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: 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.
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.
I mean, they would just tell you that this statement does not correspond to the facts. And I would say that the banks, through competition, and the other various techniques, would protect themselves from runs.
"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."
Esuric:The purchasing power of the bills won't decline insofar as the supply doesn't exceed the demand for cash holdings
Inventory changes a very common in any business what do you prupose will maintain this perfect harmony
Angurse: DD5:Yes, momentarily, even a car and a call girl can cost the same. Are they substitutes? My point exactly.
DD5:Yes, momentarily, even a car and a call girl can cost the same. Are they substitutes?
My point exactly.
Momentarily is the keyword here. and producing more cars won't devalue the price of a call girl.
Shawn77:Inventory changes a very common in any business what do you prupose will maintain this perfect harmony
Typical market mechanisms and competition. This is what free-bankers have to show--the actual process (maybe they have). How will the banks know that demand for money has changed? Can they distinguish between a real fall in the demand for money and one caused by an arbitrary reduction in the market rate of interest? How will banks, as competitive entities, respond to one (or a few) rogue banks artificially suppressing the market rate of interest? These are good questions and arguments, at least in my opinion; this fraud nonsense doesn't cut it.
People have it backwards. There are no regular mass redemptions because of low reserve ratios. The reserve ratios are low because regularly few redemptions are taking place.
DD5:Momentarily is the keyword here. and producing more cars won't devalue the price of a call girl.
Even if it did, it doesn't matter.
Esuric: DD5: 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. I mean, they would just tell you that this statement does not correspond to the facts. And I would say that the banks, through competition, and the other various techniques, would protect themselves from runs.
And I say that you are substituting rhetoric with logic. Maybee you would like to consider the possibility that the historical data may have been misinterpreted before you accept the absurd logical conclusion that everybody can be familiar with the FRB scheme, and still remain calm while they are at the mercy of others (just 10%) also remain calm. Especially when any event can trigger a panic.
I'm afraid that this argument is misguided. The 100% reserve advocates define FRB as:
1. demand deposits (no clause)
2. claim tickets masquerade as money substitutes
You claim that neither 1 and 2 necessarily must take place. perhaps it's time to understand that 100% advocates (and Rothbard) are not talking about what you are talking about. They would have no problem with what you suggest, but they will insist that this is not FRB. But I'm afraid that many free bankers like Angurse (and perhaps you) continuer to contradict yourself by claiming that it is possible for the public to accept these tickets as money substitutes when you define them as NOT (due to the clause).
Esuric:Typical market mechanisms and competition. This is what free-bankers have to show--the actual process (maybe they have). How will the banks know that demand for money has changed? Can they distinguish between a real fall in the demand for money and one caused by an arbitrary reduction in the market rate of interest? How will banks, as competitive entities, respond to one (or a few) rogue banks artificially suppressing the market rate of interest? These are good questions and arguments, at least in my opinion; this fraud nonsense doesn't cut it.
Currently demand deposits are not demand deposits with a clause. If they were we'd have no need for fdic. So as it exist currently I have no qualms with labeling it fraud. Maybe they could coexist but you'd have to give me a hell of alot more than .9% before I would ever agree to the clause. Even still it seems to me that people unable or unwilling to take advantage of whatever the interest rate would be, are end losers.
Esuric:How will the banks know that demand for money has changed? Can they distinguish between a real fall in the demand for money and one caused by an arbitrary reduction in the market rate of interest? How will banks, as competitive entities, respond to one (or a few) rogue banks artificially suppressing the market rate of interest?
As I understand it the demand for the notes of a particular bank manifests itself in the willingness to hold them, as in not redeeming them. In an unrestricted competitive environment a bank cannot just issue more notes if the public is unwilling to hold them. It can put them into circulation, but they will be returned and reserves will eventually run out. That is why the Ayr Bank went down in short order with better managed competitors taking its place.
DD5: You claim that neither 1 and 2 necessarily must take place. perhaps it's time to understand that 100% advocates (and Rothbard) are not talking about what you are talking about. They would have no problem with what you suggest, but they will insist that this is not FRB. But I'm afraid that many free bankers like Angurse (and perhaps you) continuer to contradict yourself by claiming that it is possible for the public to accept these tickets as money substitutes when you define them as NOT (due to the clause).
I said they were not "demand deposits" (no clause) not that they weren't money-substitutes. Unless you are using some bizarre terminology, bank notes and "demand deposits with a clause" both fully constitute fiduciary media (a money-substitute) as defined by Mises.
Angurse:Unless you are using some bizarre terminology, bank notes and "demand deposits with a clause" both fully constitute fiduciary media (a money-substitute) as defined by Mises.
reference please.
DD5:reference please.
The Theory of Money and Credit, liberty fund edition, page 526.
Nir says: Mises says that fiduciary media are the portion of bank notes not fully backed by commodity.
Mises Made Easier GLossary Says:
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
Esuric: DD5:reference please. The Theory of Money and Credit, liberty fund edition, page 526.
Where does he say that fiduciary media can be "demand deposits with a clause" (or similar)? Can you please provide the quote?
"Part of the money-substitutes functioning as money in the cash holdings of individuals are 'covered' by sums of money held as 'redemption funds' at the place where the money-substitutes are cashable, which is usually, although not necessarily, the issuing concern. We shall use the term Money-Certificates for those money-substitutes that are completely covered by the reservation of corresponding sums of money, and the term Fiduciary Media1 for those which are not covered in this way."
The Theory of Money and Credit, pg 133
"For want of a better equivalent, therefore, the expression 'fiduciary medium' has been adopted. It accords with Professor Mises' definition of Umlaufsmitteln as money-substitutes not covered by moneyl"
The Theory of Money and Credit, Appendix B, pg 482
"If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media."
Human Action, pg 433