If a bank lends out more notes than gold, hasn't it sealed its fate of bankruptcy at that moment?
The minute you have more claims on gold than gold available doesn't that mean that inevitably, sooner or later, the bank will go bust?
Some writers say banks 'run the risk' of going bust but i thought going bust is inevitable if you loan out more money that you have.
If there is 'only a risk' how can a bank escape the risk and get away with it FRB?
You see, to me it looks as though the only way a bank can get away with it is if the person borrowing the unbacked money returns it to the bank before it is deposited at another bank, but that is an unrealistic situation, isn't it?
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."
It is critically dependent on the depositors not all withdrawing their money at the same time. The more reserves a bank keeps, the less likely it is that they might go bankrupt (as they have more money actually backing the notes at a given time). Consequently, one can gather that full-reserve banking would prevent going bankrupt from withdrawals.
Life and reality are neither logical nor illogical; they are simply given. But logic is the only tool available to man for the comprehension of both.—Ludwig von Mises
Life and reality are neither logical nor illogical; they are simply given. But logic is the only tool available to man for the comprehension of both.
inquisitiveteenager: If a bank lends out more notes than gold, hasn't it sealed its fate of bankruptcy at that moment? The minute you have more claims on gold than gold available doesn't that mean that inevitably, sooner or later, the bank will go bust?
Yes, FRB must inevitably destroy itself.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Esuric:Yes, FRB must inevitably destroy itself.
I'm highly critical of fractional-reserve banking (as are most others here), but to say that it "must inevitably destroy itself" is hyperbole. It really depends on a variety of factors, including both the likelihood of a bank run occurring and the ability of bankers to foresee or fail to foresee one. Not only that, but when fractional-reserve banking is a state-sponsored endeavor (like it is today), such banks are pretty well insulated from the inherent faults in the model.