by Tom Woods on the origins of money. He explains the natural market processes that take place that leads to the emergence of currency. This talk emphasizes the significance of currency and picks apart the current monetary system like it is nothing, for it is. Our current system is not market based but is instead Fiat based and the difference, along with the business cycle theory is beautifully explained in this talk. Take a listen and let me know what you think, (for those capable of it).

What Austrian Economists never seem to address is the fact that fractional reserve banking arose under market conditions and not by government decree. If money supply could meet the demands of exponentially growing commerce through monetary deflation, fractional reserve banking would have been restricted to a few crooked bankers and would not have become the norm. So given the same situation again, it is not possible to retain the "sound money policy" advocated by Austrian economists without government interfering in the market and criminalising fractional reserve banking or mandating the cash to reserves ratio to be adhered to by banks.

You can't be a believer in free markets and "sound money policy" as advocated by Austrian economists.

reply to post by Observor


Alright these are two separate issues. First the to the idea that the money supply must grow with the economy or else there will not be enough. This is talked about by Woods directly in the above video. I'll explain it for you since it seems you did not make it through the video... Money is simply a unite of measure or in essence a division. Like an yard or inch. The total amount is not all that important. Gold and silver weren't chosen because there was just the right amount to match the current economy... The amount is for the most part irrelevant (with the exemption of extremes). As the economy grows and produces more wealth, the money you hold will increase in value, if the supply remains constant. People wont run out of money to trade, they will just trade smaller quantities or divisions of it. This as nothing to do with the rise of fractional reserve banking. It was not created to fill a gap left as the result of the money supply not being able to meet the demands in a growing economy. This is just not true.

As far as fractional reserve banking goes, this is not addressed in the talk but it is addressed by austrians extensively... They have books dedicated to it (The Mystery of Banking; Murrary Rothbard)...

There are ethical, legal and pragmatic economic arguments against the practice of fractional reserve banking. Some economists and ethicists have concluded that the practice is fraudulent and therefore immoral, in that a bank promises to redeem deposits on demand when it is aware that, through this practice, it will never have sufficient funds to satisfy all depositors. Some critics consider this fundamentally unethical, akin to counterfeiting and/or embezzlement.[6][7][8] The simple reality is that no bank engaged in fractional reserve banking can pay its debts as and when they fall due, because a significant proportion of current liabilities (cash deposits) have been lent out and are no longer possessed by the bank. Many analysts (including Murray Rothbard) have concluded that all banks engaged in the practice are inherently insolvent. A bank run is not an "extraordinary", "unusual", or "unexpected" event in finance, but a predictable event that merely reveals the reality of banking - that fractional reserve banking is inherently unstable and that such banks are inherently insolvent. Murray Rothbard and others have concluded that fractional reserve banking is nothing but a monetary Ponzi-scheme, relying on new borrowers (or entrants to the scheme) to remain viable. Reformist economists such as Murray Rothbard support a "full reserve" banking system and criticize fractional reserve banking as inherently fraudulent.[9] Murray Rothbard held this view very strongly throughout his life.[7][10]

Source

it is not possible to retain the "sound money policy" advocated by Austrian economists without government interfering in the market and criminalising fractional reserve banking or mandating the cash to reserves ratio to be adhered to by banks.

Government would not have to criminalize anything but fraud. Meaning it would only have to enforce that which is not permitted in a free market environment.

Originally posted by crankySamurai
Alright these are two separate issues. First the to the idea that the money supply must grow with the economy or else there will not be enough. This is talked about by Woods directly in the above video. I'll explain it for you since it seems you did not make it through the video... Money is simply a unite of measure or in essence a division. Like an yard or inch. The total amount is not all that important. Gold and silver weren't chosen because there was just the right amount to match the current economy... The amount is for the most part irrelevant (with the exemption of extremes). As the economy grows and produces more wealth, the money you hold will increase in value, if the supply remains constant. People wont run out of money to trade, they will just trade smaller quantities or divisions of it.

I very much watched the entire video and explanation in the video repeated by you above holds no water because history speaks differently.

Monetary deflation hurts exactly those who take risks to increase production resulting in increased commerce which requires increased money supply. In other words, it penalises the enterpreneur while rewarding those who do nothing other than hold on to their money. That is exactly the reason why enterpreneurs sought modern bankers who enabled increased commerce without monetary deflation. No one was forced to participate in the modern banking system (legal tender laws came much later).

This as nothing to do with the rise of fractional reserve banking. It was not created to fill a gap left as the result of the money supply not being able to meet the demands in a growing economy. This is just not true.

Oh! But it is exactly that.

Government would not have to criminalize anything but fraud. Meaning it would only have to enforce that which is not permitted in a free market environment.

Fractional reserve banking is no more fraud than borrowing to invest in a risky venture (All businesses carry a risk). Banks simply borrowed money from depositors and lent to businesses. Fractional reserve banking is the only type of banking that exists. If fractional reserve banking is to be treated as fraud, banks are nothing more than safety deposit boxes charging a fee for the deposits. Because if a bank lends even a tiny fraction of the deposits to a business it is operating with reserves which are only a fraction of the deposits. For that matter all kinds of borrowings which are not backed by any assets should be declared fraud.

Apparently risk is a word that is absent from the dictionary of Austrian Economists and they substitute risk with fraud.

Capitalism is not free-market, period.

The term free market was around long before capitalism. Capitalism is based on 'surplus value', what the worker produces above what they are paid for, and before the 1700's there was no surplus value.

Capitalism is free-market only for capitalists. If you support the idea of Austrian economics I hope you are not working for a wage. Talk about supporting something not in your best interest.

Capitalists having more power is not the answer. It would not be liberty for all. Capitalism cannot work without government over site. All it does is empower the capitalist/ruling class even more than they already are. The capitalist class would become the de facto state, with even less rights for the majority working people.

There is more to a society than just the most efficient way to exploit labour to make money for a minority class.

This is the problem with "anarcho"-capitalism, it's an oxymoron. The state we have is because of capitalism. We didn't have this state system before capitalism, it grew with it, and because of it. Capitalism cannot work with out the state because it is the state that gives private owners the right to use their property economically. The capitalists themselves created the laws that created the capitalist system. Without government they couldn't do that. The government is made up of people mostly from the capitalist class, always has been. Take the government away, without changing the economic system, it would be anarchy, not anarchism.

Or this might happen... (doubt it in this day and age but..)

The Spanish Revolution (1936)

The revolution took place because the Republic government collapsed, and they were governless for three years.

reply to post by ANOK


Just as you repeatedly criticize people for incorrectly citing the politics of Stalin, Lennon or these other leaders as an accurate representation of socialism or communism, I will now do the same.

The current system is NOT capitalism. It is not even close.

When I refer to capitalism I refer to the FREE MARKET. The two are the same. If you are under the impression that they are different that is because the system we have currently is not a free market and it is not capitalism. You cannot have capitalism with a government interfering.

You say that anarcho-capitalist is an oxymoron, I say it is the only true form of capitalism there is.

You say capitalism requires government force. I say capitalism cannot exist in the presence of government force.

You are arguing against a concept of capitalism that I DO NOT hold.

I support capitalism as it was once thought of by many and still thought of by the Austrian School, an environment of total liberty, with respect for private property and voluntary action.

Any other concept is not capitalism.

This current state is not a product of capitalism but the ignoring of its concepts. The market did not birth the state but continues in spite of it. To say that the free market produced government is more than just plane incorrect, it is the free market that exist only in the absence of government and is the actually the very antithesis of it.

If you think there is a difference between the free market and capitalism please elaborate so I can help clarify the confusion.

reply to post by crankySamurai


Deflation hurts those investors who did not anticipate it true. This does not have to do with fractional reserve banking.

Banking is a service and yes it would be essentially money warehousing.

If you deposit your money in a bank, the contract that you sign is that you are able to withdraw your money at any time, meaning that the bank must at all times have enough money to account for all deposits. If the bank is not able to fulfill the contract, present the deposited money at the time requested, then it is committing fraud.

In fractional banking this is the case. No fractional bank has the ability to fulfill all the contracts made with their clients.

If the client is willing to take a risk with his or her money there are other types of contracts that can be made and that is perfectly fine, but if a person is storing money for savings this has to be just what is done, otherwise there is a violation of contract, fraud.

Originally posted by crankySamurai
Deflation hurts those investors who did not anticipate it true.

Deflation hurts the creative risk taking producers and rewards the lazy hoarders of money who want to get rich simply by leeching off other people's creativity.

This does not have to do with fractional reserve banking.

It has everything to do with fractional reserve banking.

Banking is a service and yes it would be essentially money warehousing.

If you deposit your money in a bank, the contract that you sign is that you are able to withdraw your money at any time, meaning that the bank must at all times have enough money to account for all deposits. If the bank is not able to fulfill the contract, present the deposited money at the time requested, then it is committing fraud.

In fractional banking this is the case. No fractional bank has the ability to fulfill all the contracts made with their clients.

The bankers never hid the fact that they operated on fractional reserves. So it is not a fraud. The depositors took the risk that in the event of a bank failure they stand to lose most of their deposits with the bank.

It is like claiming that insurance is a fraud because no insurance company has the money to cover all the promises it makes. The promises are made based on the assumption (a very valid one) that under normal circumstances all the claims will never be made simultaneously.

If the client is willing to take a risk with his or her money there are other types of contracts that can be made and that is perfectly fine, but if a person is storing money for savings this has to be just what is done, otherwise there is a violation of contract, fraud.

How about those not wanting to take any risks with their money, keep it under their pillow? Why deposit it with banks who pay an interest on the deposits and demand the banks not invest / loan the deposits in/to risky businesses? Where do they think the interest is coming from? By the money in the bank laying little eggs?

reply to post by Observor


I disagree that the banks made it evident what they were doing. The bank notes said redeemable in gold. This was simply not the case.

A financial intermediary that participates in fractional reserve banking would have to make a distinction with the notes, or contracts used. The notes referring to 100% gold being stored or warehoused would have to be different that the notes where gold is being fractionally stored.

Something to this effect would have to be printed:

"Payable to the holder, at its price in gold, pending supply:
We keep 10% of our notes' total values in reserve at all times."

These notes would have a different value in the market place for these would come with risk.

The reason people would warehouse 100% their money is for the service it provides. The facility that a person places their money in issues a receipt. This would be the bank notes. These notes could be traded or a digital account could be made ect. This way the person does not have to carry around the commodity but can simply trade he notes, pay electronically ect.

Trading a note that is backed 100% would have a different value than a note backed by 10% which would carry risk. This distinction would have to be made. If a facility tried to pass of 10% notes as 100% notes this would be fraud.

reply to post by crankySamurai

The distinction is only in the minds of the gold-bugs. One very easy for anyone to distinguish if the bank is operating on fractional reserves: cost of saving the money with the bank. If there is no cost of saving the money with the bank or if the bank pays interest on savings, the bank, necessarily, is operating on fractional reserves, since even an idiot knows money doesn't lay eggs and the only way a bank can not charge a fee for securing their deposits or even pay an interest on them is if the bank is using those deposits to lend to others for an even higher interest rate, meaning at any given time the bank does not have all the deposits it received. During the rise of modern banking there existed banks of both types and it is those paying interest on deposits that attracted more depositors until the other type of banks ceased to exist.

If things were to play out again (disclaimers or not) that is exactly what would happen again, as long as there is a possibility of exponential growth in production and commerce.

Yeah, sure if there exists no possibility for an exponential growth in production and commerce, you can go back to gold/silver/ceramic or whatever commodity standard you please and live in a stagnant economy happily ever after.