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:Where does he say that fiduciary media can be "demand deposits with a clause" (or similar)? Can you please provide the quote?
What? Uncovered bank deposits and notes are examples of fiduciary media, and therefore money substitutes (which also includes money certificates). This clause nonsense is something you're hung up on.
"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:This clause nonsense is something you're hung up on
You are right that clause is nonsense
Esuric: DD5:Where does he say that fiduciary media can be "demand deposits with a clause" (or similar)? Can you please provide the quote? What? Uncovered bank deposits and notes are examples of fiduciary media, and therefore money substitutes (which also includes money certificates). This clause nonsense is something you're hung up on.
Angurse and Scienram are hung up on them, not me! perhaps you should debate them and not me.
The clause, according to them, is the part in the contract that makes the depositor agree to the fact that there is no 100% guarantee of redemption, thus, demand deposit with a clause. This is the only way they can get out of the "defrauding of depositor" argument.
And now you're back to where we started:
Are these demand deposits where redemption on demand can be guaranteed at all times or not? It is a simple question.
DD5:The clause, according to them, is the part in the contract that makes the depositor agree to the fact that there is no 100% guarantee of redemption, thus, demand deposit with a clause. This is the only way they can get out of the "defrauding of depositor" argument.
There is a guarantee of redemption, its called an option clause for a reason. The bank has the option to defer payment, since the notes are not fully covered by money, but by assets, they aren't as liquid.
Angurse: DD5:The clause, according to them, is the part in the contract that makes the depositor agree to the fact that there is no 100% guarantee of redemption, thus, demand deposit with a clause. This is the only way they can get out of the "defrauding of depositor" argument. There is a guarantee of redemption, its called an option clause for a reason. The bank has the option to defer payment, since the notes are not fully covered by money, but by assets, they aren't as liquid.
So they are not demand deposits because you cannot guarantee redemption on demand. You retain the right to defer payment and the risks in case of a bank run are obviously known. We are talking about demand deposits and not just deposits.
Angurse: There is a guarantee of redemption, its called an option clause for a reason. The bank has the option to defer payment, since the notes are not fully covered by money, but by assets, they aren't as liquid.
it can't guarantee redemption and defer payment at the same time
Shawn77:it can't guarantee redemption and defer payment at the same time
Sure it can, it's called a moratorium.
DD5:So they are not demand deposits because you cannot guarantee redemption on demand. You retain the right to defer payment and the risks in case of a bank run are obviously known. We are talking about demand deposits and not just deposits.
I think thats why I called "demand deposits with a clause." The point is, contrary to what you said, redemption is still guaranteed.
Shawn77: Angurse: There is a guarantee of redemption, its called an option clause for a reason. The bank has the option to defer payment, since the notes are not fully covered by money, but by assets, they aren't as liquid. it can't guarantee redemption and defer payment at the same time
It can if and only if the time limit on the deferral of payment is indefinite. No time limit; i.e. comeback in 50 years in case of bank-run. The free bankers will have you believe that this can be known by the public without deception (fraud), and still claim that the public would accept such tickets as money substitutes. I'm sorry, but this is to basically defy all aspects of the theory of money, as even defined by some of the free bankers themselves.
Angurse: DD5:So they are not demand deposits because you cannot guarantee redemption on demand. You retain the right to defer payment and the risks in case of a bank run are obviously known. We are talking about demand deposits and not just deposits. I think thats why I called "demand deposits with a clause." The point is, contrary to what you said, redemption is still guaranteed.
Yes, see my comment above. If you claim that this can be accepted as money substitutes, then you frankly, need to reconsider what money is.
It guarantees redemption by week X after initial payment has been deferred.
DD5:It can if and only if the time limit on the deferral of payment is indefinite. No time limit; i.e. comeback in 50 years in case of bank-run. The free bankers will have you believe that this can be known by the public without deception (fraud), and still claim that the public would accept such tickets as money substitutes. I'm sorry, but this is to basically defy all aspects of the theory of money, as even defined by some of the free bankers themselves.
I guess Mises didn't understand the theory of money. The first sentence is wrong, so is the rest.
Angurse: Shawn77:it can't guarantee redemption and defer payment at the same time It guarantees redemption by week X after initial payment has been deferred.
week? You are optimistic. In case of a bank run, try years. Yeah, I'm sure you'll accept these tickets as money just for the sheer principle of it.
And even weeks, means that your tickets ARE NOT LIQUID! So they won't be accepted as money.
oh so its a time deposit
Angurse: DD5:It can if and only if the time limit on the deferral of payment is indefinite. No time limit; i.e. comeback in 50 years in case of bank-run. The free bankers will have you believe that this can be known by the public without deception (fraud), and still claim that the public would accept such tickets as money substitutes. I'm sorry, but this is to basically defy all aspects of the theory of money, as even defined by some of the free bankers themselves. I guess Mises didn't understand the theory of money. The first sentence is wrong, so is the rest.
Mises wasn't praising FRB in "The Theory of money and Credit". He just described what is going on as is. Maybe if you manage to finally understand this, you wouldn't continue to misinterpret "The Theory of Money and Credit". and read everything backwards.