Hi all, Regarding the backing of different sorts of money.
At the bottom of the monetary tree is actual gold, i.e. wholesale and retail bullion, for which all money under a gold standard can be ultimately redeemed notwithstanding any default in the process. This physical gold forms a reserve asset for bank such as settlement banks, reserve banks and redemption banks. They hold a significant proportion of their assets in physical gold, and the balance in (highly liquid short term high credit rated) bonds. (e.g. 20% bullion, 80% bonds). Retail and commercial banks have accounts with reserve banks, settlement banks, redemption banks and correspondent banks, and provide retail money, payment and lending services. These banks have mostly loans on their balance sheets and the balance is bonds and accounts with reserve banks, settlement banks, redemption banks and correspondent banks (e.g. 70% loans, 20% bonds 10% balances with other banks). E-gold and gold pools offer a substitute for physical gold, not for financial gold. They represent secured interests in a pool of bullion and can be transferred. Legally this could be structured as a secured gold liability on the issuer, or as an ownership share. E-gold is the former, Goldmoney is the latter. This is why E-gold Ltd. has a balance sheet and assets in excess of its liabilities -- your e-gold is a liability on e-gold Ltd., secured against bullion held in trust. If the quantity of gold is 1 000 kg and you have 10% of the total e-gold in circulation, that does *not* give you a right to 100 kg. If the nominal balance is 98 kg, that that is the extent of your right. With Goldmoney, there are no liabilities, only interests accounted for with accounts and convertable from the assets held. This is why E-gold does not match assets and liabilites exactly while Goldmoney always matches circulation with reserve. E-gold and goldmoney can act as a substitute for physical gold for redemptions and can form the basis for true fractional reserve banking, as now defunct metalsavings showed. Metalsavings had its own account system listing your claim against metalsavings, metal savings made loans to debtors at interest and reserves of e-gold. In the same way digigold and standard reserve/transactions had their own accounts and payments systems and reserves and other assets. In relation to Patrick's particular statements and questions: 1. Reserve requirements are not 'too strict.' Minimum reserve ratios, as a government imposition are simply unnecessary and harmful to market risk and liquidity management. Contractually set reserve ratios may be used as an indicator of risk management and liquidity management, and in the case of 100% reserve ratios, as an indicator that no financial risk is present and they only offer a payments and redemption/bailment service. 2. Banks do not issue bonds to get liquidity when they need it, they issue bonds to get capital (a bond issuance takes far too long to use it to get liquidity) . Banks sell bonds they hold as investments for liquidity. A bank can therefore issue bonds and hold bonds of other banks, to have the effect of sharing risks between the banks and for maintaining a highly liquid low risk productive investment to make up part of their assets and part of their liaiblities. Banks also issue bonds get capital for terms that match their needs, reducing the risk of losses due to unexpected withdrawals of funds. 3. If e-gold and like entities were to become fractional reserve, it is likely that their user agreements would prohibit business lending, including business lending to themselves. Business lending is high risk and should be left to either a) banks with significant equity and scale to manage large defaults or b) lenders who do not accept deposits and finance their capital needs with bonds. Deposit taking entities can invest in ultrasafe highly liquid bond markets and bullion banks if they want interest without significant default risk. This means that a small financial services provider can offer low risk interest bearing accounts. 4. Under a gold standard, bank reserves are the property of banks. This applies to all bank assets regardless of the monetary standard. Banks issue liabilities (deposits) and have assets to pay them (reserve, bonds, loans). It is only in the case of pooled interests in physical gold that the gold can be said to be owned by the account holders. For this reason the bullion backing e-gold is owned by trustees, not e-gold users. E-gold users are trust beneficiaries, and own only a liability issued by a nevis corp. 5. There are two answers to the issue of large unexpected redemptions. If the large unexpected redemptions are particular to one bank, the bank's best defence is *liquidity.* It sells its bonds and other assets to replenish gold reserves and if the assets are sufficiently liquid, the losses on liquidation will be less than the equity of the bank and all withdrawals can be met. If the large unexpected redemptions is at a global economy level, the response will be higher interest rates to entice people to put their gold back intothe financial system to get the interest they would forgo if they held non-financial gold. Higher interest rates, if sustained will cause deflation and an increase in gold production and decline in consumption to address the increased demand to hold non-financial gold vs financial gold. Regards David Hillary --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.
