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.
Arman: 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.
DD5: Are you under the impression that 1. Money originates only by banks lending (or creating) money.
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 originates in the market place like every other commodity. Governments over time have taken over and monopolized this market either directly or by means of central banking.
Arman:Money that has not yet been lent is not yet money, whether it is in the printer or in the bank vault.
What do you think the Fed open market transactions are? Buying assets with newly created money. He does not lend out the money. He simply spends it.
"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).
He's advocating and explaining a plan, and even stating that the ideal would be to treat them as embezzlers. Sounds like support.
Angurse: 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.
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.
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.
liquidity is bailout!
Without the government, the question of whether people are deceived or not into accepting the checks as cash substitutes becomes relevant. Without the government, a check that is not backed by 100% is not a cash substitute. It will only be accepted as a substitute if people were deceived. Such is the origin of FRB and why it is fraudulent.
without government securing the deposits, a deposit certificate with a clause could not be traded as a deposit certificate without a clause. At best, it would be some sort of a financial instrument, but certainly not cash substitutes.
Legalized FRB is a contrictory of terms. If deposits are not backed by 100% and there is no deception (by a visible clause) , then they are not demand deposits but some financial scheme at best, or more accurately in this case, some sort of a lottery game that resembles a ponzi-scheme.
DD5: Money originates in the market place like every other commodity. Governments over time have taken over and monopolized this market either directly or by means of central banking.
lol. Yeah, like that is soo descriptive. Money does not in any way come from government. Money comes from banks, regardless the government propaganda that obviously has you duped.
DD5:He does not lend out the money. He simply spends it.
lol
Printed money is lent to local banks. Ledger money is transferred from bank to bank through the Fed. The fed is a print shop with a megalomaniac complex
Good Rothbardian research. ..But, let's face it, Rothbard's suggestion of allowing fractional reserve banking to continue after abolishing the Fed is a lot like Obama saying "If you like your insurance, you can keep your insurance"...while requiring insurance companies to take on pre-existing conditioners. Insurance companies will soon be out of business...and so would fractional reserve banks without a Fed.
There seems to be some confusion on this forum that I can't explain.
The fraud element is not complicated. I commit fraud when I promise something that I have no intention of living up to. A fraud is a lie. If a bank says (by way of its express policy) that all deposits are always available for withdrawal upon demand, then it would seem that it must have all funds always on hand, or it is lying. A run on a fractional reserve bank in which the bank runs out of funds, is merely the bank being caught in a lie that already existed.
And it isn't enough for a bank to say "In 100 years of banking experience, we have never had to release more than 5% of our deposits." They still must have all funds available to not be lying, or they must change their policy for demand deposits so as to put some restriction upon withdrawals.
But there is the question of how to regulate that fraud. Have we decided that a state is necessary to right all wrongs, or can the free market effectively regulate some things? If, in fact, a bank does figure out a way to always meet withdrawal requests--if it is never caught in a fraud in spite of practicing some degree of fractional reserve banking--must the iron fist of the state fall upon them? Perhaps the banker discovered some new financial instrument or practice that really does make FRB solvent--maybe something Rothbard never thought of. If people know this, and place their money with them, is not the market the best way to sort out this potential innovation?
DD5:liquidity is bailout!
Exactly. An acting lender of last resort distorts the market. So critiquing FRB via government bailouts is a just non-sequitar. Moreover, you completely left out a myriad of other distortions that the government cause, making further critiques (within a modern context) completely inapt. Not that it matters.
You are forgetting that I am the one who selected the quote. I don't know what you are arguing with. My attribution to Rothbard is true, and you stand corrected.
Arman: DD5: Money originates in the market place like every other commodity. Governments over time have taken over and monopolized this market either directly or by means of central banking. lol. Yeah, like that is soo descriptive. Money does not in any way come from government. Money comes from banks, regardless the government propaganda that obviously has you duped.
Listen, you suffer from a severe case of socialist indoctrination virus, which is having a tendency to learn all of your economics from cranks.
Banks create money by the privelege granted to them by the State. The Central bank and all of its legal power is a creation of government legislatures.
Arman: DD5:He does not lend out the money. He simply spends it. lol Printed money is lent to local banks. Ledger money is transferred from bank to bank through the Fed. The fed is a print shop with a megalomaniac complex
No, he buys assets from the public. Anybody who has for sale what the Fed wants receives this new money.
There is so much confusion out there due to really really bad popular books and youtube clips out there; "web of debt", "money masters" or whatever
Angurse: DD5:liquidity is bailout! Exactly. An acting lender of last resort distorts the market. So critiquing FRB via government bailouts is a just non-sequitar. Moreover, you completely left out a myriad of other distortions that the government cause, making further critiques (within a modern context) completely inapt. Not that it matters.
I've responded to the case without government in the previous post.
smokedgoldeye: Good Rothbardian research. ..But, let's face it, Rothbard's suggestion of allowing fractional reserve banking to continue after abolishing the Fed is a lot like Obama saying "If you like your insurance, you can keep your insurance"...while requiring insurance companies to take on pre-existing conditioners. Insurance companies will soon be out of business...and so would fractional reserve banks without a Fed.
I agree with you entirely. And this is completely consistent with my original post. So what is the contention?
Expecting a practice to wither in a free market is NOT the same as expressly banning it.
It is correct to discuss Rothbard's ideas outside of the context of anarchocapitalism? It surely seems like that is what some folks here are doing. Rothbard may not be the most consistent on the matter, but why should it suprise anyone that he didn't always immediately call for the state to right all wrongs?
DD5:No, he buys assets from the public. Anybody who has for sale what the Fed wants receives this new money.
Oh good gravy! You think that money in circulation has to be spent by the printer of it? With ideas like that, it is no wonder that politicians spend like drunken sailors.
DD5:Listen, you suffer from a severe case of socialist indoctrination virus, which is having a tendency to learn all of your economics from cranks.
The big error of most cranks is the thought that all good things come from government intervention. So why is it that I am trying to convince you that money does not come from government?
DD5:Banks create money by the privelege granted to them by the State. The Central bank and all of its legal power is a creation of government legislatures.
Banks were creating money long before the existence of central banks. Central banks are an addendum to the money supply and not a foundation of.
vikingvista: 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? 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?
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?
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?
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?
Ah, that is where the confusion comes from. I read deposit, not loan, because people don't loan banks money, they deposit money with banks. For some reason there are those of you that confuse a bank with an investment institution. People could loan a grocery store money to invest. But a grocery store is somewhere you go to buy food, not loan money for investments. So when someone says bank, that only means a place to deposit your money/valuables for safe-keeping. Conflating that with a place to go and make investments is confusing.
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
Arman: DD5:No, he buys assets from the public. Anybody who has for sale what the Fed wants receives this new money. Oh good gravy! You think that money in circulation has to be spent by the printer of it? With ideas like that, it is no wonder that politicians spend like drunken sailors. DD5:Listen, you suffer from a severe case of socialist indoctrination virus, which is having a tendency to learn all of your economics from cranks. The big error of most cranks is the thought that all good things come from government intervention. So why is it that I am trying to convince you that money does not come from government? DD5:Banks create money by the privelege granted to them by the State. The Central bank and all of its legal power is a creation of government legislatures. Banks were creating money long before the existence of central banks. Central banks are an addendum to the money supply and not a foundation of.
Show us please one privilege, power, or any special benefit that banks have that does not rely on government fiat. Can you point to just one?
Where does their power rest on? The government or the market? No evasive answer will be accepted. It is either one or the other. Nothing in between.
In my libertarian world (and perhaps Rothbard's too?), private owners might "ban" behavior on their property, like "No Personal Card Decks Allowed at this Casino"...Anyone proposing to "ban fraud at everyone's property" would be looked upon as a quaint newcomer. I would gently remind him that it wasn't his business to tell someone else what to do with their property. If, however, a customer walks into one of your yet to be invented "Super Fractional Reserve No-Defaults-Ever (patent pending) Banks -- Demand Deposits Back in Full Anytime" -- and then loans/deposits (same thing) them $100...then comes back in a week and finds they're "temporarily out of stock" -- THEN that customer would likely sue that bank for property damage/loss due to fraud at the neighborhood private arbitration court. ...So, in a rather long-winded way, in my world, fractional reserve banking would not be banned. P.S. I think some of these topics would be more easily understood if people -- including me -- would refrain from the passive tense. "Be banned" begs the question "By who?". There would be no totalitarian state in my world to do the banning anyway!