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The easy way out

The easy way out

Posted Nov 6, 2012 19:13 UTC (Tue) by man_ls (guest, #15091)
In reply to: The easy way out by nix
Parent article: Let’s Limit the Effect of Software Patents, Since We Can’t Eliminate Them (Wired)

Not to speak about the dangers of having the economy artificially limited by some external factor. US commitment (and Britain's return) to the gold standard did not help the Great depression; it helped fuel the world crisis by an artificial shortage of circulating money. Deflation and a stagnant economy for a decade were the consequences.

Every time that a bank lends money, in effect it is creating money: as long as the bank is not forced to keep reserves that balance the loan, this "new money" will circulate and fuel the economy. There are some marginal economists (e.g. our own Huerta de Soto) that call for a 100% reserve for every loan; it is another variant of the "let us go back to the gold standard olden days" fallacy. Such a measure would almost certainly lead to a credit crunch of monstruous proportions and paralyze the economy immediately and for centuries. In fact, I sometimes think that the reason why Arab countries fell behind Europe in the 15th century, after having lead the world for a millenium, is that the Quram forbids lending money at interest; while Venetian lenders were inventing modern banking. But I digress...


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The easy way out

Posted Nov 6, 2012 19:37 UTC (Tue) by fsateler (subscriber, #65497) [Link]

I am not familiar with Huerta de Soto's work, but full reserve backing has nothing to do with the gold standard or hard money delusions (despite the fact that austrian economists are strong proponents of both ideas). The idea behind full reserve banking is to prevent private money creation, which is inherently unstable. During a boom, private lenders will increase the money supply, and during recessions they contract it. Full reserve backing would seriously reduce this instability. Also, a recession (or even depression) after implementing full reserve banking need not be true.
See the recent IMF paper on the so called Chicago Plan.

The easy way out

Posted Nov 6, 2012 21:12 UTC (Tue) by man_ls (guest, #15091) [Link]

Sure, full reserve backing (thanks for supplying the correct term) and the gold standard are completely different. They are both however supposed to be solutions to economic instability and cyclic crises; supported by the same people; supposed to be a return to a golden age where they were common; and are both fringe theories widely discredited by the mainstream. Huerta de Soto even has a transition plan from the current situation to a 100% reserve backing with gold standard. Oh, and both policies would benefit rich people: those with the gold and who don't need loans. That is where the (no doubt entirely coincidental) similarities end.

The easy way out

Posted Nov 6, 2012 22:31 UTC (Tue) by fsateler (subscriber, #65497) [Link]

Well, some people support both, but other people support just the reserve requirements.

Full reserve banking has rarely been implemented, so I doubt it is a return to a golden age where they were common. It also can be argued that the ability to create money induces wealth appropriation by the rich (see the paper I linked). Finally, many Chicago economists (and apparently some economists in the IMF too) believe full reserve banking is a worthwhile idea, so it cannot be that far from the mainstream.


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