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.
I haven't seen every single contract currently in existence so how could I? You are confusing my (brief) theoretical defense of fractional-reserve banking and the current monstrosity.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Angurse: Even if I had or hadn't, I don't see the relevance.
Even if I had or hadn't, I don't see the relevance.
You said:
I haven't seen every single contract currently in existence so how could I?
You don't need to. If you read the demand deposit contracts of, say, four major banks, you can conclude that other demand deposit contracts are fairly similar. I think that a problem here is the belief that contracts have been designed out of the current regulated and protected banking system (well, slight changes could have come as a result, but the contract itself is not stipulated by the industry, but by its customers all-around). They have been taken advantage of by the current banking system, but the contracts themselves were really born out of demand for a certain service (warehousing, which is why even ten years ago many banks were charging for demand deposits [I remember Wells Fargo did, although at that time there were also banks offering free demand deposits]).
Jonathan M. F. Catalán: You don't need to. If you read the demand deposit contracts of, say, four major banks, you can conclude that other demand deposit contracts are fairly similar. I think that a problem here is the belief that contracts have been designed out of the current regulated and protected banking system (well, slight changes could have come as a result, but the contract itself is not stipulated by the industry, but by its customers all-around). They have been taken advantage of by the current banking system, but the contracts themselves were really born out of demand for a certain service (warehousing, which is why even ten years ago many banks were charging for demand deposits [I remember Wells Fargo did, although at that time there were also banks offering free demand deposits]).
I don't see the relevance given that I'm not defending the current banking banking system (or the banking system 10 years ago)
Angurse:You are confusing my (brief) theoretical defense of fractional-reserve banking and the current monstrosity. I haven't defended the current system whatsoever.
Juan:You know, the money cranks do that all the time. Whether they do it because of ignorance or because of some sort of tie to the banking mafia, sorry!! financial industry, who knows.
Do what out of ignorance? Not defend the current banking system? I guess just about every Austrian economist constitutes a "money crank" in your book
Angurse:I don't see the relevance given that I'm not defending the current banking banking system (or the banking system 10 years ago)
I didn't say that you were. You apparently did not read what I wrote:
I think that a problem here is the belief that contracts have been designed out of the current regulated and protected banking system (well, slight changes could have come as a result, but the contract itself is not stipulated by the industry, but by its customers all-around).
The demand deposit contract, at its most basic, existed both under the current banking system and under a non-cartelized banking system. It is a warehousing contract. What I'm saying is that the demand deposit contract's terms (apart from small details) are basically the same under any banking system, because the reason for having them (based on client's demands) are all the same (money warehousing).
Jonathan M. F. Catalán:The demand deposit contract, at its most basic, existed both under the current banking system and under a non-cartelized banking system. It is a warehousing contract. What I'm saying is that the demand deposit contract's terms (apart from small details) are basically the same under any banking system, because the reason for having them (based on client's demands) are all the same (money warehousing).
So you are repeatedly bringing this to my attention why? It has nothing to do with Mises' vies of banking. Nothing to do with a theoretical defense of FRB. Are you just bringing-up a non-sequitar discussion about the current contracts? (If so, thats no problem)
Juan: I don't know what an 'austrian economist' is. But I can easily recognize money cranks.....
Yeah, apparently those who don't defend the current system.
Juan:Sure ? Isn't the current system an great example of fraudulent reserve banking ?
Maybe, certainly not fractional-reserve banking though.
Juan:"Isn't the current system a great example of 'fraccional' reserve banking ?"
No.
Juan:Oh really ? And why not ?
Central banks, legal tender laws, barriers to entry, etc...
Juan:Maybe the evil government is forcing the heroes of free-enterprise, aka banking mafia, to print money ?
Maybe. The government does enforce reserve ratios.
The government does enforce reserve ratios.