fuckmekevinSo to have a functional and flexible economy why do we consider fractional reserve banking to be the only viable option? Are there alternatives?
There's little oversight and transparency when it comes to privatizing the money supply but when it comes to monetary policy, theory is heaps different than reality. Our paper money is not that tangible, correct? It doesn't really hold any intrinsic value, whereas gold, silver and other precious metals do; I should say paper money backed by gold, which has a stable value and price. And when it comes to fractional reserve banking someone will always get the end of the stick. Bankruptcy and recessions are merely a product of this monetary system. An arbitrary mess when it comes to fractional reserve banking, too many ways to manipulate policy and in doing so they have a great amount of power to change the socioeconomic system.
Do you not agree that fractional reserve banking isn't 100% stable and that fiat currency always collapses in on itself. It's just a matter of when. We already have a derivative bubble just waiting to be popped. And Trump and his advisors have assigned some greedy bastards already pushing to deregulate the financial markets for their own benefit.
We need a better system to regulate currency; a currency that has intrinsic value of which can not be easily manipulated and/or privatized by a single entity.
Government was entrusted to protect our wealth and security but that doesn't seem to be the case in the least. Maybe, the gold standard didn't work as well as people thought it would because government partly wants to gain as much wealth as possible. You talk about how a gold standard backing a currency will never work, why? Did the gold standard fail us or did our government fail the gold standard?
When have we ever heard of people clinging to the edge of a cliff in an extreme inflationary climate with shopping bags of gold and silver. You hear this with paper money, which at the end of a hyperinflation collapse is worth less to nothing. I truly believe the next collapse will bring the whole thing down and their will have to be a complete overhaul and reformation of monetary policy.
You can have functional, or you can have flexible, but fractional reserve banking is the only one that really offers both. Functional would be the gold standard or any commodity-backed currency, but it isn't flexible. Flexible would be a free banking system, but that isn't functional (in this day and age). Even Hayek, the Austrian school champion, eventually agreed a central banking system was unavoidable. History will show both of these to hold true.
You had the Gold Standard for a commodity-backed system, one being a pure precious metal system the other being a gold-backed paper system, and almost every economist will argue that the reason the US, England, and other countries rebounded so quickly compared to Italy or France was due to the suspension of this standard.
For free banking you can look at Scotland or the US. The Scottish had a successful system in place for much of the 18th and early 19th century, but it ended up failing for two reasons; economies of scale and too much competition. There is not much actual data on the healthiness" of Scottish banks during this period, but one could see that they, like the BoE, had to suspend specie-flow during certain periods which indicates that their commodity-backed currencies were not as stable as one would believe. But, one could see the number of banks that entered the industry (lots) and those that succeeded by the end of it that there was a lot of competition but ultimately economies of scales paid off. The biggest banks were able to spread their network and eventually take over markets until you were left with just a few larger banks. This ultimately means that the benefits of free-banking, or the ability to choose your currency based on the healthiness of the banks, was limited. The US was a shit show. You had fraud, state-chartered banks, little to no regulation which hurt local economies, and almost all ended up failing.
Free banking at face value sounds great. You have private banks that function off their trustworthiness and have the ability to choose which currency you will use. But it has so many pitfalls. You have to worry about fraud, no deposit insurance, inability to exchange currencies with ease, etc.
There is a lot of good literature out there on Free Banking. Selgin, White, Dowd, even Hayek are all good options. I suggest you read some of the pro-free banking work and some of the work that rails against its pitfalls. It's really fascinating. What could potentially lead to a quasi-free banking system would be something bitcoin-esque. But that too has its issues.
Bankruptcy and recessions are not limited to fractional reserve banking. They may be more common, but they are not limited it to it. You just have to look at the history of the US to see how many recessions or depressions we've had. It isn't the largest time span, but there were a lot pre-fractional reserve banking.
No currency system is 100% stable, it just isn't possible. The question one needs to ask themselves is what do they prefer? Do they prefer free banking which means their bank could collapse any day if mismanaged and leave their currency worthless? Or do they prefer a commodity-backed currency which could potentially prove to be a hinderance given a time of economic crisis but will always hold some sort of tangible value? Or, finally, do they prefer a currency that is backed by a government and, as you said, intrinsically worthless but may provide more flexibility and functionality?
There is no holy-grail currency system. It isn't possible. You'll see some economists suggest a basket of goods that can back a currency (like a combination of oil, gold, precious metals, etc.) but what commodity is rare enough that is not controlled by a single entity yet retains value?
The gold standard failed us because the system was and is broken. First, people will always see gold as a speculative asset. Gold will always be worth SOMETHING to someone. If a crisis, be it economic or militaristic, is feared then a country will start to hoard gold because it has value. Additionally, there is the potential for domestic politics to play a role in it as well. Secondly, the suspension of this system was and always will be possible. You saw many countries suspend their gold standard specie-flows during WWI because they were at war. You have also seen countries suspend gold redemption because their domestic economic situation meant that their tax revenues were too low.
The current system as it stands is quite capable of handling any major crisis. The only thing that could destroy the fractional reserve system would have to be a global, catastrophic event. If that happens, there will be bigger concerns.
We will never return to a precious-metal coin system. That is the only type of currency that would be able to retain value through an event like that. Even a commodity-backed paper system would fall pray to it as every government would suspend convertibility in event of a global disaster and all one would be left with would be paper. Sure, that paper may hold "value", but if you can't redeem it what good does it do? If your country's reserves are too low, stuck in transit, or frankly IOUs (like they often were given the difficulty and costs of trans-continental travel) then you are shit out of luck until the crisis is over.