John Médaille wrote:
>I am enjoying this discussion, but a 
>clarification, please. James is arguing in favor 
>of the FRS, and Pat against it. I had assumed 
>that Pat was for a gold system, but he says that 
>while he would like that, he is not actually 
>proposing it. In which case, what are you proposing?

John, I am proposing a 100% reserve system in 
which the government controls the quantity of 
currency (federal reserve notes and coins). I 
would prefer a commodity-based system like a gold 
standard in order to completely avoid the 
possibility of discretionary monetary policy. 
However, I don't think that this is politically 
feasible. So I settle for a 100% reserve system 
in order to reduce the exaggerated fluctuations 
in M and in financial institution lending that 
result from credit swings. Such credit swings 
cannot be controlled by the government without 
greater cost than benefit. All that one can hope 
for is to reduce the exaggerated effects.


>Also, I do not understand the distinction in 
>this sentence: "Let's keep in mind that the 
>function of financial intermediation is not to 
>get money from savers to investors, like a 
>Keynesian might argue, but to enable the 
>purchasing power of savers to be employed in the 
>directions that most satisfy consumer wants both 
>in the near and more distant future, as a good 
>Austrian would argue." Isn't that part of what 
>investors do? Of course, investors also 
>speculate with the money, as we have seen, an 
>"investment" which adds nothing, since in 
>speculation, one man's gains are measured by 
>another man's loses; there is no net gain.
I have two purpose in mind here. First I want to 
emphasize the uncertainty entailed in all saving 
through intermediaries as well as the 
uncertainty-mediating function of intermediaries. 
Second, I want to keep in the forefront the 
methodological point that production (or 
research) must be made in accord with a regard 
for consumer interests for economists to treat it 
as investment. I sensed that James may have been 
neglecting this, although I was not sure about this.

James had written: "locking up our dollars in 
safety deposit boxes would simply deprive 
borrowers the funds they otherwise could have 
received from financial intermediaries to invest, 
hire workers, and increased production in the 
economy." Let's not forget, I meant, that 
intermediaries also help to decide which types of 
investment will be carried out. They are not mere 
conduits, like a copper wire. They are living 
beings who can be tricked and who can make 
serious errors. Indeed, many were tricked and did 
make serious errors toward in the middle of the 
current decade. If getting rid of the FDIC and 
the fractional reserve system can reduce the 
harmful effects of these mistakes, wouldn't that 
be a good thing? (Of course, I did not recommend 
that dollars be locked up. I recommended that 
depositors should have the presumptive right to 
stop a depository institutions from lending out 
their deposits. If a person wants to deposit her 
funds in a lending institution, she should be 
allowed to do so. But she should also have the 
option of depositing funds in a pure depository 
institution. The fractional reserve system 
presumes against this. And to what end?)

J. Patrick Gunning