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.
GilesStratton: The other thing to keep in mind is that banks, in the instances scineram is correct about, do everything possible to obfuscate the true nature of the contract into which one is entering
The other thing to keep in mind is that banks, in the instances scineram is correct about, do everything possible to obfuscate the true nature of the contract into which one is entering
And who do you propose we put in charge so people do not sign contracts that those evil banks force upon people?
Maxliberty: GilesStratton: The other thing to keep in mind is that banks, in the instances scineram is correct about, do everything possible to obfuscate the true nature of the contract into which one is entering And who do you propose we put in charge so people do not sign contracts that those evil banks force upon people?
Nobody. I propose that "we" remove those that are artificially propping the corrupt system up. You seem to assume FRB is a free market institution, it isn't. It's gone hand in hand with statist intervention, from the beginning of its existance.
ok max, well , we started out with two contrasting definitions for deposit accounts, and we analysed how they could be implemented legitametly.
if you recall, these were Timed Deposits, and Demand Deposits. it seems you think it worthwhile to introduce a THIRD type of deposit account, I propose the name for your account to be Perhaps Deposits. Such that one might make a deposit, and when you want to make a withdrawal, the bank in question will decide whether it will smile positively or negatively in your favour at your time of request. and so perhaps they have the funds and you get reunited, and perhaps they dont, and you wont. This does well to emphasise the point that Demand Deposit accounts are not only different from Timed Deposit ACcounts, but Perhaps Deposit accounts as well.
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Maxliberty:So all banks that had time deposits would become insolvent if they had any portion of the total cash loaned by depositors on hand? Prove that please.
Because any other bank, upon realizing the nature of this one would quickly exchange the notes they received from that bank for reserves? Thus the reserves of the bank in question would decrease and the bank would quickly become insolvent. That's ignoring a whole host of issues, by the way.
MaxLiberty:Why would the bank be required to always have all the money loaned out.
Once I remove the on demand requirement then fractional reserve banking is no different than any other banking that loans out money.
Fractional reserve banking covers any bank that loans out money.
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Maxliberty: There is no inherent reason that fractional reserve banking under contract should be disallowed.
There's no such thing as FRB through contract. The whole issue of FRB arises because of a, purposeful, confusion of contracts.
Juan: Once you remove the "on demand" requirement it's not FRB. You don't know basic terminlogy
Exactly, that's the point. Since, from this the issue arises that two people both own the same good (in this case, money) at the same time. Which is where the credit expansion comes from.
FRB would naturally dissapear when rational customers demand that banks be independantly audited.
Juan: MaxLiberty:Why would the bank be required to always have all the money loaned out. I didn't say 'required' but explained why they will do it anyway. Why did you reply to my post if you didn't read it ? Alternatively you could say that in order to stay in business banks will be required (by market forces) to loan money. Once I remove the on demand requirement then fractional reserve banking is no different than any other banking that loans out money. Once you remove the "on demand" requirement it's not FRB. You don't know basic terminlogy. Fractional reserve banking covers any bank that loans out money. You know what ? I define apple = flying pig, and house = cow. I can make up any definition I want...
At some times it will not be possible for them to loan out all the money all the time. By definition they will have some portion in cash at sometimes.
Your definition of fractional reserve banking does not make sense since it does not deal with the amount that the bank has in reserves. You have defined FRB as when a bank is providing a demand deposit guarantee on a funds that have been loaned out. If I remove the demand guarantee I have not changed the reserve amount. Since your only objection to FRB is the demand requirement the concept of fractional reserves can not be considered fraud.
The FRB bank with contracts is no more likely to be insolvent than a timed-deposit bank.
GilesStratton: Maxliberty:So all banks that had time deposits would become insolvent if they had any portion of the total cash loaned by depositors on hand? Prove that please. Because any other bank, upon realizing the nature of this one would quickly exchange the notes they received from that bank for reserves? Thus the reserves of the bank in question would decrease and the bank would quickly become insolvent. That's ignoring a whole host of issues, by the way.
Exchanging the notes for reserves would not make the bank insolvent. The bank would only be unable to meet redemption requests made prior to the 60 days. Maybe you don't undrestand what the word insolvent means. The bank would be insolvent if after 60 days it was not able to liquidate its loan positions to pay the depositors. This is the same scenario with any bank that lends money, there is default risk.
if I accept your definiton then all banks that lend money will become insolvent since all banks at some point will have some cash on hand. You have failed to prove how having some cash on hand results in insolvency.
GilesStratton: Maxliberty: There is no inherent reason that fractional reserve banking under contract should be disallowed. There's no such thing as FRB through contract. The whole issue of FRB arises because of a, purposeful, confusion of contracts.
Again, you have failed to show why the contract I described is impossible or how it is fraud? i have removed the only part to which you have objection and all other elements have stayed the same. Please prove your claim that there is an inherent fraud in the contract I have described?
Perhaps it would be best if you realised that you were the ignorant one here and as such that you should probably drop the condescending tone.
It is not the issue with any bank that lends money, since banks that lend money will not become insolvent unless they make a bad loan. Which, is entirely possible. The bank you are describing would be insolvent by it's very nature. Since, individuals could ask for their money at any time, any no doubt, they would. The bank would most likely never have the sufficient liquidity to meet all of it's obligations. As such it would be forced to constantly liquidate its loan, now this might be feasible for some time, but sooner or later it will run into difficulties.
Maxliberty:You have failed to prove how having some cash on hand results in insolvency.
That's because that's a strawman. Like almost all your other posts.
Maxliberty:Again, you have failed to show why the contract I described is impossible or how it is fraud? i have removed the only part to which you have objection and all other elements have stayed the same. Please prove your claim that there is an inherent fraud in the contract I have described?
You're missing the point. Whether or not it is fraud does not concern any discussion regarding FRB, because it isn't FRB. Not once does it pretend to be a deposit contract, whereas all FRB is the misappropriation of deposits.
Maxliberty:What I am demonstrating is that the idea of fractional-reserve banking is not inherently fraudulent. It is only fraudulent if I guarantee the funds on demand to the original depositor.
I think it is helpful to think of bank notes versus government backed legal tender.
The evolution of the bank sprang from gold-smiths who held valuable commodities like precious metals in heavy vaults and issue certificates of deposit. They figured out that there is about an 8:1 chance a customer will come back to return the certificates of the deposit, rather than simply trade the certificates themselves. This principle is the origin of the fractional reserve system.
So, without government decree-backed legal tender, people would deposit assets with banks such as commodities and borrow bank notes (or other certified representation of "credit") against collateral such as real estate, etc in return for a convenience fee over a period of time or interest. Our system is so muddled we cannot even see how simple the concept is. The further from remove you get from handling actual commodities like precious metals (or tobacco, salt, seashells, etc.) the more difficult it is to imagine money as being fundamentally a representation of commodities in the final analysis. The purpose of the money is to facilitate the trade of produced goods. What we have now should not even be called money or capital in my opinion. It should be called "sucker vouchers" or some equivalent.
The government uses the abstraction of fiat money as slack in the rope we use to hang ourselves (easy credit, slow devaluation over time leading to more man-hours worked per household per week, etc.).
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