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.
Juan:2) Increasing the amount of coins by melting jewelry is irrelevant from a money-supply point of view. Jewelry is real savings so converting it into coin is not inflationary.
Jewelry is not used as money. After converting it does become exchange medium. This means bigger money supply and higher prices. How can you say it is not inflation?
scineram: Juan:2) Increasing the amount of coins by melting jewelry is irrelevant from a money-supply point of view. Jewelry is real savings so converting it into coin is not inflationary. Jewelry is not used as money. After converting it does become exchange medium. This means bigger money supply and higher prices. How can you say it is not inflation?
The 'price' of gold 'money' takes into account the gold that is in coins and jewelry.. The gold jewelry is already part of the money supply. Converting gold from jewelry into coins has no effect on the money supply. Read what Juan posted again, very s l o w l y (better yet, start from page 1)
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We are the soldiers for righteousnessAnd we are not sent here by the politicians you drink with - L. Dube, rip
The 'price' of gold 'money' takes into account the gold that is in coins and jewelry
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."
Isn't the demand for the two different? I want to be paid in coins not necklace when I sell something.
Juan:You probably meant "by inflation I mean an increase in the money supply". Now, assuming that's what you meant...
yes, i did. sorry.
Juan:1) Increasing the total amount of available gold (mining) would at best make gold a bit cheaper.
correct - that's why it makes good money. and that's why strict gold standards would prevent any sizeable business cycle. but they are theoretically still possible. that was my only point.
Bonds, Stocks, Mutual Funds are all savings. Monetizing them is inflationary if it is not met by a decrease in other money. However, you are correct that gold is mostly used monetarily, not in jewelry and even less in industry. If it were truly able to compete as a currency, it would be much more so. More points for gold.
Juan:Bottom line is, commodity money does not behave like fiat money. Comparing the two is misleading (of course, some ppl confuse things on purpose to perpetuate scams like "paper is as good as gold")
I am sorry if I confused anyone. I was merely saying that business cycles are theoretically possible in a free market; not that they would be as frequent, far-reaching, or painful as our current ones.
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scineram:Isn't the demand for the two different? I want to be paid in coins not necklace when I sell something.
Juan:Gold coins are valuable money because they are made of valuable gold, not because they are coins.
Coins would actually be slightly more valuable than raw gold because work has gone into them to make them coined.
I havn't been reading this thread for the past several pages, and actually only read that last sentence of your post, haha. I can't believe how explosive this thread became! Is it often that threads get this long?
bbnet:The 'price' of gold 'money' takes into account the gold that is in coins and jewelry
Not unless Austrians have eschewed this whole "subjectivism" business lately.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Juan:The problem is, you seem to believe that 'money' has value just because it's money, when in reality things work backwards. Gold coius are valuable money because they are made of valuable gold, not because they are coins.
They are valuable precisely because they are money. They can be exchanged. Turning them into jewelry is costly and they lose exchange value. And vice versa.
James Greene:Coins would actually be slightly more valuable than raw gold because work has gone into them to make them coined.
This sounds like a labor theory of value. I think it'd be safer to say coins have a higher market price than jewelry or dust, etc, because they have greater demand.
Maxliberty: Evidence of this is the current system, you could open a bank tomorrow that offered 100% backed gold redemption, but we don't see any.
Evidence of this is the current system, you could open a bank tomorrow that offered 100% backed gold redemption, but we don't see any.
No, a bank could not open which offered 100% backed gold redemption for a competing currency. That's why there are legal tender laws. Any attempts to create competing currencies have been shut down by federal agents. You could not open a bank tomorrow that issued money backed 100% by gold, again that's why there are legal tender laws, to prevent this sort of thing.
And if it was possible to do so, many people would rush for the exits and start demanding to be paid in a currency that held its value. If the current fractional reserve based banking system we have today were exposed to true competition by doing away with legal tender laws and allowing anyone to accept any money they wanted for goods and services, there would be a flight away from the dollar.
Offering 100% backed redemption for dollars would be pointless when you're competitors have a legal right to inflate their value away. That's the system we have today, so it's obvious that no bank is going to offer 100% backed deposits (with the exception of people who like to store their cash in a safety deposit box) - what advantage does that convey?
But what you can't seem to understand is that in a free market for money, there would be competing currencies. You say 100% backed deposit banking would not be profitable, but it would. I would put my money into a bank that had a currency and deposits backed up 100% by gold in a heartbeat, and would shun any bank that could not prove it had 100% backing for its deposits and competing currency.
WisR:You say 100% backed deposit banking would not be profitable, but it would. I would put my money into a bank that had a currency and deposits backed up 100% by gold in a heartbeat, and would shun any bank that could not prove it had 100% backing for its deposits and competing currency.
There was not any significant demand for money warehousing historicaly. You are free to do that even now if you pay the fee. I prefer being paid interest as banks invest my money.
scineram:There was not any significant demand for money warehousing historicaly.
I call BS. The Bank of Amsterdam offered this service during the Tulip Mania episode in the mid 1600's. It was so wildly popular, it caused a large surge of commodity money to enter the Netherlands, which was partially responsible for the tulip bubble.
The only reason it hasn't succeeded in the free market, is because it has never been subject to the enforcement of a free market. All banking and money operations have generally enjoyed monopoly privileges by the monopoly government backing them...or were based around such an institution. Thus, there is no means to hold banks liable for fraud when they promise 100% reserve and practice FRB.
meambobbo:I call BS. The Bank of Amsterdam offered this service during the Tulip Mania episode in the mid 1600's. It was so wildly popular, it caused a large surge of commodity money to enter the Netherlands, which was partially responsible for the tulip bubble.
I call BS too. Warehouse receipts had to be renewed in every 6 months and a fee paid. The bank also offered fiduciary media, and a lot of people eventually sold their receipts for banknotes or let them lapse.
meambobbo:The only reason it hasn't succeeded in the free market, is because it has never been subject to the enforcement of a free market. All banking and money operations have generally enjoyed monopoly privileges by the monopoly government backing them...or were based around such an institution.
This is pure assertion. Way before central banks or deposit insurance the practice emerged as early as the 14th century in Italy for example.
meambobbo:Thus, there is no means to hold banks liable for fraud when they promise 100% reserve and practice FRB.
There should be. But nobody promises 100% reserves except warehouses and safety deposit boxes.
James Greene:I can't believe how explosive this thread became! Is it often that threads get this long?
GilesStratton: bbnet: The 'price' of gold 'money' takes into account the gold that is in coins and jewelry Not unless Austrians have eschewed this whole "subjectivism" business lately.
bbnet: The 'price' of gold 'money' takes into account the gold that is in coins and jewelry
scineram:[coins]They are valuable precisely because they are money.
scineram:I prefer being paid interest as banks invest my money.
meambobbo:I think it'd be safer to say coins have a higher market price than jewelry