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: 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.
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.
It is the Austrian cult view on this subject that is condescending. Since we are only discussing what types of banks will occur in a free society the Austrian position that there will only be two types 100% reserve and 0% reserve has been demonstrated to be false. Your definition of a Fractional Reserve Bank is meaningless because in many cases deposits are treated as loans and not demand deposits so you are argueing against something that does not exist. Secondly, you agree that with a simple modification to the contract that would define all deposits as loans then these banks could continue exactly what they are doing now.
So your entire position consists of changing the language in the contract.
Knight_of_BAAWA: 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.That's what frac-reserve is all about, Max. It's not about time-deposits; it's about demand-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.
So in a free society we should expect to see banks that have the entire range of reserves related to funds supplied by customers not 100% reserves and 0% reserves as you advocate. As you point out, once the demand guarantee is eliminated then all deposits become time-deposits. So the only banks that will have demand deposits will be 100% reserve. However, the banks with 99% reserves (with no demand guarantee) will function from the perspective of the customer exactly the same as the company with 100% reserve. So your entire crusade will do little more than change the wording in the intial account contract.
Maxliberty:Since we are only discussing what types of banks will occur in a free society the Austrian position that there will only be two types 100% reserve and 0% reserve has been demonstrated to be false.
There's no such thing as a 0% reserve bank. That sort of "bank" does not hold reserves since that it is not its purpose. It's purpose is to act as a true financial intermediary.
Maxliberty:Your definition of a Fractional Reserve Bank is meaningless because in many cases deposits are treated as loans and not demand deposits so you are argueing against something that does not exist
That's my point, thank you for proving it though. FRB consists of treating a true demand deposit as a loan. Which is fraud.
Maxliberty: Secondly, you agree that with a simple modification to the contract that would define all deposits as loans then these banks could continue exactly what they are doing now.
No, if it is defined as a loan, it is exactly that and no issue arises.
Maxliberty:It is the Austrian cult view on this subject that is condescending. Since we are only discussing what types of banks will occur in a free society the Austrian position that there will only be two types 100% reserve and 0% reserve has been demonstrated to be false. Your definition of a Fractional Reserve Bank is meaningless because in many cases deposits are treated as loans and not demand deposits so you are argueing against something that does not exist. Secondly, you agree that with a simple modification to the contract that would define all deposits as loans then these banks could continue exactly what they are doing now.
strawman, the position is that time-deposits accounts may conceivably maintain ANY reserve ratio, so long as they dont necessitate insovlancy at the time that they contract to hold someones deposit for some time; (i.e. they dong positievly guarantee to not have the money)
wheras, Deman Deposits, must have 100% reserves, because that is NECESSARY to be a Demand Desposit Account.
of course, as you posit Perhaps Deposit Accounts, the reserves are not necessary, but these ARE NOT demand deposit accounts, but some other mythological beast.
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
attempted to edit above post for spelling and little clarity, but there seems to be an error on the forum edit function
nirgrahamUK: Maxliberty:It is the Austrian cult view on this subject that is condescending. Since we are only discussing what types of banks will occur in a free society the Austrian position that there will only be two types 100% reserve and 0% reserve has been demonstrated to be false. Your definition of a Fractional Reserve Bank is meaningless because in many cases deposits are treated as loans and not demand deposits so you are argueing against something that does not exist. Secondly, you agree that with a simple modification to the contract that would define all deposits as loans then these banks could continue exactly what they are doing now. strawman, the position is that time-deposits accounts may conceivably maintain ANY reserve ratio, so long as they dont necessitate insovlancy at the time that they contract to hold someones deposit for some time; (i.e. they dong positievly guarantee to not have the money) wheras, Deman Deposits, must have 100% reserves, because that is NECESSARY to be a Demand Desposit Account. of course, as you posit Perhaps Deposit Accounts, the reserves are not necessary, but these ARE NOT demand deposit accounts, but some other mythological beast.
The entire Austrian Cult anti-FRB fanaticism is pointless.
Maxliberty:The entire Austrian Cult anti-FRB fanaticism is pointless.
Remind me again, what are you doing here?
Maxliberty:This is why your entire arguement and fixation with FRB as you define it is meaningless. In a free society, which is all we are discussing, there will be no functional change to what currently happens right now, only a change in the language of the initial contracts with the banks. Is it that hard for you to see that by simply changing the language the bank could still operate exactly as it does now? Changing the language does not require the bank to change it's operations. These hybrid banks that loan money and allow customers to withdraw cash would continue just as they do now.
Guess what? There's the a reason central banks exist: FRB isn't economically viable without them. To answer your question there clearly would be a different, since without a central bank, other banks that practised FRB would become insolvent and go bankrupt one by one, please stop lying.
Any anytime you'd like to answer my posts you can. I find it amusing that the guy who wants to lead a bunch of people to a place in Africa without telling them before hand should be calling others members of a cult.
GilesStratton: Remind me again, what are you doing here?
Are you saying it's cult members only?
GilesStratton: Guess what? There's the a reason central banks exist: FRB isn't economically viable without them. To answer your question there clearly would be a different, since without a central bank, other banks that practised FRB would become insolvent and go bankrupt one by one, please stop lying.
See now you are trying to add a different arguement. You spent the entire time argueing that it was the demand guarantee that was the issue and now you are saying it is something else. I might remind you that we are discussing banking in a free society without any governement so your attempt to draw in the central bank is in fact irrelevant but a common technique for the Austrian cult.
You have yet to prove that a bank with fractional reserves that did not guarantee demand return of funds would be by design insolvent. Why don't you try proving your assertion?
Maxliberty:You have yet to prove that a bank with fractional reserves that did not guarantee demand return of funds would be by design insolvent. Why don't you try proving your assertion?
Why don't you listen, what you just described, is not fractional reserve banking. By the way, I did answer that and you ignored it.
Maxliberty:See now you are trying to add a different arguement. You spent the entire time argueing that it was the demand guarantee that was the issue and now you are saying it is something else. I might remind you that we are discussing banking in a free society without any governement so your attempt to draw in the central bank is in fact irrelevant but a common technique for the Austrian cult.
You're missing the point, you stated nothing with change in a free society. I said it would, since it would lack a central bank. And a central bank is the only way the FRB can survive.
Maxliberty:Are you saying it's cult members only?
Preferably. I'm done arguing with an intellectual bankrupt fool.
Maxliberty: This is why your entire arguement and fixation with FRB as you define it is meaningless. In a free society, which is all we are discussing, there will be no functional change to what currently happens right now, only a change in the language of the initial contracts with the banks. Is it that hard for you to see that by simply changing the language the bank could still operate exactly as it does now? Changing the language does not require the bank to change it's operations. These hybrid banks that loan money and allow customers to withdraw cash would continue just as they do now.
so a change in language that is a NECESSARY CHANGE need not change the function.
i agree that functions dont change when uneccessary changes to the language are proposed.
instead of 'walk my dog' the contract says 'walk my canine'. this is no functional change, and is uneccesary to boot.
but you imagine that a NECESSARY change happen in the language of the contract and that this does not chage the Function of the contract. this is absurd.
i suppose you are kind of arguing like this. at the moment the contract says 'walk my dog', we should change the contract to 'walk my dog, but never on tuesdays, or especiialy on tuesdays ' and perhaps if before i so happened to never walk it on tuesdays, or contrariwise had i always walked it on tuesdays anyhow, then the change to the contract is necessary to accurately express what is being contracted, but does not add to the function. (i.e. how it look sto outsiders). hopefully my example demonstrates the falsity. it is only speculation that the function hasnt changed. if the change to the contract is necessary, then its necessary for a reason, the reason is the entailments of the bad contract lead to problems and absurdities or the possibility of the wrong function pertaining, and so the contract needs to be improved to improve the function.
changing the language would not allow banks to function JUST AS they do now. if they could function legitimately just as they do now why would they need to change the language?
GilesStratton:To answer your question there clearly would be a different, since without a central bank, other banks that practised FRB would become insolvent and go bankrupt one by one, please stop lying.
This is false, empirically.
This is an example of a deposit contract. II/A says you are debtor and creditor. This is a loan contract.
Good lawyer discussion at Volokh here and here.
if it says its a loan contract then its not a deposit contact. bad contract trying to be two incompatible things at once.
scineram: This is false, empirically.
No, it isn't. And I'll read the links in a bit.
nirgrahamUK: Maxliberty: This is why your entire arguement and fixation with FRB as you define it is meaningless. In a free society, which is all we are discussing, there will be no functional change to what currently happens right now, only a change in the language of the initial contracts with the banks. Is it that hard for you to see that by simply changing the language the bank could still operate exactly as it does now? Changing the language does not require the bank to change it's operations. These hybrid banks that loan money and allow customers to withdraw cash would continue just as they do now. so a change in language that is a NECESSARY CHANGE need not change the function. i agree that functions dont change when uneccessary changes to the language are proposed. instead of 'walk my dog' the contract says 'walk my canine'. this is no functional change, and is uneccesary to boot. but you imagine that a NECESSARY change happen in the language of the contract and that this does not chage the Function of the contract. this is absurd. i suppose you are kind of arguing like this. at the moment the contract says 'walk my dog', we should change the contract to 'walk my dog, but never on tuesdays, or especiialy on tuesdays ' and perhaps if before i so happened to never walk it on tuesdays, or contrariwise had i always walked it on tuesdays anyhow, then the change to the contract is necessary to accurately express what is being contracted, but does not add to the function. (i.e. how it look sto outsiders). hopefully my example demonstrates the falsity. it is only speculation that the function hasnt changed. if the change to the contract is necessary, then its necessary for a reason, the reason is the entailments of the bad contract lead to problems and absurdities or the possibility of the wrong function pertaining, and so the contract needs to be improved to improve the function. changing the language would not allow banks to function JUST AS they do now. if they could function legitimately just as they do now why would they need to change the language?
I agree that the demand guarantee is not possible while having a fraction of the total amount supplied via deposit. So banks that are operating under this now have provided a false guarantee. That in and of itself does not make them insolvent. So if a bank were operating now with a demand guarantee and switched to a non-guarantee how woud the operations actually change? The answer is they wouldn't. That is the point.
You have clarified a legal impossibility in that a bank can not guarantee demand deposits to all its customers without all the money being available all the time. So what? Having now corrected that legal language in the contract please explain how the bank will conduct operations differently than before? You see the bank still has to have ample reserves to meet all the requests just like before.
You and your cult anti-frb crowd have charged at me howling like lunatics and with a deft flick of the blade of reason I have sent you all over the cliff.
nirgrahamUK: if it says its a loan contract then its not a deposit contact. bad contract trying to be two incompatible things at once.
It is always tough when reality slaps you and your pet theory upside the head.