I have given thought to this and I can't find any a priori demonstration that fractional reserve banking is bad. Sure, it multiplies money in the economy and may create inflation, but it might very well be equilibrated with the investment-spending-saving behaviors of the people.
I usually check any issue by asking if it violates some hardcore axiomatic principle, but I can't think of any principle violated by fractional reserve banking.
People who deposit money in a bank already know the money will be used for loans. If they had a problem with that they would put the money in a safe box instead. So there is no moral problem involved.
Then there is the inflationary issue.
Some guy deposits money in the bank, the bank will pay a fee to the first guy (being a intermediary) and could lend all the money at a higher fee to someone else. The second guy uses it to buy a new car for his taxi company. The car dealer will pay for his expenses (including buying more cars) and deposit the rest of the money. The car manufacturer, at his time, will pay his expenses and deposit the surplus. The same will happen with every other person who becomes and indirect receiver of the loan. Most of the money will be flowing through the market, only a small part will be saved. An equilibrium will be achieved sooner or later. The bank (if it expects to recover the money) can only lend to people with guarantees and projects that have a sound plan, which are scarce. The surplus of money in any economy is scarce too. The lending doesn't go on ad infinitum, it will stop at a point that depends on the current situation of the economy.
The only problem could occur when someone doesn't really want to loan the money, but just it keep there to facilitate the handling of money by issuing checks instead of having to carry (for example) gold or silver with him all the time. Then he agrees to pay a fee to the bank, and expects to be able to withdraw the money at anytime. If the bank makes loans using that money then the banker really is committing fraud. Otherwise, he is not.
The issue really comes down to sound banking practices. Fractional reserve, as based in fixed term deposits, isn't immoral at all. The danger for any person making a deposit would be the same as if he was lending it directly to some friend. His friend's project may fail and he may have to execute the guarantee, maybe will lose his money, maybe will have to go to a trial to recover something.
Actually, informal loans could be considered banking operations with a zero-reserve.
So, what's the problem? What am I missing here? Why is everybody against it?
Pity the theory which sets itself up in opposition to the mind!
Carl Von Clausewitz
gussosa: The only problem could occur when someone doesn't really want to loan the money, but just it keep there to facilitate the handling of money by issuing checks instead of having to carry (for example) gold or silver with him all the time. Then he agrees to pay a fee to the bank, and expects to be able to withdraw the money at anytime. If the bank makes loans using that money then the banker really is committing fraud.
The only problem could occur when someone doesn't really want to loan the money, but just it keep there to facilitate the handling of money by issuing checks instead of having to carry (for example) gold or silver with him all the time. Then he agrees to pay a fee to the bank, and expects to be able to withdraw the money at anytime. If the bank makes loans using that money then the banker really is committing fraud.
What you have just described as "fraud" is fractional reserve banking.
gussosa: The issue really comes down to sound banking practices. Fractional reserve, as based in fixed term deposits, isn't immoral at all.
The issue really comes down to sound banking practices. Fractional reserve, as based in fixed term deposits, isn't immoral at all.
"Fractional reserve, as based in fixed term deposits" doesn't make any sense.
It's the fractional reserve system, not fiat, that's the problem - in theory, you could have 100% reserve banking with fiat money, and it wouldn't be a problem. I'm just saying it doesn't make sense to talk about "fractional reserve" on term deposits (even in a strong 100% reserve system, term deposits would have "0% reserves" - it doesn't make sense not to loan that out)
bigwig:If there aren't bank runs (99% of the time), doesn't it mean that depositers would not touch that money and thus allow it to be loaned out in a free market?
Not necessarily, because money can be transferred from one account to another without being withdrawn and redeposited - i.e., it doesn't have to exist to be used in payment. Given Internet banking, etc., a modern bank could allow you to specify how much you want to keep on demand for immediate use and let you put different amounts in various-length term deposits (e.g., they could offer 24 hour, 7 days, 30, 60, 90 days, 6 months, 1, 2, and 5 years, say), where they'd offer continuously varying higher or lower interest rates on each length depending on their need for loanable funds, etc. (I mean the offered rate would vary perhaps several times a day; once you committed some money to it, you'd get whatever rate was offered at that time); when you put some money into, say, a 7 day account, it would disappear from your current balance and be returned (with interest) 7 days later (you could have some sort of calendar display showing your future balances as well as the current balance) - now the banks could legitimately loan out your money (with no reserve requirement!), except whatever you keep on demand (for which you'd pay a fee), and hardly anybody would keep any significant amount on demand, and bank runs would be impossible. But that's not what they do today.
gussosa:As someone else pointed out, I guess neither you or Max has ever used a bank.
Think outside of your a little box for a minute. Forget what you know about the government system and ask yourself why it's fraud for people to loan money and have an on demand call? If that doesn't violate any principle then fractional reserves will be the norm.
jason4liberty:You can have claim to it, based on the loan contract, at some future time, but you can not have it and loan it at the same time.
This is your confusion. If my money is in the bank I don't have it, the bank has it. I only have it when I ask for it. This is why it's called a demand deposit. The bank uses the money when I am not using it and then I use it when I need it. That is not fraud.
Anonymous Coward: Yes we know your claim that a demand deposit is a loan but how does that explain why they are the only industry who has a specific immunity from bailment law if a demand deposit isn't a bailment contract?
Yes we know your claim that a demand deposit is a loan but how does that explain why they are the only industry who has a specific immunity from bailment law if a demand deposit isn't a bailment contract?
You are concerned with government mandates and protections. My issue is why in a free-market this is fraud.
Anonymous Coward:It is up to you to prove that a demand deposit is a loan
Again, think outside the government box. Why in a free society is it fraud to do what I have proposed? Why would a bank not be able to tell its customers they can have their money on demand. The bank could easily have a call document in all the loans it makes or have insurance on demand deposits or timed deposits for that matter. What you do not understand is the time value of money, whether it is one second or one year the concept is the same.
So in a private bank there is no difference between timed deposits and demand deposits. Both deposits have a period of time when the lender will need the money.
Why in a free society is it fraud to do what I have proposed? Why would a bank not be able to tell its customers they can have their money on demand.
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."
If I would go the to bank tomorrow to take out my money I would be paid. What lie?
Yes. Relevancy to legitimacy?
Not if there is a massive run on the bank which is why many of the banks recently have failed and the government has bailed some of them out.
Pyramid: Not if there is a massive run on the bank which is why many of the banks recently have failed and the government has bailed some of them out.
If you deposit your money in a CD and when the time to collect comes if the bank doesn't have your money this is the same effect as a run on the bank. Are you under the impression that banks won't make bad loans in a free-market? Is it inconceivable that your specific time deposit could face the same fate as your demand deposit? Time deposits operate on a fractional reserve basis as well. The bank doesn't always collect everything due on the exact day and sometimes people default so they don't collect at all.
Giving your money to a bank involves a certain amount of risk. Are you really saying that banking is supposed to be risk free?
Maxliberty:This is your confusion. If my money is in the bank I don't have it, the bank has it. I only have it when I ask for it. This is why it's called a demand deposit. The bank uses the money when I am not using it and then I use it when I need it. That is not fraud.
You still haven't answered the question is that how you are going to structure your internet bank?
Do you really thing anyone will sign up for a 10% gold backed account...hold on, 100% gold backed account that is a loan for you to use the gold as you see fit until they ask for it, and have any confidence in this system?
I think you should start pimping up the 100% reserve/bailment contract if you want any investors other than your mom...
Or is your plan any different than a traditional FRB bank?
Maxliberty: If you deposit your money in a CD and when the time to collect comes if the bank doesn't have your money this is the same effect as a run on the bank. Are you under the impression that banks won't make bad loans in a free-market? Is it inconceivable that your specific time deposit could face the same fate as your demand deposit? Time deposits operate on a fractional reserve basis as well. The bank doesn't always collect everything due on the exact day and sometimes people default so they don't collect at all. Giving your money to a bank involves a certain amount of risk. Are you really saying that banking is supposed to be risk free?
I did not mention anything about CDs but what does it matter if your money is in a CD, savings or checking account if there is a run on the bank? It doesn't. I would say that banking is supposed to be risk free but in a fractional reserve system it isn't.
Banks that make bad loans should suffer the consequences and not be bailed out. These kind of actions only prolong a recession putting more and more people out of work. I find it amazing that in a democratic society so few are talking about the privatization of profit and the socialization of risk. This bailout was a robbery of the taxpayers dollars, pure and simple.
Anonymous Coward: You still haven't answered the question is that how you are going to structure your internet bank?
I didn't realize anyone had asked that question.
It is not a bank. It is 100% gold-backed internet currency system. The money in the system is always with 100% gold backed reserve.
Banking involves loaning money. I think that answers your question.
Pyramid: I would say that banking is supposed to be risk free but in a fractional reserve system it isn't.
Loaning money is not risk free. That is what banks do, they loan money.
Pyramid:Banks that make bad loans should suffer the consequences and not be bailed out.
Nearly everyone here is opposed to the bailout and the government in general.
Pyramid:This bailout was a robbery of the taxpayers dollars, pure and simple.
Forget the bailout, the acquisition of "taxpayer dollars" was the first robbery.
scineram:Yes. Relevancy to legitimacy?
Maxliberty:It is not a bank. It is 100% gold-backed internet currency system. The money in the system is always with 100% gold backed reserve.
So, in other words...it's a bank.
You have failed the 'if it walks like a duck...' test.
Maxliberty:Banking involves loaning money. I think that answers your question.
How is the conception of a 100% reserve bank any different than your plan and how is it not moral for you to use the depositors' money as long as you practice 'good money management'?
And why does banking only involve loaning money? They don't loan all the money or else they wouldn't require a reserve.