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Sunday, February 28, 2021

The Rat Cap Podcast: Episode 7

The Rat Cap Podcast: The History of the Monetary System and the Road to Ruin, Part 1 (libsyn.com)

The structure of the modern banking system is the product of hundreds of years of bad legal and economic theory that is leading us to disaster.  In Part 1 of this podcast, I explain some basic principles of money, banking and set out some early history of our current monetary system.  

*Also, see my prior posts:

The Rational Capitalist: The Federal Reserve: Heart of Tyranny #4. Fractional Reserve Banking, Inflation, and Boom-Bust (theratcap.com)

The Rational Capitalist: Boom-Bust Index (theratcap.com)

The Rational Capitalist: Tales from the History of Money and Banking, Part II (theratcap.com)


Unknown said...

Great PC. Too bad they don't teach this part of history anywhere in the public school curriculum.

Carl said...

Doug, two things about this part of the discussion:

- When one makes a deposit, one no longer actually has possession of the item. Yes, you still have title. But, someone else possesses the item. All you have is a receipt that serves to verify the contract. That contract document can be an asset, of some nominal value. But, it is not the actual deposited item.

- You repeatedly decry fractional reserve banking. I think your real issue is, instead, with where the institution loaned out the deposit assets instead of only the money available from loans made to the bank by investors. I have to re-listen to E7, but I think you are crossing issues in this discussion.

The Rat Cap said...


Thanks for your comment. I also cover this again in episode 8.

What should happen is that when you make a deposit, someone else stores that property for you, but you retain the title, or, if the asset is fungible, they make the same quantity and quality available to you.

For example, if I store my bike in a garage, I own the bike, and the warehouse cannot use it. If I store gold in a safe deposit box, the bank cannot take my gold and use it.

A loan is a totally different contract. In a loan, I transfer title of the good to someone else. I no longer own it. This should be a different contract LEGALLY in that we ask a court to uphold a contract based on a title transfer or a contract based on safekeeping.

Loans made to banks are valid, but the money is transferred to the bank's ownership. Deposits were meant to be safeguarded.

The courts crossed these two issues, and in fact, as I discuss, the courts ultimately said that when you "deposit" money in a bank, it is actually a "loan" under the common law. This pretty much wiped out true deposit banking.

The consequences of this practice are fairly devastating, but the devastation would have been limited if the government had forced banks to redeem or go bankrupt. Then the practice of fractional reserve would have been limited due to the risk and liability. What happened instead was that state governments allowed banks to suspend redemption (screw over depositors) which introduced moral hazard, bank runs, busts, depressions, and ultimately the call for a central bank of "last resort."