Whether you're a free banker or one who would consider fractional reserve banking to be a punishable offense, where do you draw the line between legitimate banking practices and cycle-generating credit expansion? For instance, if instead of there being warehouse receipts that said "redeemable for 10 ounces of gold", the phrasing "redeemable for 10 ounces of gold upon availability" were used, would it be permissible for a bank to loan out the money of those depositors who were provided with receipts with the latter phrasing? The "upon availability" signifies that, while the bank still owes the depositor money, if not all the money is there, the depositor will have to wait until loans are called and money is freed up before he/she can withdrawal. It would not mean the bank would have to close up shop due to insolvency and failure to meet its obligations, since the obligations weren't strictly demand deposits, but rather demand deposits upon availability of funds. A bank run needn't ruin the bank the day it happens, though the bank would quickly lose its reputation after the fact and would likely have trouble attracting future business.
So it seems to me in this case that the contract between the bank and the clients is clear -- the money is there, eventually you'll be able to take it out, though in most cases you can take it out right away. The receipts don't claim to be backed by immediately-withdrawalable money, but likely, people will treat the receipts as a money substitute, and that's really all it takes to generate a business cycle, since the money supply (including the substitutes) has increased and will likely be loaned out to businesses. All you anti-free-bankers out there, would you consider such a system to be fraudulent? How can you tell which banking practices are considered fraudulent, since whatever people consider to be money-substitutes is purely subjective? Certainly there are cases where we can all agree that a banking practice is not fraudulent and does not generate a business cycle, but some cases are less obvious. What if I have a CD that offers a higher IR than a savings account, but I have the option (at some penalty) of taking out the money before the maturity date -- is that to be considered credit expansion? If I consider the money I can extract from the CD whenever I'd like to be money "on hand", is this yet again an example of credit expansion? Where do you draw the line? It's seems like there are so many insurmountable gray areas to this, and I don't simply want to make a rule that any practice that generates a business cycle is fraudulent, simply because the mere existence of business cycles is troublesome to me.
It is actually quite simple if you look at who owns the money when determining if something is money. In the case of a checking account where the bank lends 90% of the money hoping that the holder of the checks will not cash them is the case where there are two owners of the money: 1. Check write and 2. Borrower. This check can be used as a substitute for money. Now if as you say, I agree to the term that the money may not be available for withdraw then I do not own the money and my checks I write on that money may not be paid by the bank. This future title is not money as I can not transfer ownership to you as the check I write may not be paid. It may be considered credit, but not money.
Exactly right. If you agree that you can not redeem at your will, than there is no problem, as no inflation of the amount of money occurs and the banker won't commit fraud if he lends part or all of your money to a third party.
In the begining there was nothing, and it exploded.
Terry Pratchett (on the big bang theory)
nhaag: If you agree that you can not redeem at your will, than there is no problem, as no inflation of the amount of money occurs and the banker won't commit fraud if he lends part or all of your money to a third party.
If you agree that you can not redeem at your will, than there is no problem, as no inflation of the amount of money occurs and the banker won't commit fraud if he lends part or all of your money to a third party.
How can you say there's no inflation? Even if the receipt has an availability clause, if people still consider it to be a money substitute (and what people consider to be a money substitute is purely subjective), then there is inflation of the money supply that occurred not due to an increase in the money commodity. It just seems like the only difference in fractional reserve banking with this system vs. what we had a century ago is that this system is more honest, and banks would not have to immediately close if they ran out of money in the vaults.
The difference is contractual. If you've stored your money in a timed deposit, meaning that you cannot lay claim to it until the contract has been fulfilled (until X period of time has passed) then that money cannot be demanded. You can sell the contract, surely, for its present value (or whatever value seen fit by both the seller and the buyer), but the new owner would still be bounded by the original contract's terms with the bank, meaning that the new buyer would not have present claim to that money. The claim has just been transferred. In a checking deposit the fact of the matter is that there is no contract forcing the holder of the contract to leave his or her money in the bank until the contract has been fulfilled. No, both the bank and the depositor are using the money presently.
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That is what the econometric folks thought when they invented the M2 and M3 measurements of the amount of money vs the M1 that only includes demand deposits and the like. The reality is that when there is only one person with ownership title to property at any given time then there is only one person who can use the property. Inflation comes from multiple people exercising ownership rights over the same piece of property. The example of the person writing a check is the best:
Example 1 Fractioned demand deposits:
1. Person A deposits money 1000 into checking account.
2. Bank loans 90% of money to person B.
So A can write a check on 1000 while B can buy something for 900. The 900 is now new money.
Example 2 Fraction non-demand deposts:
1. Person A deposits money 1000 into CD with large early withdraw penalty.
2. Bank loans 100% to person B.
So because A can not use the money but B can. So there is no new money even though the bank loaned all of the original deposit.
Now A can get the money but not easily. If A withdraws the money (The bank has other reserves or takes a loan from the Central Bank) and takes the penalty then you now have two owners of the same piece of property, the original 1000 minus the penalty.
So the money is multiplied (Good to Keynes and Monetarists, Indifferent to Austrians) when there are multiple titles to the money.
Note: The most free banking system to ever exist in Scotland using gold and silver as money had reserve ratios of 2 to 5 percent far below the 10 percent banks have now. The reason was two fold: It is cumbersome to hold coins and the banks were very careful about loan terms ending where they would have to pay depositors back. So the reserve rates may have been 2 to 5 percent but would go up as the probability of withdraw became greater.
Alex m: How can you say there's no inflation? Even if the receipt has an availability clause, if people still consider it to be a money substitute (and what people consider to be a money substitute is purely subjective), then there is inflation of the money supply that occurred not due to an increase in the money commodity
If someone tried to give me a check saying "$500 payable from Gold-in-Sacks Bank, depending on availablity", I wouldn't accept it as a money substitute.
If the check says "$500 payable from Gold-in-Sacks Bank", and they are a fractional reserve bank, the bank is probably commiting fraud.
baxter: If someone tried to give me a check saying "$500 payable from Gold-in-Sacks Bank, depending on availablity", I wouldn't accept it as a money substitute. If the check says "$500 payable from Gold-in-Sacks Bank", and they are a fractional reserve bank, the bank is probably commiting fraud.
Maybe you wouldn't accept it, but that doesn't stop everyone else from accepting it. You're wise enough to know that it's a lottery ticket, but that doesn't stop the masses from saying "Oh cool! money!". Surely many will wise up and certainly the value of guaranteed-redeemable money substitutes will be greater than the lottery tickets, but so far as there are people less wise than you (and there are many) that could care less about the words "upon availability" on a bill, the banks printing these bills will be increasing the money supply.
Now I know that the competing banks will be quick to try to redeem the bills for specie and the bills will quickly become worthless if word gets out that the bank can't redeem the bills, but before that happens, there's still some cycle-generating potential due to the printing of unbacked "money" upon availability.
I'm still not sure how the person buying the certificate has present claim to the money inside the bank. In effect, what would happen is that the original holder would probably sell the certificate at the value of the money deposited, and the new owner would make the interest as profit (or something similar). The actual money in the bank is still only claimed by one person, not two. It's just that the new owner of the certificate has traded some of his present money for a claim on future money of greater value (interest). The actual money that was deposited in a time deposit is still only claimed by the bank.
Jonathan M. F. Catalán: I'm still not sure how the person buying the certificate has present claim to the money inside the bank. In effect, what would happen is that the original holder would probably sell the certificate at the value of the money deposited, and the new owner would make the interest as profit (or something similar). The actual money in the bank is still only claimed by one person, not two. It's just that the new owner of the certificate has traded some of his present money for a claim on future money of greater value (interest). The actual money that was deposited in a time deposit is still only claimed by the bank.
I'm not saying the contract isn't awkward. I'm not saying I'd patronize such an institution. None of that stuff really matters for the problem at hand, which is, to reiterate, the problem of banks tinkering with the money supply with demand-upon-availability-deposits combined with the masses' subjective valuations of these receipts as money substitutes. I put forth that such a system should be permissible since the agreements, strange as they might be, are voluntary, but that such a system can generate business cycles. What are your disagreements?
Alex M: I'm not saying the contract isn't awkward. I'm not saying I'd patronize such an institution. None of that stuff really matters for the problem at hand, which is, to reiterate, the problem of banks tinkering with the money supply with demand-upon-availability-deposits combined with the masses' subjective valuations of these receipts as money substitutes. I put forth that such a system should be permissible since the agreements, strange as they might be, are voluntary, but that such a system can generate business cycles. What are your disagreements?
In that case I agree with you, although DD5 makes the case that although the two parties that signed the contract may agree on the principles, the third party (or the people affected by the inflation) are the ones being defrauded.
Alex M:Maybe you wouldn't accept it, but that doesn't stop everyone else from accepting it. You're wise enough to know that it's a lottery ticket, but that doesn't stop the masses from saying "Oh cool! money!".
"The masses" are still unlikely to accept it at full face value. $500 depending on availability from a not well trusted bank may trade as $450 depending on availability from a well trusted bank which may trade as $400 on demand from a trusted bank.
Not all money is the same.
The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.
In my opinion, the differences will be philosophical. The approach based on subjective value and voluntary relations, is not identical to the approach based on objective value and natural-rights.
Natural-rights theory is not centered on the concept of voluntarism. It is centered on a theory of right and wrong. In natural-rights, things that are voluntarily agreed on can none the less be prohibited on account of their wrongness according to a given natural-rights interpretation.
Most of the objections to FRB come from an objective value and natural-rights perspective.
The differences in the debate or discussion are not solvable because the objective value/natural-rights approach constitutes an entirely different world-view from the subjective value/voluntary relations world-view.
"It would be preposterous to assert apodictically that science will never succeed in developing a praxeological aprioristic doctrine of political organization..." (Mises, UF, p.98)
Natural-rights theory is not centered on the concept of voluntarism. It
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