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.” Governments have continually operated to widen these limits, which would be narrow in a system of “free banking”—a system where banks are free to do anything they please, so long as they promptly redeem their obligations to pay specie.They have created a central bank to widen the limits to the whole country by permitting aft banks to inflate together—under the tutelage of the government.And they have tried to assure the banks that the government will not permit them to fail, either by coining the convenient doctrine that the central bank must be a “lender of last resort” or reserves to the banks, or, as in America, by simply “suspending specie payments” that is, by permitting banks to continue operations while refusing to redeem their contractual obligations to pay specie.[20]Another device used over the years by governments was to persuade the public not to use gold in their daily transactions; to do so was scorned as an anachronism unsuited to the modern world.The yokel who didn’t trust banks became a common object of ridicule.In this way, gold was more and more confined to the banks and to use for very large transactions; this made it very much easier to go off the gold standard during the Great Depression, for then the public could be persuaded that the only ones to suffer were a few selfish, antisocial, and subtly unpatriotic gold hoarders.In fact, as early as the Panic of 1819 the idea had spread that someone trying to redeem his bank note in specie, that is, to redeem his own property, was a subversive citizen trying to wreck the banks and the entire economy; and by the 1930s it was thus easy to denounce gold hoarders as virtual traitors.[21]And so by imposing central banking, by suspending specie payments, and by encouraging a shift among the public from gold to paper or bank deposits in their everyday transactions, the governments organized inflation, and thus an ever larger proportion of money substitutes to gold (an increasing proportion of liabilities redeemable on demand in gold, to gold itself).By the 1930s, in short, the gold standard—a shaky gold base supporting an ever greater pyramid of monetary claims—was ready to collapse at the first severe depression or wave of bank runs.[22]100 Percent Gold BankingWe have thus come to the cardinal difference between myself and the bulk of those economists who still advocate a return to the gold standard.These economists, represented by Dr.Walter E.Spahr and his associates in the Economists’ National Committee on Monetary Policy, essentially believe that the old pre-1933 gold standard was a fine and viable institution in all its parts, and that going off gold in 1933 was a single wicked act of will that only needs to be repealed in order to re-establish our monetary system on a sound foundation.I, on the contrary, view 1933 as but the last link in a whole chain of unfortunate actions; it seems clear to me that the gold standard of the 1920s was so vitiated as to be ready to collapse.A return to such a gold standard, while superior to the present system, would only pave the way for another collapse— and this time, I am afraid, gold would get no further chance.Although the transition period would be more difficult, it would be kinder to the gold standard, as well as better for the long-run economic health of the country, to go back to a stronger, more viable gold standard than the one we have lost.I daresay that my audience has been too much exposed to the teachings of the Chicago School to be shocked at the idea of 100 percent reserve banking.This topic, of course, is worthy of far more space than I can give it here.I can only say that my position on 100 percent banking differs considerably in emphasis from the Chicago School.The Chicago group basically views 100 percent money as a technique—as a useful, efficient tool for government manipulation of the money supply, unburdened by lags or friction in the banking system.My reasons for advocating 100 percent banking cut much closer to the heart of our whole system of the free market and property rights.[23] In my view, issuing promises to pay on demand in excess of the amount of goods on hand is simply fraud, and should be so considered by the legal system.For this means that a bank issues “fake” warehouse receipts—warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults.This is legalized counterfeiting; this is the creation of money without the necessity for production, to compete for resources against those who have produced.In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy.I am familiar with the many arguments for fractional-reserve banking.There is the view that this is simply economical: The banks began with 100 percent reserves, but then they shrewdly and keenly saw that only a certain proportion of these demand liabilities were likely to be redeemed, so that it seemed safe either to lend out the gold for profit or to issue pseudo-warehouse receipts (either as bank notes or as bank deposits) for the gold, and to lend out those.The banks here take on the character of shrewd entrepreneurs.But so is an embezzler shrewd when he takes money out of the company till to invest in some ventures of his own.Like the banker, he sees an opportunity to earn a profit on someone else’s assets
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