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The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to rede

The article doesn’t adequately cover the role of central banks in fractional reserve banking. Back in the days of the gold standard you used to be able to redeem a set weight of physical gold from the central bank for a dollar / pound of paper cash or minted coin. This conversion ratio was set by the central bank and acted as a final brake on inflation. When the gold standard was abolished and the dollar and pound became free floating fiat currency, it only became worth something because the government says it is. The “I promise to pay the bearer x pounds/ dollars” is just a hangover from the gold standard days when you could redeem money for gold directly from the central bank rather than through a private gold dealer. Now you can only redeem an equivalent amount of fiat currency at the central bank if day your dollar / pound note becomes damaged. Banks can create deposits / reserves at the central bank out of nothing, they just have to promise to pay the central bank back at a later date, plus an equivalent amount of interest equal to the central bank set interest rate. This is how the central bank regulates the interest rate in the economy. If a bank charges another bank a higher level of interest for lending than the central bank, that bank can just go to the central bank instead and get charged the lower central bank interest rate. This acts as a brake on maximum inter-bank interest rates and ultimately what interest rates are charged by end consumers. The same is true for cash deposits, the central bank acts a floor / minimum interest rate for deposits as the central bank will pay interest at the central bank interest rate for deposits held at the central bank.

TheBobinator 6y ago
Loaning money drives inflation; when a loan check is created, it spends just like cash, except the banks, behind the scene's, trade the loan checks so everyone has enough cash on hand to appear solvent. Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people to take out loans gets them cheaper than late comers and have more favorable pricing. Business loans drive companies to leverage capital by taking out loans using their business as collaterol in order to capture market share (and rarely, creating new markets or shrinking existing ones through technological change). If they do not do this, they will be driven out of business. Net on net, because the markets are not expanding at pace with interest, prices rise. I like to think of this as the accumulation of cumulative interest; effectively when every business in a supply chain has to pass its labor and material through a bank loan, the end product becomes much more expensive than production cost. Cumulative interest acts as a tax on the velocity of capital, and when that stagnates, business revenues drop and companies\people begin to play a game of musical chairs of solvency. What this is supposed to do, in theory, is kill off rotten businesses and ownership, and provide a capital market to ensure the economy can continue expanding and when you have commonwealth companies; companies that pay majority profits to employee's and put employee welfare and interests first; this works because employee's invest in the company during downturns to reap profits in upturns. In practice, in every downturn, wages stagnate because businesses shed labor and do not have to compete for labor during the upturn. Governments are motivated to assure labor shortages are solved because paying staff more because they demand it never improves profitability of a business and is always a serious detriment. Because wages stagnate and do not recover, the profits from upturns are captured by ownership and investorship. This cycle, historically, is not new, and tends to repeat until the people become so impoverished they lose their concept of self repect and dignity and actually think burning things and killing people are effective means to solving their problems which tends to break down systems of government and force governemnts to devolve to basal forms such as tyrranies, dictatorships or autocracies out of necessity. E.G. Many western countries have negative fertility rates despite being the most technologically advanced societies in recorded history, and the way governments are assuring labor shortages do not occur is through replacement-level immigration which further radicalizes politics (it provides people making arguments about genocide with a lot of convincing empricial evidence in favor of their argument).
- z3ncyberpunk 6y ago
  The entirety of your comment shows what's wrong with fractional reserve banking and centralized banking. It's a system predicted on debt which can never be paid back.
- jacobush 6y ago
  What empirical evidence is supposed to sway me in favour of genocide?
  - alasdair_ 6y ago
    I assume the poster meant “evidence that genocide is happening” and not “evidence that genocide is a good thing”
  - clownworld 6y ago
    https://www.un.org/en/development/desa/population/publications/ageing/replacement-migration.asp https://www.un.org/en/development/desa/population/publicatio...
    - jacobush 6y ago
      So low birth rates in developed countries is genocide now?
golergka 6y ago
> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transactions alone; however, if the society as a whole loses trust in the currency, government will not be able to define it's worth. And when it tries, it just leads to black market, barter-based economy and even deeper economical collapse.
- guerrilla 6y ago
  > it's not that government says it is, it's the societal consensus that it's worth it. Disagree. The government only accepts their preferred currency for payment of taxes. This is, in my opinion, its initial source of value. Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.
  - golergka 6y ago
    > The government only accepts their preferred currency for payment of taxes. By "transactions" I also meant tax collection, yes. > Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it. Usually, at the point where society as a whole loses confidence in government-issued currency, it no longer has resources to stop you from using alternative currencies.
    - rusk 6y ago
      I think you’re receiving a strange response because people think you’re advocating some sore of crypto-anarchist freeman position, and HN as a community is very much weighted against that point of view ... I can identify with what you’re saying and there are some very well known examples of local currency being subverted. You can see Bolivia in the news recently, or Argentina or everybody’s favourite trillion dollar note the Zimbabwean kwacha. Funnily enough, all have been using dollars ...
baobabKoodaa 6y ago
Excellent comments. I have now made substantial changes to the article. If you would like to review the diffs, they are here: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621accee110f3b40510c15e9cdc061 https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...
jariel 6y ago
"something because the government says it is." This is misleading. Gold was replaced by other assets, notably 'T-Bills'. Basically, USD are backed by Government debt, instead of Gold. To imply the Fed just 'says it is' is misleading. Since 2008 a lot of the assets on Fed balance sheets are mortgages = notably, underwater mortgages bought by the Fed at face value from banks that were going bankrupt. But I think the point about Gold->Other Assets is important. Euros are backed by assets as well. RMB is the major currency based on the magic will of one man, Xi, who can effectively control currency with the press of a button. We think that is 'bad' because money should be separate from governance, but they look at it differently apparently. So imagine if Johnson, Macron, Trudeau, Trump etc. could literally decide how much money to 'print', to which banks it goes, and to whom the loans would be made, and under what terms. This is they key limitation on RMB becoming a truly 'global currency'. The article is a very worthwhile read though, so as to dispel a lot of conspiracy theories about banking. Funny enough, there is a lot of shady activity in banking, but it takes a good understanding I think to make sense of it.
raducu 6y ago
Two things: 1) Politicians around the world are circumventing central banks with special laws, guaranteed loans programs. 2) Central banks can just "temporarily" buy treasury bills with fictional money -- the only thing keeping us from Weimar inflation is the fact the money hasn't trickled down enough, the population is on the decline, and most of the money goes into propping up asset prices.
thescriptkiddie 6y ago
Gold itself only became worth something because the government says it is. Or rather, it became worth far more once governments started demanding that taxes be paid in gold. Before that it probably wasn't worth all that much, because despite its rarity it wasn't useful for much in the ancient world. Gold isn't some magic substance with intrinsic value. See Debt: The First 5,000 Years by David Graeber.
- kakwa_ 6y ago
  Also, a key idea of Graeber's book is that money is in fact debt (the example with English soldiers checks being used as bills in Hong Kong bars is quite striking in my opinion). Money is basically a small abstraction over explicit debt bonds linked to material goods, making it more easily exchangeable. This comes from the fact most economic chains are far from synchronous (example: a farmer needing tools to prepare his field, but being able to pay for said tools only after the harvest, the blacksmith needing coal and iron ore to produce said tools, but not being able to pay until the farmer has paid him, etc). In this context, the banker (or any other lender) acts as an intermediary, evaluating if the debt can be repaid and bearing the risk instead of the creditor for a fee.
vagab0nd 6y ago
Question: Why isn't a one dollar bank note worth more than one dollar in my bank account, since the bank note can be used to pay back the central bank?
- rags2riches 6y ago
  Because the dollar in your bank account is an obligation of the bank to pay you a one dollar bank note or another bank a central bank electronic reserve dollar.

TheBobinator 6y ago

Loaning money drives inflation; when a loan check is created, it spends just like cash, except the banks, behind the scene's, trade the loan checks so everyone has enough cash on hand to appear solvent. Inflation drives interest rates; interest consists of the rate of inflation plus risk and margin, no bank is going to make a loan at less the rate of inflation. This self-regultes the rate of loans; the first people to take out loans gets them cheaper than late comers and have more favorable pricing. Business loans drive companies to leverage capital by taking out loans using their business as collaterol in order to capture market share (and rarely, creating new markets or shrinking existing ones through technological change). If they do not do this, they will be driven out of business. Net on net, because the markets are not expanding at pace with interest, prices rise. I like to think of this as the accumulation of cumulative interest; effectively when every business in a supply chain has to pass its labor and material through a bank loan, the end product becomes much more expensive than production cost. Cumulative interest acts as a tax on the velocity of capital, and when that stagnates, business revenues drop and companies\people begin to play a game of musical chairs of solvency. What this is supposed to do, in theory, is kill off rotten businesses and ownership, and provide a capital market to ensure the economy can continue expanding and when you have commonwealth companies; companies that pay majority profits to employee's and put employee welfare and interests first; this works because employee's invest in the company during downturns to reap profits in upturns. In practice, in every downturn, wages stagnate because businesses shed labor and do not have to compete for labor during the upturn. Governments are motivated to assure labor shortages are solved because paying staff more because they demand it never improves profitability of a business and is always a serious detriment. Because wages stagnate and do not recover, the profits from upturns are captured by ownership and investorship. This cycle, historically, is not new, and tends to repeat until the people become so impoverished they lose their concept of self repect and dignity and actually think burning things and killing people are effective means to solving their problems which tends to break down systems of government and force governemnts to devolve to basal forms such as tyrranies, dictatorships or autocracies out of necessity. E.G. Many western countries have negative fertility rates despite being the most technologically advanced societies in recorded history, and the way governments are assuring labor shortages do not occur is through replacement-level immigration which further radicalizes politics (it provides people making arguments about genocide with a lot of convincing empricial evidence in favor of their argument).

z3ncyberpunk 6y ago
The entirety of your comment shows what's wrong with fractional reserve banking and centralized banking. It's a system predicted on debt which can never be paid back.
jacobush 6y ago
What empirical evidence is supposed to sway me in favour of genocide?
- alasdair_ 6y ago
  I assume the poster meant “evidence that genocide is happening” and not “evidence that genocide is a good thing”
- clownworld 6y ago
  https://www.un.org/en/development/desa/population/publications/ageing/replacement-migration.asp https://www.un.org/en/development/desa/population/publicatio...
  - jacobush 6y ago
    So low birth rates in developed countries is genocide now?

golergka 6y ago

> it only became worth something because the government says it is That's the only nitpick I have against your otherwise excellent comment: it's not that government says it is, it's the societal consensus that it's worth it. Of course, government is usually a pretty big entity it the country's economy, and since it uses the currency for all of it's transactions, currency acquires some value at least from these transactions alone; however, if the society as a whole loses trust in the currency, government will not be able to define it's worth. And when it tries, it just leads to black market, barter-based economy and even deeper economical collapse.

guerrilla 6y ago
> it's not that government says it is, it's the societal consensus that it's worth it. Disagree. The government only accepts their preferred currency for payment of taxes. This is, in my opinion, its initial source of value. Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it.
- golergka 6y ago
  > The government only accepts their preferred currency for payment of taxes. By "transactions" I also meant tax collection, yes. > Secondly, they may literally stop you from using an alternative currency if they can't figure out how to tax it. Usually, at the point where society as a whole loses confidence in government-issued currency, it no longer has resources to stop you from using alternative currencies.
  - rusk 6y ago
    I think you’re receiving a strange response because people think you’re advocating some sore of crypto-anarchist freeman position, and HN as a community is very much weighted against that point of view ... I can identify with what you’re saying and there are some very well known examples of local currency being subverted. You can see Bolivia in the news recently, or Argentina or everybody’s favourite trillion dollar note the Zimbabwean kwacha. Funnily enough, all have been using dollars ...

baobabKoodaa 6y ago

Excellent comments. I have now made substantial changes to the article. If you would like to review the diffs, they are here: https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621accee110f3b40510c15e9cdc061 https://github.com/baobabKoodaa/blog/commit/c2f7fef53d621acc...

jariel 6y ago

"something because the government says it is." This is misleading. Gold was replaced by other assets, notably 'T-Bills'. Basically, USD are backed by Government debt, instead of Gold. To imply the Fed just 'says it is' is misleading. Since 2008 a lot of the assets on Fed balance sheets are mortgages = notably, underwater mortgages bought by the Fed at face value from banks that were going bankrupt. But I think the point about Gold->Other Assets is important. Euros are backed by assets as well. RMB is the major currency based on the magic will of one man, Xi, who can effectively control currency with the press of a button. We think that is 'bad' because money should be separate from governance, but they look at it differently apparently. So imagine if Johnson, Macron, Trudeau, Trump etc. could literally decide how much money to 'print', to which banks it goes, and to whom the loans would be made, and under what terms. This is they key limitation on RMB becoming a truly 'global currency'. The article is a very worthwhile read though, so as to dispel a lot of conspiracy theories about banking. Funny enough, there is a lot of shady activity in banking, but it takes a good understanding I think to make sense of it.

raducu 6y ago

Two things: 1) Politicians around the world are circumventing central banks with special laws, guaranteed loans programs. 2) Central banks can just "temporarily" buy treasury bills with fictional money -- the only thing keeping us from Weimar inflation is the fact the money hasn't trickled down enough, the population is on the decline, and most of the money goes into propping up asset prices.

thescriptkiddie 6y ago

Gold itself only became worth something because the government says it is. Or rather, it became worth far more once governments started demanding that taxes be paid in gold. Before that it probably wasn't worth all that much, because despite its rarity it wasn't useful for much in the ancient world. Gold isn't some magic substance with intrinsic value. See Debt: The First 5,000 Years by David Graeber.

kakwa_ 6y ago
Also, a key idea of Graeber's book is that money is in fact debt (the example with English soldiers checks being used as bills in Hong Kong bars is quite striking in my opinion). Money is basically a small abstraction over explicit debt bonds linked to material goods, making it more easily exchangeable. This comes from the fact most economic chains are far from synchronous (example: a farmer needing tools to prepare his field, but being able to pay for said tools only after the harvest, the blacksmith needing coal and iron ore to produce said tools, but not being able to pay until the farmer has paid him, etc). In this context, the banker (or any other lender) acts as an intermediary, evaluating if the debt can be repaid and bearing the risk instead of the creditor for a fee.

vagab0nd 6y ago

Question: Why isn't a one dollar bank note worth more than one dollar in my bank account, since the bank note can be used to pay back the central bank?

rags2riches 6y ago
Because the dollar in your bank account is an obligation of the bank to pay you a one dollar bank note or another bank a central bank electronic reserve dollar.