Fractional reserve banking question

histhasthai:

Yours is called dogma.

Oh my. Can you explain why bogus property titles and inflation are 'good' ?

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.

Does it help to think of it as a loan to the bank that is callable, subject to the bank's adequate liquidity?

No. What should be done is to describe things as simply and accurately as possible.

If I loan a hammer to the bank, then the bank can only loan a hammer to a third party. However the banks prints three pieces of paper saying "this note will be exchanged for a hammer on demand". So, where will the other two hammers come from ?

Ah, OK. The other two hammers can be purchased in the hardware store ? Using counterfeited money ? Great.

So now the bank prints three more notes - and of course, there are no more hammers to be had. What happens then ?

You see, money makes sense only if it can be exchanged for other goods. Creating money, or worse, money substitutes, does not create the things that money can buy.

I can't really keep arguing against a strawman once it's already been pointed out to you that that is what it is.

There's no strawman. We are talking about the same facts, but you choose to 'interpret' them in a distorted way.

Help me figure out how to explain it so you don't keep bringing it back to a degenerate form of warehousing.

That's exactly what it is.

it's got no relation to warehousing,

Right. 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 - or both.

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?

The gun analogy doesn't hold.

You're missing the point, that no one in their right mind, under free banking, without legal tender law, is going to risk banking with an organization that practices insolvency as their core business competency.

1. We know fractional banking is not sustainable indefinitely.

2. We need to be able to trade the receipts outside the bank as tender in order to float the system in the short term.  You're right, it's not warehousing.  No one would warehouse if they thought they put gold in, and have a 80% chance of getting it out.  Even if the bank would hold it with a premium (interest), the chance of a total loss, likely exceeds the cost to warehouse with a full reserve institution.  I'm no actuary, but as mentioned multiple times, who would insure a company that practiced insolvency as their primary operational imperative.

FRB is not a sound or rational or likely business model without (i) fraud, (ii) legal tender law or as FSK mentioned (iii) limited liability when they go down and the depositors burn.

fsk:

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.

 

Sorry, man, I know how it came about I just wanted a moral justification for it from the FRB advocates as they are the ones that deny that banks operate as a warehousing operation and that money is somehow different from every other good in existence.

I'm one of those 'money is not special' dogma spouting crackpots...

* boinks the cowardly crackpot *

 

liberty student:

You're missing the point, that no one in their right mind, under free banking, without legal tender law, is going to risk banking with an organization that practices insolvency as their core business competency.

Where's the insolvency in the examples I gave?  Nowhere.  Aside from that, I'm not missing the point, I consider it an open question of how people will balance the risk/beneift analysis.

liberty student:

1. We know fractional banking is not sustainable indefinitely.

You assume it, completely without basis, as an axiom that precludes any actual analysis of whether it is true or not.  You confuse what the Federal Reserve Bank does with fractional reserve banking, and cite the former as an historical example of the latter.

liberty student:

FRB is not a sound or rational or likely business model without (i) fraud, (ii) legal tender law or as FSK mentioned (iii) limited liability when they go down and the depositors burn.

You're just making that up, or parroting what somebody told you. Again, looking at my example, where do the depositors get burned by losing their cash?  Where's the fraud?  And legal tender laws would not protect it, they would undermine it by insulating it from market discipline, and make it into what you fear it is.

 

 

histhasthai:

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.

Yes, so the hammer guy has 50 GO to spend. And I have notes theoretically worth 100 GO - which I can also spend ? If I can 'spend' them, it turns out that your scheme has magically converted 100 GO into 150 GO ?

Anonymous Coward:

I'm one of those 'money is not special' dogma spouting crackpots...

It's not crackpot, money is not special.  It has characteristics unique to it, as does every other commodity, that suit it to a particular purpose.  It's an economic good traded in the market not much differently than corn or copper, except in the mechanics of it. The one thing that might be considered "special" about it is that it is never ultimately consumed. But it's not unique in that - water and energy, for example, are never consumed, either.  It's the fact that the purpose it is suited for is at the core of all economic activity, and that it use is so abstract, that lead people to have mystical fears about it, and dogmatic beliefs in what it should and should not be.

 

 

 

 

Juan:

it turns out that your scheme has magically converted 100 GO into 150 GO ?

If you're arguing that it's inflationary, does it mean you've at least given up arguing that it is fraud or insolvency? Cause I'll address that, but not if you're just going to come back later, after I successfully counter it, with the fraud and insolvency again.

But not tonight in either case, it's late.

 

 

 

 

 

This is semantics - inflation is just the other side of the same coin...no pun intended. Okay, we'll continue tomorrow.

histhasthai:

It's the fact that the purpose it is suited for is at the core of all economic activity, and that it use is so abstract, that lead people to have mystical fears about it, and dogmatic beliefs in what it should and should not be.

What, like sound?

All money really does is to let someone trade some goods or labor for another good or someone else's labor and by printing up some fradulent claims on either of these things you are merely redistributing wealth from the producer of the goods or services to the person with the magic bean tree.

Simple as that.

What you leave out of your examples is the market pricing on this money substitute that you produce through FRB that will almost certainly reflect the perceived values of the backing commodity. If you have 50GO in reserve and print up 150GO the market will tend to price the total 150GO at the backing 50GO since they know that's all that it is really worth.

Or at least that's how it used to work when people traded in different currencies and there were no restrictions on the money changers.

Juan:

hjmaiere:

Here's something I've been thinking about for the last few months: What if there were people who understood Austrian economics just as well as the scholars associated with the Mises Institute, but had no interest in its moral implications?

You mean, people like Greenspan ?

But I suspect Greenspan is not a true member of the plutocracy. I suspect he is merely a professional intellectual in their employ. The people who really decide things seem strangely anonymous. Witness the massive military bases being built in Iraq that have been on the drawing board since at least 1996. Someone somewhere simply decided that this was going to happen. (And no, the neocons are not the ones in charge. They are also merely profesional intellectuals in the employ of the plutocracy.)