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: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.
You're right, he didn't. But you're still inventing terminology.
"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: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.
You are still just making big assumptions. Only the bank is obligated to honour the ticket, not I. And yes, banks in such a situation will probably go out of business... as they should.
DD5:And even weeks, means that your tickets ARE NOT LIQUID! So they won't be accepted as money.
In the case of a bank run, they shouldn't be. I don't see a problem.
Esuric: DD5: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. You're right, he didn't. But you're still inventing terminology.
Ensuric,
We don't have to have this debate. If you're going to accuse me of inventing terminology, I would suggest, you first be more cautious and read through the many exchanges with others.
Do you actually agree with the "logic" put forward by Angurse?
Angurse: DD5: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. You are still just making big assumptions. Only the bank is obligated to honour the ticket, not I. And yes, banks in such a situation will probably go out of business... as they should. DD5:And even weeks, means that your tickets ARE NOT LIQUID! So they won't be accepted as money. In the case of a bank run, they shouldn't be. I don't see a problem.
what dictionary are you using for your definition of guarantee
Shawn77:what dictionary are you using for your definition of guarantee
Princeton, I suppose, where do you see a conflict?
Angurse: You are still just making big assumptions. Only the bank is obligated to honour the ticket, not I. And yes, banks in such a situation will probably go out of business... as they should.
if they can't honour their guarantee it isn't much of a guarantee now is it.
Angurse: Shawn77:what dictionary are you using for your definition of guarantee Princeton, I suppose, where do you see a conflict?
It doesn't matter what the definition is. One can reinvent the entire lexicon. By your own admission, these tickets do not posses the qualities of money, for
1. You cannot even guarantee their liquidity all the time.
2. When we talk about money, then liquidity is not even an issue, for money is money, and if it bares a risk of not performing its job as money then it is not money by definition.
This is why deception must always be involved in FRB.
You don't understand what money is and if you do, then you close your eyes to the problem when ever discussing this issue.
I'm sorry if this question has already been answered, but quite frankly I don't like digging through twelve pages of material. So I understand that time deposites could indeed solve the problem of actually allowing a 100 percent reserve banking system to actually survive, but exactly what, in a free market society, would be the insentive of banks to start up anything but time deposites? What would be the point of banks to allow anyone to open a banking account for less than a few years? On a free market would there be any purpose whatsoever for non timed bank deposites for those banks which would choose to go 100% reserve?
The Late Andrew Ryan: On a free market would there be any purpose whatsoever for non timed bank deposites for those banks which would choose to go 100% reserve?
On a free market would there be any purpose whatsoever for non timed bank deposites for those banks which would choose to go 100% reserve?
Profit. Historically, even ten to twenty years ago in the United States, banked charged to warehouse money. There will always be incentives to invest money in time deposits, though, provided by banks looking to loan out that money and make even larger profits themselves. When the rate of interest is high, because time preference leans towards present consumption, then the interest offered on time deposits will be higher, while the opposite will be true when time preference leans towards future consumption.
Shawn77:if they can't honour their guarantee it isn't much of a guarantee now is it.
No, it isn't.... I don't see your point.
The bank can honour their guarantee, they haven't promised to redeem all tickets on demand, rather "by week X after the demand has been made." That's a guarantee that certainly can and should be honoured.
(The bank should go out of business for not properly balancing their reserves and assets in a timely manner)
DD5: It doesn't matter what the definition is. One can reinvent the entire lexicon. By your own admission, these tickets do not posses the qualities of money, for 1. You cannot even guarantee their liquidity all the time. 2. When we talk about money, then liquidity is not even an issue, for money is money, and if it bares a risk of not performing its job as money then it is not money by definition. This is why deception must always be involved in FRB. You don't understand what money is and if you do, then you close your eyes to the problem when ever discussing this issue.
You are the one trying to reinvent the lexicon though, not I. I never once said the tickets posses the qualities of money, where are you getting that? What I did say was that they possess the qualities of a fiduciary media. Which they do, by even Mises' own definition of the term, you seem to be using a different one.
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.
Angurse:The bank can honour their guarantee, they haven't promised to redeem all tickets on demand, rather "by week X after the demand has been made."
"week" is an assertion. It could be "month" or even "year", but that is besides the point that by your own admission, these tickets are not substitutes for the money commodity sitting in the vault as reserves. So if gold is the money commodity, then these tickets cannot constitute gold substitutes. The public, aware of this fact, will not accept these tickets for gold substitutes as it will not accept apples for oranges.
Jonathan M. F. Catalán: The Late Andrew Ryan: On a free market would there be any purpose whatsoever for non timed bank deposites for those banks which would choose to go 100% reserve? Profit. Historically, even ten to twenty years ago in the United States, banked charged to warehouse money. There will always be incentives to invest money in time deposits, though, provided by banks looking to loan out that money and make even larger profits themselves. When the rate of interest is high, because time preference leans towards present consumption, then the interest offered on time deposits will be higher, while the opposite will be true when time preference leans towards future consumption.
Ok, so let me make sure that I understand this,
Time deposits: Have the advantage under a full reserve banking system because this way banks would know that however many people would not want their money back before whatever date, this would actually mean that more money could be lent out because they wouldn't have to keep any reserve for person X before the date that their deposite expires and thier interest is due. This would also utterly end the practice of bank runs.
Time deposits would become common, indeed most non timed deposits would begin to dissapear, those who chose to remained untimed for whatever reason would have to pay the banks money to do this. This allows their funds to be in a secure environment for them, although this would detract a fair amount of poorer individuals from taking part in the banking system.
Does this look about right?
I'm not sure why you believe that "most non-time deposits" would begin to dissapear. I think that most money would be kept in demand deposits, or warehoused (in other words), or it would depend heavily on time preference.