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Brownian Schism
Restoring Credit with a Publicly-owned Bank: The Model of the Bank of North Dakota ... Neither states in the U.S. nor those in the eurozone can print their own money, but they CAN own banks, which can create bank credit on their books just as all banks do. Most of our money is now created by banks in the form of bank credit, lent at interest. Governments could advance their own credit and keep the interest. This would represent a huge savings to the people. Interest has been shown to make up about half the cost of everything we buy. Only one U.S. state actually owns its own bank – North Dakota. As of last spring, North Dakota was also the only U.S. state sporting a budget surplus. It has the lowest unemployment rate in the country and the lowest default rate on loans. North Dakota has effectively escaped the credit crisis. – WebofDebt
Dominant Social Theme: Let sovereign money rule (at a state level).
Free-Market Analysis: This Saturday the Bell posted a column entitled The Rise of Brownianism, which focused on Ellen Brown (left) and her ideas regarding the government issuance of money (versus third-party entities such as the Federal Reserve). This was not perhaps quite fair to Stephen Zarlenga, director of the American Monetary Institute who can also lay claim to triumph (along these lines) with Congressman Dennis Kucinich's (D, Ohio, 10th District) introduction of the National Emergency Employment Defense Act of 2010, abbreviated NEED. The bill number is HR6550.
Zarlenga has been toiling arduously in the sovereign money pits, convinced, like Ellen Brown, that if the US government itself prints fiat-money that the problems of the day will gradually fade and prosperity will reign once more. The Kucinich bill calls for the Treasury to take over the functions of the Federal Reserve and basically issue debt-free money. It is a bill that parallels much of what Zarlenga has been campaigning for (along with Ellen Brown) for a number of years. Here, condensed, is what Zarlenga proposes for the US's monetary economy:
• Put the Federal Reserve System into the U.S. Treasury.
• Stop the banking system from creating any part of the money supply.
• Create new money as needed by spending it on public infrastructure, including human infrastructure, e.g. education and health care.
• Genuine monetary reform is the solution to the nation's fiscal problems and that can only be achieved at the national level.
In an email sent out on the 18th of December, Zarlenga celebrates NEED as follows: "While the bill focuses on our unemployment crisis, the remedy proposed contains all the essential monetary measures being proposed by the American Monetary Institute in the American Monetary Act. These are what decades of research and centuries of experience have shown to be necessary to end the economic crisis in a just and sustainable way, and place the U.S. money system under our constitutional checks and balances. Yes it can be done!"
While both Zarlenga and Brown agree that money ought to be issued debt-free, the two have had a falling out over Ellen Brown's advocacy of sovereign money at a state-banking level, which Zarlenga believes only confuses the issue. Actually the issue is made more confusing because Ms. Brown has been a proponent of Zarlenga's theories about money and has acknowledged his primacy.
In an interview with the Daily Bell, she stated: "We need to set up our own public banks, which cannot run short of ‘the full faith and credit of the United States' because they ARE the United States (or whatever local government is setting them up). In the U.S., we should nationalize the Federal Reserve and let it operate like a real government-owned bank, issuing money and credit on behalf of the public for infrastructure and other government expenditures. States could also set up their own credit mechanisms by setting up their own banks."
Despite Ellen Brown's backing for his ideas, Zarlenga disagrees on this head. He does not believe that states ought to issue money (through any mechanism) and even believes the idea to be unconstitutional. Ms. Brown now returns fire. In a feedback yesterday was kind enough to inform us that she had abandoned her notion of sovereign money at the federal level because of the complexities involved. She is now focused specifically on states – especially North Dakota, see article excerpt above. Here is a little more from her article excerpted at the beginning of this article:
The Bank of North Dakota (BND) is a major profit generator for the state, returning a 26% dividend in 2008. The BND was set up as "North Dakota doing business as the Bank of North Dakota," making the assets of the state the assets of the bank. The BND also has a captive deposit base. By law, all of North Dakota's revenues are deposited in the BND. Municipal government and private deposits are also taken. Today, the BND has $4,000 in deposits per capita, and outstanding loans of roughly the same amount ...
Governments everywhere are artificially constrained by having to borrow at market interest rates, which means whatever interest banks can extract. Governments can throw off the shackles of this scheme, in which private banks create the national money supply and lend it at interest, by forming publicly-owned banks. These banks can then advance the credit of the nation to the nation, interest-free. And if this credit is advanced against future productivity, prices will not inflate. Supply (goods and services) will rise along with demand (money), keeping prices stable.
And here is part of a previous rebuttal by Zarlenga's group:
Don't be fooled by what's happening in a low-population State. North Dakota has about 700,000 people, a strong community spirit based on farming in difficult conditions, and significant oil revenues. The model being presented is the Bank of North Dakota, which provides support services to some other banks in its area But this arrangement won't automatically translate to other States, as the banks in other States may not wish to engage in it, and requiring them to could be very unpopular. This could lead to significant risks to taxpayers. In 1931, the Government Savings Bank of New South Wales (a federated State of Australia), at that time the 2nd largest savings bank in the British Empire, was closed down by a run caused by a series of ‘scare' stories put out in the media as part of a ‘political' attack. If a similar action were possible against a State-run bank today, taxpayers might be called upon to pay for the aftermath (e.g. the Bank of North Dakota is not FDIC-insured(!), and is instead guaranteed by the State Government itself).
We've written in the past that Ellen Brown's version of sovereign money might be at least a little better than what the US has today (even though state-banking efforts would seem to be unconstitutional). But leaving aside legal issues, the idea of states issuing money is certainly preferable to the US Treasury doing it. Additionally, Ms. Brown, via her book Web of Debt and her general industriousness, seems to us to have made an impact that has aided Zarlenga even though he does not seem especially grateful.
We could go on about the various differences and similarities of the sovereign money movement. One can actually get lost in the dizzying technicalities, both legal and monetary. In times of monetary stress, these sorts of movements always arise. (Another such movement is Georgism – which propounds real-estate as a singular important asset) and one of its primary modern proponents Ingo Bischoff often posts here.) You can read an interview with Bischoff here:
http://www.thedailybell.com/503/Ingo-Bischoff-Henry-George.html
Ms. Brown, of course, continues to be a good (and photogenic) spokesperson for sovereign money. In fact, she has added tremendous credibility to the sovereign money movement as a whole via her high-profile and media contacts. For this reason, we long-ago named the resurgent movement Brownianism (as opposed to Zarlenga-ism).
But no matter what it is called, we disagree with it. The basic premise of sovereign money is that the state itself can figure out how much money to print. The basic problem with this premise is that sovereign-money types do away with the market governor that limits how much paper money can be printed. In a free-banking system (including fractional reserve banking) the bank is alerted to an increase in redemptions (of paper for gold) as it occurs, in real time. This "early warning" feedback acts as a constraint on the lending. As stocks of gold and silver diminish, the bank contracts its lending until its owners reach a reserve level with which they are comfortable.
There is no feedback loop in sovereign money that we know of. No way for the individual state (in Ellen's case) or the US Treasury (Zarlenga) to receive market feedback as to how much lending is too much. We are aware of the Brownian argument that loans would be backed by real estate (enter the Georgists again) and that therefore the loans would be self-sterilizing and not cause inflation. But there is a problem with this as well, and it has to do with the VALUE of the real estate. How is the real estate (or even other assets) going to be assayed for purposes of collateral? Who is going to make the determination? The answer is, of course, HUMAN BEINGS.
Again, we see the Invisible Hand of the market is not to be a factor in this system of monetary utility. There are two problems immediately evident:
1) Price Inflation: As real estate begins to be in demand as collateral, it will eventually (artificially) inflate in price. The Brownian system will INEVITABLY cause a boom-bust syndrome. If a main way of obtaining money from a bank is through the use of real estate as collateral, we guarantee that there will be, eventually, an artificially high valuation for land. We shudder to think how high the price of land might go. And then how far down it might plunge during a cessation in economic vitality.
2) Collateral Corruption: Imagine the game-playing and corruption that will take place if land is to be the basic element securing a bank loan. Imagine the hand-washing and backscratching. And even if it is NOT to be land, but other sureties as well such as gold and silver, similar avenues for corruption offer themselves generously. Simply – artificially – making a loan deponent to sufficient collateral (in all cases) is an indelible distortion of the marketplace. In a free-market some loans might be subject to a surety, and some might not (depending on the opportunity). The point is, once the state is involved and once rules are in force, a distortion of the economy is inevitable. A boom of some sort is inevitable (beyond what the market would normally cause) and then a bust. And asset-inflation as well.
We are sorry to be the bearer of bad tidings. (And we have no doubt that Ms. Brown will rebut the above screed if she has the time and energy.) But that's how we see it. It is impossible to tamper with the market. It is impossible to create money artificially. Money is not land. Money is not collateral. Money is not paper. Money is gold (and silver) as history proves. The basic methodology of commerce in successful societies is bi-metallism freely entered into by a free people.
Bimetallism is self-regulating. People can tell if the supply of one metal or the other is being tampered with. If the price of one metal or the other goes down, mines close and hoarding begins. Eventually there is a lesser supply and the price goes back up and mines open up and dishoarding begins. This is the way the MARKET regulates supply and demand. THERE IS NO OTHER WAY. Every scheme of humankind will only lead to a distortion of the market sooner or later. The very best minds – Ms. Brown's and Mr. Zarlenga's and Congressman Kucinich's – even these minds as acute as they are, cannot outthink the market. They cannot win an arm wrestling contest with the Invisible Hand.
A final note: Just yesterday, we were accused by one dismayed feedbacker of providing negatives without positives. It is easy to tear down, he wrote us, but difficult to build up. Ms. Brown is out on the hustings proposing solutions. (Zarlenga, too credit where credit is due ...) What are we doing? Our answer to that would be that we are educating people about free-markets and honest money to the best our abilities (or at least our Swiss elves'.) Should we be doing more: twisting political arms; using union muscle? ... We've set up a non-profit foundation as well, but so far as we can tell, political and economic cycles have their seasons. We're not sure how much additional activism will be of benefit.
A power elite has driven paper money nearly as far as it is possible to go via central banking. For this reason, we have been somewhat suspicious of the sovereign money movement, while trying to promote market-based money. it seems, somehow, to be a backdoor way for the elite to regenerate government control of money, and then to take it over again! Our suspicion has not been eased by an almost ochestrated-seeming group of websites that have cropped up recently supporting various forms of sovereign money.
And yet ... we anticipate (as we have written many times before) that because of the truth-telling of the Internet, the Anglo-American elite may eventually have to take a step backward; free-banking, or at least gold and silver, might surge to the fore as money once again. It would happen spontaneously, not necessarily as the result of some new Bretton Woods (no matter how much the elite would like that.) It would be preferable to sovereign money in our view.
Conclusion: The sovereign money story grows more and more complicated. It is ever-thus when one tries to outwit the market. Thus, like Candide, we will till our own garden and wait for the day when the world changes. Hopefully, via articles, books – and our many fine feedbackers – we will have contributed to a solution when the world is ready to embrace free-market money once more.
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Posted by Nikki Alexander on 01/09/11 01:06 PM
The issue is really very basic and can be summarized something like this:
Which is preferable, to have money brought into existence as debt by private individuals and be charged interest for the right to use it, or have money brought into existence without associated interest where it is publicly owned and there is no obligation to repay it to anyone?
It is pure folly to assume that any bill as it is first written will not be altered before it is voted on, and anything that could be considered a flaw could not be addressed as an amendment. To me the question of whether or not this bill is an improvement to the current system is not worth contemplating and to attempt to predict negative consequences based upon assumptions and speculation only serves the purpose of preserving the status quo. Those who wish to do this are either naïve, have ulterior motives, or desire to continue to profit from the way things are.
There is a blatant contradiction in the argument being used by those attempting to discredit this bill. They are crying the sky will fall if this bill becomes law because congress will just create money excessively, to the point the economy will implode due to hyperinflation. They are failing to mention that the economy has already failed due to the mathematical impossibility of sustaining a debt-based currency indefinitely and that the US as it stands now is on an inevitable path of self-destruction. There is no possible way of avoiding it considering that all money is debt.
Assuming the numbers being disseminated pertaining to the current size of the US national debt and the forecasted unfunded liabilities are accurate, the only way this situation can be addressed and still have enough money to enable the economy to function is either for the velocity of money to increase dramatically or to somehow create a lot more of it. As it is unlikely that there is going to be a huge increase in economic activity the second choice is the most probable, but the irreconcilable paradox is that the more money that is created the more debt there is, and so it goes on and on and on and on. This is really like trying to dry out a wet blanket by pouring water on it.
The difference is that at some point with debt-free money the downward spiral stops and with money as debt this never ends.
There are those who would rather curse the darkness than light a candle.
The Metaphysics of Money
Click to view link
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Posted by Peter J. Ritter on 01/05/11 11:11 PM
To Ingo Bischoff.
Medium to long term more and more RB's will mature into gold coin, but gold mining of less than 2% annual growth will always or mostly limp behind economic activity. So a gold standard could become an impediment to economic activity. To compensate it would require the periodic revaluation of gold (upward) as the only solution to reconcile the balance between the two. If the quantity of gold is not enough, its value has to go up. That would be good for savers but how about the economy? Prof. Fekete has not addressed this aspect so far.
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Posted by Noone on 01/03/11 09:32 AM
Mr. Bischoff,
If you are still getting this, could you please give your take on why you think real bills will re-emerge in India? FOFOA is keenly interested in that point.
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Posted by Ingo Bischoff on 01/01/11 10:43 PM
@ DB
You could always hedge. True. However, hedging is done by the multi national corporations in the FX markets primarily to maintain market share overseas.
To hedge an irredeemable currency used in accounting for capital investment involves the interest rate. The prime interest rate under our irredeemable currency regime is set by the FED. You can hedge against "Acts of God". However, hedging against human judgement, as you do in the case of the FED established interest rates, is the height of folly.
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Posted by Danger Dave on 01/01/11 01:21 PM
the government doing any good! HA they just want to enslave the people and this fool thinks we are dumb enough to believe that she knows more than we do..2 2=4 it always has and always will no matter what she want it to add up to
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Posted by Ingo Bischoff on 01/01/11 12:04 PM
@ Noone
Von Mises in his work proved that unless you have a fixed accounting standard, the proper valuation of capital is not possible.
An accounting standard which uses a currency, even so exchangeable (meaning gold ownership is allowed), but cannot be exchanged for a specific amount of gold (meaning the currency is redeemable), is a currency which is usable for consumption purchases (the time between receiving "income" in irredeemable currency and spending it is very short), is unsuitable for capital investment accounting.
If capital investment is valued based on an irredeemable currency, it leaves this capital to be constantly reevaluated when the price of the currency changes in order to insure correct decisions for a proper return on investment.
Here is what I mean: If I today invest my savings in a piece of capital equipment for production purposes and the going interest rate is 5%, then the return on the savings which I use to buy the capital equipment must at least be 5%. Otherwise, as long as I am rational, I would invest my savings in a bond for 5% with much less risk.
Under the "freegold" system, the interest rate fluctuates when the price of the currency fluctuates. If the interest rate goes to 2.5%, I must value my capital equipment upward to maintain an accurate picture of my asset position. On the other hand, if I have already depreciated the capital equipment based on the purchase price when the irredeemable currency was say 1/20 of an ounce of gold, I now have to reevaluate my capital position based on the irredeemable currency say at 1/40 of an ounce of gold.
Do you see the nightmare this presents? Not to speak of the competitive situation that occurs when one business, which acquired capital equipment when the irredeemable currency sold for 1/20 ounce of gold, now has to compete with a business which acquired capital equipment when the irredeemable currency sold for 1/40 of an ounce.
The point von Mises makes in his work is that no business can proper or long exist under those circumstance in a "free market" setting. The redeemable currency provides a fixed accounting standard in terms of gold. That is the most important requirement for business planning and investment.
A redemption feature for a currency used to facilitate consumption is not important, unless of course during a period of hyper inflation. (The irredeemable Greenback Dollar worked extremely well.) A redeemable currency is essential for saving and for capital investment.
I agree with von Mises and that is the reason why the "freegold" idea will not work
Reply from The Daily Bell
You could always hedge, yes?
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Posted by Noone on 01/01/11 10:58 AM
Pardon me for prolonging this. While I am in general familiar with Mises ideas, I am not familiar with his specific arguments on why an irredeemable currency will not work. Could you perhaps briefly sketch out his salient points?
Thanks
Reply from The Daily Bell
Paper money redeemable neither in gold nor silver; fiat money. He believed in a gold standard.
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Posted by Ingo Bischoff on 01/01/11 01:17 AM
@ Joe Borden
The States cannot issue "legal tender" currency. Section 10, Article I, U.S. Constitution prohibits them from doing so.
The Constitution is silent with regard to "legal tender" currency issue on the part of the federal government. After the FED had violated the Federal Reserve Act of 1913 by condicting Open Market Operations in the 1920s, the U.S. Congress in 1934 retroactively legalized the rogue act of the FED and gave the FRN "legal tender" protection. In other words, the Congress turned the FED into a "central bank".
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Posted by Joe Borden on 12/31/10 11:46 PM
Zarlangos arguements are totally discredited when he stated that the "states could not be stoped from issueing what ever amount of money that is needed"
Really? what is the Federal reserve doing??? He is ever so elequent, but loses the point in his verbacity. It is a shame that such a great mind is so full of it's self that he cannot see the forest for the trees.
The only realistic answer at the moment is a spiecie based monitary system that precludes fiat based manipulation. See, some of us are not stupid and resent your dumheit pompasity.
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Posted by Ingo Bischoff on 12/31/10 07:49 PM
@ Noone
I fully agree with you about the amount of naked contracts being traded for which there is absolutely no chance for delivery performance. Lehman and Bear, Stearns have been among a number of firms who "leased" massive amounts of gold and used such gold leases to back contracts sold on the Toronto and New York exchanges. Lehman and Bear, Stearns are gone. They will never return the gold they had leased, and the lender has no obligation to make good, because he is owed the gold back.
Fortunate for the lender of course, the gold never left his vaults. That is how you depress the "gold price" to make the USD/FRN appear more valuable. Do you see how this works....???
It makes no sense to me to worry about speculators in the "gold market", who should have known that gold has no price and that a "gold market" is something to be approached with great suspicion. Bill Murphy and others at GATA have for years warned about the manipulation of the "gold markets" by the highest officials in the U.S. and U.K. governments. I have no sympathy for people holding gold contracts from the Exchanges. That's between them and the Exchanges. Every Exchange has a "force majeure" clause. These contracts will be simply paid off with irredeemable currency. The speculators should have read the disclaimers before they traded.
As to the USD/FRN, I have no sympathy for foreign countries complaining about the FRN losing value. Every country should have known that by accepting the irredeemable FRN after August 15, 1971 was entering a crap shoot. The U.S. may hold out a guarantee to back the FRN, but with what?
Yes....you guessed it, another FRN......cute, ain't it.
The quantity of physical gold above ground has no bearing on prices or anything whatsoever. The fact that gold exists as a unique commodity makes it the measure of value by universal acclaim. One ounce of gold would do as well as one ton of gold to act as the measure of value. Instead we have about 150,000 tons of the stuff above ground.
The quantity of roughly 25 tons of gold is held by different countries. A country's gold reserves functions similar to a "nuclear arms cache". It protects a country from speculative "currency attacks". Ask George Soros, if he likes gold.
The rest of the 125,000 tons of gold are owned by private individuals throughout the world. The longer governments persist in running this disastrous central banking system, the more and more difficult it will be to coax private gold out of hiding to help revive a "commercial banking system".
By "commercial banking system", I mean a redeemable currency created against Real Bills and Gold. Under no circumstance do I advocate that Gold should be used as a "currency".
The "freegold" system attempts to adjust prices through an irredeemable currency priced against gold. My judgment is that it won't work. You cannot value capital with irredeemable currency. Ludwig von Mises proved that conclusively, as far as I am concerned.
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Posted by Not Anti-military Per Se on 12/31/10 07:20 PM
The DB frequently offers "let the market decide," and then "the market has consistently decided on silver and gold."
Difficult to argue either point, whenever offered.
IMHO, Gold's role in commerce apparently is facilitated organically within the market by "Real Bills."
Real Bills are notable for their role in a vibrant international commerce predating WWI, as well as apparently making modern day banks (dependent on loans/usury) obsolete.
As the DB has pointed out antecedents to WWI are not all together clear. Not clear until one buys into the premise offered (and adroitly supported) by the DB that an AA PE has influence behind the scenes, fueled by what has become modern day banking. This influence is actively obfuscated by the syndication of PE cronies in MSM and Academia.
Interestingly Geo Mason U Econ Dept seemingly (from DB interviews) abhors Real Bills. This compromise on free market thought alone has earned it the recognition by MSM as the authoritative representation of Austrian Economics. Certainly a dubious distinction considering the source.
Perhaps Human Action enthusiasts should acknowledge the importance of this particular topic ie. the markets development of Real Bills in the use of real money.
This feedback in intended as a thank you to the DB for maintaining this forum and the ongoing feedbackers for their insight on what my sense is a topic of great import.
Best Wishes in promoting Human Action.
Peace.
Reply from The Daily Bell
Thanks for all your great feedbacks this year. You make an important point about GMU. Other then Fekete, Bischoff and the Daily Bell, there is no real platform for Real Bills that we know of. And there should be. They are obviously part of a vital, free-banking mix. Strange that they should be looked on, apparently, with such distrust by the formal free-market community ...
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Posted by Noone on 12/31/10 05:27 PM
Two points of FOFOA's take on freegold;
1. The "price" of gold currently is determined in various paper markets, primarily the NYMX. The vast majority of these trades are settled by offsetting trades. It is estimated that there are approximately 1 oz of physical gold for every 100 paper promises to deliver gold. So during an economic reset, most of these paper promises will be defaulted or forced to take a financial settlement. Thus a vast reset in the price as most all the worlds paper forms of wealth try to funnel into a very limited supply of physical gold.
See Click to view link for a good take on this.
2. The necessity for a floating, not fixed rate of exchange is explained here.
Click to view link
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Posted by Ingo Bischoff on 12/31/10 03:39 PM
@ Giustino on 12/30/2010 3:08:07 AM
"According to the concept of "freegold", as succinctly presented by Noone, freegold needs fiat currencies to function, the Euro having been seemingly destined to that purpose from its creation, to eventually replace the doomed USD. The argument for the end of bimetallism is then supported by the fact that rich and poor will both only use fiat currencies as a medium of exchange and gold as a store of value."
Giustino....I owe you a response to your comments. As regards "freegold", as far as I can make it out (the link you furnished has some problems), is already in existence. "Freegold", the way I understand the term, prices all irredeemable currencies against the value of gold. That means using gold as the standard. It is difficult to grasp that the "gold standard" has existed uninterrupted for over 2,500 years and that valuing currency or any other good or service against gold is nothing new. You have had "freegold" since September of 1971. What I mean is that the minute you turn around the quotation on the gold market from reading 1 oz. of Gold = $1,400 to read $1 = 1/1400 oz. of Gold you have acknowledged the existence of what you call "freegold". Simple.....isn't...???
Currencies are necessary in an advanced economy. However, they must be redeemable currencies, i.e. based on the "gold standard". For a currency to be redeemable, it must be fixed to a certain amount of gold. Why is that important? It is imperative that a fixed accounting standard be used for planning capital investments and in the recording of financial statements. "Capitalism" cannot exist under a monetary system which does not allow "capital" to be valued correctly. Irredeemable currencies value capital like a rubber band measures linear distance. Hedging currency in the FX markets is at very best a questionable alternative.
When it comes to the EURO in relation to the ECB gold reserves, I like to quote Professor Antal Fekete, "it is for the birds" not for holders of EUROs. To think that the EURO would ever be redeemable under present circumstances, is to be naive in the extreme. I think Fekete is absolutely correct, "EURO gold" is strictly for the birds. As for the EURO replacing the USD/FRN as the world reserve currency, it is very unlikely to ever happen.
What will happen over time is the return to a fixed gold standard and the restoration of "commercial banking" (Real Bills.....watch India).
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Posted by Ingo Bischoff on 12/31/10 02:36 PM
@ Pat Fields
"Says Who? With rapidly developing sophistication in real-time 'credit reporting' systems, innovations in the applicability of Bills, to a far broader array of circumstances, expands proportionally. What can prevent that development?"
...says any "commercial banker" and any knowledgeable investor. These are the only individuals involved in dealing with "Real Bills". The problem is that because "commercial banks" are no longer in existence, there are no longer any "bankers" who know the difference between a "Real Bill" and a mortgage. Since the "Bills Market" was killed in 1933 with the confiscation of gold, there are no longer any knowledgeable investors who know how to trade "Real Bills" for a discount.
As I mentioned in a previous response, a credit reporting system in relation to the creation of "Real Bills" is entirely superfluous. The drawing of a "Real Bill" does not involve credit at all. It involves simple promises without consideration between two consenting parties. One party promises to supply, the other party promises to pay any bearer the amount on a properly endorsed "Real Bill" upon maturity. The party conveying the supplies releases all claims and title in return for the mere promise of paying a specified amount upon maturity. By accepting the promise of payment, the party conveying the supplies is completely released from all liability, and it is protected against claims of unsuitability, injury or any other claim lodged against under the "Law of Bills and Notes". (I make an assumption that you are in the "legal business". "Real Bills" are a part of Anglo-American Commercial Law which will undoubtedly come back into use. It will need advocates. Today, the country of India leads the way in the use of "Real Bills". As things go, this country will have to return to "commercial banking" as well, and it will need legal expertise in this area of law.)
As regards "credit" in relation to "Real Bills", the "credit" as such is found in the ready demand of consumers for the items whose production is financed through the use of "Real Bills". If I say, "Real Bills can only be drawn between suppliers and producers of consumer items. No one else", I mean that it makes no sense for a "commercial banker" or knowledgeable investor to acquire a "Real Bill" that is drawn between parties not involved in the production of consumer items. That is where the "ready demand" exists which provides the incentive to acquire the Real Bills at a discount. Take away the "ready demand" feature of a product (any good to sustain one's self physically is in ready demand) and you take away the "credit" feature. You can readily see that modern credit reporting can not help you to gauge credit. What does help you gauge credit of the consumer at large, is the discount rate set in the Bill's Market. The discount rate immediately tells you the readiness of consumers to purchase a particular good or not. Merchants and retailers would keep their eyes peeled to the discount rate and make their inventory and production decisions accordingly.
I sympathize with you about the difficulty of grasping the concept of a "mere promise" without consideration. Growing up with an education system which teaches nothing but "central banking" according to Keynes and Friedman, one is never exposed to the idea of "free market" business dealings as used to be practiced in this country for 150 years. The body of Law regulating the use of "Real Bills" goes back hundreds of years. The "Law on Bills of Exchange" applied in this country going back to George Clymer, Benjamin Franklin and the Pennsylvania Pound was a modification of the "Law of Bills of Exchange" passed by the English Parliament in 1750.
Under a "commercial banking system" no businessman would ever dare default on a Bill, nor would he collude to create double Bills, if he ever hoped to stay in business. (If you ever wanted to know the reputation of any business, all you had to do is to consult the "commercial banker" serving the community.)
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Posted by Pat Fields on 12/31/10 05:19 AM
Ingo Bischoff ... "Real Bills can only be drawn between suppliers and producers of consumer items. No one else"
Says Who? With rapidly developing sophistication in real-time 'credit reporting' systems, innovations in the applicability of Bills, to a far broader array of circumstances, expands proportionally. What can prevent that development?
PS: Thanks for the heads-up on 'Early History of the Law of Bills and Notes'. It's very pricy! But, I have it in my list of target 'bargains'.
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Posted by Ingo Bischoff on 12/31/10 01:34 AM
@ John Danforth
A check is drawn on a bank in favor of a payee and debited to the payors account at the bank. Anybody can issue a post dated check.
A Real Bill is drawn by a supplier on a producer. The producer promises to pay the supplier a set sum for value received, but the Real Bill does not represent a contractual document. It is a mere promise to pay the specified sum ninety days out.
Real Bills can only be drawn between suppliers and producers of consumer items. No one else.
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Posted by John Danforth on 12/30/10 10:59 PM
Ah, so it's a strictly legal distinction, not a conceptual one. Or did I miss the concept?
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Posted by Ingo Bischoff on 12/30/10 07:13 PM
@ Noone
"In the case of the post dated check, what happens if during the time between the transaction and the payment date, the issuer goes bankrupt? Isn't there a counterparty risk there?"
A post dated check is a promise to pay at the date specified. If bankruptcy occurs and the check is dishonored, it will be a loss to the payee, unless the bankruptcy court can make an award depending on the agreement and transaction for which the check was issued.
The similarity of a post dated check and a Real Bill is that neither one is a credit instrument. A Real Bills are a promise to pay, as are bank checks. However, their use is covered by different parts of Anglo-American Commercial Law.
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Posted by Noone on 12/30/10 06:47 PM
In the case of the post dated check, what happens if during the time between the transaction and the payment date, the issuer goes bankrupt? Isn't there a counterparty risk there?
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Posted by Ingo Bischoff on 12/30/10 06:05 PM
@ Bill Ross
I am not saying that criminalizing failure to report to the IRS is something I support. Quite to the contrary. I am utterly opposed to the 16th Amendment.
On the other hand, when you run a business, you have to be very much concerned about the government threatening your survival. I have had several IRS audits during my time in business. These audits have eerily reminded me of my experience with the East German Stasi. Thank god, I had a good tax lawyer.
As to reality, I believe there is an infinite number of realities. The question is to what extent these realities overlap each other...???
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