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:You see the bank still has to have ample reserves to meet all the requests just like before.
Why would you assume this? This bank has taken away the on demand guarantee, so the people who want their money on demand will immediately want to transfer it to a bank that guarantees it. We don't know how many people that will be, so you have no idea if they'll have ample reserves to meet requirements or not.
Maxliberty: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.
This doesn't make much sense either.
Maxliberty: 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.
nirgrahamUK: if it says its a loan contract then its not a deposit contact. bad contract trying to be two incompatible things at once.
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.
haha,
well i suppose you think the following is a perfectly legitimate contract
A contracts with B, that whenever A pays B price P between now and next tuesday B is obligated to both : deliver an apple to A, and also, not deliver anything to A.
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
nirgrahamUK: Maxliberty: 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. haha, well i suppose you think the following is a perfectly legitimate contract A contracts with B, that whenever A pays B price P between now and next tuesday B is obligated to both : deliver an apple to A, and also, not deliver anything to A.
Do you think the example contract is not a legitimate contract? Please explain why not.
Stolz25:Why would you assume this?
Well as you have pointed out the demand (in the cases where it still exists) was an impossibility before so removing it has not changed anything for the depositor.
Stolz25:This bank has taken away the on demand guarantee, so the people who want their money on demand will immediately want to transfer it to a bank that guarantees it.
Well since they were banking there before without problems I doubt everyone will change. As I pointed out some banks don't guarantee deposits now and people still bank there. In fact I would bet that most of the anti-frb crowd here banks at these FRB banks that are "inherently insolvent and fraudulent" even with all of their posturing here on this site. I think you are overvaluing a ten word change in a contract most people don't even read.
Stolz25:We don't know how many people that will be, so you have no idea if they'll have ample reserves to meet requirements or not.
Since the bank isn't guaranteeing approval of the requests the reserves are a courtesy not a requirement so ample is a managment decision not a legal requirement.
of course its not legitimate, didnt you notice B was contracted to perfrom a logical contradiction. if he provides an apple, he fails to avoid being the deliverer of anything, and if he avoids delivering anything he does not deliver an apple.
was that not clear the first time?
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:Well since they were banking there before without problems I doubt everyone will change.
I never claimed everyone would change. It wouldn't take many (assuming a 10% reserve requirement) to want to move their money before that bank became insolvent though.
Maxliberty:As I pointed out some banks don't guarantee deposits now and people still bank there. In fact I would bet that most of the anti-frb crowd here banks at these FRB banks that are "inherently insolvent and fraudulent" even with all of their posturing here on this site. I think you are overvaluing a ten word change in a contract most people don't even read.
Right now most of the people who don't care are counting on the FDIC to cover them in the event their bank goes under. Take that assurance away from depositors and there will be even fewer who don't care.
Maxliberty:Since the bank isn't guaranteeing approval of the requests the reserves are a courtesy not a requirement so ample is a managment decision not a legal requirement.
Ample, in the sense you used it, I understood as they'd have enough reserves to meet withdrawal requests (because that is why they'd be able to operate exactly as now). If you mean it in some sort of crazy subjective way that is impossible to measure objectively, sure, maybe they'd have ample reserves by that standard. It is also a completely worthless statement to make if you intend to remove all meaning from it.
nirgrahamUK: of course its not legitimate, didnt you notice B was contracted to perfrom a logical contradiction. if he provides an apple, he fails to avoid being the deliverer of anything, and if he avoids delivering anything he does not deliver an apple. was that not clear the first time?
I was speaking of th actual contract from Bank of America, which is the largest bank in the US. Why is that contract a logical contradiction? Your imaginary contract does not bare any relation to that.
Stolz25: I never claimed everyone would change. It wouldn't take many (assuming a 10% reserve requirement) to want to move their money before that bank became insolvent though.
The bank is not insolvent because it runs out of reserves to pay requests. The bank would have for example 60 days per the contract to liquidate its loan positions to meet requests. If the bank then liquidated all of its loans and paid back the requests then that is not insolvency. Also, if not everyone changes then the bank is still in business although with less customers and it simply has to adjust its loan portfolio. Again, that is not insolvent.
Stolz25: Right now most of the people who don't care are counting on the FDIC to cover them in the event their bank goes under. Take that assurance away from depositors and there will be even fewer who don't care.
This whole line of thought assumes that there are not different risk preferences in the market place. It is far more likely that the banks in a free society will reflect the varying risk preferences of the market rather than a monolithic banking system as you are suggesting. If people make risk trade-offs now I do not see why that would stop in the absence of government.
Stolz25: Ample, in the sense you used it, I understood as they'd have enough reserves to meet withdrawal requests (because that is why they'd be able to operate exactly as now). If you mean it in some sort of crazy subjective way that is impossible to measure objectively, sure, maybe they'd have ample reserves by that standard. It is also a completely worthless statement to make if you intend to remove all meaning from it.
Any bank that operated with fractional reserves makes assesments on how much they would need in reserves to meet withdrawal requests. What you are suggesting is a dramatic increase that may be more than current reserves in which case the bank has a time frame to liquidate its loan positions to pay the requests. So your example doesn't change anything. The bank is not insolvent because it is not required to meet the requests on demand only within the time frame given.
Maxliberty:The bank is not insolvent because it runs out of reserves to pay requests. The bank would have for example 60 days per the contract to liquidate its loan positions to meet requests.
Semantics. The point you were making was that it would operate no differently than today, when in reality it most likely would. The first time you told someone they would get their money in 60 days from an account that when they deposited it was on demand, you'd cause a run on the bank.
Maxliberty:Also, if not everyone changes then the bank is still in business although with less customers and it simply has to adjust its loan portfolio. Again, that is not insolvent.
This may very well be true. You could make a contract saying that you have 60 days to pay if you desire and then pay them early if you have the money. I just don't see why you think this amounts to fractional reserve banking. On the face it may not seem like a big difference, but in your scenario you don't have two people who both have claim to the same dollar at the same time.
Maxliberty:If people make risk trade-offs now I do not see why that would stop in the absence of government.
But what is the trade off? I can't see any economic benefits to either depositing my money in your bank versus another time deposit account, and I don't see any economic benefit for running your bank versus another time deposit account. While it's true people accept different types of risk, it is based on the possible rewards.
Maxliberty:The bank is not insolvent because it is not required to meet the requests on demand only within the time frame given.
But the only reason the bank isn't insolvent is because they changed the contract on their unwitting customers. When they deposited the money it was a demand deposit afterall.
Stolz25:I just don't see why you think this amounts to fractional reserve banking.
It doesn't. FRB is the result of banks treating deposit contracts as if they were loan contracts. Now, the contract he is talking about simply isn't economically viable, but it isn't FRB. I'd also argue that if he is promising them payment within 60 days it is fraud, simply because unless he has in cash enough money to cover all of his liabilities he cannot ensure that he will pay everybody back.
Maxliberty:I was speaking of th actual contract from Bank of America, which is the largest bank in the US. Why is that contract a logical contradiction? Your imaginary contract does not bare any relation to that.
either two people have between them a contract which is a loan contract, or they have a loan which is a demand deposit agreement,
or they have two contracts, one for a loan and for a deposit account.
but they cant have a contract for a loan which is a demand deposit account.
they cant have a contract for a demand deposit account thats a loan.
its hard enough to parse the sentances, this is because it makes no logical sense. it is contradictary.
i suppose that it really is a lending agreement, and the fraud is the 'pretence' that what the customer is getting is a 'demand deposit account'. when they arent getting that. if its a loan contract, the only logically possible deposit agreements are Timed Deposit agreements, and Perhaps Deposit agreements. not Demand Deposit agreements
nirgrahamUK: Maxliberty:I was speaking of th actual contract from Bank of America, which is the largest bank in the US. Why is that contract a logical contradiction? Your imaginary contract does not bare any relation to that. either two people have between them a contract which is a loan contract, or they have a loan which is a demand deposit agreement, or they have two contracts, one for a loan and for a deposit account. but they cant have a contract for a loan which is a demand deposit account. they cant have a contract for a demand deposit account thats a loan. its hard enough to parse the sentances, this is because it makes no logical sense. it is contradictary. i suppose that it really is a lending agreement, and the fraud is the 'pretence' that what the customer is getting is a 'demand deposit account'. when they arent getting that. if its a loan contract, the only logically possible deposit agreements are Timed Deposit agreements, and Perhaps Deposit agreements. not Demand Deposit agreements
We have already cleared up the matter that it is not a demand deposit. What the real question is having been relieved of this demand burden why would the functionality of banks be any different in a free society. Take Bank of America, it's contract states that in fact that the realtionship is a loan so they have no obligation to return funds on demand. How would Bank of America operate differently in a free society? See your arguement is not about what is actually happening it's just a fiction.
GilesStratton:I'd also argue that if he is promising them payment within 60 days it is fraud, simply because unless he has in cash enough money to cover all of his liabilities he cannot ensure that he will pay everybody back.
That would mean promising to pay anyone back would be a fraud unless you had an equal amount of funds set aside to cover the timed deposit in which you case you would not need the timed deposit. If you loan someone money you have default risk, default is not fraud.
MaxLiberty: Bank of America, blah blah blah