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.
scineram: I see rothbardians are still in denial. This will apparently not ever change. So what was the point in restarting this topic? There is already 100 pages on this topic for anyone interested. The actual arguments here will not convince anyone to change opinion, I have debated Cantor cranks enough to know that.
I see rothbardians are still in denial. This will apparently not ever change. So what was the point in restarting this topic? There is already 100 pages on this topic for anyone interested. The actual arguments here will not convince anyone to change opinion, I have debated Cantor cranks enough to know that.
Maybe you're not a "Rothbardian", but you certainly ain't Misesian either.
"You selected a passage where he describes an alternative, a "second-best.""
Yeah. I can read. And I don't usually select quotes without reading them. I wrote what I did in my post, BECAUSE of those Rothbard quotes. I think you need to listen to what I actually wrote, instead of what the voices in your head tell you that I wrote.
"Since there would be no central banks in a free society, banks would probably not offer CDs. Instead, people would go en masse to places like prosper.com that let people loan other people money. But oh wait, I wonder how they do it, since they apparently know nothing about money or finance?!!"
Rather than going through and trying to respond to a tidal wave of non sequiturs, let me just see if I can nail down your "thinking". Is it your belief, that without government coercion, there would not exist institutions that offer both money warehousing services AND investment services?
"Remove FDIC and demand deposits can no longer be guaranteed to be available on demand. Either it is available on demand or it is not. Available maybee on demand is not a demand deposit but a lottery ticket."
Are you even reading my posts that you respond to? Or are you randomly selecting me to quote for unrelated nonsense? Where did I refer to demand deposits? Perhaps I should reply to you about ETF diversification, or crop management. I give up. You're nuts.
DD5: Their credit is worthless if I am not required by law to accept it.
Their credit is worthless if I am not required by law to accept it.
Their credit is and always has been money. The law is a recent addendum to money. The law changed nothing.
DD5:The fact is that you could not come up with one example yet you still managed to give a lengthy answer.
By your question you display ignorance. Everything that the bank does, is now done with government approval, but the government approval is recent, and did not change what and how the bank operated.
DD5:Go back to your Ellen Browns...
Who is that? I was educated in conventional economics 35 years ago, but even from that mess I had a better understanding of money than Rothbard. After a few decades of separating fact from fiction, I am firmly convinced that all the economics I was given in business college is lying propaganda. I am sure that EB is just as useless as Rothbard. Not interested at all in opinions. Give me fact.
DD5:Maybe you're not a "Rothbardian", but you certainly ain't Misesian either.
I do not think so, but not impossible. If that is the case, it is because he is wrong.
The fact is it is illegal for anyone other than the Treasury or the Fed to print dollars or coin cents.
DD5: Nobody said you can't, for example, buy or sell a CD on the market, but its value will be expressed in some money prices. The same applies for your demand deposits with a clause. Here is the crux of the argument: you have money deposited in some vault, and receive some claim tickets for that money, the ticket has a clause that says either: 1. for CD: redeemable only upon expiration of loan, otherwise pay fine. 2. for demand deposit: redeemable on demand with no 100% guarantee that the money will be there. And you will still maintain that these tickets can somehow be treated as money substitutes when by definition, the clause says that they are not!! The only way for a CD to become money is if the CD certificate itself is somehow accepted as circulating medium of exchange, but then it is impossible for the CD to retain the commodity money value of its face value, for the simple reason that the two are not exchangeable due to the time constraint of the certificate. The CD and the commodity money would become like 2 different monies with an exchange rate. This is of course silly, and doesn't make any sense why such a scheme could possible evolve in a market.
Nobody said you can't, for example, buy or sell a CD on the market, but its value will be expressed in some money prices. The same applies for your demand deposits with a clause.
Here is the crux of the argument: you have money deposited in some vault, and receive some claim tickets for that money, the ticket has a clause that says either:
1. for CD: redeemable only upon expiration of loan, otherwise pay fine.
2. for demand deposit: redeemable on demand with no 100% guarantee that the money will be there.
And you will still maintain that these tickets can somehow be treated as money substitutes when by definition, the clause says that they are not!!
The only way for a CD to become money is if the CD certificate itself is somehow accepted as circulating medium of exchange, but then it is impossible for the CD to retain the commodity money value of its face value, for the simple reason that the two are not exchangeable due to the time constraint of the certificate. The CD and the commodity money would become like 2 different monies with an exchange rate. This is of course silly, and doesn't make any sense why such a scheme could possible evolve in a market.
If you can use a CD as cash then it is acting the same as cash. You assert people are not allowed to treat CD's as money substitutes....why? I have given you a very specific and very common example where people treat delayed payments as cash. Your theory when applied to predict actual human behavior without government interference fails......people do at times treat delayed payment as cash...it is just a fact.
If i have a CD redeemable one second from now, you are saying it wont trade at face value. There only needs to be one example where you are wrong to prove your theory is incorrect. There are a lot more than one example where people accept delayed payment at face value.
vikingvista:Rather than going through and trying to respond to a tidal wave of non sequiturs, let me just see if I can nail down your "thinking". Is it your belief, that without government coercion, there would not exist institutions that offer both money warehousing services AND investment services?
Spideynw:Again, banks can lend money. And so too can grocery stores. But when I say grocery store, do you think of a business in the business of lending money?
At most, I think only 5% of the adult population would need to stop cooperating to have real change.
DD5: That's not an assertion. It is a fact, and therefore, valid as proof. It is a fact that a deposit certificate with a clause and a certificate without clause (backed by 100% reserves) cannot be treated the same by the market unless the former is deceived into looking like the latter. That they are different commodities is an undeniable truth like apples are not oranges.
That's not an assertion. It is a fact, and therefore, valid as proof.
It is a fact that a deposit certificate with a clause and a certificate without clause (backed by 100% reserves) cannot be treated the same by the market unless the former is deceived into looking like the latter. That they are different commodities is an undeniable truth like apples are not oranges.
Sorry, just saying "it is a fact" doesn't make it so.
There really isn't any reason why the certificates cannot be treated the same by the market without deception. You are placing a "can't" in place of a "won''t" to try and mask a mere assertion. Trust in the bank being an obvious counterexample, making your quibble obsolete. A quibble thats already been refuted here before. As we already know different commodities frequently exchanges for the same amount.
vikingvista:Yeah. I can read. And I don't usually select quotes without reading them. I wrote what I did in my post, BECAUSE of those Rothbard quotes. I think you need to listen to what I actually wrote, instead of what the voices in your head tell you that I wrote.
And those Rothbard quotes prove my point. You "need to listen to" what Rothbard actually wrote, instead of what the voices in your head tell you that he wrote. Ideally, he'd ban FRB.
one can treat all cats as one would treat all dogs:- make them outhouses, buy them rubber bones, call them rex and rover
and yet this wont make all cats be dogs.
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
nirgrahamUK: one can treat all cats as one would treat all dogs:- make them outhouses, buy them rubber bones, call them rex and rover and yet this wont make all cats be dogs.
Exactly.
so we are now going to hear the thyomological/historical/psychological arguments as to why people would treat 'cats' exacltly like 'dogs' ?
nirgrahamUK: so we are now going to hear the thyomological/historical/psychological arguments as to why people would treat 'cats' exacltly like 'dogs' ?
I hope not, try asking the person treating assertions like facts.