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.
A time deposit traded even at some discount does increase the money supply, increase the the price level because the credit is used in exchange in addition to the gold that was loaned to the bank and then loaned out by the bank. I cannot make it any clearer. Today it is not for demand deposits are not banned by the state.
scineram: A time deposit traded even at some discount does increase the money supply, increase the the price level because the credit is used in exchange in addition to the gold that was loaned to the bank and then loaned out by the bank. I cannot make it any clearer. Today it is not for demand deposits are not banned by the state.
No, it absolutely does not. Go reread my last four or five posts and you should understand. I'm tired of repeating myself. lol
Me too. lol
There are the gold coins traded in the market and there are the time deposits to a lesser extent. This is more than using only the gold in exchange. Hence bigger money supply and price level.
scineram: ... demand deposits are not banned by the state.
... demand deposits are not banned by the state.
The problem today rests in FRB being guaranteed by the state.
We are the soldiers for righteousnessAnd we are not sent here by the politicians you drink with - L. Dube, rip
I know. Free banksters want frb unguaranteed by the government.
scineram: Me too. lol There are the gold coins traded in the market and there are the time deposits to a lesser extent. This is more than using only the gold in exchange. Hence bigger money supply and price level.
Alright this is the last time. Listen up.
Person A deposits $10,000 into a time deposit account and receives a CD for $10,000 that can be redeemed in one years time. Person B takes out a loan for 10,000 dollars and goes about his business buying a small house or whatever. No credit created - merely a transfer of wealth from person A to person B with the bank as the middleman. Enter person C. Person B trades his time deposit to person C for a car. No inflation has happened here. Upon first glance it may appear that the same money is being used by person A and person B, but all that is really happening is that person A traded his certificate for future payment to person C for a present good. An innocent swap that causes absolutely no inflation. Person C (the car salesman) cannot redeem the certificate for one year and in effect has no wealth for one year. Person C can continue trading that CD just in the way person A did if he wants to and the effect will always be the same. No inflation will ever be created because the real wealth is still being used by person B (the loan taker). All that is happening are simple and innocent swaps of a promise of future payment for a present good.
If you have read this along with my last 4 or 5 posts and you still don't get it, I guess I can't help you.
James Greene: Alright this is the last time. ...
Alright this is the last time. ...
Well James, I suppose your original question has been sufficently resolved? I promise myself never to view this thread again, regardless of what banter is to follow ... lol ... cu
bbnet: James Greene: Alright this is the last time. ... Well James, I suppose your original question has been sufficently resolved? I promise myself never to view this thread again, regardless of what banter is to follow ... lol ... cu
haha Yeah, I learned a lot during the course of this thread. I've been reading a lot on my own as well and I am much more knowledgeable than when I first asked my question. I had no idea this thread would explode with activity like this.
James Greene: If person A traded a $10,000 CD to person B for a car and person B placed that CD into a bank for safe keeping then it would be exactly the same as when person A had the CD in a bank only now person B has it in a different bank and it is in his name instead of person A's. When the CD was in person A's posession, the bank clearly cannot make loans to other customers with it as backing because that completely destroys the purpose of loan banking. Just because person B receives the CD and puts it in a different bank (or the same bank) under his name does not mean that the bank could use it for backing of more loans. Total nonsensical dribble. That CD is a title for future money that is currently being used by a debtor. It cannot and would not be used as backing for loans. Period.
If person A traded a $10,000 CD to person B for a car and person B placed that CD into a bank for safe keeping then it would be exactly the same as when person A had the CD in a bank only now person B has it in a different bank and it is in his name instead of person A's. When the CD was in person A's posession, the bank clearly cannot make loans to other customers with it as backing because that completely destroys the purpose of loan banking. Just because person B receives the CD and puts it in a different bank (or the same bank) under his name does not mean that the bank could use it for backing of more loans. Total nonsensical dribble. That CD is a title for future money that is currently being used by a debtor. It cannot and would not be used as backing for loans. Period.
Explain why this scenario is impossible:
Person A has a CD. Person A uses the CD to buy a car from Person B. Person B goes to his bank and deposits CD in his account. Bank now has customer C that wants to borrow money for a car. Bank loans customer the money and when the owner of the car comes to collect his funds he agrees to accept the CD as payment. Repeat process.
The CD is just a substitute for the underlying asset which is either gold or something that can be converted to gold. When physical redemption takes place is not important as to how this money substitute can be used.
Your entire argument is based on the fact that a cd will trade as cash. Whats your stance on post dated checks money also?
James Greene:Person C (the car salesman) cannot redeem the certificate for one year and in effect has no wealth for one year. Person C can continue trading that CD just in the way person A did if he wants to and the effect will always be the same. No inflation will ever be created because the real wealth is still being used by person B (the loan taker). All that is happening are simple and innocent swaps of a promise of future payment for a present good.
If IOU's are being used to indirectly exchange present goods and services, then this debt IS money, and there IS inflation. The inflation is not from one CD being used as multiple payments. It is because if CD's were as good as cash, cash would disappear and CD's would be the standard money. All cash would be turned into CD's by banks. Banks would keep lending out the cash they received in exchange for CD's, but the recipients would quickly convert to CD. People would not redeem CD's - they would roll them over, or request new ones. CD's would become exactly like demand deposits currently are, being issued expansively against a static or less-slowly-expanding cash/demand deposit base.
Why? If CD's are accepted as money, there is no point to use cash. CD's earn more interest than cash, checking, NOW, and other spendable accounts. They will never trade at a risk premium because they are ensured by the government against the bank's failure. They will never trade at a time premium because there is no time premium between a present good and another present good. The only reason the time premium exists to begin with is because CD's are not accepted as a general medium of indirect exchange.
The only difference between CD's and demand deposits is that CD's are not legal tender and are not necessarily instantly convertible into such; however, their payment of interest may partially make up for this.
What we are missing is that banks and governments alone do not create inflation. People's willingness to accept additional currencies denominated in the same units, including debt instruments, is inflationary. This willingness may come from government guarantees, but the only reason government can do such, is because people accept government. They supply it the means they need to suppress dissenters.
Check my blog, if you're a loser
meambobbo: James Greene:Person C (the car salesman) cannot redeem the certificate for one year and in effect has no wealth for one year. Person C can continue trading that CD just in the way person A did if he wants to and the effect will always be the same. No inflation will ever be created because the real wealth is still being used by person B (the loan taker). All that is happening are simple and innocent swaps of a promise of future payment for a present good. If IOU's are being used to indirectly exchange present goods and services, then this debt IS money, and there IS inflation. The inflation is not from one CD being used as multiple payments. It is because if CD's were as good as cash, cash would disappear and CD's would be the standard money. All cash would be turned into CD's by banks. Banks would keep lending out the cash they received in exchange for CD's, but the recipients would quickly convert to CD. People would not redeem CD's - they would roll them over, or request new ones. CD's would become exactly like demand deposits currently are, being issued expansively against a static or less-slowly-expanding cash/demand deposit base. Why? If CD's are accepted as money, there is no point to use cash. CD's earn more interest than cash, checking, NOW, and other spendable accounts. They will never trade at a risk premium because they are ensured by the government against the bank's failure. They will never trade at a time premium because there is no time premium between a present good and another present good. The only reason the time premium exists to begin with is because CD's are not accepted as a general medium of indirect exchange. The only difference between CD's and demand deposits is that CD's are not legal tender and are not necessarily instantly convertible into such; however, their payment of interest may partially make up for this. What we are missing is that banks and governments alone do not create inflation. People's willingness to accept additional currencies denominated in the same units, including debt instruments, is inflationary. This willingness may come from government guarantees, but the only reason government can do such, is because people accept government. They supply it the means they need to suppress dissenters.
I agree that CDs would not work like cash and it is absurd to suggest that they would. The point of the previous discussion is to show that in the rare instances where someone does trade a CD for a good, it is not inflationary. I know for myself that it would not create inflation. I guess you handful of people can think that it will if you want to. lol
Maxliberty: James Greene: If person A traded a $10,000 CD to person B for a car and person B placed that CD into a bank for safe keeping then it would be exactly the same as when person A had the CD in a bank only now person B has it in a different bank and it is in his name instead of person A's. When the CD was in person A's posession, the bank clearly cannot make loans to other customers with it as backing because that completely destroys the purpose of loan banking. Just because person B receives the CD and puts it in a different bank (or the same bank) under his name does not mean that the bank could use it for backing of more loans. Total nonsensical dribble. That CD is a title for future money that is currently being used by a debtor. It cannot and would not be used as backing for loans. Period. Explain why this scenario is impossible: Person A has a CD. Person A uses the CD to buy a car from Person B. Person B goes to his bank and deposits CD in his account. Bank now has customer C that wants to borrow money for a car. Bank loans customer the money and when the owner of the car comes to collect his funds he agrees to accept the CD as payment. Repeat process. The CD is just a substitute for the underlying asset which is either gold or something that can be converted to gold. When physical redemption takes place is not important as to how this money substitute can be used.
This is a time deposit CD. It cannot be just deposited into a savings, checking or demand account like cash and it can't be used like cash. The bank would never be able to make loans to other customers based upon a premature time deposit CD. This CD would be held in more of a safe deposit box style way, rather than being held in an account.
whats really interesting is if for some reason you could use a cd as you would cash it would be you the depositor and not the bank that were creating the inflation.
Maxliberty: But banks are not required to have demand deposits. So a better question is what is a time deposit because if the bank poses any delay on redemption what you now think of as a demand deposit would become a time deposit. So since we are talking about physical redemption of gold then if the bank had for example a one day waiting policy for the physical redemption of gold that would make your demand deposit a time deposit. The function of the bank would be the same of course but your entire arguement has just collapsed since all time demand deposits are time deposits now. All a bank note is, is a claim on the underlying asset, whatever the asset is. Just beacuse the bank offers redemption in gold does not mean the bank has to have physical gold, it only means the bank has to have assets sufficient to convert to gold to meet redemptions. See my example of a bank that has silver but offers gold as a redemption option.
But banks are not required to have demand deposits. So a better question is what is a time deposit because if the bank poses any delay on redemption what you now think of as a demand deposit would become a time deposit. So since we are talking about physical redemption of gold then if the bank had for example a one day waiting policy for the physical redemption of gold that would make your demand deposit a time deposit. The function of the bank would be the same of course but your entire arguement has just collapsed since all time demand deposits are time deposits now.
All a bank note is, is a claim on the underlying asset, whatever the asset is. Just beacuse the bank offers redemption in gold does not mean the bank has to have physical gold, it only means the bank has to have assets sufficient to convert to gold to meet redemptions. See my example of a bank that has silver but offers gold as a redemption option.
I'm sorry but you have not collapsed my entire argument. By your reasoning if I had to wait a day to receive payment it would not be a demand deposit. Well If I had to wait an hour, a minute or a second then it would also be a time deposit and there would essentially be no such thing as a demand deposit. A demand deposit means that I have access to the money deposited whenever I choose to claim it. Now you would probably say that "well if the bank closes for business at 5pm and is closed on weekends then it is also not a demand deposit. That would be a contract or agreement that you made with the bank before depositing your money. It still would be a demand deposit. A CD is a loan for a certain duration of time. I cannot buy anything with the CD because during the duration it is loaned to the bank I do not have claim to the CD, the bank does. The bank can buy something with the money in the CD but you cannot. You cannot buy a car or anything else with money you loaned to someone else.
Also, if I loan gold to a bank and we have an agreement to be repaid in gold then the bank cannot repay me in anything else that they consider to be of the same value. It is the same as If I have a safe deposit box at the bank stored with a gun, my passport, a diamond ring. I would expect those items on demand from the bank. Not some items that the bank considers to be of equal value.
May I suggest instead of spending your time posting on this forum, try reading up on the subject. "The mystery of banking" and "The case against the Fed" both by Murray Rothbard are good books for this.