by MrBill » Tue 22 Nov 2005, 03:56:28
$this->bbcode_second_pass_quote('gego', 'N')ero,
Fiat money is money not backed by a physical commodity.
Fractional reserve banking is a system where a "reserve" is kept that backs a liability, but the reserve is only a fraction of the liability.
The US (and Canadian) banking system is both a fractional reserve system and all the "money" involved in this system is fiat. When is the last time you transacted in species?
We are not discussing some ambigious point that could be intrepreted by rational minds in different ways.
We have fiat money because it is not backed by a physical commodity. You cannot surrender your bank account to the bank and get a physical commodity. All you can get is a credit promise. We have fractional reserve banking because the banking system issues credit based on reserves ranging from zero in the case of federal reserve bills of credit to a small percent in the case of certificates of deposits, savings accounts and checking accounts.
You are arguing that black is white.
No, that money is backed by the physical assets of the entire country. At any point in time you can exchange those useless paper IOUs for food, transport, housing, energy and any physical good you like as well as for such things as an Ivy League university education. Do those assets go up and down in value? Yes, so does gold.
If you use your savings to buy a house, you have a house. You have exchanged your dollars, euros or pesos at a fixed point in time for a physical asset. You will no longer earn interest on your paper money or electronic debit, but you will no longer pay interest either. The house becomes your asset. It is real. Does it really make any difference to you if you used gold to pay for the house, cash to pay for the house or whether an electronic book-entry was made to pay for the house?
Yesterday I bought & sold millions of dollars worth of oil & gas futures, which will mature in mid-December. But, at the end of the day, my position was the same as it was on Friday afternoon. Did I create or use physical oil & gas? No, I temporarily entered into future obligations, either to buy or to sell a physical commodity, but before maturity, in this case the sameday, I cancelled those obligations by taking an equal and opposite position. The on difference from a bookkeeping perspective is the gain I made between the purchase and the sale price. That gain is someone else's loss.
When I use my credit card to book an airline ticket, I have entered into an obligation to pay for that ticket either immediately or over time. If over time then my bank will charge me interest for use of their funds. Yes, they are their funds because I do not pay for the airline ticket they do. Then they charge me for the ticket. If I don't pay then they have to write my debt off or pursue me through the courts, which also has costs attached to it.
Even when there was such a thing as 'The Gold Standard' whatever that means as it was never universal, but book-keeping entries not the physical transfer of coins or gold were the basis of commerce. The Medici in 15th century Florence leant money to merchants and royalty and charged interest. Never less than 12% p.a. and up to 45% if the party in question needed the funds urgently or like most royalty of the day were poor credit risks. You could quite reasonably argue that even on the gold standard (?) the concept of fractional banking (i.e. extending credit based on promises to pay) and fiat banking (more credit than the physical supply of coinage) was well entrenched. For instance, money might be leant against an estate or a copper or silver mine or in the case of the Church as future income stream from the productive operations of the church's property.
Sounds like modern banking to me, but because our current system is more sophisticated and efficient the concept of lending has extended to more and more people with lower and lower transaction costs. But, even then you still had debtors that got into trouble and could not repay their debts. They did not have the gold or silver to repay the paper IOU that they had signed. So how can you say that all transactions were backed by a physical commodity?
The History of Banking
p.s. I like the comment about being a clerk. Got a chuckle out of that one.
The organized state is a wonderful invention whereby everyone can live at someone else's expense.
