A person can have paper money or coins. But in a bank, most of the money exists just as numbers in a computer. And we all trust that the bank does not go in and just doubles those numbers just for fun.
My question is: who allows banks to do that? And can institutions other than banks do the same? Take organizations such as Paypal or GoldMoney, for example, do they have the money they hold for members in a bank account, or on their own computer? And if the latter, how did they get to a point where they are trusted to do this?
7 comments:
I really belive that there isn't enough coins/paper for the numbers in banks. Some of them is in form of gold/silver, lands, artwork, etc. But i fear that a good part of money is virtual. The current crisis here in Portugal is making me thinking. The situation is so severe that I belive that we are in the direction of direct trade. We’ll trade a fish for an apple, and the ‘problem’ is how are they going to charge tax about that trade? Feudalism? Maybe…
Money is basically an agreed upon illusion. They don't and probably won't have all the money deposited into the system at any one time. At least the banks won't; I doubt Paypal can do the same because it isn't a bank and it's used solely to exchange funds, not lend them out. A bank is able to rely on fractional reserves because the likelihood of everyone coming in and demanding their money in cash is exceptionally low.
In other words, psychological factors tend to have the most influence over the economy and monetary system.
'the likelihood of everyone coming in and demanding their money in cash is exceptionally low.
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Unfortunately, this DOES happen, and has done so locally quite recently, when there was a 'run' on a very large Building Society (aka a bank)who had their Head Office just a few miles away.
The result? Queues that ran around the block at each branch . Thousands of redundancies, people on the street lost money, and a massive government bail-out that was not exactly successful. With such a massive local impact when a (inter)national institiution virtually goes under, you are maybe too aware of the consequences, and just how easily it all happened ... people ... Joe Public ... simply panicked about the possibility of losing savings, and withdrew .....
I'm aware it happened a few times in 2008. I don't recall if there were any bank runs in 2009; I've heard of bank failures this year but not bank runs. Regardless, the whole system is psychologically sustained, meaning that it's far more fragile than people would believe. It only works because nobody really stops to question it. When they do they tend to panic instead of trying to look at the bigger picture.
All money is essentially worthless, even precious metals. The only things that have value are the things which we ascribe value. This simple fundamental is usually glossed over and replaced by faith, and worse still blind faith. I wonder how long it will take for the majority of humanity to recognize how volatile such a thing is?
It'll take a while. I'm only learning it slowly myself, and I'm working on it much harder than most.
Most banks have to follow rules and regulations made by the governmnent. There is some oversight by the government that goes along with the rules and regulations. There is also recourse of sorts for citizens if the bank or other financial institution does them wrong.
Paypal, though, is outside of the law. PayPal is basically making it up as they go along.
Actually, there IS no need for all money to all exist as palpable coins/paper. Even with the most trusting intent, these are merely concrete symbols of the State's credit.
And, if you believe some of the more pessimistic, this State credit itself is an illusion, but this is another topic.
Inflation decreases the value of money, quite simply because it dilutes this credit. Money IS purely an economical convention, based on either trust or belief.
If everybody agrees on the worth of money, then you can use it for buying or selling anything, far more conveniently than with barter. It just takes the reputation of a State to back it up. In the medieval past, local lords had the right to emit their own coins. I guess the gold that made them up was, more or less, the "higher reference standard". Nobody would put much trust in tin coins...
In the game of Monopoly, if there's no money left in the Bank as notes, the Bank may emit equivalents, such as checks. (I think I even have one such checkbook buried somewhere.) As long as all the players all follow the same accepted rules, availability of PAPER money isn't a problem. It's written word for word in my official Monopoly Rules: "The Bank never goes bankrupt"!!!
"and the ‘problem’ is how are they going to charge tax about that trade?"
Or "barter". Well, it seems that many small communities have already established their own inner "Free Trade System". In France, "Système d'Echanges Libres", or SEL. Since "sel" means salt, they usually establish a virtual currency they call "grains de sel", where a "grain" amounts to a euro. They don't actually print money notes, they just assess the value of what they're swapping. Then they keep accounts (yes, it IS based on mutual trust), and "pay up their debts" either with goods, or with services. "I owe you 10 grains of salt, how about I mow and rake your lawn for it? -Deal." They're re-inventing mind-easing autarcy.
As for how "they" are going to charge tax for it, the answer is: "they" won't. Swapping isn't taxable. The modern laws are obsolete regarding good old-fashionedprehistoric-style barter. :-P
This might very well be a growing trend in the world... In the end people ARE free to reject capitalism. They just need to organize themselves.
Philocalist,
What you're saying, basically, is that when the banks lose more money than they supposedly have, people legitimately fear the end of the illusion and its very real practical consequences. Like I said, it's all based on trust towards the States. A trust growing more and more fragile, as revelations of the factual anarchy pile up, like so many Catholic Church paedophilia affairs.
But having your money in "cold, hard cash" isn't going to make you much safer. Cash is just slightly less illusory than bank accounts, in the end. The Euro, originally emitted at the equivalent worth of a dollar, was once as low as $0.80, but today it rates at $1.35; not because the Euro has soared, but because Bush has managed to sabotage the U.S. dollar by sinking the economy.
"The only things that have value are the things which we ascribe value."
"Only after the last tree has been cut down,
Only after the last river has been poisoned,
Only after the last fish has been caught,
Only then will you find money cannot be eaten." -- old Cree proverb
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