Hello,
I am a layperson only recently exposed to the Austrian school of economics. I'm fascinated by it and I'm buying what you're selling. I do have a question:
I've read a few books by Murray Rothbard and he's critical of the fractional reserve banking system. What I do not understand: without fractional resreve banking, how can money be loaned and how could a bank possibly pay me interest? I certainly understand the risk of fractional reserve banking, especially when rerserve requirement is very low but I don't understand what the alternative is.
Thanks.
Don
Thanks for your answer.
But - how do you loan the first dollar? i.e., if, as a bank, all my deposits must be backed, isn't 100% of my money not loanable?
This is an easy answer:
There are a bunch of ways to get money without making fractional reserve loans on deposits that users can claim immediately:
1. Most Common: Issue equity. That is you sell ownership in a bank, normally done through stock holders but can be done through a mutual system. In either case the investors are not contractually obligated to be paid the money back. Understand that if the bank makes more than the interest rates then the investors get more money paid back. There are many more insurance companies that use the mutual system and it has advantages.
2. Contract deposits now for money later. A certificate of deposit is an example. The agreement for higher interest rates means the depositor has limit access to their deposit unlike a checking account or passbook savings. This method includes selling long term bonds.
In all likelyhood there would arise, in a stateless society, two different kinds of institutions.
The first would be a true financial intermediary, who would facilitate the loaning of money. There profits would be the result of arbitrage. For example, person A comes to the bank offering them money for 5% per annum, they would then lend this money at a rate higher than that and (e.g. 6% per annum) and then pocket the difference as a profit.
The second would be more like a warehousing business with whom individuals would conduct a monetary irregular deposit contract. The bank would charge a sum of money in order to guard the gold (or whatever other commodity) and this is how they would make money.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
dmuldoon:how do you loan the first dollar?
You have to get a depositor (or an investor) to allow you to do so. That's what a CD is for example. Remember you only need to maintain 100% backing for demand deposits.
The definitive work on this subject from an Austrin perspective is De Soto's book Money, Bank Credit, and Economic Cycles. It's available online in pdf format here.
vikingvista:Banks would loan out the money that people loan to the banks.
If I deposit money with a bank that promises to have it on hand at all times, and they do not, would you not call that fraud?
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
dmuldoon,
Are you under the impression that
1. Money originates only by banks lending (or creating) money.
2. That the producers loan market (Banks) is the primary means of businesses to acquire capital financing.
Because both statements above are false.
vikingvista: Rothbard did not necessarily advocate banning fractional reserve banking per se. If not banned outright, however, it was imperative that the bank suffer the consequences of inadequate funds--e.g. bankruptcy. That way the market could regulate the credit expansion risk. If a bank somehow managed to find a successful fractional reserve business model that allowed it to survive panic after panic, who are we to claim to be better bankers? But that is a big "if".
Rothbard did not necessarily advocate banning fractional reserve banking per se. If not banned outright, however, it was imperative that the bank suffer the consequences of inadequate funds--e.g. bankruptcy. That way the market could regulate the credit expansion risk. If a bank somehow managed to find a successful fractional reserve business model that allowed it to survive panic after panic, who are we to claim to be better bankers? But that is a big "if".
What? He clearly considered it to be fraud, why wouldn't he advocate a ban on fraud (a form of aggression)?
Fraud. Pure and simple. Fraud enabled by the bankers' cartel: the US Federal Reserve.
Murray Rothbard's Economics 101 (from the mises.org store) explains this very clearly.
Angurse: vikingvista: Rothbard did not necessarily advocate banning fractional reserve banking per se. If not banned outright, however, it was imperative that the bank suffer the consequences of inadequate funds--e.g. bankruptcy. That way the market could regulate the credit expansion risk. If a bank somehow managed to find a successful fractional reserve business model that allowed it to survive panic after panic, who are we to claim to be better bankers? But that is a big "if". What? He clearly considered it to be fraud, why wouldn't he advocate a ban on fraud (a form of aggression)?
He was at the opinion that since FRB is inherently fraudulent, it should be outlawed and would be in the free society. Rothbard analyzed free banking with legalized FRB and concluded that it would, by forces of the market, not be able to expand much credit, if at all, and would converge into a hard money near %100 reserve banking system anyway.
DD5:He was at the opinion that since FRB is inherently fraudulent, it should be outlawed and would be in the free society...
Exactly, Rothbard would have banned it.
Spideynw: vikingvista:Banks would loan out the money that people loan to the banks. If I deposit money with a bank that promises to have it on hand at all times, and they do not, would you not call that fraud?
Frankly no one promises that. Phew, the day is saved!
scineram: Spideynw: vikingvista:Banks would loan out the money that people loan to the banks. If I deposit money with a bank that promises to have it on hand at all times, and they do not, would you not call that fraud? Frankly no one promises that. Phew, the day is saved!
Only because the Banks got the State to "insure" the day of reckoning. Otherwise, banks and the law could not engage is such logical contradictions that, by the way, take place only in the banking sector, thus, further popularizing the myth regarding the importance of the loans market in the economy.
Only what? Please prove such promises actually exist!
scineram: Only what? Please prove such promises actually exist!
When I accept a money order check from a buyer, there is no question of whether the money will be there or not upon redemption. When was the last time somebody came to redeem a check and the bank said: 'oh sorry, you're out of luck, we have no money for you'?
How is this possible when you know that the system is not sound? Because every few years, the Central Bank must provide it with liquidity so that this doesn't happened.
The money order check is treated as a substitute for cash not becuse it really is but because the government makes it that way by force.
I'm trying to make sense of your question in the context of your selected quote from my post.
If you loan money, you typically don't demand that the person you loan it to "have it on hand at all times". In many cases, that defeats the whole purpose of the loan.
Additionally, failure to pay back a loan is not always fraud. That is part of the calculated risk independent of considerations of fraud.
It sounds like you don't understand the difference between a demand deposit and a loan. Can you clarify what you are asking me?
DD5: Are you under the impression that 1. Money originates only by banks lending (or creating) money.
And where do you thinkk money becomes money? Do you think that money comes from government? Do you think there is something magical in the ink? Money is a marker of bank liability, and is created in the lending of it. All money that is circulating has been borrowed (or stolen) from the banking system. Money that has not yet been lent is not yet money, whether it is in the printer or in the bank vault.
DD5:When was the last time somebody came to redeem a check and the bank said: 'oh sorry, you're out of luck, we have no money for you'?
NSF.
DD5: How is this possible when you know that the system is not sound? Because every few years, the Central Bank must provide it with liquidity so that this doesn't happened.
Yeah, the government only play the role of providing liquidity and nothing else.
It was not my intention to attribute the last two sentences (starting "If a bank...") to Rothbard. But your question is easily answered by a direct Rothbard quote:
"One great advantage of this plan is its simplicity, as well as the minimal change in banking and the money supply that it would require. Even though the Fed would be abolished and the gold coin standard restored, there would, at this point, be no outlawry of fractional-reserve banking. The banks would therefore be left intact, but, with the Federal Reserve and its junior partner, federal deposit insurance, abolished, the banks would, at last, be on their own, each bank responsible for its own actions."
...
"It is perhaps a "second-best" solution to the ideal of treating fractional-reserve bankers as embezzlers, but it would suffice at least as an excellent solution for the time being, that is, until people are ready to press on to full 100 percent banking."
-- Murray N. Rothbard. The Case Against the Fed. Pages 150-151. (Emphasis mine).
vikingvista: If you loan money, you typically don't demand that the person you loan it to "have it on hand at all times". In many cases, that defeats the whole purpose of the loan. Additionally, failure to pay back a loan is not always fraud. That is part of the calculated risk independent of considerations of fraud.
And yet, it is suggested that the bank's lending to society that is reciprocated when society lends to banks is somehow fraudulent.