therealjjj77:Bank B has 97% of the on demand deposits to loan out(3% reserve policy) and 4x the CD deposits to loan out(at least this is what I heard they are able to do with Cert of Deposits). This is where I came up with that number. CD deposits are loaned back out at 4x the amount deposited.
If their reserve is 25%, then after compounded into infinitum by re-entering the bank as a new CD and being re-loaned out at 75% again, the result will eventually be 4 times the initial CD.
For a 3% reserve, this would eventually create 33 1/3 times the initial deposit. This is why banks also remove currency from circulation.
But it will cause price inflation, plus it will cause capital misallocations. Many loans may go to default. This would shrink the real profits.
The initial loan would be $750 + $9,700 = $10,450.
I would definitely agree it is more profitable, nonetheless. On the other hand, it is also more risky.
Check my blog, if you're a loser
For fun I was checking the reserve requirements on the FRB website.
Is it true that "Nonpersonal time deposits" have a 0% reserve requirement?! Does this mean what I think it does, i.e. no limit? Seems kind of scary.
Ed
http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1
meambobbo:Bank notes not fully backed by gold are not fiat currency - their purchasing power can represent the value of their backing rather than the proclaimed redemption value in the market.
It's not fraud if the depositors understand that the bank operates in such a manner.
Here's the thing: how do you know if a bank is operating with FRs?
Do you have audits?
Do you have regulation?
Having government regulate full reserves allows government to do all kinds of other things
increases to the money supply through FRB would equal decreases to the money supply by removing the artificial credit once the loan has been repaid.
I'm not necessarily saying its the best way to put credit on the market,
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."
Ed Fleck: Is it true that "Nonpersonal time deposits" have a 0% reserve requirement?! Does this mean what I think it does, i.e. no limit? Seems kind of scary.
Of course; why would you expect a reserve requirement on a term deposit? That's a loan to the bank - you don't loan money to someone expecting them to keep the cash in their possession, right?
meambobbo: therealjjj77:Bank B has 97% of the on demand deposits to loan out(3% reserve policy) and 4x the CD deposits to loan out(at least this is what I heard they are able to do with Cert of Deposits). This is where I came up with that number. CD deposits are loaned back out at 4x the amount deposited. If their reserve is 25%, then after compounded into infinitum by re-entering the bank as a new CD and being re-loaned out at 75% again, the result will eventually be 4 times the initial CD. For a 3% reserve, this would eventually create 33 1/3 times the initial deposit. This is why banks also remove currency from circulation. But it will cause price inflation, plus it will cause capital misallocations. Many loans may go to default. This would shrink the real profits. The initial loan would be $750 + $9,700 = $10,450. I would definitely agree it is more profitable, nonetheless. On the other hand, it is also more risky.
There is no reserve requirement on CDs. They just get to expand it by a certain multiple. It works differently then fractional reserve banking and is just as inflationary.
Paul:If there's a time limit on withdrawls (i.e., the customer is making a loan to the bank), there's no reason for the bank to keep any in reserve at all - in fact, they'd have to be idiots to do so!
The problem is you assume that for there to be a loan to the bank it must have a fixed time limit.
Paul:And you admit it would fail. QED.
I see no reason why it should necessarily fail, if the bank keeps sufficient reserves and possibly has an option clause a bank run is not too likely.
Juan:Well, that's fine. That's exactly what would happen in a free market. Notes which are not fully backed will trade at a discount.
As the issuer bank reddems them on face value there is no incentive to trade them for less.
Juan:Do you think any sane person would deposit 1 ounce of gold in a bank in exchange for a note he knows will trade for less than 1 ounce ?
They did trade at face value, see above. How on earth could any of you expect that when you open your account and it pays interest the bank is just warehousing it??
Juan:It doesn't put 'credit' on the market. It creates bogus property titles and misallocates resources. Credit only exists if there are real savings to be lent. Issuing notes (that trade at a discount!!) is not credit.
There are no bogus property titles. People loan money to the bank and it reloans it. It is also not inflatoinary as long as the reserves are constant.
scineram: therealjjj77:Unless they let the next party to hold it know that this receipt truly isn't backed 100% and let them know how much it is backed by, and everyone who is enticed to use that receipt in exchanges are made aware of such, then those who knowledgeably used it in commerce without disclosing that the receipt was only partly backed: they are guilty of fraud and stealing property through fraud.
therealjjj77:Unless they let the next party to hold it know that this receipt truly isn't backed 100% and let them know how much it is backed by, and everyone who is enticed to use that receipt in exchanges are made aware of such, then those who knowledgeably used it in commerce without disclosing that the receipt was only partly backed: they are guilty of fraud and stealing property through fraud.
But this is what redeemable at sight means, I have the right to redeem it any time I choose. So if all checking account holders have that very right, they can use it any time they want. If that happens, not enough money is there to fulfill the contract. And you as a banker know upfront that you can not fulfill a contract. So against at least a part of your trading partners (depending on your reserves) you can not fulfill the contract and you know it upfront. Which constitutes fraud.
Oh, fraud is only fraud when it is encountered? So, given I grab into the petty cash and take $ 100 having the intend to put it back before the next revision is due, this is not theft than? Strange way to look at things. What if the next revision (bank run) comes out of the blue, am I aquitted because I intedet to replace the $ 100 before the next "regular" revision was due? Good luck in finding a judge that would accept that argumentation :-)
In the begining there was nothing, and it exploded.
Terry Pratchett (on the big bang theory)
If I cannot repay a loan that is not fraud. An insurer cannot pay all claims at the same time yet it is not fraud. As long as all requests actually made are satisfied there is no problem.
A breach of contract to redeem is not fraud.
Why don't you try to rebute my arguments instead of opening a new field where no reference from my side was made to?
If you engage into a contract of which you know you can not fulfill it, it is called fraud,no?
A breach of contract is not fraud, the engagement into a contract you can not possibly keep is.
And what about the petty cash example? Is that not theft? Just yes or no :-)
wildcat banking was clearly fraud, but that was a lot different than what we're talking about.
If a bank goes bankrupt due to FRB, the bankers themselves will sacrifice a good bit of their expected personal wealth to their depositors. I don't see why anyone would want to do this. This is why the wildcat banks didn't stick around and fled by night.
Statistically speaking, many banks that practiced FRB did not fail. And high withdrawal demands are very rare. It is reasonable to say that bankers practicing FRB aren't intentionally breaching their contract because they can reasonably expect that they will be able to uphold their contracts.
potentially, they are insolvent. and i'm not a fan of FRB. but i think cries of fraud and all this are a little extreme, especially when most depositors have a vague understanding of what banks do with their money yet still use them.
Why could you not? Managers usually did well enough that made sure they have enought reserves to satisfy redemption demands. That is why there were not too many failures in free banking systems.
Whatever the terms of contract as long as the obligations are not misrepresented there is no fraud. Like when I cannot repay a huge loan with enourmus interest.
Petty cash, what do you mean concretely?
scineram: Juan: Well, that's fine. That's exactly what would happen in a free market. Notes which are not fully backed will trade at a discount. As the issuer bank reddems them on face value there is no incentive to trade them for less.
Juan: Well, that's fine. That's exactly what would happen in a free market. Notes which are not fully backed will trade at a discount.
They did trade at face value, see above.
How on earth could any of you expect that when you open your account and it pays interest the bank is just warehousing it??
People loan money to the bank and it reloans it.
If I cannot repay a loan that is not fraud. An insurer cannot pay all claims
meambobbo:Statistically speaking, many banks that practiced FRB did not fail.
especially when most depositors have a vague understanding of what banks do with their money yet still use them.
Juan:But the issuer bank can't redeem them on face value because the issuer bank does not have enough gold to do so.
They can and they did. Bank runs were very rare in free banking systems.
Juan:I never said I expect that.
Then you know that it reloans it.
Juan:People loan $1 to the bank and the bank 'loans' out $10 creating bogus property titles for $9 (or whatever number they can get away with).
Under free banking the bank loans out what people loaned to it but lenders can recall their loans.
Look, I have an accoutn which pays small interest. But I can withdraw any time.
Juan:FRB is not insurance. Confusing the two means you are confused.
It was an analogy. The inability to pay all demands in a hypothetical scenario is insufficient for fraud.
Juan:The problem won't go away regardless of the name you use for the action.
There is nothing to go way but state intervention.
Juan:Unproven assertion which goes against basic economic theory. FRB causes all sorts of damage and will ultimately fail, unless propped up by government. History clearly illustrates this point.
A fact you chose to ignore along with the experiences of scottish, swedish, suiss, american, canadian examples of free banking.
Must be an interesting economic theory that is constantly being falsified since medieval times.
Juan:The current system is not free banking by any stretch of the imagination.
AMEN!
Juan:People now use FRB because other options are outlawed.
I don't think so. You can place money or anything in a bank for safekeeping and pay the fees. I don't think alternatives were ever outlawed. I wonder why people rather earn interest than pay for warehousing.
scineram: Juan: But the issuer bank can't redeem them on face value because the issuer bank does not have enough gold to do so. They can and they did. Bank runs were very rare in free banking systems.
Juan: But the issuer bank can't redeem them on face value because the issuer bank does not have enough gold to do so.
There is nothing to go away but state intervention.
A fact you chose to ignore along with the experiences of scottish, swedish, suiss, american,
You can place money or anything in a bank for safekeeping and pay the fees.
I don't think alternatives were ever outlawed.
I wonder why people rather earn interest than pay for warehousing
nhaag: Why don't you try to rebute my arguments instead of opening a new field where no reference from my side was made to? If you engage into a contract of which you know you can not fulfill it, it is called fraud,no? A breach of contract is not fraud, the engagement into a contract you can not possibly keep is. And what about the petty cash example? Is that not theft? Just yes or no :-)
Welcome to the discussion. I am looking at it purely from a justice standpoint. We both agree. Don't get me wrong. We both agree that federal reserve banking is a injustice issue.
The part you quoted me from was in response to someone stating that they contracted with the bank to get this note that really isn't backed by the commodity it states. They were making the argument that if the person receiving the note from the banker understood it wasn't backed by anything, then this would be lawful. I was stating that in such a situation then if that person spent such a note, they would be using fraud upon the person they spent it with unless that person also agreed that they would take it for their property under the understanding that it wasn't redeemable.
But if the bank did redeem it for gold, then the bank is guilty of violating the property of the person who's gold they gave away(unless it was their own gold and if that's the case it was backed then).
Context, my friend.
I have a question: how many people in this thread have not read Money, Bank Credit, and Economic Cycles?
I'd assume the majority, including myself. It's on my reading list, though.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
meambobbo: therealjjj77: The person on whom the taxes are imposed will determine if any injustice is occurring. For instance, if taxes are only paid on a fine basis by those who violate the rights of others, then this is perfectly justifiable and a good monopoly of government. This punishes those who do harmful things to the free market with the responsibility of taxation. That's great for the free market as it discourages these activities of injustice which harm the free market. When trust is high in the free market and people aren't ripping each other off, then government is almost non-existent. If someone violates the rights of others, they are the only ones punished after they make restitution to parties they damaged. So those who don't want to play by the rules of justice are the only ones to suffer. I have this theory that the less injustice there is in a society, the better the economy and free market will function. When people aren't stealing each other's property or violating others liberties, and the institution to secure justice isn't hindering liberties or stealing people's property, then the only way people can be best rewarded is through contributing to the economy in the most efficient way. A free market by definition must lack both government force and crime. It is utopian and no basis of what I'm saying. A situation where government funds itself by imposing fines on criminals isn't a free market, because there is already crime. Only in anarchy can there be a free market, but there probably will never be one, so it's kind of a moot point. A good monopoly of government is easily interrupted. Let's say only criminals pay government revenue. Ok. I want to be a government. I catch somebody I accuse of a crime, try him, convict him, and force him to pay me taxes. What stops me from doing this? A bigger government? What if I catch criminals the bigger government doesn't? What if I can catch criminals at a cheaper rate than the bigger government? What if I catch the injustices of the bigger government? A coercively monopolist government does not allow free competition in the provision of government services. It is coercively regulating this market. More likely than not, it will convict innocent men (or make just acts illegal) to provide itself with greater revenue. Anarchists would argue that any conception of monopoly government relies on a futile attempt to separate economics from justice. Yet government requires economic power to put boots on the ground. Also, government decisions change economic conditions. The point is - the provision of government services is fundamentally bound to market positions and decisions. Any use of coercion, especially monopolist, in providing such services will result in the institutionalization of injustice.
therealjjj77: The person on whom the taxes are imposed will determine if any injustice is occurring. For instance, if taxes are only paid on a fine basis by those who violate the rights of others, then this is perfectly justifiable and a good monopoly of government. This punishes those who do harmful things to the free market with the responsibility of taxation. That's great for the free market as it discourages these activities of injustice which harm the free market. When trust is high in the free market and people aren't ripping each other off, then government is almost non-existent. If someone violates the rights of others, they are the only ones punished after they make restitution to parties they damaged. So those who don't want to play by the rules of justice are the only ones to suffer. I have this theory that the less injustice there is in a society, the better the economy and free market will function. When people aren't stealing each other's property or violating others liberties, and the institution to secure justice isn't hindering liberties or stealing people's property, then the only way people can be best rewarded is through contributing to the economy in the most efficient way.
The person on whom the taxes are imposed will determine if any injustice is occurring. For instance, if taxes are only paid on a fine basis by those who violate the rights of others, then this is perfectly justifiable and a good monopoly of government. This punishes those who do harmful things to the free market with the responsibility of taxation. That's great for the free market as it discourages these activities of injustice which harm the free market.
When trust is high in the free market and people aren't ripping each other off, then government is almost non-existent. If someone violates the rights of others, they are the only ones punished after they make restitution to parties they damaged. So those who don't want to play by the rules of justice are the only ones to suffer.
I have this theory that the less injustice there is in a society, the better the economy and free market will function. When people aren't stealing each other's property or violating others liberties, and the institution to secure justice isn't hindering liberties or stealing people's property, then the only way people can be best rewarded is through contributing to the economy in the most efficient way.
A free market by definition must lack both government force and crime. It is utopian and no basis of what I'm saying. A situation where government funds itself by imposing fines on criminals isn't a free market, because there is already crime. Only in anarchy can there be a free market, but there probably will never be one, so it's kind of a moot point.
A good monopoly of government is easily interrupted. Let's say only criminals pay government revenue. Ok. I want to be a government. I catch somebody I accuse of a crime, try him, convict him, and force him to pay me taxes. What stops me from doing this? A bigger government? What if I catch criminals the bigger government doesn't? What if I can catch criminals at a cheaper rate than the bigger government? What if I catch the injustices of the bigger government?
A coercively monopolist government does not allow free competition in the provision of government services. It is coercively regulating this market. More likely than not, it will convict innocent men (or make just acts illegal) to provide itself with greater revenue.
Anarchists would argue that any conception of monopoly government relies on a futile attempt to separate economics from justice. Yet government requires economic power to put boots on the ground. Also, government decisions change economic conditions. The point is - the provision of government services is fundamentally bound to market positions and decisions. Any use of coercion, especially monopolist, in providing such services will result in the institutionalization of injustice.
Studying societies around the world, I've noticed an interesting trend. A country in which taxes and regulations are low or non-existent actually results in higher morality(respect for the rights of others) and more efficient economic growth. The society need not have an organized institution for justice.
Ok. I want to be a government. I catch somebody I accuse of a crime, try him, convict him, and force him to pay me taxes. What stops me from doing this?
Trial by jury. If you accuse someone wrongfully, then you make restitution to them and pay for the administration and time of the jurors.
The whole premise requires that people in the society value justice.
For example, in my store today I was sitting in my office reading the news about our politicians trying to rob the taxpayers when in my restaurant a young man came and stole some money from my tip jar. It was only two bucks and the risk I would place myself in by pursuing him and confronting him was far greater then two dollars. However, because I value justice above the monetary loss, I found him and confronted him anyway. I managed to get the money back and told him to never come in my store again. By confronting him and showing him that I valued my property rights, he is less likely now to repeat the same behavior. That's worth it to me as now he is no longer a threat to my store and is a lower threat to my community.
So if you wonder why I try to sell the principles of justice, this is because I strongly believe that justice is the core of a true free market. If injustice prevails(like we have in the USA with the actions of the criminal organization of the United States government), then the free market cannot function. Likewise, anarchy is like having no immune system(no justice). I know some will disagree with that statement and say that the free market can put a price on justice. But I would say justice is above price. How does the poor widow pay for justice? If I see injustice, I feel obligated to do something about it regardless of pay. If I see someone getting physically beaten, I do everything in my power to stop the aggressor. You don't have to pay me to do that. If I see someone getting robbed, I will do everything in my power to stop that situation. There was no price for that. In fact, most people would do likewise. It's not forced on me to do that and I don't need pay for it. It's simply because I have a strong belief that it is wrong to violate the person, property, or liberties of others. These are things ingrained in the very essence of our humanity. This is what makes us civilized. Even my 11 month old baby realizes when he has physically hurt someone and feels remorse. You don't have to explain to a two year old property rights when he/she takes possession of a toy. "Mine". They certainly understand property.
Justice is ingrained in humanity and has no price.
Also, what I'm espousing involves no monopoly on justice. Everyone still retains their right of self-defense. We are just voluntarily agreeing to use that right to protect others as well. However, that community self-defense is only a last resort. First one confront the aggressor and if the aggressor refuses to make restitution then the victim assess if they have enough individual force to make the aggressor make restitution. If not then they get as many as they need together to confront the aggressor and hear both sides and then find the appropriate resolution.
Jon Irenicus: I'd assume the majority, including myself. It's on my reading list, though.
I'd suggest the first three chapters are essential reading, covering the nature and history of the banking contract and fractional reserve banking.
Juan:Which means that money is at the same time loaned and available on demand, but that is a logical and physical impossibility, so FRB is doomed to failure. Under real free banking there would probably exist 1. fee-based warehousing 2. loans funded by timed deposits To confuse these two arrangements as you seem to be doing, is nonsense.
This is the assetion you are touting but without any proof why a loan must have a strictly fixed term. Which is the issue.
Paul: I have a question: how many people in this thread have not read Money, Bank Credit, and Economic Cycles?
I read the initial chapters. Here is a 3 part review by White: 1, 2, 3.
scineram: This is the assetion you are touting but without any proof why a loan must have a strictly fixed term. Which is the issue.
On the one hand, the entire point of taking a loan is to use the money for something. You wouldn't bother if you were just going to sit on a pile of cash for a while and then return it, right? But if you put it to use, you don't have it available to return at any instance; only at some time in the future. Therefore it makes no sense to have a loan with zero term. (E.g., say you take out a loan to buy machinery and improve production capacity in your widget factory; a little while later, after the upgrades are paid for out of your loan but before you've earned anything from them, the bank suddenly decides it wants its money back - oops; you can't easily liquidate the new machinery, etc...)
On the other, that's really not the point anyway; a bank taking "demand" deposits and treating it as a loan is not the same thing as a proper loan, because both parties have (supposed) access to the same money at the same time - if you loan your money to the bank, you don't have it any more.
How is this inconsistent with anarchism, then? I have the feeling you don't really know what it is.
scineram: Paul: I have a question: how many people in this thread have not read Money, Bank Credit, and Economic Cycles? I read the initial chapters. Here is a 3 part review by White: 1, 2, 3.
He appears to be missing the point. He writes 'Huerta de Soto later declares (pp. 17-18) that "it is impossible to imagine a monetary loan contract without a fixed term". Loan contracts with prepayment or call options are apparently unknown to his imagination, or for some reason do not qualify as loan contracts.' but early payment isn't relevant to HdS's point (the loan having a fixed term doesn't preclude early repayment!), and a "callable" loan is never callable on demand - it's a requirement that the loan be repaid within some time, perhaps as short as 24 hours, but never on the instant; in other words, it's really a short term loan (e.g., 24 hours, not zero) that continuously rolls over. A demand deposit at a bank bears the requirement for instant payment. A "instant callable" loan would be pointless, because the borrower would have to just sit on the cash in the event that it's recalled - why borrow money if you're not going to use it?
Darn, don't make me read the whole thread
Have a great time.
Paul:"callable" loan is never callable on demand - it's a requirement that the loan be repaid within some time, perhaps as short as 24 hours, but never on the instant; in other words, it's really a short term loan (e.g., 24 hours, not zero) that continuously rolls over.
I think this is just nitpicking. In practice there is not so much difference between 24 hours and on demand. I mean does the bank reloans and collects the money every 24 hours? If not, there is no real difference. Anyway, calling thing pointless is pointless, because others might have different ideas what business practices make sense.
Jon Irenicus: How is this inconsistent with anarchism, then? I have the feeling you don't really know what it is. -Jon
i suppose that depends on who is defining anarchism. So many different kinds of anarchists out there. Many only understand justice in terms of the free market. I am saying justice is something that is superior to the free market and originates from the individual.
Rights pre-exist and are the necessary precondition for the market. Their enforcement is a good (and certainly not a right), to be handled like any other, on the market, whether in the form of charity or a service sold at a fee. That is all the anarchist claims.
scineram: Paul:"callable" loan is never callable on demand - it's a requirement that the loan be repaid within some time, perhaps as short as 24 hours, but never on the instant; in other words, it's really a short term loan (e.g., 24 hours, not zero) that continuously rolls over. I think this is just nitpicking. In practice there is not so much difference between 24 hours and on demand. I mean does the bank reloans and collects the money every 24 hours? If not, there is no real difference. Anyway, calling thing pointless is pointless, because others might have different ideas what business practices make sense.
No; it automatically rolls over continuously; when the bank wants the money back it phones the borrower and says "you have 24 hours to return our money". If you, as a depositor, turn up at the bank and say to the teller "I'd like to withdraw $100 from my account", the teller immediately hands you $100, s/he doesn't say "OK; come back tomorrow and it'll be here". That's the difference between 24 hours and on demand.
Jon Irenicus: Rights pre-exist and are the necessary precondition for the market. Their enforcement is a good (and certainly not a right), to be handled like any other, on the market, whether in the form of charity or a service sold at a fee. That is all the anarchist claims. -Jon
Interesting... learn something new everyday. I've only run across a few self-proclaimed anarchists so I suppose I was unfair in mis characterizing all anarchists based on those experiences. I do apologize.
I noticed that the NY Fed website linked is an organization website, meaning it has .org and not a government website, like .gov....Though I think a lot of people think the Federal Reserve is a goverment agency, when it is really a hybrid, i.e. a banking cartel
"Is there fraudulent intent by producing more on demand certificates then one has the ability to pay? "
if you are producing more of them (on demand certificates) doesnt that mean you have the ability to pay (in on demand certificates)?
"Which means that money is at the same time loaned and available on demand, but that is a logical and physical impossibility, so FRB is doomed to failure. "
"This is the assetion you are touting but without any proof why a loan must have a strictly fixed term. Which is the issue."
sure...anyone could loan someone money with a pay back at your leisure term.
i am not sure here....is there a difference if i look at it this way . i have just earned $100. i place my $100 dollars in the DD account. the bank loans $90 to someone. $10 of what i deposited still resides with the bank but i have $100 of spending ability at my demand?? (based on a 10 percent ratio of course) my statement says so.
$10 dollars for sure (maybe sitting in front of the teller in a cash drawer)..., and also $90 of spendable 'stuff' that is likely someone elses $10 residing with the bank and maybe $20 they can quickly grab from the VP's wallet (to satisfy my demand) super fast. then they sell the wall clock the on ebay that was hanging at the local branch for a quick $30. and another $10 from a guy who just made a payemnt on his credit card. ok..demand satisfied...but if 100 people do this an uberbank will make up similar looking pieces of paper or spendable 'stuff' pretty close to when demanded to top off all the accounts - all the while my bank statement never changes.
first...did i describe something incorrect as far as money being loaned and available on demand in the process i describe above.
second....is " money "at the same time loaned and available on demand" really an impossibility?
or does the uberbank step in enough to constantly un-failure the banks?
thanks for any clarification