david_z:First of all, anyone who thinks that a free market bank would pay interest on a demand deposit, or a quasi-demand deposit, is kidding themselves. I think the "time deposit" idea is also mostly bunk: look, if you want to loan money to other people, then loan money to other people and accept the risk of possible default. If, on the other hand, you want your money to be available, then you need to forego the possibility of earning a return on it.
Interest on demandable accounts was standard since medieval times.
david_z:The question of whether interest could be charged on loans, we need to agree upon assumptions about monetary growth. If, there is some monetary growth, i.e., the supply of gold (or w/e) increases, then I suppose interest payments are possible. If there is no monetary growth, interest payments are possible only as part of a zero-sum game.Think about it: if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world.
Compound interest nonsense.
scineram: david_z:First of all, anyone who thinks that a free market bank would pay interest on a demand deposit, or a quasi-demand deposit, is kidding themselves. I think the "time deposit" idea is also mostly bunk: look, if you want to loan money to other people, then loan money to other people and accept the risk of possible default. If, on the other hand, you want your money to be available, then you need to forego the possibility of earning a return on it. Interest on demandable accounts was standard since medieval times.
Why would a bank give you interest for keeping your money safe? In full-reserve banking, they can't use the money at all, so demand deposits are a service performed by the bank, which they charge for. They can't loan them out, nor use them in any other way, since the money would be made at least temporarily unavailable, so this would mean that less-than-100% reserve is in effect, which is contradictory to full-reserve.
I misunderstood you. I thought about fractional reserves. You are right of course. It should have been clear to me when you said demand deposits.
Do you think that two kind of businesses must be segragated in FRB world? Otherwise demand deposits will not be fully protected in case of credit losses. Alternatively demand deposits should be kept off-balance sheet the same way as cash in safe deposit box or securities in custodian bank so that assets cannot be claimed from other crediors.
I have not been convinced by any argument I've read so far, that FRB is a viable business model, in a free market.
People put their money in banks in order to save it for the future, or to keep it safe from criminals. They don't put their money in to banks in order to loan it to other people (brokers could certainly accommodate that function, if they so desired), and they sure as hell don't put their money in banks for the sake of bank profits.
What "service" does FRB actually provide? and realistically, how much are people willing to pay for that?
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David Z
"The issue is always the same, the government or the market. There is no third solution."
david_z: The question of whether interest could be charged on loans, we need to agree upon assumptions about monetary growth. If, there is some monetary growth, i.e., the supply of gold (or w/e) increases, then I suppose interest payments are possible. If there is no monetary growth, interest payments are possible only as part of a zero-sum game.Think about it: if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world.
The question of whether interest could be charged on loans, we need to agree upon assumptions about monetary growth. If, there is some monetary growth, i.e., the supply of gold (or w/e) increases, then I suppose interest payments are possible. If there is no monetary growth, interest payments are possible only as part of a zero-sum game.Think about it: if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world.
Sure you can - I borrow $100 off you, and a month later I pay back $8.75; the next month, I pay you another $8.75, and so on. You spend some of your money, so it reenters the system, and I can keep paying $8.75/month until after a year you have your $105 back. As long as you spend at least $5/yr, I can repay the interest (and if I didn't expect you to spend more than $5/yr, I wouldn't have borrowed the money!)
Paul: david_z:... if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world. Sure you can - I borrow $100 off you, and a month later I pay back $8.75; the next month, I pay you another $8.75, and so on. You spend some of your money, so it reenters the system, and I can keep paying $8.75/month until after a year you have your $105 back. As long as you spend at least $5/yr, I can repay the interest (and if I didn't expect you to spend more than $5/yr, I wouldn't have borrowed the money!)
david_z:... if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world.
Ummm, no. There is only $100 in the world. I can't spend $5 more dollars, because you have all of my money.
After the first month I've repaid $8.75 - you can spend anything up to $8.75; let's say you spend $1 each month. Then at the end of the year you've paid $12 and I've repaid the $5 in interest, leaving me with $7 even after you've got all your money back, including interest!
david_z: Paul: david_z:... if there is only $100 in the world, and I own it, I can lend it to whomever I want, but I can't possibly charge 5% on it, because there will never be $105 in the world. Sure you can - I borrow $100 off you, and a month later I pay back $8.75; the next month, I pay you another $8.75, and so on. You spend some of your money, so it reenters the system, and I can keep paying $8.75/month until after a year you have your $105 back. As long as you spend at least $5/yr, I can repay the interest (and if I didn't expect you to spend more than $5/yr, I wouldn't have borrowed the money!) Ummm, no. There is only $100 in the world. I can't spend $5 more dollars, because you have all of my money.
Why does the payment (in both cases) have to be in money? Couldn't it simply be in another resource? What are you trying to prove?
Wait, an example of this is basically a tool-crafter giving some farming tools to the farmer, with the expectation that the farmer will pay it back later in wheat, and he keeps the tools as long as he produces the wheat. Isn't this trade possible in the free market?
Schools are labour camps.
i don't have anything against barter.
All i'm saying is that if money is inflated by debt, the money needed to repay it doesn't exist. The debt cannot be reconciled in terms of the money, but must instead be satisfied with something else.
Depositing banking in FRB world will mainly provide funds transfers for business transactions and easy and safe acess to cash for all users as normal banks. However businesses and savers will be assured that transactional moneys are not under risk because of credit losses on asset side. Also keeping safe from criminals is good function partularly if one accumulated large amount.
when u say FRB do you mean "Full" or "Fractional" ?
I mean full reserve as discussed here
We usually mean fractional reserves by frb. You might want to refer to full reserves as full reserves.
Interes rate doesn't have to be a nominally positive number.
In a constant money supply economy, the interest rate might be nominally 0 or even a negative number depending on the general time preference.
You may loan 100 dollars for 5 years and get back 100 dollars and you would still be paid a real positive interest because 100 dollars 5 years later would have more purchasing power. The law of time preference says that every one would prefer the same good sooner than later. But 100 dollars today and 100 dollars 5 years from now doesnt have to be the same good. Especially where the money supply is constant and demand to hold cash rises due to increased production and population.
You may ask why any one would lend any money instead of hoarding it if the nominal interest rate is 0. And that would be a good question.
Real interest rate is not only made of time preference. It must also include risk premiums.
Hoarding is also risky and costly. There is always a risk of theft and that is why it is always costly to keep valuble stuff in posession. Buying a safe, hiring guards, even paying insurance premiums are all costs.
By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.
Just like keeping a Van Gogh at home by putting an expensive alarm system and paying for insurance. Yes in 20 years the painting would be nominally more valuable but if you calculate the expenses over those 20 years, that increase in value might not be real.
Anyways in a free market economy even gold money supply is increased by mining, although very slowly. Maybe a very dispursed and slow increase of the supply of the gold is one of the subtle reasons while it is pciked as free market money.
ktibuk:the interest rate might be nominally 0 or even a negative number depending on the general time preference.
No, and here's why:
If the increasing value of money assets is so great that banks can loan money out at negative interest rates and not lose anything, they would gain that much more by simply holding on to their money, there would be no reason to loan it out.
If the interest rate were 0% on the loan, you, as a lender, would be just as wealthy once the loan had been paid off as you would have been if you simply held onto the money. Why risk the loan then? The whole point of investing is because the potential ends outweigh the risk.
In "Mystery of banking" M Rothbard suggested to allocate gold amongst banks against M1 ( I arrived to $5166 per ounce). But what happens if CD holders after maturity will want to reduce (M2-M1) in favour of M1 so that M1 increases. How then banks will back these new demand money? Will right solution be to allocate gold against M2 at $28,000 per ounce. Thoughts?
ktibuk:By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded.
If there's a cost to holding and protecting money, then giving it to someone else does not dissolve that cost, it simply transfers it. If you sell an old beat up car to someone, the bad brakes don't somehow get fixed during the transfer. The new owner now has to pay for maintenance and repairs, and he'll account for those costs when he decides how much he wants to pay you for it.
The same is true with money transfers. What you're looking for is a cheaper provider of safeguarding services, not really a loan.
There is little to debate even with zero growth money supply. Bad debt wont' be repaid plus part of equity ( btw nobody mentioned here that equity is also part financing ) will be wiped out so losses will be sourse of interest for good debt and source of dividend for good business. Of course total wealth will only grow via population and productivity growth. I saw US statistics where in 19th century there was (although volitile) deflation -0.4% with real 4+ pct growth.
PeterWellington: ktibuk:By lending one would assume the risk of default but would get rid of the maintenance expenses which would eat at the value of the stuff that is hoarded. If there's a cost to holding and protecting money, then giving it to someone else does not dissolve that cost, it simply transfers it. If you sell an old beat up car to someone, the bad brakes don't somehow get fixed during the transfer. The new owner now has to pay for maintenance and repairs, and he'll account for those costs when he decides how much he wants to pay you for it. The same is true with money transfers. What you're looking for is a cheaper provider of safeguarding services, not really a loan.
Yes but the debtor doesnt want to hold the money. He wants to use it, invest with it. So he doesn't have to face the cost of "holding the money".
So there would be some incentive for people to lend out money even in a zero interest enviroment.
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