I was reading a debate between two people who disagreed on whether fractional reserve banking was bad. I wanted to get to the root of why it is bad. Would it be correct to say it's only bad to the extent that it requires the central bank to print more money to meet redemption requests? For example, if I deposit $100 in a bank that lends $90 of it to someone who spends it on a product and the seller of the product then deposits the $90 in another bank, as long as I don't redeem my deposit before the loan is repaid, the central bank doesn't have to print money and lend it to my bank in order to repay me, right? Or is this an impossible situation because the loan cannot be repaid without some sort of monetary expansion in order for the borrower of the $90 to cover the interest that accrues on the principal? Thanks!
liberty student: I am talking about FRB, which means that receipts EXCEED reserves, not receipts cannot access reserves at this time.
The money that was loaned out is an asset, and the aggregate of assets, reserves plus loans, still exceeds reciepts. There's no insolvency there.
Of course it's still a default to not honor redeemability, as Juan pointed out, and that is a risk that depositors would be taking. And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets. But the risk is not the complete or even partial loss of capital, it is the loss of having your money now instead of later. To talk of insolvency or the permanent loss of your capital is simply wrong.
The state won't go away once enough people want the state to go away, the state will effectively disappear once enough people no longer care that much whether it stays or goes. We don't need a revolution, we need millions of them.
histhasthai:The money that was loaned out is an asset
Yeah, an asset of the person who deposited the money in the bank under the promise of 'redeemable upon demand'.
Perhaps you can explain how bailment law doesn't apply to banks and how the managers are morally able to do whatever they want with their customer's property irregardless of their individual wishes.
If someone wanted a time deposit then it should be safe to assume they wouldn't deposit money into their checking account, right?
histhasthai:And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets.
The bank would 'suffer' by having to liquidate their fraudulently acquired 'assets' in order to return them to their rightful owners?
Isn't that, you know, their job?
histhasthai:To talk of insolvency or the permanent loss of your capital is simply wrong.
Yeah...that's never happened before.
Isn't that the whole point of FDIC? To give the people 'faith' in the system so they won't race to the bank to make sure they aren't the ones who lose their capital when the bank goes titsup?
histhasthai:The money that was loaned out is an asset, and the aggregate of assets, reserves plus loans, still exceeds reciepts. There's no insolvency there. Of course it's still a default to not honor redeemability, as Juan pointed out, and that is a risk that depositors would be taking. And the bank should and would suffer for it, possibly to the extent of having to liquidate the entire bank assets. But the risk is not the complete or even partial loss of capital, it is the loss of having your money now instead of later. To talk of insolvency or the permanent loss of your capital is simply wrong.
100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency
It's that simple. If 500 ounces of receipts circulate, and there are only 100 in reserve, 100 receipts come back and claim all of the reserves, how is this not an insolvent situation?
I feel like we are speaking two different languages.
I would make a great bureaucrat. Wanna see? Click here. It's fun.
liberty student:100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency
You think the bank just gave them away? No, they acquired assets in the form of loans. You're just being obstinate. I pretty much take that as having no real argument, and refusing to admit it.
liberty student:I feel like we are speaking two different languages.
Yup. Yours is called dogma.
AnonymousCoward: You've apparently missed a whole chunk of this thread.
histhasthai: Yours is called dogma.
Juan:Can you explain why bogus property titles and inflation are 'good' ?
What, and hijack the thread?
They're not bogus property titles, it's you (among others) who keep insisting that what we're talking about is warehouse banking plus fraud. I can't really keep arguing against a strawman once it's already been pointed out to you that that is what it is.
Does it help to think of it as a loan to the bank that is callable, subject to the bank's adequate liquidity? Help me figure out how to explain it so you don't keep bringing it back to a degenerate form of warehousing. It's not warehousing, it's got no relation to warehousing, and if you insist on trying to stuff it into the warehousing model, you're going to keep making nonsense claims about fraud and insolvency.
Anonymous Coward:Perhaps you can explain how bailment law doesn't apply to banks and how the managers are morally able to do whatever they want with their customer's property irregardless of their individual wishes.
After the late 19th century, banks were allowed to use limited liability incorpation. This means that if a bank was insolvent, the depositors got shafted in bankruptcy court, if the bank's assets were insufficient to pay depositors. Fractional reserve banking is inherently unsound, so a newspaper printing a rumor of a bank's insolvency is sufficient to cause insolvency.
In 1933, President Roosevelt confiscated the gold from US citizens. If you deposited a gold coin in a bank in 1932, you were unable to withdraw it after President Roosevelt seized the gold.
In both cases, State violence protected bank management from the consequences of their fraud. The first example was limited liability laws. The second example was an outright seizure of property by government.
According to common law or natural law, bank owners and management would be personally liable for any shortfall. In a free market, given the choice of depositng gold in a fractional reserve bank or a sound bank, most customers would choose a sound bank.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
Does it help to think of it as a loan to the bank that is callable, subject to the bank's adequate liquidity?
I can't really keep arguing against a strawman once it's already been pointed out to you that that is what it is.
Help me figure out how to explain it so you don't keep bringing it back to a degenerate form of warehousing.
it's got no relation to warehousing,
Juan:What should be done is to describe things as simply and accurately as possible.
OK. You deposit 100 GO in my bank, demand deposit, knowing full well that I will have only a 50% reserve, and so there is a chance I will default on your demand and convert it, by the terms for default in our contract, to a time deposit, along with whatever penalty the contract provides (out of my own assets or the interest recieved from the loan). So far no fraud, right? Now, I loan 50 GO to a guy who wants to buy a hammer. It's the gold you deposited, but I told you that is what I was going to do with it, so still no fraud. There is now 100 GO in notes out there, your original note only, 100 GO liablility on my books. My assets are 50 remaining GO, and the hammer guy's obligation to repay 50 GO, but at a later date. No insolvency, only a risk of immediate demand default that you were aware of going in, and no risk to your principle.
Let's try it another way. You deposit 100 GO and get a note. I loan to the hammer guy a demand note for 100 GO. My liabilities are now 200 GO in notes out there. My assets are 100 GO - since I gave none of it away - plus the 100 (GO or notes) obligation from hammer guy. 200 GO (equivalent), total assets, still no insolvency, still 50% reserves and the same chance of default. (If he pays back with the note I gave him, instead of gold, it's just a wash, but his interest would have to be paid in gold or redeemable notes from another bank in this constrained example.)
Either way, if I loan out any more of the gold, or issue any more notes, now there's fraud. My reserve is below 50%, violating the contract with you and the others I've issued notes to.
It works the same at whatever reserve we want to talk about. Obviously, 0% reserve is no longer risk, but a certainty, since the first withdrawal would be defaulted on. The exact reserve level chosen would be arrived at by the market, but whatever it is, it works the same way.
Your example of my issuing notes willy-nilly without regard to what my reserves actually are is a violation of the contract, and is fraud. It's a strawman, because the premise here is a contractually set minimum reserve, and that the contract is honored by the bank. If you assume otherwise, there's no issue to discuss here.
Juan:So, the fact that FRB came about as a fraudulent form of warehousing is either historical fantasy, or has really nothing to do with the matter at hand
The latter, though I don't concede that it came about strictly through fraud. Regardless, the fact that it was used fraudulently does not mean that it is inherently fraudulent. People write bad checks, does that mean that checks are inherently fraudulent? Anybody can find a way to use any financial tool for fraud, it doesn't mean the tool is fraudulent. Your claim smacks of the anti-gun argument, guns are used to murder people, so guns are bad.
histhasthai: liberty student:100 ounces of gold. Fractional reserving at 10%. 1000 ounces of receipts. Once more than 100 receipts are in circulation, insolvency You think the bank just gave them away? No, they acquired assets in the form of loans. You're just being obstinate. I pretty much take that as having no real argument, and refusing to admit it.
So a bank can make money appear out of thin air and give it to someone to buy a house and you think that the house backs this new money?
Since the house existed prior to the magical money production this didn't create any new wealth so the only valid argument is that the bank produced a fraudulent claim on the house since they didn't actually own the assets that were used to exchange for it nor did these assets exist prior to the bank printing them up.
Doesn't really fit into the theory that the only way wealth can be created is through mixing land with labor does it? But I suppose that's just dogma too, isn't it?
Not even mentioning how this inflationary pressure causes all the other buyers of houses who don't have access to a magical money supply source to have to pay more as they have to exchange real goods for real goods instead of wealth redistribution magic beans for real wealth.
histhasthai:AnonymousCoward: You've apparently missed a whole chunk of this thread.
Yup, my Real Bills Doctrine Bullsh*t Detector™ went off and I just had to jump in...
So, what'd I miss? A moral justification for fraud or how banks aren't morally obligated to follow common law?