Over at this website, an interesting discussion about fiat money, gold, fractional reserve banking, lending and borrowing, what a new monetary system might look like.
The thesis appears to be that fiat money is politically inevitable, whatever its infirmities, and that a monetary system based on fiat will always surface and eventually implode. This is a fallen world, so to speak.
Yet rather than the usual dichotomy, the “either-or” of a gold standard money versus irredeemable fiat money, FOFOA (an acronym for, I believe, Friend of a Friend of Another, “Another” being a relatively ancient pseudonymous internet personality) seems to advocate a hybrid, with fiat money freely circulating and being borrowed and loaned just as it has been; and an unregulated, presumably unofficial and I guess underground world of real money, which would be physical gold as the one and only final payment medium, and which could not be loaned or borrowed.
Thus the moniker “Freegold”.
I admit to an odd attraction to this idea, and FOFOA’s discussions and posts seem to have a lot of depth, touching not only on economics issues but also psychology, politics, anthropology, philosophy, history and even a little religion. He also seems to appreciate the fact that law has a big role to play in monetary matters, unusual among bloggers of this kind.
However, the most pertinent idea for my purposes, thus far, is his idea that the lending and borrowing of physical gold should be prohibited.
One of the problems of the Austrian economists and other gold bugs is the somewhat useless fixation with abolishing fractional reserve lending. For the most part, I agree that fractional reserve lending is a bad thing. That’s not the problem I have with the proposal to abolish it. The problem I have with it is, how would you do that? I have asked and asked without receiving anything even approaching a satisfactory answer.
Making the practice a crime would be worse than prohibition: let’s not forget that when lending was largely unavailable, organized crime filled the gap and we saw rather brutal loan sharking. It would seem that Austrian economists, who are self-described libertarians, would see this problem and have an answer for it. Some answer that we don’t need to criminalize fractional reserve lending, that the “market” would solve the problem because savvy savers would figure out which banks had committed “fraud” and loaned out their money. But are they saying that this fraud should be prosecuted criminally by the government? That’s just a different way of criminalizing the practice itself. Or are they saying that the defrauded depositors would have some other recourse? What would that be? They can’t get their money back – it’s been loaned out. What do they do? Some kind of violence? These guys never say.
I think it’s because there isn’t a solution to the problem. It’s in the nature of people to borrow and lend, and that leads to banks, and that leads to fractional reserve lending. You might as well try to do away with alcohol. Oh wait, we did that. It didn’t work.
FOFOA has a good sense of this. He seems to recognize that fractional reserve lending is going to occur. And if I understand him correctly, he believes that it could be restricted to fiat money alone, and that you could have a monetary system where gold was not loaned or borrowed. He even understands that this is more of a legal system than a monetary system.
There are some things that the law can do effectively, and some things it can’t. Legal tender laws work. That’s not to say they’re a good thing, just that they work pretty much the way they’re intended to. The law can also effectively define the monetary unit of account – the dollar, for example – in gold terms.
The law could not effectively prohibit borrowing and lending money, even in the passive sense of not enforcing such contracts in the courts, because many people will do it anyway, and the enforcement of the contracts will become ugly and violent. But could the law recognize one kind of money – fiat – that you could borrow and lend; and another kind – physical gold – concerning which courts would not enforce lending and borrowing contracts, and avoid the problems of loan sharking, since lawful institutions could still loan fiat “money” but not gold?
I really don’t know whether such a bifurcated system would be advantageous or not. It just interests me. I think there’s something to it. I think the law could effectively eliminate gold lending if there were another kind of money that could be lent. And that would have the effect of establishing a savings medium which would not be subject to the ravages of fractional reserve dilution, which could conceivably be largely confined to the other kind of money – fiat.
But the effects of all this are very difficult to gauge. “Freegold”? I don’t know. I’m thinking about it.