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Gresham's Law and Fiat Currencies

Thu, 11 Jun 2026 00:00:00 +0000

Gresham’s Law stipulates thus. “Artificially overvalued money will drive out of circulation artificially undervalued money.”

As terrible as the US Dollar has been at inflation in a century, other currencies have proven to be worse. Governments throughout the world have been egregiously inflationary. They have expanded their money supply and devalued their currencies. Entities in these countries have thus resorted to hoarding (a term without a negative connotation to me) US Dollars. The upward pressure on the demand for US Dollars is such that despite the massive expansion in US Dollar supply, we do not see the corresponding amount of price level rises in the US. The abysmal fiscal policies of the rest of the world allows the US to export its price inflation.

Components of the Fiat Banking System (India-Centric)

Wed, 03 Jun 2026 00:00:00 +0000

The following table depicts the major components of the fiat financial system from the Indian point-of-view. For the most part, it is similar to the table for the US case. The key differences are noted at the bottom.

COMPONENTS OF THE INDIAN BANKING SYSTEM

ENTITIES	LIABILITIES	ASSETS	EXAMPLES
Individuals	Mortgages, Loans, Taxes	Deposits, Banknotes, Government Securities (G-Secs), Stocks, Bonds, Fund Units, SDLs, Benefit Payments	High Net-Worth Individuals, Retail Investors, Family Offices, Other Individuals
Businesses and Non-Profits	Loans, Bonds, Equity, Commercial Paper, Taxes	Deposits, Banknotes, Subsidies	Tata Group, Reliance Industries, Infosys, Indian Red Cross Society, Small and Medium Enterprises
Financial Institutions	Deposits, Fund Units, Securities Issued, Taxes	Loans, Mortgages, G-Secs, SDLs, Stocks, Bonds, Commercial Paper, Bank Reserves, Deposits, Banknotes, Bailouts	State Bank of India, HDFC Bank, ICICI Bank, SBI Mutual Fund, Life Insurance Corporation of India
Foreign Sector	Deposits, Stocks, Bonds, Loans, Taxes	G-Secs, Stocks, Bonds, Loans, Fund Units, Deposits, Banknotes	Reserve Bank of Japan, Norges Bank Investment Management, Foreign Portfolio Investors (FPIs), Global Corporations
Public Authorities, Government Trust Funds, State Governments	Bonds, SDLs, Benefit Payments	Government Securities, (State) Taxes	Employees’ Provident Fund Organisation (EPFO), National Pension System (NPS Trust), State PSUs like NTPC, Indian Railways, Government of Maharashtra
Reserve Bank of India (RBI)	Banknotes, Bank Reserves	Government Securities, Foreign Exchange Reserves, SDLs	Reserve Bank of India (Mumbai, Regional Offices)
Government of India	Government Securities, Subsidies, Bailouts	Taxes	—

NOTES

Components of the Fiat Banking System (US-Centric)

Wed, 03 Jun 2026 00:00:00 +0000

This is a simplified depiction of the fiat banking system. Here, we will focus on the US system. Note how each liability of an entity corresponds to an asset of another entity and vice versa.

COMPONENTS OF THE US BANKING SYSTEM

ENTITIES	LIABILITIES	ASSETS	EXAMPLES
Individuals	Mortgages, Loans, Taxes	Deposits, Banknotes, Treasuries, Stocks, Bonds, MBS, Fund Shares, Benefit Payments	High Net-Worth Individuals, Retail Investors, Family Offices, Other Individuals
Businesses and Non-Profits	Loans, Bonds, Stocks, Commercial Paper, Taxes	Deposits, Banknotes, Subsidies	Walmart, Caterpillar, American Red Cross, Powell’s Sweet Shoppe
Financial Institutions	Deposits, Fund Shares, MBS, Taxes	Mortgages, Loans, Treasuries, Stocks, Bonds, MBS, Commercial Paper, Reserves, Deposits, Banknotes, Bailouts	Bank of America, Vanguard, Fidelity Investments, Fannie Mae MBS Trusts, CalPERS
Foreign Sector	Deposits, Stocks, Bonds, Loans, Taxes	Treasuries, Stocks, Bonds, Loans, MBS, Fund Shares, Deposits, Banknotes	Bank of Japan, Norway Government Pension Fund Global, Foreign Corporations and Individuals
Public Authorities and Government Trust Funds	Bonds, Benefit Payments	Treasuries	Social Security Trust Fund, Medicare Hospital Insurance Trust Fund, Tennessee Valley Authority, Port Authority of New York and New Jersey
Federal Reserve	Banknotes, Reserves	Treasuries, MBS	Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, Federal Reserve Bank of San Francisco
US Federal Government	Treasuries, Subsidies, Bailouts	Taxes	—

NOTES

Natural Limits on Free Banking Reserve Requirements

Sun, 24 May 2026 00:00:00 +0000

In a free banking system, various banks issue their own banknotes which are redeemable for the gold that they hold. The banks set their policies independently and compete with other banks in the free market. This is distinct from the central banking system we experience today, where a central bank dictates key requirements the chartered banks must obey, and these banks issue a single fiat currency.

One important decision a bank needs to make in a free banking system is how much reserves it shall hold on to at any moment to meet the withdrawal demands of the depositors. If the reserves are less than 100% of the deposits, the bank engages in fractional reserve banking. (Setting aside the question of morality of such a system, free banks with fractional reserves have emerged in the free market and operated for a long time in the past.)

The Immorality of Fractional Reserve Banking

Sat, 23 May 2026 00:00:00 +0000

Before discussing fractional reserve banking, let’s go over the concept of full reserve banking. Suppose a bank takes in total deposits worth $100 million from its depositors. The bank promises the depositors that they may withdraw their deposits anytime. The bank, in this case, simply acts as a warehouse for the money deposited, collecting fees from the depositors in return. At any time, all deposited money remains within the bank; and at any time, any or all depositors may come to collect the money they have deposited. This is full reserve banking: all the deposits remain in reserve.