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Jan. 16, 2010 - Freedomain Radio - Stefan Molyneux
23:15
1557 Fractional Banking, Private Currencies and Humble Freedom

Don't imagine you can know how the future will function...

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Hi everybody, I hope you're doing well.
This is Stefan Molyneux from Freedom Main Radio.
This is a part two to my recent video on money, currency, and power.
And of course I got an endless cavalcade of emails and communications asking me, well, Steph, how could a currency work in the absence of a state?
And why wouldn't it all collapse?
And why wouldn't one currency take over and order everyone to become self-mutilating robot drones?
You know, all the usual stuff that comes out of any...
Proposal for a removal of a violent monopoly over a particular resource, whether it's humanity or their products in terms of taxes or currency or debt or whatever.
As soon as you say, well, let's take off this violent monopoly, people are like, how could it all work?
And I can't believe that people are still asking this question, and I apologize for sounding rude, but people, you really have to have gotten this by now.
It is a trick question, and I don't mean that people are consciously trying to trick me or you if you ask this question, but it is a trick question, and I'll tell you why.
One of the fundamental philosophical virtues and scientific virtues and economic virtues Humility.
Humility means I do not know how society should be organized.
I do not know every answer as to how the roads will be built and how the poor will be educated and how the sick will be healed and how currency will work.
Because if I did, that would be an argument for statist central planning.
If I had the genius to know exactly how all aspects of society, or even approximately How all aspects of society should be organized, then everybody should just obey me and should do what I tell them to, which would be complete nonsense.
It's like saying we don't need the scientific method of peer review and reproducibility and release of data and so on because I know exactly what is the best scientific approach and what the best scientific results are and what the best scientific theories and conclusions are.
So we don't need all of this mucky review and all of that.
All we need is for people to email their stuff to me, to Steph, and I will tell everybody exactly what's what.
That, of course, would be mad vanity, just as statism is mad vanity.
It's the idea that there are a group of people somewhere...
Who, within a month or two of knowing that there's a big problem with massively complex financial instruments and derivatives and banking, international banking systems, know exactly how $700 billion or a trillion dollars should be spent to solve the problem.
It's complete madness. If somebody were to come to me and say, here's a billion dollars, spend it somehow to fix the economic system, I would have to be seriously a disturbed, a mentally disturbed human being to say, excellent, give me that money, I know what to do.
Because to me it would just be, no, no, give the money back to whoever...
It came from, because I can't tell people, and I don't know, I don't know how all these derivatives work and how everything should be solved, and I have no idea how to spend the money.
Better than the collective intelligence of those whose money it actually is.
So I think it's really, really important when you argue for The elimination of a violent monopoly in whatever, in education, in healthcare, in dispute resolution, in criminal justice, in currency or wherever, or in military.
And people say, well, how would it work without this?
There's two principles that are embedded in that question that's really, really important to understand.
The first is you say, well, let's get rid of the violent monopoly of a currency.
And people say, well, how would it work then?
Well, of course, embedded in that is the idea that it's working at the moment, which it clearly isn't when you have unemployment or underemployment rates approaching 20% in the United States, when you have, as I say, over a 95% reduction in the value of the dollar, when you have the boom-bust cycles that make manic depressive look like Perry Como.
It's clearly not working at the moment, right?
So... Point that out, right?
How would currency work in the absence of the state?
It's not working now.
So anything that we do is going to be better than what is occurring now.
So that's the first thing.
And the second thing is the idea that someone can understand or design an economic system that works better than the free choices of uncoerced individuals.
That is...
I mean, I can't believe that people still ask that question or take that premise with a straight face after...
The incredible disasters of the 20th century with regards to central planning.
How would it work? Let me give you an analogy so you just understand how insane it is.
Let's say that we had a system whereby the government ordered everybody who to marry, right?
So you'd get a letter saying, you know, this is the social insurance number, the name and the address of the person you're going to marry, go and marry them.
And that was how marriage worked in society.
And then let's say that someone, someone garrulous and bold came along and said, I think that we should let people choose for themselves who to marry and we should get rid of this system of state-ordered marriages.
Well, if I came along to you and said that, you would very likely say, well, who would I marry?
And who would this guy marry? And who would this guy marry?
And who would this guy marry? Which is a premise that says that somebody knows who everybody should marry.
Now, if somebody does know who everyone should marry, then of course we should give that person the power to order everybody to marry.
But the reality is...
Then nobody knows who everyone should marry.
So asking, well, who should I marry and who should...
That's the whole point of freedom, is that nobody knows the answers to this.
And that's why we can't imagine that there is an answer like the state.
Like, nobody knows where the universe came from.
But let's not pretend that we know, because we prayed to some big guy with big hair and a beard in the sky who's very fond of talking snakes and rib-women.
Right? We don't pretend a knowledge that we don't have.
And statism, fundamentally, is the pretense of a knowledge that is impossible, which is how disputes should be resolved, how children should be educated, given all the wide diversity of abilities and cultures in any modern diversified society, how the poor should be helped, how medical care should be provided, how financial instruments should be...
Nobody knows. Nobody knows even the answers to one of these things, let alone the combined of them.
The pretense of knowledge is the foundation of hierarchy.
The pretense of knowledge is the foundation of political and abusive hierarchies.
The idea that there's some guy, Harper, Obama, Blair, whoever, there's some guy out there or some group of...
Backroom boys who know how society should be organized and should be given all the guns in the world to make that happen.
That is a mad vanity.
That is a mad, insane, megalomaniacal, self-aggrandizing, delusional belief that there's this knowledge.
It's like the Pope. Oh, there's this guy who has a direct pipeline.
To the eye in the sky. Well, it's complete nonsense.
You know, he's just a guy in a funny hat who looks somewhat like a guy who got caught in a bunch of drapes.
That's all he is.
And there's no one out there who has these magical answers about how society should be organized, and who should marry who, and who should get what job.
You're in the South and slavery is ending, right?
Or you're proposing that slavery...
I come up to you and say slavery should end.
And you say, well, how would this slave get a job?
And where would this guy work? And where would this guy work?
And what would this guy do? He's lame.
Or whatever, right? Well, I don't know how everybody should live their life.
That is a recognition of humility.
I'm not even sure sometimes exactly how I should live my life.
How on earth am I going to say how millions of other people should live their lives and what is proper and appropriate and optimal for happiness for everyone in the world?
It's madness! Madness!
And so if you say, well, we should free the slaves, and somebody says, well, how would this guy get a job?
And how would this guy get a job? And this guy has no teeth, and this guy can't read.
And it's like, the whole point is that we don't know.
And that's why people should not wave guns in everybody's faces and tell them what to do, because they don't possess the knowledge.
And we should recognize and understand that they simply do not possess the knowledge and giving them guns and giving them the power to tell everybody what to do is complete madness.
So I don't know how a currency would work in a free society.
I don't know. Nobody knows.
Nobody knows how currency should work in a status society.
You understand? Nobody knows.
No individual knows how currency should work or defense should work or roads should work or education should work or healthcare should work.
Nobody knows. Nobody knows.
It's a complete blank fog.
If you've ever read the economic treatise, it's a very, very interesting, well worth reading, called I Pencil.
I, Pencil. In this, the author describes that nobody knows how to build a pencil.
No individual Nobody knows how to build a pencil.
Because a pencil is, you know, graphite and wood and paint and erasers and metal and nobody knows exactly how graphite is produced and exactly how erasers are produced.
Nobody knows how to build a pencil!
One pencil! No individual knows how a pencil should be built.
Of course it requires the free and voluntary cooperation.
Of dozens, hundreds or thousands of people to make a pencil.
And this is the reality. Not one person knows even how to make a pencil, let alone run a currency, let alone how national defense should be organized, let alone how roads should be built, the poor should be saved, the sick should be healed, the ignorant should be educated.
Nobody knows. Just think, if you don't even know how to build a pencil, there's no conceivable way that anybody is going to know how all these other things should be done.
That's why statism is as valid an approach to social organization as religion is as valid an approach to the scientific understanding of the universe.
It is the pretense of knowledge.
It is the hollow, vain, mad, empty, narcissistic pretense of knowledge.
That we are fighting. It is the revelation of ignorance.
Which is all the way back to Socrates.
I know that the only thing I know is that I don't know.
Now. I don't believe that's true as far as reason and evidence and science and ethics and all this goes.
I think that we do know, or at least I think that I know some things that are valuable, and I've got free books on my website if you're interested in those topics.
But I don't know how other people, other than, you know, don't kill, don't steal, don't rape, don't assault, I don't know how people should live their lives.
That's the fundamental reality.
I also got a number of questions about fractional reserve banking, which is a very interesting topic, and I'll just touch on it very briefly.
First of all, there's nothing wrong with fractional reserve banking whatsoever, as long as it's in a free society.
There's nothing wrong with anything that doesn't initiate force of fraud.
There's nothing wrong with any of it.
There's nothing wrong with fractional reserve banking.
However, of course, the fractional reserve banking that exists now because it's state protected and monopolized is evil to the core.
And I'll just sort of give you an example.
So let's say I'm a guy with a thousand dollars in a free society and I want to put that money in a bank.
Now, in a free society, banks would offer all kinds of things, right?
There would be some banks who say, look, We're going to take your money, we're going to convert it exactly to gold, and we're going to put it in the bullion vaults.
And anytime the price of gold goes up or down, we're going to add or subtract that gold.
So you always can come and get $1,000 worth of gold at the current prices.
Take my money, I just know I'm going to have $1,000 worth of gold in the future, no matter what fluctuations there are in currency values.
But I'm not going to make any money.
Now, there'll be other people who'll say, we're going to take your $1,000 and we're going to use it as leverage to lend out $10,000 to a whole bunch of entrepreneurs and people who want to go and make things that will return a profit.
And therefore, when you come back in five years, there may be $10,000 or $100,000 or there may be $50 because we're going to use that as leverage to lend out the money.
If I'm a conservative guy, I'm going to go to the bank that doesn't do fractional reserves, that doesn't lend out a multiple of the amount that it has in its vaults.
And if I'm a guy who likes frying bacon in the nude and going to Vegas, you know, likes risk, then I'm going to go to a bank that does a lot of heavily leveraged fractional reserve lending.
It's just going to be a continuum.
It's a spectrum. If you want the risk and the reward, you'll go to fractional reserve.
If you don't, you'll go to something very conservative.
People have also asked me about the gold standard.
I don't know whether the gold standard is optimal or not.
The gold standard, for those who don't know, It follows the evolution of money backwards and says we should go back to that.
And what that means is that originally, of course, gold and silver were the medium of exchange.
And the reason we ended up with currency was because people didn't like carrying around gold and silver.
It's heavy, you can get robbed and so on.
So people began to write checks and the checks began to circulate, but they could be redeemed for the gold and silver at any time.
That was a currency that was backed by gold and silver.
And we had that in the West until I think it was the 1930s for most of the country.
1971, America went off the gold standard, which is one of the reasons why you had the oil crisis and stagflation and so on.
And so people say, well, should we go back to the gold standard where all currency is backed by gold?
Well, no, we should not go back to the gold standard because that implies that, again, there's one best solution.
For a particular answer.
And the moment you're deluded into thinking there's one best solution for any complex social issue, you're led straight back to the bottomless, mad, violent pit of statism.
Do not delude yourself that there is one optimal best solution for a particularly complex social problem, especially one as complex and challenging as currency.
There is no one solution to these problems.
You need a system of continual competition and innovation and creation and You need the creative destruction and hurly-burly of the free market.
That is the only way that anything that approximates the best solution can occur.
Do not ask yourself how should this work.
Do not ask yourself how should X work.
Because the moment that you do, you're implying...
That there is a best solution.
And then if you believe that there's a best solution, you're going to be inevitably led back to statism, which is the imposition of one best solution.
I'm generally quite wary of looking in society back in time to things prior to the computer revolution, prior to the internet, prior to smartphones, prior to whatever it is that's going on in your pocket.
That is sort of Dick Tracy, space fantasy, 21st century gizmo doodads, right?
I mean, that's not... It doesn't make much sense to go back to that, right?
It's like saying, well, in order to create the best accounting system, we should base it upon the abacus and anything you can count up to using one hand and three toes.
It doesn't make any sense.
Now, what does happen, though...
It's that when the government creates a solution, when the government imposes a solution, which is really the better way of putting it, The chilling fact is that it gets frozen in time.
It gets stuck in time.
And that is a terrible, terrible thing.
So, for example, right, in the mid-19th century, the government imposed state education.
In the mid-19th century, what did you have?
You had a teacher, a bunch of students, and you had a blackboard.
And students shuffled like zombies from one room to another or had teachers shuffle from one room to another.
And that's what the education that was...
Possible with the technology of the mid-19th century.
You know, fast forward over 150 years into the future, when you've had every kind of conceivable communications and technological revolution that could be imagined, and what do we have?
We have, you know, 25 to 40 students sitting in a class, we have a teacher, and we have a frickin' blackboard!
I mean, can you imagine just how insane that would be?
If the government had imposed an accounting standard in the Egyptian times, we would still be using I don't believe that the gold standard is the optimal solution because it was created in the past and does not recognize all of the amazing technology that's available now,
which could be used to balance and smooth out currencies or easily switch from competing currencies depending on whatever store you're buying stuff at, using the internet, using smartphones or whatever.
And it was, of course, to some degree, a state-imposed solution.
So I just don't think there's a best solution.
The last thing that I'll say, and I know I'm sort of breaking the rule here, but just for playtime funsies of the brain, the one thing I will say is that If I were to start a currency company and wanted to get people to join and use my currency, I would generally take this approach.
This doesn't mean this is the best solution.
This is just how I would enter the marketplace to compete with other currency companies.
So if currency, you know, stayed in post-currency vanished tomorrow, Lord, wouldn't that be beautiful?
No more war. Then what I would do is I would sit down and say, okay, well, what is it the people most want in the currency?
I tell you what they most want in the currency is stability.
Stability over time. I need to, need to, need to know that a dollar that I have today is worth Roughly the same or hopefully as close to exactly the same as possible in the future.
That's what I desperately and most want as a currency consumer.
Because that way I can make calculations in the future without having to worry about inflation or deflation.
I want the value, the purchasing power of my dollar to remain constant over time because that means that I can make calculations.
Plans, which is why people get, you know, fixed rather than variable rate mortgages, so that they can make plans over time.
And you wouldn't want a job which said, you know, this year or, you know, next month you'll be paid $5,000.
The month after, you'll be paid $1,000.
The month after, it might be $7,000 or it might be $2,000.
We don't really know. You wouldn't really be able to make any plans.
So you want a fixed value.
Now, how do you achieve that?
Well, you have to have A benchmark, you know, like the Economist Big Mac Index of how much Big Macs cost around the world.
You need some sort of index and you need to align the currency value to the productivity of society.
So if the GDP or productivity goes up 5% over a particular year, that probably would be closer to 10% in free society, eliminating poverty within half a generation.
But you would want to peg your currency to some standard of goods production and consumption so that it would remain relatively constant over time.
That would be the first thing.
In the same way that you would want to produce electricity in a way that was constant so that people could make predictions.
Right now, trying to run a business under state-imposed currency monopolies is like trying to run a factory when you have no idea how much electricity you're getting next month or next year.
Is it going to be more? Is it going to be less?
Is they going to be short out? There's just no way to make those kinds of plans.
You need constancy.
There's so many variables in business that you need constancy in as many variables as possible.
And the fundamental variable that you would need to be constant would be the value of your currency.
So I would make all kinds of provisions to ensure that the purchasing power of the dollar remained constant over time.
And that would be a very important thing for me.
The other thing that I would do...
And this has been done in certain areas in the world already.
I would say to merchants that, hey, listen, partake of my currency and I will give a discount to people in your neighborhood who come to your store.
And we would sort of split the discount and so on.
And what you would do then is you would have a smartphone or some sort of computer chip or it would be like the Interac or Visa terminals.
And you would load it up with just a wide variety of currencies or like a little currency arbitrage in your computer.
You would swipe Your Interact card or your private currency card to make a purchase.
And it would immediately fly off to some central server which would figure out the best currency for that particular purchase, right?
And you would then be competing to offer discounts to people who came into your store.
You would get the sort of automatic sales and it would figure out on the fly which would be the optimal currency to use for that particular purchase.
And you would pay a fee for that that would, of course, be less than the savings that you would get from doing that.
So, I mean, this is just how I would approach it, that there would be lots of competing currencies which would give the best deal possible for the customer, but it would have to be transparent the way of choosing.
You wouldn't have, you know, 500 different kinds of currency in your wallet and have to thumb through them to figure out which one you would want to use.
It would have to be transparent and...
It would have to be invisible to the end consumer which currency was being used, but they would have to see the savings and you'd pop up the savings, you know, you saved 12% on this because you used this currency and so on.
So there'd be a myriad of competing currencies, but it would be invisible in terms of the transaction costs or time to the end consumer.
And that's how I believe that it would work.
And so... You may have people who would want to gamble on a currency, who would take high variability in response for the sake of potential profits.
You'd also have people who say, you know, I don't want variable rate currency.
I just want a fixed rate currency.
I'm going to give up the potential upside in order to avoid the potential downside.
So again, it's just your level of risk tolerance and how much you want the upside versus the downside.
If you don't want it, there'll be people to provide that.
If you do want it, there will be people to provide that as well.
So, how would you guarantee stability?
Well, what I would do is, I would say, as a currency provider, I would say, look, the value of your dollar is going to be stable over time.
And I'm going to pay you whatever percentage point it varies, you know, relative to this benchmark, right?
So I'm going to give you 2% of your money back if the value of your money varies by 2%, either up or down.
And that would be my guarantee and also my massive incentive to keep the currency on an even keel.
And it would be, you know, third party independent people who would verify the value of the currency and blah, blah, blah.
So that's, you know, you would just offer that.
Of course, you don't get any of those kinds of guarantees with the state.
So I just wanted to sort of point out some of these additional things around currency.
But please, please, please, when you talk about a free society, do the best that you can to avoid being drawn into what is the solution, because that is a statist premise.
There is no single solution.
Thank you so much for listening.
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