I recently opened a checking and a savings account at my local credit union. I asked them about their fractional reserve banking policy and they looked at me rather funny. After explaining FRB to the teller she was worried that I was trying to figure out how much money they had on site, as if i was planning to rob the place. She went and spoke to a manager and all she could end up doing was pointing me to the FDIC poster on the wall.
So I have some questions about FRB as it applies to small banks. First off, is there a good simple text which I could share with the bank heads about how FRB works and its benefits? It seems like any bank that can guarantee its own solvency in these down times would be able to attract a lot of new customers. Also a more general question, how does a savings-and-loan bank make money if it is on full reserve banking? If it has to keep all of its deposits available, how can it ever lend out money?
Is there a single bank in the U.S. that voluntarily operates on Full Reserve? It seems like there must be some market for this type of service.
Thanks,
jason
tir38: corpus delicti:Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc. I'm unclear how this works
corpus delicti:Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc.
I'm unclear how this works
All I meant was that we must draw a distinction between demand deposits and time deposits. If you have a demand deposit you have the right to instantly redeem your deposit any time you want. With this right, however, it would be hard to receive any rate of interest. With a time deposit you forego your right to redemption for a set period of time. By foregoing this right you receive a corresponding rate of interest, e.g. 1 % interest if you forego your right 1 year, 2 % interest if you forego it 2 years etc. (all the numbers are just arbitrary).
Let us imagine A placing $10,000 in a bank. A's portfolio could look like this:
In this case A can redeem $2,000 any time he wants, but will have to wait 2 years to redeem the next $4,000 and 5 years for the last $4,000. This way the bank is ensured that a bank run cannot happen. In effect, they can control their time-structure of assets to match the time-structure of their obligations. Thus they can remain solvent just like any other business.
A last note. Foregoing a right to redemption for a set period of time doesn't have to be an absolute right, i.e. you would of course be able to withdraw money placed in time deposits if you really needed to. There would just be a considerable fee to restrain you from doing so unless it was an emergency.
Don't know if you have noticed, but I edited my initial reply to you to expres my apologies for writing in so harsh a tone.
nazgulnarsil: corpus delicti:By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency I agree. corpus delicti:Of course full reserve banks can treat depositor money as assets. They just need to align their time structure of assets via time-deposits, e.g. 1%@1 year, 2%@2 year etc. again, no problem with this, savings would be in the form of CD's. corpus delicti:FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite. I agree. I'm talking about from the perspective of FRB supporters. I support free banking.
corpus delicti:By that logic everyone can claim solvency. It is not a matter of claiming, but proving, and no frb-bank can prove solvency
I agree.
again, no problem with this, savings would be in the form of CD's.
corpus delicti:FRB doesn't just "free up more capital". In bust periods it seems it does quite the opposite.
I agree. I'm talking about from the perspective of FRB supporters. I support free banking.
No worries then. You just got me worried initially
Actually I'm just learning too, so could you tell me what a CD is? Something to do with a Deposit I imagine? (sorry if it is a stupid question, but english isn't my primary language, nor is banking my primary field of interest)
nazgulnarsil: corpus delicti:You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say. there's The Mystery of Banking, History of banking and currency in the U.S., and one other I can't remember. Which would you suggest?
corpus delicti:You really need to read up on how free banking works. This is utter nonsense, I'm sorry to say.
there's The Mystery of Banking, History of banking and currency in the U.S., and one other I can't remember. Which would you suggest?
The only book I have read about this subject is Mystery of Banking so perhaps that is not the best kind of recommendation
I don't know about worldwide, but here a CD means certificate of deposit and is exactly what you describe: a certain amount of money you agree to leave alone for a set amount of time in exchange for a set amount of interest. you write and argue well for this being your second language. I have no aptitude for languages.
Disclaimer: the following requires that enough people understand money to keep politicians and governments - and money - honest. So it is probably doomed, along with civilization and the human species.
In response to the Great Depression, Irving Fisher and a group of prominent US economists devised "The Chicago Plan" (CP). The CP requires all lenders to have a 100% reserve backing for their loans using fiat money created by the US government - perhaps in lieu of taxation. Fisher wrote a book about the CP, "100% Money", for the general public. (You may be able to get a copy from your local university through inter-library loan but it is out of print.) The idea is for the government to control the supply of money so that it is in proportion to what is required to circulate the real wealth of the economy - and NO more! No more Greenspan bubbles using cheap and easy money, no more wars using borrowed money, etc.
Fisher makes a convincing argument that normal flucuations in the business cycle are turned into economic catastrophes when the debt-based money supply collapses as bankers call in loans to meet reserve requirements. Our current collapse is apparently the product of capital NOT reserve requirements (which now have enough loopholes and evasions they are a joke). See articles by Ellen Brown on her web site http://webofdebt.com. I don't understand this stuff enough to consider capital requirements and so will only discuss Fisher's 100% reserve requirement.
The idea addresses the two largest problems with the Federal Reserve: 1-private parties creating the nation's money and walking off with the real wealth to which they can use that money to lay claim; 2-regulation of the money supply so there is a direct relationship between what the real economy requires and the amount of money in circulation.
Addressing this second problem is the whole purpose behind a gold standard. But from everything I've read, a return to the gold standard would not really solve the problem. The British master the art of gold-standard based fractional-reserve banking to the point where miniscule amounts of gold were required to preserve the fiction of a gold-back pound. It was only the combination of financial parasite-ism that destroyed the real British economy combined British imperial conflict culminating in WW 1 that blew the whole scheme apart. Add to this the fact that fractional-reserve banking and credit would never have come into existence if it didn't fill a need for more money than a gold-backed system could easily supply.
The point is - there is a unity of purpose behind backers of the gold standard and backers of a 100% reserve solution like Stephen Zarlenga of the American Monetary Institute - http://monetary.org. Just as government fiat money has the probably insuperable obstacle of enough public understanding of money to keep the system honest, devising a gold or commodity-backed money that will operate on 'automatic pilot' without this understanding is probably doomed from the outset.
Like the Mogambo says, we are doomed.