In a universal full reserve banking system, is it possible to charge interest on loans? If so, where do the interest payments come from?
Of course. Loans at interest existed long before fractional reserve banking.
exile: In a universal full reserve banking system, is it possible to charge interest on loans? If so, where do the interest payments come from?
If the bank makes a loan to somebody, just because the bank has a full reserve system in place, it doesn't mean that they have to have a 0% interest rate (as advocated by Keynes I believe). The bank is essentially making an investment in you. If you need a loan to help start up a business for the sake of argument, you would pay the interest from the profits of your business the bank helped you start. Even if it was a personal loan to help you out in a rough time or something, when you're employed again or whatever the case may be you pay the bank the interest with your new earnings. It would be the same scenario with inter-bank lending as well.
Anyone know how a full reserve bank would make money?
Would you charge a fee for the storage? Because it doesn't seem possible that you could give interest on your customers deposits unless you were in the business of losing money.
I know you could make money on loans, but where would you get the money to loan out, since you can't draw from your customers deposits?
They come from the borrower, where they always come from.
banned:Anyone know how a full reserve bank would make money? Would you charge a fee for the storage? Because it doesn't seem possible that you could give interest on your customers deposits unless you were in the business of losing money. I know you could make money on loans, but where would you get the money to loan out, since you can't draw from your customers deposits?
Banks would function more as pure depositary institutions and clearing houses for transactions. They would charge fees for these services. Customers could also authorize the loan of their funds in order to generate interest on their deposits. As such, the bank could require restrictions on withdrawals. There would be a clear distinction between demand deposits and funds the bank could invest on behalf of its depositors.
I think you'd actually see two kinds of businesses develop: depositary institutions and loan agencies.
banned:but where would you get the money to loan out
If you were to get money to loan where would you get it? From your savings.
Sound banking doesnt require some dramatic change in the way business is done. It only requires that bankers operate honestly, that is; if they lend $100 away their liquid assets must be reduced by $100.
JonBostwick: They come from the borrower, where they always come from.
The question then becomes where does the borrower get the interest payments from? Whether there is one bank or thousands of banks in a full reserve system it doesn't matter because the total amount of money in the system is physically present somewhere. So let's reduce complexity by saying there is exactly one bank for everbody. So if we have full reserve banking, the bank makes money from either fees,charging depositors, etc.. The bank can then loan their money to a borrower, but where on earth does the borrower get the interest from? It doesn't exist anywhere in the sytem.
exile:The question then becomes where does the borrower get the interest payments from? Whether there is one bank or thousands of banks in a full reserve system it doesn't matter because the total amount of money in the system is physically present somewhere. So let's reduce complexity by saying there is exactly one bank for everbody. So if we have full reserve banking, the bank makes money from either fees,charging depositors, etc.. The bank can then loan their money to a borrower, but where on earth does the borrower get the interest from? It doesn't exist anywhere in the sytem.
You're being confused by the concept of "money." The borrower could pay the interest with anything of value. I could, for example, borrow planting seed in spring and repay the loan with 10% of my crop in fall.
But to answer the question, people could draw down their accounts with the bank to pay the interest. You have assumed, incorrectly, that the bank owns all the gold. If this was true then the bank would have zero depositors.
Edit:
Actually, fractional reserve banking poses a problem in this situation that I've never considered. If this single bank loans out everyone's deposits to themselves, they would have to draw down their account to pay the interest. But that money would no longer be there. The more quickly the bank loans the more quickly its accounts are drawn down, which ends in a bank run.
The borrower gets the money to pay the interest from other people who buy the fruits of their labor. If one were to take out a $100 loan at 10% interest for a year they would full well expect to make more than $10 from the usage of the money over the course of the year else they wouldn't bother to borrow the money.
People buy, people sell and money moves around from market actor to market actor.
JonBostwick:Actually, fractional reserve banking poses a problem in this situation that I've never considered. If this single bank loans out everyone's deposits to themselves, they would have to draw down their account to pay the interest. But that money would no longer be there. The more quickly the bank loans the more quickly its accounts are drawn down, which ends in a bank run.
Oh noes, the compound interest paradox.
*head splodes*
Anonymous Coward: Oh noes, the compound interest paradox. *head splodes*
Really?
I've never paid much attention to FSK.
P.S.
The obvious solution to the situation I described would be to treat the operators of fractional reserve banks that fail because of bank runs as the criminals they are, seizing their personal assets to repay depositors.
(This is perfectly consistent with the limited liable corporation, by the way)
So basically, to create more "money" to pay back a loan, you'd have to deposit less precious comodities (silver/oil etc) in another bank?
bigwig: So basically, to create more "money" to pay back a loan, you'd have to deposit less precious comodities (silver/oil etc) in another bank?
Nah, the commodities are money in themselves. Banks want to be paid in commodities but want to pay you in paper, for obvious reasons.
With fractional reserve money deposited is not actually on hand because it was lent out.
But it reasons that the more money the bank lends out, the more people withdraw from their accounts. Banks lend out demand deposits because they notice their reserves never fall below a certain amount but if the act of lending actually causes their reserves to fall due to increased withdrawals then fractional reserve is self defeating.
Has anyone more well read on Mises than I seen him talk about this?
Why is it necessary to create more money?
Person A takes out a loan and uses it to produce some goods. Persons B, C, and D buy these goods and A uses the money received in exchange to pay the loan interest and principal.
B,C, and D are better off than the were originally since their wants were satisfied and A both has money to pay back the loan and 'profits' to buy goods and services from B, C, and D who could then also buy from each other and A.
Everyone gets to accumulate more wealth (real goods) while no new money is created.
It is not a zero-sum game.
That makes sense anon, but then wouldn't that lead to deflation that could become quite serious after a while? Or would we just do the opposite of what zimbabwe did, and add some zeroes to make it easier to trade, like splitting a stock?
bigwig:That makes sense anon, but then wouldn't that lead to deflation that could become quite serious after a while? Or would we just do the opposite of what zimbabwe did, and add some zeroes to make it easier to trade, like splitting a stock?
Money is a market function. If the market needs more of it to facilitate trade, it will be produced. No central authority needs to "do" anything.
Can someone familiar with the free-market currencies in the industrial revolution in Britian fill us in on how private money/currencies was circulated?
http://www.mises.org/store/Good-Money-P519.aspx
Been meaning to buy this book myself, but havent gotten to it yet.
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