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.
Knight_of_BAAWA: Maxliberty:The scenario above is fractional reserve banking via contract Knight_of_BAAWA:No it isn't. Merely asking if the person has the capability is not the same as demanding payment. Maxliberty:That is what fractional reserve banking via contract doesNo it doesn't. Merely asking if the person has the capability is not the same as demanding payment of any amount. This will be repeated to you until such time as you grasp it.
Maxliberty:The scenario above is fractional reserve banking via contract
Knight_of_BAAWA:No it isn't. Merely asking if the person has the capability is not the same as demanding payment.
Maxliberty:That is what fractional reserve banking via contract does
No you are missing the point. The banks are not doing what you say they are doing. I take it from your post though that you are in agreement with me that contracts that remove the demand requirement for the bank make this form of banking acceptable. So there will be banks in an unregulated banking environment that practice fractional reserve banking which only means that the bank will not have 100% reserves of all deposits. The assets of the bank will be divided up into cash reserves and the value of loans made.
So the notion that there will only be two types of banks, 100% reserves and essentially 0% reserves is false. A 0% reserve bank would be a bank that does not honor any requests for customer funds until the time limit on the deposit expires because the bank is loaning out all of the money.
Maxliberty:Person A puts money in the bank. The bank says we will be making loans with the money you put in the bank.
You're using misleading terminology. Nobody is putting money in the bank here, they're loaning the bank money.
Maxliberty:The bank says if you request your money back we have until 60 days to meet that request. The bank says that if you request some or all of your money back and we have the funds on hand we will approve your request immediately. Person A agrees to those terms.
That's still not FRB, it's a loan contract. And one that would lead any bank to become insolvent very quickly
It would only be FRB if I made a deposit contract with the bank, and they then proceeded to misappropriate the fund.
GilesStratton: Maxliberty:This is the Austrian cult part because what a contract actually says doesn't matter to you. Yes, it does. Maxliberty:The Austrians will label any contract that punches holes in their theory as a demand deposit irregardless of what the actual contract says. No, I have no issue with a loan contract. It's just not the same thing.
Maxliberty:This is the Austrian cult part because what a contract actually says doesn't matter to you.
Yes, it does.
Maxliberty:The Austrians will label any contract that punches holes in their theory as a demand deposit irregardless of what the actual contract says.
No, I have no issue with a loan contract. It's just not the same thing.
Why can't you just address what I am proposing and offer your verdict on whether that woul dbe aloed in your "free society" ? That is my only issue in this post.
Maxliberty:the Austrian cult
Stop that! Are you saying Salin, Selgin, White, Horwitz are not Austrians?
Maxliberty:irregardless
Aaaaarghhhhhh.
Knight_of_BAAWA:No it doesn't. Merely asking if the person has the capability is not the same as demanding payment of any amount. This will be repeated to you until such time as you grasp it.
Maxliberty:No you are missing the point.
MaxLiberty:The bank says if you request your money back we have until 60 days to meet that request.
The bank says that if you request some or all of your money back and we have the funds on hand we will approve your request immediately.
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."
It would be allowed, because as Juan pointed out it's a time deposit (e.g. loan), not a demand deposit. As such it would be allowed. Your "business" would just become insolvent very quickly.
also, despite the fact that the impractical system of banking Max proposes might be 'allowed'; it is decidedly NOT what currently happens in FRB participating banks, and does NOT describe their contracts with their depositors. hence Max's contribution's to this thread have been non-sequiturs.
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
Well, the current contracts are loan contracts, as they exlicitly say so.
Which is only possible due to statist intervention and legal priveleges.
scineram:Well, the current contracts are loan contracts, as they exlicitly say so.
do they? well, I live in the UK, i understand the banks here practice fractional reserve banking, though of course it is not 'federal'.
still does you logic hold here?
http://www.firstdirect.com/savings/savings-account-indetail.shtml
here is an example of a bank offering a straightforward savings account, which can be applied for online.
where does it state that any deposits consititute a loan contract?
i would appreciate a url, and a description of what section to read. or else feel free to qoute what you feel the relevant section is.
The other thing to keep in mind is that banks, in the instances scineram is correct about, do everything possible to obfuscate the true nature of the contract into which one is entering
Juan:Except that the the bank will never have the funds on hand because in order to make a profit the bank must loan whatever money people put in it. So, although your scheme is not technically a fraud, it still is a scam of sorts in that you suggest you might have funds available on demand, but actually you don't.
Why would the bank be required to always have all the money loaned out. In fact it would be impossible for the bank to loan out money immediately after you purchased your CD. So all banks even "time-deposit" banks have some cash on hand. So you are saying any bank that had cash on hand at some point would be insolvent?
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. Once I remove the on demand requirement then fractional reserve banking is no different than any other banking that loans out money.
Also, I am discussing banking in a society without government. Fractional reserve banking covers any bank that loans out money.
GilesStratton: It would be allowed, because as Juan pointed out it's a time deposit (e.g. loan), not a demand deposit. As such it would be allowed. Your "business" would just become insolvent very quickly.
So all banks that had time deposits would become insolvent if they had any portion of the total cash loaned by depositors on hand? Prove that please.
nirgrahamUK: also, despite the fact that the impractical system of banking Max proposes might be 'allowed'; it is decidedly NOT what currently happens in FRB participating banks, and does NOT describe their contracts with their depositors. hence Max's contribution's to this thread have been non-sequiturs.
We are discussing banking in a free society. The approved answers to the OP are that in a free society only two types of banks will exist, 100% reserve banks (demand deposit) and essentially 0% reserve banks (time-deposit). I have simply demonstrated that is in fact false. Through contracts fractional reserve banking is not fraudulent as long as the guarantee of return on demand is eliminated. There is no inherent reason that fractional reserve banking under contract should be disallowed.
Since, even a timed-deposit bank will frequently have some cash on hand the only difference between a timed-deposit bank and a fractional reserve bank is that the timed-deposit bank will not let you have your money back early even if they have it, whereas a fractional reserve bank with contracts will.