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.
Angurse: Shawn77:How would everyone engage in FRB voluntarily. In an FRB system everyone is effected by it regardless of whether they wish to or not. You voluntarily open bank accounts. You voluntarily accept money. You don't have to participate if you don't want to.
Shawn77:How would everyone engage in FRB voluntarily. In an FRB system everyone is effected by it regardless of whether they wish to or not.
You voluntarily open bank accounts. You voluntarily accept money. You don't have to participate if you don't want to.
This is NOT true, as I am trying to point this out to Ensuric. The owners of Gold did not choose to participate in your scheme. The multiple claim tickets issued for the same amount of gold are masquerading as perfect substitutes, devaluing the value of Gold, defrauding all owners of Gold.
Angurse:demand deposits with a clause."
This sounds alot like a time deposit
DD5:Are these claim tickets masquerading as "demand deposits" or aren't they?
There not masquerading as anything. They are media of exchange, people know the deal, and voluntarily agree. Stop using Rothbardian jargon.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
DD5:This is NOT true, as I am trying to point this out to Ensuric. The owners of Gold did not choose to participate in your scheme. The multiple claim tickets issued for the same amount of gold are masquerading as perfect substitutes, devaluing the value of Gold, defrauding all owners of Gold.
1) They aren't masquerading as gold substitutes. See last post.
2) You don't own value!
Esuric: There not masquerading as anything. They are media of exchange, people know the deal, and voluntarily agree. Stop using Rothbardian jargon.
are they exhanged at face value or a discounted rate because they are ya know not really worth what is printed on them
Angurse: DD5:Are these claim tickets masquerading as "demand deposits" or aren't they? It's a very simple question which I think I am entitled to get a Yes or No response without talking about demand. We can talk about demand later. This question has been answered for you already. No. The claims are "demand deposits with a clause."
DD5:Are these claim tickets masquerading as "demand deposits" or aren't they? It's a very simple question which I think I am entitled to get a Yes or No response without talking about demand. We can talk about demand later.
This question has been answered for you already. No. The claims are "demand deposits with a clause."
And since oranges are not apples, demand deposits are not demand deposits with a clause. The public, unless deceived, will never treat them the same.
In fact, FRB cannot survive without this deception. It never has! Once the public finds out, it will always initiate a run on the bank.
I mean, it will only devalue gold if it causes inflation. Either way, I'm not satisfied with the free-bankers position; there are a lot of flaws. This argument, though, is very weak, and goes against many libertarian principles. The free-bankers have to show the connection between money demand and the natural rate of interest (and also the labor market), which is implied in Mises and Hayek's work. Also, their argument seems plausible because the entire subsistence fund (savings) isn't required at all times--Bohm-Bawerk says half will suffice.
Esuric: DD5:Are these claim tickets masquerading as "demand deposits" or aren't they? There not masquerading as anything. They are media of exchange, people know the deal, and voluntarily agree. Stop using Rothbardian jargon.
Impossible! The soundness of a bank relies on the fact that other people do not redeem their money, people know of this, they know that everybody else knows of this, yet they still think it is not plausible that others may get worried and go take out their money. That is basically what you are claiming.
Never happened and it never will. All 100% understood this, which is why it is easy to show that deception is always part of the scheme.
Shawn77:are they exhanged at face value or a discounted rate because they are ya know not really worth what is printed on them
The purchasing power of the bills won't decline insofar as the supply doesn't exceed the demand for cash holdings. The free-bankers usually say "we want to keep MV stable, which means prices should decline as a result of productivity gains--increasing the purchasing power of money." But I'm not happy with this "keeping MV stable" monetarist bullshit.
DD5: And since oranges are not apples, demand deposits are not demand deposits with a clause. The public, unless deceived, will never treat them the same.
Because two different goods have never been traded at the same price before...
Why not?
They are exchanged at whatever value the exchanging parties agreed to.
Let me put it in another way,
Once everybody knows that if let's say more then 10% redeem their claim tickets, then the rest loose their money, ALL will act in a panic to redeem their money as quickly as possible. It's no different then saying that once everybody or just enough people, finally understand that the US dollar is over, then all we act NOW and dump their dollars.
Angurse: DD5: And since oranges are not apples, demand deposits are not demand deposits with a clause. The public, unless deceived, will never treat them the same. Because two different goods have never been traded at the same price before...
Yes, momentarily, even a car and a call girl can cost the same. Are they substitutes?
DD5:Yes, momentarily, even a car and a call girl can cost the same. Are they substitutes?
My point exactly.