How does credit work in a 100% reserve gold backed system?
If there is no fiat, how can credit be extended?
ViennaSausage: If there is no fiat, how can credit be extended?
Credit comes from savings. If you put $10 in a 1 year time deposit at 50% interest the bank can loan it out at 75% interest. When the person who received the loan pays it back to the bank their profit is the 25% difference and your $10 turns into $15.
ViennaSausage:If there is no fiat, how can credit be extended?
You mean 'expanded'?
This is actually one of the topics I want to research in detail when I get into a Grad program. The previous response is correct, but very simplistic. Money lended by banks would come from specifically fixed instruments like CDs, which hold your money for a certain period of time. However, most CDs today are short-term. 3 months up to 5 years. Under these circumstances, it seems problematic for a bank to fund a 30-year mortgage it has to repay the money in one-sixth of the time or less.
I would theorize that savings accounts would take on a different for under this system. Right now, my savings account is really no different than my checking account, with the exception that I earn a paltry interest rate on it. Under a 100% reserve system I think that savings accounts would have greater restrictions placed on them and may act in a manner similar to a lot of hedge fund agreements in that you'd have to tell you're bank "I want to withdraw $ X.XX from my savings" by a certain date in order to withdraw it at a date in the near future. (Hedge fund/Private equity agreements usually say something like "The investor must notify the general partner 30 days prior to the close of the quarter in order to withdraw on the last day of the quarter).
In addition, I believe that banks would try to raise more fund from investors, via public offerings and debt-issuances. And banks would have a natural check on expanding too rapidly.
This is all theory though, if anyone has a better understanding or other ideas, I'd love to hear more about it.
(Rothbard goes into a simple explanation of 100% reserve and fractional reserve banking in The Case Against the Fed.)
Credit works something like a micro-loan. When you would use a credit card, for example, the bank would decide whether or not to issue you a loan for the amount asked. If the loan were approved, the payment would go through and the bank would have to transfer money from its own reserves (not its clients' accounts) to the seller.
The important thing is that the loan has to come from the bank's equity. The amount of credit in an economy would therefore be limited to amount of savings invested in credit capital.
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