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.
Monopsony: You guys act as if it's some big secret that deposits are loaned out.
You guys act as if it's some big secret that deposits are loaned out.
Bankers would never be secret about anything, would they?...oh yeah, Bernake refused Bloomberg's FOIA request.
My point is that their sneaky language promotes confusion on the part of the public. This confusion helps to ensure their government sanctioned survival.
How about my deposit-purge quest: do you agree that a "deposit" is actually a loan from the saver to the bank? If so, will you join me in calling them "loans" instead of "deposits". It would be so much easier for children (do it for the children!) to understand if you tell them, "Would you like to keep that Christmas money in your shoe box or would you rather lend it to Bank of America and earn one percent interest after a year? But remember, when you lend money to someone, there's always some risk that you won't get paid back". That would be truly honest, right? No secrets. Let there be the light of truth! No?
Monopsony: This is not true! There was no free banking era! Perhaps more free then today, but it was not free. What White and Selgin call free banking was, in fact, never free banking completely free of government intervention. see The myth of Free Banking in Scotland see http://www.terry.uga.edu/~selgin/freebanking.html
This is not true! There was no free banking era! Perhaps more free then today, but it was not free. What White and Selgin call free banking was, in fact, never free banking completely free of government intervention. see The myth of Free Banking in Scotland
This is not true!
There was no free banking era! Perhaps more free then today, but it was not free. What White and Selgin call free banking was, in fact, never free banking completely free of government intervention. see The myth of Free Banking in Scotland
see http://www.terry.uga.edu/~selgin/freebanking.html
Thank you very much but the home page of Dr. Selgin is no response.
Monopsony: No matter how you slice it, these FRB claim tickets are, BY DEFINITION, not money substitutes, for they cannot guarantee redemption. So who in the market will except your claim tickets (or checks) as perfect money substitutes (and at face value) when in fact they are not? The answer is unequivocally: NOBODY. They have been accepted as such in the past only due to their deceptive and fraudulent nature of circulating as perfect money substitutes. Deposit tickets circulate as part of the money supply because they DO function as money. You accept it because you trade it later for the actual good/service you want. This is an efficient selection of the market.
No matter how you slice it, these FRB claim tickets are, BY DEFINITION, not money substitutes, for they cannot guarantee redemption. So who in the market will except your claim tickets (or checks) as perfect money substitutes (and at face value) when in fact they are not? The answer is unequivocally: NOBODY. They have been accepted as such in the past only due to their deceptive and fraudulent nature of circulating as perfect money substitutes.
Deposit tickets circulate as part of the money supply because they DO function as money. You accept it because you trade it later for the actual good/service you want. This is an efficient selection of the market.
And apples circulate as oranges because that's also efficient.
You are not addressing the problem I presented to you. You either didn't read it, didn't understand it, or are just attempting to evade it.
Except apples do not circulate as oranges. However, deposits do circulate as money. They are not "money substitutes" once they themselves become money. The deposit tickers eventually clear through the clearinghouse (under a free banking scenario) against the bank draining their reserves (unlike fed notes) to other banks.
Carrying around the certificates for the commodity is easier and more fluid to economic transactions than the commodity itself. Eventually the commodity (base) can support a wide expansion (but limited, unlike fed notes) of money.
Don't group me with bernanke/contemporary bankers. I can go on for hours about what a failure our system currently is.
However, my main point is that the blame does not reside with fractional-reserve banking.
Monopsony: Don't group me with bernanke/contemporary bankers. I can go on for hours about what a failure our system currently is. However, my main point is that the blame does not reside with fractional-reserve banking.
I'm sorry about the Bernake secrecy remark in responding to you. You were clear earlier about your desire to eliminate FDIC and central banks. ...But why such a strong supporter of fractional reserve banking? It was a secret meeting of Morgan fractional reserve banks and government that created the Federal Reserve in 1913. Aren't you just a tiny worried that, when in a pinch, fractional reserve banks of the free-banking future will reach for the lever of governmnent power once again to sanction suspension of withdrawals, for example? I said earlier that take away FDIC and the Fed and FRBs will go the way of the dodo bird. But you object. Why?
Monopsony:However, deposits do circulate as money.
Because they parade as money substitutes. You accept a check because you know that you can if you wanted to, redeem it for cash. Otherwise, it is a piece of worthless paper that can never become money, if you understand at leas something about the theory and origin of money.
Monopsony:They are not "money substitutes" once they themselves become money
Are you sure about that? Go ahead and Email this particular comment to Dr. Selgin. I want to see if he approves.
If for the sake of argument, I put aside the problem of the inherent instability of FRB, then perhaps it is possible that such "deposit" tickets become some sort of financial instruments. But they will not become money. Do you know of any financial instruments that have become money? Show me a single type of "instrument" used as money that does not parade as a substitute for cash.
Monopsony:he deposit tickers eventually clear through the clearinghouse (under a free banking scenario) against the bank draining their reserves (unlike fed notes) to other banks.
Yes, and this is what enables the credit expansion to take place without actually moving the physical money commodity around. That's why multiple people suddenly are able to put the same amount of physical money into circulation, effectively increasing the money supply and causing the inflationary boom. The holders of the money commodity are robbed of value because there the bank has created multiple ticket claims that parade as real money substitutes. The market accepts these substitutes as real cash (or gold) but of course they are not. The whole thing is based on deception.
It's not so much that I'm a supporter for either method of banking. I'd prefer the option to freely choose how you want to bank your money.
I object to that "fdic and fed required to keep FRB solvent" statement because it's not true. Take how the U.S. and Canada performed during the great depression. We had a fed (although FDIC was on its way) and Canada did not. With that logic we should expect Canadian banks to be dropping like flies due to the argument that FRB need a last resort to save them. Except they didn't have bank failures, we did, and on a grand scale.
Our failures were due to our insistence on restricting branch banking and preventing banks from issuing their own currency.
I will agree that FDIC and Fed can keep dead banks alive, no doubt. But that's a failure of central banking, not the institution of FRB.
http://www.terry.uga.edu/~selgin/files/cj9n2_9.pdf
Also, this is a pretty good article I enjoy guys.
The Scottish Free Banking era is an ambiguous case at best, even White has narrowed the period which he presents as a real-life example. Look for the critiques put forth by Rothbard, Dow, and Smithin. (Nothing against FRB though)
Monopsony:With that logic we should expect Canadian banks to be dropping like flies
I'm actually Canadian. And I used to work for two Canadian banks no less. I'm not an expert on Canadian banking history but I can tell you that Canada has very few banks. Five up until the 1980's. Five. So if they had "dropped like flies" it would have only taken an hour or so for them to be all gone. USA had likely what, a thousand in the 1930s? I suspect that Canadian banks, being a cozy gentlemen's club, looked after each other in the depression just like a friendly central bank cartel would have.
We had thousands because of our stupid branch-banking policies. Canada did not possess the same distaste for private banking that the United States did (does).
So we should have had the Canadian government bust up the private cartel? If it was a private solution, what's so bad.
Here is an article I found on the Canadian experience. I haven't had the time to fully digest it, but its claims are opposite Monopsony's.
http://eh.net/Clio/Conferences/ASSA/Dec_90/Kryzanowski-Roberts.shtml
Extract:...
The provision of government funds to avert a bank failure appears to have been initiated by the Government of Quebec. The Quebec Government financially assisted the merger of the Bank Nationale with the Banque d'Hochelaga in 1923 as follows [Globe (1924): 6]: ... The arrangement between the Quebec Provincial Government and the Banque d'Hochelaga is a unique one. Whether the Quebec Government felt that it had a moral obligation to advance aid, or whether its motives were purely philanthropic is a most interesting question. So far as Ontario is concerned, it opens up the possibility that Home Bank creditors may press for similar consideration. Although the two cases are admittedly not parallel ones, the fact that a Provincial Government has come to the rescue in one case may suggest a line of action for interested parties in the other.
Partly based on this precedent, the depositors in the Home Bank petitioned the Canadian Government for compensation and received payment up to 35% of the value of their deposits.
After 1923, the Canadian government provided an implicit guarantee to the public that no chartered bank would be allowed to fail and cause depositor losses. This guarantee was implicit because it was never formally embodied in law, and it was equivalent to one hundred percent deposit insurance.11 Beckhart (1964) documents that government policy was to arrange forced mergers for insolvent banks. He argues that the impetus for mergers came primarily from smaller banks near failure and from government.
Evidence exists that bank mergers were designed to avoid firesale insolvency for the merger of the Bank Nationale with the Banque d'Hochelaga in 1923 (discussed earlier) and the takeover of the Weyburn Bank by the Imperial Bank in 1931.
While the impetus for mergers may not have come primarily from larger banks seeking to expand, they were willing participants and there was considerable "behind-the-scenes" manoeuvering by the larger banks to absorb each new target bank. "I think it a pity," said another banker, "that the opportunity [Merchants Bank] was not offered to the other banks to participate in the business of the Merchants, and thus distribute the assets and the load, whatever its nature may be." [Globe (1921a):�1].
With regard to the role of regulators, primary evidence for the existence of an implicit guarantee comes from parliamentary documents and the popular press during the 1920's. A report in the Globe [(1921c):�1] described the rationale for the Federal Government's approval of the merger of the Merchants Bank with the Bank of Montreal: "The merger is the only way out." That is the considered opinion of Sir Henry Drayton, Minister of Finance, when asked if some other method could not have been found of meeting the crisis brought about by the troubles in the Merchants Bank .... Sir Henry Drayton said that a merger was only justified when the rest of a bank had been wiped out, its capital impaired and the affairs of the bank in such a position that the interests of the depositors themselves required to be guaranteed. It is assumed here that that must be the position of the Merchants Bank.
"What would happen if you had not given the preliminary consent to such a merger?" Sir Henry was asked.
"The only alternative is insolvency, with a consequent loss to depositors," was the reply. "That is my answer to criticisms of the Government's action in permitting the merger."
Although a proposal in 1914 to merge the Bank of Hamilton with the Royal was not approved by the then Minister of Finance, Sir Thomas White, a proposal to merge the then ailing Bank of Hamilton with the Bank of Commerce in 1923 was readily approved. [The Financial Post (1923a): 1, 16]
Similar sentiments were expressed during 1923 and 1924 when the failure of the Home Bank was scrutinized. A former Minister of Finance, Sir Thomas White, stated Government policy in favor of forced mergers to bank failures as follows:
Under no circumstances would I have allowed a bank to fail during the period in question�...�If it had appeared to me that the bank was not able to meet its public obligations, I should have taken steps to have it taken over by some other bank or banks, or failing that, would have given it necessary assistance under the Finance Act, 1914. [McKeown Commission (April�24, 1924, Vol.�5): 324].
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
Thank you for that information, it is very useful.
Still there is no link that FRB is itself the cause of instability. The instability was from government action, not the concept of FRB.
FRB inevitably causes the Austrian Business Cycle. make of that what you will
Still there is no link that FRB is itself the cause of instability.
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."
Interesting journal article here on Mises that I found
http://mises.org/journals/rae/pdf/R92_5.PDF