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.
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.
What about sperm banks then? I haven't heard about too many of those making loans.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Anonymous Coward: So, in other words...it's a bank. You have failed the 'if it walks like a duck...' test.
So, in other words...it's a bank.
You have failed the 'if it walks like a duck...' test.
No, banks take deposits and then loan that money out. That is what banking is. The storage of money is a different service. Banks often provide this service as well.
An online digital currency is not a bank. It is an exchange system where people can use electronic currency backed by gold to buy and sell things. The system does not loan money. The system will charge a small fee on each transaction in order to maintain the system and provide a profit for the investors.
Maxliberty: 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.
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.
READ my posts BEFORE you reply. You're reading them with preconceived notions and not paying attention. I agreed with you on every account.
Maxliberty:No, banks take deposits and then loan that money out. That is what banking is. The storage of money is a different service. Banks often provide this service as well.
You do realize that before banks were in the business of loaning money their #1 job was the storage of money and giving you little bits of paper as a receipt?
How do you think this whole FRB business started in the first place, someone just thought it would be a good idea and started taking deposits?
I can't believe that I have to explain both the origin of banking and how FRB came about to someone who is so expert as yourself that you can say without a shadow of a doubt that FRB is a non fradulent activity.
It boggles my mind, it does...
Maxliberty:An online digital currency is not a bank. It is an exchange system where people can use electronic currency backed by gold to buy and sell things. The system does not loan money. The system will charge a small fee on each transaction in order to maintain the system and provide a profit for the investors.
Oh, so its a electronic checking account then?
You know, back in the day, they used to do that exact same thing. They would take your gold and store it while giving you a warehouse receipt that eventually traded the same as the gold that backed it.
It was pretty a popular system in Amsterdam around 400 years ago. They called it the Bank of Amsterdam...
Maxliberty: If your deposit is insured then in a free market the people insuring the deposit will have restrictions on the loans you make to protect their investment. The insurer will have an incentive to make sure you make good loans. Private insurers are not the same as government.
If your deposit is insured then in a free market the people insuring the deposit will have restrictions on the loans you make to protect their investment. The insurer will have an incentive to make sure you make good loans. Private insurers are not the same as government.
Except that it doesn't matter if you make good loans. Your fractional reserve bank will fail sooner or later anyway, even if never makes a single bad loan.
Maxliberty: 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?
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.
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?
Yes. A properly-run full-reserve bank should be as risk-free as anything in life. It doesn't matter if they make the occasional bad loan - that only affects the bank's profit, not customer accounts.
Maxliberty:An online digital currency is not a bank. It is an exchange system where people can use electronic currency backed by gold to buy and sell things. The system does not loan money.
They should (but not by engaging in fractional reserve shenanigans). FWIW, when 1MDC started they did offer a term loan that paid interest...
Paul:Yes. A properly-run full-reserve bank should be as risk-free as anything in life. It doesn't matter if they make theoccasional bad loan - that only affects the bank's profit, not customer accounts.
What? Cannot they default on time deposits?
Anonymous Coward: You do realize that before banks were in the business of loaning money their #1 job was the storage of money and giving you little bits of paper as a receipt?
You do realize storing money is different than lending money.
Anonymous Coward: You know, back in the day, they used to do that exact same thing. They would take your gold and store it while giving you a warehouse receipt that eventually traded the same as the gold that backed it. It was pretty a popular system in Amsterdam around 400 years ago. They called it the Bank of Amsterdam...
So exactly what is your problem with the idea. I do not think of banking as the storage of money. A company that only stores money is like a vault. Banks make money by lending money.
It is not possible to lend money and have 100% reserve. Banks make money by accepting deposits in exchange for services or interest and then loaning the money out. Default is always a risk with any bank. Just like there is always theft risk if you hire someone to store your money.
Maxliberty:If your deposit is insured then in a free market the people insuring the deposit will have restrictions on the loans you make to protect their investment. The insurer will have an incentive to make sure you make good loans. Private insurers are not the same as government.
So what's the point for the existence of the banker?
If the insurer knows best I would just loan my money to the insurer. In your world the banker is a prick who doesn't know where his nose is and lives on the charity of insurance companies.
Paul: Yes. A properly-run full-reserve bank should be as risk-free as anything in life. It doesn't matter if they make the occasional bad loan - that only affects the bank's profit, not customer accounts.
Where does the money come from to loan if not from customers? Lending money has default risk. If enough loans are bad then the default risk will pass directly to the people loaning the money to the bank, that is the customers.
gussosa: So what's the point for the existence of the banker? If the insurer knows best I would just loan my money to the insurer. In your world the banker is a prick who doesn't know where his nose is and lives on the charity of insurance companies.
I see no reason why insurance would be needed. People could bank with people based on reputation. I simply said that the deposits could be insured. Bankers specialize in putting borrowers and lender together. Insurance companies specialize in quantifying risk. People can specialize in what they are good at.
I see no reason why bank deposits can not be insured.
scineram: Paul:Yes. A properly-run full-reserve bank should be as risk-free as anything in life. It doesn't matter if they make theoccasional bad loan - that only affects the bank's profit, not customer accounts. What? Cannot they default on time deposits?
They'd have to be spectacularly bad at their jobs to make that a possibility.
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."
Juan:But that's not related to full reserves vs. fractional reserves. If a bank acts as a middleman taking loans from people who save and making loans to people who want credit, it is possible for the bank to make bad loans and lose its clients' savings -- of course such an inept bank wouldn't stay in business for long.
There are lots of things that might cause default problems. It would be quite easy and normal for good banks that had been successful to make bad loans and go bankrupt. Businesses go bankrupt all the time, banks are no different.