[e-gold-list] Re: Gary North Response

[Pete Chown]

Michael wrote:

> Gary North has responded to the Canadian Governments attack on gold
> currencies ...

I didn't understand his point about credit cards.  Northern Rock 
experienced a perfectly good bank run, in spite of the fact that most of 
their customers probably have them.  It's no doubt true that money 
withdrawn from Northern Rock went into another digital account, but from 
the Rock's point of view that wasn't important.  What was important was 
that all the money was flowing out of their digital account, to the point 
where there would have been none left without a bailout from the taxpayer.

I also think he's overstating his case with regard to fractional-reserve 
banking.  Bank customers are not being deceived; the nature of banks is 
well known, and you don't have to put your money in there.  If you don't 
trust the banks to maintain adequate reserves, and think the government 
guarantee is not strong enough, you can keep your money in a safe deposit 
box.  A safe deposit box has a 100% reserve, so you shouldn't be affected 
by a bank run.  On the other hand, you're probably being too careful, so 
losing the return you could be making on your money by allowing the bank 
to invest it.

The real problem with fractional-reserve banking is slightly different, 
IMO.  Because of the risk that a bank collapse could spread through the 
system, most countries operate some sort of government guarantee for 
their banks.  This means that the taxpayer has taken on an enormous 
potential liability.  For example, the liquidity provided to Northern 
Rock is around £300 for every UK citizen.  Theoretically it will be paid 
back as the markets stabilise and the Rock is able to sell assets.  In 
practice, who knows.

To protect themselves against this liability, governments regulate banks 
closely.  I'm not sure what else they can do, bearing in mind the size of 
the bill they get when a bank fails.  On the other hand, banking would be 
much more vibrant and competitive if banks were not micro-managed by the 
government.  It has also become almost impossible to start a new bank, 
because without a track record, how do you convince the regulators of 
your prudence?  This has handed a monopoly to the existing banks.

I don't have a problem with floating currencies, as long as governments 
don't use legal measures against any alternatives that emerge.  There is 
no reason not to let the market decide between state and private 
currencies.

Pete



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