Banking, Real Money, and Intrinsic Value

The great Ron Paul taught me everything I know about the immoral and unwise practice of fractional reserve banking on which our current banking system is built in his book End the Fed.  This book also opened my eyes to the Federal Reserve system and how it ultimately  benefits the banking elite.  In the book Dr. Paul also explains now he thinks a return to the gold standard would cure the problems which come along with the fractional reserve system.

How does a fractional reserve system work?  Tom Peaceworth sums it up nicely, though maybe a little too simply in his article “Credit for the Rest of Us” when he writes:

The way our current system of fractional reserve banking works, whenever a commercial bank makes a loan, it is counted as an asset rather than a liability of the bank, because ostensibly it is still deriving interest from it. But what actually happens is that the credit is created out of thin air, against a “fractional reserve” which is made up of the commercial bank’s deposits (its true liabilities).

Basically, when the bank gives you a loan, mortgage, etc. it is creating the money and then charging you interest on the money it just created.  The author calls this checkbook-credit.  The result is profits for the bank, but risks for the depositors.  Peaceworth writes, “they are socializing this shared risk but privatizing the gains from it, which accrue to the bank on interest. In the words of Wendell Berry, this process was literally ‘selling a bet on a debt as an asset.'”  We see the rotten fruit of this system in times such as in the crises of 2007.  Who paid the price?  Not the banks. 

But if, as happened in 2007, debts stop being paid back, banks very quickly call in their debts and refuse to lend any more, and the general economic trust on which the monetary system depended, collapses. The result of the use of checkbook-credit is that privately-run corporate banks can profit on all manner of risky and predatory lending projects right up until the point where they can’t get away with it anymore, and then insulate themselves from any of the consequences when it becomes apparent that the piper has to be paid somewhere (with something that doesn’t actually exist). The Joneses are the only ones who suffer from this collusion of Hudge and Gudge.

The reason I brought up Ron Paul at the beginning and how he argues bringing back the gold standard would prevent such things from happening is because Tim Peaceworth tries to show that this argument fails. Peaceworth argues that the Austrian school of economics, which Paul represents, are wrong when they argue that gold, when used as money, has intrinsic value. When you use gold as money you are depending on it being useful in further exchanges “the exact same way you would do with bank notes or checkbook-credit.”

I’m thankful for the article because it has caused me to think about the gold standard and fiat currency from a different perspective.  Many questions have persisted in my mind about the intrinsic worth of gold and other precious metals.  Will gold and silver really be valuable in the event of a terrible economic collapse?  I hope we never find out. 

Here is a link to the full article:

Credit for the Rest of Us?


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