Fractional reserves and car-pools

I came across an interesting notion on savings & loans FRB that I would appreciate some thoughs on.

This only applies to savings & loans and not to increasing the supply of high-powered money.

The idea was that a savings & loans bank that engage in FRB operations having all the cash readily avaliable for saver and loaner at the same time is in fact just like a car-pool. That would mean that the FRB lending cycle does in fact not increase the money supply, it only lowers the demand for money.

Just like extensive use of car-pools would lower the demand for cars, and thus also lower the price of cars. (Obviously cars unlike money do get consumed eventually, the production would go down and the price back up. But that cars expire don't change the principle. If this was done to money the price of money would drop until all the high-powered money where utilized at peak effencicy.)

So am I missing some vital difference between FRB savings and loans operations and A, B and C putting a bunch of money into an economic organisation agreeing on basically: "If there happens to be money there when you need it. Use this as you see fit and put it back when you are done with it."

Todays banks leave the first part of that sentence out ... but suppose banks that didn't.

Zeddicus:

The idea was that a savings & loans bank that engage in FRB operations having all the cash readily avaliable for saver and loaner at the same time is in fact just like a car-pool. That would mean that the FRB lending cycle does in fact not increase the money supply, it only lowers the demand for money.

The flaw in your logic is that if the bank has "all the cash readily available for saver and loaner at the same time," it is not fractional reserve.  By definition.

Fractional reserve protections apply to demand deposit accounts.

For savings accounts, sure, it's like you say.

So they can have savings account with withdrawls only limited by availiability of funds and it is still not FRB?

JackCuyler:

The flaw in your logic is that if the bank has "all the cash readily available for saver and loaner at the same time," it is not fractional reserve.  By definition.

It would be the same money booth parties have full access to. The credit is paid in high-powered money from the banks reserves and the person with the savings account is still allowed to withdraw at any time except if the banks reserves are low, in which case he would have to wait for the loan or another to be re-paid.

If the savings account can be liquidated instantly with a phone call, click on the web or at an atm.
I don't see much of a difference between such a savings account and a demand deposit account, or rather you could say there are no real demand deposit accounts today. Just easily liquidated savings accounts ... so if the banks rebranded everything to savings accounts it would be ok?

It has nothing to savings vs checking.  I misundersood what you meant by "all the cash readily available for saver and loaner at the same time."  I took that to mean that the cash to cover all demands, loans and deposits, was readily available, which is 100% reserve.  I didn't realize you meant the same cash was available to two or more parties.

Zeddicus:

So am I missing some vital difference between FRB savings and loans operations and A, B and C putting a bunch of money into an economic organisation agreeing on basically: "If there happens to be money there when you need it. Use this as you see fit and put it back when you are done with it."

The difference is, the car is a commodity.  You can do anything with it unless you actualy have it.  On the other hand, checks can be spent in the same manner as cash.  When the FR bank takes you deposit and loans out 90% of it, you and the borrower each are able to spend the checks as if you had the cash, even though 90% of that cash does not exist.

Zeddicus:

Todays banks leave the first part of that sentence out ... but suppose banks that didn't.

Yes, suppose the banks said, "When you deposit money here, you may not be able to take it out until we're done with it."  I'm sure that would go over well.  A better approach, in my opinion, is the CD.  Allow the bank to use the money for a fixed time, and then return it with interest.

JackCuyler:

The difference is, the car is a commodity.  You can do anything with it unless you actualy have it.  On the other hand, checks can be spent in the same manner as cash.  When the FR bank takes you deposit and loans out 90% of it, you and the borrower each are able to spend the checks as if you had the cash, even though 90% of that cash does not exist.

Mm, yeah as long as check payment are made within the FRB system I don't really se how it could be stopped though. If you are to buy something outside the FRB bank (or collaborating FRB banks) you need to first convert it to cash or the payment won't be accepted.
Well as long as you tell them the check is only a claim against a pool that may or may not have cash availiable when you try to use it at least...

But in principle this doesn't seem any different from paying for something with any financial asset.
The check is sort of a short-term loan contract that may or may not be redemable to cash instantly, but it will be at some point in the near future. If the buyer is willing to take it then fine, just as if he is willing to take a bond ..... or my car-pool membership, which may or may not give him access to a car when he wants it.

JackCuyler:

Yes, suppose the banks said, "When you deposit money here, you may not be able to take it out until we're done with it."  I'm sure that would go over well.  A better approach, in my opinion, is the CD.  Allow the bank to use the money for a fixed time, and then return it with interest.

Todays banks don't give enough information about what they are doing that is pretty clear. Current accounts are opened for the purpose of having faster, more secure and easier access to cash then carrying it with you wherever you go. And the banks lends it out...

What I am interested in here however FRB operations under a free system. It seems very difficult to just classifly it as fraudulent by default. This car-pool reference debunked my belif it was. It would also mean that the FRB cycle don't apply to savings and loans and no money is actually created when this is done even if the price of money is drived down.
Even if they in practice work just like demand deposit accounts, the savings beeing reedemable to cash instantly in most cases.

The system could even be set up so that you can't withdraw before the fixed date. But you can take out a loan using the savings for security if the bank has cash reserves left.  When the date is reached the loan and interests are cleared. This could also make it about as easy to spend your savings instantly as FRB demand deposit accounts does...

Zeddicus:

as long as check payment are made within the FRB system I don't really se how it could be stopped though. If you are to buy something outside the FRB bank (or collaborating FRB banks) you need to first convert it to cash or the payment won't be accepted.
Well as long as you tell them the check is only a claim against a pool that may or may not have cash availiable when you try to use it at least...

If I were buying a car from you, would you accept my check if i told you that?

Zeddicus:

But in principle this doesn't seem any different from paying for something with any financial asset.
The check is sort of a short-term loan contract that may or may not be redemable to cash instantly, but it will be at some point in the near future. If the buyer is willing to take it then fine, just as if he is willing to take a bond ..... or my car-pool membership, which may or may not give him access to a car when he wants it.

That is completely different, as the agreement is up front.  You know that you may not be able to have a car on a given day, as it's implicit in the agreement.  The agreement with the bank, on the other hand, makes no such claim.  If a bank is unable to give me the money I put in a demand account, that is fraud.  We agreed I could have it on demand, and they are not holding up their end.

Zeddicus:

What I am interested in here however FRB operations under a free system. It seems very difficult to just classifly it as fraudulent by default. This car-pool reference debunked my belif it was. It would also mean that the FRB cycle don't apply to savings and loans and no money is actually created when this is done even if the price of money is drived down.

It's not just that the price of money is driven down.  When you deposit $1,000 in a bank with 10% reserve, the bank lends out $900 by adding $900 to the borrowers demand accounts.  There is now $1,900 in total in said demand accounts.  Since checks are spend and accepted as cash, I don't see how you can say there hasn't been a monetary expansion.

That being said, in a free system, one with competing banks, the practice is bound to be limited by competition and the fear of the bank run.  If you take out a loan and spend it writing checks, the recipeints will of course either attempt convert those checks into cash or deposit them in their own accounts.  If the deposit is made in a competing bank, that bank will demand the cash from the first bank.

The bank that tells its customers their money might not be available is not going to do as well as the bank that guarantees availability.  ("Oh, so my rent check bounced because you don't have enough reserves.  That's okay.  I'm sure my landlord will understand...") The banks that cannot back up those guarantees, either to other banks or its own customers, will quickly go insolvent.

Zeddicus:

The system could even be set up so that you can't withdraw before the fixed date.

Do you realize that you are describing something that already exists, namely a CD?

JackCuyler:

If I were buying a car from you, would you accept my check if i told you that?

Yes, if the value of the asset was good enough and the risk of loss to maturity minimal. And I don't need to buy another car right away with the money. Obviusly I would take a premium for the risk it might not be 100% convertable to cash instantly.

JackCuyler:

That is completely different, as the agreement is up front.  You know that you may not be able to have a car on a given day, as it's implicit in the agreement.  The agreement with the bank, on the other hand, makes no such claim.  If a bank is unable to give me the money I put in a demand account, that is fraud.  We agreed I could have it on demand, and they are not holding up their end.

Banks do reserve the right to delay sevice in all kinds of situations though if you read the fine print. But yes demand deposts accounts today are fraud we agree. I am still supposing a system where everyone was fully informed about the products.

And trying to figure out how that could still be fradulent and create money expansion.

JackCuyler:

It's not just that the price of money is driven down.  When you deposit $1,000 in a bank with 10% reserve, the bank lends out $900 by adding $900 to the borrowers demand accounts.  There is now $1,900 in total in said demand accounts.  Since checks are spend and accepted as cash, I don't see how you can say there hasn't been a monetary expansion.

Ok, and this would be different from savings accounts with free withdrawals subject to availibilty in the sence that the total present spending in the economy from the savings & loan system still could never be more then 100% of what is deposited. Right?

But suppose I buy a 10-year bond for $1000. The company that issued it gets $1000 cash to spend. And then I find I need something really bad so I offer the bond as payment. Whoever I am buying from will add a premium to accept this kind of payment.

But if the bond was perfectly safe, had a nice little interest rate and was with 99.9% certainty instantly convertible to cash in the bondmarket then this premium would be very very small.

If everyone where to realize this specific bond in practice works just as well as using cash the use of these bonds as money would sour.

Isn't that just what has happened with checks?

And the FRB today is a very stable system. The banks maintain it by lending between eachother, and the more clients the more stable it will get since predictions from gathered probaility data of how large percent of the money will be used at any one time get even more acurate.
It is quite rare that the banking system get a infusion of new high-powered money to be able to sustain itself.

JackCuyler:

Do you realize that you are describing something that already exists, namely a CD?

Yes, it would in a sence be just like opening a CD and then forfeiting it taking it out in advance. But I was trying to completley seperate the savings and loan part of the trasaction, by introducing this "counter"-loan on it instead. Still it would be very much like the way demand deposit accounts work today.
In order for the money not being avialiable on demand even if the bank already lent it out EVERY bank in the market have to have completley depleted reserves. This is really bloody unlikley. And if it works that well people wouldn't want to have much real demand deposits at all.

Instead these savings balances would start to be circulated as a means of trade because they are so close to being actual cash.

The risk of a run against all banks is pretty small, and even if it happen you will eventually get the money back when the bank can liquify its assets.

A bank run would also be even less likley if private gold based money was used. Because if this is the case the gold will still have it's value when the bank finally reclaims there outstanding loans. So you can afford to wait.

Unlike today where a massive bank run like this would be solved by printing more high-powered money which would make all the money you havn't managed to spend worthless, even if they are hidden in your bed rather then a bank account....