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Fractional or 100% Reserve System

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JEHeer6231 Posted: Thu, Sep 25 2008 2:57 PM

I was listening to Peter Schiff, and I heard him say that you don't have to give up a fractional reserve system as long as you tie it to gold.  However, I thought you would want a 100% reserve currency because otherwise the money supply could still change based on the amount of credit in the system and there could still be runs on banks.  However, that's simply my opinion, and I was curious what everyone else thought.

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banned replied on Thu, Sep 25 2008 5:26 PM

There's nothing wrong with fractional deposits, what's wrong with them currently is the fractional deposits now are demand deposits (at least in this case).

What fractional deposits OUGHT to be are deposits using the bank as an intermediary to loan out accumulated credit while you gain interest on what you deposit. These deposits would represent a certain time preference. Example: I deposit money at Bank A promising not to withdraw it for B ammount of time receiving C% interest on my investment.

Demand deposits (deposits that are immediately withdrawable) ought to work somewhat like a warehouse. There would be a flat fee (or perhapse an indexed fee) on deposits, and depositers would pay banks to manage and guard their savings.

The system we have today doesn't work like that. If you invest savings in a bank, most of it will be loaned out almost immediately. Gold is irrelevant, you still have credit expansion which isn't backed up by time investment. Also, In the 1930s they still had a gold standard.

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What you described is basically what I assumed the term 100% reserve system to mean.  The business of returning time deposits with interest would not result in an expansion of the money supply because no one could plan to use that money during the time in deposit other than the person it was being loaned to.  Also, the time deposit should be looked at more like a mutual fund.  If a few loans go south, no-one with time deposits would be worse off, only the bank would lose profits, but individuals with time deposits would also need to recognize ahead of time that if a lot of loans go bad, they are not garenteed to get all of their money back.  There is no such thing as risk free if you're gaining interest.  Is there a different description of a 100% reserve currency that I am unaware of?

 

When Peter Schiff was talking about not needing to get rid of the fractional reserve system, I assumed he ment not get rid of demand deposits that could also be used as the banks reserves for loans.

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Peter Schiff is wrong on this one.  Fractional Reserve is as wrong as me taking money directly from you.  It is injustice.  It is stealing upon the purchasing power of everyone else and loaning it out with interest. 

The depositors are not informed that their money is loaned out, and they are not informed that they cannot receive their money immediately. 

The free market would place an appropriate interest rate and appropriate deposit fee under a 100% reserve currency system.  So banks wouldn't be out anything.  It's just that they need to be brought to justice when they are violating property rights.  Currency is property and so by expanding it through fractional reserve banking, to do that requires that everyone else lose part of their currency's purchasing power.  That stolen purchasing power is now competing for the same pool of goods and resources.  The pool of resources didn't increase when they created the new money.  It just got unevenly allocated to those who haven't worked for it.  It is the same reason why counterfeiting is injustice. 

However, if the depositors are informed that their money is being loaned out and it will not be paid back until the loan has matured, then they will be able to voluntarily reject that contract.  This type of contract would be similar to a current day CD.  The incentive for the depositor would be that they receive just compensation(interest) on the loan.  In this situation no new money is created.  This is not fractional reserve banking.  Lending still occurs.  But no injustice is created. 


Injustice needs to be punished by our government.  Not licensed by it.

 

Here is where you can read on the New York Federal Reserve website all about current fractional reserve policies in the United States.

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Paul replied on Thu, Sep 25 2008 10:53 PM

therealjjj77:

The depositors are not informed that their money is loaned out, and they are not informed that they cannot receive their money immediately. 

But then it wouldn't be a demand deposit.

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scineram replied on Fri, Sep 26 2008 3:27 AM

therealjjj77:
Fractional Reserve is as wrong as me taking money directly from you.  It is injustice.

Why exactly? People voluntarily agreed to it, because pays interest and convenient.

therealjjj77:
It is stealing upon the purchasing power of everyone else and loaning it out with interest. 

Stealing purchasing power? Seems like a right to property value.

therealjjj77:
The depositors are not informed that their money is loaned out, and they are not informed that they cannot receive their money immediately.

They can, of course. And not informed in what way? How do they think it pays interest?

therealjjj77:
It's just that they need to be brought to justice when they are violating property rights.

Where is the violation?

therealjjj77:
Currency is property and so by expanding it through fractional reserve banking, to do that requires that everyone else lose part of their currency's purchasing power.  That stolen purchasing power is now competing for the same pool of goods and resources.  The pool of resources didn't increase when they created the new money.  It just got unevenly allocated to those who haven't worked for it.  It is the same reason why counterfeiting is injustice. 

Oh, right to value of property again.

 

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Paul replied on Fri, Sep 26 2008 5:41 AM

scineram:

therealjjj77:
Fractional Reserve is as wrong as me taking money directly from you.  It is injustice.

Why exactly? People voluntarily agreed to it, because pays interest and convenient.

How can you "voluntarily agree" to do something which is impossible?

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Well, the current FRB system is in fact far from consentual.

-Jon

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scineram:

therealjjj77:
Fractional Reserve is as wrong as me taking money directly from you.  It is injustice.

Why exactly? People voluntarily agreed to it, because pays interest and convenient.

therealjjj77:
It is stealing upon the purchasing power of everyone else and loaning it out with interest. 

Stealing purchasing power? Seems like a right to property value.

therealjjj77:
The depositors are not informed that their money is loaned out, and they are not informed that they cannot receive their money immediately.

They can, of course. And not informed in what way? How do they think it pays interest?

therealjjj77:
It's just that they need to be brought to justice when they are violating property rights.

Where is the violation?

therealjjj77:
Currency is property and so by expanding it through fractional reserve banking, to do that requires that everyone else lose part of their currency's purchasing power.  That stolen purchasing power is now competing for the same pool of goods and resources.  The pool of resources didn't increase when they created the new money.  It just got unevenly allocated to those who haven't worked for it.  It is the same reason why counterfeiting is injustice. 

Oh, right to value of property again.

 

I apologize for the confusion.  I am speaking of fractional reserve banking as the Federal Reserve describes it.

If we are talking about fractional reserve banking from their definitions, this is the ability of a bank to take money that people wish to only store in the bank.  The bank loans it out at interest.  These are NOT time deposits(i.e. CDs) OR savings accounts. 

If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000).

...

Deposits that are components of M2 and M3 (but not M1), such as savings accounts and time deposits, have no reserve requirements and therefore can expand without regard to reserve levels.

Savings accounts and time deposits work differently and actually compound the situation.  We haven't even started dealing with how the banks use those.  That even expands the amount of injustice occurring.

So, back to fractional reserve banking: If I asked you to house some potatoes for me until I'm ready to use them, and you said you would just house them(read a checking account contract) but you then instead loaned them out to someone else, you have violated my property and the contract.  It did not become your property just because you agreed to house it.  It is still my property.

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meambobbo replied on Fri, Sep 26 2008 11:30 AM

When you have government actions that institutionalize fractional reserve banking, it is bad.  This creates greater and greater amounts of credit, so that the value of money/credit declines.

Without the government to institutionalize it, credit greater than reserves actually decreases as well as increases.  The value of money is preserved in the long run, although banks do temporarily put themselves at risk.

Notice the largest panics in the US were due to government intervention allowing fractional reserve banking to become institutionalized, such as in 1819 (post-war ban on redemption of notes for specie), 1907 (control of money supply through banking regulation since the civil war), and 1933 (central banking).

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scineram:
Why exactly? People voluntarily agreed to it, because pays interest and convenient.

I believe that you or someone with similar opinions has, in other threads, discussed how if the fractional reserve nature of the deposit is free and fully informed, then there is not a right's violation.  Thus (paraphrasing your position, please correct if I misuse), it is not fractional reserve banking that it wrong, it is the mandatory nature of it that is wrong.  Please forgive me if you are not one who has contributed to those other threads.

I have always wanted to ask:  How is this different than me counterfeiting money?  I make a note that looks exactly like the "real" one.  I then use it to buy stuff, but since it isn't a real note I have defrauded the other party to the transaction.  So the note looks like money, and can perhaps be used as money, but it isn't the real thing and use of it constitutes fraud.  In fractional reserve banking the original $100 of money can magically become $1000 of (money + credit).  So there is $900 of credit that really doesn't exist out there in the market chasing investments and goods, driving up prices and competing with my (assuming I did not participate in the $900 of credit inflation) REAL money.  To me it appears that there must be a difference in character between the original $100 and the created $900, and that character is the difference between non-fraud when spending the $100 and fraud when spending the $900. 

So, just to wrap up, the question I am asking about isn't the bank loaning out the depositor's money - I will accept that can be done if under voluntary contract (but at the depositor's risk).  Aren't the people who have to compete with the created $900 being disadvantaged?  The same way I would be if a person competed against me in an auction but paid with counterfeit bills?

One hundred trillion Zimbabwe dollar note

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meambobbo replied on Fri, Sep 26 2008 12:24 PM

Jason, here's the thing - are you talking about a regulated banking industry?

Without regulation, each bank would have to issue its own bank notes and have those bank notes fixed to something that couldn't be counterfeited, like gold.  If a single bank issues too many notes, this will become apparent as they start losing value, compared to the bank notes of other banks, or gold itself.  In a free market of banking, fractional reserve banking has no tendency to constantly expand and create excessive amounts of credit.  While some situations encourage banks to issue credit beyond reserves, others encourage them to do just the opposite.  Unbacked credit plays only a small part in fundamental money supply expansion -> you are more likely to see more gold mined from the Earth.

Banks given the privilege of suspending redemption of notes for gold will result in excessive credit.

Banks being required to accept their competitors' notes and redeem them for gold will result in excessive credit.

Trying to protect such a system with central banking only encourages even more excessive credit.

Trying to protect that system with fiat currency encourages even more excessive credit.

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scineram replied on Fri, Sep 26 2008 1:08 PM

Not counterfeiting because those are not fake, but real banknotes issued by the bank, obliging itself  to redeem them on demand. Also it is not mandatory, as far as I know there are fully backed reserves available if you want, people just rather earn interest than pay for warehousing.

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A time deposit is NOT fraction reserve.  Fractional reserve banking is where you warehouse your money expecting to be able to get back out what you deposited but instead they have loaned out 90% of your money.  To pay you on demand they have to take from someone else's money who expects to be paid on demand.  They have to steal someone's property to accomplish this. 

 

I think there is a lot of confusion here.  If you choose to make a contract with them where you will allow them to loan out your money and pay you interest but they can't redeem it back to you until either:

The debt is paid

OR

Someone else purchases that loan(through opening a similar account)

This activity would be fine and NOT fractional reserve banking.  In this situation the bank always has the amount of reserves on hand to meet all demand deposits it has agreed to.  In this situation if you wanted your deposit back out before the debt was paid, you would go to the bank and tell them and they would then take any who wished to create a similar account and sell the remainder of the loan to them for their money(if they so choose to provide such a provision).  Then they redeem this money to you as soon as they have the available funds from others making this same arrangement, but do not use that money to make new loans with.  It is to maintain the deposits on the current loan.  Then no more money is in circulation then was before.  No inflation occurs.  But more importantly, no injustice occurs.

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In a free market, banks that practice fractional reserve banking will eventually fail. It is logical to assume that without government promotion of fractional reserve banking via cheap government loans, regulation, and bailouts, banks would instead turn towards full reserve banking.

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krazy kaju:

In a free market, banks that practice fractional reserve banking will eventually. It is logical to assume that without government promotion of fractional reserve banking via cheap government loans, regulation, and bailouts, banks would instead turn towards full reserve banking.

 

The proper operation of government is to punish injustice.  If individuals who's property was violated brought these things to the judicial system as soon as there was any sign of funny business, then others see that bank get sued and punished for the violation of property they have committed.  No need for regulations, cheap government loans, bailouts, fractional reserve banking, etc.  Just let justice prevail and the problem is solved.  A bank that violates people's property needs to recompense them for the violation.  It is a justice issue. 

No different then a factory or pig farm damaging your property through polluting.  They are violating your property, your money, when using it for things you have not permitted them to use it for.  A simple respect for property rights will solve this problem.

 

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Even without government enforcement, banks would turn to full reserve banking due to the danger of going bankrupt.

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scineram replied on Fri, Sep 26 2008 5:31 PM

krazy kaju:

In a free market, banks that practice fractional reserve banking will eventually fail. It is logical to assume that without government promotion of fractional reserve banking via cheap government loans, regulation, and bailouts, banks would instead turn towards full reserve banking.

 Without loans, regulations, bailouts banks operated with low reserve ratios, about 2 percent in Scotland, 20 in Switzerland due to more foreign exchange.

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Source, please.

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scineram replied on Fri, Sep 26 2008 5:34 PM

therealjjj77:
The proper operation of government is to punish injustice.  If individuals who's property was violated brought these things to the judicial system as soon as there was any sign of funny business, then others see that bank get sued and punished for the violation of property they have committed.  No need for regulations, cheap government loans, bailouts, fractional reserve banking, etc.  Just let justice prevail and the problem is solved.  A bank that violates people's property needs to recompense them for the violation.  It is a justice issue. 

The problem is there was no injustice, because it was contractual. The improper operation of governments was when they allowed banks to suspend redemption, a contract violation.

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scineram replied on Fri, Sep 26 2008 5:36 PM

I don't remember exactly but I heardsuch numbers from Jeff Hummel and Larry White.

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scineram:

Not counterfeiting because those are not fake, but real banknotes issued by the bank, obliging itself  to redeem them on demand. Also it is not mandatory, as far as I know there are fully backed reserves available if you want, people just rather earn interest than pay for warehousing.

 

TO COUNTERFEIT, criminal law. To make something false, in the semblance of that which is true; it always implies a fraudulent intent. Vide Vin. Ab. h. t. Forgery. (Bouvier's Law Dictionary, 1856)

Is there fraudulent intent by producing more on demand certificates then one has the ability to pay? 

Is the amount of certificates in the semblance of the amount of true amount of deposits on hand? 

 

 

 

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scineram:

therealjjj77:
The proper operation of government is to punish injustice.  If individuals who's property was violated brought these things to the judicial system as soon as there was any sign of funny business, then others see that bank get sued and punished for the violation of property they have committed.  No need for regulations, cheap government loans, bailouts, fractional reserve banking, etc.  Just let justice prevail and the problem is solved.  A bank that violates people's property needs to recompense them for the violation.  It is a justice issue. 

The problem is there was no injustice, because it was contractual. The improper operation of governments was when they allowed banks to suspend redemption, a contract violation.

For sake of argument and so we can better understand each other, please make up a contract as an example to reference what you are speaking of.  I'm not sure we are talking the same things here.  Thanks.  Smile

 

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Paul replied on Fri, Sep 26 2008 10:05 PM

scineram:

The problem is there was no injustice, because it was contractual. The improper operation of governments was when they allowed banks to suspend redemption, a contract violation.

A contract to do the impossible is ipso facto invalid.  You're saying it's OK to contract to have your cake and eat it too, and then blaming the government for allowing the person who ate the cake to not give it up - well, obviously he can't do that, with or without any government aid; the alternative would be for the bank to go out of business and the customer never to get his money back - from the individual customer's point of view, that would be worse.

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scineram replied on Sat, Sep 27 2008 8:50 AM

What is impossible? A call loan is impossible? A repurchase agreement is impossible? Why are they invalid?

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scineram:

What is impossible? A call loan is impossible? A repurchase agreement is impossible? Why are they invalid?

 

Money is used for it's ability to purchase our limited resources, labor, and property.  The purchasing power is part of the property.  Any loan that would expand the money supply is basically stealing(taking without consent) a fraction of that purchasing power from every other unit of that currency and centralizing it into the loan.  Stealing property has never been acceptable in society. 

Now I'm still waiting for that example of such a contract you are referring to.

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scineram replied on Sat, Sep 27 2008 10:46 AM

Does that mean gold mining should be illegal? Or converting gold used in electronics or jewellery into gold coins? Those reduce purchasing power too. You are talking about the value of property or some kind of intellectual property. After all purchasing power depends on how others evaluate your offer. That this is nonsense should not even be controversial among libertarians.

You keep claiming that a contract that makes fractional reserve banking possible is somehow impossible, illegal, void. The burden of proof is on you to prove individuals cannot voluntarily agree to such contract, despite the fact that they existed for centuries. An example of a contract that started with fixed term and after expiration became demandable is given in The Rise and Decline of the Medici Bank: 1397-1494. The account document

certifies that Cosimo and Lorenzo de' Medici & Co. of Venice have received from Lady Jacopa, the wife of Malatesta de' Baglioni of Perugia, the sum of 2,000 fiorini larghi to be placed on deposit for one year. After this first year, the contract is automatically renewable from year to year, but with the understanding that principal and accrued interest, or rather discrezione, are repayable at any time at the request of the depositor.

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Stranger replied on Sat, Sep 27 2008 11:11 AM

The problem isn't even about fractional reserve anymore. It's about the banks borrowing short-term and lending long-term. When the government stopped subsidizing short-term rates, the system collapsed.

Fractional reserve deposits are just one aspect of this larger dilemma, a deposit being a loan with term 0.

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scineram:

Does that mean gold mining should be illegal? Or converting gold used in electronics or jewellery into gold coins? Those reduce purchasing power too. You are talking about the value of property or some kind of intellectual property. After all purchasing power depends on how others evaluate your offer. That this is nonsense should not even be controversial among libertarians.

You keep claiming that a contract that makes fractional reserve banking possible is somehow impossible, illegal, void. The burden of proof is on you to prove individuals cannot voluntarily agree to such contract, despite the fact that they existed for centuries. An example of a contract that started with fixed term and after expiration became demandable is given in The Rise and Decline of the Medici Bank: 1397-1494. The account document

certifies that Cosimo and Lorenzo de' Medici & Co. of Venice have received from Lady Jacopa, the wife of Malatesta de' Baglioni of Perugia, the sum of 2,000 fiorini larghi to be placed on deposit for one year. After this first year, the contract is automatically renewable from year to year, but with the understanding that principal and accrued interest, or rather discrezione, are repayable at any time at the request of the depositor.

If you and I agree together on a contract but that contract involves stealing from everyone else, then it is illegal.  Unless you have the consent with everyone else actually contributing their own money to that loan and not caring that the bank keeps the interest, then it is illegal.

So suppose that the contract between the lending institution and the debtor is such that the debtor is aware that the warehouse receipt they are receiving is not 100% backed by money.  And then they go and spend that receipt as though it were.  That's fraud.  Unless they let the next party to hold it know that this receipt truly isn't backed 100% and let them know how much it is backed by, and everyone who is enticed to use that receipt in exchanges are made aware of such, then those who knowledgeably used it in commerce without disclosing that the receipt was only partly backed: they are guilty of fraud and stealing property through fraud.

The affects on the economy is NOT what makes it illegal.  The damage is only the result of injustice.  A tornado happens and does damage to someone's house, but that doesn't make it injustice.  What makes something injustice is when a human is violating the person, property, or liberties of others. 

Me taking my gold necklace and having it minted into coin is not injustice.  It was my own property that was being used in the process.  That's not injustice just like someone planting corn will inevitably raise the supply and bring down the price of all other corn.  Those affects are not the result of injustice.

But if I promised something that I did not possess, then that is fraud.  If I gave something I did not have, that is fraud.  If I took fool's gold and tried to pass it off as real, that is fraud.  If I made a warehouse receipt for corn and tried to sell it to you, but when you went to the warehouse there was no such corn there, or only a fraction of the amount on the receipt that is fraud. 

Likewise, if I make a warehouse receipt for money that doesn't exist, then it is fraud. 

These are all forms of violating property through fraud.  That is injustice and what we institute government to secure us against.

Historically people have voluntarily agreed together to take someone else's life too, but does that make murder acceptable just because it has historically occurred?

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scineram replied on Sat, Sep 27 2008 3:36 PM

therealjjj77:
So suppose that the contract between the lending institution and the debtor is such that the debtor is aware that the warehouse receipt they are receiving is not 100% backed by money.  And then they go and spend that receipt as though it were.  That's fraud. 

If it is lending to a debtor then it is NOT a warehouse receipt. If I take a loan then I can go and spend it, there is no need to return same items I was lent.

therealjjj77:
Unless they let the next party to hold it know that this receipt truly isn't backed 100% and let them know how much it is backed by, and everyone who is enticed to use that receipt in exchanges are made aware of such, then those who knowledgeably used it in commerce without disclosing that the receipt was only partly backed: they are guilty of fraud and stealing property through fraud.

The next party only has to know that he can redeem the notes as they claim. As long as this happens there is no fraud.

therealjjj77:
But if I promised something that I did not possess, then that is fraud.  If I gave something I did not have, that is fraud.

Of course I can promise something I do not possess. When I take a loan I do not possess the interest I eventually have to pay, but it is not fraud.

therealjjj77:
If I made a warehouse receipt for corn and tried to sell it to you, but when you went to the warehouse there was no such corn there, or only a fraction of the amount on the receipt that is fraud.

Of course. But actually can someone sell warehouse receipt itself at all? I mean who is supposed to pay the warehousing fee and when?

therealjjj77:
Likewise, if I make a warehouse receipt for money that doesn't exist, then it is fraud.

Naturally, but we are not talking about warehouse receipts.

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scineram:

The next party only has to know that he can redeem the notes as they claim. As long as this happens there is no fraud.

But for them to pay the next party when that party redeems that receipt requires that they take from someone else's stored money.  At that point they have committed injustice against the property of another depositor. 

scineram:

Naturally, but we are not talking about warehouse receipts.

We are talking about warehouse receipts of money.  They are claiming to be able to furnish money they do not have.  They provide the debtor with a receipt that can be exchanged for money.  What is being warehoused is totally irrelevant.  Whether it be corn, computers, or money: it is an object stored that is expected to be stored on your behalf, and not given to someone else.

But actually can someone sell warehouse receipt itself at all? I mean who is supposed to pay the warehousing fee and when?

Of course you can exchange a warehouse receipt for money or anything really.  That's up to the person exchanging it and receiving it at what value.  The warehouse fee is totally irrelevant.

Of course I can promise something I do not possess. When I take a loan I do not possess the interest I eventually have to pay, but it is not fraud.

A receipt for something is far different then a promissory note.  When making exchanges the party accepting the fraudulent receipt makes the exchange under the belief that the receipt is instantly redeemable for the money described.  But when it isn't(fraud), and the bank takes someone else's deposits to cover it(theft), then property has been violated(either through fraud or theft).

The next party only has to know that he can redeem the notes as they claim. As long as this happens there is no fraud.

So suppose the next party goes to the bank with his receipt and redeems it.  Where does the bank get the money to pay for it?  The bank must use someone else's money(property) that is being stored.  That is a violation of that person's property. 

If it is lending to a debtor then it is NOT a warehouse receipt. If I take a loan then I can go and spend it, there is no need to return same items I was lent.

Well what do they "loan" you?  RECEIPTS FOR MONEY!!! Or maybe they loan you money.  But either way, violation of someone's property is now inevitable if they have loaned that isn't theirs and which they haven't been granted permission to loan, or if they create more receipts then they have in deposits to cover.

 

Often times we can get confused in terms.  To better help us understand each other let's define these terms so we can further identify if there is in fact injustice occurring.  If you have a dispute with any of the terms being defined, let's dispute those each individually or we'll just keep going around in circles like this. 

MONEY. Gold, silver, and some other less precious metals, in the progress of civilization and commerce, have become the common standards of value; in order to avoid the delay and inconvenience of regulating their weight and quality whenever passed, the governments of the civilized world have caused them to be manufactured in certain portions, and marked with a Stamp which attests their value; this is called money. 1 Inst. 207; 1 Hale's Hist. 188; 1 Pardess. n. 22; Dom. Lois civ. liv. prel. t. 3, s. 2, n. 6.

RECEIPT, contracts. A receipt is an acknowledgment in writing that the party giving the same has received from the person therein named, the money or other thing therein specified.

BANK, com. law. 1. A place for the deposit of money.  A warehouse of money.

WAREHOUSE. A place adapted to the reception and storage of goods and merchandise, etc.

 

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krazy kaju:

In a free market, banks that practice fractional reserve banking will eventually fail. It is logical to assume that without government promotion of fractional reserve banking via cheap government loans, regulation, and bailouts, banks would instead turn towards full reserve banking.

I think you're right. Let's just look at how the US government oppreses digital gold currency providers and Liberty Dollars on their territory, seizing the gold and the notes. It looks like they do whatever they can to destroy the reputation of such alternatives, alternatives which represent full-reserve banking.

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banned replied on Sat, Sep 27 2008 6:38 PM

therealjjj77:
  The purchasing power is part of the property.

 

Wrong. Purchasing power is subjective. You do not own or have a right to what others value your property at.

 

therealjjj77:
Any loan that would expand the money supply is basically stealing(taking without consent) a fraction of that purchasing power from every other unit of that currency and centralizing it into the loan.

Wrong again. It is fraudulent when the bank's clientelle have agreed to a full reserve deposit, but If no agreement to full reserves has been made, the bank is free to do as it pleases. Of course that's an unrealistic scenario since a reserve ratio would likely be included with any account contract.

therealjjj77:
Now I'm still waiting for that example of such a contract you are referring to.

He's describing contractual consent in a client bank relationship where the bank is permitted to loan out x% of clients savings and the client can make y% interest on the savings they've deposited.

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banned replied on Sat, Sep 27 2008 6:52 PM

therealjjj77:
If you and I agree together on a contract but that contract involves stealing from everyone else, then it is illegal.  Unless you have the consent with everyone else actually contributing their own money to that loan and not caring that the bank keeps the interest, then it is illegal.

Everyone who uses the bank implicitly contracts to it, everyone who exchanges goods for the banks notes contracts to the use of the banks notes. There is no violation of property. Unless the bank fraudulently prints money where it has said it wouldn't and then distributes that money as actual refundable credit it has done nothing wrong in inflating it's own currency and/or setting up it's accounts with reserve ratios below 100. If you think a certain banks note is worthless don't trade for it. The fact is, banks with high inflation rates will be beaten by the market.

therealjjj77:
Likewise, if I make a warehouse receipt for money that doesn't exist, then it is fraud. 

No, it's only fraud to exchange something and claim that isn't the thing you've exchanged. For instance, I trade you a priceless painting but it turns out the painting was really a knock off. Counterfeit is only fraud when the notes are exchanged.

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JEHeer6231:

I was listening to Peter Schiff, and I heard him say that you don't have to give up a fractional reserve system as long as you tie it to gold.  However, I thought you would want a 100% reserve currency because otherwise the money supply could still change based on the amount of credit in the system and there could still be runs on banks.  However, that's simply my opinion, and I was curious what everyone else thought.

Personally, I have no problem with a system that doesn't run on gold. I'm open to the interpretation that gold isn't the best system to go by and I would love to see its flaws corrected.

 

The thing that is, however, the most malicious part of the current system of banking isn't so much that it is "fractional reserve," so much as it is the mechanism by which the money supply increases.

 

In some ways, the system today is not at all fractional reserve. There are such things, for example, as safety deposit boxes, are there not?

The Origins of Capitalism

And for more periodic bloggings by moi,

Leftlibertarian.org

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Paul replied on Sat, Sep 27 2008 9:38 PM

scineram:

What is impossible?

Two people having access to the same dollar at the same time is what's impossible.

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Ed Fleck replied on Sat, Sep 27 2008 10:06 PM

I agree.  From what I read in Rothbard's book "Mystery of Banking" a fractional reserve system, while unfavorable, would not be a problem in an unregulated banking industry.

Every time a bank (say Bank A) engaged in fractional reserve lending, and the borrower (a customer of Bank A) spent Bank A's note to purchase a good or service from a customer of Bank B, the note would be deposited in Bank B, who would redeem it immediately from Bank A.  Neither bank would be able to inflate their money supply by very much at all, because their notes would be being called in constantly from other banks.  The result surprisingly would be hard money.

The major problems come in when a central bank gets involved.  (Of course Rothbard explains it far better - I'm a beginner!).

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scineram replied on Sun, Sep 28 2008 9:23 AM

Paul:
Two people having access to the same dollar at the same time is what's impossible.

Of course, all dollar notes are the property of whoever holds them. There is no problem of ownership.

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scineram replied on Sun, Sep 28 2008 9:30 AM

Ed Fleck:
The result surprisingly would be hard money.

Sounds good in theory, but not necessarily in practice.  Historicaly in free banking systems the reserve ratios generally varied from 2 to 20 percent. The freer the more stable the lower the reserve ratios.

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Then he could rephrase: two people having access to the same underlying money-good that the money-substitute represents.

-Jon

Freedom of markets is positively correlated with the degree of evolution in any society...

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