I came across a refreshingly well informed professor explicating bills of exchange. While I recommend his article, I felt obliged to critique as well.
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Dear Prof. Fekete,
Your exposition is to be recommended, especially as you outline a world few people understand, and the degree to which "bills of exchange" (in essence vendor financing) worked in history long before banks, or even money, and works quite well to this day.
You are right to note that the state has ruined a perfectly good system.
I could not agree more with your conclusions, but I wonder at a few points:
1. You note "Banks need not be involved." yet you say fractional reserve had nothing to do with the depression. I understand you posit it was the destruction of the bills of exchange system, but I do not think that which the state-chartered banks took over were any longer bills of exchange when the banks took over. They did indeed employ fractional reserve, and it did indeed due much harm.
2. I think you place too much emphasis on "the final gold-paying consumer"... the final consumer was not paying in gold, I think the self-liquidating credit system you note extended down to the workers, whose employment was on credit as well. These people were obliged to be customers to a particular pub, and forbidden to drink elsewhere. Sailors mutinied for not being paid for years. My point is, this credit, backed by bills, was far wider than I think you are even admitting.
3. In trade especially in the times you cite, "bills" means "lists, " not "what is owed." This small clarification is important, because it shows how value was associated with a particular list of goods.
I could not agree more with your conclusions, but I wonder at a few points:
1. You note "Banks need not be involved." yet you say fractional reserve had nothing to do with the depression. I understand you posit it was the destruction of the bills of exchange system, but I do not think that which the state-chartered banks took over were any longer bills of exchange when the banks took over. They did indeed employ fractional reserve, and it did indeed due much harm.
2. I think you place too much emphasis on "the final gold-paying consumer"... the final consumer was not paying in gold, I think the self-liquidating credit system you note extended down to the workers, whose employment was on credit as well. These people were obliged to be customers to a particular pub, and forbidden to drink elsewhere. Sailors mutinied for not being paid for years. My point is, this credit, backed by bills, was far wider than I think you are even admitting.
3. In trade especially in the times you cite, "bills" means "lists, " not "what is owed." This small clarification is important, because it shows how value was associated with a particular list of goods.
4. Lending and borrowing against bills is not fractional reserve banking, it is two parties making a contract. The trick in banking is they get involved and lend their credit, where there is nothing, no bills (lists of goods by which the loan is backed) to warrant such a loan. This is fraud, and when allowed by the state, given the potential for violence.
If there is a argument for fractional reserve, you have not made it. In any case, the rest of the article is stellar.
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