In the wake of the Crypto World exchange/banking debacle, it is time to revisit two old sages and personal mentors, Edward C. Harwood and Richard Timberlake.

A generation ago E. C. Harwood described in layman's terms The Lost Art of Commercial Banking.

Just before his passing Richard Timberlake concluded his epic work Gold, The Real Bills Doctrine, and The Fed with Thomas M. Humphrey explaining how fixed gold reserves led to the deepening of The Great Depression.

My goal here is to briefly describe to the average layman how decentralized personal HODLS will develop sound commercial banking in local market communities from the bottom up rather than the top down, for it is through the non-banking laymen that sound banking will be relearned one exchange at a time.

The significance of these combined works by Harwood and Timberlake is neither a commodity standard (physical gold or digital bitcoin) nor the Real Bills Doctrine function as stand-alone sound money banking.

Self-liquidating commercial paper is sound only when the creation of non-inflationary purchasing media is subordinated to base money like gold or bitcoin.

Once the tie is broken the fiduciary money on the Real Bills Doctrine alone is subject to a self-feeding inflation or deflation loop while the commodity standard base money becomes a simple warehouse operation unable to meet the needs of a modern productive society.

The important principle here is that no matter how invalid the real bills doctrine is in its role as a basis for creating the “right” quantity of money, the system’s higher-ranking commitment to an operational gold standard completely overrides any weaknesses in that doctrine.(Timberlake Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy, page 334, citations omitted)

As Ááron Sepúlveda-Cué emphasizes, “𝐌𝐨𝐧𝐞𝐲 𝐢𝐬 𝐭𝐡𝐞 𝐦𝐨𝐬𝐭 𝐭𝐫𝐚𝐝𝐚𝐛𝐥𝐞 𝐠𝐨𝐨𝐝, 𝐧𝐨𝐭 𝐭𝐡𝐞 𝐦𝐨𝐬𝐭 𝐯𝐚𝐥𝐮𝐚𝐛𝐥𝐞 𝐠𝐨𝐨𝐝.”

Sound commercial banking makes a physical commodity (gold) and/or a digital commodity (bitcoin) more efficiently tradable.

Of course, the fiat dollar and especially the fiat Crypto World (by that I mean all shitcoins, including stablecoins) are not tied to a gold or bitcoin standard.

While present exchange banks do not pretend to put into practice The Real Bills Doctrine, they do link one nominal value to another nominal value. None subordinate this newly created “wealth” to gold or bitcoin, except in the sense that they accept customer deposits as “reserves.”

This “reserve” is really just the savings of others. This saved wealth of others represents no new wealth creation so this saved wealth must be liquidated by the exchange bank at their discretion to use or abuse as they see fit with the hope to fulfill the promise of discounted trading fees, interest-bearing accounts, or some other promised benefit.

Worse still, is that many of these exchange banks create money like Luna and FTT with the fraudulent scheme that money creation creates new wealth that can be collateralized, resulting in runaway inflation that ends within days or even hours with the total collapse of value, imitating the practices of the Federal Reserve and U. S. dollar but without the force of legal tender.

Redeemability

In contrast, sound commercial banking which also happens to be free market banking requires little or no reserves except what is necessary for redeemability. Deposits are neither required nor necessary, while real wealth remains dormant in base money, newly created wealth exists in fiduciary money.

The specie issued represents new wealth coming into the marketplace indexed to the commodity standard apart from the specie issue.

While the standard (whether gold or bitcoin) fluctuates in relation to the newly created wealth, it is the redeemability function that regulates the amount of specie issued as well as the judgment of the banker of the worth of the new wealth.

When the value of the underlying commodity increases in value relative to new wealth creation, less specie is issued representing the new wealth. When the value of the underlying commodity decreases in value relative to new wealth creation, a greater quantity of specie is issued.

Redeemability is tied to real wealth creation, the value of this wealth in relation to the standard used, and an estimate of the worth of the wealth by the banker.

A sound bank making sound loans is able to purchase the standard used (whether gold or bitcoin) for redeemability which in turn benefits and rewards the decentralized HODL.

HODLERS are both the reserve and bank of last resort in free market sound commercial banking.

The lost art of sound commercial banking will be relearned through the market mechanism of redeemability without fixed decreed reserves.

Hope this helps,

UGLY OLD GOAT