The example did not involve any leverage. It involved borrowing short and lending long. The two are not connected in any way whatsoever. It is quite possible for a bank to only lend out deposits on a 1:1 totally unleveraged ratio, and still benefit from the "oversubscribed" effect you talk about. They would lend say 90% on long-term loans, and keep 10% in t-bills for liquidity. If their loan portfolio fell say 10% (a huge amount for a conservative loan portfolio), then depositors would lose 10% of their savings, no more. Actually it would be less than 10% because they would get shareholder capital first. There are many financial institutions that have operated on this model. For example, the UK building societies that did not de-mutualise. They *never* go bust even during heinous recessions and financial panics. The reason is that they use no leverage. Every loan is backed by deposits of equal amounts. If there is a run on a building society (a real one, not one that converted to a bank), then the very worst case is that people get 10% of their money immediately, and then have to wait a while to get back the rest of their cash, meanwhile it earns interest payments each month from the loan portfolio. Now compare to a typical bank. For every $1 in deposit they might make $10-15 in loans. A 10% fall in the value of their loan portfolio will threaten to wipe them out, unless they can raise more capital. If there is a run, they go bust in most cases. Is there any reason at all to favour the latter over the former system?
I just thought I would comment on the part about monopolies not being natural. There are many industries in which a monopoly is best for the consumer and much more practical. http://en.wikipedia.org/wiki/Natural_monopoly
This is wrong. It is no harder for a government to ban gold and enforce legal tender laws than it is to tell a central bank to print money. A stable fiat currency system is easy to envisage - you could amend or write a national constitution requiring a fixed, or GDP-inflating money supply, and a politically independent institution to enforce it. It would be the financial equivalent of the US Supreme Court. That would be *much* more stable than having a gold standard, which can be left at any time.
You're confusing your terms. From the article you cite: "A natural monopoly and a monopoly are not the same concept. A natural monopoly describes a firm's cost structure (high fixed cost, extremely low constant marginal cost). A monopoly describes market share and market power; the two are not synonymous. This has been a source of some ambiguity in discussions of "natural monopoly"" We are not discussing the competitive markets misleadingly called "natural monopolies" (they should be called markets with returns to scale, or lock-in markets. Examples would include phone directories, technical standards, or networks of various kinds). After all, "monopolies" which benefit consumers more than competition would hardly be objectionable. We are discussing *actual* monopolies i.e. where there is only one firm providing a given service. It's market power being so great that no other firm can compete and provide that service or a close susbtitute for any length of time, and thus consumers end up paying so-called economic rent - far higher prices for worse product than if competition was brought about by force. Could you give an example of a monopoly of the latter kind please?
Of course. I think regional cable and utilities providers is the easiest to think of. The infrastructure cost is too much to have several companies competing in the same area. In other words, any industry which has significant entry barriers is most likely to develop a healthy natural monopoly. *edit I just wanted to add after I saw the revision to your post that these monopolies although the easiest still do not give the best prices. They are beneficial to the consumer in the way that with competition the service would not likely be provided. They are still paying higher prices for less service in this monopoly.
The model you mention is an investment, not a store of cash. Most people who want cash don't want to "invest" in giving loans to people voluntarily. Cash means cash, not exposure to a mortgage portfolio. Thus we are back to square 1. People who want zero principal risk would not want to be in this investment class as you describe it. With the existence of the FDIC, the govt is backing fractional reserve.
I am a little dubious about this. Perhaps the idea has merit but it seems as vulnerable to political whim as a gold standard. "Independent institutions" are hard to come by I'd say. For instance the US Supreme Court is under constant assault by which ever party is currently in control by the attempts to stack the deck with sympathetic judges.
You really need to read my posts more closely. I wouldn't have been talking about deflation if it wasn't understood that gold's circulation would be stretched thinner. Saying "there wouldn't be enough gold to go around" is just an expression of what causes it to thin out and to increase in value. The problems with hard currency go beyond the fact that the money supply stretches thin, I'm talking about the resulting deflation of prices, and how ridiculously high valued gold could be if there was a hypothetical imposed gold standard. I'm going to assume you didn't read my posts completely. If one has any education or clue in economics, when the word deflation pops up in a discussion about hard currency, it shouldn't be a strain to figure out the correlation. I guess my general opinion on this is that there's no magic solution to the problem of confidence in currency or money. Back it with whatever you want, any form of money or tradable thing in general will always have the potential to raise doubts on its own value. Pricing is subjective, because people are subjective.
I've been searching around a bit, and it seems that each Austrian economist had a different angle on monopolies. Some argue that natural monopolies can exist, others (Rothbard) argue that without government support there is no such thing as a monopoly. I won't get in the middle of it, but it seems a pointless exercise to try to describe a unified attitude towards monopoly regulation if in fact they do not have a unified view on the definition of monopoly (versus free market competition). Here's a source that compiles a bunch of points together. http://74.125.95.132/search?q=cache...nnaturalâ+Monopoly&hl=en&ct=clnk&cd=1&gl=us His only conclusion was Austrians wanted complete repeal of anti trust (but I assume that i based on their assumption that monopoly occurs with government support only, which I adamantly disagree with). If you aren't cool with regulating against monopolies, how can you be fine with regulating against the Fed / banking cartel ? I understand the ideal, that the government should stay out of capitalistic pursuits, but that is against human nature (look at soviet communism for evidence of this failure, where its corrupt leaders asserted hierarchal dominance in a system that was sold on virtue of equalizing the masses.) That inconsistency breaks the deal. If you want government out, then you want no safety net. And if you want no safety net and a commodity backed currency (vulnerable itself to the whims of inherent human speculation boom/bust even without the influence of frac reserve dynamics) , you have to agree being fine with 35% unemployment and very very long recessions. http://en.wikipedia.org/wiki/List_of_recessions Just look at those nineteenth century crashes. Even though the dollar has fallen, people's standard of living has grown, and while technological progress is responsible for the bulk of that, I think it might be fair to say modern Keynesian and other socialistic constructs may have had a hand in stabilizing things since the great depression. As evidenced by the late nineteenth century, there were jarring shocks to the system were attributable to changes in commodity backing of the currency (1873, silver crash). That chart above does not point to me to the idea that a gold standard would mean smaller boom and busts. Those recessions looked pretty long and deep. In conclusion, if you want stability, I think Keynesian policy is better. If you want wild gyrations, deep unemployment rates for long periods, a deflationary trend protecting the buying power of hoarders versus investors, creative destruction, and inefficient use of capital, the Austrians have a package for you. I'd rather have a supply boom of agriculture motivated by amped up investment seeking profit to beat inflation than a tougher incentive to grow the plant size. At least in the end, we'll have something to eat (even if it means a deflationary spiral assuming they can't print enough money). PS: In response to the notion Austrians are OK with non-government supported (and thus Frac reserve as an option is there) banks, I classify 'inefficent use of capital' under Austrian ideas because I think fractional reserve banking on any degree of leverage (ie 10% reserve requirement) would be too vulnerable to runs and collapses if privately done without government backing, and long term sustainable deposits in a leveraged environment would not exist without getting wiped out every few decades in natural panics. We learned that lesson in the great depression, and thus the FDIC was born in 1933. Interesting place for some info on reserve requirements in 1929: http://findarticles.com/p/articles/mi_qa5461/is_1_44/ai_n28779679/pg_1?tag=artBody;col1 Effective reserve requirements actually went up during the great depression from 5.4% in 1929 to 7.72%. I've read some stuff speculating our effective reserve ratio is near 2.5%-5% rather than 10% due to 0% reserve requirements in time deposits.
I can't think of any present-day monopolies that exist under a free market - but this is because the government intervenes to make it impossible. In the days before such intervention, monopolies appeared very quickly in a number of industries once various social, legal, technological etc. changes made it feasible for single enterprises to operate on a national scale. Offhand, I can think of Standard Oil, the various railroad trusts, US Steel, and AT&T. It may be true that all monopolies are transitory phenomena in the long run, but there's no reason that one couldn't remain in place for decades, or even centuries.