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.
DD5:That's 100% correct but that is because FRB would practically not exist.
Based on what? Your dreams?
Juan:By the money cranks, yeah.
Yeah, Rothbard, Hülsmann, etc...
scineram: DD5:That's 100% correct but that is because FRB would practically not exist. Based on what? Your dreams?
Based on sound economic analysis which the FRB crowd are unable to respond to.
This is why you keep finding yourself having to equate oranges with apples.
Angurse: Juan:By the money cranks, yeah. Yeah, Rothbard, Hülsmann, etc...
Do you want to add Mises to that list also? (note text in bold)
It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue bank notes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by (Thomas) Tooke: “free trade in banking is free trade in swindling.” However, freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which (Henri) Cernuschi advanced in the hearings of the French Banking Inquiry on October 24, 1865: “I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer.”
--Human Action
I sense your acrimony against Rothbard, but alas I don't understand it. Not well read enough I guess! I googled "Rothbard is wrong" and could only find shabby critique of his self-ownership axiom.
Could you indulge me with 2 or 3 sentences to summarize the thesis about why Rothbard is a "money crank"? Thanks in advance.
This entire thread and a lot others are a debate about that thesis. There is no need for google.
scineram: This entire thread and a lot others are a debate about that thesis. There is no need for google.
Would it be too much trouble just to summarize the argument against him for me? I'm lazy and don't want to scour a lot of threads to deduce the core argument against him. Just something simple like "Rothbard believes the earth is flat" or something like that. Think of it as a Christmas present for the lazy! Cheers.
Angurse:Yeah, Rothbard, Hülsmann, etc...
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."
A demand deposit is a loan to the bank. That is just what it is, a call loan. Once you understand this simple fact the entire embezzlement argument collapses into nothingness.
scineram, would it always be inappropriate to describe an explicit bailment-type deposit as a 'demand deposit' ? it seems you are committed to affirming that it would always be inappropriate.
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
scineram: A demand deposit is a loan to the bank.
A demand deposit is a loan to the bank.
No, it's not. Are you seriously telling me that you deposit your money into demand deposits as loans, not because banks are the best method (which you know) to store your money, electronically account for your expenses, et cetera?
nirgrahamUK: scineram, would it always be inappropriate to describe an explicit bailment-type deposit as a 'demand deposit' ? it seems you are committed to affirming that it would always be inappropriate.
It could be confusing, but what matters are the actual terms of contract, not how someone calls them. You either agree to the terms or not. Renting a safety deposit box is different from opening a checking account.
you think its confusing to say about a bailment that funds have been deposited, and the original depositor has access on demand, and that he has a demand deposit?
scineram: It could be confusing, but what matters are the actual terms of contract, not how someone calls them. You either agree to the terms or not. Renting a safety deposit box is different from opening a checking account.
This is nonsensical. The terms of the demand deposit contract is that your money is available to you on demand; if the bank is lending out a fraction of your money, it is risking not being able to fulfill the terms of the contract. In a world without central banking and deposit guarantees (to a certain maximum limit, of course), bank runs would occur fairly often in this case (as history has even proved to us). "Renting a safety deposit box" is not the same as a money warehouse, because that deposit box does not keep track of your expenditures and rearrange your funds for you (and for those you give your money substitutes to). A safety deposit box would be no different from stuffing money under your matress. People don't do it because the bank provides a service; I remember when banks used to charge for that service (as it should be).
Jonathan M. F. Catalán: scineram: A demand deposit is a loan to the bank. No, it's not.
No, it's not.
I agree with scineram here. Although I quibble with the term "demand deposit". I like these terms:
safe deposit = money you deposit in a safe deposit box kept in the bank's vault which they are warehousing for you for a fee and which they may not lend out to others.
unsafe deposit (aka deposit aka demand deposit) = money you deposit in a checking account, savings account, money market account etc.. This money is actually a loan to the bank and is indeed recorded on their balance sheet as a liability. As the recipient of loaned funds, they may do what they wish with it: pay their rent, salaries of bank employees, lend it out to others whatever. Unless a certificate of deposit with explicit delayed repayment terms, banks typically promise (brazenly) that the lender (depositor) may return at any time and have their loan repaid in cold hard cash.
I don't see how you can argue that common "deposits" are not actually loans. I don't see how this weakens Rothbard's advocacy of hard money either. I think it would speed up the demise of FRBs if the general public were keenly aware that their "deposits" were in fact loans to banks..."And remember Johnny, when you lend money to anyone, there's always a risk that they might not pay you back." Don't you think calling deposits what they truly are, loans, would help end the damage we have been experiencing from FRBs and central banks now for hundreds of years? Maybe I'm missing something glaringly obvious.