Fractional reserve banking is like counterfeiting, right? It effectively allows banks to print money, transferring wealth to themselves (and government) through the process of inflation. But since the people borrowing from the banks are early recipients of the newly printed money, they too would benefit, no? So as well as wealth transfer to banks and government, does fractional reserve banking also involve any significant wealth transfer to borrowers?
if inflation taxes X amount of real wealth from dollar holders (reducing their purchasing power by X) and transfers it to borrower Y, which borrower Y then uses for productive activity, would that be equivalent to dollar holders saving X and lending it to Y?
It's not quite the same. When X saves the dollars and lends them to Y, Y's newly-acquired purchasing power is offset by that lost by X. Prices will change because the borrower mostly likely wants to spend the money on something the lender wouldn't have, but it doesn't cause a general rise in prices. What the borrower wants will become more expensive, but it will be offset by a drop in demand for what the lender might have bought if he hadn't lent the money to Y.
When credit is artificially expanded by the Fed, purchasing power appears out of thin air, and is not offset by a commensurate loss in purchasing power somewhere else. There is a general rise in prices, which means that wealth is not merely being transfered; it is being destroyed.
ETA:
And yes, I know the government is incapable of making productive investments, but I'm not talking about the government, rather I'm talking about a business that borrows money from the fractional reserve banking system and in effect gets a real wealth transfer from other dollar holders.
Without taking account of actual consumer savings and preferences, malinvestments are far more likely, even for the most capable entrepreneur. "Forced savings", instead of voluntary savings, essentially result in a situation where the supply of money available for entrepreneurs to borrow bears no relation to the expected supply of cash consumers are going to be willing and able to pony up for whatever it is they plan on selling to them. It causes the boom-bust cycle.
Of course the people who think that they run out little world think that consumers should be told what to want and buy... Not only that, but they think they're capable of achieving such a feat, and making a planned economy work.
Yes, inflation does benefit debtors at the expense of creditors.
"Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity." - Murray Rothbard, 'What Has Government Done to Our Money'
Of course the government is the biggest debtor around.
Ah, thanks for that. If the borrower in question is a business, does that mean that fractional reserve lending can act like a form of forced savings? By which I mean, if inflation taxes X amount of real wealth from dollar holders (reducing their purchasing power by X) and transfers it to borrower Y, which borrower Y then uses for productive activity, would that be equivalent to dollar holders saving X and lending it to Y?
which borrower Y then uses for productive activity
Never happens. One could ask a similar q.
When the Mafia extorts protection money from a local businessman, can the extortion act like a form of forced savings? By which I mean, if extortion takes X amount of real wealth from a small businessmen (reducing their purchasing power by X) and transfers it to Mafioso Y, which Mafioso Y then uses for productive activity, would that be equivalent to small businessmen saving X and lending it to Y?
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It's easy to refute an argument if you first misrepresent it. William Keizer
"When the Mafia extorts protection money from a local businessman, can the extortion act like a form of forced savings? By which I mean, if extortion takes X amount of real wealth from a small businessmen (reducing their purchasing power by X) and transfers it to Mafioso Y, which Mafioso Y then uses for productive activity, would that be equivalent to small businessmen saving X and lending it to Y?"
Well, I don't see why it wouldn't, in a purely non-moral sense of equivalency. And if the small businessman was going to use X real wealth for consumption, but instead it was taken by Mafioso Y and invested for production of something profitable, then this would mean more 'real savings' than if the Mafia had let the small businessman use X for consumption, no? Not that I'm arguing that this is desirable, just asking if there's any reason why it wouldn't function like a form of forced savings. And yes, I know the government is incapable of making productive investments, but I'm not talking about the government, rather I'm talking about a business that borrows money from the fractional reserve banking system and in effect gets a real wealth transfer from other dollar holders.
"What the borrower wants will become more expensive, but it will be offset by a drop in demand for what the lender might have bought if he hadn't lent the money to Y."
I see a problem here, probably just semantics, but wanted to clarify.
The objective here seems to be to illustrate the contrast in demand that shifts from what X would have bought to the increase in demand for whatever Y did pay for. However, demand is only in evidence, and can be said to exist, by virtue of an actual purchase. I might want a lot of things, I might need a lot of things, and even cry out for a lot of things - and I might even be able to pay for all of these things. None of these factors constitutes an actual demand, nor does it affect the demand side of the equation in any way until I actually make a purchase.
So even if we could say with any certainty what Lender X might have bought had he had he not lent the money to Y, the decision to lend the money to someone else instead left demand for all other things completely unaffected. While demand for what Lender X might have bought could have gone up had he made the purchase rather than made a loan, it did not "go down" or represent an actual drop in demand as a result of lending the money out instead.
The only thing we can state with universal certainty is what happened to value and demand for the currency itself, and especially when we remember the other possibility - that Lender/Saver X might not have bought anything at all. By continuing to save, and therefore keep that currency out of circulation, the overall demand for, and value of, all other currency would increase.