running a google search for "banks do not lend deposits" yields only one link on the first page of results (at the bottom) that even mentions this.
I see that in today's daily article in the speech given it is mentioned that banks keep a tiny fraction of the deposits and lend out the rest...
I thought austrians were aware of the fact that banks do not lend deposits. deposits cover some small fraction of the checkbook money that loans create.
Has anyone found a decent explanation of fractional reserve banking online?
just read the relevant parts of The Mystery of Banking by Rothbard and he makes the "out of thin air" fallacy. A loan does not create value out of thin air, it is a piece of paper that says "I will pay you x dollars over y time". Depending on who signed it this piece of paper has a lot of value. How can an austrian say that such a contract isn't valuable?
nazgulnarsil:How can an austrian say that such a contract isn't valuable?
A loan made in a 100% reserve system is the transfer of property rights to real savings - it represents real goods and services: real wealth.
A loan made in a fractional reserve system represents fictional, nominal wealth: "wealth" created "out of thin air" (mostly so - a certain small portion of it represents real wealth).
nazgulnarsil: just read the relevant parts of The Mystery of Banking by Rothbard and he makes the "out of thin air" fallacy. A loan does not create value out of thin air, it is a piece of paper that says "I will pay you x dollars over y time". Depending on who signed it this piece of paper has a lot of value. How can an austrian say that such a contract isn't valuable?
Anything is valuable. It's more about what the value brings in returns when it comes to the economy. Too much credit signed off as loans creates bubbles. Where's all the money coming from in the first place to pay off these loans? Are there more loans than actual money in circulation? I say yes in FRB. Without a government to back up or a Federal Reserve to push the button to create more money to cover the bank's balance sheets lot's malinvestments occur and loans are not paid back as promised. Foreclosures on houses or what have you - happens. FRB leads to bubbles. It can go on, but it is not efficient for the market and leads to increased risk to stay afloat as the increasing non-paid loans hurt the bank (lender).
That's my take anyways.
"I used to see a mountain as a mountain.. Thereafter.. when I saw a mountain; lo! it was not a mountain.. yet now of final tranquillity: I see a mountain just as a mountain as I used to.." - Master Yuan; molon labe
funny you mention "searching the internet for truth". My 69 year old dad has NO idea what the internet is. He asked me one day, "How do you know it's telling the truth?" He thought the internet was one big computer that you could ask questions.
no disrespect intended toward my dad. He certainly has more understanding in certain regards about things I'm clueless about. Just funny to have a little insight about something and then witness someone else's total cluelessness.
"The best way to bail out the economy is with liberty, not with federal reserve notes." - pairunoyd
"The vision of the Austrian must be greater than the blindness of the sheeple." - pairunoyd
if the vast majority of people are in fact paying back their loans I don't see how this affects wealth. it is merely a mutually beneficial exchange between people with differing time preferences. of course if a bank makes loans that aren't paid back the bank should pay the price.
nazgulnarsil: just read the relevant parts of The Mystery of Banking by Rothbard and he makes the "out of thin air" fallacy.
just read the relevant parts of The Mystery of Banking by Rothbard and he makes the "out of thin air" fallacy.
"out of thin air" fallacy? Is this thread now going to become FRB fraud or not fraud part III?
As I believe even Selgin agreed in the previous thread from the other day, when the multiplier effect is present as a result of credit expansion in an FRB system, money IS created "out of thin air". It is not a fallacy. Selgin I think claims FRB in free banking can exist without the multiplier effect. At least that is what I think he is saying. If not, I hope he corrects me so I don't spread false rumors.
You cannot loan something (wealth) that you do not have, or in this case saved. Do not be so biased against this concept. Rothbard shows that this is indeed the case more clearly then anyone I have ever read. If he cannot convince you, then I do not have any further suggestions.
Austroglide:A loan made in a fractional reserve system represents fictional, nominal wealth: "wealth" created "out of thin air"
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
It is accurate to say that nominal wealth is being created out of thin air.
Nominal vs. real. Nominal vs. real. Nominal vs. real.
fractional reserve banking does create money out of thin air by the follow
100£ deposit
10 kept 90 loaned out.
the 90 can be/is deposited back and so again 10% can be kept and 90% loaned out.
an original 100£ deposit can lead to 1000£money , 900 thin air money to the original 100.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
nirgrahamUK:fractional reserve banking does create money out of thin air by the follow... an original 100£ deposit can lead to 1000£money , 900 thin air money to the original 100.
To be precise, the 900£ is not created out of thin air. It is created out of liabilities or equity (i.e. the 100£ deposit). "Out of thin air" means that something is created out of nothing. The 900£ is not created out of nothing; it is created out of the original 100£ deposit.
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Sage: To be precise, the 900£ is not created out of thin air. It is created out of liabilities or equity (i.e. the 100£ deposit). "Out of thin air" means that something is created out of nothing. The 900£ is not created out of nothing; it is created out of the original 100£ deposit.
Can you please show the equivalent analogy in a barter system? Or is this a magical manifestation of the invention of paper money? Show us that one can deposit 10 loafs of bread in a warehouse, but the house can loan out 100 loafs of bread.
Can you please show the equivalent analogy in a barter system? Or is this a magical manifestation of the invention of paper money?
Show us that one can deposit 10 loafs of bread in a warehouse, but the house can loan out 100 loafs of bread.
um...like i said, you can't disregard the creation of loans (checkbook money) and the payment of this checkbook money + interest back when talking about monetary expansion. There is no magic involved. FRB is fraudulent because it treats liabilities as asets and is thus illiquid all the time.
oh and BTW
Banks do not lend deposits!
nazgulnarsil: How can an austrian say that such a contract isn't valuable?
How can an austrian say that such a contract isn't valuable?
Ethics of Liberty - 19. Property Rights and the Theory of Contracts (p. 133)
"the 90 can be/is deposited back and so again 10% can be kept and 90% loaned out."
You don't seem to have a sound understanding of basic money and banking. In a system of many banks (and the discussion isn't about a monopoly), it is highly unlikely that lent funds will be redeposited in the very bank that lent them to begin with. (Of course ifyour assumption were literally true, banks wouldn't need reserves, fractional or otherwise, and each bank could lend without any limit at all!) In all treatments such redeposits are regarded as of trivial importance. Read C.A. Phillips _Bank Credit_, or Macleod's _Principles of Financial Intermediation_, or any standard money and banking text, and you will find no support for your claim as one relevant to competitive banking. It may convince some people on this list, of course. But that's another matter.
No, Juan: relevant to any banking system were there are large numbers of banks.
But of course, you know more about the theory of money supply than I do, or C.A. Philips (whom you've probably never heard of--though he is the man who invented the theory of the money multiplier), or any of the many textbook writers I referred to.
Or perhaps not. But that's the wonderful thing about blogs. Any fool can contribute to them.
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