Pat Gunning wrote:

>although the FDIC does not profess or probably even know it, it is, 
>from a functional standpoint, insuring savings against the "vagaries 
>of the market." It is, in a functional sense, trying to achieve a 
>goal that it cannot possibly achieve in a free market economy. So it 
>is not surprising that it has failed. About 20 years ago, the FSLIC 
>(and probably the FDIC also, although I haven't studied the issue 
>sufficiently to be sure) also failed.

The purpose of insuring the public's deposits against loss -- up to a 
certain amount, per account type -- is to prevent panics against 
certain banks from turning into a contagion on the banking system as a whole.
The U.S. hasn't had a banking contagion since the establishment of 
the FDIC.  So in what sense has the FDIC failed?

Pat also claims that
>The growth of M2 is not relevant to the state of the economy. This 
>is because to understand the macroeconomy, one must deal with 
>functions and not statistical categories. What is relevant to the 
>avoidance of a rise in aggregate long run unemployment (as opposed 
>to a short run fluctuation due to a restructuring in light of the 
>massive recent reduction in perceived wealth and massive 
>redistribution of wealth) is the M1 in circulation.

Both the M1 and M2 include the public's "savings" -- non-consumed 
income held as financial assets-- with depository institutions.  The 
savings are about 55% of M1 and 90% of M2 in the U.S.  Indeed, the 
constituents of M2, especially savings deposits, CDs, money market 
deposits, and money market mutual fund shares, make it possible for 
banks to extend longer term loans for business investment as well as 
mortgages.  Thus, the growth of M2 is more relevant to the "state of 
the economy" than that of M1.

I think it is too bad that some analysts, particularly some Austrians 
-- Pat included here, do not appreciate the benefits of a fractional 
reserve banking system as Adam Smith well explains -- creating a 
highway through the sky!   They think a 100% reserve banking system 
would serve an economy best, including preserving individual 
liberty.  Now anyone who wants to store up their non-spent dollars 
could use the safety deposit box facility of banks to achieve that 
aim.  And they will pay a fee for that safety service rather than 
receive interest from a bank.

Secondly, 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.  Indeed, it is really not our dollars that 
are lent but our savings.  The dollars are simply the "deed of 
assignment," the means of extending savers' purchasing power: "By 
means of the loan, the lender, as it were, assigns to the borrower 
his right to a certain portion of the annual produce  the land and 
labour of the country, to be employed as the borrower pleases" (Smith 
/WN/, 1:  373).

I agree that a clear understanding and distinction of money from 
credit and capital (savings) as well as their sources as explained by 
David Hume, Adam Smith, Henry Thornton, David Ricardo, John Stuart 
Mill and Alfred Marshall, and not by J.M. Keynes, "would have avoided 
the silly political games that have been played in recent hours, 
days, weeks and months."  This is where I think historians of 
economic thought could well assist in informing the discourse on 
appropriate monetary policy.

James Ahiakpor