Responce to crique of Gold and Ron Paul

1. Though Ron Paul talks about the gold standard and 100% reserve banking, what he says he would implement is free banking, he believes that the people should be allowed to choose the form of money that they would like to use.  
He believes that people’s choices would lead to 100 percent reserve gold standard banking, I do not. In the case of the Scottish free banking era (about 1750 to 1850)  the system moved progressively away from gold through fractional gold reserves and the option cause.  Just before the end of Scottish free banking system, the Banks kept gold reserves below 2% and the option clause allowed them to deny gold in case of a run. On the other had bank capital* was typically over 30%.  Thus the system was moving toward money backed by only bank assets.  

2.  According to Christine Romer (no right winger) the depression of 1890 was not nearly as bad the Great depression.  So the worst depression occurred after the creation of the Federal Reserve and as far as a financial system collapse the worst ever was the one that just occurred in 2008.  The system is obviously fragile with serious feedback problems.   

3.  In the current monopoly currency system the failure of one bank weakens all the others.  This sort of feedback is what led to the collapse in 2008.  We need a monetary system where the failure of one  bank strengthens all the other banks.  I believe that fee banking would evolve into such a system.  

4.  The current system is not robust to changes in the demand for currency.  Currency is not as different from checks as we tend to think.  If banks floated their own currency rises in demand for currency could be accommodated without contraction of the money supply.  If you think about it in a free banking system, if people drained their demand accounts and horded currency the banks would not need to contract as they do today.  Money in currency would be no different  to the banks than money in a demand account.  

 * Bank capital is equal to the value of bank assets - bank liabilities.   Your mortgage is a bank asset and the money in your checking and savings account are bank liabilities.