Similar questions probably get asked a lot, but this one is very straightforward.
I am curious about how fractional reserve banking is inflationary but yet 100% loan banking is not.
Loan banking would be where you place your savings in an interest paying loan account from which the bank would make loans to third parties with. These loan banking accounts would be used to make loans to customers which must be paid back during a certain time window and depositors would also not be able to withdraw their funds during that same window of time. Bunk runs would be impossible.
Fractional Reserve banking is still a bit mysterious to me on how it is inflationary while the above banking is not. I realize that a fractional reserve bank is subject to runs, but how is it inflationary? If a bank has a $1000 deposit and loans out $900 of it under the full extent allowed with a 10% reserve requirement. How is this inflationary? I know that the bank now has $1900 on its books but the original depositor is not using his $1000. It doesn't seem like any new credit has been created. So as long as the bank does not experience a run, how is this inflationary?
I am very interested in clearing this up for myself so that I can more properly explain this to others.
James Greene: Maxliberty: Juan:The CD is not cash, so it's very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed. Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible. Think about this for a minute, rather than hastily thinking that you have "debunked" something without looking at all sides. Lets say that Tony buys a car from his local car dealer with a $10,000 CD. The CD is not redeemeble for one year and the car dealer is still willing to accept it. The car that Tony bought was already in existance and built and paid for by the dealer and an automoble production factory. No new product creation happened and the dealer will not be able to efficiently replace that car on his lot until he eventually redeems his CD. All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. The dealer cannot access the money that the CD is entitled to and therefore no money has really been used even though at first glance it appears like it has.
Maxliberty: Juan:The CD is not cash, so it's very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed. Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible.
Juan:The CD is not cash, so it's very very likely to trade at a discount. Also in your hypothetic example, the CD is transfered from, say, Smith who was willing to save money, to Jones who is also willing to save money. That means that firstly Smith and then Jones are abstaining from consumption. The CD is never cashed.
Even if it trades at a discount, it is irrelevant to the fact that I can use it like to cash to buy things which defeats your whole arguement of time deposits being inaccessible.
Think about this for a minute, rather than hastily thinking that you have "debunked" something without looking at all sides.
Lets say that Tony buys a car from his local car dealer with a $10,000 CD. The CD is not redeemeble for one year and the car dealer is still willing to accept it. The car that Tony bought was already in existance and built and paid for by the dealer and an automoble production factory. No new product creation happened and the dealer will not be able to efficiently replace that car on his lot until he eventually redeems his CD. All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. The dealer cannot access the money that the CD is entitled to and therefore no money has really been used even though at first glance it appears like it has.
So, it can therefore be concluded that using CDs like cash is completely harmless and would not contribute to a business cycle or inflation.
James Greene:All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap.
But this is exactly what fiduciary media or a demand deposit is. They are all IOUs.
scineram: James Greene:All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. But this is exactly what fiduciary media or a demand deposit is. They are all IOUs.
My point is that it matters not who holds that CD. The funds are still inaccessable and it could be swapped around for goods many times and would still not have the same properties as a fractional reserve loan. I realize that fiat money are IOUs too, but a CD is more of an IOU for an IOU. haha The car dealer, in my previous example, has not received any real wealth that he can use to create new goods with. He has only received the future promise to be able to consume or produce.
An apple is an apple. An orange is an orange. A CD is a CD.
For something to be considered money, it must be widely accepted by most people for exchanges of goods and services.
In some areas apples, oranges, or even CDs might be considered money. In most areas, however, they would not be able to compete with better forms of money like silver, gold, and/or copper.
Inflation is simply the expansion of a money supply as occurs under FRB (MS=M0+M1). This does not occur under a 100% reserve system except to the extant that the money is able to be produced before being brought into the banking system (MS=M0+Mp). A rise in prices can be a symptom of inflation.
The original depositor may need his $1,000 back the following week, in which case the bank would have to take $100 from nine other peoples accounts and pray that they don't also need their $1,000 the week after.
We are the soldiers for righteousnessAnd we are not sent here by the politicians you drink with - L. Dube, rip
In some areas apples, oranges, or even CDs might be considered 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."
Juan: ... CDs can't be money because CDs rely on a preexisting monetary and financial system. ...
In the village of CD brokers, they might?
I CD could possibly be swapped for something, but this is not the same as using the money while it is lent to someone else. It is simply swapping the claim for future money for a present good. Harmless swap.
This is the case with demand deposits too. You are not using any money when you make transactions.
scineram: This is the case with demand deposits too. You are not using any money when you make transactions.
It is? But with a demand deposit you would withdraw your money (be it fiat or gold backed) and spend that real money on a good. Swapping a CD for a good is trading a note of future payment for a present good. I don't understand your point.
James Greene: Lets say that Tony buys a car from his local car dealer with a $10,000 CD. The CD is not redeemeble for one year and the car dealer is still willing to accept it. The car that Tony bought was already in existance and built and paid for by the dealer and an automoble production factory. No new product creation happened and the dealer will not be able to efficiently replace that car on his lot until he eventually redeems his CD. All that is happening is that the car is changing hands for an IOU. NO real wealth is being used. All that has happened is that Tony now has a car and the dealer now has an IOU. A simple harmless swap. The dealer cannot access the money that the CD is entitled to and therefore no money has really been used even though at first glance it appears like it has.
If we continue trading the CD then the car dealer gives the CD to the car maker who then sends him another car. The car maker then sends the CD to the car part suppliers who then send the material to build another car. It doesn't have to matter what the physical restrictions are for redemption. All that matters is that the note whether it is a check or a CD can be redeemed in the physical commodity. All that is happening when notes are being passed from one person to another is simply changing who has the claim on the underlying assets of the note. There is no requirement that the bank has to offer instantaneous redemption into the physical commodity.
It is quite likely that banks will only allow physical redemption in defined quantities and that physical redemption might actually come at a premium to the face value of the note. Some banks may actually charge a premium to redeem in small quantites of gold due to minting costs and other factors and almost certainly physical redemption will be limited to minimum requirements like 1 oz. It is entirely likely that if you went to the bank with your dollar note and wanted to redeem gold that the bank would tell you sorry we don't redeem in quantities that small. Would that make the note worthless?, I don't think so.
bbnet: An apple is an apple. An orange is an orange. A CD is a CD. For something to be considered money, it must be widely accepted by most people for exchanges of goods and services. In some areas apples, oranges, or even CDs might be considered money. In most areas, however, they would not be able to compete with better forms of money like silver, gold, and/or copper. Inflation is simply the expansion of a money supply as occurs under FRB (MS=M0+M1). This does not occur under a 100% reserve system except to the extant that the money is able to be produced before being brought into the banking system (MS=M0+Mp). A rise in prices can be a symptom of inflation. The original depositor may need his $1,000 back the following week, in which case the bank would have to take $100 from nine other peoples accounts and pray that they don't also need their $1,000 the week after.
You are making an artificial distinction between a CD and a bank note. They are both pieces of paper that have value based on the ability to be redeemed in the physical commodity of gold. The only distinction is maybe the time frame for redemption. The point being is I can use both pieces of paper right now to purchase things even though specifically in the case of the CD the money has already been loaned out to someone else. I understand your fixation with the artificial distinction because your entire theory is based upon it.
James Greene: scineram: This is the case with demand deposits too. You are not using any money when you make transactions. It is? But with a demand deposit you would withdraw your money (be it fiat or gold backed) and spend that real money on a good. Swapping a CD for a good is trading a note of future payment for a present good. I don't understand your point.
Lets examine the CD on the open market instead of "withdrawing" my money from the bank and turning the CD into gold I withdraw from other people who buy the CD with gold. This is what the bank does on redemption in a checking account they use the gold of other people to meet redemption requirements. No functional difference and since all the bank depositors have signed contracts agreeing to this system you can't claim it' s fraud. As long as people are willing to allow their gold to be used to meet redemption requirements prior to a given expected time of redemption then there is no distinction. The only difference is the redemption in the case of the CD is taking placing with non-bank customers.
max liberty-"All that matters is that the note whether it is a check or a CD can be redeemed in the physical commodity. "
Money is defined as being generally accepted as payment for goods and services. Your comment in the previous post seems to indicate you understand this. Almost anything could be used as money and probably has at one time or another but when you loan that money out(like to the bank say for 6 mnths with 3% interest) just because you may be able to sell that loan to someone else for money or other products that does not make it money. furthermore If you find someone who pays full value please introduce me I've got a deed to the brooklyn bridge they may be interested in.
James Greene:It is? But with a demand deposit you would withdraw your money (be it fiat or gold backed) and spend that real money on a good. Swapping a CD for a good is trading a note of future payment for a present good. I don't understand your point.
It is. I very rarely take cash form an ATM. Mostly I just buy train ticket on the net or pay with card. The majority of transactions today is only electronic. Banks hold little cash at hand because people just conduct transactions digitally with credit card or direct access.