I understand the rational behind full reserve banking, but would banning fractional reserve banking be right? What if someone wants their money to be lent out with only fractional reserves kept? Wouldn't banning fractional reserves be similar to occupational liscensure or drug prohibition? There are alternatives that could help, including contract law. For instance, banks could be required to disclose the reserves kept on hand at all times and what they are investing a person's money in.
Any thoughts or ideas?
No one advocates banning Fractional reserve banking as such. What people advocate is banning fractional reserve banking which claims to be 100 percent reserve banking, which the current system does.
Ah...that must be FUD then. Personally, I don't mind fractional reserve banking in a free market, as long as people know what they are getting into, which means more disclosure than there is now. I think if banks had to disclose and there was no FDIC or Federal Reserve, banks would be forced not to go crazy like they have in the past. I think most people know their money is being lent out, but just not to what degree that it's being lent out.
Anyone else have any thoughts?
neodoxy - completely disagree with you. Im pretty sure a lot of us advocate banning fractional reserve banking, and our banking system doesnt claim to be 100% reserve banking.
I dont think fractional reserve banking should be a subject where we should be in disagreeance either. FRB is theft therefore should be banned. No one has a right to devalue your currency if you dont agree to it.
As for the original post - As i said above, no one has a right to get higher returns at their bank at the expense of someone else's money (higher returns would be the only reason anyone would want to have a bank loan out their money).
There are some ways that a bank can practice fractional reserve banking legally. If they told their customers that they are a fractional reserve bank, and the currency is only used by other people that use THAT fractional bank. What that means, Bank of America can create their own fiat money and anyone who wants to accept that note can and exchange it at bank of america for their preferred form of currency. Bank of America could also go into agreement with ALL major banks that want to practice fractional reserve banking and have a single fiat currency so that the currency can be exchanged at ANY bank. I dont think this would really work because i think most people would exchange their money for at the bank for their preferred currency. It could work if their fiat currency acted more like a share and provided the holder of the currency returns.
Or another option, if all the banks got together and purchased ALL of a certain commodity then they can use that. Example, if the banks got together and bought ALLLL of the silver in the world they could use that as their currency and loan out. Though that would be pretty impossible too.
The point is as long as their is a single person you doesnt want their currency devalued then it is illegal. If they want their money loaned out, then they are going to have to deposit their money for a fixed period of time ie a CD.
Fractional reserve banking in and of itself isn't the problem. It is the fact that there is a monopoly where all people must accept fractional reserve banking. In a free market if people were willing to have fractional reserve banking it would be perfectly fine, people should be free to choose what kind of banking they themselves want, but it becomes a problem when the fractional reserve bank forces everyone to use their bank notes.
umm yes that what i said, but it is not fine to use a currency where there is at least one person who doesnt want it. So you cant have a gold standard, where people use gold as money, then practice FRBing with gold. You are inflating the price of gold and stealing wealth from people that didnt agree to it.
I'm not sure if I'm understanding you correctly Grant. This is how I see things. Bank A can be on the gold standard, Bank B can practice FRB with gold, and so on and so forth. As long as no one bank attempts to force anyone to use their currency then no problem arises. If Bank B wants to practice FRB with gold it doesn't hurt Bank A, both banks would have different currencies, and so they won't be harming each other. You may understand this better than I, if so please break it down, showing exactly how Bank B will be inflating Bank A's currency.
what happens is the fractional reserve banks are actually 'creating' gold out of thin air. When people put money in a bank that they can take out at anytime then the gold is in the market. if banks loans out that gold prices rise because the market believes their is more gold out there then there really is.
if you deposit 1 oz of gold. the bank loans out that ounce of gold to someone and he buys product 'x' with that loan. Then you buy it right after him the price rises because there is a lower supply of that product and a greater demand for that product.
Now prices arent going to really change immediately, nor would they probably change for one less of a product, but someone is going to be hit with that inflation. If prices change then the consumer gets hit with the inflation. If prices dont change then the producer gets hit with the inflation.
So you just price competed with someone with your own money. It might not sound like a big deal when compared to one ounce of gold, but multiply that across the whole world and every bank and we have quite a bit of inflation.
From my understanding of your post, you are saying the following happens, resulting in Bank A being financially damaged. - Bank B who uses FRB with gold. Loans out their bank notes (which represent a certain amount of gold). - Loaning out the bank notes creates the illusion that there is more gold than there actually is. - Illusion results in the value of gold dropping. - Devalued gold damages Bank A because Bank A is 100% full reserve gold. The 2nd point sounds iffy. Bank B, after printing out more notes for each unit of gold, will decrease the value of their currency due to their being the same amount of gold backing more currency. It's certainly true that the printing of more money may temporarily create the illusory sense that there is more gold. But it seems that it would be just that, temporary, in that once it is realized that Bank B still has the same amount of gold, people will realize that there isn't more gold and prices will go back to normal. Leaving Bank A just as it was before, while Bank B's currency will still be devalued since they have the same gold backing more money, possibly even resulting in Bank A being better off than they were before.
"Im pretty sure a lot of us advocate banning fractional reserve banking, and our banking system doesnt claim to be 100% reserve banking."
1. It says that all demand deposits could be withdrawn in cash at any point in time. This is fraudulent and something which only a 100 percent system could do by definition.
2. A bank in and of itself has no way to print more money, people have to accept money substitutes. If the money substitute claims to be redeemable only at that bank, or not depending upon what their reserves are looking like, then what is illegal about this? Banning fractional reserve banking which was open with its constituents is unlibertarian because it denies open and voluntary human behavior.
3.
"The point is as long as their is a single person you doesnt want their currency devalued then it is illegal."
Then you're going to ban savings and the mining/discovery of more gold?
well the bank gets damaged just like every single person. So because bank B is loaning out more gold then they own that means there is more gold in the market. The actual gold deposits is irrelevant. They can loan out a trillion dollars against 1 gold oz and just be a bank that practices 0.0000000000001% fractional reserve banking. Maybe using bigger numbers is easier to see how it is inflationary. If you can see how that is inflationary then a single extra dollar is inflationary.
Its not temporary, since they will be doing it 100% of the time. Then they just keep moving the money around where prices havent inflated and start using their inflated gold against an uninflated gold economy. They start injecting it in that economy and then move out once they lose their purchasing power to ANOTHER spot thats doesnt have inflated gold and injects that economy. The last economy goes bust because businesses opened with that large increase of capital flowing through the town. It just keeps going around the world building up economies then moving out when profits slow, all while seeping wealth from the previous economies.
neodoxy -
1 .its not fraud because you can. Goto the bank and prove me wrong then. The fed can print enough money to cover every bank and every deposit. Once the people realize that it is ok they put the money bank in and the fed reclaims what it had printed.
2. We are using 'print' like its not just hitting enter on a computer keyboard. They can 'print' or hit enter. Im comfused about everything after the first comma.
*last sentence of #2 - how is it unlibertarian to ban theft? If you make an agreement with someone else to take my money it might be voluntary to you two, but its not to ME!!!!
3. how does savings devalue your currency? savings would increase your buying power because there is less gold on the market flowing. Discovery of more gold shouldnt be banned either. it costs money to mine it, pay for the miners, coin it, and then sell it. If mining for gold was so cheap and we can sell it for so much more we would all be gold miners. second point, discovery of gold doesnt mean there is anymore gold in the world. If everything was privitized that gold in the ground is own it just isnt being used yet. Even if everything wasnt privitized if we accept gold as currency we go in with the understanding that there is more gold in the earth not on the market yet.
1. While in our world it is not the case that everyone could just get all of the money, freshly printed or not, from the banks. You are right so long as the fed or FDIC exists.
2. I'm confused about everything that you said before the paragraph here. My point is money substitutes which are used by banks don't just magically appear other places as money, the money substitutes have to be accepted in order to be worth anything. I can print of neodoxian dollars and have anyone accept them... Well fine maybe I could because that sounds cool but you know what I mean.
Money devaluation is not theft, you are choosing to use the currency. You do not have to use the currency (in a free market), you can trade entirely physical goods or use another currency. The value of money changes naturally. This is basic economics, and unless you bring about the ERE you cannot stabilize the prices of goods.
3. When I mentioned savings I was really associating it with its sister dissaving which has the same effect as inflation except (usually) following deflation, and everything else you said was frankly wrong. The market doesn't care whether or not new gold cost many to be mined or not, it still results in inflation of the money supply as soon as it is traded as currency, and according to you this is stealing. The market isn't effected by how much gold is in the world, only how much gold is on the market and it will therefore fluctuate in value, both on the goods and the money side of the table. Sorry, but this is not theft because you are not entitled to the goods which money grants you. The market is a voluntary phenomenon.
@ Grant
Bank B can't loan out more gold than it has because it simply doesn't have it to lend out. The only way Bank B could cause a distortion of the value of gold is to print out bank notes, putting those bank notes into circulation, and even then the distortion would only be temporary.
grant.w.underwood:Its not temporary, since they will be doing it 100% of the time.
Who are "they"? In a free society, who/what is stopping you from issuing 1,000 times more GrantNotes (gold certificates) than the amount of gold you owned?
Perhaps you need to stop thinking of banks as firms with special privileges of any kind. There'd be no entity to grant them.
serpentis - yes they can. and they will. Thats what a free market is, the people get to choose and create their own money, but are we goingn to create the money? or the banks? if fractional reserve banking is legal, without a central bank, they are their own central bank. They will make their own notes and transfer money as they see fit. Most my family work in the banking sector and everytime i bust their balls about fractional reserve banking they cant even fathom how a bank could operate without loaning 10:1. I dont see how in the world yall would think they would just magically start having smarter business practices? Thats the 'proven' system, thats the 'proven' way to help the economy, so why would they change? When the banks fail and they will there will be streams for another central bank because of free market 'failures'.
and IT SHOULDNT MATTER if it is temporary or not. Why does ANYONE have the right to devalue your currency?! Thats theft, thats immoral. Why would you support a practice like that? How do you propose small business owners that are struggling to manage prices when the money supply constantly changes?
"Why does ANYONE have the right to devalue your currency?! Thats theft, thats immoral. Why would you support a practice like that? How do you propose small business owners that are struggling to manage prices when the money supply constantly changes?"
And thus we have a supposed libertarian justification for an organization supporting price stabilization...
1. not suggesting they get all the money, but they will be skimming off local exchange rates. They will be creating booms and busts. If you think it is alright business practice then what is the limit? Why would a 99% fractional reserves be alright, but a .0000000000000000000000000001% be wrong (hopefully you think that should be wrong).
2. This whole money substitute is still confusing me. are you commenting on when i said exchange a bank's note for another money substitute or are you making your own statement?
How is money devalutation not theft? So i can just counterfeit my own money then? Im going to assume your answer will be no, but whats the difference? If devalutation of currency isnt theft then creating your own money that looks like everybody else's currency isnt theft. If i printed free market 'neodoxians' that everyone uses, to buy a $50 million dollar home then how can you morally stop me from doing it? They guy selling the house wants it because he wants the $50 mil and i want the house. You would just be getting in the way of two people peacefully doing business with each other. You might claim they have a copyright on the look of that currency. because thats your only stance, protection of IP.
what about the bank that does own the rights to print that money? how can you consider it a crime, if its not theft, to keep debasing your currency until its worthless? Until they have flooded the market with so much currency that its literally worthless. I think your only position on this would be they would go out of business and the better practicing banks would stay in business. But why would it matter? the whole time while the bank was debasing their currency they were exchanging it for the next currency or other investments.
Money does change naturally, but its not natural to expand the money supply.
3. thats not inflation, thats supply and demand. The saver that starts spending was just holding their money until goods hit the market they were willing to buy. Thats mainstream economics that defines inflation as a rise in prices. They earned that wealth and they get to spend it anyway and at anytime they see fit.
EVERYONE that would hold gold as money KNOWS their is gold in the ground still. They are accepting that. The banker that loans out all he wants isnt dealing in scarce resources like the miner is.
I NEVER said that mining gold is stealing. how does that make any sense? i SAID the gold has been there since Earth for anyone to mine. So how are you creating money out of thin air (like fractional reserve banking) when you mine a SCARCE resource out of the ground that has been around since before man? The market doesnt care how much gold is in the world? look at oil prices when oil starts 'running low', what do you think will happen to gold prices if we realized we have mined it all? The fact is mining is a process and hit enter on a keyboard happens in a blink of an eye.
I saw a video today with Paul Krugman and he said virtually the same thing that you just said. If you start quoting krugman you are wrong.
starts around 1:30 - 'there is no promise a euronote does not have a promise on it that it will have a fixed purchasing power in terms of goods'.
http://www.youtube.com/watch?v=bQcRPJMyVKw
z1235 - ALL banks that practice fractional reserve banking is 'they'. i could, but no one would accept grantnotes, but that doesnt mean they wont accept jpmorgannotes, BoA notes, or whatever. And nothing would be stopping them (ANYONE whose currency is accepted) either. If you allow them to do it, then you ARE granting them to do it. Why in the world would they not do it if their customers want them to do it?
How am i granting special privileges to banks? I'm advocating the stoppage of THE special privilege! I dont get this. When did everyone jump on the fractional reserve banking bandwagon?
neo -
lol you cant be serious... are you? 100% reserves is the price stabilization. where do you think i would be supporting any organization for price stabilization? HOW is price stabilization bad?!?!!? thats what we want! the best way to do that is not screwing with the money supply!
and thus we have a supposed libertarian justification for an organization supporting the confiscation of person property.
Grant, what are banks and how do they differ from you or any other firm? What happens when everyone starts issuing as many notes (gold certifiicates ) as their printers could bear? Would you value every note at par? Do you always fully believe everything everyone tells you or writes on a piece of paper?
z1235 - there is nothing different. unless frb is allowed.
my bottom line is point is that there will be a widely used and accepted currency. Are you disagreeing with that?
if there is a widely used currency then they have the power. I dont care who it is, nor am i claiming to know. I am claiming that there will be currency, and it will be paper. People wont be rolling up to a million dollar home with 600 pounds in gold to purchase it. It will be paper money, and computers. Most likely 'backed' by gold. The currency that is chosen on the market will be from a fractional reserve bank, because they can outcompete. They can outcompete because every deposit is worth 10x more. They will be able to other higher returns on investment and they will win.
Anyway you slice it, if anyone is allowed to inflate the currency that is theft to the person that didnt ask for it.
grant.w.underwood:z1235 - there is nothing different. unless frb is allowed.
Allowed by whom exactly?
Yes, I'm disagreeing. There will be as many notes (currencies?) as there are bonds today. There will also be independent raters/reviewers (Moody's, Fitch, etc.) who would provide (demanded) insight as to the quantities of each type of note and the amounts of gold backing them. Firms (banks, you, me, McDonalds, Disney) would be incentivized to seek stamps of approval (ratings) from said raters and would open up their vaults for their review. Notes issued by firms known to practice FRB, would be discounted (a "1oz GrantNote" would be trading at 0.3oz in the market and at your local grocer) to reflect the notes-to-gold discrepancy.
There is no need for a regulator to outlaw FRB. As with everything else, the market is the best regulator and it will easily regulate FRB out of existence.
Grant, you seem to think that FRB in a truly free market, will be just like the Federal Reserve, not only that but you seem to think a FRB that has its currency backed by gold will be like the Federal Reserve. It's simply not the case. The Federal Reserve gets away with what it does because the government essentially allows it to operate outside the law. Not only that but the Federal Reserve notes aren't backed by gold. A free market FRB where currency is backed by gold just isn't anywhere close to the Federal Reserve.
z1235 -
'allowed by whom'
-better question NOT allowed by whom?
2nd part -
umm there will NOT be many different kinds of currencies. Do you REALLY expect citizens to know the exchanges rates of thousands of different notes? 100? a dozen? There WILL be 1 maybe 2.
independent reviewers? why would 310 million people spend so much time reading about currency? it WONT happen. There WILL be a standard, and lets be honest it will probably be a gold standard. If banks are allowed to keep fractional reserves on their gold then THAT is inflationary. then THAT is theft. There is no need to regulate FRB because THEFT is illegal so it shouldnt be allowed.
serpentis - UGHH!!! NO i dont, but they WILL practice under the same principles. They will create money just like the FED they just probably wont be able to do it to the same extent as the fed. Just because it isnt as big doesnt mean it isnt still bad.
First of all, fractional reserve banking is only theft if they don't somehow compensate people who are stolen from via inflation. Second, fractional reserve banks could exist with a full reserve currency. They woulndn't have all of the gold, silver, platinum, etc. on hand. They would hire a larger "reserves" who would store vast quantities at full reserve. If people wanted to make small withdrawls, then they could without a problem, but you could either pay a fee or wait for the commodity to be trucked in. Larger banks could have their own reserves, much like Walmart has it's own warehouses that act as hubs for their merchandise before it's trucked off to various stores.
1st - i agree, but that is an impossible task to figure out. How would you in a million years figure out who got hit with the inflation. then how would you figure out a monetary value amount that they suffered when there are 1000 banks doing it.
2nd - are you saying that they have 100% reserves, but its offsite? i wouldnt call that fraction reserve banking. id say thats still 100% reserves just not 'on demand' reserves. im cool with that. They could even bury it under the bank for all i care. Just as long as its there and they have ownership of it.
I'm not 100% sure how you figure it out how it affects each person to the penny, but it could be estimated. I imagine that if banks were deregulated and taxes simplified and cental planing ended, then the world's best financial and ecomomic minds could turn their attention to issues like that, instead of finding and exploiting tax loopholes, working around regulations, planning the economy, etc. Even if it can't be determined down to the penny, I imagine that it could be calculated fairly close via local and geographical CPI's and PPI's. I suspect that one day in the future, even if this is decades away, people will prefer electronic currency over paper currency, even if it has a commodity backing. If this happens, then it would be fairly easy to figure out. The only issue would be privacy concerns. I suppose people could always have to option to opt out of the reimbursment or to choose a different bank entirely. If you're tring to minimize invasiveness, you could use an electronic watermark in the metadata of the container of the file storing the currency. The software would simply read the file ananamously add the money for compensation. How do you prevent abuse? By ensuring that the software involved is open source so that everyone can look at the code to make sure that it is completely benign.
grant.w.underwood: z1235 - 'allowed by whom' -better question NOT allowed by whom?
OK, answer the better question then.
So what? If the market preferred one or two note issuers vs. 100 then so be it. You seem to have a hard time taking yourself out of the monopoly privilege paradigm. Without legal tender laws, capital gains taxes, or taxes of any kind people will be free to accept whatever they think works best for them. If you think that JPMorgan 1oz Notes are likely not worth 1oz then don't value them as such. So would everyone else. There would be no gun pointed at your head making you accept hundred JPMorgan 1oz Notes in exchange for 100 1oz gold coins.
independent reviewers? why would 310 million people spend so much time reading about currency? it WONT happen.
It does not happen now because everyone trusts the nanny state to take care of such things for them. To think that you should spend more time picking a refridgerator or a car vs. picking a reliable and honest note issuer is preposterous. Freedom is not easy as it comes with responsibility for your own actions and decisions. It's just too much work sometimes. That's why most people seem to prefer slavery.
There WILL be a standard, and lets be honest it will probably be a gold standard.
You are mixing apples with monkeys here. Gold is likely to be the most prevalent money in the market, but that wouldn't prevent thousands of entities (firms, banks, persons) to issue certificates (notes, i.e. currencies) claiming to be backed by it. Most people would prefer not to carry gold coins in their pockets and use paper notes, checks, or electronic debit/credit cards (all backed by gold) instead.
If banks are allowed to keep fractional reserves on their gold then THAT is inflationary. then THAT is theft.
If JPMorgan is inflating their JPMorgan 1oz Notes that would NOT affect the value of your Grant 1oz Notes or z1235 1oz Notes. How has JPMorgan stolen from you? If you do own JPMorgan 1oz Notes and your local grocer starts valuing them as 0.6oz then you better run to JPMorgan with the notes and ask them to be redeemed at full face value (1oz) then store your money (gold) in the vault of someone more reputable (say z1235 Firm). Then use your z1235 1oz Notes or z1235 gold debit card to buy your groceries.
There is no need to regulate FRB because THEFT is illegal so it shouldnt be allowed.
Fine. If JPMorgan renegs on their obligation to redeem their 1oz Notes for 1oz of gold to you then they are in breach of contract and may be liable for fraud and/damages. Take your case to a third party arbitrator and seek damages, or perhaps your defense/insurance agency would take that process over after it pays you for your loss claim.
1. We both already know that answer. NO ONE will stop them from doing it.
2. So what? You seem to be only looking after the expropriators welfare. Your fractional reserve world will be a mob rule that can take from the minority by the will of the majority. Where will most people bank? The 100% reserve bank that cant POSSIBLY offer the same returns to depositors or give out near the amount of loans and at higher rates than at that fractional reserves banks do? or will the FRBs win because they have 10x more money to give? THATS where most people will bank. They will inflate and steal value from the minority 100% reserve customers.
You seem to have a hard time letting go of the monopoly privilege of theft that FRB have.
3. No it doesnt happen now because it doesnt happen in the real world. YOU, with over 2,000 post on a free market Austrian Economics forum, suggested there could be thousands of different currencies in a single economy. You, with probably 10x more knowledge about the economy than the average citizens, are defending fractional reserve banking, but some how the uneducated population will get more educated than yourself are today?
You talk about freedom and slavery like its a punch line. What you are really saying in anarchy the majority will screw you and you need to suck it up. Thats NOT freedom. Freedom is not having your rights infringed upon. That includes your personal property. No one has the right to counterfeit gold for their own benefit at someone else expense.
4. You just agreed with me. Yes they will claim it is backed by 1 oz gold and if you would like you could trade in that note for a gold coin. Until the scheme goes burst of course. When there is 10 trillion in notes out there and only 1 trillion in gold your 'free market' wont be so free anymore.
5. Now you are just being obtuse. THERE CANT BE A 1000 DIFFERENT EXCHANGE RATES. It just wont happen, EVER.
6. Since JPMorgan isnt in breach of contract, since the customers were aware of FRB, since there will be a single currency that all banks will use, it isnt JPMorgan's fault. Its YOUR 'free market'. Time to get a central bank to regulate those greedy bastards.
_____________
You are centering your ENTIRE argument that the expropriators (FRBs and their customers) are the ONLY people in the market. If 100% of the population WANTS and AGREES to fractional reserve banking there isnt a problem other than it is a terrible business policy that is doomed to fail.
My stance is we have to defend the property and rights of those that are unwilling to take part in your little ponzi scheme. They work, they take in their gold backed by the exact same amount of physical gold, but they have to compete in a market that has prices 10 higher than gold reserves. How is it justifiable to take in x amount of gold because demand for gold is y. Then your fool's gold floods the market driving up prices to 1/10y and the people that it doesnt affect are those on the receiving end because they now have 10x gold. All while you still just have your x amount. Please explain how counterfeiting gold isnt theft to people who have gold? Why should the sound money person just suck it up because 'HEY thats the free market. You dont HAVE to be a part of society.'
In free market prices of goods are free to change, including price of gold.
chy3nius - thanks for the heads up. had no clue that demand can actually change.
price change due to couterfeiting is the problem. im not talking about natural demand changes.
@grantunderwood
Fractional reserve banking isn't theft any more than market speculation, such as land speculation and price fluctuations.
Let's use your micro example of investing money in a fractional reserve bank. Their money is going to be devalued if reserves are lowered.
Let's say you buy a house. Other houses surrounding it foreclose, dropping property values and in turn your wealth. Similar scenario.
Now for macro scenarios, both do expand the dollar and thus devalue everybodies dollar.
So the solution is not to ban FRB, or we might as well fix prices altogether.
The solution is competing currencies, and I would prefer a gold-based debit card as Peter Schiff just set up with his new bank. That way, you control you're wealth fluctuations better.
CL - Im swamped with work right now so ill reply when i get some time as your post needs some thought, but you are also still on the lines of z's posts. I'm obviously not that articulate because to me its plain as day so i will try and make it more clear.
dude - yes there is, but there professional traders out there that study those rates all day everyday.
How do you expect a grocery store to keep up with that? All while they still have no real clue what business practice the banks are taking with their notes. Yes in the long run the better notes will rise to the top, but in the short run anything can happen to any note. How plausible do you really think it is to have 100 different prices for a bottle of coke?
I think computers can handle that. And a lot of currecies will be local. So while there may be 100's of currecies in the US. Maybe only 20 would be relevant in a given city. Even if that weren't true. Smartphones and computers can handle thousands of currencies.
Note: There may be multiple competing currencies in a market, but only one of those currencies can be money in any given market..
Mises:
Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange.
Just sayin'
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring