[ClumsyPilot]

"the free market works well"

Unless there is too much inflation like in Weimar Republic, too much corruption like in Russia, too much monopoly like with Standard Oil, too many shenanigans leading to 2008-style meltdown (imagine that without central bank support), given working police and the justice system which is missing in many developing countries, given basic infrastructure like roads and electricity etc, etc.

[WalterBright]

> Unless there is too much inflation like in Weimar Republic

The government money printing press is not free market.

> too much corruption like in Russia

The government's role in a free market is to prevent corruption.

> too much monopoly like with Standard Oil

Standard Oil was very good for consumers, as SO brought about something like a 70% reduction in kerosene prices. Besides, SO never was a monopoly. It was accused of attempting to create one.

> imagine that without central bank support

Don't need to imagine it. It happened several times in the 1800s. Recovery tended to be as quick.

> given working police and the justice system

Free markets require a working police and justice system

[ClumsyPilot]

"The government money printing press is not free market."

Oh no, not again this 'No True Scottman'-'Free market' myth.

Let's go down this path - what does 'free market' theory say, how much money should be in the economy? How should it be created or destroyed? There is no natural process for it, whoever has lisense to print money can rule the world or collapse the economy. 'Free market theory' provides no answer, just like it provides no answer to most important economic questions.

Is using a physical valuable substance as money, let's say gold, free market? That's Mercantilism and it brought national economies to a standstill due to lack of liquidity. People couldn't trade goods, take loans, nations went to wars over silver.

Do you want to have gold standard and fractional reserve banking? Is it freely floating currency and a system where banks create money out of thin air? (governments don't print money any more by the way). Which one of these three totally different systems is the mythical true 'free market'?

Are private currencies owned by banks free market? That's what we used to have, they used to collapse all the time. That's why we invented central banks.

[ImprobableTruth]

I'm sorry, but if your definition of free market literally includes a government printing money to get rid of its debt (like the Weimar republic did), then your definition is just broken. The 'free' in free market literally refers to governments (or other actors) not interfering in trade. There is no prescribed free market monetary policy, but if you intentionally manipulate the market through monetary policy (as is common policy - the fed's goal isn't only monetary stability, they also account for things like unemployment), it's absurd to blame free markets if this goes wrong.

Using gold as your currency also isn't mercantilism. Mercantilism is about increasing exports while reducing imports. e.g. China today is quite mercantilist, despite not using gold.

[WalterBright]

> how much money should be in the economy? How should it be created or destroyed?

Great questions.

Money is created when money is loaned out against collateral. Money is destroyed when the loan is repaid and the collateral returned. It's a natural process. The pressure on it is to have the supply of money match the value in the collateral.

> whoever has lisense to print money

Under a free banking system, anyone can print money. Of course, anyone printing money has to convince others that it has value. Did you know that anyone can print money today? We call them "IOUs", "checks", and more recently, "credit cards". We're all familiar with having to convince others that our IOUs, checks, and credit cards will be honored.

I'm not aware of any that managed to rule the world or collapse the economy.

> no answer

I just gave you one! I can only surmise you've been talking to the wrong people. May I suggest Milton Friedman's "Monetary History of the United States". It's tough sledding, but worth it if you really want to know.

> Is using a physical valuable substance as money, let's say gold, free market?

Of course. Are you familiar with the commodities marketplace? It's the same thing, but would you call that mercantilism? Shipping gold around to settle debts, however, is clumsy, expensive, and dangerous, hence the rise of trading receipts for the gold instead, and later those receipts turning into bank notes, and even later became electronic entries in a ledger.

> Do you want to have gold standard and fractional reserve banking?

That's how free banking worked in the United States. It's free market.

> they used to collapse all the time.

Not all the time, but banks did fail from time to time.

> That's why we invented central banks.

That was the public reason. The real reason was to inflate the money. As for collapse, now we have fewer bank failures, but when they do fail, it's a doozy (Great Depression, 2008, etc.). Also, did you notice that as of this month 9% of the money you had last year disappeared? You can thank our fiat money system for that.

I grew up in the Carter stagflation years, and learned to never keep more than pocket money around. It's all in things that aren't inflated into worthlessness by the central bank.

P.S. How do I know all this stuff? My dad spent the last years of his career as head of the finance department at a college. We had many long and happy conversations about how banks worked. It isn't an easy subject, but I wish more people could have such an experience.

[ClumsyPilot]

"Money is created when money is loaned out against collateral. Money is destroyed when the loan is repaid and the collateral returned. It's a natural process."

But there is nothing natural about it - the limit on money supply is how easy it is to get a loan. Bank could give out mortgages with 0% deposit, they could give out loans equal to 120% of the house value, and they indeed have done so.

What regulates the money supply is not 'natural process' but the rules set by the regylator on minimum reguirements. Is having no rules free market? But then it will be creating 2008 style event every tuesday.

Furthermore, this whole thing only creates money in our current floating-money system, right?

If you have medieval-style economy where you count literal gold coins, you can not create money, you would just be loaning out other people's deposits. The amount of money in the system would stay fixed, right?

So then the only 'natural' money supply is your ability to mine gold?

[WalterBright]

BTW, this will blow your mind. Let's say you have $300 in your bank checking account. You borrow $1000 from the bank. You bank checking account now has a balance of $1300.

Where did the thousand bucks come from? Where was it moved from?

Nowhere!

The bank just changed the amount in the electronic ledger from 300 to 1300.

Crazy, right?

[webXL]

Yes, crazy, but not exactly "nowhere". It "comes from" future earnings and the (projected) demand for US military protection and access to the markets which it enables. The bank (really the government) is helping you shift future consumption to the present, because you didn't save enough in the past. And why should you or anyone else be held personally accountable for not saving in the past? /s Because the US and its allies have god-like firepower, baby!

My mind was actually blown recently learning that fractional reserve banking has turned into a widely believed myth. Banks are still making low-interest loans and there's no reserve requirement!

[WalterBright]

> But there is nothing natural about it

The natural pressures are the law of supply and demand. If the bank creates too much money relative to the collateral, it risks a run on the bank. Too little, and the bank goes out of business because it isn't making money.

> Is having no rules free market?

Yes (other than you cannot force people to do business with you nor can you defraud them).

> The amount of money in the system would stay fixed, right?

Nope. You don't actually loan out the coins. You loan out a receipt for the coins. As long as people don't redeem the receipts, you can loan out a multiple of the coins in the vault. This is called "fractional reserve banking". After a while, instead of trading coins, people trade the receipts. The receipts evolved into bank notes.

It's a fascinating history.

> So then the only 'natural' money supply is your ability to mine gold?

Lots of commodities would work. People in colonial America used tobacco leaves. Today people "mine" bitcoins.

[ClumsyPilot]

'If the bank creates too much money relative to the collateral, it risks a run on the bank.... This is called "fractional reserve banking". '

I dont fully understand the system, and its clear neither do you, or most people commenting here

We have not been using fractional reserve banking for at least 60 years now, as you sibling comment and this paper by the bank of England Explains. The only thing limiting hiw much bank can loan are capital requirements in the rules passed by parliament.

https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

[Sebb767]

It's definitely fair game to critique capitalism and free matkets based on actual implementations, not theoretical optimized scenarios.

If we're going for perfect scenario, communism is absolutely a great idea. Unfortunately, the real world is a bit different, and it turns out that capitalism and free markets can survive reality and bad actors just a bit better. And that's what counts in the end. Still, we shouldn't dismiss the failures of the system, since this is what shows misaligned incentives.