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.
Physiocrat: GilesStratton: Physiocrat: For questions pertaining to whether you can voluntarily enter into an agreement for a bank to hold fractional reserves and answers to most questions about FRB read this- Against Fiduciary Media. It's co-writtem by Hoppe, Block and Hulsmann. It doesn't get better than this. Didn't Huerta de Soto also write it? Nope. He wrote something along the lines of The Uneasy Case for FRB but it doesn't seem still to be hosted on the Mises site. Do you recommend de Soto's Banking and Business Cycle book?
GilesStratton: Physiocrat: For questions pertaining to whether you can voluntarily enter into an agreement for a bank to hold fractional reserves and answers to most questions about FRB read this- Against Fiduciary Media. It's co-writtem by Hoppe, Block and Hulsmann. It doesn't get better than this. Didn't Huerta de Soto also write it?
Physiocrat: For questions pertaining to whether you can voluntarily enter into an agreement for a bank to hold fractional reserves and answers to most questions about FRB read this- Against Fiduciary Media. It's co-writtem by Hoppe, Block and Hulsmann. It doesn't get better than this.
For questions pertaining to whether you can voluntarily enter into an agreement for a bank to hold fractional reserves and answers to most questions about FRB read this- Against Fiduciary Media.
It's co-writtem by Hoppe, Block and Hulsmann. It doesn't get better than this.
Didn't Huerta de Soto also write it?
Nope. He wrote something along the lines of The Uneasy Case for FRB but it doesn't seem still to be hosted on the Mises site. Do you recommend de Soto's Banking and Business Cycle book?
I thought he did coauthor it for some reason. In any case, yes I strongly recommend it.
I would have to disagree with you on this. Fractional Reserve banking IS inherently criminal and fraudulent. Fractional reserve banking violates private property rights. Under the fractional reserve system both the original depositor and whoever the bank then later lends the money out to both have a legitimate claim to the same property. If we believe in private property rights then only one individual can claim full ownership of something. Under FRB system multiple people would have claims to the same property. The only way fractional reserve banking works is due to money's fungibility. It will not work if you deposited an item which is not easily substitutable. If you decided to store a diamond ring at the bank and could demand it at anytime you would want your exact ring back and not someone else's. The bank cannot lend your diamond ring to someone to do what they wish with and also let you have claim to it during the same period. This agreement would create a dual claim on ownership of the same property. The contract itself would be fraudulent even if both parties were aware.
Hi Joe,
Under that logic, a timeshare is a fraudulent activity because own person does not own the property outright at all times. The point I was making is that in order to avoid fraud, the banker could not call a note an "On Demand" note availble for redemption under all circumstances at anytime. It would be a note contingent upon terms agreed upon between the two parties. The fact that the owner cannot redeem their note at anytime they want does not constitute fraud if both parties agreed to those terms. According to the agreement between depositor and banker, the depositor would have to wait until the bank did have the means of payment if it didn't have them on hand. Because of this inconvenience perhaps the depositor can expect a bigger return on their deposit than otherwise possible with a 100% reserve bank. As I already mentioned, I don't quite see the benefit in taking that risk but others might.
no, timeshare explicitly states when the different parties have ownership, analgous to time deposit accounts. this is different from demand deposit acounts and public parks.
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
dmuldoon: 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
What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
Maxliberty:What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
this is so off the mark its outrageous.
nirgrahamUK: no, timeshare explicitly states when the different parties have ownership, analgous to time deposit accounts. this is different from demand deposit acounts and public parks.
Quite right. Timeshares are future goods whereas money is necessarily a present good. It is held due to the lack of perfect information. If there were perfect infomation there would be no need for a media of exchange since you would know what goods people wished to consume and in what quantities and would trade accordingly. Thus FRB makes it so two or more people own the same ounce of silver, for example, at the same time. This is fraudulent and against the free market.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
You can't be serious...
http://www.youtube.com/watch?v=7_KIzbktgJk
Maxliberty: What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
Whilst person B has the money it is to him an asset and to A a liability. This swaps round when the money is paid back. Fractional reserve banking only appears when both two claim that $100 to be an asset at the same time. This is not the case in your example.
Physiocrat: Maxliberty: What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid. Whilst person B has the money it is to him an asset and to A a liability. This swaps round when the money is paid back. Fractional reserve banking only appears when both two claim that $100 to be an asset at the same time. This is not the case in your example.
If you are part of the Austrian free-banking crowd then the above scenario can not be done with a contract. If I were to say that person B was in fact a bank then the scenario outlined is fractional-reserve banking via contract. If you are willing to say the above scenario is ok with a contract then banks can have all the functional aspects of fractional reserve banking via a contract. The only difference is that the deposits are not guaranteed to be demand deposits but only are available at the desire of the bank, but the practical working functionality is the same.
Physiocrat:Fractional reserve banking only appears when both two claim that $100 to be an asset at the same time.
Most banks right now don't make this claim. If you carefully read most contracts when you open bank accounts you will find many times the relationship is like a loan not a demand deposit. So the Austrians are argueing against a fiction.
nirgrahamUK: Maxliberty:What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid. this is so off the mark its outrageous.
The scenario above is fractional reserve banking via contract, so it is exactly on mark. Change person B to a bank.
nirgrahamUK:this is so off the mark its outrageous.
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."
No, it isn't. Stop lying, there's no deposit contract here which is exactly where the issue lies in regard to FRB, in which a deposit is incorrectly treated as a loan.
Maxliberty:The scenario above is fractional reserve banking via contract, so it is exactly on mark. Change person B to a bank.
im sorry, in your example, what is the reserve ratio?