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.
Maxliberty: dmuldoon: 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 What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
dmuldoon: 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
What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian "free" banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
This is where your analogy fails, and what you tried to quietly slip in there(such intellectual dishonesty is detestable) is exactly the reason that FRB is fraud and is doomed to failure. You do not agree to have your money to be paid back in 60 days, you both agree that person B will hold the money for you, which you may retrieve, in its entirety, at any time. Here's a more accurate analogy.
What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back whenever you want it. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says he only has 10% of your money, and has loaned out the rest. At this point the Austrian "free" banking police swoop in and arrest your friend for stealing 90 dollars from you. If you think that the police are right and this is fraud then welcome to Austrian "free" banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the "free" bankng Kool-aid.
http://video.google.com/videoplay?docid=-8484911570371055528
incase you have not seen this before, very articulate, and yet in very simple language.
nibbler491: You do not agree to have your money to be paid back in 60 days, you both agree that person B will hold the money for you, which you may retrieve, in its entirety, at any time.
Not exactly. If you read an actual demand deposit contract, I linked one somewhere once, it will tell you this is a loan contract.
scineram: nibbler491: You do not agree to have your money to be paid back in 60 days, you both agree that person B will hold the money for you, which you may retrieve, in its entirety, at any time. Not exactly. If you read an actual demand deposit contract, I linked one somewhere once, it will tell you this is a loan contract.
No it will tell you that bankers are attempted to defraud you by labelling a loan contract a demand deposit contract. The two are entirely different in their nature and cannot be equated.
http://video.google.com/videoplay?docid=-466210540567002553&ei=RSeYSeW7AqierAL74_DZBA&q=money+banking
first link was on the fallacies of fed reserve, this one complements it
nirgrahamUK: Maxliberty:The scenario above is fractional reserve banking via contract, so it is exactly on mark. Change person B to a bank. im sorry, in your example, what is the reserve ratio?
Maxliberty:The scenario above is fractional reserve banking via contract, so it is exactly on mark. Change person B to a bank.
im sorry, in your example, what is the reserve ratio?
The reserve ratio would depend on what Person B did with the money. So the ratio could be anywhere from 0 to 100%.
Where exactly is demand deposit defined as warehousing?
nibbler491: This is where your analogy fails, and what you tried to quietly slip in there(such intellectual dishonesty is detestable) is exactly the reason that FRB is fraud and is doomed to failure. You do not agree to have your money to be paid back in 60 days, you both agree that person B will hold the money for you, which you may retrieve, in its entirety, at any time. Here's a more accurate analogy.
That is why what the contract says matters. I should have the right to make a contract like the above scenario. The Austrians disagree because they want to label the above scenario a demand deposit even though the contract specifically lays out the terms of the loan and in fact the money is not guaranteed to be returned on demand.
GilesStratton: scineram: nibbler491: You do not agree to have your money to be paid back in 60 days, you both agree that person B will hold the money for you, which you may retrieve, in its entirety, at any time. Not exactly. If you read an actual demand deposit contract, I linked one somewhere once, it will tell you this is a loan contract. No it will tell you that bankers are attempted to defraud you by labelling a loan contract a demand deposit contract. The two are entirely different in their nature and cannot be equated.
This is the Austrian cult part because what a contract actually says doesn't matter to you. The Austrians will label any contract that punches holes in their theory as a demand deposit irregardless of what the actual contract says. In the scenario I described, how can you consider Person A to have made a demand deposit?
Maxliberty:The scenario above is fractional reserve banking via contract
scineram: Where exactly is demand deposit defined as warehousing?
What do you mean where? That's what it is. A money irregular deposit contract is by definition warehousing.
Maxliberty:This is the Austrian cult part because what a contract actually says doesn't matter to you.
Yes, it does.
Maxliberty:The Austrians will label any contract that punches holes in their theory as a demand deposit irregardless of what the actual contract says.
No, I have no issue with a loan contract. It's just not the same thing.
Knight_of_BAAWA: Maxliberty:The scenario above is fractional reserve banking via contractNo it isn't. Merely asking if the person has the capability is not the same as demanding payment.
That is what fractional reserve banking via contract does, it changes the demand deposit into a request based on availability of funds. The practical application is that fractional reserve banking would continue. In a completely unregulated banking environment we should expect to see banks operating with fractional reserves via contract. The depositors could request their funds based on availability not demand and the bank would keep a fraction of the total deposits to meet these redemption requests.
Knight_of_BAAWA:No it isn't. Merely asking if the person has the capability is not the same as demanding payment.
Maxliberty:That is what fractional reserve banking via contract does
GilesStratton: Maxliberty:This is the Austrian cult part because what a contract actually says doesn't matter to you. Yes, it does. Maxliberty:The Austrians will label any contract that punches holes in their theory as a demand deposit irregardless of what the actual contract says. No, I have no issue with a loan contract. It's just not the same thing.
How can you describe the scenario I layed out as anything other than a loan contract? Person A puts money in the bank. The bank says we will be making loans with the money you put in the bank. The bank says if you request your money back we have until 60 days to meet that request. The bank says that if you request some or all of your money back and we have the funds on hand we will approve your request immediately. Person A agrees to those terms.
That is what banks will do. I see absolutely no fraud in that scenario. I can see no reason why people should not be allowed to enter into contracts like that.
This time try analyzing the scenario and explain exactly who is being defrauded and why you are willing to use force to prevent people from making these contracts?