# News & Current Events > Economy & Markets >  Fractional reserve banking is fraud, period.

## hazek

EDIT:

I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.

Yes it's true FRB operators compete with savers about who is going to offer lower interest rates but this is not theft since savers aren't exposed to counterparty risk while FRB operators and their depositors are. As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it. Savers lose out but they avoid risk, depositors and operators gain but they do so at a risk of loss.

Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition. If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs my a bit of my purchasing power but the trade off is no risk and so the balance is there.


*I now believe I was wrong*. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.






OP: I got inspired to write this post by reading Adam's interview about Bitcoin but it's also something that's been on my mind for a while now. It's something that I feel too many people hold a potentially very dangerous belief about simply because they intuitively miss the unseen and I want to change that.


No matter the circumstance, fractional reserve banking is fraud in it's purest form.


facts:
when a bank loans more than the amount of it's deposits, it creates money(currency, promissory notes, certificates) out of thin airwhen anyone in an economy creates money out of thin air they effectively steal goods and services from everyone else holding the same moneynot only does a bank steal by charging interest on money created out of thin air, they also steal goods or services pledged as collateral after an increased number of people default when an inevitable bubble fueled by their money creation pops

These facts do not magically go away if there is no state mandated fractional reserve banking. They hold true even in free market fractional reserve banking. It's nothing but a scam and if people ever want to live in peace and be truly free and prosperous you better wake up to these facts.

Kokesh:



> If I have one Bitcoin and I want to loan out ten and actually give people something effective to use, I can’t just create more Bitcoins and hand them more Bitcoins in the way that a bank doing fractional-reserve can effectively just create an account and create some money in it because they say that they have the reserves to back it up at a fraction or whatever is approved by the government.  I can only issue certificates and promissory notes and say “Here’s a promissory note for one Bitcoin and if you bring this back, I will redeem it for a Bitcoin”.  Then it’s based on the credibility of my institution and me as an individual, not on special privileges granted by government.


No, no, no, no and no.

Even if they can't actually loan money they are still stealing from those holding their certificates or promissory notes. Granted under such circumstances the inevitable problems that would arise as a consequences of this fraud would play out on a much smaller scale but the facts would nevertheless remain the same: The bank is committing fraud.

I mean where is the difference if a bank is stealing from holders of dollars or holders of a private certificates or promissory notes? Stealing is stealing, period. If I'm wrong, please show me how placing fractional reserve banking somehow removes the above stated facts.


Fractional reserve banking is fraud, period.

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## Paul Or Nothing II

Fraud occurs when a party to a contract, engages in an activity that other parties haven't consented to but in a free-banking environment (VERY different from current system), if a bank openly says that it lends its demand-deposits & that its depositors are told that they mayn't be able to cash in all their deposits on demand then that's NOT fraud because parties to the contract are aware of the terms & there's no coercion involved

The confusion really arrives for a lot of people from misunderstanding of the words "banks creating money", what they actually create is entries of deposits & loans on the central-bank-money so what the banks create & what a central-bank creates are two different things & remember, just as loaning leads to "creating money", paying off the debt, "destroyes money" so what banks are essentially doing is lending the purchasing-power of the net-savers to borrowers until the loan is repaid & thereby purchasing-power is returned back to the savers
The problem with the current system is that it's coercive due to Legal Tender laws & such, & banks can't issue their own currencies BUT under a free banking system with no government interference, there might be full-reserve banks, 50%-reserve-banks, 25%-reserve-banks & whatever & each would have their own notes, & people would have a CHOICE so if somebody doesn't want to go for a fractional-reserve-bank then they can always choose not to accept their notes

Fractional-reserve-banking under free banking has been discussed many times & I'm sure you'll find plenty of information about it on mises website & even the most anti-FRB person like Rothbard admitted that VOLUNTARY & HONEST FRB is perfectly in line with a free society

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## hazek

Wrong. It is fraud.

Example:

Someone who agreed to a bank fractionally lending it's certificates or promissory notes payed me with the notes for my goods. I now own the financial instrument for which I know I can go to the bank and the bank will redeem it for the underlying asset. I also know I can trade this promissory note to someone else willing to accept it.

Just where exactly in the above example did I give my consent for the bank to rob me of my purchasing power if I instead decide to save or trade this financial instrument instead of redeeming it? No where.

Someone came to me, gave a note that was a promise to pay and all I need to accept is the trust that the bank will pay or the trust that someone else will accept this note.

But not only that, the bank is also without consent robbing people who hold the underlying asset because they are creating representations of this asset making it appear there is a greater supply of it than there actually is. A good example is what LBMA banks do to gold with allegedly issuing paper gold and manipulating the price of the underlying asset physical gold.

Did I give them my consent as a physical gold owner for them to do so?




One more time, the facts of fractional reserve banking are inescapable and it's, dare I claim this, impossible to get consent to these facts by everyone involved. It's fraud, period.

p.s.: I know this has been discussed a lot but I just wanted to destroy this myth once and for all that's why I started a new thread. And I wanted to do this by sticking to the facts and nothing else.

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## demolama

Promise to pay and guarantee to pay are not the same.  Without fractional reserve banking what you would have is a warehouse without any means to provide credit.

I'm sorry if Rothbard couldn't convince  White and Selgin about the "fraud" of fractional reserve banking I don't think this post will end this debate "once and for all"

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## fisharmor

> Promise to pay and guarantee to pay are not the same.  Without fractional reserve banking what you would have is a warehouse without any means to provide credit.


Um, how does that follow, exactly?
Do you not know that every single business in the world has to deal with credits, and only the banks can practice fractional reserve lending?

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## thoughtomator

fractional reserve = legalized counterfeiting

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## hazek

> fractional reserve = legalized counterfeiting


Precisely.

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## Travlyr

Straight up dishonest counterfeiting theft, and that fraud truly is the heart of modern day problems.

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## Travlyr

> fractional reserve = legalized counterfeiting


Except it is not really legal. It is accepted by society as normal because very few people understand the power derived by debasing currency, but it is in direct violation of the Constitution and was in fact a capital crime. The Coinage Act of 1792



http://www.youtube.com/watch?feature...&v=40MBdt1BQgE

tomwoods.com/dollar

"To Regulate The Value Of Money" by Edwin Vieira, Jr.

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## Bohner

Fractional reserve banking works just fine as long as interest rates are left to the free-market, and the losses a bank experiences is not socialized which are what lead to high risk investments and over-leveraged FR ratios.

In fact, FR is beneficial as it provides people with the capital to start businesses and buy houses that they could not have done otherwise without it. In other words, it stimulates growth.

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## heavenlyboy34

> Fraud occurs when a party to a contract, engages in an activity that other parties haven't consented to but in a free-banking environment (VERY different from current system), if a bank openly says that it lends its demand-deposits & that its depositors are told that they mayn't be able to cash in all their deposits on demand then that's NOT fraud because parties to the contract are aware of the terms & there's no coercion involved
> 
> The confusion really arrives for a lot of people from misunderstanding of the words "banks creating money", what they actually create is entries of deposits & loans on the central-bank-money so what the banks create & what a central-bank creates are two different things & remember, just as loaning leads to "creating money", paying off the debt, "destroyes money" so what banks are essentially doing is lending the purchasing-power of the net-savers to borrowers until the loan is repaid & thereby purchasing-power is returned back to the savers
> The problem with the current system is that it's coercive due to Legal Tender laws & such, & banks can't issue their own currencies BUT under a free banking system with no government interference, there might be full-reserve banks, 50%-reserve-banks, 25%-reserve-banks & whatever & each would have their own notes, & people would have a CHOICE so if somebody doesn't want to go for a fractional-reserve-bank then they can always choose not to accept their notes
> 
> Fractional-reserve-banking under free banking has been discussed many times & I'm sure you'll find plenty of information about it on mises website & even the most anti-FRB person like Rothbard admitted that VOLUNTARY & HONEST FRB is perfectly in line with a free society


This^^  IIRC, it was Friedman who said that the FED could be replaced by a computer in an honest money system and Murray agreed.

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## Gumba of Liberty

> Fractional reserve banking works just fine as long as interest rates are left to the free-market, and the losses a bank experiences is not socialized which are what lead to high risk investments and over-leveraged FR ratios.
> 
> *In fact, FR is beneficial as it provides people with the capital to start businesses and buy houses that they could not have done otherwise without it.* In other words, it stimulates growth.


Businesses and homes could be started and purchased for much less in a full-reserve system. It does not stimulate business ownership, it puts it out of reach for the average person.

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## heavenlyboy34

> Businesses and homes could be started and purchased for much less in a full-reserve system. It does not stimulate business ownership, it puts it out of reach for the average person.


Pardon my ignorance, but where do loans and consumer credit originate from in your understanding of a 100% reserve system?

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## Bohner

> Businesses and homes could be started and purchased for much less in a full-reserve system.


Ok... As heavenlyboy stated, you are going to have to explain this.

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## rpwi

> Fraud occurs when a party to a contract, engages in an activity that other parties haven't consented to but in a free-banking environment (VERY different from current system), if a bank openly says that it lends its demand-deposits & that its depositors are told that they mayn't be able to cash in all their deposits on demand then that's NOT fraud because parties to the contract are aware of the terms & there's no coercion involved


I'm not sure a free market in fractional banking can exist.  When a banker issues more deposits than he has reserves that is inherently either fraudulent or dependent on deception.  A truly free market will tolerate neither.




> The confusion really arrives for a lot of people from misunderstanding of the words "banks creating money",


No need to put it in quotes...they do create money.




> what they actually create is entries of deposits & loans on the central-bank-money so what the banks create & what a central-bank creates are two different things & remember, just as loaning leads to "creating money", paying off the debt, "destroyes money" so what banks are essentially doing is lending the purchasing-power of the net-savers to borrowers until the loan is repaid & thereby purchasing-power is returned back to the savers


I don't think that is an accurate characterization.  Banks don't lend out of savings, but rather what the market allows them to get away with and they borrow reserves from other banks as needed to alleviate risks to liquidity and satisfy regulations.




> The problem with the current system is that it's coercive due to Legal Tender laws & such, & banks can't issue their own currencies


They can issue travelers checks which count as M1.  They used to issue their own currencies and that caused all sorts of problems. Fractional based currencies (fiat) duked it out and inevitably destroyed themselves.  We don't want banks issuing their own currencies or deposits (in essence the same thing)...

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## rpwi

> Promise to pay and guarantee to pay are not the same.


What is the difference?




> Without fractional reserve banking what you would have is a warehouse without any means to provide credit.


A good thing for banks.  The market will still have access to loans...  Without banks flooding the loan markets with their funny money, interest rates would go up and reward savers and those who are frugal.  This would create real investment instead of all the mal-investment bubbles we have now because the bankers have to launder newly created deposits as loans.

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## rpwi

> Fractional reserve banking works just fine as long as interest rates are left to the free-market,


A free market + fractional banking = huge spike in interest rates as banks scramble for liquidity without government aid.  Only without fractional banking could the free market have truely stable interest rates.




> and the losses a bank experiences is not socialized which are what lead to high risk investments and over-leveraged FR ratios.


Socialized risk is bad.  Direct risk is bad too.  You don't want the bank to close your checking account because of bad loans.  Conceptually the problem is not about bad investments of ratios...as long as we have fractional banking...we will ALWAYS have 'bad investments' and 'over-leverage'.  When a bank mismatches short term liabilities with long term assets that is inherently risk and unstable and will always cause negative side-effects.




> In fact, FR is beneficial as it provides people with the capital to start businesses and buy houses that they could not have done otherwise without it. In other words, it stimulates growth.


If people couldn't have bought those homes or started those businesses without counterfeited money driving down interest rates...then they shouldn't have.  That they do now represents mal-investment and will create derivative mal-investment and a bubble that pops that leaves savings ruined and jobs lost.  The other problem is fractional banking creates a lot of inflation that steals from you and I...much more so than inflation caused when the government creates dollars (MB).

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## heavenlyboy34

> What is the difference?
> 
> A good thing for banks.  The market will still have access to loans...  Without banks flooding the loan markets with their funny money, interest rates would go up and reward savers and those who are frugal.  This would create real investment instead of all the mal-investment bubbles we have now because the bankers have to launder newly created deposits as loans.


Where are the loans you speak of going to originate?  I don't know of any lender who has enough capital to back up every loan.  Thanks.

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## cubical

To say free market fractional reserve banking is fraud, is to say loaning someone money is a fraud. It's not! Attack the fed, not fractional reserve banking itself.

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## hazek

> Fractional reserve banking works just fine as long as interest rates are left to the free-market, and the losses a bank experiences is not socialized which are what lead to high risk investments and over-leveraged FR ratios.
> 
> In fact, FR is beneficial as it provides people with the capital to start businesses and buy houses that they could not have done otherwise without it. In other words, it stimulates growth.


And how exactly do your mere statements invalidate the facts I listed pertaining to fractional reserve lending?

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## heavenlyboy34

> A free market + fractional banking = huge spike in interest rates as banks scramble for liquidity without government aid.  Only without fractional banking could the free market have truely stable interest rates.


I think you're confusing FRB with central banking.  There would only be liquidity crises if banks took on an insane amount of bad debt-highly unlikely in the absence of a central bank because if the banks take that much risk they're very likely to go under in cases of default.

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## heavenlyboy34

> To say free market fractional reserve banking is fraud, is to say loaning someone money is a fraud. It's not! Attack the fed, not fractional reserve banking itself.


this^^  Not a perfect analogy (lending in FRB generally comes from direct deposits), but a very good one.

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## GeorgiaAvenger

No it isn't, unless people are intentionally mislead on what happens to their money. The problem is central banking.

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## hazek

> Where are the loans you speak of going to originate?  I don't know of any lender who has enough capital to back up every loan.  Thanks.


You should take a look at the real world experiment that is Bitcoin and the lending that goes on there to get your answer: https://bitcointalk.org/index.php?board=65.0

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## rpwi

> This^^  IIRC, it was Friedman who said that the FED could be replaced by a computer in an honest money system and Murray agreed.


Friedman was very influential and getting the Fed in 1979 to abandon fed fund rate targeting and for them to target a constant growth in the money supply (M1).  This system got more criticism than it deserved...and for a brief period in time we came much closer to having a genuine market for interest rates.

The simplicity is very appealing and had the advantage of minimizing the amount games the banks and Fed can do to harm the economy. (Friedman was very critical of Open Market Churning)

The mistake was that M1 was targeted...of all monetary aggregates...this was not the best.  MB would have been best...as this was the least manipulatable.  They could have set say MB to grow at an annualized 1% rate, THIS could have been done by a computer and we would have been good.

M2 or M3 would have given a better gauge of inflation...but IMO MB is the base in which all money is pyramided so it would have suited Friedman's plans much better than M1.

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## hazek

> To say free market fractional reserve banking is fraud, is to say loaning someone money is a fraud. It's not! Attack the fed, not fractional reserve banking itself.


How exactly does lending money created out of thin air equal lending money? I'm simple baffled by this statement.

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## rpwi

> Ok... As heavenlyboy stated, you are going to have to explain this.


I don't know about interest rates being lower...but without bank money inflating the cost of the dollar, the amount of money you would have to borrow would be much less which IMO would offset things.  Personally, I suspect interest rates would be higher without fractional banking.

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## Travlyr

> To say free market fractional reserve banking is fraud, is to say loaning someone money is a fraud. It's not! Attack the fed, not fractional reserve banking itself.


Not true. Fractional Reserve banking is fraud. It is a trusted holder of assets promising ownership of those assets to more than one owner. For example, it is no different than a farmer with a 1000 bushel grain bin full of grain selling 1000 bu. to Billy while selling Betty the exact same 1000 bu. of grain too. It is fraud straight up. Two people cannot own 100% of the same asset.

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## heavenlyboy34

> You should take a look at the real world experiment that is Bitcoin and the lending that goes on there to get your answer: https://bitcointalk.org/index.php?board=65.0


Thanks for the link.  The first think I peeked at was this:




> This isn’t a charity and there is real money at stake. There are real defaults (about 400 coin worth to date) and lending is a high risk process, that’s why the interest rates are high.  However, Starfish is well capitalised and I have significant funds tied up in income generation rather than simply speculating on the price of coins.
> 
> Lending and Seeking a Loan
> I decide if you’re a good credit risk or not.  I may seek a credit check with other regular lenders, and I will use whatever other subjective measures I want.
> It would be useful to know what you want the funds for.  Mining rigs, bridging finance and the like are much more likely.
> Short term or small loans have higher costs to set up and look after, so don’t expect to get things too cheap.
> Having evidence of ability to repay when (not if) things go wrong is an advantage.
> 
> Loan Types:
> ...


It seems that the bitcoin economy has a lot in common with FRB.

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## hazek

> It seems that the bitcoin economy has a lot in common with FRB.


 Are you just trolling me or do you seriously believe this crap?

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## heavenlyboy34

> Not true. Fractional Reserve banking is fraud. It is a trusted holder of assets promising ownership of those assets to more than one owner. For example, it is no different than a farmer with a 1000 bushel grain bin full of grain selling 1000 bu. to Billy while selling Betty the exact same 1000 bu. of grain too. It is fraud straight up. Two people cannot own 100% of the same asset.


Please address this point I raised earlier:



> Pardon my ignorance, but where do loans and consumer credit originate from in your understanding of a 100% reserve system?


Those who oppose FRB in EVERY instance have a lot of explaining to do in regards to how the economy is actually going to grow without it.

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## heavenlyboy34

> Are you just trolling me or do you seriously believe this crap?


No trololol.  Did you see what I quoted from the link you provided?

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## rpwi

> To say free market fractional reserve banking is fraud, is to say loaning someone money is a fraud.


There is a difference.  

Scenario A:

Non-bank loans a 10 year 100k loan to person A.  Non-bank has 100k loan asset that matures in 10 years and the person has a 100k loan liability that matures in 10 years.

Scenario B:

Bank Z loans a 10 year loan worth 100k to person A like before, but finances it with a 10 day loan worth 100k.

The difference between the two, is that bankers work by mismatching short term debt with long term assets.  You're making promises in the aggregate that you can't keep.  

As long as bankers don't mismatch the maturities from assets to liabilities...I wouldn't have any problem with them.  But then they wouldn't be considered a bank.

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## Travlyr

> Pardon my ignorance, but where do loans and consumer credit originate from in your understanding of a 100% reserve system?


From savings.

100% reserve is the only honest system. Everything else is slight of hand fraud. 

Can you create hamburger out of thin air? Can you create a car out of thin air? Can you create money out of thin air? No to all. Fractional reserve is simply theft of resources by privileged fraud. While it is an accepted practice it is not even legal. It is a capital crime according to the Coinage Act of 1792.

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## Bohner

> A free market + fractional banking = huge spike in interest rates as banks scramble for liquidity without government aid.  Only without fractional banking could the free market have truely stable interest rates.


Interest rates wouldn't go from 2% to 35% overnight... it would raise gradually as more and more people take out loans. 




> Socialized risk is bad.  Direct risk is bad too.


Socialized risk provides an incentive to make risky investments. Direct risk inhibits that incentive. 




> You don't want the bank to close your checking account because of bad loans.


They wouldn't be making bad loans to begin with if Fannie and Freddie wasn't guaranteeing them. 




> Conceptually the problem is not about bad investments of ratios...as long as we have fractional banking...we will ALWAYS have 'bad investments' and 'over-leverage'.  When a bank mismatches short term liabilities with long term assets that is inherently risk and unstable and will always cause negative side-effects.


As mentioned before, they do this kind of $#@! because they know that the tax-payer is going to pick up the tab if those investments go bust. They would be a lot more careful if those losses were direct. 




> If people couldn't have bought those homes or started those businesses without counterfeited money driving down interest rates...then they shouldn't have.


99% of the population wouldn't be able to afford to buy a house or open up a business if they couldn't take out a loan. 




> That they do now represents mal-investment and will create derivative mal-investment and a bubble that pops that leaves savings ruined and jobs lost.


In a free market, interest rates would rise to the point where taking out a loan would be unfeasible before a bubble would form. 




> The other problem is fractional banking creates a lot of inflation that steals from you and I...much more so than inflation caused when the government creates dollars (MB).


Any inflationary period would be quickly squashed as interest rates begin to rise.

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## Gumba of Liberty

> Pardon my ignorance, but where do loans and consumer credit originate from in your understanding of a 100% reserve system?


In a *full-reserve banking system*, banking is separated into its two natural functions. Banks would, first, _warehouse_ or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would _invest_ money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)

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## hazek

> No trololol.  Did you see what I quoted from the link you provided?


Yes. If you understand Bitcoin then you know what that person is doing is taking deposits, paying interest on them to the depositors and lending them out to borrowers at 100% reserve meaning no new bitcoins are being created in this process unlike in FRB.

The scheme in this example goes like this:

A -> depositor
B -> lender
C -> borrower 

A relinquish his possession of bitcoins and gives to B for which B pays an interest, B then relinquishes his possession of these same bitcoins lending them to C charging an interest, once C repays, B gets the bitcoins + interest back and can now pay A the bitcoins + interest back.

Where in here do you see any fractional reserve banking?!

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## Bohner

> From savings.


How do loans come from savings in a 100% reserve system?

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## hazek

> In a *full-reserve banking system*, banking is separated into its two natural functions. Banks would, first, _warehouse_ or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would _invest_ money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)


And that's what honest banking is, there is no fractional reserve banking in your examples.

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## hazek

> How do loans come from savings in a 100% reserve system?


Seriously? Are you seriously asking this question?!

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## rpwi

> I think you're confusing FRB with central banking.  There would only be liquidity crises if banks took on an insane amount of bad debt-highly unlikely in the absence of a central bank because if the banks take that much risk they're very likely to go under in cases of default.


Because the banks have promised more deposits than they have reserves...this constantly puts pressure on reserves.  Fractional banking survives now because of FDIC guarantees and because the Fed constantly adding more water to the pool using the open market to make the growing sharks (banks) happy.  Without a stead stream of MB being injected into market...the primary dealers wouldn't be able to lend to banks to satisfy their reserve requirements.  Banks would have to borrow from each other which would drive up the rate for reserves.  As this would happen, reserves would become scarce and bankruns would ensue...this would REALLY jack up the demand for reserves and because no bank can have a proper credit rating...nobody would lend to each other.  Liquidity would be a major problem.

My solution would be to transition from bank money to an expanded base money system where individuals had the one time chance to convert the deposits into base money or deposits at a 100% backed deposit.  So this would result in an increase in MB but a decrease in M1.  After this...no more more bailouts.  With this action, reserves would be not be something the banks could control and market, so liquidity would not be an issue.

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## Travlyr

> In a *full-reserve banking system*, banking is separated into its two natural functions. Banks would, first, _warehouse_ or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would _invest_ money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)


You must spread some Reputation around before giving it to Gumba of Liberty again.

Please read this carefully. Gumba of Liberty explains it perfectly.

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## cubical

> There is a difference.  
> 
> Scenario A:
> 
> Non-bank loans a 10 year 100k loan to person A.  Non-bank has 100k loan asset that matures in 10 years and the person has a 100k loan liability that matures in 10 years.
> 
> Scenario B:
> 
> Bank Z loans a 10 year loan worth 100k to person A like before, but finances it with a 10 day loan worth 100k.
> ...


If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme? 

Fractional reserve banking offers a good way to get a return on your money while spreading out risk. For a better return go with a bank that has a 10% reserve(probably non-existent in a Fed-less world) or for pure safety you go with a bank that offers 100% reserve banking.

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## hazek

> If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme? 
> 
> Fractional reserve banking offers a good way to get a return on your money while spreading out risk. For a better return go with a bank that has a 10% reserve(probably non-existent in a Fed-less world) or for pure safety you go with a bank that offers 100% reserve banking.


You still haven't explained how your statements make the facts presented in the OP invalid and therefor FRB not fraud.

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## Gumba of Liberty

> You must spread some Reputation around before giving it to Gumba of Liberty again.
> 
> Please read this carefully. Gumba of Liberty explains it perfectly.


Thank you. I teach high school economics and I get these type of questions all the time. BTW Is it bad that Austrian Economics isn't in the curriculum but I teach it anyway?

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## heavenlyboy34

> In a *full-reserve banking system*, banking is separated into its two natural functions. Banks would, first, _warehouse_ or store money for its customers. It would provide a vault for which bank depositors would pay a small monthly fee. Second, banks would _invest_ money in business projects. Banks would encourage investment by inviting their depositors to put some of their savings toward business ventures that they believe will produce a return (interest). Individual depositors would have a say in exactly where their money is invested, they would claim the benefits of investing wisely but they would also take full responsibly for business ventures that fail. Innocent depositors would not be on the hook for the poor decisions of investors and the banks would not flood the market with credit artificially increasing the price of essential industries (housing, business, education, medicine, etc.)


Problem with that is the depositors who don't allow their deposits to be invested don't earn interest and don't have much incentive to make a deposit at all.  (why let the money sit in a vault when it could be earning interest in the form of some investment instrument?)  Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans.  Another thing is you're assuming the presence of a central bank to make your claim about vast misallocations of capital in the form of bad loans.  FRB is not the same as central banking, and the possible crises you describe aren't a symptom of FRB, but of central banking.

----------


## cubical

> You still haven't explained how your statements make the facts presented in the OP invalid and therefor FRB not fraud.


Would it be fraud if someone defaults on a loan?

----------


## Travlyr

> How do loans come from savings in a 100% reserve system?


Banks must have the money on hand to loan through their business plan or else not loan it.

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## rpwi

> Interest rates wouldn't go from 2% to 35% overnight... it would raise gradually as more and more people take out loans.


Actually...when it comes to the money market for bank reserves...this is absolutely one sector that can go from 2% to 35% in one day (without government intervention).  It's just that volatile because it is a big confidence game.




> 99% of the population wouldn't be able to afford to buy a house or open up a business if they couldn't take out a loan.


Not talking about removing loans.  Just long term loans mismatched/financed by short term liabilities (loans that should not have been created).  Will rates go up...I think so.  But will prices go down without funny bank money?  I think so...  People always want low interest rates so they can buy their homes...what about the price of the home itself?  Isn't that important?  Bank money creates inflation which drives up home mortgages.

There might be a little shock to the market as the economy adapts to living without bank loans (like getting off of a drug).  I'm sure accounts payable/accounts receivable would be a lot more important for businesses.

----------


## hazek

> Would it be fraud if someone defaults on a loan?


How does anything you've said so far include this last question invalidate the facts I outlined in the OP?!

If you aren't willing to answer this question I cannot have a conversation with you because you are either trolling me or just unwilling to face the facts for neither of which I have patience for.

----------


## heavenlyboy34

> Yes. If you understand Bitcoin then you know what that person is doing is taking deposits, paying interest on them to the depositors and lending them out to borrowers at 100% reserve meaning no new bitcoins are being created in this process unlike in FRB.
> 
> The scheme in this example goes like this:
> 
> A -> depositor
> B -> lender
> C -> borrower 
> 
> A relinquish his possession of bitcoins and gives to B for which B pays an interest, B then relinquishes his possession of these same bitcoins lending them to C charging an interest, once C repays, B gets the bitcoins + interest back and can now pay A the bitcoins + interest back.
> ...


Gotcha.  Sorry I didn't have time to read a wall of text at the time.

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## Travlyr

> Thank you. I teach high school economics and I get these type of questions all the time. BTW Is it bad that Austrian Economics isn't in the curriculum but I teach it anyway?


It is not bad, but I am surprised that you are still employed. Sound money should be mandatory teaching in the school system.

----------


## heavenlyboy34

> Banks must have the money on hand to loan through their business plan or else not loan it.


This is what happens in FRB.  Money on hand exists in the form of direct deposits.

----------


## Travlyr

> Would it be fraud if someone defaults on a loan?


Not fraud, but very few bank loans would go bad because due diligence would be completed before the loan. Bank profits would be more like shoe store profits... honestly earned. There would not be a CEO making $23 Million for losing $2 Billion .. it just wouldn't happen.

----------


## hazek

> Problem with that is the depositors who don't allow their deposits to be invested don't earn interest and don't have much incentive to make a deposit at all.  (why let the money sit in a vault when it could be earning interest in the form of some investment instrument?)


Ah yes because having millions in bullion at home is such a bright idea..  It doesn't cross your mind that some people would like to simply preserve their purchasing power and would be willing to pay a fee for safekeeping?





> Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans.  Another thing is you're assuming the presence of a central bank to make your claim about vast misallocations of capital in the form of bad loans.  FRB is not the same as central banking, and the possible crises you describe aren't a symptom of FRB, but of central banking.


Bull$#@! twofold:

FIRST: There's no way to know bakers will sell enough of their supply of bread in order to meet the demand for eating. -> can you see where you FAIL?!

SECOND: FBR creates money out of thin air robbing those who already hold this money, increasing the supply of money and inevitably fueling bubbles and causing busts, central bank or no central bank. YOU CANNOT ESCAPE THE 3 FACTS I OUTLINED IN MY OP. PERIOD.

----------


## cubical

> How does anything you've said so far include this last question invalidate the facts I outlined in the OP?!
> 
> If you aren't willing to answer this question I cannot have a conversation with you because you are either trolling me or just unwilling to face the facts for neither of which I have patience for.


Because its not fraud. Are you trolling me?? If you deposit your money with a bank expecting a return, there will be risks associated with it. If you bank comes up short when you try to withdraw your money, you picked a bad bank. 

Bank A says they will take my money and give me x% in a year by loaning it out(maybe there are time restrictions, maybe not, all associated in risk/reward). They fail to deliver, they default. Person A says they will take my money and give me x% in a year. They fail to deliver, they default.

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## Travlyr

> This is what happens in FRB.  Money on hand exists in the form of direct deposits.


Modern banks don't store money. The money does not exist. It is all based on faith.

----------


## cubical

> Not fraud, but very few bank loans would go bad because due diligence would be completed before the loan. Bank profits would be more like shoe store profits... honestly earned. There would not be a CEO making $23 Million for losing $2 Billion .. it just wouldn't happen.


I agree.

----------


## hazek

> Gotcha.  Sorry I didn't have time to read a wall of text at the time.


Finally some rationality out of you in this thread, I must say I'm surprised by your statements in this thread when I have this reasonable image about you from the philosophy section..

----------


## rpwi

> If your bank is doing this, why would you bank with them? Would you loan money to someone who was using it to go spend a weekend in Vegas on some "can't lose" gambling scheme?


?? We do all the time.  Deposits are very short term liabilities to the bank and in some cases finance the majority of assets in a bank.




> Fractional reserve banking offers a good way to get a return on your money


My checking account yields 0%.  I have an option for 'performance checking'...but that yields less than 1%.  Good for the banks to get a yield on my money...but not for me.  When you count all the inflation they create, it's quite the drain on the economy.




> while spreading out risk.


But they don't spread-out the risk.  Banks are inherently risky...and in fact the only risk distribution is done by the Fed...from the banks to the taxpayers.

----------


## hazek

> Because its not fraud. Are you trolling me?? If you deposit your money with a bank expecting a return, there will be risks associated with it. If you bank comes up short when you try to withdraw your money, you picked a bad bank. 
> 
> Bank A says they will take my money and give me x% in a year by loaning it out(maybe there are time restrictions, maybe not, all associated in risk/reward). They fail to deliver, they default. Person A says they will take my money and give me x% in a year. They fail to deliver, they default.


That's now where the fraud comes from. 

The fraud comes from a bank doing FRB when:
when a bank steals from savers by charging interest on purchasing power it created out of thin airwhen this bank protects their ass from bubbles and busts their fraud caused with the pledged collateral


Depositing money with an investment fund and losing on a bad bet by this investment fund or bank or whatever is not fraud. I never said it was.

----------


## thoughtomator

In a fractional reserve system, one party gets something of value for effectively zero work, which is entirely due to a legal privilege extended to some parties and not others. It has no benefits that exceed the risks of moral hazard inherent in this process.

----------


## cubical

> ?? We do all the time.  Deposits are very short term liabilities to the bank and in some cases finance the majority of assets in a bank.


Where in the world are you depositing with a bank free from the fed? They don't exist.





> My checking account yields 0%.  I have an option for 'performance checking'...but that yields less than 1%.  Good for the banks to get a yield on my money...but not for me.  When you count all the inflation they create, it's quite the drain on the economy.


No one is forcing you to keep your money there, but this is off topic. Again you are calling out a fed lead banking system and then complaining about a free market system.




> But they don't spread-out the risk.  Banks are inherently risky...and in fact the only risk distribution is done by the Fed...from the banks to the taxpayers.


AGAIN you are looking at the current system and making judgments on a free market system.

----------


## Gumba of Liberty

> Problem with that is the depositors who don't allow their deposits to be invested don't earn interest and don't have much incentive to make a deposit at all.  (why let the money sit in a vault when it could be earning interest in the form of some investment instrument?)


I completely agree. Why let your money sit there when you can make a return? The incentive would be to make investments. Most people would make investments. Granted, if you have limited funds you might opt out of the banking system but that is your choice to make. Any smart individual with substantial savings will want a secure place to keep their money (especially in an urban area) and will put their money in a bank.




> Also, there is no way to know that enough depositors will allow their money to be lent to meet demand for loans.


Isn't this a contradiction of your previous point? Why would you let your money sit there when you can make a return? It defies logic (for those educated enough to make good decisions). Also, how do you know when the demand for loans has been met? Doesn't Economics 101 each that supply meets demand? You can only demand a good or service is you 1. desire the good or service and 2. Have the ability to purchase the good or service. Right now I would love to have a $100,000 loan at 0.5%. Does that mean a bank should provide it? Doesn't Austrian Economics preach that no one person, group, or government knows exactly when demand (or supply) is actually met?






> Another thing is you're assuming the presence of a central bank to make your claim about vast misallocations of capital in the form of bad loans.  FRB is not the same as central banking, and the possible crises you describe aren't a symptom of FRB, but of central banking.


Fractional-Reserve Banking does not produce a national crisis the way Central Banking does but it does produce an individual crisis for each bank that participates in the practice. All fractional-reserve banks are destined to fail. What goes up must come down and when these banks produce more loans than would naturally occur in a free-market economy the loans go into the industries that people most value (housing, business, education, medicine, etc.) increasing the price.

----------


## rpwi

> Would it be fraud if someone defaults on a loan?


To an extent ALL defaults are dishonest.  However...IMO there is a world of difference between Joe Shmo who defaults on his house loan because he gets laid off...and a banker who defaults on his deposit to the depositor...because he promised more deposits than he had in reserves.  Using your logic...a ponzi scheme shouldn't be that bad because when popped, defaults are just part doing business and we should just accept that.

----------


## cubical

> ?? We do all the time.  Deposits are very short term liabilities to the bank and in some cases finance the majority of assets in a bank.
> 
> My checking account yields 0%.  I have an option for 'performance checking'...but that yields less than 1%.  Good for the banks to get a yield on my money...but not for me.  When you count all the inflation they create, it's quite the drain on the economy.
> 
> But they don't spread-out the risk.  Banks are inherently risky...and in fact the only risk distribution is done by the Fed...from the banks to the taxpayers.





> That's now where the fraud comes from. 
> 
> The fraud comes from a bank doing FRB when:
> when a bank steals from savers by charging interest on purchasing power it created out of thin airwhen this bank protects their ass from bubbles and busts their fraud caused with the pledged collateral
> 
> 
> Depositing money with an investment fund and losing on a bad bet by this investment fund or bank or whatever is not fraud. I never said it was.


It does not create purchasing power out of thin air. There can only be 1 person holding a deposited dollar at a time. Unless you are insinuating the bank counterfeits its money.

----------


## hazek

BTW everyone just calm down a little bit, realize that we are all human subject to human nature and cognitive dissonance, realize that reality clearly is true only in one way and we would all be best served if we can figure which way is the right way.

So stop for a few, take a few deep breaths, don't just fall in a loop of repeating yourselves but actually read and listen to the arguments and facts presented. 


Let's display some rationality people, it's not that hard.

----------


## hazek

> It does not create purchasing power out of thin air. There can only be 1 person holding a deposited dollar at a time. Unless you are insinuating the bank counterfeits its money.


That's what fractional reserve banking is, they lend more than what they have on reserve. Where do they get this "more" from if not out of thin air?

----------


## Travlyr

> In a fractional reserve system, one party gets something of value for effectively zero work, which is entirely due to a legal privilege extended to some parties and not others. It has no benefits that exceed the risks of moral hazard inherent in this process.


Yes, this is very similar to a contractor who builds a house. First he must buy the land, contract for design, framing, roofing, siding, electric & plumbing, interior and finish. Then he must find a buyer. The contractor has an investment of $100k+ and then the banker steps in without any money but he has the "privilege" of creating money out of nothing. So the banker "creates" $100k+ out of nothing and earns $200k+ through interest over a 30 year time period. The people who did all the work earned peanuts while the banker made out like a bandit because that is what they are. Counterfeiting thieves.

----------


## cubical

> To an extent ALL defaults are dishonest.  However...IMO there is a world of difference between Joe Shmo who defaults on his house loan because he gets laid off...and a banker who defaults on his deposit to the depositor...because he promised more deposits than he had in reserves.  Using your logic...a ponzi scheme shouldn't be that bad because when popped, defaults are just part doing business and we should just accept that.


Well YOUR OPINION is just that. You can say an individual defaulting is worse than a bank, but assuming you know the risks going in, there is no difference. If the bank lies about their assets and liabilities or if an individual lies about their income or other debts, then yes there is fraud, but that doesn't mean we should stay away from fractional reserve banking, only that we should stay away from crooks.

----------


## rpwi

> Because its not fraud. Are you trolling me?? If you deposit your money with a bank expecting a return, there will be risks associated with it. If you bank comes up short when you try to withdraw your money, you picked a bad bank.


The problem is that 99% of the population does not know how banking works.  They do not know what happens to their money they deposit...and if they did they would not deposit their money in the bank.  The banks are taking advantage of their ignorance and that IMO is a form of fraud.




> Bank A says they will take my money and give me x% in a year by loaning it out(maybe there are time restrictions, maybe not, all associated in risk/reward). They fail to deliver, they default. Person A says they will take my money and give me x% in a year. They fail to deliver, they default.


A bank doesn't properly tell you that your 'deposit' is actually an investment in the bank that yields an infinitesimally small amount of interest and has an infinitesimally small maturity period.  If they did that might wake people up.  

You've brought up the competitive lending aspects multiple times...that's not how banks work.  They're source of financing isn't really from CD's that they acquired because they offered 5% instead of 4% compared to bank X.  Although that is part.  It is mostly from the deposits that you and I have in the banks.  And this is NOT competitive.  Indeed a competitive market could never really exist for banks because their model is fraudulent...how would ponzi schemes compete for example?  They couldn't...

----------


## thoughtomator

> To an extent ALL defaults are dishonest.


Default is not inherently dishonest unless the intent to default was present at the time the contract was signed. No person can account for all possibilities in the future. An honest man may run up a credit card bill which he could normally pay, then lose his income and/or encounter an unavoidable expense. An honest business could take out a loan to expand, and then fail to be successful. Both cases would lead to an honest default. 

An honest loan contract takes default into account, so default on the loan can occur while the contract itself remains intact. In the case of a secured loan, the lender then claims the collateral. In the case of an unsecured loan, the lender gets nothing. An unsecured loan is a very risky one and no lender has an excuse not to be fully aware of those risks. Those risks are the natural limitation to the issuance of the most risky types of loans.

----------


## cubical

> That's what fractional reserve banking is, they lend more than what they have on reserve. Where do they get this "more" from if not out of thin air?


When I make a loan to an individual I have 0 money in reserves. That doesn't mean I don't want to go through with it. I know that going into it I won't be able to access the money for a while or if I do want to I might have to take a haircut. But rather than going to that extreme, why not pool my money with other lenders and borrowers to spread the risk? That is what the bank is for.

----------


## heavenlyboy34

> Ah yes because having millions in bullion at home is such a bright idea..  It doesn't cross your mind that some people would like to simply preserve their purchasing power and would be willing to pay a fee for safekeeping?


Then you're not talking about banking at all-you're just leaving your bullion in a big safe deposit box.







> Bull$#@! twofold:
> 
> FIRST: There's no way to know bakers will sell enough of their supply of bread in order to meet the demand for eating. -> can you see where you FAIL?!
> 
> SECOND: FBR creates money out of thin air robbing those who already hold this money, increasing the supply of money and inevitably fueling bubbles and causing busts, central bank or no central bank. YOU CANNOT ESCAPE THE 3 FACTS I OUTLINED IN MY OP. PERIOD.



No BS at all.  Rothbard points out in "Taking Money Back":
*http://mises.org/daily/2882*
Banking is a particularly arcane part of the economic system; one of the problems is that the word "bank" covers many different activities, with very different implications. During the Renaissance era, the Medicis in Italy and the Fuggers in Germany, were "bankers"; their banking, however, was not only private but also began at least as a legitimate, noninflationary, and highly productive activity. Essentially, these were "merchant-bankers," who started as prominent merchants. In the course of their trade, the merchants began to extend credit to their customers, and in the case of these great banking families, the credit or "banking" part of their operations eventually overshadowed their mercantile activities. These firms lent money out of their own profits and savings, and earned interest from the loans. Hence, they were channels for the productive investment of their own savings.To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive and unexceptionable. Even in our current commercial banking system, if I buy a $10,000 CD ("certificate of deposit") redeemable in six months, earning a certain fixed interest return, I am taking my savings and lending it to a bank, which in turn lends it out at a higher interest rate, the differential being the bank's earnings for the function of channeling savings into the hands of credit-worthy or productive borrowers. There is no problem with this process.

The same is even true of the great "investment banking" houses, which developed as industrial capitalism flowered in the 19th century. Investment bankers would take their own capital, or capital invested or loaned by others, to underwrite corporations gathering capital by selling securities to stockholders and creditors. The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their clients' government bonds. Hence, the powerful and baleful political influence of investment bankers in the 19th and 20th centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States.

----------


## cubical

> The problem is that 99% of the population does not know how banking works.  They do not know what happens to their money they deposit...and if they did they would not deposit their money in the bank.  The banks are taking advantage of their ignorance and that IMO is a form of fraud.


People are ignorant because they rely on the government/fed system to do their thinking/due diligence for them.

All of your arguments are coming from a fed banking system POV. Until it is completely removed you will not see the potential of a free market banking system.

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## hazek

> When I make a loan to an individual I have 0 money in reserves.


Please please please tell me how you do that without being caged by the state because I'd like to make loans like that also. Right now whenever I want to make a loan I always need 100% reserve..

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## Travlyr

> People are ignorant because they rely on the government/fed system to do their thinking/due diligence for them.
> 
> All of your arguments are coming from a fed banking system POV. Until it is completely removed you will not see the potential of a free market banking system.


Not necessarily true. A lot of us are working diligently for sound money, 100% redeemable.

"The Purse & The Sword" by Dr. Edwin Vieira Jr.

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## hazek

> Then you're not talking about banking at all-you're just leaving your bullion in a big safe deposit box.


Yes precisely, isn't this what traditional banking at first was?




> No BS at all.  Rothbard points out in "Taking Money Back":
> *http://mises.org/daily/2882*


Are you sure you understand to which one of your question my quote is a reply to?

----------


## rpwi

> Where in the world are you depositing with a bank free from the fed? They don't exist.


??  My example implied that the depositing banks in turn were part of the Fed.  My statement stands...that individual deposits represent massive amounts of short term lending to banks that use this to acquire long term assets that are illiquid.  There is a massive liquidity mismatch on all bank balance sheets.




> No one is forcing you to keep your money there, but this is off topic.


Indirectly I do.  Say I pull all reserves out of the bank and into paper cash.  When I pay my taxes...I have to do so through a bank.  The government then through a special program deposits tax receipts with insider banks to give them 0% loans (to ensure 'market stability').  Then before tax time...my pulling the dollars out of the banking system drove up the money market rate because reserves were more scarce in the banking system.  The magic of the Fed Funds Rate kicks in and the vacuum of reserves created by my withdrawal is filled by open market operation deposits.  So try as I can...I can't really remove dollars out of the banking system.




> Again you are calling out a fed lead banking system and then complaining about a free market system.


They're all bad.  Fractional banking can exist without government support.  That doesn't mean it is good.  Murder can exist in a free market too...doesn't mean that is good.

----------


## BattleFlag1776

> Modern banks don't store money. The money does not exist. It is all *based on faith*.


A quote from Joseph G. Baldwin in 1853 (italics his, bold mine):




> “In the fullness of time the new era had set in—the era of the second great experiment of independence; the experiment, namely, of credit without capital, and enterprise without honesty.  The Age of Brass had had succeeded the Arcadian period when men got rich by saving a part of their earnings, and lived at their own cost and in ignorance of the new plan of making fortunes on the profits of what they owed.  A new theory, not found in the works on political economy, was broached.  It was found out that the prejudice in favor of the metals (excluding brass) was an absurd superstition; and that, in reality, any thing else, which the parties interested in giving it currency chose, might serve as a representative of value and medium for exchange of property; and as gold and silver had served for a great number of years as representatives, the republican doctrine of rotation in office required they should give way.  Accordingly it was decided that Rags, a very familiar character, and very popular and easy of access, should take their place.  Rags belonged to the school of progress.  He was representative of the then Young America.  His administration was not tame.  It was very spirited.  It was based on the Bonapartist idea of keeping the imagination of the people excited.  The leading fiscal idea of his system was to _democratize_ capital, and to make, for all purposes of trade, credit and enjoyment of wealth, the man that had _no_ money a little richer, if anything, than the man that had a million.  The principle of success and basis of operation, though inexplicable in the hurry of the time, is plain enough now: *it was faith*.  Let the public believe that a smutted rag is money, it is money: in other words, it was a sort of financial biology, which made at night the thing conjured for, the thing that was seen, so far as the patient was concerned, while the fit was on him—except that now a man does not do his trading under the mesmeric influence: in the flush times he did.”


and




> “‘Commerce was King’ −and Rags, Tag and Bobtail his cabinet council.  Rags was treasurer.  Banks, chartered on a specie basis, did a very flourishing basis on the promissory notes of the individual stockholders ingeniously substituted in lieu of cash.  *They issued ten for one, the one being fictitious.*  They generously loaned all the directors could not use themselves, and were not choice whether Bardolph was the endorser for Falstaff, or Falstaff borrowed on his own proper credit, or the funds advanced him by Shallow.  The stampede towards the golden temple became general: the delusion prevailed far and wide that this thing was not a burlesque on commerce and finance.  Even the directors of the banks began to have their doubts whether the intended swindle was not a failure.  Like Lord Clive, when reproached for extortion to the extent of some millions in Bengal, they exclaimed, *after the bubble burst*, ‘When they thought of what they had got, and what they might have got, they were astounded at their own moderation.’”


Granted, he is critiquing it all (especially "banks" that are operating as banks in name only), but these discussions are not new.  Perhaps today's economists should spend less time on proving the validity on their financial models and more time reading their Southern Literature...

----------


## rpwi

> It does not create purchasing power out of thin air. There can only be 1 person holding a deposited dollar at a time. Unless you are insinuating the bank counterfeits its money.


In a sense it does.  They profit by issuing more claims on money then they have...then conflating those claims as money.  Sure only one person can have a deposit at a time...but more than one person can hold claim to a single dollar reserve.  That is the problem.  And has been a problem sense the goldsmith days...when naive gold depositors trusted goldsmiths to honor their deposits with claim slips...but were robbed when the goldsmiths issued more claim-slips than there was gold deposited.

----------


## hazek

Yes, it's not the deposits that are the problem it's clearly the lending.. the lending of more than they have that is.

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## cubical

> In a sense it does.  They profit by issuing more claims on money then they have...then conflating those claims as money.  Sure only one person can have a deposit at a time...but more than one person can hold claim to a single dollar reserve.  That is the problem.  And has been a problem sense the goldsmith days...when naive gold depositors trusted goldsmiths to honor their deposits with claim slips...but were robbed when the goldsmiths issued more claim-slips than there was gold deposited.


Wrong. If I loan out money to someone I can't claim I own that purchasing power, only that I own the loan. Doing it through a bank spreads out the risk, for a price, and offers you more than likely the ability to access your purchasing power, but again that is all determined with what bank you are using.

----------


## hazek

> Wrong. If I loan out money to someone I can't claim I own that purchasing power, only that I own the loan. Doing it through a bank spreads out the risk, for a price, and offers you more than likely the ability to access your purchasing power, but again that is all determined with what bank you are using.


It's not the bank that claims purchasing power out of nothing it's the borrower who does that. But the bank earn interest on it, interest on holding a loan they couldn't have possibly made in 100% reserve banking, a loan created out of thin air. Not only that but they also lower the overall available interest on loans by artificially inflating the supply of loans punishing the servers even more.

Can you see why it's fraud now?

----------


## Travlyr

> A quote from Joseph G. Baldwin in 1853 (italics his, bold mine):
> 
> and
> 
> Granted, he is critiquing it all (especially "banks" that are operating as banks in name only), but these discussions are not new.  Perhaps today's economists should spend less time on proving the validity on their financial models and more time reading their Southern Literature...


Indeed. Those who learn about and embrace honest sound money will see riches in their lifetime. A peace through security rather than a lifetime of debt.

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## rpwi

> Wrong. If I loan out money to someone I can't claim I own that purchasing power, only that I own the loan. Doing it through a bank spreads out the risk, for a price, and offers you more than likely the ability to access your purchasing power, but again that is all determined with what bank you are using.


What I'm espousing is not wild-crackpot economics...but standard econ 101 which talks about how banks using the money multiplier take X in reserves (monetary base) and create-multiply the money supply through lending and creating deposits (M1).

You have to look at the banking system in the aggregate since they are constantly re-lending each other reserves and selling each other loan asset.  In the aggregate you can have 1 trillion dollars in reserves matched by 4 trillion dollars in deposits.  The banks get away with this because they balance the remaining three trillion with loan assets.  In essence when a bank loans out reserves...they really aren't doing so.  Banks are not normal businesses...the create their own liquidity.  Their dynamics are much more akin to that of counterfeiters.

----------


## Gumba of Liberty

> What I'm espousing is not wild-crackpot economics...but standard econ 101 which talks about how banks using the *money multiplier* take X in reserves (monetary base) and create-multiply the money supply through lending and creating deposits (M1).
> 
> You have to look at the banking system in the *aggregate* since they are constantly re-lending each other reserves and selling each other loan asset.  In the aggregate you can have 1 trillion dollars in reserves matched by 4 trillion dollars in deposits.  The banks get away with this because they balance the remaining three trillion with loan assets.  In essence when a bank loans out reserves...they really aren't doing so.  Banks are not normal businesses...the create their own *liquidity*.  Their dynamics are much more akin to that of counterfeiters.



The only way to speak about the banking system with legitimacy is through Keynesian Jargon (money multiplier, aggregate demand, liquidity, etc.). If you speak in real terms it exposes them for the frauds and criminals they truly are.

----------


## heavenlyboy34

> It's not the bank that claims purchasing power out of nothing it's the borrower who does that. But the bank earn interest on it, interest on holding a loan they couldn't have possibly made in 100% reserve banking, a loan created out of thin air. Not only that but they also lower the overall available interest on loans by artificially inflating the supply of loans punishing the servers even more.
> 
> Can you see why it's fraud now?


That's not fraud.  Banks never claim that they don't do that.  It's actually quite clear if you bother to read _all_ their literature.  Remember also that FRNs are fungible.  Nowadays dollars are just numbers on a computer-not "money" in the strictest sense, but an instrument that is used to facilitate exchange.  Now, if banks were loaning non-fungible assets of depositors, you would have an absolutely sound case for fraud.  This is understood by both the Salamaca and Austrian school (and several others, as I understand it).

----------


## hazek

> That's not fraud.  Banks never claim that they don't do that.  It's actually quite clear if you bother to read _all_ their literature.  Remember also that FRNs are fungible.  Nowadays dollars are just numbers on a computer-not "money" in the strictest sense, but an instrument that is used to facilitate exchange.  Now, if banks were loaning non-fungible assets of depositors, you would have an absolutely sound case for fraud.  This is understood by both the Salamaca and Austrian school (and several others, as I understand it).


If it's not fraud, why can't you or I do what these banks do? Remember, facts in my OP are inescapable, and neither your or cubical have even attempted to argued they were.

Secondly it's fraud precisely because dollars are fungible otherwise they could never get away with creating promissory notes or certificates for any longer period of time before they whole house of cards comes crashing down.

----------


## heavenlyboy34

> What I'm espousing is not wild-crackpot economics...but standard econ 101 which talks about how banks using the money multiplier take X in reserves (monetary base) and create-multiply the money supply through lending and creating deposits (M1).
> 
> You have to look at the banking system in the aggregate since they are constantly re-lending each other reserves and selling each other loan asset.  In the aggregate you can have 1 trillion dollars in reserves matched by 4 trillion dollars in deposits.  The banks get away with this because they balance the remaining three trillion with loan assets.  In essence when a bank loans out reserves...they really aren't doing so.  Banks are not normal businesses...the create their own liquidity.  *Their dynamics are much more akin to that of counterfeiters*.


You were doing well up to there.  
*coun·ter·feit*   [koun-ter-fit]  Show IPA
*adjective**1.*made in imitation so as to be passed off fraudulently ordeceptively as genuine; not genuine; forged: _counterfeitdollar bills._

*2.*pretended; unreal: _counterfeit grief.


_The dynamics of a bank are those of a business.  A unique sort of business, as you say-but necessarily so.  Commercial banking is an important part of how commerce happens.  Like I said earlier, if you _just_ want a place to store money, get a safe deposit box.  Now, Central Banking is another story entirely.  This sort of bank has control of the money (more accurately, credit) supply.  The fact that a central bank can expand or contract the money supply via its various instruments makes it a cartel of criminals and fraudsters.

----------


## Travlyr

> That's not fraud.  Banks never claim that they don't do that.  It's actually quite clear if you bother to read _all_ their literature.  Remember also that FRNs are fungible.  Nowadays *dollars are just numbers on a computer-not "money" in the strictest sense*, but an instrument that is used to facilitate exchange.  Now, if banks were loaning non-fungible assets of depositors, you would have an absolutely sound case for fraud.  This is understood by both the Salamaca and Austrian school (and several others, as I understand it).


Ahh No. Dollars were defined in the "Free Market" in Joachim valley (1519 AD) by market participants.

----------


## heavenlyboy34

> If it's not fraud, why can't you or I do what these banks do? Remember, facts in my OP are inescapable, and neither your or cubical have even attempted to argued they were.
> 
> Secondly it's fraud precisely because dollars are fungible otherwise they could never get away with creating promissory notes or certificates for any longer period of time before they whole house of cards comes crashing down.


Actually, you can do it.  You just wouldn't be FDIC insured, and people wouldn't likely borrow from you, but you could do it.  If you lend me x amount of dollars for x amount of time and I invest some of it to make a profit, I haven't defrauded you-unless I make the claim that I will hold your specific dollars for the time agreed upon.  (money is inherently fungible-one unit is, for all intents and purposes, the same as the next.  If it weren't, it wouldn't serve the purpose of money and would just be a barter instrument.  Austrians would tell you this too.)  

How do you propose to grow an economy (especially one of scale) if you can't lend to people?

----------


## heavenlyboy34

> Ahh No. Dollars were defined in the "Free Market" in Joachim valley (1519 AD) by market participants.


No.  A US dollar is just a slip of paper that represents money (assuming some sort of standard) or is just an IOU (like an FRN).  You are thinking of _money_, not dollars.

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## Bohner

> Actually...when it comes to the money market for bank reserves...this is absolutely one sector that can go from 2% to 35% in one day (without government intervention).  It's just that volatile because it is a big confidence game.


That is a highly unlikely scenario. But if it does happen, then so be it. Better a sharp rise in interest rates than rates staying low and a bubble being formed. 




> Not talking about removing loans.  Just long term loans mismatched/financed by short term liabilities (loans that should not have been created).  Will rates go up...I think so.  But will prices go down without funny bank money?  I think so...  People always want low interest rates so they can buy their homes...what about the price of the home itself?  Isn't that important?  Bank money creates inflation which drives up home mortgages.


Yes, higher interest rates = contraction of the money supply = deflation = lower prices. Doesn't change the fact that 99% of the population would not be able to buy a house or start a business without a loan. Regardless of inflation/deflation. The thing is though that an expansion of the money supply is not necessarily a bad thing in the sense that it encourages growth. The problem is when interest rates are artificially forced down by the government is when bubbles are created. 




> There might be a little shock to the market as the economy adapts to living without bank loans (like getting off of a drug).  I'm sure accounts payable/accounts receivable would be a lot more important for businesses.


It's not even necessary... That's the thing. There is nothing wrong with fractional reserve banking, so long as the benefits/consequences of the free market keep the banks honest.

----------


## chronicaust

FRB inherently forces interest rates down artificially through the increased ability to lend money. This clearly creates a distortion in the market. For instance: Bank A using Currency A has a 10% reserve ratio while Bank B using Currency B has a 100% reserve ratio. Bank A lends approx. 10 times more Currency A Dollars than it has deposits. Bank B only lends Currency B Dollars that it physically has and requires the permission of the depositor (investor in the bank, essentially) to make these loans. Clearly, Bank A will have low interest rates while Bank B will have high interest rates. However, assuming both currencies begin with 1000 units then the ratio of prices of Currency A to Currency B will be approx. 10:1. So, people using Currency A will tend to borrow more to buy a house/car/etc. while Currency B users will be more likely to save until they can buy the house. The difference is that the people using Currency A are driving prices up by borrowing (or the flip side of the coin where the banks are lending excessively)(inflation), making it harder and harder to save to buy a house in those dollars. Eventually, A users will not be able to borrow money on such a large scale because they won't be able to pay it back. This is where the bubble forms and a deflationary event must come into play. Sure, the A users got their houses more quickly than the B users, but it was clearly a distortion. Currency B users will not see this inflation and the price of houses will remain relatively constant, making it easier to save for the house. If borrowing does occur, inflation is not present because no new money is created and the person must pay back the loan or default. This creates an incentive not to borrow beyond your means, because it is expensive, and to instead save money to buy the house. 

To say people could not buy houses without loans is ludicrous. Sure, it may be harder but the main reason people haven't lost the homes they couldn't pay for when the bubble burst is because of government intervention. In a free market, these people would lose their homes and realize the danger of borrowing excessively and be wary of currencies where the bank lends excessively.

In a free market, the good money (Currency B) will drive out the bad money (Currency A) and only B will continue to exist as people see that the A model will come crashing down eventually.

Sorry if I created a text wall.

----------


## Bohner

> FRB inherently forces interest rates down artificially through the increased ability to lend money. This clearly creates a distortion in the market. For instance: Bank A using Currency A has a 10% reserve ratio while Bank B using Currency B has a 100% reserve ratio. Bank A lends approx. 10 times more Currency A Dollars than it has deposits. Bank B only lends Currency B Dollars that it physically has and requires the permission of the depositor (investor in the bank, essentially) to make these loans. Clearly, Bank A will have low interest rates while Bank B will have high interest rates. However, assuming both currencies begin with 1000 units then the ratio of prices of Currency A to Currency B will be approx. 10:1. So, people using Currency A will tend to borrow more to buy a house/car/etc. while Currency B users will be more likely to save until they can buy the house. The difference is that the people using Currency A are driving prices up by borrowing (or the flip side of the coin where the banks are lending excessively)(inflation), making it harder and harder to save to buy a house in those dollars. Eventually, A users will not be able to borrow money on such a large scale because they won't be able to pay it back. This is where the bubble forms and a deflationary event must come into play. Sure, the A users got their houses more quickly than the B users, but it was clearly a distortion. Currency B users will not see this inflation and the price of houses will remain relatively constant, making it easier to save for the house. If borrowing does occur, inflation is not present because no new money is created and the person must pay back the loan or default. This creates an incentive not to borrow beyond your means, because it is expensive, and to instead save money to buy the house. 
> 
> To say people could not buy houses without loans is ludicrous. Sure, it may be harder but the main reason people haven't lost the homes they couldn't pay for when the bubble burst is because of government intervention. In a free market, these people would lose their homes and realize the danger of borrowing excessively and be wary of currencies where the bank lends excessively.
> 
> In a free market, the good money (Currency B) will drive out the bad money (Currency A) and only B will continue to exist as people see that the A model will come crashing down eventually.
> 
> Sorry if I created a text wall.


This isn't exactly true. At least not if FRB interest rates were left to the free market and not the fed. You make it sound like this rise in prices would be permanent, which is absolutely not true if the fed wasn't involved. 

If interest rates are low, then prices will be as well because there is a contraction in the money supply as a result of excess savings. As people take advantage of the low interest rates and begin to take out loans, prices will gradually rise as a result of an increase in the money supply, but so will interest rates as a result of a reduction in savings. As interest rates increase, fewer and fewer people will borrow, forcing prices to gradually drop back down.

----------


## Travlyr

> No.  A US dollar is just a slip of paper that represents money (assuming some sort of standard) or is just an IOU (like an FRN).  You are thinking of _money_, not dollars.


The "Dollar" was codified in 1792. Coinage Act of 1792.



> DOLLARS -- each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy-one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.

----------


## hazek

> Actually, you can do it.  You just wouldn't be FDIC insured, and people wouldn't likely borrow from you, but you could do it.


This is bull$#@! and you know it. I personally cannot lend by having less than 100% reserves. If I do I would be branded a counterfeiter and caged by the state.




> If you lend me x amount of dollars for x amount of time and I invest some of it to make a profit, I haven't defrauded you-unless I make the claim that I will hold your specific dollars for the time agreed upon.  (money is inherently fungible-one unit is, for all intents and purposes, the same as the next.  If it weren't, it wouldn't serve the purpose of money and would just be a barter instrument.  Austrians would tell you this too.)


If however I could do this I wouldn't be defrauding you, the borrower, as I already explained it, I and the borrower would be defrauding every other saver holding this money by stealing their purchasing power which I created out of thin air and lent it out at interest. I would be also stealing their savings by artificially lowering the available interest on loans because of my artificially increased supply of loans.

Are you familiar with Frederic Bastiat and his That Which is Seen, and That Which is Not Seen? The fraud here happens because of the unseen:
Savers lose purchasing power because of inevitable higher prices due to an artificially higher supply of money (and this happens precisely because money is fungible)Savers lose purchasing power because of artificially increased supply of loans artificially decrease the available interest rates on loans 




> How do you propose to grow an economy (especially one of scale) if you can't lend to people?


Already answered. By investment of savings, the only honest way.

----------


## hazek

I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.

Yes it's true FRB operators compete with savers about who is going to offer lower interest rates but this is not theft since savers aren't exposed to counterparty risk while FRB operators and their depositors are. As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it. Savers lose out but they avoid risk, depositors and operators gain but they do so at a risk of loss.

Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition.  If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs my a bit of my purchasing power but the trade off is no risk and so the balance is there.


I now believe I was wrong. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.

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## Travlyr

Fractional Reserve banking is fraud. Two people cannot both own 100% of an asset. Take a double bacon cheese burger for example. If you and I both own 100% of it then I have the right to eat all of it. Once I do eat it then I've stolen your portion of the ownership. If we own it 50-50, then we can cut it in half.

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## William R

> I got inspired to write this post by reading Adam's interview about Bitcoin but it's also something that's been on my mind for a while now. It's something that I feel too many people hold a potentially very dangerous belief about simply because they intuitively miss the unseen and I want to change that.
> 
> 
> No matter the circumstance, fractional reserve banking is fraud in it's purest form.
> 
> 
> facts:
> when a bank loans more than the amount of it's deposits, it creates money(currency, promissory notes, certificates) out of thin airwhen anyone in an economy creates money out of thin air they effectively steal goods and services from everyone else holding the same moneynot only does a bank steal by charging interest on money created out of thin air, they also steal goods or services pledged as collateral after an increased number of people default when an inevitable bubble fueled by their money creation pops
> 
> ...



The Problem is Central Banking not Fractional Reserve Banking

http://www.freebanking.org/2011/06/2...serve-banking/

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## hazek

Yes I get that now.

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## hazek

> Fractional Reserve banking is fraud. Two people cannot both own 100% of an asset. Take a double bacon cheese burger for example. If you and I both own 100% of it then I have the right to eat all of it. Once I do eat it then I've stolen your portion of the ownership. If we own it 50-50, then we can cut it in half.


Travlyr, I had a really heated discussion on the bitcoin forums about this same issue and when people explained to me how FRB works the "Two people cannot both own 100% of an asset" part is not what happens in a FRB regulated by strictly market consumers (i.e. a free market).

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## Travlyr

> Travlyr, I had a really heated discussion on the bitcoin forums about this same issue and when people explained to me how FRB works the "Two people cannot both own 100% of an asset" part is not what happens in a FRB regulated by strictly market consumers (i.e. a free market).


If everyone took delivery of their asset, then fractional reserve anything could not fulfill the order for everyone. In a free market, market players could agree to participate in fractional reserve banking but at a risk of losing their asset. 

However, if one entity is fractional reserve banking in the same asset class as a competitor 100% reserve, then the fractional reserve entity will dilute the asset class for everyone.

----------


## Bohner

> Fractional Reserve banking is fraud. Two people cannot both own 100% of an asset. Take a double bacon cheese burger for example. If you and I both own 100% of it then I have the right to eat all of it. Once I do eat it then I've stolen your portion of the ownership. If we own it 50-50, then we can cut it in half.


Absolutely horrible comparison. 
A cheeseburger is a consumable good that disappears once it's consumed. Money can be used multiple times. 

Do you know what your bank does with your savings when you deposit it in the bank?
Did you voluntarily deposit that money in the bank?

If the answer to these questions is yes, then how can it possibly be fraud? 

Secondly... Let's say you buy a treasury bond from the government, who does that money now belong to? You, or the government? 
FRB is essentially the same thing. Once you deposit money in the bank, that money now belongs to the bank, and your bank account is essentially an IOU that you can redeem at any time. 

The advantage of this system is that should you need capital to buy a house or start a business, the bank has the funds necessary pooled from it's depositors to lend you so that you can make it happen, spurring economic growth.

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## Travlyr

> Absolutely horrible comparison. 
> A cheeseburger is a consumable good that disappears once it's consumed.


That was the point of using that example. Once delivery is completed then somebody loses.




> Money can be used multiple times.


No doubt. If everyone stored it at home, (took delivery) then everyone would hold a store of wealth.




> Do you know what your bank does with your savings when you deposit it in the bank?


The bank does not store money. FRNs are faith based notes.




> Did you voluntarily deposit that money in the bank?


I prefer to not deposit currency in a bank. They inflate the value of it away. I put my savings into commodities.




> If the answer to these questions is yes, then how can it possibly be fraud?


Because two people are assigned 100% ownership of the exact same asset. It is an impossible contract to fulfill if delivery is ever required by everyone.




> Secondly... Let's say you buy a treasury bond from the government, who does that money now belong to? You, or the government? 
> FRB is essentially the same thing. Once you deposit money in the bank, that money now belongs to the bank, and your bank account is essentially an IOU that you can redeem at any time.


The bond isn't really money... it is a note. It is a note that inflates away.




> The advantage of this system is that should you need capital to buy a house or start a business, the bank has the funds necessary pooled from it's depositors to lend you so that you can make it happen, spurring economic growth.


Wrong. In the absence of that system the people would be wealthy and bankers would have to make an honest living. Bankers would not be owning everyone's house, car, boat, motorcycle, motorhome, education, appliances, and credit card debt as they do today. Productive people would be rich because their savings would accumulate rather than inflate away. People would own their house, car, boat, etc. outright. Virtually everything would be affordable without borrowing money to purchase it.

This post explains it pretty well.

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## Travlyr

Right now the government is rich beyond anyones wildest imagination and most people are just getting by or deeply in debt. That disparity is because of allowing privileged people to 'create' money out of nothing... which is impossible. Money can not be 'created' any more than a car can be 'created.' What happens is that whoever gets the privilege to 'create' money out of nothing do so at the expense of production.

They do not let us unprivileged people 'create' money. When we try it it is a crime.

When we stop them from 'creating' money out of nothing, (End The Fed and Fractional Reserve banking) then productive people become wealthy and the government starves.

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## smithtg

ask bernie madoff how it feels to create money.  Once he had enough capital to 'loan' all he had to do was shuffle the eggs so that everyone thought they had money.  He 'paid' the same million to everyone as long he got it from someone else.  His 'business' was 'passing' money and in some ways 'creating it' except when people came to collect there was nothing there

----------


## Bohner

> That was the point of using that example. Once delivery is completed then somebody loses.


The reason why everyone loses in your stupid example is because the good disappears once it is consumed. This does not apply to money. 




> The bank does not store money. FRNs are faith based notes.


It doesn't matter what the currency is. FRB was still going on even under the gold standard. I'm defending FRB here, not FRNs. 




> I prefer to not deposit currency in a bank. They inflate the value of it away. I put my savings into commodities.


So you don't even have a checking account? Don't you run into liquidity problems when having to find someone to convert your silver into fiat before going to the corner store to buy a loaf of bread?




> Because two people are assigned 100% ownership of the exact same asset. It is an impossible contract to fulfill if delivery is ever required by everyone.


But you don't have 100% ownership when you deposit money in the bank, I already explained this to you. 




> The bond isn't really money... it is a note. It is a note that inflates away.


Your account balance isn't really money either. It's a note as well, which indicates that the bank OWES you what you have in your account. 




> Wrong. In the absence of that system the people would be wealthy and bankers would have to make an honest living. Bankers would not be owning everyones house, car, boat, motorcycle, motorhome, education, appliances, and credit card debt as they do today. Productive people would be rich because their savings would accumulate rather than inflate away. People would own their house, car, boat, etc. outright. Virtually everything would be affordable without borrowing money to purchase it.


I'm defending FRB here, not FRNs. If you want to save money in order to buy these things instead of taking out a loan, that's fine. But it's the government printing press that is responsible for money inflating away, not FRB.

----------


## Travlyr

> I'm defending FRB here, not FRNs. If you want to save money in order to buy these things instead of taking out a loan, that's fine. But it's the government printing press that is responsible for money inflating away, not FRB.


Then why can't just anyone set up a FRB without penalty?

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## Bohner

> Then why can't just anyone set up a FRB without penalty?


Because of regulations... Which I oppose.

----------


## The Free Hornet

> Then why can't just anyone set up a FRB without penalty?


I suspect a FRB that is not FDIC insured and getting FRNs at a multiple of their private deposits would be at an extreme competitive disadvantage.

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## Travlyr

> Because of regulations... Which I oppose.


I agree. They regulate it to keep it under their 'control.' If they just let anyone and everyone operate a fractional reserve bank, then the currency would be worthless. It is a privileged system.

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## Bohner

> If they just let anyone and everyone operate a fractional reserve bank, then the currency would be worthless.


What?

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## Travlyr

If several million people who are not able to start their own FRB were allowed to start a FRB, then they would flood the market with currency. They have to control that or ruin the economy. So only privileged people get to FRB.

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## Bohner

> If several million people who are not able to start their own FRB were allowed to start a FRB, then they would flood the market with currency. They have to control that or ruin the economy. So only privileged people get to FRB.


You're joking right?

----------


## Travlyr

> You're joking right?


No. Why should some people be able to operate a FRB but others can't?

----------


## Bohner

> No. Why should some people be able to operate a FRB but others can't?


Because they wouldn't have the funds or knowledge necessary to start an FRB to begin with? 

As I said, I'm opposed to regulations, but being allowed to open a bank and being able to are 2 different things.

----------


## hazek

> Originally Posted by Travlyr
> 
> 
> Then why can't just anyone set up a FRB without penalty?
> 
> 
> I suspect a FRB that is not FDIC insured and getting FRNs at a multiple of their private deposits would be at an extreme competitive disadvantage.


Yeah, there actually already is FRB in Bitcoin although it is regulated strictly by market consumers and isn't insured.

----------


## Bohner

> Yeah, there actually already is FRB in Bitcoin although it is regulated strictly by market consumers and isn't insured.


I love it!!!

(Waits for Travylr to say that Bitcoin will now inflate to the point of worthlessness ).

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## Travlyr

> Yeah, there actually already is FRB in Bitcoin although it is regulated strictly by market consumers and isn't insured.


Do people normally take delivery of Bitcoins? Or a better question, if everyone requested delivery all at once could they deliver to everyone?

----------


## Bohner

> if everyone requested delivery all at once could they deliver to everyone?


Of course not!!! 

Do you understand what an FRB is?

----------


## hazek

> Do people normally take delivery of Bitcoins? Or a better question, if everyone requested delivery all at once could they deliver to everyone?


Nope. That's the risk the depositors bare in a strictly by market consumers regulated FRB. It's also the trade off for access to purchasing power as oppose to paying savers a higher interest rate.

But what operators can do is lend to each other for a short period of time to remain solvent.

----------


## Travlyr

> Of course not!!! 
> 
> Do you understand what an FRB is?


Yes, with real money. 

FRB with FRNs are only based on faith. There is no real reserve requirement. It is an accounting myth.

I do not understand the Bitcoin. And since it is not tangible, it is not something that I have interest in.

----------


## hazek

> Do you understand what an FRB is?


This is the crucial mistake in the argument I originally supported. The confusion of debt based central banking with capital FRB.

----------


## Bohner

> Yes,


You clearly don't




> with real money.


The currency could be horse $#@!... It doesn't change the concept of FRB. 




> FRB with FRNs are only based on faith. There is no real reserve requirement. It is an accounting myth.


Central banking via printing press =/= FRB. 




> I do not understand the Bitcoin. And since it is not tangible, it is not something that I have interest in.


But you clearly have an interest in FRB, as you are clearly opposed to it. It's usually wise to develop at least a basic knowledge on a topic before expressing your opinion on it.

----------


## hazek

Bohner cut him some slack, it's not even 6hours ago when I defended the exact argument as he does. Luckily I often manage to detach myself from my beliefs and reexamine them in light of new evidence and I realized my mistake.

----------


## Travlyr

> You clearly don't
> 
> 
> 
> The currency could be horse $#@!... It doesn't change the concept of FRB. 
> 
> 
> 
> Central banking via printing press =/= FRB. 
> ...


I know what fractional reserve banking is. It is a method of asset ownership where two or more people claim ownership to the exact same asset.

----------


## hazek

Travlyr would you mind giving this a read?: http://www.freebanking.org/2011/06/2...serve-banking/

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## hazek

> I know what fractional reserve banking is. It is a method of asset ownership where two or more people claim ownership to the exact same asset.


Yes that is true but there's nothing wrong with that. What you are actually against is counterfeiting this asset and making copies out of thin air.

----------


## Bohner

> Yes that is true but there's nothing wrong with that. What you are actually against is counterfeiting this asset and making copies out of thin air.


A little clarification... When you deposit money in the bank, it's not shared ownership. The money belongs to the bank. Your account balance is not necessarily money that you have, it's money that the bank OWES you that you can claim at any time. 

In essence, your account balance is like the IOU you receive from the government when buying a bond... When you lend the government money, that money now belongs to the government, it's not shared ownership. But when it comes time to claim the IOU, they need to pay you what they owe. The only difference between bonds and checking accounts is that checking accounts don't need to mature before you can claim what the bank owes you, which is why they need reserves.

I already explained this to Travylr, but he doesn't seem interested.

----------


## awake

Fractional reserve banks are indeed fraud. To prove this statement true, one would need to stop taxpayer bank bailouts and end central counterfeiting; the banks would prove themselves insolvent once and for all time under these conditions. But since both of those "institutions" are in full force, the theory is prevented from becoming irrefutably correct.

Fractional reserve should be free to do as long as the fraud will be prosecuted when the bank over prints or allows thier reserves to dwindle.

Just like speeding; it should be legal, but if you want to do it and you hurt someone else, your going to be prosectued.

----------


## hazek

> A little clarification... When you deposit money in the bank, it's not shared ownership. The money belongs to the bank. Your account balance is not necessarily money that you have, it's money that the bank OWES you that you can claim at any time. 
> 
> In essence, your account balance is like the IOU you receive from the government when buying a bond... When you lend the government money, that money now belongs to the government, it's not shared ownership. But when it comes time to claim the IOU, they need to pay you what they owe. The only difference between bonds and checking accounts is that checking accounts don't need to mature before you can claim what the bank owes you, which is why they need reserves.
> 
> I already explained this to Travylr, but he doesn't seem interested.


Ok more precisely the ownership isn't shared but the claim on ownership is. I have a claim on ownership of my deposit and so does the bank once it lends out a fraction of it.

Would you agree?

----------


## Bohner

> Ok more precisely the ownership isn't shared but the claim on ownership is. I have a claim on ownership of my deposit and so does the bank once it lends out a fraction of it.
> 
> Would you agree?


I agree...  

Your account balance is your asset and the bank's liability. Which is where the claim on ownership comes into play. And the bank must give you money owed to you when you ask for it. But until you ask for it, that money technically belongs to the bank in the meantime. 

It's kind of a semantics argument, but it's an important distinction given the thread topic.

----------


## rpwi

> I just had a long walk outside thinking through all the arguments and scenarios and I believe I was mistaken, FRB in a market regulated by market consumers is not fraud.


You were mistaken that you were mistaken :P




> Yes it's true FRB operators compete with savers about who is going to offer lower interest rates but this is not theft since savers aren't exposed to counterparty risk while FRB operators and their depositors are.


It's more than just not getting your fare shake at being frugal and saving.  It's that fractional banking causes inflation (lot more than the Fed money does)...and there is where most of the thievery happens.  




> As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it.


This is wrong.  This is like saying a ponzi scheme is not wrong...as long as they don't use government assistance.




> Savers lose out but they avoid risk, depositors and operators gain but they do so at a risk of loss.


Depositors are only investing in a bank in an abstract financial sense.  In reality it is simply where the public stores their money...and they don't know that banks are not keeping their money on demand.  This is dishonest.

[qutoe]Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition.  If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs my a bit of my purchasing power but the trade off is no risk and so the balance is there.[/quote]Well...one could justify competing with a counterfeiter using that logic.  Sure the counterfeiter risks going to jail...but that risk doesn't justify his activities.




> I now believe I was wrong. Everyone defending FRB in a market regulated strictly by market consumers(i.e. free market) was right.


You are wrong that you were wrong.  Banks are offering more claim clips on reserves than they have in reserves.  This is dishonest.  There would be no 'free market' for fractional banking.  This would be like saying there would be a free market for Russian roulette.  Or a free market for defective parachutes.  An enlightened consumer will have no reason to accept a deposit in which say only 30% consist of dollars...because they know one bank run and it is all gone (and the government won't bail them out).  So why get a 0% yielding checking account that is guaranteed to fail in the aggregate?

In fact in smaller countries, currency speculators will 'crack' fractional banking system to manipulate interest rates and exchange rates.  They would be able to do this in the US easily without government aid to fractional banking.  Key is not to have government supported fractional banking, nor free market-fractional banking...but no fractional banking at all.

----------


## hazek

The important part is there is no new money created out of thin air, it doesn't actually happen in by strictly market consumers (i.e. a free market) regulated FRB.

The money creation stuff happens in debt based central banking.

----------


## rpwi

> The Problem is Central Banking not Fractional Reserve Banking
> http://www.freebanking.org/2011/06/2...serve-banking/
> http://www.freebanking.org/2011/06/2...serve-banking/


That article was very poorly written.  In fact even Keynesian's would have a bone to pick with it.  The author does not understand a lot, including how modern banks relend and borrow reserves from each other  which is the backbone of how fractional banking works now.  In reality, banks don't lose reserves though check clearing because they can reacquire those reserves from the money market.  So they merely swap deposit liabilities for liabilities to other banks.  He uses an orthodox unrealistic model and then makes erroneous conclusions on it.  Fractional banking is in fact a problem far greater than central banking...and in fact the biggest problem with central banking is that it props up fractional banking.

----------


## rpwi

> Travlyr, I had a really heated discussion on the bitcoin forums about this same issue and when people explained to me how FRB works the "Two people cannot both own 100% of an asset" part is not what happens in a FRB regulated by strictly market consumers (i.e. a free market).


Over-booked reserve assets are ABSOLUTELY how fractional banking works now and would work without government involvement.  It's a simple matter of analyzing a banks balance sheets...as long as deposits are more than dollar reserves...then yes...they are issuing more promises on money then they have.

----------


## Steven Douglas

> The Problem is Central Banking not Fractional Reserve Banking
> 
> http://www.freebanking.org/2011/06/2...serve-banking/


Feel free to poke holes and help me understand, as here is my understanding, and the problem I have with that article: (my emphasis in bold)




> Now you say, Yes, but that $900 will be spent and deposited at another bank, which will keep $90 and lend out $810, and so on.  And you are quite right, which leads us to Banking Rule #2:  
> *
> The banking system can expand by a multiple of those original excess reserves*.  
> 
> Assuming 
> 
> all banks face a 10 percent requirement,no one takes wants outside money, andno banks hold excess reserves,
> *the system will create $10,000 based on that original $1,000 deposit*.  
> 
> ...


With FRB there is a _system-wide_ artificial expansion of the money supply, followed by an _ultimate_ contraction.  And note that I make zero distinction between reserves and fiduciary media, all of which can behave and is treated as money in the market.  The statement that "_the system simultaneously contracts by a multiplied amount_" is incorrect, because simultaneously implies immediately.  In fact, the system _eventually, theoretically, ultimately_ contracts by a multiplied amount of the original deposit/withdrawal.   

This is seen as a net zero-sum game, given that the "inflation" of money in circulation is only temporary; that the system will eventually self-correct and equilibrate over time with an eventual contraction as loans are called in or repaid, as could indeed happen in a system with no Fed, and no injection of new reserves. This self-correcting mechanism is what makes it "harmless", or not fraud in the minds of many.  But is that true?

Consider the following:

*Able and Cane go to an auction to bid on the same good.*  Prior to auction Cane realizes he would not be able to compete with Able, who has more money than him.  So Cane takes what little money he does have and hires a *Bart, A Special Kind of Conversion Thief*.  Bart is special because he lives by a creed that whatever he takes must eventually be replaced - secretly and unobserved both times. He is also special because he is almost never caught. The only way he can be caught is if he fails to return money he takes. 

Bart breaks into Alex's safe (undetected) and takes some money out. Temporarily. This money, which Bart now treats as his own (Bart is a very responsible fellow), is then loaned to Cane at interest.  At auction, because Able and Cane are both competing for the same good the price of that good is naturally driven up.  Cane wins the auction and pays for the good with the money taken from Alex's safe.  Cane then quickly sells that good on the market for a profit.  Cane returns the original amount to Bart, along with half of the profits from the sale.  Bart then turns around, breaks into Alex's safe (again, secretly and unobserved) and returns the original money he borrowed/stole from Alex.  

*Under FRB logic**:* so long as Bart eventually returns the money to Alex, Alex cannot have been said to be harmed. 

In the above scenario "Alex" represents currency holders in the  aggregate. Bart represents the banking system on the whole, while Cane represents the aggregate  borrowers from an FRB system.  The "money" taken temporarily from the safe is not  actual physical money or a physical safe, but only the *scarcity component of value* of all like currency in circulation.  

What is ignored in the article quoted above: the harm done from a system-wide value dilution of _all current holdings,_ regardless of the fact that it was only _temporarily_ diluted, as an aggregate expansion through the FRB multiplier.   

The fraud involved here is a special kind of theft known as conversion. 




> *There is conversion when a person intentionally, and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that other person's right of possession.*


What makes this not conversion in the eyes of many is that there is no "physical" control assumed or exercised over the physical property of any one specific person. Thus, my modified version of what Keynes wrote:
*
"By a continuing initiating the process of inflation, however temporarily, government inflators can confiscate, secretly and unobserved, an important part of the wealth/value of their citizens currency holders/holdings.**"*

Theoretically, and in the above limited context only, all a currency holder must  do to retain purchasing power is _wait_ until the multiplied money contracts _system-wide_.   In other words, wait until the "value" is returned back to your safe.  Then,  in this zero-sum game, all is well again, and nobody is seen as harmed. 

The fact that it is a temporary dilution, and the fact that the market  itself is only temporarily distorted, does not mean that those who were  not direct parties of interest to specific FRB loans were not defrauded in the process. *The value of FRB multiplied fiduciary media does not come out of thin air.* It comes from the control exercised or assumed (even temporarily) over the _value of property belonging to others_, no differently in essence than if you had broken in, secretly and unobserved, and TEMPORARILY confiscated a physical part of everyone's holdings, regardless of the fact that it comes with a promise that it will later be replaced as the multiplier contracts. 

The value of the multiplier loan came from all other holdings, but the currency holders whose value was taxed were not named as parties of interest, let alone risk.  And whenever there is a default, the losses are socialized, because the money is not returned - the fiduciary media remains in circulation, even in the form of goods and services not paid for in the aggregate -- and so the value is not returned to everyone's safe. 

Since the fraud is only temporary and against the aggregate, no specific victim can be named. But that is irrelevant in the criminal sense.  If I defraud someone specifically, even then that fraud is treated as not only against the person I  defrauded, but also against everyone else. Fraud affects and is  affected by "the public interest", which is why fraud is prosecuted by  "The People of the State VS.", rather than simply The State On Behalf of  Victim X.  It's only when you get to the CIVIL component of fraud that specific victims are named as parties of interest - even in the case of a class action suit. 

Then comes the argument that we ALL exercise *control over the value* of other people's property (money, goods or services) through competition in a free market.   The influence over the value of other people's money, goods and services in a free market comes from direct control over only that which is yours to legitimately control.  If I, as a private party, counterfeit with the full intent of later replacing it with real money, it will be no less a crime. This is because I am exercising, however temporarily, influence and control over the value of property that belongs to someone other than me. When banking system does this exact same thing it gets a pass.

----------


## Bohner

> It's that fractional banking causes inflation (lot more than the Fed money does).


You do realize that FRB has been going on since long before the fed even existed right??? 

Look at all this inflation!!!!



You do know that the fed has had full control over the printing press since 1971 right? Notice anything particularly interesting happening on the graph around that time?

Yet you believe FRB causes more inflation than the fed??

----------


## hazek

> It's more than just not getting your fare shake at being frugal and saving.  It's that fractional banking causes inflation (lot more than the Fed money does)...and there is where most of the thievery happens.


I had a really hard time with this too. I asked myself the question what is the difference between 1) me personally making a loan, 2) a group of people pooling money and making a fractional loan, and 3) an operator pooling money from a group of people making loans

I could only conclude that there is none when it comes to money supply. There is however a difference in risk/reward.




> As long as this risk isn't somehow removed by some monopoly on violence i.e. a state or FRB lending isn't being done based on debt but on capital reserves then there's nothing wrong with it.
> 			
> 		
> 
> This is wrong.  This is like saying a ponzi scheme is not wrong...as long as they don't use government assistance.


Not a good analogy. Money is not a fixed claim on value which I also thought it was and so I wrongly though savers are getting robbed by FRB operators but then I realized money is just a good with supply and demand components much like any other good and FRB operators are competitors competing with savers for business of loaning by offering a better price for this good, a lower yield. 




> Depositors are only investing in a bank in an abstract financial sense.  In reality it is simply where the public stores their money...and they don't know that banks are not keeping their money on demand.  This is dishonest.


 Yes but that is not free market FRB. Take for instance the FRB going on in Bitcoin. There every depositor is well aware of what the operator of the fund is doing.




> Ownership of money carries no special entitlement of goods and services but is a good like any other subject to competition.  If my interest rate is being undercut by a FRB operator that's ok because it's being balanced out with him carrying risk that I do not. Yes that costs my a bit of my purchasing power but the trade off is no risk and so the balance is there.
> 			
> 		
> 
> Well...one could justify competing with a counterfeiter using that logic.  Sure the counterfeiter risks going to jail...but that risk doesn't justify his activities.
> 
> You are wrong that you were wrong.  Banks are offering more claim clips on reserves than they have in reserves.  This is dishonest.  There would be no 'free market' for fractional banking.  This would be like saying there would be a free market for Russian roulette.  Or a free market for defective parachutes.  An enlightened consumer will have no reason to accept a deposit in which say only 30% consist of dollars...because they know one bank run and it is all gone (and the government won't bail them out).  So why get a 0% yielding checking account that is guaranteed to fail in the aggregate?
> 
> In fact in smaller countries, currency speculators will 'crack' fractional banking system to manipulate interest rates and exchange rates.  They would be able to do this in the US easily without government aid to fractional banking.  Key is not to have government supported fractional banking, nor free market-fractional banking...but no fractional banking at all.


I thought so too but the real world market experiment regulated strictly by market consumers (i.e. a free market experiment) that is Bitcoin shows evidence to the contrary.

----------


## rpwi

> Absolutely horrible comparison. 
> A cheeseburger is a consumable good that disappears once it's consumed. Money can be used multiple times.


There is a difference between successive ownership and concurrent ownership.  Nothing wrong with the former...tons wrong with the latter.  This should be logical.  It's ok to sell a house to another...it's not ok to sell the same house to two different people.




> Do you know what your bank does with your savings when you deposit it in the bank?


I do, but most do not.  That is the problem.  Banks are taking advantage of our ignorance.




> Did you voluntarily deposit that money in the bank?


Not really.  Work will only pay from a bank account.  I have to pay taxes in a bank account.  Governments 'invests' my tax receipts in fractional bank accounts.  Many large purchases can only be done with a bank account.  If I withdraw a lot of cash I get reported to the IRS and terrorism watch lists.  Even if I do withdraw the cash, the Fed will inject the reserves lost right back into the banking system...so little was changed for the banks.




> If the answer to these questions is yes, then how can it possibly be fraud?


Because they are issuing false promises.  Is a ponzi scheme fraud?




> Secondly... Let's say you buy a treasury bond from the government, who does that money now belong to? You, or the government? 
> FRB is essentially the same thing. Once you deposit money in the bank, that money now belongs to the bank, and your bank account is essentially an IOU that you can redeem at any time.


They are not the same.  A t-bill is clearly an investment dependent upon payout.  A deposit is not an investment but liquidity that people use as a store of value and whose value does not depend on payouts. 




> The advantage of this system is that should you need capital to buy a house or start a business, the bank has the funds necessary pooled from it's depositors to lend you so that you can make it happen, spurring economic growth.


That is not logical.  First, there the free market can generate loans outside of banking.  Secondly, without FRB, prices go down...so we don't have to borrow as much.  To say that our checking accounts finance needed investment is somewhat circular...why not 'invest' that money yourself?

----------


## rpwi

> This is the crucial mistake in the argument I originally supported. The confusion of debt based central banking with capital FRB.


You should elaborate on this...as fractional banking does not depend exclusively on central banking.

The problem with central banking is that they mismanage assets, issue money (which creates inflation/bubbles) and bailout financial institutions (financial loss and encourages risky behavior).  A central bank doesn't really borrow that much...and their biggest 'liability' is base money...which shouldn't even be considered a liability at all.

A FRB bank creates money, inflation (MANY times that of a central bank), and malinvestment (again many times that of a central bank).  They also create bank runs and/or financial bailouts.  

They both steal through inflation...just banks do so on a much bigger scale.

----------


## hazek

> A FRB bank creates money,


Looking at the facts I found this not to be true.

I'll elaborate if you want after I finish eating dinner. :P

----------


## rpwi

> A little clarification... When you deposit money in the bank, it's not shared ownership. The money belongs to the bank. Your account balance is not necessarily money that you have, it's money that the bank OWES you that you can claim at any time.


But is a false promise so can never be a legit promise to began with.  




> In essence, your account balance is like the IOU you receive from the government when buying a bond... When you lend the government money, that money now belongs to the government, it's not shared ownership. But when it comes time to claim the IOU, they need to pay you what they owe. The only difference between bonds and checking accounts is that checking accounts don't need to mature before you can claim what the bank owes you, which is why they need reserves.
> 
> I already explained this to Travylr, but he doesn't seem interested.


Noooo...  Bonds are completely different.  Yes.  You can abstract the demand deposit as a 0% yielding asset with a 0 second maturity, but that doesn't explain how banking works.   Now if banks matched their balance sheets with 0% paying demand deposits with perfectly liquid able assets, I wouldn't have a problem with that.  Banks mismatch maturities to manipulate things though.  They use long term assets to match-up with short term liabilities...and this doesn't add up in the aggregate.  Banks are constantly demanding more liquidity than they can offer...and can only thrive by rolling overly false-liquid assets or by getting government assistance.

----------


## rpwi

> I agree...  
> 
> Your account balance is your asset and the bank's liability. Which is where the claim on ownership comes into play. And the bank must give you money owed to you when you ask for it. But until you ask for it, that money technically belongs to the bank in the meantime. 
> 
> It's kind of a semantics argument, but it's an important distinction given the thread topic.


So how does a bank run fit into your philosophy?

----------


## rpwi

> The important part is there is no new money created out of thin air, it doesn't actually happen in by strictly market consumers (i.e. a free market) regulated FRB.
> 
> The money creation stuff happens in debt based central banking.


This is absolutely incorrect.  Do you know what M1, M2 and M3 are?  They are the aggregates and measures in which banks have created money.  When a bank issues more deposits than they have in reserves they absolutely create money.

----------


## Bohner

> There is a difference between successive ownership and concurrent ownership.  Nothing wrong with the former...tons wrong with the latter.  This should be logical.  It's ok to sell a house to another...it's not ok to sell the same house to two different people.


Money deposited in the bank is owned by the bank. There is no concurrent ownership. I went over this many times already in this thread. 




> I do, but most do not.  That is the problem.  Banks are taking advantage of our ignorance.


FRBs are not some kind of secret that the banks are keeping from us. But yes, as Ron Paul always says: We need laws and regulations in order to protect us from our own ignorance . 




> Not really.  Work will only pay from a bank account.  I have to pay taxes in a bank account.  Governments 'invests' my tax receipts in fractional bank accounts.  Many large purchases can only be done with a bank account.  If I withdraw a lot of cash I get reported to the IRS and terrorism watch lists.  Even if I do withdraw the cash, the Fed will inject the reserves lost right back into the banking system...so little was changed for the banks.


Fair enough... That is an indicator that there is something wrong with the system. But it doesn't necessarily mean that FRB is the cause. 




> Because they are issuing false promises.  Is a ponzi scheme fraud?


What false promises are they issuing? They admit to what they're doing!!!!




> They are not the same.  A t-bill is clearly an investment dependent upon payout.  A deposit is not an investment but liquidity that people use as a store of value and whose value does not depend on payouts.


They are not 1:1 in similarity in the sense that with a bond, you sacrifice liquidity for interest. Where as with a checking account, you sacrifice interest for liquidity. Other than that, my analogy is pretty dead on. 




> That is not logical. First, there the free market can generate loans outside of banking.  Secondly, without FRB, prices go down...so we don't have to borrow as much.  To say that our checking accounts finance needed investment is somewhat circular...why not 'invest' that money yourself?


How long is it going to take you to save in order to buy a house? How long is it going to take a builder to save in order to build that house for you to buy? How long is it going to take for a person to save in order to start a business? FRBs enable you to acquire the capital required in order to invest and buy within a fraction of the time it would have taken otherwise. And no, there is nothing inflationary about FRBs. 

I posted this before... Perhaps you missed it. 




> You do realize that FRB has been going on since long before the fed even existed right??? 
> 
> Look at all this inflation!!!!
> 
> 
> 
> You do know that the fed has had full control over the printing press since 1971 right? Notice anything particularly interesting happening on the graph around that time?
> 
> Yet you believe FRB causes more inflation than the fed??

----------


## Bohner

> So how does a bank run fit into your philosophy?


Bank runs are a result of asset bubbles bursting as a result of interest rates being forced down via government manipulation. Leading to a panic.  

Austrian Business Cycle Theory... You should check it out some time.

----------


## rpwi

> You do realize that FRB has been going on since long before the fed even existed right???


I do indeed.  In fact FRB existed back in the goldsmith days.  When the goldsmith issued more claims on gold than he had stored...I'm sure you had no problem with this?




> Look at all this inflation!!!!
> 
> ...


It absolutely happened during that time but much of that was soaked up by the rapidly growing economy and by the bank runs or threats of bank runs at the time.  What caused the later spike in inflation was the Fed cartelization and support of the banking industry.  Fed greatly magnifies the evils of fractional banking.  




> You do know that the fed has had full control over the printing press since 1971 right? Notice anything particularly interesting happening on the graph around that time?


That was when the US officially went off of the international gold standard...which logically resulted in a lot of selling of the dollars and inflation (Vietnam didn't help).  Indeed the US government has been issuing currency and practicing their own form of FRB long before the Fed even was started.




> Yet you believe FRB causes more inflation than the fed??


They absolutely do.  Many economists study this issue in detail...and MB doesn't correlate with inflation like the higher bank aggregates do.  An example to illustrate.  Please view the 4th chart from http://www.shadowstats.com/charts/mo...e-money-supply

Specifically the one that references MB (that is government money).  Notice in 2008 it went from ~1 trillion dollars to 2.2 trillion dollars in 2010?  Where has been our massive inflation?  We have had a lot...but not that would explain a 2.5X growth in the money supply.

Indeed according to this graph we had deflation then:

http://www.shadowstats.com/alternate...flation-charts

So if prices are going down by government money is growing by leaps and bounds...how does this add up?  Simple...we have to take into account bank money.  When you look at the bank aggregate graphs you can see they are much flatter and more more in line with the inflation graphs.

----------


## hazek

If FRB causes inflation and is fraud then so is making a single loan.

When I was thinking this through today, this is the question I kept asking myself.

"What is the difference between me making a loan, or giving my money to someone else who makes a fractional loan instead?"

Example:

1)
A owns $100
A sells $90 of his savings for interest x% to B
A now has $10+ a claim on $90*x% and B has $90

2)
A owns $100
A sells $100 to FRB operator for interest y%
A now has a claim on $100*y% and FRB operator has $100 reserve
FRB operator sells $90 of his reserve for interest x% to B
A now has a claim on $100*y%, operator now has $10 + a claim on $90*x% and B has $90

Where's the difference? I can't see it. In both cases there's only $100 of actual money everything else are mere claims.

----------


## hazek

If anyone is interested, here's a by strictly market consumers regulated (i.e. a free market) FRB operator in Bitcoin you can research:

https://bitcointalk.org/index.php?topic=77343.0

----------


## Bohner

> I do indeed.  In fact FRB existed back in the goldsmith days.  When the goldsmith issued more claims on gold than he had stored...I'm sure you had no problem with this?


As long as their assets and liabilities are in check and they have a sufficient amount of reserves in their vault to cover people's day to day expenses, it's not a problem. 




> It absolutely happened during that time but much of that was soaked up by the rapidly growing economy


Which is an advantage of FRBs. Rapidly growing economies are a result of inflation in general, regardless of an FRB or 100% reserve system. 




> and by the bank runs or threats of bank runs at the time.


Or maybe rising interest rates???




> What caused the later spike in inflation was the Fed cartelization and support of the banking industry.  Fed greatly magnifies the evils of fractional banking.


The fed $#@!ed up the system via taking control over interest rates. No argument here. 




> That was when the US officially went off of the international gold standard...which logically resulted in a lot of selling of the dollars and inflation (Vietnam didn't help).  Indeed the US government has been issuing currency and practicing their own form of FRB long before the Fed even was started.


Going off the gold standard was a big mistake. And yes, the US gov't has been involved in manipulating interest rates since before the fed existed. Which is why asset bubbles have been happening since even before the fed's existence.




> They absolutely do.  Many economists study this issue in detail...and MB doesn't correlate with inflation like the higher bank aggregates do.  An example to illustrate.  Please view the 4th chart from http://www.shadowstats.com/charts/mo...e-money-supply


What the hell am I looking at? Graphs from >2000? The fed has been printing money all this time keeping interest rates low. This has nothing to do with free-market based fractional reserve banking and doesn't prove anything.




> Specifically the one that references MB (that is government money).  Notice in 2008 it went from ~1 trillion dollars to 2.2 trillion dollars in 2010?  Where has been our massive inflation?  We have had a lot...but not that would explain a 2.5X growth in the money supply.


Money needs to circulate in order for inflation to occur. Which hasn't been happening since aggregate demand is in the $#@!ter.




> Indeed according to this graph we had deflation then:
> 
> http://www.shadowstats.com/alternate...flation-charts
> 
> So if prices are going down by government money is growing by leaps and bounds...how does this add up?  Simple...we have to take into account bank money.  When you look at the bank aggregate graphs you can see they are much flatter and more more in line with the inflation graphs.


I see a tiny deflationary period in 2009 that barely lasted a year. I don't quite understand what you are trying to prove.

----------


## rpwi

> I had a really hard time with this too. I asked myself the question what is the difference between 1) me personally making a loan,


Say it is 10k.  Your 10k loan asset is matched by their 10k loan liability.  That's ok. 




> 2) a group of people pooling money and making a fractional loan,


You can not make fractional loans out of equity or internally.  You have to obtain short-loans from outside your group.  What you describe is not a fractional loan.




> and 3) an operator pooling money from a group of people making loans


Not an issue if the maturities lined up.  




> I could only conclude that there is none when it comes to money supply. There is however a difference in risk/reward.


There is no reward to a checking account.  It is not a proper investment to a bank.  It's a store of value and a 'sham investment'.  I can get 0% at one bank or 0% at another bank...the vast majority of the population does not view deposits as loans.  It is only accurate to call deposits loans in an accounting sense.




> Money is not a fixed claim on value which I also thought it was and so I wrongly though savers are getting robbed by FRB operators


They absolutely are.




> but then I realized money is just a good with supply and demand components much like any other good and FRB operators are competitors competing with savers for business of loaning by offering a better price for this good, a lower yield.


So are counterfeiters creating healthy competition for currency?  What if they only acquired home mortgages with their newly created money!  If they invest in the economy does that mean they can be ok?




> Yes but that is not free market FRB. Take for instance the FRB going on in Bitcoin. There every depositor is well aware of what the operator of the fund is doing.


Bitcoin is a sham.  It is a private currency that the 'miners' try to sell to us that has no intrinsic value.  The only winners are the miners and the speculators that exit early.  There will be a big run on the system and it will all collapse.

----------


## hazek

In fact when Griffin talks about capital formations that started happening in the west that got wallstreet bankers scared and motivated to create the FED cartel in order to protect their market share, those capital formations were most likely FRB operators. I'm speculating of course.

----------


## rpwi

> Looking at the facts I found this not to be true.
> 
> I'll elaborate if you want after I finish eating dinner. :P


Say we have a town of 100k.  Everybody there banks at ABC bank.

The bank has 100 billion in deposits, 10 billion in reserves and 90 billion loan assets.

Bob writes a check to Jo.  Both bank at the same bank.  Say the check is for 20 billion.  The bank merely swaps one liability for the other.  How could this happen if banks couldn't create money?  How can bank aggregates exceed reserves, if they weren't money?

----------


## hazek

It can't happen. What usually happens is the FRB operator goes to another FRB operator for a short term low yield loan until he can unwind his assets.

EDIT: hmm I think I misunderstood the question.

Could you clarify a bit better? also please answer my post here: http://www.ronpaulforums.com/showthr...=1#post4434811

----------


## Bohner

> Say we have a town of 100k.  Everybody there banks at ABC bank.
> 
> The bank has 100 billion in deposits, 10 billion in reserves and 90 billion loan assets.
> 
> Bob writes a check to Jo.  Both bank at the same bank.  Say the check is for 20 billion.  The bank merely swaps one liability for the other.  How could this happen if banks couldn't create money?  How can bank aggregates exceed reserves, if they weren't money?


You said it yourself, one liability is transferred to another. The bank now owes Jo. 20 billion more, Bob 20 billion less. 

No new money is being created.

----------


## rpwi

> Money deposited in the bank is owned by the bank. There is no concurrent ownership. I went over this many times already in this thread.


There is no concurrent claim on deposits...but that makes no sense as deposits are themselves claims so this would be circular.  The concurrent claim is on reserves.  The consumer is absolutely promised more than can be delivered in reserves.  You can abstract this by viewing the bank as a legal layer...but this doesn't really change this conceptually.




> FRBs are not some kind of secret that the banks are keeping from us.


Not a 'hiding under a bed' secret, but a secret on confusion.




> But yes, as Ron Paul always says: We need laws and regulations in order to protect us from our own ignorance .


As Ron Paul says...Fractional banking is quite fraudulent 

http://www.dailypaul.com/119914/frac...n-paul-on-cnbc (7:47)




> What false promises are they issuing? They admit to what they're doing!!!!


Maybe in small print and in legalize on a form you never read when you create the account.  Your common person off of the street DOES NOT understand how their deposits are not backed by 100% reserves and how this creates instability in the system as the financial markets are always dependent on us not having a collective urge to withdraw money from the banking system.




> They are not 1:1 in similarity in the sense that with a bond, you sacrifice liquidity for interest. Where as with a checking account, you sacrifice interest for liquidity. Other than that, my analogy is pretty dead on.


But the checking account is not backed by an infinitely small maturing loan asset.  While risky...that could work.  When you back a demand deposit with long term debt...that is fraudulent.  The banking system is making the statement that they can pay say 1 million in reserves tomorrow...yet their assets will only let them get these 1 million reserves in the future.  They are pretending the future is now...

It's not about loans...it about what finances the loans.  That's what defines a bank and FRB.




> How long is it going to take you to save in order to buy a house? How long is it going to take a builder to save in order to build that house for you to buy? How long is it going to take for a person to save in order to start a business? FRBs enable you to acquire the capital required in order to invest and buy within a fraction of the time it would have taken otherwise.


You could get non FRB loans.  Without FRB inflation would be lower (in fact we would have deflation with the loss of bank money) so homes would be cheaper and you wouldn't have to borrow so much to buy the home.  If you still can't get get a loan post FRB...that is a good sign that it wasn't meant to be...and any false enabler would be creating mal-investment.  I mean using your logic...a counterfeiter could justify his operations...he would create loans to support the economy!




> And no, there is nothing inflationary about FRBs.


Deposits are absolutely inflationary.  Let's go back in time.  People used to keep their gold at the local gold smith for safe keeping.  They then were issued claim slips on the gold which were a convenient means for commerce.  The gold smiths got clever...and noticed that very rarely were the slips redeemed.  So they carefully issued more claims than they had and used them to purchase loan assets.  Are you saying this was honest?  Surely this would create inflation as they slips would be conflated with gold.  What then would be the difference between a gold smith issuing excess claims off of gold and a bank issuing excess deposits off of reserves?

----------


## rpwi

> Bank runs are a result of asset bubbles bursting as a result of interest rates being forced down via government manipulation. Leading to a panic.  
> 
> Austrian Business Cycle Theory... You should check it out some time.


There are two types of bank runs.  One caused by asset collapse...and subsequently leads to a bank run.  Then one that is led by liquidity concerns...and that leads to the same thing.  A bank doesn't to have bad assets to have a run.  It can happen to ANY bank at ANY time.  That's because they all practice FRB.  The Austrians made the observation that FRB created more money than should have naturally been created.  The only mechanism by which this money could be introduced...was through loan purchases...so this leads to an over-purchase of loans...and a bubble of what the loans financed.  Bubbles create feedback bubbles (housing bubble > construction bubble > building material bubble > etc...) and this grows out of control...before it collapses.  The mal-investment does come home to roost to the bank's asset and this can indeed cause a run.

But this is not to say most Austrians believe this is the exclusive manner in which runs happen.  Most Austrians are critical of FRB and see it as unstable and capable of collapse at any time.

----------


## rpwi

> "What is the difference between me making a loan, or giving my money to someone else who makes a fractional loan instead?"
> 
> Example:
> 
> 1)
> A owns $100
> A sells $90 of his savings for interest x% to B
> A now has $10+ a claim on $90*x% and B has $90


No FRB was involved in this transaction.  Your balance sheet is:

A: 90 in savings
A: 10 in reserves
--
L: 0 (key!)
Equity: 100

Your 90k loan is matched by another's 90k debt.  Do you see?  No problem.




> 2)
> A owns $100
> A sells $100 to FRB operator for interest y%
> A now has a claim on $100*y% and FRB operator has $100 reserve
> FRB operator sells $90 of his reserve for interest x% to B
> A now has a claim on $100*y%, operator now has $10 + a claim on $90*x% and B has $90


This is not FRB.  FRB is not where a bank matches a 10 year cd with a 10 year morgtage.  FRB is where a bank matches a 10 year mortgage with a demand deposit liability.  In your example you did not include deposits nor maturities.




> Where's the difference? I can't see it. In both cases there's only $100 of actual money everything else are mere claims.


Maturity is everything.  If I offer you 100k payable in 100 years to 100 seconds, which do you prefer?  Just because they both show up on the balance sheets as 100k doesn't mean they are equal.

----------


## heavenlyboy34

> There are two types of bank runs.  One caused by asset collapse...and subsequently leads to a bank run.  Then one that is led by liquidity concerns...and that leads to the same thing.  A bank doesn't to have bad assets to have a run.  It can happen to ANY bank at ANY time.  That's because they all practice FRB.  The Austrians made the observation that FRB created more money than should have naturally been created.  The only mechanism by which this money could be introduced...was through loan purchases...so this leads to an over-purchase of loans...and a bubble of what the loans financed.  Bubbles create feedback bubbles (housing bubble > construction bubble > building material bubble > etc...) and this grows out of control...before it collapses.  The mal-investment does come home to roost to the bank's asset and this can indeed cause a run.
> 
> But this is not to say most Austrians believe this is the exclusive manner in which runs happen.  Most Austrians are critical of FRB and see it as unstable and capable of collapse at any time.


It's important to note that Austrians are more concerned about FRB in the presence of a central bank than FRB in general.  See de Soto. (prominent member of the Salamaca school, created by Mises' tenure teaching in Salamaca-and virtually the same as AE)

----------


## Bohner

> There is no concurrent claim on deposits...but that makes no sense as deposits are themselves claims so this would be circular.  The concurrent claim is on reserves.  The consumer is absolutely promised more than can be delivered in reserves.  You can abstract this by viewing the bank as a legal layer...but this doesn't really change this conceptually.


We're going from concurrent ownership to concurrent claims now? The consumer isn't promised anything. In fact, most banks have a limit as to how much a person can withdraw within a day for this very reason (barring special exceptions). 




> Not a 'hiding under a bed' secret, but a secret on confusion.


I've known how the banking system works since high school. You agree to the banks terms when you deposit money with them. If you choose not to read the terms, that is your own fault. 




> As Ron Paul says...Fractional banking is quite fraudulent 
> 
> http://www.dailypaul.com/119914/frac...n-paul-on-cnbc (7:47)


Didn't see that one coming.




> But the checking account is not backed by an infinitely small maturing loan asset.  While risky...that could work.  When you back a demand deposit with long term debt...that is fraudulent.  The banking system is making the statement that they can pay say 1 million in reserves tomorrow...yet their assets will only let them get these 1 million reserves in the future.  They are pretending the future is now...


This goes back to knowing how the fractional reserve banking system works. So one last time... IT'S NOT FRAUDULENT IF THE BANK TELLS YOU WHAT IT'S DOING!!!! 




> You could get non FRB loans. Without FRB inflation would be lower (in fact we would have deflation with the loss of bank money) so homes would be cheaper and you wouldn't have to borrow so much to buy the home.  If you still can't get get a loan post FRB...that is a good sign that it wasn't meant to be...and any false enabler would be creating mal-investment.  I mean using your logic...a counterfeiter could justify his operations...he would create loans to support the economy!


FRB is not counterfeiting, that's the thing. No money is being printed. If I chose to put my money in an FRB in exchange for access to low interest loans, or perhaps a cut in the interest the bank receives from interest. Or maybe I don't want to pay a high deposit fee that a 100% reserve bank would certainly entail... Who are you to tell me that I don't have that right? Especially if I am aware of the risks?




> Deposits are absolutely inflationary.  Let's go back in time.  People used to keep their gold at the local gold smith for safe keeping.  They then were issued claim slips on the gold which were a convenient means for commerce.  The gold smiths got clever...and noticed that very rarely were the slips redeemed.  So they carefully issued more claims than they had and used them to purchase loan assets.  Are you saying this was honest?  Surely this would create inflation as they slips would be conflated with gold.  What then would be the difference between a gold smith issuing excess claims off of gold and a bank issuing excess deposits off of reserves?


Yes... I am aware of the story. And it's the basis for how FRBs became created. But as mentioned before, the way banks do their business is not a secret. As long as a bank's assets, liabilities, and reserves are in check, everything works fine as long as the government doesn't manipulate the market.

----------


## rpwi

> As long as their assets and liabilities are in check and they have a sufficient amount of reserves in their vault to cover people's day to day expenses, it's not a problem.


This makes no sense.  The goldsmiths have issued more claims on gold than they have.  It is not a matter of assets and liabilities being in check and having 'sufficient reserves'.  They are hoping the gold depositors trust them.  And won't withdraw the gold.  Because without the trust...their operation fails...just like a ponzi scheme.  It's that simple.




> Which is an advantage of FRBs. Rapidly growing economies are a result of inflation in general, regardless of an FRB or 100% reserve system.


I don't buy that.  Say there is 1 trillion in 'money' in the economy.  The population doubles...the amount of farmland doubles...railroads enable manufacturing...etc...  This results in deflation.  Not a bad thing as things become cheaper.  The answer isn't too inflate to cover this up.




> Going off the gold standard was a big mistake.


FDR had no choice but to end the public gold standard and Nixon had no choice but to end the international gold standard.  The government was practicing fractional banking just like the banks were!  They issued more dollar claims and dollar deposits on gold...then they had.  And when the claims came pouring in...what choice did they have?   It was quite the pyramid back then...Gold was the base...then dollars...then for period then regional bank deposits...and then common bank deposits!  All fractional based on each other like an upside pyramid.




> What the hell am I looking at? Graphs from >2000? The fed has been printing money all this time keeping interest rates low. This has nothing to do with free-market based fractional reserve banking and doesn't prove anything.


We are talking about the money supply and inflation.  The correlation much more closely matches bank money money to inflation, than government money to inflation.  Your initial argument was that banks don't cause inflation.




> Money needs to circulate in order for inflation to occur. Which hasn't been happening since aggregate demand is in the $#@!ter.


The money multiplier is at record lows.  When banks start relending like they used to (at typical money multiplier rates) off of our double monetary base...we will see inflation like we have never seen it before

----------


## rpwi

> It can't happen. What usually happens is the FRB operator goes to another FRB operator for a short term low yield loan until he can unwind his assets.


This transaction was internal to one singular bank which most clearly demonstrates how FRB works.  There would be no check-clearning here and you can clearly see how the bank is creating money and how bank money has replaced base money.

----------


## Travlyr

Honest money must be earned. It is quite a stretch to claim that fractional reserve banking is earned income. Money is earned by finding it (oil, gold, water). Money is also earned by growing it (livestock, grains, cotton, hemp, etc.). And finally money can be acquired by creating something of value (cars, art, houses, pianos, etc.)

Cheating someone out of their earned income is not really 'earned' income.

----------


## rpwi

> Say we have a town of 100k. Everybody there banks at ABC bank.
> 
> The bank has 100 billion in deposits, 10 billion in reserves and 90 billion loan assets.
> 
> Bob writes a check to Jo. Both bank at the same bank. Say the check is for 20 billion. The bank merely swaps one liability for the other. How could this happen if banks couldn't create money? How can bank aggregates exceed reserves, if they weren't money?
> 			
> 		
> 
> You said it yourself, one liability is transferred to another. The bank now owes Jo. 20 billion more, Bob 20 billion less. 
> ...


Exactly.  The money was created before this.  Don't you see?  How can a 20 billion transaction happen if only 10 billion in reserves were available?  The answer is that deposits have to be considered money.

----------


## hazek

> Your 90k loan is matched by another's 90k debt.  Do you see?  No problem.


Yes but the same goes for FRB, it just isn't as obvious.




> This is not FRB.  FRB is not where a bank matches a 10 year cd with a 10 year morgtage.  FRB is where a bank matches a 10 year mortgage with a demand deposit liability.  In your example you did not include deposits nor maturities.
> 
> Maturity is everything.  If I offer you 100k payable in 100 years to 100 seconds, which do you prefer?  Just because they both show up on the balance sheets as 100k doesn't mean they are equal.


I thought demand deposits were the actual fraudulent part of FRB as well but then I thought it through:

1)
A owns $100
A sells $90 of his savings for interest x% to B
A now has $10+ a claim on $90*x% and B has $90

2)
A owns $100
A sells a $100 to FRB operator for interest y% as a demand deposit
A now has a claim on $100*y% and FRB operator has $100 reserve
B owns $100
B sells a $100 to FRB operator for interest y% as a demand deposit
B now has a claim on $100*y% and FRB operator has $200 reserve
C owns $10
C sells a $10 to FRB operator for interest y% as a demand deposit
C now has a claim on $10*y% and FRB operator has $210 reserve 

FRB operator sells $90 of his reserve for interest x% to D as a 10y mortgage

A now has a claim on $100*y%, B now has a claim on $100*y%, C now has a claim on $10*y%, FRB operator now has $120 reserve and a claim on $90*x%*10y, D now owns $90

C demands his claim be fulfilled, gets $10*y% back

A now has a claim on $100*y%, B now has a claim on $100*y%, C now owns $10*y%, FRB operator now has $110 reserve and a claim on $90*x%*10y, D now owns $90

Still the same as example 1.. The 10y mortgage matched in part by a demand deposit hasn't changed a thing, some of the depositors still are able to withdraw their deposit until they deplete the FRB operator's reserves, while D was able to borrow a 10y mortgage.

----------


## rpwi

> It's important to note that Austrians are more concerned about FRB in the presence of a central bank than FRB in general.  See de Soto. (prominent member of the Salamaca school, created by Mises' tenure teaching in Salamaca-and virtually the same as AE)


Most Austrians don't believe FRB can survive in a genuinely free economy.  However, most Austrians will acknowledge that FRB is fraudulent apart from its dependence on central banking.

----------


## heavenlyboy34

> Honest money must be earned. It is quite a stretch to claim that fractional reserve banking is earned income. Money is earned by finding it (oil, gold, water). Money is also earned by growing it (livestock, grains, cotton, hemp, etc.). And finally money can be acquired by creating something of value (cars, art, houses, pianos, etc.)
> 
> Cheating someone out of their earned income is not really 'earned' income.


So, have you demanded your bank/credit union stop paying you interest on your bank account and stop lending you money?  If not, you're using flawed economic theory.

----------


## BattleFlag1776

> Exactly.  The money was created before this.  Don't you see?  How can a 20 billion transaction happen if only 10 billion in reserves were available?  The answer is that *deposits have to be considered money*.


We have finally arrived at the crux of the issue!

----------


## heavenlyboy34

> Most Austrians don't believe FRB can survive in a genuinely free economy.  However, most Austrians will acknowledge that FRB is fraudulent apart from its dependence on central banking.


Austrian criticism of FRB (especially Rothbard) assumes a central banking cartel at the same time.  Austrians generally accept that FRB would occur in free banking (Hayek was an advocate of free banking).

----------


## rpwi

> We're going from concurrent ownership to concurrent claims now?


Meh...really the same thing with deposits.




> The consumer isn't promised anything. In fact, most banks have a limit as to how much a person can withdraw within a day for this very reason (barring special exceptions).


The depositor is promised money on demand (aka demand deposit).  Yes...there is probably legalize and small print attached to the demand deposit...but that doesn't change the equation.  Banks are making promises they can't keep.  Even if the banks utilized all restrictions possible...they couldn't prevent a full brunt run on reserves.




> I've known how the banking system works since high school. You agree to the banks terms when you deposit money with them. If you choose not to read the terms, that is your own fault.


Understanding the banking terms are one thing.  The concepts another.  People don't realize that there are more deposits than there are reserves.  If they did their behavior (especially politically) would change dramatically.




> Didn't see that one coming.


Well said by Ron Paul   Wish he would have built upon this during the debates...  FRB needs to be inserted in the national lexicography as a meme to get a discussion started.




> This goes back to knowing how the fractional reserve banking system works. So one last time... IT'S NOT FRAUDULENT IF THE BANK TELLS YOU WHAT IT'S DOING!!!!


Pull your average person off the street.  Do they understand what the bank is doing?  




> FRB is not counterfeiting, that's the thing. No money is being printed.


It is conceptual counterfeiting.  




> If I chose to put my money in an FRB in exchange for access to low interest loans,


Sounds more like a credit union...




> or perhaps a cut in the interest the bank receives from interest.


Which is what 0% for demand deposit?  Under 1% for a savings account?




> Or maybe I don't want to pay a high deposit fee that a 100% reserve bank would certainly entail... Who are you to tell me that I don't have that right? Especially if I am aware of the risks?


If you were aware of the risks you wouldn't have deposited the money with the bank.




> Yes... I am aware of the story. And it's the basis for how FRBs became created. But as mentioned before, the way banks do their business is not a secret. As long as a bank's assets, liabilities, and reserves are in check, everything works fine as long as the government doesn't manipulate the market.


The balance sheet is irrelevant.  As long as the bank issues more deposits than they have in reserves they are unstable.

----------


## The Northbreather

> Feel free to poke holes and help me understand, as here is my understanding, and the problem I have with that article: (my emphasis in bold)
> 
> 
> 
> With FRB there is a _system-wide_ artificial expansion of the money supply, followed by an _ultimate_ contraction.  And note that I make zero distinction between reserves and fiduciary media, all of which can behave and is treated as money in the market.  The statement that "_the system simultaneously contracts by a multiplied amount_" is incorrect, because simultaneously implies immediately.  In fact, the system _eventually, theoretically, ultimately_ contracts by a multiplied amount of the original deposit/withdrawal.   
> 
> This is seen as a net zero-sum game, given that the "inflation" of money in circulation is only temporary; that the system will eventually self-correct and equilibrate over time with an eventual contraction as loans are called in or repaid, as could indeed happen in a system with no Fed, and no injection of new reserves. This self-correcting mechanism is what makes it "harmless", or not fraud in the minds of many.  But is that true?
> 
> Consider the following:
> ...


Can someone respond to this so I can remain a spectator...for now

----------


## rpwi

> Yes but the same goes for FRB, it just isn't as obvious.


Compare the maturity dates of assets to liabilities.  That is what defines a bank.  They mismatch short term liabilities with long term debt (to paraphrase Harry Browne).




> I thought demand deposits were the actual fraudulent part of FRB as well but then I thought it through:


For M1...conceptualizing M2 and above takes a little more work.




> 1)
> A owns $100
> A sells $90 of his savings for interest x% to B
> A now has $10+ a claim on $90*x% and B has $90
> 
> 2)
> A owns $100
> A sells a $100 to FRB operator for interest y% as a demand deposit
> A now has a claim on $100*y% and FRB operator has $100 reserve


So A has a 100 dollar interest bearing demand deposit ?(we're out of M1 territory and going into M2...but that's fine)

The bank currently has 100 in reserve assets and 100 in deposit liabilities.




> B owns $100
> B sells a $100 to FRB operator for interest y% as a demand deposit
> B now has a claim on $100*y% and FRB operator has $200 reserve


Ok...same deal...double the balance sheet for the bank.

A: 200 in reserves
--
L: 200 in demand deposits
E: 0




> C owns $10
> C sells a $10 to FRB operator for interest y% as a demand deposit
> C now has a claim on $10*y% and FRB operator has $210 reserve


Ok...new bank B/S is:

A: 210 in reserves
--
L: 210 DD
E: 0




> FRB operator sells $90 of his reserve for interest x% to D as a 10y mortgage


We've drawn first blood!

New B/S

A: 120 in reserves
A: 90 in Loan Assets
--
L: 210 DD
E: 0

Demand deposits are now backed 120/210 (57%)  A, B, and C if they are paying attention can't be happy...




> A now has a claim on $100*y%, B now has a claim on $100*y%, C now has a claim on $10*y%, FRB operator now has $120 reserve and a claim on $90*x%*10y, D now owns $90
> 
> C demands his claim be fulfilled, gets $10*y% back


We'll assume interest was REALLY small and calculate the new B/S:

A: 110 reserves
A: 90 in loan assets
--
L: 200 in DD

deposits are now backed at 55% (A and B can't be happy)




> A now has a claim on $100*y%, B now has a claim on $100*y%, C now owns $10*y%,


Wait...I thought C got his 10 dollars back?




> FRB operator now has $110 reserve and a claim on $90*x%*10y, D now owns $90
> 
> Still the same as example 1.. The 10y mortgage matched in part by a demand deposit hasn't changed a thing, some of the depositors still are able to withdraw their deposit until they deplete the FRB operator's reserves, while D was able to borrow a 10y mortgage.


The list of transactions clearly shows the dangers of fractional banking.  By backing a 'demand deposit' with non-liquid assets...the bank was pulling a fast one.  You can clearly see how a bank run was possible here...and if the new deposits were accept as reserves (a common conflation) this means because there are more deposits than reserves, this would lead to inflation.  Don't you see?

----------


## heavenlyboy34

> Can someone respond to this so I can remain a spectator...for now


The critical flaw is this: *"It comes from the control exercised or assumed (even temporarily) over the value of property belonging to others"*.  Depositors surrender their property when they make a deposit.  Banks are very upfront about what they do too, as someone else pointed out earlier.  These two facts alone tell us that Steven's argument is incorrect. (though we could go and write detailed books and essays like Hayek and other Austrians did if we had the time)

If a depositor doesn't want his FRNs to be part of the system, he should not look for a bank at all (as the point of a bank is defeated).  He should look for a safe deposit box.

----------


## The Northbreather

So its not fraud to the letter of the law.




> The value of the multiplier loan came from all other holdings, but the currency holders whose value was taxed were not named as parties of interest, let alone risk. And whenever there is a default, the losses are socialized, because the money is not returned - the fiduciary media remains in circulation, even in the form of goods and services not paid for in the aggregate -- and so the value is not returned to everyone's safe.
> 
> Since the fraud is only temporary and against the aggregate, no specific victim can be named. But that is irrelevant in the criminal sense. If I defraud someone specifically, even then that fraud is treated as not only against the person I defrauded, but also against everyone else. Fraud affects and is affected by "the public interest", which is why fraud is prosecuted by "The People of the State VS.", rather than simply The State On Behalf of Victim X. It's only when you get to the CIVIL component of fraud that specific victims are named as parties of interest - even in the case of a class action suit.


So this is irrelevant per the fine print of the contract?

----------


## hazek

Yes C got his $10 back with, that is what I meant with "C now owns $10*y%"

Yes FRB poses a danger of a bank run.. to avoid this danger the FRB operator can go to another FRB operator and borrow a short term low yield loan to shore up his reserves until he can unwind his assets.

Ok let's see what happens when E makes a deposit having sold his house to D.

1)
A owns $100
A sells $90 of his savings for interest x% to B
A now has $10+ a claim on $90*x% and B has $90

2)
A owns $100
A sells a $100 to FRB operator for interest y% as a demand deposit
A now has a claim on $100*y% and FRB operator has $100 reserve
B owns $100
B sells a $100 to FRB operator for interest y% as a demand deposit
B now has a claim on $100*y% and FRB operator has $200 reserv
e
C owns $10
C sells a $10 to FRB operator for interest y% as a demand deposit
C now has a claim on $10*y% and FRB operator has $210 reserve 

FRB operator sells $90 of his reserve for interest x% to D as a 10y mortgage
---------------------------------------------------------------------------------------------
A now has a claim on $100*y%, B now has a claim on $100*y%, C now has a claim on $10*y%, FRB operator now has $120 reserve and a claim on $90*x%*10y, D now owns $90

C demands his claim be fulfilled, gets $10*y% back

A now has a claim on $100*y%, B now has a claim on $100*y%, C now owns $10*y%, FRB operator now has $110 reserve and a claim on $90*x%*10y, D now owns $90
D buys a house from E for $90.
E now owns $90
E sells his 90$ to FRB operator for interst y% as a demand deposit

A now has a claim on $100*y%, 
B now has a claim on $100*y%,
C owns $10*y%, 
E now has a claim on $90*y%,
FRB operator now has $200 reserve and a claim on $90*x%*10y
------------------------------------------------------------------------------------------
FRB operator sells another $50 of his reserve for interest x% to F as a 10y mortgage

A now has a claim on $100*y%, 
B now has a claim on $100*y%,
C owns $10*y%, 
E now has a claim on $90*y%,
F now owns $50
FRB operator now has $150 reserve and a claim on $90*x%*10y, and a claim on $50*x%*10y
------------------------------------------------------------------------------------------
F buys a car from G
G now owns $50
G sells his 50$ to FRB operator for interst y% as a demand deposit

A now has a claim on $100*y%, 
B now has a claim on $100*y%,
C owns $10*y%, 
E now has a claim on $90*y%,
G now has a claim on $50*y%
FRB operator now has $200 reserve and a claim on $90*x%*10y, and a claim on $50*x%*10y


The only thing that changed is the demand deposit to reserve ratio from 55% to 59% but there is still only $200 and C's $10 of actual money.

----------


## Steven Douglas

> The critical flaw is this: *"It comes from the control exercised or assumed (even temporarily) over the value of property belonging to others"*.  Depositors surrender their property when they make a deposit.  Banks are very upfront about what they do too, as someone else pointed out earlier.  These two facts alone tell us that Steven's argument is incorrect. (though we could go and write detailed books and essays like Hayek and other Austrians did if we had the time)
> 
> If a depositor doesn't want his FRNs to be part of the system, he should not look for a bank at all (as the point of a bank is defeated).  He should look for a safe deposit box.


I'm not claiming the "depositor" is exclusively harmed (even if we accepted that all depositors really do understand the difference between a deposit and a bailment - regardless how "up front" banks are presumed to be).  

Depositors are only one kind of currency holder.  Currency holders with cash stuffed into coffee cans and under mattresses are affected as well.

----------


## hazek

> Depositors are only one kind of currency holder.  Currency holders with cash stuffed into coffee cans and under mattresses are affected as well.


If you accept that money is a good like any other and that there's competition for "selling" (lending) this good and the price in the form of interest rates then it makes sense that savers who do not loan their money and carry no risk get outcompeted for some of their purchasing power from those who do lend their money and risk a loan default. If FRB robs savers, so does an individual loan.

----------


## heavenlyboy34

> I'm not claiming the "depositor" is exclusively harmed (even if we accepted that all depositors really do understand the difference between a deposit and a bailment - regardless how "up front" banks are presumed to be).  
> 
> Depositors are only one kind of currency holder.  Currency holders with cash stuffed into coffee cans and under mattresses are affected as well.


True.  That's the trade-off you make for the convenience of currency (as opposed to _money_).




> If you accept that money is a good like any other and that there's competition for "selling" (lending) this good and the price in the form of interest rates then it makes sense that savers who do not loan their money and carry no risk get outcompeted for some of their purchasing power from those who do lend their money and risk a loan default. If FRB robs savers, so does an individual loan.


Excellent point!

----------


## Bohner

> This makes no sense.  The goldsmiths have issued more claims on gold than they have.  It is not a matter of assets and liabilities being in check and having 'sufficient reserves'.  They are hoping the gold depositors trust them.  And won't withdraw the gold.  Because without the trust...their operation fails...just like a ponzi scheme.  It's that simple.


I might have to concede this point. If the goldsmith didn't make clear what he was doing, then it's wrong. However, this is not the case with banks in this day and age. 




> I don't buy that.  Say there is 1 trillion in 'money' in the economy.  The population doubles...the amount of farmland doubles...railroads enable manufacturing...etc...  This results in deflation.  Not a bad thing as things become cheaper.  The answer isn't too inflate to cover this up.


Doesn't apply... If money is circulating, then that is inflationary, if money is being saved, that is deflationary. However, as long as new money isn't being created, the currency can only inflate to a point before interest rates rise, people start saving and the economy corrects itself before an asset bubble arises. 




> FDR had no choice but to end the public gold standard and Nixon had no choice but to end the international gold standard.  The government was practicing fractional banking just like the banks were!  They issued more dollar claims and dollar deposits on gold...then they had.  And when the claims came pouring in...what choice did they have?   It was quite the pyramid back then...Gold was the base...then dollars...then for period then regional bank deposits...and then common bank deposits!  All fractional based on each other like an upside pyramid.


There's always a choice. Keynesians convinced these guys that a commodity backed currency was holding the economy back, and that cutting federal spending wouldn't be necessary as long as the Fed was given free reign over the printing press. And here we are 40 years later, and the world is going to $#@!. 




> We are talking about the money supply and inflation.  The correlation much more closely matches bank money money to inflation, than government money to inflation.  Your initial argument was that banks don't cause inflation.


Spending is what causes inflation. Even with FRB, there are only so many dollars in the economy to spend in a commodity backed system before interest rates have to rise. Causing spending to drop and prices along with it. The Fed's printing press allows for interest rates to remain low, and for more dollars that were printed out of thin air to be spent. These artificially low interest rates allows for asset bubbles to be formed, and grow to the point where the entire economy gets $#@!ed when those bubbles pop. In an FRB free market system, interest rates would have risen before the bubble would have been formed, and would have discouraged spending, causing prices to drop before anything catastrophic happened. 




> The money multiplier is at record lows.  When banks start relending like they used to (at typical money multiplier rates) off of our double monetary base...we will see inflation like we have never seen it before


No $#@!!!! But that monetary base grew as a result of the stimulus (ie. money created out of thin air), not because of FRB.

----------


## Bohner

> Meh...really the same thing with deposits.


It's not the same thing... If I owed you $30, you have a claim to my $30 in the sense that my debt to you is your asset. But until I give you that $30, I own it. 

A claim to something =/= owning something. But you probably already knew this which is most likely the reason why you changed your statement on the fly. 




> The depositor is promised money on demand (aka demand deposit).  Yes...there is probably legalize and small print attached to the demand deposit...but that doesn't change the equation.  Banks are making promises they can't keep.  Even if the banks utilized all restrictions possible...they couldn't prevent a full brunt run on reserves.


I guess you can make the claim that insurance companies are fraudulent too. If everyone's house burned down all at once, there's no way an insurance company would be able to cover all those homes. How is that any less fraudulent? Or are you against insurance as well?




> Understanding the banking terms are one thing.  The concepts another.  People don't realize that there are more deposits than there are reserves.  If they did their behavior (especially politically) would change dramatically.


This $#@! isn't rocket science. If someone opens up an account with a bank without even wanting to understand the terms, even though the bank is perfectly open with regard to what they do with their client's money, where exactly is the bank in the wrong?




> Pull your average person off the street.  Do they understand what the bank is doing?


I don't understand how the internal mechanisms of my wireless network works in my home. Does that mean the internet company is committing fraud by giving me internet access? I don't understand how my remote control turns on my TV, does that mean the company who I bought my remote control from is committing fraud as well?

For the last time... IT'S NOT FRAUDULENT IF THE BANK IS NOT HIDING WHAT IT'S DOING WITH YOUR MONEY!!!




> It is conceptual counterfeiting.


So the currency is being conceptually counterfeited? You are really grasping for straws here. 




> Sounds more like a credit union...


It does doesn't it??? You do realize the credit unions engage in FRB right?? Does this make it any better?




> If you were aware of the risks you wouldn't have deposited the money with the bank.


You do realize that deposit fees for a 100% reserve bank would be pretty damn expensive right? Do you think banks would just store your money for free without getting anything in return? Not to mention access to low-interest loans with an FRB. Even in a free-market, there would be plenty of reasons to deposit your money in a fractional reserve bank as opposed to a 100% reserve bank. 




> The balance sheet is irrelevant.  As long as the bank issues more deposits than they have in reserves they are unstable.


As mentioned before, insurance companies provide coverage to more people than they can provide coverage to should all those people call in their insurance at the same time. How is this any less fraudulent?

----------


## Bohner

> I'm not claiming the "depositor" is exclusively harmed (even if we accepted that all depositors really do understand the difference between a deposit and a bailment - regardless how "up front" banks are presumed to be).  
> 
> Depositors are only one kind of currency holder.  Currency holders with cash stuffed into coffee cans and under mattresses are affected as well.


That applies everything in the free market. If you buy a house for the first time, everybody else who wants to buy a house is affected. If you buy or sell a stock, everybody else who buys, sells or owns that stock is affected as well. That's how the free market works. Money is no different. 

The only difference is that the government cannot print houses, gold or stocks.

----------


## Steven Douglas

> If you accept that money is a good like any other...


...which I very much do - to the point of not even making a distinction between money and goods as a matter of first principles.




> ...and that there's competition for "selling" (lending) this good and the price in the form of interest rates...


No problem there either - that's nothing more to me than any good that could be loaned out - sold on the promise of more of that same good returned in the future.  I give you 10 fish, you promise to return 15 fish to me later. No problem. 




> ...then it makes sense that savers who do not loan their money and carry no risk get outcompeted for some of their purchasing power from those who do lend their money and risk a loan default.


Also not a problem. The reverse is also true, and I say it all the time: *Savers in a free market are a spender's best friend*.  Not putting what you have into circulation increases the value of every like thing in circulation.  In that sense HOLDING currency increases the value of everyone's currency -- including your own.  So Savings = A Very Good Thing For Everybody Concerned. 




> If FRB robs savers, so does an individual loan.


Let's separate banking obfuscation altogether, including the counting of 0% interest checking deposits by ignorant laypeople who actually pay for checking services, and have NOTHING, ZERO, ZIP, NADA to do with credit (many of whom may not even be credit-worthy - even though they are ALWAYS counted worthy of and qualified to be the unwitting lenders).  Instead, let's first examine this on the basis of an "individual loan" OF CASH between two private _non-banking_ parties.  When we talk about reserve requirements, that's only to satisfy demand deposits.  Otherwise, there would be no need for any reserve. You could loan out all of what you have, and it's GONE - bread on the waters. You now wait for the money to return with interest, with nobody else having a RIGHT NOW claim on anything.  

As a private party, you loan out 100% of your CASH to another private party for principle plus interest. No pesky banking system even involved, _no checks deposited anywhere_, no counter-party claims established, and nothing held in reserve.  As a private lender you now don't have anything, but you don't need anything either, because your cash is now hard at work.  The guy you loaned the money to goes out and spends that money on the things he needs to earn the principle plus interest so that you don't send Guido out to break his legs.  End of story.

In the above case you have not "robbed" savers of anything, because you are only controlling, or allowing others to assume control, of _what is yours_ to begin with.  The ownership at all times is both clear and SINGULAR. Likewise, the damage from any defaults due to insolvency is localized and constrained mostly to actual parties of interest, with a ripple effect that is minor, and no domino effect of any kind to speak of.  So even though the increased money put into circulation momentarily affects the value of other savers' holdings, it's really no different than any other increase in real goods sold on the market.  MOST importantly there is no market distortion involved. 

In the case of FRB (all banks considered as a single banking system) the same money is loaned out repeatedly, with multiple RIGHT NOW claims established along the way.  It really does operate under the same basic principles as a legalized Ponzi scheme. And remember, MONEY IS JUST ANOTHER GOOD.  If it's not a bad idea to allow multiple RIGHT NOW claims on the same money, then neither should it be a bad idea to allow multiple RIGHT NOW claims on the same good.  And yet one good is legalized and protected as a Special Ponzi Commodity - to the exclusion of all other commodities. 

The effect of this market-distorting Ponzi scheme is fully networked, and expanded on a scale that affects virtually everyone, and not just specific parties of interest (e.g., the implosion of MF Global affected WAY MORE than just the Farmers and Ranchers who were direct victims as named parties of interest).

Furthermore, FRB multiplied currency is not just deposited, loaned out and redeposited in a simple borrower/re-lender vacuum. That money is actually spent on real goods and services along the way, including cash transactions with people who are not involved in, nor are they necessarily party to, _any banking systems risks_ (OR REWARDS). These parties have absolutely no way of knowing if, when or why a banking system is inherently unstable or insolvent based on legalized Ponzi principles. All they know is that there is suddenly an increase in demand - a temporary rise in the economic tides, which shows up as the number of transactions for their goods and services per given period.  And the closer they are to the credit spigots, the better off they are.  They don't know that this increase in the frequency of demand (which does affect prices) is based in large part on a deliberate instability, one that creates an enormous market distortion. This musical chairs expansion/contraction game has an end game which they are part of whether they know it or not, in terms of a) temporal affects on prices, b) distorted market expectations, and c) the fact that they most certainly can be adversely, directly affected when the system implodes, even if they are not parties of interest with any banks. 

Normally I would consider sellers 100% responsible for their own risks based on their own market expectations. But I can't say that about sellers in a market where Ponzi distortions are created on the basis of an willing intentional insolvency that is not only tolerated, but defended.

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## DamianTV

I need someone with knowledge of religious history to back me up on this one.  (or correct me if I am wrong)

The only time in his life that Jesus ever became violent was with the Money Changers.  How things have changed.

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## hazek

> In the case of FRB (all banks considered as a single banking system) the same money is loaned out repeatedly, with multiple RIGHT NOW claims established along the way.  It really does operate under the same basic principles as a legalized Ponzi scheme. And remember, MONEY IS JUST ANOTHER GOOD.  If it's not a bad idea to allow multiple RIGHT NOW claims on the same money, then neither should it be a bad idea to allow multiple RIGHT NOW claims on the same good.  And yet one good is legalized and protected as a Special Ponzi Commodity - to the exclusion of all other commodities. 
> 
> The effect of this market-distorting Ponzi scheme is fully networked, and expanded on a scale that affects virtually everyone, and not just specific parties of interest (e.g., the implosion of MF Global affected WAY MORE than just the Farmers and Ranchers who were direct victims as named parties of interest).
> 
> Furthermore, FRB multiplied currency is not just deposited, loaned out and redeposited in a simple borrower/re-lender vacuum. That money is actually spent on real goods and services along the way, including cash transactions with people who are not involved in, nor are they necessarily party to, _any banking systems risks_ (OR REWARDS). These parties have absolutely no way of knowing if, when or why a banking system is inherently unstable or insolvent based on legalized Ponzi principles. All they know is that there is suddenly an increase in demand - a temporary rise in the economic tides, which shows up as the number of transactions for their goods and services per given period.  And the closer they are to the credit spigots, the better off they are.  They don't know that this increase in the frequency of demand (which does affect prices) is based in large part on a deliberate instability, one that creates an enormous market distortion. This musical chairs expansion/contraction game has an end game which they are part of whether they know it or not, in terms of a) temporal affects on prices, b) distorted market expectations, and c) the fact that they most certainly can be adversely, directly affected when the system implodes, even if they are not parties of interest with any banks. 
> 
> Normally I would consider sellers 100% responsible for their own risks based on their own market expectations. But I can't say that about sellers in a market where Ponzi distortions are created on the basis of an willing intentional insolvency that is not only tolerated, but defended.


So you also see what I realized? There is no new money created, just the frequency of money exchanging hands is artificially increased and yes this does lead to higher prices that affect everyone. But induvidual lending can also increase the frequency of money exchanging hands..

I have two questions for you that I asked myself:
1) do you believe in a market regulated strictly by market consumers (i.e. a free market) a FRB operator wouldn't get sufficiently regulated to ensure their demand deposit to reserve ratios are at "safe" levels giving them the ability to service all of their obligations and perhaps get a short term loan if need be if they can't?

2) do you not think that the advantages of such a scheme of artificially increased frequency of money exchanging hands are balanced off with the risk of going broke if reserves are kept too low? I guess what I'm asking is do you believe there's moral hazard present in FRB?

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## AlexMerced

Pre-face: I'm an advocate of as much competition in currency and banking systems as possible, in my point of view if any particular currency or banking system proves not to meet the demand of the economy people will opt for an alternative which is a different dynamic than the world of geographical banking/currency monopolies we have today.


*What's the real issue with Fractional Reserve Banking?*

This is really only an issue if you have a monopoly currency, because then the consumption of all goods and services is tied to one monetary unit. FRB as I'll argue later doesn't create money but merely speeds it's circulation which is different but still may cause the rate of consumption to outstrip the rate of production leading to an imbalance aka Price Inflation (demand up from fast circulation, supply down for fast consumption). In a true free market people who run stores will choose to stop accepting currencies that are too unstable, and currency issuers may act as pseudo central banks for banks that choose to manage deposits in their currency to certain standard.

As long as their is only one money, then 100% reserve is more stable, but stability isn't the criteria for good economic performance.

*Is FRB Fraud?*

In my opinion, no. For something to be a fraud, one must have to enter a contract under a false pre-tense and when I place my money in a bank I for sure am not under the pretense that they merely are warehousing it, although one can make the case that one can take legal action if the bank doesn't make this very clear but that doesn't invalidate the practice itself. The economic effects of increased consumption is not fraud because no one ever entered any contract with the bank relating to the overall purchasing power of the monetary unit, I am not saying there isn't any issues with economic stability, but that we can't call this fraud so we can conveniently outlaw it.

As a libertarian I then question even if it is fraud, is fraud truly an aggression that goes against the Non-Aggression Principle? My reasoning is, if that's the case one can argue that if you sleep with someone because they lied about who they were, that would be legally actionable and that just doesn't seem like something that would work... although in a true free market there would be multiple legal system with different legal principles that could sort this out in a way that best fits the culture and population of the time.

*
Is it creating money?*

No, when a central bank creates money, that is true money creation because the money did not exist before. At a normal bank, if I deposit $10 and the bank lends out $9 of it, only $10 can be spent at any moment so the money supply at any moment in time hasn't change, just the liabilities on banks balance sheet. If I and the borrower both decide to spend all our money in the same moment there is a shortage of money, but increasing the claims for money at a bank is different than increasing the amount of money at the bank.

So the bank is essentially making a bet that my time preference is lower than the person they lent it to so that the money isn't used at the same time, and the $9 they'll make later will honor my claim. Yes, banks can miscalculate time-preference and cause  bad coordination in the economy but that's the case for any practice, but that's how the knowledge for better coordination later on is created. Failed business consume resources and can push up the price of goods, but that's how we learn what businesses not to start. Failure of a firm and the economic adjustment in it's wake is not problem with the market process, but is the market process.

FRB doesn't increase the money supply, but increases the effective use of the current money supply at any point in time. So instead of my $10 not being used till I withdraw, $9 of it is being employed during that time. Can their be instabilities, yes, but I can think of many ways markets will develop to make up for it if given the chance, especially in a world of denationalized currency.

----------


## hazek

Very nice summation of the facts I ran into, that forced me to change my position on FRB, Alex.

----------


## AlexMerced

> Very nice summation of the facts I ran into, that forced me to change my position on FRB, Alex.


Thanks, didn't read the whole thread since I'm at work, but thought I'd chime in.

Also before anyone begins using a Ponzi Scheme argument, a Ponzi Scheme isn't a fraud because it's unsustainable, but because you told the people who's money you took your investing when your just spending it, that's the fraud.

This is why when we say "Social Security is a Ponzi Scheme" we are half right, cause while it's unsustainable for the same reasons, it's not a fraud, cause Social Security is pretty upfront about sitting the money treasuries, so there technically is no "fraud" in the legal sense. Just saying, we have bec areful what we say as to not fall in easy traps that hurt our own credibility.

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## Steven Douglas

I don't have time to give this the time it deserves, so I'll have to come back to this (including a response to Hazek), but did want to make the following distinction, because I see a lot of goalpost movement with regard to FRB.   

For example:  


> As long as their is only one money, then 100% reserve is more stable, but stability isn't the criteria for good economic performance.


Lots of crimes have "good economic performance".  Racketeering, loan-sharking, etc., can have "good economic performance". 




> A Ponzi Scheme isn't a fraud because it's unsustainable, but because you told the people who's money you took your investing when your just spending it, that's the fraud.


What you described, Alex (people who simply take your money and spent it rather than investing it as promised) is simple fraud - embezzlement. Ponzi schemes are far more elaborate, and not fraudulent simply because the scammer spends the investor's money.  In fact a Ponzi scheme, once detected, can be prosecuted long before a scammer spends a dime of investor's money.  It's fraudulent, in part,  because the scammer "pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation."

An enterprise is not fraudulent simply because it's "unsustainable". A lot of bad but otherwise above board and legitimate investments are unsustainable.  It is not sustainable vs. unsustainable that is at issue, but rather what is required for that sustainability, that makes it fraudulent in nature.  In a normal investment, sustainability is required from profits from real earnings; real economic activity where actual value of unlike things of value are exchanged in the market.  In a Ponzi scheme the new customer feeds both the old customers who demand payment as well as the illusion that everyone else may do so as well at any time. 

A Ponzi scheme is fraudulent because it is structured in such a way that it is self-feeding, and only sustainable as an illusion of solvency, but is mathematically impossible to sustain without a perpetual (and perpetually expanding) influx of new investors (and yes, that includes Social Security, which now behaves fundamentally like a Ponzi scheme). It's not that it's "unsustainable" - it's that it is _deliberately and inherently insolvent_. 

Aside from typical promises of extraordinary returns, some other characteristics of a Ponzi scheme:

* Taking advantage of a lack of investor knowledge or competence, often using vague, overly complex or confusing verbal constructions (e.g., "hedge futures trading," "high-yield investment programs", "offshore investment").  
* Initial high returns attract more investors, while luring current investors into putting in additional money. 
* A flood of new investors leads to a cascade effect, as initial investors are paid out of the investments of new entrants, not out of profits.
* Most investors are satisfied by statements showing how much they have earned, so they don't touch their money, which maintains the deception that the fund is solvent.
* Attempts to minimize withdrawals by offering new plans, often where money is frozen for a longer period of time, in exchange for higher returns. 

Most importantly - and the motive behind all of the above:  

* At all costs, *avoid runs* that would reveal the inherent insolvency to everyone which would cause the entire system to implode.  If a few investors do wish to withdraw their money in accordance with the terms allowed, the requests are usually promptly processed, which gives the illusion to all other investors that the fund is solvent.

A "run" on an otherwise "solvent" business (one that loses all customers along with the vendors it can no longer hire or pay) would simply result in that firm going out of business, as assets are liquidated, the affairs of that business are wrapped up, and the entire "system" theoretically _returns to zero_.  With FRB that scenario is both unthinkable and mathematically impossible, as "zero" is another way of saying _exponentially negative_.  It's like 1,000 people playing musical chairs with only 100 chairs.

1,000 people would not have been possible were it not for the false promise, the false and deceptive assurance, that 1,000 chairs were indeed available to a 1,000 rightful claimants.  That's not merely a question of "risk" in the normal business sense, wherein businesses run the "risk" of people not buying their goods or services as planned or expected.  In the case of a Ponzi scheme, the "risk" is in _having the insolvency tested, and thus losing the influx of new investors required to sustain it_. This particular kind of risk is the same as the risk taken on by The Producers in the movie of that same name.  The risk that 1,000 investors will lay RIGHTFUL claim to their shares at the same time.  *Not* that they will simply sell their shares to other DUPES - but that nobody will want to buy them, and everyone wants instead to actually _cash out_.  That system can NEVER, EVER return to zero - by design.  Not unless we ignore negative numbers, or redefine anything less than zero as simply meaning zero. 

In the FRB version of the musical chairs game the rules don't require a stoppage of music for anyone to stop circling and lay claim to a chair that really is theirs as a matter of right - even though it belongs, theoretically, to ten other people by that same right.  Without a _Chair Counterfeiter of Constant Resort_, if more than 100 people rush to claim a chair at one time, the game is over and everything gets ugly as the entire circle implodes, and innocent bystanders, including those who had nothing to do with the system, are caught in that implosion - just as they were in 1929. 

The fraudulent deception - The Big Lie - involved is in convincing everyone that it's simply "volatile", or "risky", but otherwise solvent and possible to sustain.  But it's not, since the success of the entire operation is conditioned on a steady expansion of future participants who will feed the illusion of solvency while expanding the number of claims on 100% of the same thing, which is sold to multiple parties.  Just like a Ponzi scheme. No differently than 100% of a share of stock sold to ten different parties. 

What we benignly refer to as the "leverage" of a given banking system, is quite literally the measure of a system's inherent insolvency. Implosion was the problem the Fed was ostensibly created to address after the Panic of 1907.  The FRB network of that time was showing signs of imploding, as the insolvency of the entire system was being tested and revealed through bank runs. People actually tested the solvency of the system, only to come face to face with the ultimate deception - _that your claim to what you thought was your wealth, and yours alone, could only be considered valid if a limited number of people tested their equally rightful claims at any given time_.  

I would have no problem with FRB if maturities had to be matched at all times.  But that would change the entire nature and dynamic of the system.  It's not that the system would be "more stable", as if that was some kind of generic concern; it's that the system would be inherently non-fraudulent.  

Lastly (regarding the "it's not fraudulent so long as they're open about it" argument) - If I try to sell the same share of stock to ten different people, and let them know up front that this is what I am doing - along with full explanations as to why selling 1000% of 100% is a good thing, what would make it fraudulent is if I included a proviso that everyone can converge at once and lay an equal claim to withdrawal at any time.  Which is the crux of what make FRB fraudulent.  That RIGHT NOW claim proviso implies (DECEPTIVELY) a promise to every depositor in the aggregate that such an event is even possible to resolve. Meanwhile, as an FRB system owner - the instigator and designer - I get to then shift the burdens of impossible to resolve claims resolutions onto the courts and onto the victims, as I play peacemaker and facilitator in a deliberate game of "Let's you and them all fight".  After all, it's not my fault that they all wanted to exercise WHAT I PROMISED THEM was their rightful claim.  

More on this later.

----------


## rpwi

> Yes C got his $10 back with, that is what I meant with "C now owns $10*y%"
> 
> Yes FRB poses a danger of a bank run.. to avoid this danger the FRB operator can go to another FRB operator and borrow a short term low yield loan to shore up his reserves until he can unwind his assets.


To an extent yet.  But that other bank is practicing FRB.  So when we have a tightly interwoven money-market...you mitigate risk to individual banks but GREATLY magnify systemic risk...in which EVERYTHING crashes.




> 2)
> A owns $100
> A sells a $100 to FRB operator for interest y% as a demand deposit
> A now has a claim on $100*y% and FRB operator has $100 reserve
> B owns $100
> B sells a $100 to FRB operator for interest y% as a demand deposit
> B now has a claim on $100*y% and FRB operator has $200 reserv
> e
> C owns $10
> ...


To sum the bank's balance sheet so far:

A: 110 reserves
A: 90 in loan assets
--
L: 200 in DD
E: 0




> A now has a claim on $100*y%, B now has a claim on $100*y%, C now owns $10*y%,


I'm confused.  I thought 'C demands his claim be fulfilled, gets $10*y% back'??




> FRB operator now has $110 reserve and a claim on $90*x%*10y, D now owns $90
> D buys a house from E for $90.
> E now owns $90
> E sells his 90$ to FRB operator for interest y% as a demand deposit


The assumption being D & E didn't bank with this bank before.

A: 200 reserves
A: 90 in loan assets
--
L: 290 in DD
E: 0

Incidentally where D & E banked from is kind of important.  If D did not deposit from cash...then E's old bank will have destroyed a little M1 to rebalance their portfolio 




> FRB operator sells another $90 of his reserve for interest x% to F as a 10y mortgage


A: 110 reserves
A: 180 in loan assets
--
L: 290 in DD
E: 0

What does the other bank do with their new reserves?




> F buys a car from G
> G now owns $50
> G sells his 50$ to FRB operator for interest y% as a demand deposit


Where did F and G bank before the money was deposited at this bank (that was FRB too...and should be part of your formula).

A: 160 reserves
A: 180 in loan assets
--
L: 340 in DD
E: 0




> The only thing that changed is the demand deposit to reserve ratio from 55% to 59% but there is still only $200 and C's $10 of actual money.


By my account there is much more than that (340 in demand deposits).

Demand deposits > reserves = created money (although you have to count other banks).  Your bank was very strange in that it existed in a volume and kept accepting reserves from other banks...which made the scenario very odd.  But it still illustrated very clearly that the bank was making unmeetable promises and creating inflation.

----------


## rpwi

> I might have to concede this point. If the goldsmith didn't make clear what he was doing, then it's wrong. However, this is not the case with banks in this day and age.


What is the difference?  The wildcat banks in the 1900's issued bank notes off of gold...was that wrong?  What would be different from that and deposits?




> I don't buy that. Say there is 1 trillion in 'money' in the economy. The population doubles...the amount of farmland doubles...railroads enable manufacturing...etc... This results in deflation. Not a bad thing as things become cheaper. The answer isn't too inflate to cover this up.
> 			
> 		
> 
> Doesn't apply... If money is circulating, then that is inflationary, if money is being saved, that is deflationary. However, as long as new money isn't being created, the currency can only inflate to a point before interest rates rise, people start saving and the economy corrects itself before an asset bubble arises.


Inflation being a matter of simple circulation makes no sense.  So you are saying if there is crop failure in the US of say 90%...that would cause no inflation??




> FDR had no choice but to end the public gold standard and Nixon had no choice but to end the international gold standard. The government was practicing fractional banking just like the banks were! They issued more dollar claims and dollar deposits on gold...then they had. And when the claims came pouring in...what choice did they have? It was quite the pyramid back then...Gold was the base...then dollars...then for period then regional bank deposits...and then common bank deposits! All fractional based on each other like an upside pyramid.
> 			
> 		
> 
> There's always a choice. Keynesians convinced these guys that a commodity backed currency was holding the economy back, and that cutting federal spending wouldn't be necessary as long as the Fed was given free reign over the printing press. And here we are 40 years later, and the world is going to $#@!.


What should have FDR nor Nixon done differently to keep us on the standard?  There were more claims on gold than the government had.  Claims were coming in and creating a feedback loop...if FDR and Nixon not taken us off the gold standard...we would have been taken off by default as our reserves would have been drained and depositors would be left with their their central bank deposits.




> Spending is what causes inflation.


Say the Fed lies...and announces to the market they created 5 zillion dollars.  The market believes the Fed and this causes inflation right?  No money was spent though?

----------


## hazek

C now owns $10*y% = C got $10 plus interest back is what I meant




> If D did not deposit from cash...then E's old bank will have destroyed a little M1 to rebalance their portfolio


I don't understand this, D got $90 from FRB operator, made an exchange with E, E now has the $90 and makes a demand deposit with FRB operator.




> FRB operator sells another $90 of his reserve for interest x% to F as a 10y mortgage


I made a mistake, I meant F takes out a $50 loan, please check my post again for correct numbers..




> Where did F and G bank before the money was deposited at this bank (that was FRB too...and should be part of your formula).


Isn't this irrelevant? The way FRB works is you can pretend there's a close loop and just put everything on one balance sheet instead of looking at all the individual FRB operator's sheets, no?




> Demand deposits > reserves = created money


It was creating price inflation meaning rising prices by speeding up velocity of money but it was not creating money. Demand deposits are not money, reserves are. The actual money that can be spent at any one time in my example is the amount of the reserves, if depositors all wanted to withdraw all of their deposits they couldn't get them.

----------


## rpwi

> It's not the same thing... If I owed you $30, you have a claim to my $30 in the sense that my debt to you is your asset. But until I give you that $30, I own it.


The maturity of this debt/credit matches though.  Different story when a bank finances credit with demand deposits...looks like same on a 2d balance-sheet but is significantly different in a 3d balance sheet.  In essence...the bank can not meet demands in the aggregate.  What they are depending on is that depositors accept their claims on reserves as faith...and keep rolling over their 'investment'.  Of if the depositors cash out their liquidity that the bank can borrow liquidity from external sources.   




> A claim to something =/= owning something. But you probably already knew this which is most likely the reason why you changed your statement on the fly.


?  So how do you define a claim?  In your effort to make it as distinct as possible from the ownership...you've marginalized its true power.  If a claim can't own anything, what good is it?  I think it is fair to see that you have both a claim on reserves as well as ownership on them.  We would not deposit our reserves if we thought otherwise.




> I guess you can make the claim that insurance companies are fraudulent too. If everyone's house burned down all at once, there's no way an insurance company would be able to cover all those homes. How is that any less fraudulent? Or are you against insurance as well?


Insurance is a topic for another thread :P .  




> This $#@! isn't rocket science. If someone opens up an account with a bank without even wanting to understand the terms, even though the bank is perfectly open with regard to what they do with their client's money, where exactly is the bank in the wrong?


They offer the ability to redeem dollars from deposits in the aggregate...but it is only possible if people in the aggregate don't demand dollars for deposits in the aggregate.  It's circular and a confidence game.  It is nonsense to state your average Jo off the street understands banking.  Most believe that CD's finance their home mortgages...or bonds...most have no idea the upside pyramid our money supply looks like.  Ask them where money comes from.  Most will not say a bank even though bank money is much larger than the monetary base.  Again...if they understood banking...the wouldn't partake.  If you understood that your car had a 90% chance of blowing up...you wouldn't buy it.  Same with depositing with FRB.




> I don't understand how the internal mechanisms of my wireless network works in my home. Does that mean the internet company is committing fraud by giving me internet access? I don't understand how my remote control turns on my TV, does that mean the company who I bought my remote control from is committing fraud as well?


Keep going with your sarcastic examples...  People didn't understand how the ponzi scheme worked so that was 'fraud' right?  People didn't understand Madoff's schemes...so that was <sarcastic>fraud</sarcastic> right?




> So the currency is being conceptually counterfeited? You are really grasping for straws here.


We accept deposits as payments, right?  So isn't it fair to call it money?  Since there are more deposits than base money...it is fair to say money has been created, right?  Rothbard, Friedman, Ron Paul, Greenspan, Krugman and Bernanke would all agree with me so far.  If the money was created...then it was done by a specific party for specific benefit right?  The difference between a bank detaching deposits from reserves and a counterfeiter is...?




> It does doesn't it??? You do realize the credit unions engage in FRB right?? Does this make it any better?


Credit unions aren't honest either.  They are not-for-profit banks...aka not-for-profit counterfeiting rackets.  In your example you made a reference to depositors getting preferential loan treatment...while this happens with some banks...it is more of a characteristic of credit unions.




> You do realize that deposit fees for a 100% reserve bank would be pretty damn expensive right?


It shouldn't be.  It's just accounting entries for the most part.  I could see a higher 'exchange' fee for customers depositing cash or withdrawing cash though because of the security concerns.




> Do you think banks would just store your money for free without getting anything in return?


Sure...that's honest.  I'm sure with competition (especially to get branding rights onto other financial services) upkeep fees would be small.  My ideal solution is to let consumers deposit directly at their regional Fed bank.  Banks can do it...why can't we?  We have to go through a private bank as an unnecessary middleman to acquire electronic dollars.  In fact I wouldn't mind seeing the ability to not only deposit directly with the Fed...but to have a national debit card as well (one without those annoying transaction fees that bank debit cards have).




> Not to mention access to low-interest loans with an FRB.


You don't want low interest loans if they cause inflation and mal-investment.

----------


## rpwi

> *
> Is it creating money?*
> 
> No, when a central bank creates money, that is true money creation because the money did not exist before.


So when the Fed used to be on the gold standard...and issued dollars in excess of what could be redeemed for gold...were these dollar than not money?




> At a normal bank, if I deposit $10 and the bank lends out $9 of it, only $10 can be spent at any moment so the money supply at any moment in time hasn't change, just the liabilities on banks balance sheet. If I and the borrower both decide to spend all our money in the same moment there is a shortage of money, but increasing the claims for money at a bank is different than increasing the amount of money at the bank.


Applicable for reserves...not deposits.




> FRB doesn't increase the money supply, but increases the effective use of the current money supply at any point in time.


It absolutely increases the supply of deposits.  Are deposits money?  Austrians and Keynesian's say yes.




> So instead of my $10 not being used till I withdraw, $9 of it is being employed during that time. Can their be instabilities, yes, but I can think of many ways markets will develop to make up for it if given the chance, especially in a world of denationalized currency.


Money is not for 'use' like a power tool or car.  It's your measure of what you've contributed to the economy.  It's more akin to a record than a tool.  To let others sneak and 'use' your money makes no sense.

----------


## rpwi

> Isn't this irrelevant? The way FRB works is you can pretend there's a close loop and just put everything on one balance sheet instead of looking at all the individual FRB operator's sheets, no?


With fractional banking...it is always most useful to conceptualize the transactions as if there is only one monopoly bank in the economy.  Only after you understand how fractional banking works where we are limited to one FRB...can you understand 2,4,8 banks and the rest of the economy and the money market system.




> It was creating price inflation meaning rising prices by speeding up velocity of money but it was not creating money. Demand deposits are not money, reserves are.


Yet you accept deposits as payment, right?

Let's get back to the monopoly bank example.  Just one bank.  Lot's of depositors.  Some cash circulating outside the bank. Say it starts at 100% reserves.  When I write a check to you...no money has been created, right?  The bank just swapped it's liabilities on the balance sheet.  Now say the bank fabricates deposits and uses them to get a loan asset.  Deposits are more than reserves, right?  When in this system, you write a check to me...am I getting reserves for payment or deposits?




> creating price inflation meaning rising prices by speeding up velocity of money


I don't know about that.  Why do we spend something?  To improve our position.  If we are improving our position than we are improving our wealth...  If wealth is improving...all else being equal that is deflationary (wealth being destroy like bad crops is inflationary).  I mean using this velocity thing...I could create a series of dummy transactions with another person to sell each other the same piece of gold...these transactions could move very fast...10^zillion times fast.  Back and forth...back and forth...  Monetary velocity would be zippy, no?  Has much changed though?




> The actual money that can be spent at any one time in my example is the amount of the reserves,


No the constrain on spending is not reserves because we accept deposits as a store of value and as a means of payment...so they can be much more than reserves.

----------


## AlexMerced

> So when the Fed used to be on the gold standard...and issued dollars in excess of what could be redeemed for gold...were these dollar than not money?
> 
> Applicable for reserves...not deposits.
> 
> It absolutely increases the supply of deposits.  Are deposits money?  Austrians and Keynesian's say yes.
> 
> Money is not for 'use' like a power tool or car.  It's your measure of what you've contributed to the economy.  It's more akin to a record than a tool.  To let others sneak and 'use' your money makes no sense.


Point #1 - Arguably that could be the case, again more than anything I feel we're ignoring the root issue of closed competition due to monopoly banking and currency

Point #2 - Well, if I said it doesn't increase the supply of base money that probably would've been better. The definition of money is tricky so I generally stick to the base, because one can make arguments things like coupons and gift certificates can be inflationary or food stamps even. (actually, I have made that argument)

Point #3 - I agree but again, this is only an issue when there is a monopoly money, if you had privately issued money I don't see how this is an issue still because of the ability to diversify.

----------


## AlexMerced

> I don't have time to give this the time it deserves, so I'll have to come back to this (including a response to Hazek), but did want to make the following distinction, because I see a lot of goalpost movement with regard to FRB.   
> 
> For example:  
> 
> Lots of crimes have "good economic performance".  Racketeering, loan-sharking, etc., can have "good economic performance". 
> 
> 
> 
> What you described, Alex (people who simply take your money and spent it rather than investing it as promised) is simple fraud - embezzlement. Ponzi schemes are far more elaborate, and not fraudulent simply because the scammer spends the investor's money.  In fact a Ponzi scheme, once detected, can be prosecuted long before a scammer spends a dime of investor's money.  It's fraudulent, in part,  because the scammer "pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation."
> ...


I'm not saying crimes should be allowed if they make good economic perfromance, I'm saying stability isn't the only criteria of a good banking system.

----------


## AlexMerced

Bottom line is this, there is no absolute answer in this question, what is fraud and what isn't can have shifting definitions despite having a seemingly clear definition. It's up to the courts and judges to make these determinations which will be impacted by prevailing values, if the prevailing sentiment that it is fraud then it will natually be outlawed by a common law system and if the prevailing norm is that it isn't then it won't.

I just don't care which is the prevailing norm, because in true free market with multiple currencies many of these issues are just mute.

----------


## hazek

> With fractional banking...it is always most useful to conceptualize the transactions as if there is only one monopoly bank in the economy.  Only after you understand how fractional banking works where we are limited to one FRB...can you understand 2,4,8 banks and the rest of the economy and the money market system.


Right. That's why my example has only one bank.




> Yet you accept deposits as payment, right?
> 
> Let's get back to the monopoly bank example.  Just one bank.  Lot's of depositors.  Some cash circulating outside the bank. Say it starts at 100% reserves.  When I write a check to you...no money has been created, right?  The bank just swapped it's liabilities on the balance sheet.  Now say the bank fabricates deposits and uses them to get a loan asset.  Deposits are more than reserves, right?  When in this system, you write a check to me...am I getting reserves for payment or deposits?


Deposits are indeed more than reserves, hence FRB. But when I write you a check you get reserves not deposits. If the FRB operator runs out of reserves my check will bounce.




> I don't know about that.  Why do we spend something?  To improve our position.  If we are improving our position than we are improving our wealth...  If wealth is improving...all else being equal that is deflationary (wealth being destroy like bad crops is inflationary).  I mean using this velocity thing...I could create a series of dummy transactions with another person to sell each other the same piece of gold...these transactions could move very fast...10^zillion times fast.  Back and forth...back and forth...  Monetary velocity would be zippy, no?  Has much changed though?


http://en.wikipedia.org/wiki/Velocity_of_money

Velocity of money is the frequency which a unit of money is spent on new goods and services.

That's all the FRB does is increase this velocity of money. And this can raise prices.. So instead of me saving $100 and my $100 just sitting there, it's being lent out and made available to the market to be exchanged for goods and services.. while I and the FRB make some money on yields.




> No the constrain on spending is not reserves because we accept deposits as a store of value and as a means of payment...so they can be much more than reserves.


We mistakenly do now with the FDIC, the FED and the monopoly on violence that is the government legitimizing and even forcing this practice upon us. But FRB in a market regulated strictly by market consumers (i.e. a free market) we wouldn't think of deposits as a store of value but rather more correctly as an investment with on demand liquidity. And investments carry risk of default.

----------


## heavenlyboy34

> Credit unions aren't honest either.  They are not-for-profit banks...aka not-for-profit counterfeiting rackets.  In your example you made a reference to depositors getting preferential loan treatment...while this happens with some banks...it is more of a characteristic of credit unions.


Credit unions are perfectly honest.  Everything you could want to know is in the member literature, and you can always ask someone if you can't find the answer to your question.  

Members of a CU are effectively "share holders".  That's why we (I am a CU member) get a lot more benefits than normal bank members do.  

Since you have made a positive claim (that CU's are "not-for-profit counterfeiting rackets"), let's see some evidence.

----------


## Bohner

> What is the difference?  The wildcat banks in the 1900's issued bank notes off of gold...was that wrong?  What would be different from that and deposits?


One is hiding what it's doing (fraud), the other makes it clear what it's doing (not fraud). This is starting to get a little aggravating. 




> Inflation being a matter of simple circulation makes no sense.  So you are saying if there is crop failure in the US of say 90%...that would cause no inflation??


Inflation is a result of an increase in the amount of money circulating in the economy leading to higher prices. In your example, prices would rise as a result of a drastic reduction in the supply of crops. So I personally wouldn't call that inflation. 




> What should have FDR nor Nixon done differently to keep us on the standard?  There were more claims on gold than the government had.  Claims were coming in and creating a feedback loop...if FDR and Nixon not taken us off the gold standard...we would have been taken off by default as our reserves would have been drained and depositors would be left with their their central bank deposits.


They should have never gone off the gold standard period, or at least implement competing currencies. I don't really know enough about the issue to make an elaborate comment though




> Say the Fed lies...and announces to the market they created 5 zillion dollars.  The market believes the Fed and this causes inflation right?  No money was spent though?


The fed prints money and forces down interest rates. As a result, there is more money in the economy that circulates, leading to higher prices. What's saving the US now is that aggregate demand is so low that money isn't circulating, and most of that newly created money is stuck in the bond market (which is a bubble that's certainly going to pop).

----------


## Bohner

> The maturity of this debt/credit matches though.  Different story when a bank finances credit with demand deposits...looks like same on a 2d balance-sheet but is significantly different in a 3d balance sheet.  In essence...the bank can not meet demands in the aggregate.  What they are depending on is that depositors accept their claims on reserves as faith...and keep rolling over their 'investment'.  Of if the depositors cash out their liquidity that the bank can borrow liquidity from external sources.


Jesus... The bank CAN meet the demands of the aggregate. Only barring exceptional circumstances (normally caused by the government) does it go to $#@!. But as said before, if the government stayed out of the market, everything would work just fine. 




> So how do you define a claim?  In your effort to make it as distinct as possible from the ownership...you've marginalized its true power.  If a claim can't own anything, what good is it?  I think it is fair to see that you have both a claim on reserves as well as ownership on them.  We would not deposit our reserves if we thought otherwise.


A claim is what you are owed... But until what you are owed is actually given to you, then you do not own it. 




> Insurance is a topic for another thread :P


How convenient... 




> Keep going with your sarcastic examples...  People didn't understand how the ponzi scheme worked so that was 'fraud' right?  People didn't understand Madoff's schemes...so that was <sarcastic>fraud</sarcastic> right?


Those guys LIED about what they were doing with their investor's money (fraud). Banks are up front about it (not fraud). Nice try though. 




> We accept deposits as payments, right?  So isn't it fair to call it money?  Since there are more deposits than base money...it is fair to say money has been created, right?  Rothbard, Friedman, Ron Paul, Greenspan, Krugman and Bernanke would all agree with me so far.  If the money was created...then it was done by a specific party for specific benefit right?  The difference between a bank detaching deposits from reserves and a counterfeiter is...?


Who is accepting these deposits as payments? What is being deposited? I don't get your point. 




> It shouldn't be.  It's just accounting entries for the most part.  I could see a higher 'exchange' fee for customers depositing cash or withdrawing cash though because of the security concerns.


Money costs money to store and secure. Banks have people to employ, services to provide and bills to pay. It would be significantly more expensive to store your money at a 100% reserve bank than a FRB because you are essentially eliminating the banks' primary revenue stream, so they are going to have to find a way to make up for those costs. The way they will do that is by passing those costs off to their clients. There's no way around it. 




> Sure...that's honest.  I'm sure with competition (especially to get branding rights onto other financial services) upkeep fees would be small.  My ideal solution is to let consumers deposit directly at their regional Fed bank.  Banks can do it...why can't we?  We have to go through a private bank as an unnecessary middleman to acquire electronic dollars.  In fact I wouldn't mind seeing the ability to not only deposit directly with the Fed...but to have a national debit card as well (one without those annoying transaction fees that bank debit cards have).


I see your point... The best thing about it is that the fed will have no problems with covering all it's clients deposits. Since all they would have to do is print more money should they get into a crunch. Yep, this idea isn't stupid at all 




> You don't want low interest loans if they cause inflation and mal-investment.


Actually, I don't want low interest loans if that interest was forced down via government manipulation. But it's essentially the same thing.

----------


## heavenlyboy34

> One is hiding what it's doing (fraud), the other makes it clear what it's doing (not fraud). This is starting to get a little aggravating. 
> 
> 
> 
> Inflation is a result of an increase in the amount of money circulating in the economy leading to higher prices. In your example, prices would rise as a result of a drastic reduction in the supply of crops. So I personally wouldn't call that inflation. 
> 
> 
> 
> They should have never gone off the gold standard period, or at least implement competing currencies. I don't really know enough about the issue to make an elaborate comment though
> ...






> Jesus... The bank CAN meet the demands of the aggregate. Only barring exceptional circumstances (normally caused by the government) does it go to $#@!. But as said before, if the government stayed out of the market, everything would work just fine. 
> 
> 
> 
> A claim is what you are owed... But until what you are owed is actually given to you, then you do not own it. 
> 
> 
> 
> How convenient... 
> ...


 FTW!

----------


## Bohner

> FTW!


Cheers!!!

----------


## Seraphim

I'm sorry Hazek.

Contract law solves the issues of FRB. As long as the government does NOT force anyone to use FRB or grant FRB any special priviledges, you can and should be able to enter a contract with any entity.

FRB's can serve as vehicles for investment and growth when they are used in a market choosen, uncoerced fasion.

Sadly, FRB's as of now do not fit this criteria, but the concept of FRB itself is not the culprit. Coersion through governance is.

----------


## hazek

Seraphim, please reread the first post

----------


## Seraphim

Word up.

lol




> Seraphim, please reread the first post

----------


## rpwi

> Deposits are indeed more than reserves, hence FRB. But when I write you a check you get reserves not deposits.


In interbank transactions, reserves are 'cloned' in a process called float so yes...for a brief moment M1 gets converted into MB and back into M1 again.  That is not consequential to deposits being methods of payment though.   Say I write a check to you for 20 dollars...my bank only had 10 dollars in reserves.  From your perspective it is impossible...yet quite easy.  In a modern system of banking, my bank merely borrows the reserves from the money market (perhaps from your bank!).    This clearly illustrates we accept deposits and not reserves for payment.  This is especially self-evident in case in which we bank with the same bank and write checks for amounts that exceed the reserve amounts.  This means deposits are money.




> If the FRB operator runs out of reserves my check will bounce.


It would be wonderful if interbank clearing acted as a brake on FRB...but it doesn't because banks unfortunately borrow reserves from other banks to make up the difference...good for the banks involved...bad for the system at large as it creates a all or nothing fail scenario.




> That's all the FRB does is increase this velocity of money.


It's more important to consider that FRB increases the volume of money.  




> We mistakenly do now with the FDIC, the FED and the monopoly on violence that is the government legitimizing and even forcing this practice upon us. But FRB in a market regulated strictly by market consumers (i.e. a free market) we wouldn't think of deposits as a store of value but rather more correctly as an investment with on demand liquidity. And investments carry risk of default.


It is not a logical investment.  Why do I obtain a demand deposit?  Not really to yield interest...but to be able to spend and withdraw money as demanded.  It makes no sense as an 'investment' if for the simple convenience of being able to use the money...say 90% of the time I can't...and there is a significant risk of failure.  In fact failure is absolutely guaranteed with FRB.  Free-market FRB'ing is a joke.  Without the Fed to provide artificial liquidity...banks will get into liquidity wars, the money market will break down and the system will collapse.

----------


## rpwi

> Credit unions are perfectly honest.


They are not.  The inflation and mal-investment they create, hurts all of us.  If not supported by government, the depositors would get hurt as well.




> Everything you could want to know is in the member literature, and you can always ask someone if you can't find the answer to your question.


There is a difference between information being available in a technical and clerical format and the participants understanding what is going on.  With banks and credit unions...participants are so ignorant (not entirely their own fault) that they don't know the right questions to ask.




> Since you have made a positive claim (that CU's are "not-for-profit counterfeiting rackets"), let's see some evidence.


Deposits are money, right?  Creating money creates inflation, right?  Inflation is theft from the creators of money to those who provide the things money buys, right?  Therefore credit unions are thieves.

----------


## rpwi

> What is the difference? The wildcat banks in the 1900's issued bank notes off of gold...was that wrong? What would be different from that and deposits?
> 			
> 		
> 
> One is hiding what it's doing (fraud), the other makes it clear what it's doing (not fraud). This is starting to get a little aggravating.


There is no conceptual difference between issuing (bank notes or deposits) off of (dollars or gold).  




> Inflation being a matter of simple circulation makes no sense. So you are saying if there is crop failure in the US of say 90%...that would cause no inflation??
> 			
> 		
> 
> Inflation is a result of an increase in the amount of money circulating in the economy leading to higher prices. In your example, prices would rise as a result of a drastic reduction in the supply of crops. So I personally wouldn't call that inflation.


Can you cite one reference that shares your view of inflation as being an exclusively a monetary matter?




> They should have never gone off the gold standard period, or at least implement competing currencies.


The government never truly was on a gold standard.  They always issued more dollar claims on gold, then they had in gold.  If FDR and Nixon had not taken us off the gold standard...we would have had a gold standard with no gold.  That is an oxymoron. The claims were coming in too fast.  Taking us off was the only solution.  

Currencies are already allowed to compete.  There are minor barriers (like gold not being able to utilize short term capital gains).  But the big problem is that only dollars can pay taxes...so legal tender gives the dollar a lot of power.  I'm not sure FDR or Nixon could have made a snap judgment to accept gold, silver, (whatever else)? for taxes and that would have restored a hard money standard (which was never truly a standard even before the Fed because it was fractionally based).




> The fed prints money and forces down interest rates. As a result, there is more money in the economy that circulates, leading to higher prices.


The money the Fed creates though goes straight to the Primary Dealers (the big banks) and then from there to other banks.  The monetary base for the most part stays in the system...and it merely facilitates the deposits in which banks create.  With our modern banking system + the Fed...banks don't have to worry about reserves that much.  All they need are good investments...and they can borrow all the reserves they need from the money market...and when the money market rates get too high...the Fed cools it off by adding more MB to the system.  So in essence the Fed creating MB doesn't really create inflation...it just enables the banks to expand deposits at a bigger rate and THAT creates inflation.




> What's saving the US now is that aggregate demand is so low that money isn't circulating, and most of that newly created money is stuck in the bond market (which is a bubble that's certainly going to pop).


To a certain extent.  I'm definitely personally very bear'ish on the bond market and think it is the next bubble (especially with how private equity is messing up the markets with all its phony junk bonds for their phoney buyouts).  But to a large extent FRB is actually at a historical low now.  Banks don't trust each other!  So the money market is not working like it usually does...and this is hurting the banks ability (a little bit) to create deposits.  Much of the Fed's new money is simply increasing the reserve ratio of many our nations banks.

----------


## hazek

> In interbank transactions, reserves are 'cloned' in a process called float so yes...for a brief moment M1 gets converted into MB and back into M1 again.  That is not consequential to deposits being methods of payment though.   Say I write a check to you for 20 dollars...my bank only had 10 dollars in reserves.  From your perspective it is impossible...yet quite easy.  In a modern system of banking, my bank merely borrows the reserves from the money market (perhaps from your bank!).    This clearly illustrates we accept deposits and not reserves for payment.  This is especially self-evident in case in which we bank with the same bank and write checks for amounts that exceed the reserve amounts.  This means deposits are money.


I'm afraid cognitive dissonance is getting the best of you here.. You said it yourself that if a bank runs out of reserves they borrow reserves from someone else willing to lend to them. How does this clearly illustrate we accept deposits and not reserves, if it's reserves they needed to borrow in order to transfer the money?




> It would be wonderful if interbank clearing acted as a brake on FRB...but it doesn't because banks unfortunately borrow reserves from other banks to make up the difference...good for the banks involved...bad for the system at large as it creates a all or nothing fail scenario.


Strictly market regulated FRB would face a lot more scrutiny so yes, while you would have a point that there is this moral hazard present in the form of emergency loans, you must not forget that each FRB must maintain a reasonable balance sheet to remain attractive to investors meaning they can't afford to always loan to other FRB operators especially to operators that are a high risk of default. 

I have the feeling that you continue to be stuck in this central bank printing money + government insurance and regulations paradigm which doesn't allow you to see the picture more clearly..




> It's more important to consider that FRB increases the volume of money.


If by volume you mean supply, then fact is, it does not.




> It is not a logical investment.  Why do I obtain a demand deposit?  Not really to yield interest...but to be able to spend and withdraw money as demanded.  It makes no sense as an 'investment' if for the simple convenience of being able to use the money...say 90% of the time I can't...and there is a significant risk of failure.  In fact failure is absolutely guaranteed with FRB.  Free-market FRB'ing is a joke.  Without the Fed to provide artificial liquidity...banks will get into liquidity wars, the money market will break down and the system will collapse.


Risk/reward. You may feel the reward doesn't warrant the risk, but not everyone thinks like you.

----------


## rpwi

> Jesus... The bank CAN meet the demands of the aggregate.


They can do no such thing.  Say Deposits are backed 10% by reserves.  Say there is no government safety net.  The whole forest burns down with one campfire.  For-whatever reason 1% cashes out reserves.  The system is now at less than 10% backing.  This increases worry and another 1% withdrawals...the aggregate reserve ratio drops and the concerns about liquidity rise...this leads to more withdrawals which creates a feedback loop.    Everything fails.  




> Only barring exceptional circumstances (normally caused by the government) does it go to $#@!. But as said before, if the government stayed out of the market, everything would work just fine.


Not really the case.  In fact government is a significant benefactor to FRB.  Remove government from the equation...and FRB fails in mass.  It's that simple.




> A claim is what you are owed... But until what you are owed is actually given to you, then you do not own it.


  You can play semantics...  But to me it doesn't make sense to to argue whether deposits are 'claims' or 'ownership'.  The bottom line is that we have deposits not because we are playing financial speculative games about future claims on reserves depending on the credit rating of the bank relative to other bank...or any other convoluted rational...  We have a deposit because that is what we accept as money. 




> Those guys LIED about what they were doing with their investor's money (fraud). Banks are up front about it (not fraud). Nice try though.


We can go in circles on this...  When was the last time a bank told you that your deposit was only backed by say 10% reserves?  When was the last time when you made a withdrawal and banks explained that you weren't withdrawing your reserves...but somebody else?  When was the last time banks explained the financial source of that home mortgage loan?  Sure...in a technical obscure format this information is free available.  That doesn't mean that the public understands nor that the banking system in general is not preying on their ignorance in the same fashion that any fraudster would.




> We accept deposits as payments, right? So isn't it fair to call it money? Since there are more deposits than base money...it is fair to say money has been created, right? Rothbard, Friedman, Ron Paul, Greenspan, Krugman and Bernanke would all agree with me so far. If the money was created...then it was done by a specific party for specific benefit right? The difference between a bank detaching deposits from reserves and a counterfeiter is...?
> 			
> 		
> 
> Who is accepting these deposits as payments?


Almost everybody who get paid by check.




> What is being deposited? I don't get your point.


A credit to your bank account and a debit to the payee's bank account.  When somebody gets paid...one of two things happens.

If we bank within the same bank...the bank merely swaps liabilities.  How can you say that in such a case somebody is paid in reserves instead of deposits?

In an inter-bank transaction...the old deposit liability gets transferred to the new bank.  The old bank loses the reserves...but then reacquires them in most cases from the money market. In this manner...payments can clearly exceed reserves...which clearly illustrates that we get paid in deposits, not reserves (the implicit point behind your question).  In fact, you can think of the situationas the starting bank + the other banks.  When the starting banks had a check clear...they in essence send reserves to 'the other banks' and in turn get a money market loan.  This is just a big liability swap on a grander scale.




> Money costs money to store and secure. Banks have people to employ, services to provide and bills to pay. It would be significantly more expensive to store your money at a 100% reserve bank than a FRB because you are essentially eliminating the banks' primary revenue stream, so they are going to have to find a way to make up for those costs. The way they will do that is by passing those costs off to their clients. There's no way around it.


I don't buy that.  Many businesses (pizza places, laundry mats) deal with storing lots of money no problem and it's not costing them zillions of dollars which they pass onto us.  If a quicky-mart can figure out how to store dollars...then a 100% reserve bank can as well.  The nice thing is...most dollars are electronic now...which makes them much easier to store.




> Sure...that's honest. I'm sure with competition (especially to get branding rights onto other financial services) upkeep fees would be small. My ideal solution is to let consumers deposit directly at their regional Fed bank. Banks can do it...why can't we? We have to go through a private bank as an unnecessary middleman to acquire electronic dollars. In fact I wouldn't mind seeing the ability to not only deposit directly with the Fed...but to have a national debit card as well (one without those annoying transaction fees that bank debit cards have).
> 			
> 		
> 
> I see your point... The best thing about it is that the fed will have no problems with covering all it's clients deposits. Since all they would have to do is print more money should they get into a crunch. Yep, this idea isn't stupid at all


Why would the Fed 'cover client deposits'?  MB is a base currency and not redeemable in anything else.   Dollars exist in two forms now.  Electronic and paper.  For electronic dollars, these are only accessible as deposits at the Fed...and only banks are allowed to hold deposits at the Fed.  We indirectly deposit with the Fed...but only through the private bank.  The private bank is an unnecessary and wasteful middleman that gets between me and my electronic dollar.  The Fed already knows how to clear electronic dollar transactions...since they do so now with private banks.  It should be no problem to allow the public the same ability that is not granted exclusively and in elitist fashion to private banks.

----------


## rpwi

> I'm afraid cognitive dissonance is getting the best of you here.. You said it yourself that if a bank runs out of reserves they borrow reserves from someone else willing to lend to them.


Yes.  But things tend to be circular.  If you follow the trail of reserves...you'll see it is not so much a matter of reserves moving so much in a banking system...but debt between banks that tends to move around as a counter-weight.




> How does this clearly illustrate we accept deposits and not reserves, if it's reserves they needed to borrow in order to transfer the money?


Reserves =/= Deposits.  Start with the monopoly bank example.  Clearly no reserves are transferred when a check is cleared, right?  In fact reserves would be in no practical way a constraint on the size of deposits or checks, right?

Now image that the monopoly bank is split into a duopoly.  Bank A and Bank B.  Say these banks practice fractional reserve banking.  10 zillion deposits to 1000 dollar reserves.

When checks are sent between the two...does that mean this will cause FRB will collapse?  No.  Say a depositor writes a check for 2000 dollars to depositor in the other bank.  Problem, eh?  Bank A only has a 1000 in reserves.  But is not a problem.  As what happens now...the bank for all practical purposes would not send those reserves to the other bank...but instead would send a debt instead.  So bank A loses a nice interest free demand deposit liability and gains a less nice interest bearing liability to Bank B.

Bank B acquires a nice interest free demand deposit liability and either an interest bearing debt asset...or the cancellation of a earlier debt to bank A.

This is how modern banking works...check clearing doesn't scare them that much.  So if reserves are not a constraint on deposits being created (as I have illustrated) then why would it make sense to say that we accept them and not deposits for payment? 




> Strictly market regulated FRB would face a lot more scrutiny so yes, while you would have a point that there is this moral hazard present in the form of emergency loans, you must not forget that each FRB must maintain a reasonable balance sheet to remain attractive to investors meaning they can't afford to always loan to other FRB operators especially to operators that are a high risk of default.


I do believe...that without government assistance...the whole house of cards falls.  It is not a matter of having 'healthy balance sheets'.  Demand for liquidity creates a feedback loop with FRB.  One small withdrawal could and would bring everything down without government aid.  Banks that have deposits backed at 50% are just as likely to go belly up in a liquidity run as would banks with with deposits backed by 60%.




> I have the feeling that you continue to be stuck in this central bank printing money + government insurance and regulations paradigm which doesn't allow you to see the picture more clearly..


I'm not sure what you are referring to...




> It's more important to consider that FRB increases the volume of money.
> 			
> 		
> 
> If by volume you mean supply, then fact is, it does not.


FRB absolutely increases the number of deposits beyond reserves...so you must mean that deposits are not money. 

Let's try a mind bending exercise ...  When American central banks in history have practiced fractional reserve banking off of gold...did that cause inflation?  Did they create money?

All our central banks pretty much did the same thing...but let's consider the Fed when it was first founded.  They had X in gold.  And say 2x in gold claims from deposits and notes.  Was this honest?  The Fed had two 'bank runs'...one in 1933 and one in 1971.  How were these different from FRB?  When the Fed expanded the number of deposit/note claims on gold...did that not create inflation?  What's the difference?




> Risk/reward. You may feel the reward doesn't warrant the risk, but not everyone thinks like you.


The math doesn't add up though.  A perfectly logical and educated person would not deposit in a bank (unless it has support from big brother).  This is because banks make more promises for liquidity than they can deliver.  An omniscient depositor sees in his head the liquidity promises as a spider-web throughout the economy...and sees they don't add up with FRB.  And he no more partakes in FRB then plays Russian roulette.

----------


## Steven Douglas

One of the biggest bald face lies told in defense of FRB is that depositors are somehow aware of the difference between a bailment, where title to money is retained (and I use the term money VERY loosely), stored at a bank for safe-keeping and convenience, and a deposit in noninterest-bearing transaction accounts, wherein full transfer of title and ownership of the depositor's money is given over to the bank in exchange for IOU's.  Economists are aware of the difference. The courts are aware. The bankers are certainly aware. Not the vast majority of depositors, who weren't even aware of the Koolaid everyone else had swallowed, to the point of presuming everyone else must have. 

FRB deliberately establishes the illusion of bailments with only the fine print legal distinction of deposits. Indeed most people don't even think about what they are signing when they open an account. For most people it's just the usual legal yada yada - standard procedure with lots of legalese and fine upstanding banking lingo; just a formality that everyone goes through. Everyone else is signing, and nobody else is complaining, so it must be fine whatever it is - and besides, you won't get an account unless you do sign.   

When the average person with a debit card makes a purchase, or goes to an ATM to pull out cash, does anyone honestly think that person realizes they are doing the equivalent of "calling in a loan"? Does anyone really think that the average Joe or Jane Sixpack has any thought that the bank is "paying back" anything on demand?  *Not a chance.* The vast majority of people do not have the slightest comprehension about what money is, let alone how banking really works.  Most are deliberately led to believe that their money is simply being stored at the bank for safe-keeping, *because that is how the system behaves* MOST of the time, and the illusion they've been presented with.  And the speed and ease at which transactions do occur only reinforces the illusion of a bailment.  Debit cards and checks are just a matter of convenience for easy and direct access to exactly what most people believe is _theirs and theirs alone_ at all times, because that has _always_ been the illusion -- deliberately and by design. 

An extension of that same lie goes to the question of risk in different banks, and how people can supposedly shop around - as if the average person understood anything at all about what makes one bank more leveraged or volatile than another.  Just the FDIC insurance illusion scam alone means that for most people a bank is a bank is a bank.  From the average person's perspective, how banks differ from one another is only a matter of the conveniences they offer and the fees that they charge.  But actual risk?  What a laugh.  There is no risk, because it's been socialized for so long that it's not even a thought in the back of anyone's mind, generally speaking.  There is no need to shop around even if people understood banking and knew how or even why they should shop around.  Why? Because the VAST MAJORITY don't have anywhere near the FDIC SMDIA limit - per depositor per insured depository - of $250,000.  Most depositors are entirely insulated from the concept of banking risk precisely because defaults and losses have been socialized. 

FRB is not a case of intentional deceit and fraud against any single individual - who is always presumed to be educated enough to understand, given that it's "all there in black and white for those interested in knowing". It is a case of aggregate ignorance exploitation at it finest, where *most of the people really are fooled most of the time*.  And that is covered up nicely by those who actually do understand a little about banking, who then project that understanding onto everyone.  Because, doncha know, anyone with a modicum of educational virtue about banking can see plainly that the FRB emperor is fully clothed in the finest cloth ever made.

----------


## GeorgiaAvenger

Steven, you ought to educate the idiots on Redstate with your own diary. They could use a shot of economic reality.

----------


## Steven Douglas

> Steven, you ought to educate the idiots on Redstate with your own diary. They could use a shot of economic reality.


Cheers, I might do just that. Scary how liberal many otherwise conservatives have unwittingly become.

----------


## GeorgiaAvenger

> Cheers, I might do just that. Scary how liberal many otherwise conservatives have unwittingly become.


Yeah.
It is pretty sad when they criticize Austrians for being "too free market".

----------


## Steven Douglas

> Yeah.
> It is pretty sad when they criticize Austrians for being "too free market".


It is ironic to me that they openly rail against an idiot madman like Krugman, while defending all of the underpinnings that make his brand of leftist lunacy possible in the first place - just for different reasons. They rail against socialism, but not when it comes to forced socialization of the collectivized currency itself under the color of political independence and private control.  They sound off strongly about fiscal accountability, but are more than willing to compromise their own stated principles when their own interests are perceived to be at stake, and their own losses are about to be suffered.  That's when government has to step forward and make it all better. 

No, screw the leftist teat, by God. That's the teat on Lady Liberty that was reserved for all of the socialist thieving parasites.  We "conservatives" don't suckle from the "bad" teat - the blue teat.  Suckle from the right teat only; the red teat with "Patriotic And Well Deserved" tattooed right on it.

----------


## Bohner

> There is no conceptual difference between issuing (bank notes or deposits) off of (dollars or gold).


But there is a conceptual difference between telling people what you're doing with their money, and NOT telling people what you're doing with their money. This is a simple concept to grasp and I have no idea why you are having such a hard time grasping it. 




> Can you cite one reference that shares your view of inflation as being an exclusively a monetary matter?


Inflation is typically referred to as the general rise in prices. So I guess in that sense, your example can technically be referred to as inflation. However, it is commonly understood by most people with an understanding of economics that the primary cause of inflation is an increase in the money supply. 




> The government never truly was on a gold standard.  They always issued more dollar claims on gold, then they had in gold.  If FDR and Nixon had not taken us off the gold standard...we would have had a gold standard with no gold.  That is an oxymoron. The claims were coming in too fast.  Taking us off was the only solution.


The gold standard from 1945-71 was simply an agreement to keep the price of gold at $30 an ounce, and to adjust the money supply accordingly. So money wasn't necessarily backed by gold during this time. It was more a reference that the Fed used in order to stabilize the money supply. So your claim that this final tie to gold was removed because the banks didn't have enough gold to back their deposits can't be true because the dollar wasn't backed by gold during that time. But once that final tie was removed, an unprecedented rate of continuous inflation ensued.  




> Currencies are already allowed to compete.  There are minor barriers (like gold not being able to utilize short term capital gains).


The fact that you have to pay taxes when buying gold, and a capital gains tax when bartering in gold is not a minor barrier. 




> But the big problem is that only dollars can pay taxes...so legal tender gives the dollar a lot of power.  I'm not sure FDR or Nixon could have made a snap judgment to accept gold, silver, (whatever else)? for taxes and that would have restored a hard money standard (which was never truly a standard even before the Fed because it was fractionally based).


Not really... I could very well convert the gold I own into fiat for paying taxes, and make all my other transactions in gold. But should an alternate currency beat out the dollar in the free market, the government is going to have a pretty hard time justifying why they wouldn't accept it for taxes. 




> The money the Fed creates though goes straight to the Primary Dealers (the big banks) and then from there to other banks.  The monetary base for the most part stays in the system...and it merely facilitates the deposits in which banks create.  With our modern banking system + the Fed...banks don't have to worry about reserves that much.  All they need are good investments...and they can borrow all the reserves they need from the money market...and when the money market rates get too high...the Fed cools it off by adding more MB to the system. So in essence the Fed creating MB doesn't really create inflation...it just enables the banks to expand deposits at a bigger rate and THAT creates inflation


That's exactly what happens. Which is why I am vehemently opposed to the concept of a central bank. It causes the economy to expand continuously at an unsustainable rate. Where as in a free market system, the economy would be forced to cool off because of rising interest rates. 




> To a certain extent.  I'm definitely personally very bear'ish on the bond market and think it is the next bubble (especially with how private equity is messing up the markets with all its phony junk bonds for their phoney buyouts).  But to a large extent FRB is actually at a historical low now.  Banks don't trust each other!  So the money market is not working like it usually does...and this is hurting the banks ability (a little bit) to create deposits.  Much of the Fed's new money is simply increasing the reserve ratio of many our nations banks.


Sure.

----------


## Steven Douglas

> The gold standard from 1945-71 was simply an agreement to keep the price of gold at $30 an ounce, and to adjust the money supply accordingly. So money wasn't necessarily backed by gold during this time.


Actually, that is not correct.  The agreement to keep the price of gold at $35 an ounce was not something that involved or affected ordinary people, whose right to even own gold, let alone use it as money had been abrogated since FDR. So while for them there was ZERO gold backing for dollars, the dollar was very much backed by gold when it came to foreign governments under Bretton-Woods.  That's who that agreement applied to, and they didn't have to care a whit about how the Fed or Treasury affected the ever-diluted and increasing supply of paper currency, because no matter how much it was debased, they could always convert their paper into hard specie at the fixed rated - which they did, until the supply of gold became so depleted that Nixon finally slammed the window shut on everyone.

----------


## rpwi

> There is no conceptual difference between issuing (bank notes or deposits) off of (dollars or gold).
> 			
> 		
> 
> But there is a conceptual difference between telling people what you're doing with their money, and NOT telling people what you're doing with their money. This is a simple concept to grasp and I have no idea why you are having such a hard time grasping it.


You will have to make a more granular argument than that.

There are different degrees to 'knowing' what people are doing with your money.  

There is a technical/legalize level.  This does not mean the individual knows. 

There is a level in which the participant is not privy to every last little detail...but understands the big picture and the contract is carried out and fulfilled with fiducial responsibility.  This is proper.

Then there is a fraud level in which a contract is constructed in which one side takes advantage of the ignorance of the other.  The ultimate measure of which a participant recognizes fraud...is if they partake in it.  If I buy a defective parachute...this means I did not know the parachute was defective...otherwise I would not have bought it.  By bank customers accepting bank deposits for payment and storage...they are 'accepting defective parachutes' and demonstrating that they are absolutely unaware of how the system works.




> Inflation is typically referred to as the general rise in prices. So I guess in that sense, your example can technically be referred to as inflation. However, it is commonly understood by most people with an understanding of economics that the primary cause of inflation is an increase in the money supply.


How do you define money then?




> The gold standard from 1945-71 was simply an agreement to keep the price of gold at $30 an ounce, and to adjust the money supply accordingly. So money wasn't necessarily backed by gold during this time. It was more a reference that the Fed used in order to stabilize the money supply. So your claim that this final tie to gold was removed because the banks didn't have enough gold to back their deposits can't be true because the dollar wasn't backed by gold during that time. But once that final tie was removed, an unprecedented rate of continuous inflation ensued.


When FDR removed the US from the gold standard in 1933...he did not do so completely.  He just did so for American citizens.  International governments of course still had lots of dollars...and they could still redeem dollars for gold.  30 dollars an ounce was merely the ratio at which they did so.  Now the Fed had many more dollars than gold (dollars > gold ounces * 30).  A nationalized FRB of sorts.  Many countries started demanding gold for dollars and culminating with Switzerland pulling out 50 million and France pulling out 191 million of gold...the US really had no choice but to end the gold standard they system was doomed to fail regardless.




> The fact that you have to pay taxes when buying gold, and a capital gains tax when bartering in gold is not a minor barrier.


Not sure about this...  Isn't it fair that currency speculators pay capital gains?  Buy 1000 euros for 500 dollars and sell for 2000 dollars...should that be a capital gain?  What about gold?  IMO the ability to pay taxes is a more more important determinant in deciding what currency dominates in a given economy.




> But the big problem is that only dollars can pay taxes...so legal tender gives the dollar a lot of power. I'm not sure FDR or Nixon could have made a snap judgment to accept gold, silver, (whatever else)? for taxes and that would have restored a hard money standard (which was never truly a standard even before the Fed because it was fractionally based).
> 			
> 		
> 
> Not really... I could very well convert the gold I own into fiat for paying taxes, and make all my other transactions in gold. But should an alternate currency beat out the dollar in the free market, the government is going to have a pretty hard time justifying why they wouldn't accept it for taxes.


The key is that we (almost all of us) pay taxes to the government in dollars.  This means at a minimum...even if we were anti-dollar...we have to buy dollars from the marketplace every-time we have to send tax receipts to the feds.  This buying activity gives the dollar a lot of value...and means sellers will surely have them on stock to sell to us.  Those that sell dollars to us, will buy dollars from others and so forth creating a chain...in which in an odd-round-about way...the dollar's ability to pay US tax debts means it is not totally a fiat currency.  Just like you might sell a get-out-jail free card to other players  in monopoly for 49 dollars...gold bugs would have to acquire dollars using the same logic.  And because currencies compete...what is good for the dollar...is bad for gold.




> That's exactly what happens. Which is why I am vehemently opposed to the concept of a central bank. It causes the economy to expand continuously at an unsustainable rate. Where as in a free market system, the economy would be forced to cool off because of rising interest rates.


Without Fed assistance...what would prevent a melt-down of the money market a collapse of the banking system?

----------


## Bohner

> They can do no such thing.  Say Deposits are backed 10% by reserves.  Say there is no government safety net.  The whole forest burns down with one campfire.  For-whatever reason 1% cashes out reserves.  The system is now at less than 10% backing.  This increases worry and another 1% withdrawals...the aggregate reserve ratio drops and the concerns about liquidity rise...this leads to more withdrawals which creates a feedback loop.  Everything fails.


That's one hell of an unlikely circumstance. People generally don't withdraw all their deposits at the same time. Furthermore, if this is only one bank we are talking about, that bank can simply take out a loan from another bank (or multiple banks) in order to fulfill their reserve requirements. And once again, the same argument can be made about insurance, but I have yet to see you arguing that insurance should be outlawed. In fact, you dodged that one like Neo in The Matrix. 




> Not really the case.  In fact government is a significant benefactor to FRB.  Remove government from the equation...and FRB fails in mass.  It's that simple.


No... Banks simply have to be more careful, raise interest rates during times of high demand, and possibly raise their reserve ratios in order to lessen their risks. As Hazek has stated, even Bitcoin has an FRB. 




> You can play semantics...  But to me it doesn't make sense to to argue whether deposits are 'claims' or 'ownership'.


When you deposit money in the bank, the bank owns that money. This is a basic undeniable fact. You can call it a semantics argument, but the word 'claims' and the word 'ownership' have two different meanings.  




> The bottom line is that we have deposits not because we are playing financial speculative games about future claims on reserves depending on the credit rating of the bank relative to other bank...or any other convoluted rational...  We have a deposit because that is what we accept as money.


A number on an ATM displaying you account balance is not money, its an asset. Maybe you (and everyone else for that matter) should actually read the contract the next time you open up an account with the bank. 




> We can go in circles on this...  When was the last time a bank told you that your deposit was only backed by say 10% reserves?


I've never asked.




> When was the last time when you made a withdrawal and banks explained that you weren't withdrawing your reserves...but somebody else?  When was the last time banks explained the financial source of that home mortgage loan?  Sure...in a technical obscure format this information is free available.  That doesn't mean that the public understands nor that the banking system in general is not preying on their ignorance in the same fashion that any fraudster would.


Again, you said it yourself, the information is freely available. So the bank hasn't done anything wrong, much less commit fraud. 




> Almost everybody who get paid by check.


There's nothing stopping you from cashing that check at the bank, and request that the bank gives you that money in cash instead of depositing it into your account. Or simply asking that person who wrote you that check to pay you in cash instead. 




> If we bank within the same bank...the bank merely swaps liabilities.  How can you say that in such a case somebody is paid in reserves instead of deposits?


Because when I withdraw that money, that money came from the bank's reserves. It's pretty simple. 




> In an inter-bank transaction...the old deposit liability gets transferred to the new bank.  The old bank loses the reserves...but then reacquires them in most cases from the money market. In this manner...payments can clearly exceed reserves...which clearly illustrates that we get paid in deposits, not reserves (the implicit point behind your question).  In fact, you can think of the situations the starting bank + the other banks.  When the starting banks had a check clear...they in essence send reserves to 'the other banks' and in turn get a money market loan.  This is just a big liability swap on a grander scale.


Yes... Deposits can exceed reserves. But that would be one hell of a big deposit. Do you actually think that someone is going to withdraw that much cash in one shot?




> I don't buy that.  Many businesses (pizza places, laundry mats) deal with storing lots of money no problem and it's not costing them zillions of dollars which they pass onto us.  If a quicky-mart can figure out how to store dollars...then a 100% reserve bank can as well.  The nice thing is...most dollars are electronic now...which makes them much easier to store.


I'm not sure of you're serious... Are you actually comparing the amount of money that would be stored in a 100% reserve bank to the amount of money stored in a quicky-mart? 

A pizza place's primary revenue stream is selling pizza. Banks don't sell pizza.  Do you think a banker will work for the same price as a pizza boy? Do you think a pizza place will have to invest the same amount of money as a bank would for security? How much do you think one of those big ass vaults cost? Do pizza places hire security guards?

So how in your world, is a 100% reserve bank going to make a profit without passing those costs over to it's clients?




> Why would the Fed 'cover client deposits'?  MB is a base currency and not redeemable in anything else.   Dollars exist in two forms now.  Electronic and paper.  For electronic dollars, these are only accessible as deposits at the Fed...and only banks are allowed to hold deposits at the Fed.  We indirectly deposit with the Fed...but only through the private bank.  The private bank is an unnecessary and wasteful middleman that gets between me and my electronic dollar.  The Fed already knows how to clear electronic dollar transactions...since they do so now with private banks.  It should be no problem to allow the public the same ability that is not granted exclusively and in elitist fashion to private banks.


So is this fed going to be an FRB or a 100% reserve bank? If it's the latter, then you run into the same problems as mentioned above.

----------


## rpwi

> That's one hell of an unlikely circumstance. People generally don't withdraw all their deposits at the same time.


It's a simple equation...  In a true free market, the probability that somebody will deposit, invest or withdraw money from a bank is determined by its credit rating.  One of the most important components of the credit rating would be the reserve ratio.  The worse off the banks credit...the less likely they will be to get it.  So as a banks credit rating plummets...it's reserve ratio sinks...which drives down its credit rating and creates a positively reinforcing feedback loop.  This spreads to other banks and everything fails.  It would just take a spark...but it would absolutely happen and everything would burn.




> Furthermore, if this is only one bank we are talking about, that bank can simply take out a loan from another bank (or multiple banks) in order to fulfill their reserve requirements.


That is presently how the system works.  You advocate Fed-less banking as a positive component of the marketplace though...  Without the Fed...the money market fails.  Small loss...it was a fake market anyways.  Interest rates shoot way up as banks squabble over over-sold reserves.  There aren't enough lifeboats...and banks know this...so each bank will try to cash out from the others as fast as possible.  The money market can't exist in this scenario.




> And once again, the same argument can be made about insurance, but I have yet to see you arguing that insurance should be outlawed. In fact, you dodged that one like Neo in The Matrix.


Insurance is more complicated.  It can be fraudulent...but on the other hand there are cases in which insurance companies can go bankrupt and this is understandable.  If I as a home owner insurer...take all my insurance payments...and pay myself lots of dividends...then a tornado strikes town and I say...shucks...I can't pay as I'm bankrupt...that's kind of fraudulent.  But if asteroid wipes out the western half the the United States...I can kind of understand insurance companies not being able to pay.  Insurance is more akin to gambling (and in fact some life insurance policies have been outlawed on this basis).  It's not a great industry...all government laws mandating insurance or giving it preferential tax treatment should be eliminated.  Buying insurance is a lot like buying a government...more about the politics, deception, waste, inefficiency, high prices...and less about making financial sense to the consumer and personal accountability.  While I don't like the insurance industry...in this case, I advocate buyer beware and they need to be responsible about who they buy from.  Most states heavily regulate insurance to ensure they have adequate financial resources, that they are re-insured and that insurance contracts are interpreted properly and fulfilled.  I don't know if this is the right or wrong role for state governments.  My vote would be to see that we didn't use insurance as much as we do now.




> No... Banks simply have to be more careful, raise interest rates during times of high demand, and possibly raise their reserve ratios in order to lessen their risks.


30% reserve ratio...60% reserve ratio...to a certain point it doesn't matter.  In a free market economy consumers and investors see the same thing.  More promises than can be met...and because nobody wants to be the last to withdraw...the FRB would come under attack.  It is inevitable and not a matter of a bank being prudent.  By a bank being a bank they are not behaving prudently.  




> As Hazek has stated, even Bitcoin has an FRB.


Bitcoin is messed up...




> When you deposit money in the bank, the bank owns that money. This is a basic undeniable fact. You can call it a semantics argument, but the word 'claims' and the word 'ownership' have two different meanings.


It is a semantic game.  So what exactly does the depositor have?  The bank owns the reserves.  So the depositor owns...?




> A number on an ATM displaying you account balance is not money, its an asset.


So you are saying deposits are not money.  You are saying they do not cause inflation.  So what are deposits then?  How can they be investments and not money if they earn 0% interest and are with-drawable at any time?




> Maybe you (and everyone else for that matter) should actually read the contract the next time you open up an account with the bank.


I have to have a bank account.  Work won't pay me in cash.  I have to pay my taxes with a bank account.  Many business won't accept cash.  Many of my monthly bills aren't payable in cash.  The public at large is kind of stuck with the banking system and if they tried to withdraw into cash...bank-runs would ensue or the Fed would just take the public's money and reinsert it back into the banking system.




> Again, you said it yourself, the information is freely available. So the bank hasn't done anything wrong, much less commit fraud.


It is not available in a meaningful fashion.  A virus programmer could claim, hey...yes my program went in and stole all your credit card numbers...but the information was freely available!  All you had to do was to decompile the program.  I even posted the source code on my hacker website and the virus checking program all published warnings about this.  So it's your fault!  In fact I even spelled out how my program would take CC's in page 43 of 78 of the terms and conditions that you skimmed through!




> Almost everybody who get paid by check.
> 			
> 		
> 
> There's nothing stopping you from cashing that check at the bank, and request that the bank gives you that money in cash instead of depositing it into your account. Or simply asking that person who wrote you that check to pay you in cash instead.


To a certain degree you can cash out...and that can hurt the banking system to an extent.  The fed fills in the gaps now with the money market.  I still have to bounce back into the banking system (and FRB) to make many key purchases though (like pay taxes).  




> If we bank within the same bank...the bank merely swaps liabilities. How can you say that in such a case somebody is paid in reserves instead of deposits?
> 			
> 		
> 
> Because when I withdraw that money, that money came from the bank's reserves. It's pretty simple.


You glossed over a fairly important point.  If you withdraw your deposit...that is AFTER THE FACT.  Say you cash out in a year from now...what are the effects of accepting payments from deposits RIGHT NOW.  Clearly...nothing happens to reserves in an internal bank operation.  So because no reserves moved...then how could I have made a purchase?  You claim deposits are not money.  Yet reserves did not move...and yet I paid with something and we perhaps made subsequent deals.  How is this possible?  Understanding customer to customer transactions when they both bank at the same bank is KEY to understanding FRB.




> Yes... Deposits can exceed reserves. But that would be one hell of a big deposit. Do you actually think that someone is going to withdraw that much cash in one shot?


Well...deposits exceed reserves in the aggregate...so wouldn't it appear that the economy is accepting deposits as a form of money?




> I'm not sure of you're serious... Are you actually comparing the amount of money that would be stored in a 100% reserve bank to the amount of money stored in a quicky-mart?


It could be even easier...  If it is an internet bank (100% reserves)...the variable cost to operate it would be very little with automation.




> A pizza place's primary revenue stream is selling pizza. Banks don't sell pizza.  Do you think a banker will work for the same price as a pizza boy? Do you think a pizza place will have to invest the same amount of money as a bank would for security? How much do you think one of those big ass vaults cost? Do pizza places hire security guards?


100% banking wouldn't be that expensive.  It's mostly a clerical operation...the Fed could actually do it. Sure there could be a fee...probably another fee for cash operations because that involves security...but with economies of scale, automation, and the ability for institutions to get branding exposure for unrelated services...I don't see these being that high.  




> So how in your world, is a 100% reserve bank going to make a profit without passing those costs over to it's clients?


They would pass these on to the client.  It is possible they would do it for free...so everybody knew about ABC Inc...and the side-businesses they offered.  If the Fed itself offered direct banking, that should be free.  The sham of it is...now the Fed pays banks interest for the reserves they have!  (beyond dividends...this is a new 2008 measure)  It's all so messed up...




> So is this fed going to be an FRB or a 100% reserve bank? If it's the latter, then you run into the same problems as mentioned above.


The Fed is not a FRB.  It was when it was on the gold standard...but no longer.  The dollar is not convertible into anything else but dollars.  

Speaking of the Fed as a FRB...you never answered my question about this.  The Fed used to practice FRB off of gold.  Were gold deposits and gold notes money?  Did dollars only become money...after we went off of the gold standard?

----------


## Bern

I haven't read all 23 pages of this thread, but I thought hazek et. al. might enjoy this bit from Mish:

http://globaleconomicanalysis.blogsp...k-run-ecb.html

----------


## Bohner

> There is a level in which the participant is not privy to every last little detail...but understands the big picture and the contract is carried out and fulfilled with fiducial responsibility.  This is proper.


This is basically what a bank does. I'm pretty sure most people understand that a bank doesn't have 100% reserves. I learned about this in high school econ 101. So I don't understand why others wouldn't have learned this as well. 




> Then there is a fraud level in which a contract is constructed in which one side takes advantage of the ignorance of the other.  The ultimate measure of which a participant recognizes fraud...is if they partake in it.  If I buy a defective parachute...this means I did not know the parachute was defective...otherwise I would not have bought it.  By bank customers accepting bank deposits for payment and storage...they are 'accepting defective parachutes' and demonstrating that they are absolutely unaware of how the system works.


Defective parachutes? What is it with you and horrible analogies? Did the parachute company tell you it was defective?  I (and you as well) have a checking account and am completely aware of how the system works. Which is the same way it has worked for HUNDREDS of years. Most people should understand how the system works from high-school econ. So I really don't see the big deal. 




> When FDR removed the US from the gold standard in 1933...he did not do so completely.  He just did so for American citizens.  International governments of course still had lots of dollars...and they could still redeem dollars for gold.  30 dollars an ounce was merely the ratio at which they did so.  Now the Fed had many more dollars than gold (dollars > gold ounces * 30).  A nationalized FRB of sorts.  Many countries started demanding gold for dollars and culminating with Switzerland pulling out 50 million and France pulling out 191 million of gold...the US really had no choice but to end the gold standard they system was doomed to fail regardless.


Sounds like more of a reason to eliminate the central banks... The gold standard existed for a long time, and all it took the central bank was 20 years to screw it all up. 




> Not sure about this...  Isn't it fair that currency speculators pay capital gains?  Buy 1000 euros for 500 dollars and sell for 2000 dollars...should that be a capital gain?  What about gold?  IMO the ability to pay taxes is a more more important determinant in deciding what currency dominates in a given economy.


Fair or not, who cares? The fact that a capital gains tax is paid when bartering in gold means that a competing currency system is not in place.




> The key is that we (almost all of us) pay taxes to the government in dollars.  This means at a minimum...even if we were anti-dollar...we have to buy dollars from the marketplace every-time we have to send tax receipts to the feds.  This buying activity gives the dollar a lot of value...and means sellers will surely have them on stock to sell to us.  Those that sell dollars to us, will buy dollars from others and so forth creating a chain...in which in an odd-round-about way...the dollar's ability to pay US tax debts means it is not totally a fiat currency.  Just like you might sell a get-out-jail free card to other players  in monopoly for 49 dollars...gold bugs would have to acquire dollars using the same logic.  And because currencies compete...what is good for the dollar...is bad for gold.


The dollar may increase in value during tax season as a result of increased demand, but it would have lost much more in value as many would be making transactions in other forms of currency. Once tax season is over, the value of the dollar would depreciate once more. 




> Without Fed assistance...what would prevent a melt-down of the money market a collapse of the banking system?


Sound money and responsible banks who now know that the fed will not be there to bail them out should they make stupid decisions.

----------


## Bohner

> It's a simple equation...  In a true free market, the probability that somebody will deposit, invest or withdraw money from a bank is determined by its credit rating.  One of the most important components of the credit rating would be the reserve ratio.  The worse off the banks credit...the less likely they will be to get it.  So as a banks credit rating plummets...it's reserve ratio sinks...which drives down its credit rating and creates a positively reinforcing feedback loop.  This spreads to other banks and everything fails.  It would just take a spark...but it would absolutely happen and everything would burn.


So it's alright that insurance wouldn't be able to pay if an asteroid hit the earth? Even though you bought that insurance with an understanding that they would cover you if something happened to your assets? But if an FRB goes bankrupt because of that asteroid, than it's fraudulent? 

Why would the banks have their credit rating reduced? You would think they would be extra careful to make sure that they maintain their credit rating, and make sure they have sufficient reserves. Especially when considering that there wouldn't be a fed to bail them out. 




> That is presently how the system works.  You advocate Fed-less banking as a positive component of the marketplace though...  Without the Fed...the money market fails.  Small loss...it was a fake market anyways.  Interest rates shoot way up as banks squabble over over-sold reserves.  There aren't enough lifeboats...and banks know this...so each bank will try to cash out from the others as fast as possible.  The money market can't exist in this scenario.


But why would the banks oversell? They may oversell now because they can always go back to the fed for more money, but if they knew that the buck stopped with them, they would make damn well sure not to oversell. The only reason why banks may have a 10:1 reserve ratio right now is because of the fed. They would most likely have much more reserves in a free-market system. And if you think the reserve ratio is too low, you could simply deposit your money in a bank with  a higher reserve ratio. 




> Insurance is more complicated. It can be fraudulent...but on the other hand there are cases in which insurance companies can go bankrupt and this is understandable. If I as a home owner insurer...take all my insurance payments...and pay myself lots of dividends...then a tornado strikes town and I say...shucks...I can't pay as I'm bankrupt...that's kind of fraudulent. *If asteroid wipes out the western half the the United States...I can kind of understand insurance companies not being able to pay.*


But if FRBs go bankrupt as a result of that asteroid, then it's because of fraud? 




> in this case, I advocate buyer beware and they need to be responsible about who they buy from.


And why wouldn't this apply to FRB's? Or anything for that matter?




> Most states heavily regulate insurance to ensure they have adequate financial resources, that they are re-insured and that insurance contracts are interpreted properly and fulfilled.  I don't know if this is the right or wrong role for state governments.  My vote would be to see that we didn't use insurance as much as we do now.


FRB's have their deposits insured as well. This wouldn't change in a free market system. If a bank doesn't have their deposits insured, just deposit your money in a bank that does. 




> 30% reserve ratio...60% reserve ratio...to a certain point it doesn't matter.  In a free market economy consumers and investors see the same thing.  More promises than can be met...and because nobody wants to be the last to withdraw...the FRB would come under attack.  It is inevitable and not a matter of a bank being prudent.  By a bank being a bank they are not behaving prudently.


It really does matter actually. As mentioned before, if a bank is subject to a run, they can still take out a loan from other banks to cover those deposits. They could have their deposits insured. But it wouldn't be a problem if the bank has it's $#@! together, and the government/fed stopped creating these boom/bust cycles. 




> It is a semantic game.  So what exactly does the depositor have?  The bank owns the reserves.  So the depositor owns...?


The depositors own an IOU from the bank that they can claim at any time. Why are you having such a hard time grasping this?




> So you are saying deposits are not money.  You are saying they do not cause inflation.  So what are deposits then?  How can they be investments and not money if they earn 0% interest and are with-drawable at any time?


I never said it was an investment. I said it was an asset. 




> I have to have a bank account.  Work won't pay me in cash. I have to pay my taxes with a bank account.  Many business won't accept cash.  Many of my monthly bills aren't payable in cash.  The public at large is kind of stuck with the banking system and if they tried to withdraw into cash...bank-runs would ensue or the Fed would just take the public's money and reinsert it back into the banking system.


You can always find another job that WILL pay you in cash, you don't have to buy stuff from companies that don't accept cash, and you can always keep your balance at $1, and then deposit what you owe the government in your account in order to pay your taxes. 




> It is not available in a meaningful fashion.  A virus programmer could claim, hey...yes my program went in and stole all your credit card numbers...but the information was freely available!  All you had to do was to decompile the program.  I even posted the source code on my hacker website and the virus checking program all published warnings about this.  So it's your fault!  In fact I even spelled out how my program would take CC's in page 43 of 78 of the terms and conditions that you skimmed through!


I don't know about you... But I'm usually pretty careful with what I download. There are already many applications that do this (minus the admitting their doing it). If I don't trust the source, or the company who made the app, I don't download it. So far, my credit card info has remained in tact. Furthermore, you can call what happened here fraud if there was a deliberate attempt to deceive (fine print on p 44 is still attempting to deceive). But considering that you learn what banks do in high school econ, you certainly can't make the case that the banks are deliberately deceiving anyone. 




> To a certain degree you can cash out...and that can hurt the banking system to an extent.  The fed fills in the gaps now with the money market.  I still have to bounce back into the banking system (and FRB) to make many key purchases though (like pay taxes).


It only hurts the bank if everyone cashes out at the same time. Which doesn't happen without a government created bust. 




> You glossed over a fairly important point.  If you withdraw your deposit...that is AFTER THE FACT.  Say you cash out in a year from now...what are the effects of accepting payments from deposits RIGHT NOW.  Clearly...nothing happens to reserves in an internal bank operation.  So because no reserves moved...then how could I have made a purchase?  You claim deposits are not money.  Yet reserves did not move...and yet I paid with something and we perhaps made subsequent deals.  How is this possible?  Understanding customer to customer transactions when they both bank at the same bank is KEY to understanding FRB.


You made a purchase because your bank account is worth less than it was before. And the bank account of the person who you made that purchase from is now worth more. 




> Well...deposits exceed reserves in the aggregate...so wouldn't it appear that the economy is accepting deposits as a form of money?


I guess so... But it doesn't change the fact that the amount of dollars in the economy has not changed. 




> It could be even easier...  If it is an internet bank (100% reserves)...the variable cost to operate it would be very little with automation.
> 
> 100% banking wouldn't be that expensive.  It's mostly a clerical operation...the Fed could actually do it. Sure there could be a fee...probably another fee for cash operations because that involves security...but with economies of scale, automation, and the ability for institutions to get branding exposure for unrelated services...I don't see these being that high.


You are forgetting the concept of a 100% reserve bank. There is more to it than a simple wire transfer. If you and I have different banks, and you wire transfer me $5. Someone is going to have to go to your bank, take the $5 out of your bank, bring it over to my bank, and my bank is going to have to put that money in their high security vault. Otherwise, my bank has $5 less in their reserves than what they owe to their clients. They may have to do this thousands of times a day in order to ensure that their reserves remain at 100%. Do you think this is free?





> They would pass these on to the client.  It is possible they would do it for free...so everybody knew about ABC Inc... and the side-businesses they offered.


What would this side business be? Selling pizza? Maybe a quicky-mart? Instead of opening up a profitless bank, might it be much easier and less expensive to simply advertise that side business and do that side business well in order to attract clients?




> If the Fed itself offered direct banking, that should be free.


No product or service is ever free. 




> Speaking of the Fed as a FRB...you never answered my question about this.  The Fed used to practice FRB off of gold.  *Were gold deposits and gold notes money?*  Did dollars only become money...after we went off of the gold standard?


Technically speaking, yes. The reason why bank notes were issued was because it was realized that gold made for crappy money. Gold is heavy and a bitch to carry around when going on a shopping spree. It was also a bitch for stores to accept gold since they would need a lot of space to store it, and then to transport all that gold to the bank. This is not to say that gold couldn't be used as money, but bank notes were simply much more convenient.

----------


## rpwi

> Speaking of the Fed as a FRB...you never answered my question about this. The Fed used to practice FRB off of gold. Were gold deposits and gold notes money? Did dollars only become money...after we went off of the gold standard?
> 			
> 		
> 
> Technically speaking, yes. The reason why bank notes were issued was because it was realized that gold made for crappy money. Gold is heavy and a bitch to carry around when going on a shopping spree. It was also a bitch for stores to accept gold since they would need a lot of space to store it, and then to transport all that gold to the bank. This is not to say that gold couldn't be used as money, but bank notes were simply much more convenient.


So if fed reserve notes and deposits were money during the gold standard...why aren't bank deposits money?

Scenario A:

Fed had X in gold and issues 2X in gold deposits.  You say gold deposits are money.

Scenario B:

Private Bank has X in reserves and 2X in deposits.  You say bank deposits are NOT money.

Don't you see the contradiction?

----------


## Bohner

> So if fed reserve notes and deposits were money during the gold standard...why aren't bank deposits money?
> 
> Scenario A:
> 
> Fed had X in gold and issues 2X in gold deposits.  You say gold deposits are money.
> 
> Scenario B:
> 
> Private Bank has X in reserves and 2X in deposits.  You say bank deposits are NOT money.
> ...


I kind of agreed with your point on this here: 



> Well...deposits exceed reserves in the aggregate...so wouldn't it appear that the economy is accepting deposits as a form of money?
> 
> 
> 
> 
> 
>  Originally Posted by Bohner
> 
> 
> I guess so... But it doesn't change the fact that the amount of dollars in the economy has not changed.


It's essentially a liabilities transfer. Which is fine considering all of the banks liabilities are backed by assets (ie. loans), and the amount of dollars circulating around the economy has not changed.

As mentioned before...



It's the fed's printing of the currency that is truly responsible for this unprecedented rate of inflation.

----------


## rpwi

> So if fed reserve notes and deposits were money during the gold standard...why aren't bank deposits money?
> 
> Scenario A:
> 
> Fed had X in gold and issues 2X in gold deposits. You say gold deposits are money.
> 
> Scenario B:
> 
> Private Bank has X in reserves and 2X in deposits. You say bank deposits are NOT money.
> ...


So you do agree than that Federal Reserve Deposits were properly considered money when the US was on the gold standard?

You then agree that there is little fundamental difference between what the Fed did while on the gold standard and what a FRB does now?

If so...then deposits are money, right?  Fed deposits are money.  Private bank deposits are money.

If bank deposits are money...then isn't it possible they can create inflation?

----------


## Bohner

> So you do agree than that Federal Reserve Deposits were properly considered money when the US was on the gold standard?


Sure. 




> You then agree that there is little fundamental difference between what the Fed did while on the gold standard and what a FRB does now?


No... You can't print gold. 




> If bank deposits are money...then isn't it possible they can create inflation?


Only to a point because all of the banks liabilities are backed by assets... REAL ASSETS!!! as opposed to the fed who can simply print a $1,000 bill out of thin air and then say that it's worth $1000. 

A bank cannot transfer more liabilities than it has in assets. So it's impossible to have a continuous rate of inflation. It may peak at some point, but prices will have to drop eventually. A bank can only lend out so much money before it's reserves start to dwindle, when that happens, interest rates will rise, the lending will stop, and prices will go down. In other words, there is an automatic break that sets on the economy before inflation begins to rise out of control.

----------


## heavenlyboy34

> They are not.  The inflation and mal-investment they create, hurts all of us.  If not supported by government, the depositors would get hurt as well.


Inflation in the broadest sense is not evil.  Slight and natural inflation is part of how an economy (especially an economy of scale) grows.  As mentioned earlier, even Friedman thought it a good idea to replace the FED with a computer that sets rates at a certain level consistently.




> There is a difference between information being available in a technical and clerical format and the participants understanding what is going on.  With banks and credit unions...participants are so ignorant (not entirely their own fault) that they don't know the right questions to ask.


Ignorance is not an excuse.




> Deposits are money, right?  Creating money creates inflation, right?  Inflation is theft from the creators of money to those who provide the things money buys, right?  Therefore credit unions are thieves.


Direct deposits represent money in the vault, yes.  Creating money is inflationary, yes.  (but there is no purpose for banks or CUs if they can't lend and store money at interest.  As I demonstrated, if you just want a place to store money, keep it in a safe deposit box)  Inflation can be theft if it's done in the way the FED does it.  Low, natural inflation benefits the economy.

----------


## heavenlyboy34

> Only to a point because all of the banks liabilities are backed by assets... REAL ASSETS!!! as opposed to the fed who can simply print a $1,000 bill out of thin air and then say that it's worth $1000. 
> 
> A bank cannot transfer more liabilities than it has in assets. So it's impossible to have a continuous rate of inflation. It may peak at some point, but prices will have to drop eventually. A bank can only lend out so much money before it's reserves start to dwindle, when that happens, interest rates will rise, the lending will stop, and prices will go down. In other words, there is an automatic break that sets on the economy before inflation begins to rise out of control.


Excellent point!

----------


## rpwi

> If bank deposits are money...then isn't it possible they can create inflation?
> 			
> 		
> 
> Only to a point because all of the banks liabilities are backed by assets... REAL ASSETS!!! as opposed to the fed who can simply print a $1,000 bill out of thin air and then say that it's worth $1000.


But the Fed backs their created money with assets as well.

*Scenario one:*

Private Bank X:  Uses 10x in reserves to create 100x in deposits.  The B/S look like:

Liabilities: 100 deposits
--
Assets: 10 reserves
Assets: 90 loan assets

Right???

*Scenario two:*

The Fed (pre-1933) takes a gold deposit of 10X and turns it into 100x in special Federal Reserve Deposits (or greenbacks....same thing).  With this difference they acquire t-bills.  So their balance sheet look like:

Liabilities: 100x in deposit liabilities
--
Assets: 10x in gold
Assets: 90x in t-bills

Am I right?

What is the difference between the two?

*Scenario Three:*

Now once the Fed got off of the gold standard...they no longer practiced fractional banking.  They however still 'back' newly created dollars with assets though.  Say the Fed buys 10x worth of t-bills from the open market.  The balance sheet looks like:

Liabilities: += 10x in special Federal Reserve deposits that only banks can hold
Assets: += 10x in tbills.

Are you saying because the Fed buys t-bills that nullifies inflation?

----------


## rpwi

> Inflation in the broadest sense is not evil.


Natural inflation, no.  Like crop failures.  Monetary inflation...is evil though.  When I pay 1.2x for my bread instead of 1.0x...and that .2x is going to a financial manipulator or government...that is little different than theft.




> Slight and natural inflation is part of how an economy (especially an economy of scale) grows.


So you say if things get cheaper in the aggregate...that is a bad and unhealthy thing?




> Ignorance is not an excuse.


To a certain degree...but we can't be all-knowing in all matters.  Have you ever gotten a computer virus?  I'll assume you have...does your being ignorant of not securing your computer properly mean...the virus maker was not at fault?




> Deposits are money, right? Creating money creates inflation, right? Inflation is theft from the creators of money to those who provide the things money buys, right? Therefore credit unions are thieves.
> 			
> 		
> 
> Direct deposits represent money in the vault, yes.


So you are saying Federal Reserve Deposits or electronic dollars...are properly considered money then?  Why not dollars when they fractionally backed by gold?




> Creating money is inflationary, yes.


So do you admit banks create money?

----------


## Bohner

> But the Fed backs their created money with assets as well.
> 
> *Scenario one:*
> 
> Private Bank X:  Uses 10x in reserves to create 100x in deposits.  The B/S look like:
> 
> Liabilities: 100 deposits
> --
> Assets: 10 reserves
> ...


The problem in the second scenario is that the money supply has increased. That money was sitting in the fed's reserve fund, now it's circulating around the economy. That is particularly problematic if that money is being loaned to the banks at super low interest so that the banks can keep THEIR interest rates low. As a result, speculators take out more low interest loans and keep the good times going for longer than they should, resulting in the creation of an asset bubble in whatever they are speculating in.

Furthermore, it provides banks with a false sense of security since they are under the impression that they can keep their reserve lower than they should be, and that they can take more risks than they should. Since if something goes wrong, they can simply get more money from the fed. But the fed only has so much money (under the gold standard). Once those funds dry up, the banks are left on the hook for their mistakes.  




> *Scenario Three:*
> 
> Now once the Fed got off of the gold standard...they no longer practiced fractional banking.  They however still 'back' newly created dollars with assets though.  Say the Fed buys 10x worth of t-bills from the open market.  The balance sheet looks like:
> 
> Liabilities: += 10x in special Federal Reserve deposits that only banks can hold
> Assets: += 10x in tbills.
> 
> Are you saying because the Fed buys t-bills that nullifies inflation?


Seriously? That money came from a printer. It was created out of thin air. At least FRBs are using preexisting assets. See my previous example, only with more inflation and bigger bubbles.

----------


## rpwi

> The problem in the second scenario is that the money supply has increased.


Which is not different from how the banks operate now.




> That money was sitting in the fed's reserve fund, now it's circulating around the economy.


This is not true.  Prior to to the Fed expanding the reserve ratio off of gold...they did not have those deposits in existence.  Don't you see how, if you accept that gold AND Federal Reserve deposits can be money...that MB (dollars) AND bank deposits can be money?




> That is particularly problematic if that money is being loaned to the banks at super low interest so that the banks can keep THEIR interest rates low. As a result, speculators take out more low interest loans and keep the good times going for longer than they should, resulting in the creation of an asset bubble in whatever they are speculating in.


It does indeed create a speculative bubble...most mostly in t-bills.  Which creates derivative bubbles and other problems.  The Fed doesn't really now...nor has...lend that much out in money.  Most their security assets come from open market operations in which they've purchased.




> Furthermore, it provides banks with a false sense of security since they are under the impression that they can keep their reserve lower than they should be, and that they can take more risks than they should. Since if something goes wrong, they can simply get more money from the fed.


Quite true.




> But the fed only has so much money (under the gold standard).


Not so true.  The degree to which the US was on a gold standard  was largely self-defined.  Yes...they had a set exchange rate (that changed from time to time)...but this in no way constrained the government from creating deposits in excess of what they had in gold.




> Seriously? That money came from a printer.


The figurative printer...not the literal printer.  Dollars only get converted into paper money to meet paper withdrawals.  




> It was created out of thin air.


So are bank deposits.




> At least FRBs are using preexisting assets.


Sure...a bank might use their new deposit to acquire loan securities...but then again so does the Fed use newly created deposits to acquire t-bills.

----------


## Steven Douglas

> The Fed doesn't really now...nor has...lend that much out in money.  Most their security assets come from open market operations in which they've purchased.


And "purchase" becomes the warm fuzzy word that goes unquestioned. This only means that money is *spent* rather than *lent* into existence - out of a vacuum.  And whether we're talking about assets of real value or overvalued toxic assets that should never have been bought by anyone, in either case there is no offsetting value traded in that so-called "purchase", because the value of the currency created to make that purchase does not originate from the same vacuum as that new currency.  It's no different than a watered down drink, as the value comes directly from diluting the value of everything already in the pool.  

Which means that the Fed is "purchasing" assets with value that has been confiscated, secretly and unobserved, as Keyne's once put it. The real rub is that the seller of those security assets gets the privilege of straining the current value through his kidneys as it gets pissed out through loans or spending into the rest of the pool.

----------


## hazek

Steven did you read my last post in the other FRB thread?

----------


## Bohner

> Which is not different from how the banks operate now.


The difference is that bank deposits are backed by preexisting capital. 




> This is not true.  Prior to to the Fed expanding the reserve ratio off of gold...they did not have those deposits in existence.  Don't you see how, if you accept that gold AND Federal Reserve deposits can be money...that MB (dollars) AND bank deposits can be money?


So if I'm understanding correctly... They printed the money. If this is true, then the money supply has increased.




> It does indeed create a speculative bubble...most mostly in t-bills.  Which creates derivative bubbles and other problems.  The Fed doesn't really now...nor has...lend that much out in money.  Most their security assets come from open market operations in which they've purchased.


If by security assets, you are referring to bonds, then that is the equivalent of lending money. A bond is nothing more than a receipt of your loan. If a bond is bought with newly printed money, then the money supply has increased. 




> Not so true.  The degree to which the US was on a gold standard  was largely self-defined.  Yes...they had a set exchange rate (that changed from time to time)...but this in no way constrained the government from creating deposits in excess of what they had in gold.


Didn't the fed have a minimum reserve requirement though? Either way, if they don't respect that reserve requirement, that only further adds to the inflation. 




> The figurative printer...not the literal printer.  Dollars only get converted into paper money to meet paper withdrawals.


No... It's a literal printer. 




> So are bank deposits.
> 
> Sure...a bank might use their new deposit to acquire loan securities...but then again so does the Fed use newly created deposits to acquire t-bills.


As mentioned before, the difference is that the bank's new deposit came from preexisting assets, while the fed's newly created deposits came from a printer.

----------


## rpwi

> The difference is that bank deposits are backed by preexisting capital.


Bank deposits are backed by dollar reserves and loan assets.  Fed deposits used to be backed by gold reserves and t-bills...I don't see a difference.




> So if I'm understanding correctly... They printed the money. If this is true, then the money supply has increased.


The question is whether federal reserve dollar bills and/or federal reserve deposits were money during the gold standard if they were but redeemable in gold on a fractional basis.  Are you saying both dollar bills and gold could have been money even though there were more dollar claims on gold then gold in reserve?




> Didn't the fed have a minimum reserve requirement though?


No...they had reserve ratios for private banks but that was different.  They had a ratio by which the dollar was pegged to gold...but that would have only been relevant if we had a 100% back gold dollar (which we didn't).




> Either way, if they don't respect that reserve requirement, that only further adds to the inflation.


So why is it when the Fed creates fractional deposits off of gold, that is inflation...but if banks do the same that is not?




> No... It's a literal printer.


Most of the time no.  When the Fed buys t-bills in the open market....they don't use paper dollars.  They use electronic dollars.  If you look at a fed balance sheet...you will see t-bill liabilities and private bank deposit liabilities.  They are both MB.  Banks can swap them as needed.  The difference between the two is not super relevant.

http://www.federalreserve.gov/releas...41.htm#h41tab1




> As mentioned before, the difference is that the bank's new deposit came from preexisting assets, while the fed's newly created deposits came from a printer.


The deposits the Fed creates are mere accounting entries.  The same for bank deposits.  There really is no profound difference (especially when we were on the gold standard).

----------


## Bohner

> Bank deposits are backed by dollar reserves and loan assets.  Fed deposits used to be backed by gold reserves and t-bills...I don't see a difference.


A t-bill is simply a receipt for a loan saying that you loaned someone some money. The difference between the bank and the fed is where that money came from. A bank can only loan out so much money before it's reserves get too low. The fed can create money out of thin air on a whim and make an unlimited number of loans at whatever amount they want. 




> The question is whether federal reserve dollar bills and/or federal reserve deposits were money during the gold standard if they were but redeemable in gold on a fractional basis.  Are you saying both dollar bills and gold could have been money even though there were more dollar claims on gold then gold in reserve?
> 
> They had a ratio by which the dollar was pegged to gold...but that would have only been relevant if we had a 100% back gold dollar (which we didn't).
> 
> So why is it when the Fed creates fractional deposits off of gold, that is inflation...but if banks do the same that is not?


I'm a little confused here... Was the fed able to manipulate the dollar to gold ratio? If so, how could there be more dollar claims on gold than the fed has in gold? Couldn't the fed simply increase the dollar/gold ratio to the point where dollar claims on gold = the amount of gold the fed has in reserves?

What I mean is that if there was $5 in the economy, $3=1oz of gold, and the fed only has 1oz of gold in reserves. Couldn't the fed simply increase the dollar to gold ratio to $5 =1oz of gold so that all the claims are covered? I just need a bit of clarity on this before I reply. 




> Most of the time no.  When the Fed buys t-bills in the open market....they don't use paper dollars.  They use electronic dollars.  If you look at a fed balance sheet...you will see t-bill liabilities and private bank deposit liabilities.  They are both MB.  Banks can swap them as needed.  The difference between the two is not super relevant.


Sure... But at some point, money is going to have to be printed. 




> The deposits the Fed creates are mere accounting entries.  The same for bank deposits.  There really is no profound difference (especially when we were on the gold standard).


The fed simply types in those accounting entries. The fed simply has to type $1000 into a computer, and the fed all of a sudden has an extra $1000 in assets like magic. In order for banks to create assets, people actually have to deposit money with them.

----------


## Steven Douglas

> I'm a little confused here... Was the fed able to manipulate the dollar to gold ratio?


_Never_. Not the official "price" (referred to as "value" in the coinage acts) of the dollar in relation to gold. That's still fixed, as a function of Congress and NEVER the Fed, which has no control over that.  And even though that fixed ratio peg is no longer honored as convertibility (since August 1971), the Fed was always able to manipulate the ratio _in reality_ with the increased multiple claims it created. But it never had any control over the pegged value, or ratio. 




> Couldn't the fed simply increase the dollar/gold ratio to the point where dollar claims on gold = the amount of gold the fed has in reserves?
> 
> What I mean is that if there was $5 in the economy, $3=1oz of gold, and the fed only has 1oz of gold in reserves. Couldn't the fed simply increase the dollar to gold ratio to $5 =1oz of gold so that all the claims are covered? I just need a bit of clarity on this before I reply.


Only Congress can do that, and if it did that, it would only be acknowledging the dollar as a float against gold, and not an actual standard.  It would be like a stock split, only your stock holdings aren't split -- they're devalued to make room for stocks that are issued to others.  And if this had happened, it would only reflect the reality of what has always happened when new money is loaned or spent into existence.

----------


## Bohner

> _Never_. Not the official "price" (referred to as "value" in the coinage acts) of the dollar in relation to gold. That's still fixed, as a function of Congress and NEVER the Fed, which has no control over that.  And even though that fixed ratio peg is no longer honored as convertibility (since August 1971), the *Fed was always able to manipulate the ratio in reality with the increased multiple claims it created.* But it never had any control over the pegged value, or ratio.


So basically, the gold standard was more of a "in theory" kind of thing than an "in reality" kind of thing. And I guess the fed simply couldn't go overboard with their money-printing (like we see today) in order to keep up appearances. 

Am I getting this right?

----------


## Steven Douglas

> So basically, the gold standard was more of a "in theory" kind of thing than an "in reality" kind of thing. And I guess the fed simply couldn't go overboard with their money-printing (like we see today) in order to keep up appearances. 
> 
> Am I getting this right?


The gold standard was nothing more than a declaration of what a given mass quantity of gold (quantity at some level of purity) would be called.  No different than inches, miles, gallons, pounds, acres, or any other "standard" of measurement.  That's all it ever was, and had nothing to do with its market exchange value with anything else - *except for one poisonous, fatal exception*, and that's the exchange value of gold against silver in our bi-metallic "standard", courtesy of Alexander Hamilton.  That's where the government went where it never should have gone in the first place, even in 1792 - trying to peg the _market exchange value_ (i.e., fix the price) of one commodity used as coinage relative to another, based on their _apparent scarcity_ relative to one another _at that particular time_.   That $#@!ed absolutely everything up, because only the market is qualified to determine relative exchange values -- as it does this anyway, despite fiat declarations by presumptuous governments. 

Gold _never was a Dollar_. US Gold coins are defined as EAGLES.  Silver coins are defined as DOLLARS (with copper coins as CENTS).  Gold was only ever reckoned in Dollars because Congress had pegged (regulated) its exchange value against SILVER DOLLARS.  Had that never happened, gold EAGLES and silver DOLLARS and copper CENTS could have just floated against one another as three separate and competing currencies - not "change" for one another, except as the market dictated the value of that ex"change".

----------


## rpwi

> A t-bill is simply a receipt for a loan saying that you loaned someone some money. The difference between the bank and the fed is where that money came from. A bank can only loan out so much money before it's reserves get too low. The fed can create money out of thin air on a whim and make an unlimited number of loans at whatever amount they want.


Post-gold standard, yes.  During the gold standard the Fed in essence practiced fractional reserve banking.  Gold was really the monetary base of much 20th century.  So when the Fed creates more dollar claims on gold...then there is gold...they are acting like a bank.  The Fed (during the gold standard) may issue 1 million dollars to loan to a bank in the discount window (out of thin air) and get a loan asset in return.  They did not create the dollars in proportion to gold though.  How is this different from banks creating deposits for loan assets out of proportion to their reserves?




> I'm a little confused here... Was the fed able to manipulate the dollar to gold ratio?


Not the redemption ratio...but that was irrelevant.  Congress could say...we'll trade gold for 5 dollars an ounce.  Yet the Fed would create many more dollars than 5 * ounces of gold they had.  In essence there was a true dollar to gold ratio (not the public dollars per ounce figure) and this was always fractional and almost always growing.




> If so, how could there be more dollar claims on gold than the fed has in gold?


Quite easily...banks do the same thing now.  People (well banks) stored their gold largely with the Fed.  The fed in turn provided claim slips (dollar bills) or direct deposits.   The Fed then issued deposits in excess of gold to acquire all sorts of other non-gold assets.    Is this wrong?  If so, why not for private banks?




> Couldn't the fed simply increase the dollar/gold ratio to the point where dollar claims on gold = the amount of gold the fed has in reserves?


Yes.  The problem would be two-fold though (and this was considered).  Gold could have an exchange of say 1 dollar an ounce.  There could be 2 dollars for every ounce of gold on deposit at the fed.  The Fed could say that 50 cents = 1 ounce of gold...and we would have full backing.  But this is a default of sorts.  The government did promise 1 dollar per ounce.  The same issue could be faced to banks.  Sure with a bank run...they could change the redemption ratio...  Perhaps every 1 dollar in deposits = 20 cents in with-drawable reserves.  That would not be honest either.  The other issue was that this was considered deflationary...this I'm not so sure about...but it was a popular concern.




> Most of the time no. When the Fed buys t-bills in the open market....they don't use paper dollars. They use electronic dollars. If you look at a fed balance sheet...you will see t-bill liabilities and private bank deposit liabilities. They are both MB. Banks can swap them as needed. The difference between the two is not super relevant.
> 			
> 		
> 
> Sure... But at some point, money is going to have to be printed.


Maybe...maybe not.  The money can circulate just in its electronic form as long as individuals don't make cash withdrawals.  If individuals make a lot of cash withdrawals...the banks can always exchange their fed deposit accounts for paper dollars to meet customer demand (or vice versa).




> The fed simply types in those accounting entries. The fed simply has to type $1000 into a computer, and the fed all of a sudden has an extra $1000 in assets like magic. In order for banks to create assets, people actually have to deposit money with them.


In theory no.  Imagine small town X.  The people don't really do business outside of the town and just bank with one bank.  This one bank has 0 reserves.  The people strangely enough believe that they do have reserves though.  So when the bank offers a loan to citizen A...they accept...they then pay citizen B and nobody is the wiser.  The bank has 0 reserves...but had fake deposit liabilities and an ill-gotten loan.  

Now, today...we don't have reserve-less banks...but banks in essence do the same thing by issuing more deposits than they have in reserves.  The Fed during the gold era did the same thing.  Sure they had gold on reserve....but then again so does a private bank now have reserves of its own.

----------


## Bohner

One more question if Stephen or rpwi could answer this... If the fed had lets say $5 worth of gold, could it lend out more than 5 dollars if it wanted to? Lets say... A million dollars?

I'm asking this because FRBs can only lend out as much money as it has in deposits, I simply want to know if this same principle applied to the fed.

----------


## rpwi

> One more question if Stephen or rpwi could answer this... If the fed had lets say $5 worth of gold, could it lend out more than 5 dollars if it wanted to? Lets say... A million dollars?


Absolutely.  

Say the Fed's gold-era balance-sheet started at:

Assets: 1 billion in gold
--
Liabilities: .5 billion in Fed Deposits (that banks hold)
Liabilities: .5 billion in Federal Reserve Notes
Equity: 0

Then say a bank borrows 2 billion from the discount window.

New balance sheet:

Assets: 1 billion in gold
Assets: 2 billion in loan assets
--
Liabilities: 2.5 billion in Fed Deposits (that banks hold)
Liabilities: .5 billion in Federal Reserve Notes
Equity: 0

The Fed has create more deposit claims on gold than it has and lent out more than it has in gold.  The true reserve ratio of gold has one from 100% to 40%.




> I'm asking this because FRBs can only lend out as much money as it has in deposits, I simply want to know if this same principle applied to the fed.


A FRB does not have to do this.  Image a closed community in which everybody banks with the same bank.  Assuming no withdrawals...can't you see how loans could exceed reserves?  What would prevent a bank from loaning out more than it has in reserves in a closed community?

----------


## Bohner

> A FRB does not have to do this.  Image a closed community in which everybody banks with the same bank.  Assuming no withdrawals...can't you see how loans could exceed reserves?  What would prevent a bank from loaning out more than it has in reserves in a closed community?


No... If that community has a combined $100 deposited in the bank, the bank can only loan out a maximum of $100. A bank cannot loan out more money than it has in deposits.

----------


## rpwi

> No... If that community has a combined $100 deposited in the bank, the bank can only loan out a maximum of $100. A bank cannot loan out more money than it has in deposits.


It can do so by creating more deposits.  Same for the fed.  Same for private banks.

----------


## Bohner

> It can do so by creating more deposits.  Same for the fed.  Same for private banks.


A bank can't just "create" more deposits. People have to actually deposit money in the bank in order for the bank to have more deposits.

----------


## rpwi

> A bank can't just "create" more deposits. People have to actually deposit money in the bank in order for the bank to have more deposits.


All they have to do is to buy something...that's easy enough.

Bank A creates 1000 in deposits...and buys 1000 in loan assets.

----------


## Bohner

> All they have to do is to buy something...that's easy enough.


How does buying something increase the amount of money they have in deposits? Doesn't buying something just mean they now have less money to loan out?




> Bank A creates 1000 in deposits...and buys 1000 in loan assets.


As previously stated, banks can't just "create" deposits.

----------


## rpwi

> How does buying something increase the amount of money they have in deposits? Doesn't buying something just mean they now have less money to loan out?


Because they didn't buy with reserves...they bought with deposits.  Another form of money.

Look at a banks B/S before and after they buy a 1000 dollar interest bearing asset:

Before:

A: X
--
L: Y
E: Z

After they issue a check the security dealer:

A: X + 1000 dollar in loan assets
--
L: Y + 1000 dollar in deposit liabilities
E: Z

This is the problem with fractional banking...




> As previously stated, banks can't just "create" deposits.


Sure they can.  Just like the gold-standard Fed could just issue deposits.  They pick something to buy...and in exchange give them a deposit.  Pretty simple.

----------


## Bohner

> Because they didn't buy with reserves...they bought with deposits. Another form of money.


Deposits are another form of money for the people who deposit money in the bank, not for the bank itself. Deposits are liabilities for the bank, they can't buy stuff with liabilities. 




> Look at a banks B/S before and after they buy a 1000 dollar interest bearing asset:
> 
> Before:
> 
> A: X
> --
> L: Y
> E: Z
> 
> ...


This makes absolutely no sense. 




> Sure they can.  Just like the gold-standard Fed could just issue deposits.  They pick something to buy...and in exchange give them a deposit.  Pretty simple.


Deposits are not assets for the bank. They cannot buy things with deposits unless they have that money in their reserves.

----------


## rpwi

> Deposits are another form of money for the people who deposit money in the bank, not for the bank itself. Deposits are liabilities for the bank, they can't buy stuff with liabilities.


You can absolutely buy things with liabilities.  The Fed does so all the time on the open market.  They create a federal deposit liability and use it to acquire a t-bill.

With a bank, it not much different.  They want a t-bill too...  So they write a check for that t-bill.  Assume the t-bill seller banks with this bank.  This means the bank merely created a deposit liability and used it to 'finance' acquiring a t-bill asset.




> This makes absolutely no sense.


This same t-bill seller...what did he get for his t-bill?  All he has to show for it is a bank account...with a demand deposit for that amount of money (his asset and the bank's liability). 




> Deposits are not assets for the bank.


Yes they are not accounted that way.




> They cannot buy things with deposits unless they have that money in their reserves.


If this were true, then how could deposits exceed reserves on the balance sheet?

----------


## Bohner

> You can absolutely buy things with liabilities.


Who the hell would give away an asset in exchange for a liability??? It's like if I gave you money in exchange for the privilege of paying off your debt. Why the hell would someone do that?




> The Fed does so all the time on the open market.  They create a federal deposit liability and use it to acquire a t-bill.


No... They print money (an asset) in order to acquire that t-bill. 




> With a bank, it not much different.  They want a t-bill too...  So they write a check for that t-bill.  Assume the t-bill seller banks with this bank.  This means the bank merely created a deposit liability and used it to 'finance' acquiring a t-bill asset.


If the bank pays someone $5, and that person puts deposits that $5 back in the bank. The bank still owes that person $5 because that $5 dollar that the person deposited is a liability of the bank. Whether that $5 comes from the banks reserves or the banks profits, that $5 has to come from somewhere. The bank can't simply create that $5 out of thin air. 




> Yes they are not accounted that way.


They are not account that way because they're not assets. 




> If this were true, then how could deposits exceed reserves on the balance sheet?


Because that money is being loaned out... Those loans are assets. So the bank's B/S is still balanced.

----------


## Steven Douglas

> Who the hell would give away an asset in exchange for a liability??? It's like if I gave you money in exchange for the privilege of paying off your debt. Why the hell would someone do that?
> 
> 
> 
> 
> 
> 			
> 				No... They print money (an asset) in order to acquire that t-bill.


Think about what that means in terms of the essence of each of those instruments as a matter of function. 

Whether it's an asset or liability depends on whose perspective we're talking about - without conflation of parties of interest.

The Fed's new money creation is an asset to whom?  To the Fed it's an asset in the same sense that stolen goods are an asset to any thief in the moment.  The newly created funds themselves count as an asset to the Treasury, not the Fed when all is said and done.  The T-Bill is also an asset from the perspective of the Treasury thief that acts in collusion with the Fed it  received stolen goods from -- in exchange for a liability to others, since it's a promise to tax unnamed taxpayers of the future.  

In both cases an asset to the beneficiaries _is an automatic liability to someone else_. Thus:

The Fed prints a "_Liability To Existing Currency Holders_" in exchange for the Treasury's "_Liability To Future Taxpayers_".  From the perspective of the taxpayer who is also a currency holder, a liability to him was exchanged for a future liability to him.  




> If the bank pays someone $5, and that person puts deposits that $5 back in the bank. The bank still owes that person $5 because that $5 dollar that the person deposited is a liability of the bank. Whether that $5 comes from the banks reserves or the banks profits, that $5 has to come from somewhere. The bank can't simply create that $5 out of thin air.


From a legal and financial accounting "balance sheet" standpoint a deposit describes a liability owed by the bank to the depositor. It is NOT, however, a reference to the funds themselves, which are shown an asset of the bank.  Thus, a bank starting with $5 in assets (in the form of a deposit, or liability to the depositor) can create $45 in loans, which are also counted as assets to the bank - albeit with a different liquidity as the funds themselves.  So the bank(ing system) has $50 in assets -- the original $5 in deposits (the funds themselves of which are assets to the bank, even though a matching liability to the depositor is created) plus $45 in assets with a different liquidity in the form of loans. 

Those loans, or liabilities to borrowers, are not simply recycled as money that does nothing but circulate in a banking system vacuum.  That money gets spent.  The bank makes a loan, but the debtor may not redeposit that money directly. He can cash it out and convert this it into a different kind of hard asset, which may or may not be considered security for that loan.  The person who received money for that hard asset then turns around and pays others, all of whom deposit that money into the exact same bank, where it becomes, once again, an asset to the bank with an offsetting liability to the depositor(s).  Rinse and repeat until the reserve requirement is exhausted.  

All these assets (loans and assets purchased from them) all came into being from different fractions of the same $5. 




> Because that money is being loaned out... Those loans are assets. So the bank's B/S is still balanced.


The bank's B/S (perfect acronym, btw) is balanced, even as $5 in deposit assets (the funds themselves, not the liability to the depositor) have expanded to $50 in total assets to the bank (loans + reserves), and $45 in total assets to the borrowers (as hard assets paid for) in a short period of time.  For 900% of an asset's value to come into existence as tangible assets in other forms the same real money asset had to appear, be exchanged, and then vanish into thin air.  

Think of this in terms of NO reserve requirement (e.g., a cashless society that never demands money directly except as deposits are shuffled around within the banking system).  Now there is literally no limit to the amount of loans banks can make. No pretense of reserve requirements to give the "real" money involved an air of tangibility. The number of hard assets that can come into existence as a result of exchanges for nothing but promises means that banks would behave EXACTLY like the Fed does with the Treasury - with no "reserve medium" involved.  That's creating money out of thin air, but somehow because there's a "reserve medium" involved as a transaction carrier, and a theoretical mathematical limit to bank lending based on that, it's all based on real money, and not out of thin air.  

As the old joke goes: You say that you would sleep with someone for a million dollars, and comes the response, "Now that we've established what you are, let's get real about the price." 

If a bank's fractional reserve requirement was ZERO, it could indeed create money out of thin air - given that the same asset (deposit - the funds themselves, not the liability to the depositor) can be re-loaned indefinitely (regardless how unstable such a system might seem).  But what if the bank's reserve requirement was .0000001%?  Now the bank cause upward to 1,000,000 times its original reserves to appear as assets; $1 Million in original assets can now be multiplied into nearly a Trillion in loans, all counted as bank assets, in addition to all the hard assets that came into existence because of those loans. Would that count as creating money out of thin air?

----------


## rpwi

> ...


Steven had some nice answers to your questions...I'll just add my angle.




> Who the hell would give away an asset in exchange for a liability??? It's like if I gave you money in exchange for the privilege of paying off your debt. Why the hell would someone do that?


In this case it might be helpful to think of the demand deposit as a 0%, 0 maturity investment.  So say the banker buys a t-bill from one of its patrons.  It in essence gives them a 0% maturity 'investment' in exchange for the t-bills.  It is not a real investment...but from an accounting perspective it helps to understand why what goes where.

The Fed during the gold era essentially did the same thing.  They would issue '0% - 0 maturity' securities...and 'swap' them for mostly t-bills.  Now truly...these are not proper investments...but is is how they are accounted at both the Federal and private level.




> No... They print money (an asset) in order to acquire that t-bill.


They do not.  They purchase a t-bill by crediting the primary dealer's bank account at the Fed for X dollars.  No paper money was created nor moved.  If the primary dealer wants paper dollars instead of electronic dollars...that is fine...and they can get them.  But that would only be after the fact and doesn't affect the supply of the monetary base...and sense the primary dealers are money center banks, they wouldn't deal that much in paper reserves anyways.




> If the bank pays someone $5, and that person puts deposits that $5 back in the bank. The bank still owes that person $5 because that $5 dollar that the person deposited is a liability of the bank.


Yep...deposits are liabilities to the banks.  Just as fed deposits are liabilities to the Fed.




> Whether that $5 comes from the banks reserves or the banks profits, that $5 has to come from somewhere. The bank can't simply create that $5 out of thin air.


Yes it can (barring regulations).  If I start a bank...and one of my depositors sells me a t-bill...no reserves were changed...nor moved.  Why should reserves change?  This is the magic of fractional reserve banking.  And is what the Fed did during the gold era.




> They are not account that way because they're not assets.


Reserves are assets to the banks.  Deposits are liabilities to the banks.  The deposits to the depositor are assets.  The securities the bank acquired for deposits are assets to the bank.




> Because that money is being loaned out... Those loans are assets. So the bank's B/S is still balanced.


The reserves are not being loaned out.  Deposit 'loans' are exchange for non-deposit loans.

----------


## Bohner

> Think about what that means in terms of the essence of each of those instruments as a matter of function. 
> 
> Whether it's an asset or liability depends on whose perspective we're talking about - without conflation of parties of interest.
> 
> The Fed's new money creation is an asset to whom?  To the Fed it's an asset in the same sense that stolen goods are an asset to any thief in the moment.  The newly created funds themselves count as an asset to the Treasury, not the Fed when all is said and done.  The T-Bill is also an asset from the perspective of the Treasury thief that acts in collusion with the Fed it  received stolen goods from -- in exchange for a liability to others, since it's a promise to tax unnamed taxpayers of the future.  
> 
> In both cases an asset to the beneficiaries _is an automatic liability to someone else_. Thus:
> 
> The Fed prints a "_Liability To Existing Currency Holders_" in exchange for the Treasury's "_Liability To Future Taxpayers_".  From the perspective of the taxpayer who is also a currency holder, a liability to him was exchanged for a future liability to him.


The difference is that at no single point in time, does the fed have any liabilities. They print money (an asset) buy a t-bill (another asset), then recoups the debt from that t-bill (more assets). The second someone deposits money in an FRB on the other hand, that bank has an equal amount of assets as it has liabilities from the start, as opposed to the fed who only has assets (at the expense of everyone else). 




> From a legal and financial accounting "balance sheet" standpoint a deposit describes a liability owed by the bank to the depositor. It is NOT, however, a reference to the funds themselves, which are shown an asset of the bank.  Thus, a bank starting with $5 in assets (in the form of a deposit, or liability to the depositor) can create $45 in loans, which are also counted as assets to the bank - albeit with a different liquidity as the funds themselves.  So the bank(ing system) has $50 in assets -- the original $5 in deposits (the funds themselves of which are assets to the bank, even though a matching liability to the depositor is created) plus $45 in assets with a different liquidity in the form of loans. 
> 
> Those loans, or liabilities to borrowers, are not simply recycled as money that does nothing but circulate in a banking system vacuum.  That money gets spent.  The bank makes a loan, but the debtor may not redeposit that money directly. He can cash it out and convert this it into a different kind of hard asset, which may or may not be considered security for that loan.  The person who received money for that hard asset then turns around and pays others, all of whom deposit that money into the exact same bank, where it becomes, once again, an asset to the bank with an offsetting liability to the depositor(s).  Rinse and repeat until the reserve requirement is exhausted.  
> 
> All these assets (loans and assets purchased from them) all came into being from different fractions of the same $5.


You do realize that throughout this whole process, the bank is accumulating liabilities in the form of deposits at a the exact same rate as they are accumulating assets right (assuming the loans are 0% interest)? Loans may be assets for the bank, but when people deposit that loaned money back into the bank, that deposit is a liability for the bank. You see how this is different to the fed??? The fed has NO liabilities at any point. This is where the imbalance comes from. 





> The bank's B/S (perfect acronym, btw) is balanced, even as $5 in deposit assets (the funds themselves, not the liability to the depositor) have expanded to $50 in total assets to the bank (loans + reserves), and $45 in total assets to the borrowers (as hard assets paid for) in a short period of time.  For 900% of an asset's value to come into existence as tangible assets in other forms the same real money asset had to appear, be exchanged, and then vanish into thin air.  
> 
> Think of this in terms of NO reserve requirement (e.g., a cashless society that never demands money directly except as deposits are shuffled around within the banking system).  Now there is literally no limit to the amount of loans banks can make. No pretense of reserve requirements to give the "real" money involved an air of tangibility. The number of hard assets that can come into existence as a result of exchanges for nothing but promises means that banks would behave EXACTLY like the Fed does with the Treasury - with no "reserve medium" involved.  That's creating money out of thin air, but somehow because there's a "reserve medium" involved as a transaction carrier, and a theoretical mathematical limit to bank lending based on that, it's all based on real money, and not out of thin air.


So what happens if people takes out loans and deposit those loans another banks? Or maybe invest their loaned money in another city or another country? What if people want to buy t-bills with that money? Does the treasury bank at the same bank as you do in this hypothetical scenario? What happens if people want to pay for things in cash? Debit has existed for decades, why don't all transactions take place electronically these days?

Hypothetical scenarios are nice... But in the real world, that 0 reserve bank would go out of business pretty damn quickly. 




> If a bank's fractional reserve requirement was ZERO, it could indeed create money out of thin air - given that the same asset (deposit - the funds themselves, not the liability to the depositor) can be re-loaned indefinitely (regardless how unstable such a system might seem).  But what if the bank's reserve requirement was .0000001%?  Now the bank cause upward to 1,000,000 times its original reserves to appear as assets; $1 Million in original assets can now be multiplied into nearly a Trillion in loans, all counted as bank assets, in addition to all the hard assets that came into existence because of those loans. Would that count as creating money out of thin air?


Once again so it's clear... THE BANK'S LIABILITIES HAVE INCREASED ALONG WITH IT'S ASSETS!!!!!!

As for the hard assets part, that's kind of how the economy works. Money circulates, assets get created. Money circulates in the banks, the banks will gain assets as a result, just like with any other aspect of the economy. 

For example... If you and I are the only two people in an economy, you have $5 and no other assets, and I have $0 and no assets. I build you a house in exchange for your $5. Now I have $5, and you have $5 in assets (ie. that house I built you). If you then decide to build me a house in exchange for that $5 you gave me, now you have $10 in assets (the $5, and the house worth $5) and I have $5 in assets (the house you built me). For a total of $15 worth of assets in an economy that started out with 5$.  

ZOMG!!! AND HOW DO YOU HAVE $10 WORTH OF ASSETS IN AN ECONOMY WITH ONLY 5 DOLLARS IN IT????. 

Money circulates, assets get created.. FRBs are no different.

----------


## Bohner

> In this case it might be helpful to think of the demand deposit as a 0%, 0 maturity investment.  So say the banker buys a t-bill from one of its patrons.  It in essence gives them a 0% maturity 'investment' in exchange for the t-bills.  It is not a real investment...but from an accounting perspective it helps to understand why what goes where.


So the bank basically increases the balance in that person's deposit (should that person have an account at the same bank). But this also means that the amount of money the bank owes in deposits has increased. Meaning the bank's reserve ratio is lower than it was before. Therefore, the bank is going to have to increase it's interest rates (slightly) so that it's reserves are once again in check. Either way, the bank is basically adding a liability to it's own balance in exchange for that asset. It's not GIVING that person a liability in exchange for that asset. 




> The Fed during the gold era essentially did the same thing.  They would issue '0% - 0 maturity' securities...and 'swap' them for mostly t-bills.  Now truly...these are not proper investments...but is is how they are accounted at both the Federal and private level.


Issuing a 0% maturity security, is a fancy way of saying that the fed payed them electronically. 




> They do not.  They purchase a t-bill by crediting the primary dealer's bank account at the Fed for X dollars.  No paper money was created nor moved.  If the primary dealer wants paper dollars instead of electronic dollars...that is fine...and they can get them.  But that would only be after the fact and doesn't affect the supply of the monetary base...and sense the primary dealers are money center banks, they wouldn't deal that much in paper reserves anyways.


Once again, your basically saying that the fed payed them electronically via an account the primary dealer has with the fed. And if the primary dealer wants paper dollars as opposed to electronic, OF COURSE that's fine... The fed just has to print it. And yes, the money supply has increased. 




> Yes it can (barring regulations).  If I start a bank...and one of my depositors sells me a t-bill...no reserves were changed...nor moved.  Why should reserves change?  This is the magic of fractional reserve banking.  And is what the Fed did during the gold era.


Your reserves went down, because your liabilities have increased (ie. you owe more in deposits than you did before while your reserves stayed the same). So your ratio is off. 





> The reserves are not being loaned out.  Deposit 'loans' are exchange for non-deposit loans.


Of course they aren't, otherwise they wouldn't be 'reserves.' Some of the money from deposits is being loaned out, the rest of the money is stored in reserves. This is why deposits>reserves on a bank's B/S

----------


## rpwi

> So the bank basically increases the balance in that person's deposit (should that person have an account at the same bank). But this also means that the amount of money the bank owes in deposits has increased.


Sure...  




> Meaning the bank's reserve ratio is lower than it was before.


Yes




> Therefore, the bank is going to have to increase it's interest rates (slightly) so that it's reserves are once again in check.


We don't know if the bank was operating at, above or below target reserve ratios.  The important things is that the bank COULD and DOES increase deposits beyond reserves.  Gold era Fed did the same thing.  Don't you think it is bad?




> Either way, the bank is basically adding a liability to it's own balance in exchange for that asset. It's not GIVING that person a liability in exchange for that asset.


Well...semantics.  Yes to the bank...they add a liability and add an asset. 




> Issuing a 0% maturity security, is a fancy way of saying that the fed payed them electronically.


And increases the money supply/inflation just like a FRB does.




> Once again, your basically saying that the fed payed them electronically via an account the primary dealer has with the fed. And if the primary dealer wants paper dollars as opposed to electronic, OF COURSE that's fine... The fed just has to print it. And yes, the money supply has increased.


But not once the primary dealer (or any bank) demands paper dollars.  It happens when the Fed acquired the t-bills.

It may be helpful to go back in time...to when the Fed was started.  Before the Fed...we had a gold standard...in which gold was traded, or bank notes/deposits on gold...or US notes that were fractionally based off of gold.  When the Fed was enacted...one of the first rules was that gold could not satisfy reserve ratios.  The Fed had a plan for gold though...  If the banks deposited the gold with the Fed...they were awarded a Federal Reserve deposit.  This WOULD satisfy reserve ratio requirements.  Because this was a deposit...banks could deposit and withdrawal gold as needed with the Fed.  This is the origin of Federal Reserve Deposits.  If the banks wanted...they could trade in their Federal Reserve deposits for Federal Reserve notes (the Fed would destroy one to create the other) and they could circulate that in the economy.  Greenbacks did count for reserves.  Now of course what the Fed did...was to issue more deposits to banks than they had in gold...which created a big mess...and it created a lot of inflation.  When the banks converted between paper fed notes and fed deposits...this was largely inconsequential to inflation.

When the Fed went off of the gold standard...federal reserve deposits largely remained and functioned the same...just that they couldn't be converted into gold anymore.  Federal Reserve Deposits (and Federal Reserve Notes + coins + US notes) formed the monetary base.  The main component of the monetary base is and has been federal reserve deposits though.  These almost always get created first and account for most of the MB in circulation.  Our economy is in no way dependent upon paper MB (federal reserve notes) to engage in commerce.




> Your reserves went down, because your liabilities have increased (ie. you owe more in deposits than you did before while your reserves stayed the same). So your ratio is off.


My reserve ratio went down...but my reserves stayed the same.




> Of course they aren't, otherwise they wouldn't be 'reserves.' Some of the money from deposits is being loaned out, the rest of the money is stored in reserves. This is why deposits>reserves on a bank's B/S


In my example...the bank could hold all reserves as greenbacks in a vault...and gremlins could have snuck in and stole all the greenbacks without anybody noticing...and yet my transaction still goes through.    In an 'internal' bank operations...no reserves get transferred or moved when one entity writes a check to another.

----------


## Bohner

> We don't know if the bank was operating at, above or below target reserve ratios.  The important things is that the bank COULD and DOES increase deposits beyond reserves.  Gold era Fed did the same thing.  Don't you think it is bad?


The reserves ratio is what keeps the banks' honest. The banks can't keep buying things while paying for them by increasing it's liabilities to the point where their reserves dwindle to the point where they are unable to cover their clients' day to day transactions. If they do this, they go out of business. 




> And increases the money supply/inflation just like a FRB does.


The difference is that the banks need to respect their reserve ratios, and will have to raise interest rates when their reserves start to dwindle. This does not apply to the modern day fed (or even the fed under the gold standard apparently). 




> But not once the primary dealer (or any bank) demands paper dollars.  It happens when the Fed acquired the t-bills.
> 
> It may be helpful to go back in time...to when the Fed was started.  Before the Fed...we had a gold standard...in which gold was traded, or bank notes/deposits on gold...or US notes that were fractionally based off of gold.  When the Fed was enacted...one of the first rules was that gold could not satisfy reserve ratios.  The Fed had a plan for gold though...  If the banks deposited the gold with the Fed...they were awarded a Federal Reserve deposit.  This WOULD satisfy reserve ratio requirements.  Because this was a deposit...banks could deposit and withdrawal gold as needed with the Fed.  This is the origin of Federal Reserve Deposits.  If the banks wanted...they could trade in their Federal Reserve deposits for Federal Reserve notes (the Fed would destroy one to create the other) and they could circulate that in the economy.  Greenbacks did count for reserves.  Now of course what the Fed did...was to issue more deposits to banks than they had in gold...which created a big mess...and it created a lot of inflation.  When the banks converted between paper fed notes and fed deposits...this was largely inconsequential to inflation.
> 
> When the Fed went off of the gold standard...federal reserve deposits largely remained and functioned the same...just that they couldn't be converted into gold anymore.  Federal Reserve Deposits (and Federal Reserve Notes + coins + US notes) formed the monetary base.  The main component of the monetary base is and has been federal reserve deposits though.  These almost always get created first and account for most of the MB in circulation.  Our economy is in no way dependent upon paper MB (federal reserve notes) to engage in commerce.


Ok... So by issuing deposits, I'm assuming that you mean that they added credit to the accounts the banks held with the fed? More than the fed had in gold? This is a little different to an FRB as an FRB can't simply increase the credit in it's depositors' accounts beyond the amount of money the bank has in reserves without going in debt (or possibly out of business). 




> My reserve ratio went down...but my reserves stayed the same.


By reserves going down, I was referring to the reserve ratio, sorry for not being more clear. But if a bank's reserve ratio gets too low, they'll have to raise interest rates. They can't just as you call it... "create more deposits."




> In my example...the bank could hold all reserves as greenbacks in a vault...and gremlins could have snuck in and stole all the greenbacks without anybody noticing...and yet my transaction still goes through.    In an 'internal' bank operations...no reserves get transferred or moved when one entity writes a check to another.


True, but what happens if you want to transfer funds to another bank, or make a cash withdrawal, and the bank has no money in it's reserves? It's game over for the bank is what happens.

----------


## malkusm

Haven't read the thread, and won't pretend I did.

All you need to know is: In a free market, any business which informs you of its business practices in advance, is not committing fraud. Undoubtedly, if the Federal Reserve did not exist, keeping such small percentages in reserve would not be easy and would likely result in a bank run and ultimate failure. However, it appalls me that so many on this forum would suggest that a bank simply *should not* be able to engage in this practice. That is for the bank to decide, and customers would be free to choose between this bank and full-reserve institutions.

Having said that, I also certainly disagree with some on this forum about the supposed evil of fractional reserve banking. (Yes, I'm well aware that this puts me at odds with Rothbard and Walter Block as well.)

If I may: Do you really suppose that individuals would risk 100% principal when providing loans and other forms of financing? Do you really suppose this would meet the demand of the hundreds of thousands of small businesses in this country?

EDIT: Just read the first few posts and it seems that this was the conclusion that was reached....so, as usual, I'm behind by about a week.

----------


## rpwi

> The reserves ratio is what keeps the banks' honest. The banks can't keep buying things while paying for them by increasing it's liabilities to the point where their reserves dwindle to the point where they are unable to cover their clients' day to day transactions. If they do this, they go out of business.


Well...yes and no.  A banks reserve ratio is constrained by legal requirements (capital requirements and the national reserve ratio), by their credit rating in the money market and the strength of the money market...and the volatility in which the average deposit base fluctuates on a daily basis.  Can a bank create a zillion dollars?  No (well not without monopoly market control and not with legal restrictions).  This still means though they can create deposit money...just not the infinite amount they would desire.  If I tell a counterfeiter...he can only counterfeiter 3x of what he has in reserve of legit currency...sure that is a constraint...but the counterfeiter is still stealing from us through inflation.




> The difference is that the banks need to respect their reserve ratios, and will have to raise interest rates when their reserves start to dwindle.


Minus legal considerations...yes...the bank needs to keep a buffer on hand to meet average withdrawals from customers and other banks.  There will still be an average amount that sits at the bank though and the banks can easily leverage this.  I mean say at your bank you average between 2k and 8k in deposits.  The bank can figure that on average you will have at least 2k...and can easily lend that out (until they get exposed when reserves get scarce).

Now the reserve ratio in a modern banking system is considered largely antique because of how strong the money market works.  In fact, I believe Canada doesn't even have a reserve ratio.  Capital requirement ratios are considered now to be more effective brakes on reserve adequacy.  See in a modern system...a bank can borrow and sell reserve from the money market.  With a bank...if you don't have the reserves...big deal...you get them from the money market.  So they don't care THAT much about having reserves on hand.  In fact the problem has been made much worse by sweeps accounts.  Basically...each night many banks convert their demand deposits to 'time deposits' (of a minuscule negligible variety) to skirt reserve requirements.  Very controversial...and some blame these games banks were pulling in creating (well magnifying) some of the economic problems we have now. 




> This does not apply to the modern day fed (or even the fed under the gold standard apparently).


The gold era Fed, yes didn't have a proper reserve ratio requirement.  But it still had to worry about a 'bank run'  just like a FRB does and it still created inflation like FRB'ing does.  In fact it was a massive 'bank run' that ended the Fed's fractional reserve banking of gold in 1933 for the public and in 1971 for international clients.   I can't see the conceptual difference between the gold era Fed and a private bank of today...




> Ok... So by issuing deposits, I'm assuming that you mean that they added credit to the accounts the banks held with the fed?


Credit aka deposits...yes.




> More than the fed had in gold?


Yes.




> This is a little different to an FRB as an FRB can't simply increase the credit in it's depositors' accounts beyond the amount of money the bank has in reserves without going in debt (or possibly out of business).


It can do so very easily.  The gold era Fed (regardless of its gold reserves) creates the deposits for clients and in exchange gets securities.  The bank creates a deposit for a customer and uses it to acquire their asset.  The only 'debt' acquired by both the Fed and the private banks are deposits.




> By reserves going down, I was referring to the reserve ratio, sorry for not being more clear. But if a bank's reserve ratio gets too low, they'll have to raise interest rates. They can't just as you call it... "create more deposits."


Yes and no.  There are certain constraints that control the money multiplier of how many deposits can be created off of aggregate reserves.  But the multiplier is positive...which is evidence enough that banks are not TOO concerned about having enough reserves on hand.  Again in modern era banking...the reserve ratio is considered antiquated.  Banks merely acquire solid securities and worry about getting (or selling) the needed reserves from the money market (and the money market gets a lot of its reserves from the Fed).  By and large, bank management doesn't tell their loan officers to lend or not lend based on reserves on hand...instead they tell them to make good loans...and management will take care of getting the reserves needed.




> In my example...the bank could hold all reserves as greenbacks in a vault...and gremlins could have snuck in and stole all the greenbacks without anybody noticing...and yet my transaction still goes through. In an 'internal' bank operations...no reserves get transferred or moved when one entity writes a check to another.
> 			
> 		
> 
> True, but ...


Then you acknowledge with an internal bank operation a bank can create money/inflation with FRB?




> what happens if you want to transfer funds to another bank, or make a cash withdrawal, and the bank has no money in it's reserves? It's game over for the bank is what happens.


Many things...  Remember...on average while a bank faces a lot of outgoing withdrawals from clients and other banks...they also receive the opposite in that clients will put money into the bank all on its own.  On average...this kind of cancels each other out...which means a bank can figure a statistical deposit amount...and calculate how many reserves they can promise away with nobody knowing.  Beyond this there is the money market...as banks can borrow as needed to meet any shortfalls for their target B/S portfolio.

----------


## Bohner

> Well...yes and no.  A banks reserve ratio is constrained by legal requirements (capital requirements and the national reserve ratio), by their credit rating in the money market and the strength of the money market...and the volatility in which the average deposit base fluctuates on a daily basis.  Can a bank create a zillion dollars?  No (well not without monopoly market control and not with legal restrictions).  This still means though they can create deposit money...just not the infinite amount they would desire.  If I tell a counterfeiter...he can only counterfeiter 3x of what he has in reserve of legit currency...sure that is a constraint...but the counterfeiter is still stealing from us through inflation.


You forget about rising interest rates. As interest rates rise, people will stop taking out loans and start saving. Meaning less money is circulating around the economy, and the currency will deflate back to where it was before. 




> Minus legal considerations...yes...the bank needs to keep a buffer on hand to meet average withdrawals from customers and other banks.  There will still be an average amount that sits at the bank though and the banks can easily leverage this.  I mean say at your bank you average between 2k and 8k in deposits.  The bank can figure that on average you will have at least 2k...and can easily lend that out (until they get exposed when reserves get scarce).


Leveraging implies risk. They can do what you are saying, but the most successful/trustworthy banks wouldn't do this in a free market where they don't have the fed to bail them out. It's not worth risking bankruptcy to make a few extra bucks.  




> Now the reserve ratio in a modern banking system is considered largely antique because of how strong the money market works.  In fact, I believe Canada doesn't even have a reserve ratio.  Capital requirement ratios are considered now to be more effective brakes on reserve adequacy.  See in a modern system...a bank can borrow and sell reserve from the money market.  With a bank...if you don't have the reserves...big deal...you get them from the money market.  So they don't care THAT much about having reserves on hand.  In fact the problem has been made much worse by sweeps accounts.  Basically...each night many banks convert their demand deposits to 'time deposits' (of a minuscule negligible variety) to skirt reserve requirements.  Very controversial...and some blame these games banks were pulling in creating (well magnifying) some of the economic problems we have now.


The way the money market works now is a direct result of central banking. This is not what I am advocating. 




> But it still had to worry about a 'bank run'  just like a FRB does and it still created inflation like FRB'ing does.  In fact it was a massive 'bank run' that ended the Fed's fractional reserve banking of gold in 1933 for the public and in 1971 for international clients.   I can't see the conceptual difference between the gold era Fed and a private bank of today...


This is the difference:



> The gold era Fed, yes didn't have a proper reserve ratio requirement.





> It can do so very easily.  The gold era Fed (regardless of its gold reserves) creates the deposits for clients and in exchange gets securities.  The bank creates a deposit for a customer and uses it to acquire their asset.  The only 'debt' acquired by both the Fed and the private banks are deposits.


As I previously stated... If a bank does this (to a large degree) without raising interest rates, they are taking a huge risk because their deposit/reserve ratio will be getting larger and larger to the point where they won't have enough money in their reserves to cover their deposits. 




> Yes and no.  There are certain constraints that control the money multiplier of how many deposits can be created off of aggregate reserves.  But the multiplier is positive...which is evidence enough that banks are not TOO concerned about having enough reserves on hand.  Again in modern era banking...the reserve ratio is considered antiquated.  Banks merely acquire solid securities and worry about getting (or selling) the needed reserves from the money market *(and the money market gets a lot of its reserves from the Fed).*  By and large, bank management doesn't tell their loan officers to lend or not lend based on reserves on hand...instead they tell them to make good loans...and management will take care of getting the reserves needed.


Again... Central banking. Not what I am advocating. 




> Then you acknowledge with an internal bank operation a bank can create money/inflation with FRB?


Yes... But only to a point before they don't have enough reserves to cover their deposits and are forced to raise interest rates, and the currency deflates back to it's initial value. 




> Many things...  Remember...on average while a bank faces a lot of outgoing withdrawals from clients and other banks...they also receive the opposite in that clients will put money into the bank all on its own.  On average...this kind of cancels each other out...which means a bank can figure a statistical deposit amount...and calculate how many reserves they can promise away with nobody knowing.


This is a very big risk for the bank to take that will most likely blow up in it's face. People withdraw money constantly, people usually deposit money only on paydays (usually on the 15th and the 1st IIRC). If this predicament doesn't fall on a payday, then the bank is $#@!ed. 




> Beyond this there is the money market...as banks can borrow as needed to meet any shortfalls for their target B/S portfolio.


Possibly. But in a free market, the bank can't keep on taking out loans forever.

----------


## Paul Or Nothing II

> All you need to know is: In a free market, any business which informs you of its business practices in advance, is not committing fraud.


+1

This is what most people in general & even most people here don't seem to grasp - the concept of VOLUNTARY ACTION

Current system is coercive, that's the problem but consensual FRB under free banking system would be perfectly in line with the concept of voluntary action



The thing is if someone deposits 10 ounces of gold into a bank then they're entitled to receive 10 ounces from the bank as per the terms of the agreement between the bank & the depositor & that's that; whether it's a full-reserve-bank or fractional-bank is IRRELEVANT, the only thing that matters is that they redeem 10 oz to the depositor (plus interest, if any), as per the terms of the agreement

Now, if it's a time-deposit then the depositor may have to wait till maturity, if it's a demand-deposit with a full-reserve-bank then the depositor is entitled to his 10 oz ON DEMAND while if it's a demand-deposit with a fractional-bank then it will be subject to availability of funds
For example, in a free banking environment, a 25%-reserve-bank may have 100 oz as demand-deposits, 75 oz as loans & 25 oz as reserves, & let's say those 25 oz are withdrawn by some depositors, & the bank can't redeem anymore deposits then rest of the depositors would KNOW that as per the agreement, they'd have to wait until bank acquires more gold either through more deposits or due repayment of the loans they had made

Again, the point is that so long as the FRB bank is honest about its "FRBness" & tells its depositors beforehand that their demand-deposits are subject to availability of funds, it's NOT fraud
Now, if someone doesn't want to deposit their gold with such a bank & thereby earn interest on their demand-deposits then they can go for a full-reserve-bank which offers no interest & asks for a safe-keeping fee & if even that's not optimal then one can choose to keep their gold in their house or whatever

Again, under a free banking system, the bottomline wouldn't change either way - if you deposit 10 ounces of gold into a bank then you're entitled to receive 10 oz of gold (plus interest, if any) irrespective of whether it's a full-reserve-bank or a fractional-reserve-bank, just the terms of agreement would differ
So all the talk of losing purchasing-power due to FRB under free banking is rather misguided

----------


## rpwi

> So all the talk of losing purchasing-power due to FRB under free banking is rather misguided


When the Fed was on the gold era and practiced FRB of dollars off of gold...did that lead to a lose in purchasing power for the public?

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## Dsylexic

is a power/utility company selling electricity on a 24x7 promise commiting fraud ? in reality the company knows that not all its customers will plug into the grid at the same time. in fact if they tried,it would trip/crash and burn. so they use some amount of optimization/queueing theory and knowledge of the customer behavior to plan their grid.
why is this different for money,another commodity. fractional reserves are fine. let the market decide.why do you want to regulate how consumer demand for money should be.

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## Dsylexic

ofcourse,there is no role for a fed/monopoly in the market for money.goes without saying.

----------


## rpwi

> Leveraging implies risk. They can do what you are saying, but the most successful/trustworthy banks wouldn't do this in a free market where they don't have the fed to bail them out. It's not worth risking bankruptcy to make a few extra bucks.


But that's how a bank makes money.  If they don't fabricate deposits...they are not really a bank.  Are you saying in a free economy, FRB would not happen because the bank wouldn't want to risk defaults?    The risk/concern to bank's equity is minimal...as that tends to be a tiny portion of assets.




> The way the money market works now is a direct result of central banking. This is not what I am advocating.


There would be a money market in a free economy...but it would break down quickly.  Without a money market, FRB would crash most likely.




> But it still had to worry about a 'bank run' just like a FRB does and it still created inflation like FRB'ing does. In fact it was a massive 'bank run' that ended the Fed's fractional reserve banking of gold in 1933 for the public and in 1971 for international clients. I can't see the conceptual difference between the gold era Fed and a private bank of today...
> 			
> 		
> 
> This is the difference:


You made a reference to the Fed not having a legal reserve ratio.  This does not make sense.  A reserve ratio doesn't prevent a bank from creating deposit money and creating inflation...it just prevents the extent to which deposits can be created (without open-market operations interfering).  Both the gold-era fed and private banks today...had fractional reserves off of deposits.  They acted the same and they both stole from us through inflation.




> As I previously stated... If a bank does this (to a large degree) without raising interest rates, they are taking a huge risk because their deposit/reserve ratio will be getting larger and larger to the point where they won't have enough money in their reserves to cover their deposits.


Yes...they can't create an infinite amount of deposits.  That doesn't mean they create 0 deposits.   




> Then you acknowledge with an internal bank operation a bank can create money/inflation with FRB?
> 			
> 		
> 
> Yes... But only to a point before they don't have enough reserves to cover their deposits and are forced to raise interest rates, and the currency deflates back to it's initial value.


So you acknowledge private banks can create money?  With an internal operation would it be fair to say the extent to which inflation was created was the amount of deposits issued minus the amount of reserve?




> This is a very big risk for the bank to take that will most likely blow up in it's face. People withdraw money constantly, people usually deposit money only on paydays (usually on the 15th and the 1st IIRC). If this predicament doesn't fall on a payday, then the bank is $#@!ed.


But this is how modern banking works.  The banks have guys that punch the stats...and they promise away the reserves they think they can getaway with...and borrow the rest from the money market.  If things didn't work this way...deposits could never be bigger than reserves.  That deposits are more than reserves demonstrates that yes...banks have figured out how to do this. Is it risky?  You bet.  But much of the risk is systemic risk put onto the money market and onto the Fed and FDIC.  Not true risk that bank is accountable for. If we were to remove government support from banks...they would collapse.  There would be no free market in FRB. 




> Possibly. But in a free market, the bank can't keep on taking out loans forever.


Well...a bank can keep taking on liabilities...as long as nobody demands (on average) that those liabilities be withdrawn.  The liabilities can be rolled over in perpetuity making the bank very rich.

----------


## Paul Or Nothing II

> When the Fed was on the gold era and practiced FRB of dollars off of gold...did that lead to a lose in purchasing power for the public?


Last time I checked Fed wasn't part of free banking, it's a coercive government-backed monopoly




> If they don't fabricate deposits...they are not really a bank.


*Facepalm*
I wish people would at least take the time to understand what they are trying to criticize but I suppose that would be too much to ask

----------


## Bohner

> But that's how a bank makes money.  If they don't fabricate deposits...they are not really a bank.  Are you saying in a free economy, FRB would not happen because the bank wouldn't want to risk defaults?    The risk/concern to bank's equity is minimal...as that tends to be a tiny portion of assets.


No, I'm saying the banks are not going to over-leverage their deposit/reserve ratio and risk not being able to cover it's clients day to day transactions in a free market unless they have a death-wish. 




> There would be a money market in a free economy...but it would break down quickly.  Without a money market, FRB would crash most likely.


There would be a money market in a free market, but as opposed to today, that money market would have limited funds. And a crash wouldn't occur if the banks have their reserves in check. 




> You made a reference to the Fed not having a legal reserve ratio.  This does not make sense.  A reserve ratio doesn't prevent a bank from creating deposit money and creating inflation...it just prevents the extent to which deposits can be created (without open-market operations interfering).  Both the gold-era fed and private banks today...had fractional reserves off of deposits.  They acted the same and they both stole from us through inflation.


It went further than that... The fed added credit to it's client's deposits beyond what they had in reserves (ie. gold). They basically gave the banks money that they didn't have. If the fed adds a combined $5000 worth of credit to it's clients accounts when they only have $1000 worth of reserves available, it's balance sheet is now NEGATIVE (ie. -$4000)!!!! If an FRB did this in a free-market, they would be in some serious trouble. 




> Yes...they can't create an infinite amount of deposits.  That doesn't mean they create 0 deposits.


People need to have an account with the bank, and voluntarily deposit money in that account in order for deposits to be created. Sure, the bank could add credit to their clients' account balance like the fed did, but that just means that the bank now owes it's clients more money without getting anything in return... So why would a bank do this?




> So you acknowledge private banks can create money?  With an internal operation would it be fair to say the extent to which inflation was created was the amount of deposits issued minus the amount of reserve?


If by inflation, you mean amount of money circulating around the economy, then yes. But once again, once reserves start to dwindle, banks will have to raise their interest rates and the amount of money circulating will go down. 




> But this is how modern banking works.  The banks have guys that punch the stats...and they promise away the reserves they think they can getaway with...and borrow the rest from the money market.  If things didn't work this way...deposits could never be bigger than reserves.  That deposits are more than reserves demonstrates that yes...banks have figured out how to do this. Is it risky?  You bet.  But much of the risk is systemic risk put onto the money market and onto the Fed and FDIC.  Not true risk that bank is accountable for. If we were to remove government support from banks...they would collapse.  There would be no free market in FRB.


Actually... An FRB could function just fine in a free market. It simply forces the banks to act responsibly since they know that the fed is not going to be there to bail them out. 




> Well...a bank can keep taking on liabilities...*as long as nobody demands (on average) that those liabilities be withdrawn*.  The liabilities can be rolled over in perpetuity making the bank very rich.


So this scheme works just fine as long as nobody withdraws money from the bank? Do you really believe this hypothetical scenario to be a realistic one?

----------


## rpwi

> Last time I checked Fed wasn't part of free banking, it's a coercive government-backed monopoly


The question is context was about the Fed during the gold era.

The fed practiced fractional reserve deposits by issuing more deposits than they had in gold.  Right???  Did that cause inflation?

A bank now issues more deposits than they have in reserves.  How is that different?  Does that cause inflation?

Yes and no as to the Fed during the gold era being a monopoly.  They weren't the only game in town where you could park your gold.  Indeed other central banks redeeming dollars for gold was what ultimately did the gold backing in 1971.  So there was always competition for 'reserves'/gold.  Yet in both the public and private sector that didn't stop fractional deposits from being created, from being accepted as money themselves and for them to cause inflation.

----------


## rpwi

> There would be a money market in a free market, but as opposed to today, that money market would have limited funds. And a crash wouldn't occur if the banks have their reserves in check.


The money market (at least for bank reserves) would exist for a while...but it would crash.  The demand for reserves in the banking sector is constantly growing...without the Fed to supply those demands..banks hold onto the reserves they have...this creates a chain reaction which exposes the ponzi scheme that FRB is.




> It went further than that... The fed added credit to it's client's deposits beyond what they had in reserves (ie. gold). They basically gave the banks money that they didn't have. If the fed adds a combined $5000 worth of credit to it's clients accounts when they only have $1000 worth of reserves available, it's balance sheet is now NEGATIVE (ie. -$4000)!!!! If an FRB did this in a free-market, they would be in some serious trouble.


The Fed got away with this by counting the gold deposits as liabilities and the securities acquired with these deposits as assets.  In this fashion they avoided some balance sheet complications.  Was this inflationary and/or dishonest to the gold depositors?  Oh yes.  The issue is that private banks do the same thing today.  If I deposit 10 dollars...the bank will give me a credit off of that...but also create additional deposits off of those reserves I gave the bank.  That's exactly how the gold era fed operated.




> People need to have an account with the bank, and voluntarily deposit money in that account in order for deposits to be created.


That is one way...  You can receive a deposit from the bank without depositing reserves first.




> Sure, the bank could add credit to their clients' account balance like the fed did, but that just means that the bank now owes it's clients more money without getting anything in return... So why would a bank do this?


Because they can and it's profitable.   If you as a banker notice that on average...100k never gets withdrawn...wouldn't you be tempted to invest it?




> If by inflation, you mean amount of money circulating around the economy, then yes. But once again, once reserves start to dwindle, banks will have to raise their interest rates and the amount of money circulating will go down.


True...just as banks can cause inflation...they can cause deflation as well.  But as long as deposits are more than reserves...this is evidence that they have inflated more than they deflated.




> Actually... An FRB could function just fine in a free market. It simply forces the banks to act responsibly since they know that the fed is not going to be there to bail them out.


While banks would probably hold a higher degree of reserves to deposits...to not practice 100% FRB is risky.  With no government support...once people figure out what is going on...there will be a run because nobody wants to be the last one to withdraw from a FRB.




> So this scheme works just fine as long as nobody withdraws money from the bank?


Yep...or the Fed adds more reserves to compensate.




> Do you really believe this hypothetical scenario to be a realistic one?


Yes...because on average the monetary aggregates show this to be the case.  Since they remain larger than reserves...this means there has always be a certain percentage of debt that has only been rolled over.

----------


## Bohner

> A bank now issues more deposits than they have in reserves.  How is that different?  Does that cause inflation?


Banks don't issue more deposits than they have in reserves. If a bank has $1000 in reserves, and decides to issue it's depositors a combined additional $5000 worth of credit, do you not see how the bank just lost $4000 by doing this? So why the hell would a bank do this?

----------


## Bohner

> The money market (at least for bank reserves) would exist for a while...but it would crash.  The demand for reserves in the banking sector is constantly growing...without the Fed to supply those demands..banks hold onto the reserves they have...this creates a chain reaction which exposes the ponzi scheme that FRB is.


As long as the banks raise their interest rates when their reserves start to dwindle, everything works just fine. 




> The Fed got away with this by counting the gold deposits as liabilities and the securities acquired with these deposits as assets.  In this fashion they avoided some balance sheet complications.  Was this inflationary and/or dishonest to the gold depositors?  Oh yes.  The issue is that private banks do the same thing today.  If I deposit 10 dollars...the bank will give me a credit off of that...but also create additional deposits off of those reserves I gave the bank.  That's exactly how the gold era fed operated.


Ummm... The gold deposits are assets for the fed, the securities (ie. an IOU to the banks for the gold they deposited) are liabilities. If the Fed starts issuing more securities to the banks than the fed has in gold reserves... The fed's balance sheet is NEGATIVE!!!!




> That is one way...  You can receive a deposit from the bank without depositing reserves first.


Yes, the bank can give you credit. But that credit the bank gives you is a liability to the bank. If the bank gives you more credit than they have in reserves (like what the fed did under the gold standard), then the bank's liabilities > the bank's assets, and the bank is in debt. 




> Because they can and it's profitable. If you as a banker notice that on average...100k never gets withdrawn...wouldn't you be tempted to invest it?


Where did that 100K come from? If the bank gives it's clients an additional 100K in credit, that doesn't mean the bank has an additional 100K in assets. It means that the bank owes it's depositors an additional 100K, and nothing else. In other words, all they did was increase their liabilities by an additional 100K for absolutely no reason. 




> True...just as banks can cause inflation...they can cause deflation as well.  But as long as deposits are more than reserves...this is evidence that they have inflated more than they deflated.


The value of the currency will fluctuate in both directions and will cap at a certain point. In other words, the value of the currency would remain relatively stable. 




> While banks would probably hold a higher degree of reserves to deposits...to not practice 100% FRB is risky.  With no government support...once people figure out what is going on...there will be a run because nobody wants to be the last one to withdraw from a FRB.


What the hell do you mean once they figure out whats going on? People already KNOW what's going on!!! People NEVER try to withdraw their cash all at the same time unless the bank is completely irresponsible with their reserve ratio and starts a panic, or if there is a government created asset bubble bust.

The power grid example someone mentioned above is a perfect analogy to how an FRB works.

----------


## rpwi

> Banks don't issue more deposits than they have in reserves. If a bank has $1000 in reserves, and decides to issue it's depositors a combined additional $5000 worth of credit, do you not see how the bank just lost $4000 by doing this? So why the hell would a bank do this?


A bank would only lose 4000 in reserves if one of their depositors wrote out a check to another person who banked elsewhere or a cash withdrawal was made.

The threat of cash withdrawals isn't that great...because people prefer to pay electronically for most transactions.

The threat of reserves leaving because people write checks to other banks is a threat...but is counter-balanced by outsiders writing checks to my depositors.

In this way FRB has no problem existing with check-clearing.

Could a bank get in trouble?  Sure...but to a bank it is a risk not to take a risk.  With the Fed there to keep the money market artificially low and the bankers putting put a only a small percentage of equity vs assets...it's not that much of a concern.

----------


## Bohner

> A bank would only lose 4000 in reserves if one of their depositors wrote out a check to another person who banked elsewhere or a cash withdrawal was made.


Ummm.... Exactly my point. 




> The threat of cash withdrawals isn't that great...because people prefer to pay electronically for most transactions.


I pay in cash all the time. And those electronic transactions are often times inter-bank transactions. 




> The threat of reserves leaving because people write checks to other banks is a threat...but is counter-balanced by outsiders writing checks to my depositors.


For a total sum of 0. Meaning that the bank is still $4000 in debt. 




> Could a bank get in trouble?  Sure...but to a bank it is a risk not to take a risk.  With the Fed there to keep the money market artificially low and the bankers putting put a only a small percentage of equity vs assets...it's not that much of a concern.


There is a difference between taking a risk, and being suicidal. But you do have a point in the sense that the Fed enables them to do this as they are a convenient inflationary safety net for the banks to fall back on.

----------


## rpwi

> As long as the banks raise their interest rates when their reserves start to dwindle, everything works just fine.


That still would not help a faltering money market.  There comes a point when investors stop looking at the rate of return offered and simply ask...will I get my money back?   




> Ummm... The gold deposits are assets for the fed,


Yes.




> the securities (ie. an IOU to the banks for the gold they deposited) are liabilities.


Securities aren't Fed deposits though.  Fed deposits are liabilities to the Fed and assets to the private banks that hold them.  You could kind of think of them as national gold deposits.

So say bank X sends 1 million in gold to the Fed.

Bank X's balance sheet reads:

Assets: -= 1 million in gold
Assets: += 1 million in Federal Reserve Gold Deposits

These deposits are very handy...the Fed allows the bank to satisfy reserve ratios with these and they are traded to other banks when individual checks clear.

After the Fed receives the gold, their balance sheet reads:

Assets: += 1 million in gold
--
Liabilities: += 1 million in a gold deposit to Bank X

Now say the Fed gets greedy...they go and buy some t-bills with fake gold deposits. So their balance sheet reads:

Assets: += 1 million in tbills (they could have bought bank loan securities)
--
Liabilities: += 1 million in gold deposits to Bank Y (that sold the t-bills)

Here we see the problem.  The fed has now issued more deposits than it had in gold.  This leads to either inflation if the economy accepts the dollar deposits are as gold, or as theft if the Fed does not return the gold when asked by the gold depositors.




> Yes, the bank can give you credit. But that credit the bank gives you is a liability to the bank.


Yes...but they didn't just give me that credit.  They traded it for an asset of mine (like a promise to pay the bank with a home mortgage loan).




> If the bank gives you more credit than they have in reserves (like what the fed did under the gold standard), then the bank's liabilities > the bank's assets, and the bank is in debt.


When the gold-era Fed expanded the money supply...they did so by buying assets.  It could be bank loans from the Discount window or it could be t-bills from the open market.  These registered as new assets on the Balance Sheet which offset the new liabilities (deposits) the Fed created.




> Because they can and it's profitable. If you as a banker notice that on average...100k never gets withdrawn...wouldn't you be tempted to invest it?
> 			
> 		
> 
> Where did that 100K come from?


From depositors.  Either as cash deposits, or from incoming cleared checks to my customers.




> If the bank gives it's clients an additional 100K in credit, that doesn't mean the bank has an additional 100K in assets.


It will because the bank will never just give that money away...they'll trade it for interest bearing assets.  I approach my bank and say I want to sell them 100k in t-bills.  They say ok...credit my deposit with 100k and keep the 100k t-bills.  No reserves moved during this transaction.




> It means that the bank owes it's depositors an additional 100K, and nothing else. In other words, all they did was increase their liabilities by an additional 100K for absolutely no reason.


They do it for the same reason the gold-era Fed did it. Those "Liabilities" are considered money.  See a normal liability is issued and then eventually repaid.  Deposit liabilities don't have to be repaid because their function is an intermediary of exchange.




> The value of the currency will fluctuate in both directions and will cap at a certain point. In other words, the value of the currency would remain relatively stable.


But why does the currency fluctuate up at all?  It does so because deposits > reserves.  If Deposits = reserves (in the aggregate) we would already have 100% reserve banking which we don't and have never had.




> The power grid example someone mentioned above is a perfect analogy to how an FRB works.


It is not.  Various similar analogies have been frequently proposed by pro-FRB'ers...the theme is that many commercial services are not capable of 100% capacity/utilization...so if that is ok, then so must banks be ok.

A perfect counter-analogy would be the gold-era Fed.  They could argue that it is ok for them to lend out a certain percentage of gold on deposit because on average, a certain amount of gold always stayed with the Fed.  People complain about losing money and about inflation...to which the Fed could say...well what if everybody used the laundry mat at once?  

This 100% capacity argument for FRB fails because money is different.  It's YOUR store of value...and not supposed to be someone else's store of value.  For somebody else to be able to use your money...defeats the purpose of money being money.  If all the laundromats in town went up in smoke that would be a serious economic loss.  If all my money is buried in a hole and is unspent there is no economic loss in the aggregate.  Nothing real has been destroyed...in fact without my money being in circulation prices would go down which would benefit everybody else.

----------


## rpwi

> A bank would only lose 4000 in reserves if one of their depositors wrote out a check to another person who banked elsewhere or a cash withdrawal was made.
> 
> 
> 
> 			
> 				Ummm.... Exactly my point.


That doesn't happen in the aggregate though.  If I have 1 million in reserves on hand...and notice that on average this fluctuates between .9m and 1.1m reserves...then why would .9m of the reserves be missed if loaned out?  See electronic money has to ALWAYS be sitting in somebody's bank (until withdrawn as cash but that is not a significant factor).  So even if reserves are passed around from bank to bank...they are still in the banking system...and the banking system as a whole can practice FRB.  Some banks might specialize in acquiring reserves...some in getting loans....some in selling reserves...but as whole...the banks are able to issue more deposit than reserves.




> I pay in cash all the time.


Sure...but people still prefer electronic-dollars as a whole.  According to http://www.federalreserve.gov/releas...1.htm#h41tab9c...  Paper money is at about 1 trillion dollars while electronic money (Fed Deposits) are at about 1.6 trillion.  Lot's of reserves available for banks to practice FRB without having to worry about people cashing out.




> And those electronic transactions are often times inter-bank transactions.


You bet...and that does drain reserves from a bank and fast.  But a counter-flow comes from other banks on average.




> The threat of reserves leaving because people write checks to other banks is a threat...but is counter-balanced by outsiders writing checks to my depositors.
> 			
> 		
> 
> For a total sum of 0. Meaning that the bank is still $4000 in debt.


Say there are two banks.

Bank A gets 1 million in reserves and increases this to 1.5 in deposits.

Bank B gets 1 million in reserves and increases this to 1.5 in deposits.

Does Bank A fear that depositors will take their reserves to another bank?  Perhaps a little...but not much.  Because they know that on average Bank B's customers will be writing checks to bank A's customers.  Why would you have to send reserves out of the bank when reserves are coming in?  This is why check clearing does not destroy fractional reserve banking.  Sure there will be fluctuations...which is why a bank doesn't lend out all reserves and does utilize the money market....but they are still are able to create more deposits than reserves in the aggregate and it sticks...because you and I accept deposits as money in and of itself.  We don't acquire deposits to acquire reserves.  We acquire deposits so we can buy things.  If no reserves are involved in the aggregate...we are none the wiser.




> There is a difference between taking a risk, and being suicidal. But you do have a point in the sense that the Fed enables them to do this as they are a convenient inflationary safety net for the banks to fall back on.


To an extent...  The banks are actually the ones that create most of the inflation.  When the banks are on the verge of going through a massive bank run/deposit contraction...that is very deflationary (good thing as this means things are cheaper).  So by the Fed stepping in...it would be more accurate to say that they keep prices from falling...rather than they raise prices by propping up the money market with open market injections.

----------


## Bohner

> Securities aren't Fed deposits though.  Fed deposits are liabilities to the Fed and assets to the private banks that hold them.  You could kind of think of them as national gold deposits.
> 
> So say bank X sends 1 million in gold to the Fed.
> 
> Bank X's balance sheet reads:
> 
> Assets: -= 1 million in gold
> Assets: += 1 million in Federal Reserve Gold Deposits
> 
> ...


So basically, the fed had zilch in reserves and payed the free market price. 




> When the gold-era Fed expanded the money supply...they did so by buying assets.  It could be bank loans from the Discount window or it could be t-bills from the open market.  These registered as new assets on the Balance Sheet which offset the new liabilities (deposits) the Fed created.


But they have no reserves. All they are doing at this point is printing money to buy those assets and telling the banks to $#@! off if they ask for their gold deposits that the fed owes to them. 




> From depositors.  Either as cash deposits, or from incoming cleared checks to my customers.


That's fine then. Those deposits come from people depositing money, it's not the bank just "creating" deposits. 




> It will because the bank will never just give that money away...they'll trade it for interest bearing assets.  I approach my bank and say I want to sell them 100k in t-bills.  They say ok...credit my deposit with 100k and keep the 100k t-bills.  No reserves moved during this transaction.


They can do that... But they have to keep in mind that their deposit/reserve ratio will get bigger and bigger if they keep on doing this. So they can't just do this forever or they won't have enough money in their reserves to cover their deposits. I went over this multiple times already. 




> They do it for the same reason the gold-era Fed did it. Those "Liabilities" are considered money.  See a normal liability is issued and then eventually repaid.  Deposit liabilities don't have to be repaid because their function is an intermediary of exchange.


Those liabilities are not considered money to the bank. If the bank has a liability, it's money that THE BANK owes to someone, not the other way around. 




> But why does the currency fluctuate up at all?  It does so because deposits > reserves.  If Deposits = reserves (in the aggregate) we would already have 100% reserve banking which we don't and have never had.


No, the currency fluctuates up because there is more money circulating in the economy. Even with 100% reserve banking this would occur... People save there money, there's less money circulating and prices go down. If those savers notice that prices are cheap and decide it's a good time to spend their savings on goods and services, that is inflationary. Prices start to rise again, people start to save again untill prices drop back down. Just like in an FRB system.




> It is not.  Various similar analogies have been frequently proposed by pro-FRB'ers...the theme is that many commercial services are not capable of 100% capacity/utilization...so if that is ok, then so must banks be ok.
> 
> A perfect counter-analogy would be the gold-era Fed.  They could argue that it is ok for them to lend out a certain percentage of gold on deposit because on average, a certain amount of gold always stayed with the Fed.  People complain about losing money and about inflation...to which the Fed could say...well what if everybody used the laundry mat at once?  
> 
> This 100% capacity argument for FRB fails because money is different.  It's YOUR store of value...and not supposed to be someone else's store of value.  For somebody else to be able to use your money...defeats the purpose of money being money.  If all the laundromats in town went up in smoke that would be a serious economic loss.  If all my money is buried in a hole and is unspent there is no economic loss in the aggregate.  Nothing real has been destroyed...in fact without my money being in circulation prices would go down which would benefit everybody else.


Umm... It's not your money when you deposit it in the bank, it's the bank's money. So no, the analogy is pretty dead on.

----------


## Bohner

> That doesn't happen in the aggregate though.  If I have 1 million in reserves on hand...and notice that on average this fluctuates between .9m and 1.1m reserves...then why would .9m of the reserves be missed if loaned out?  See electronic money has to ALWAYS be sitting in somebody's bank (until withdrawn as cash but that is not a significant factor).  So even if reserves are passed around from bank to bank...they are still in the banking system...and the banking system as a whole can practice FRB.  Some banks might specialize in acquiring reserves...some in getting loans....some in selling reserves...but as whole...the banks are able to issue more deposit than reserves.


If reserves fluctuate between .9m and 1.1m, it means the bank is far in the black, and could most likely afford to invest some of that on-hand capital, which is fine. Just keep some additional cash on hand in case of a rainy day. 




> You bet...and that does drain reserves from a bank and fast.  But a counter-flow comes from other banks on average.


As mentioned before, if a bank's reserves are at zero, and it's relying completely on deposits=withrawals all the time, the bank is taking a big risk that could most likely blow up in its face when a rainy day comes along where withdrawals > deposits. It's for this very reason that banks hold on to reserves. Furthermore, interest rates will have to be through the roof at this point because the bank doesn't have any money to lend.

----------


## rpwi

> So basically, the fed had zilch in reserves and payed the free market price.


Kind of...they fabricated deposits to purchase investments from the market...honest?




> But they have no reserves. All they are doing at this point is printing money to buy those assets and telling the banks to $#@! off if they ask for their gold deposits that the fed owes to them.


But if the market accepts Fed Gold deposits as money...won't this create inflation?




> That's fine then. Those deposits come from people depositing money, it's not the bank just "creating" deposits.


If banks don't create deposits...than how can a bank have more deposits on its balance sheet than reserves?  




> They can do that... But they have to keep in mind that their deposit/reserve ratio will get bigger and bigger if they keep on doing this. So they can't just do this forever or they won't have enough money in their reserves to cover their deposits. I went over this multiple times already.


I do not argue that bank can practice FRB in perpetuity.  They are constrained by various factors. In a hypothetical monopoly bank scenario...in which there are no cash withdrawals...that would have no limit on the amount of deposits a bank could creates off of reserves.  I do say that FRB can be practiced to a degree...and that this creates inflation and unnecessary risk.




> Those liabilities are not considered money to the bank. If the bank has a liability, it's money that THE BANK owes to someone, not the other way around.


Yes in theory a demand deposit is a debt from the banker to the depositor for X amount of reserves.  But it is kind of a pathetic liability...  Yielding little to no interest to the customer...it is primarily a store of value.




> No, the currency fluctuates up because there is more money circulating in the economy. Even with 100% reserve banking this would occur... People save there money, there's less money circulating and prices go down. If those savers notice that prices are cheap and decide it's a good time to spend their savings on goods and services, that is inflationary. Prices start to rise again, people start to save again untill prices drop back down. Just like in an FRB system.


There are non-FRB factors that influence inflation.  This does not stand to reason though that FRB does not itself influence inflation.




> Umm... It's not your money when you deposit it in the bank, it's the bank's money. So no, the analogy is pretty dead on.


Well not to go in circles here...  But say you, in the 1920's, deposit gold at the Federal Reserve and get a Federal Reserve Deposit credit in return.  Can the Fed say...sorry..you deposited...not it is our gold.  If the Fed creates more gold deposits than they have in gold...than that is there prerogative?  Is that honest?

----------


## rpwi

> If reserves fluctuate between .9m and 1.1m, it means the bank is far in the black, and could most likely afford to invest some of that on-hand capital, which is fine. Just keep some additional cash on hand in case of a rainy day.


How do you define a rainy day?  Markets are unpredictable...  Is it honest for a bank to keep 54% of reserves/deposits on hand...but not say 23.34523%?




> As mentioned before, if a bank's reserves are at zero, and it's relying completely on deposits=withrawals all the time, the bank is taking a big risk that could most likely blow up in its face when a rainy day comes along where withdrawals > deposits. It's for this very reason that banks hold on to reserves. Furthermore, interest rates will have to be through the roof at this point because the bank doesn't have any money to lend.


No bank now relies on 0% reserves...so that it is not super relevant.  There is always the chance that outgoing reserves will be more than incoming reserves.  Which is yes, why banks hold onto reserves.  But just because they have reserves doesn't mean they are not creating deposits.

----------


## Paul Or Nothing II

> The question is context was about the Fed during the gold era.
> 
> The fed practiced fractional reserve deposits by issuing more deposits than they had in gold.  Right???  Did that cause inflation?
> 
> A bank now issues more deposits than they have in reserves.  How is that different?  Does that cause inflation?
> 
> Yes and no as to the Fed during the gold era being a monopoly.  They weren't the only game in town where you could park your gold.  Indeed other central banks redeeming dollars for gold was what ultimately did the gold backing in 1971.  So there was always competition for 'reserves'/gold.  Yet in both the public and private sector that didn't stop fractional deposits from being created, from being accepted as money themselves and for them to cause inflation.


Oh, so central-banks are part of free banking now? 

No, it IS a monopoly because Americans weren't allowed to hold gold, as far as other countries are concerned, they knew what was going on, all along, it was hardly a secret

The thing is you don't understand the difference between central-banks & other banks; central-banks can create money, other banks can only lend money that they have acquired through deposits & such, they can't "create" it, what they do "create" is "commercial-bank-money" which are just entries to show how many times CENTRAL-BANK-MONEY has been spent into the economy, the faster the money is spent the more TEMPORARY price-inflation will be felt but that will be neutralized when loans are repaid

ONLY central-banks can create inflation in the LONG-RUN because "commercial-bank-money" is created when new loans are made through acquired deposits & when the loans are repaid, that "money" is destroyed

And the following chart perfectly shows how FRB has no effect on long-term inflation because "commercial-bank-money" (book entries) are created when loans are made & it is destroyed when loans are repaid, the problem is that you only focus on the former & ignore the latter




> You do realize that FRB has been going on since long before the fed even existed right??? 
> 
> Look at all this inflation!!!!
> 
> 
> 
> You do know that the fed has had full control over the printing press since 1971 right? Notice anything particularly interesting happening on the graph around that time?
> 
> Yet you believe FRB causes more inflation than the fed??

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## Paul Or Nothing II

> The Fed got away with this by counting the gold deposits as liabilities and the securities acquired with these deposits as assets.


Again, you've no clue what you're talking about; gold belonging to Fed against which "money" was issued, has always been on the Assets side & it still is - http://www.federalreserve.gov/releas...41.htm#h41tab9

Fed's B/S is supposed to reflect central-bank-money in circulation so Assets side shows what was bought to issue new money & Liabilities side shows where that money is at any given point in time




> That is one way...  You can receive a deposit from the bank without depositing reserves first.


NO, banks must first have money to lend it out




> While banks would probably hold a higher degree of reserves to deposits...to not practice 100% FRB is risky.


And who is anyone to judge how much risk anyone can take? Under a free banking system, people would be free to choose how much risk they want to take, whether they want to deposit with FRB & earn an interest or whether they want to deposit with a full-reserve-bank & thereby earn no interest plus pay a fee to the bank for sefe-keeping

In a free society, people should be free to engage in voluntary action as they please, they can take risks & reap rewards or bear losses, it's nobody else's business

As I've said before, there's no issue with FRB under free banking because if you deposit 10 ounces in a bank, you'll be entitled to receive 10 ounces (plus interest, if any) as per the terms of the agreement, whether the bank is full-reserve or fractional-reserve is of little relevance; what IS of relevance in a free society is FREEDOM TO CHOOSE

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## Paul Or Nothing II

> That's fine then. Those deposits come from people depositing money, it's not the bank just "creating" deposits.


But those conspiracy theories say that banks just "create deposits" so that has to be true 




> Those liabilities are not considered money to the bank. If the bank has a liability, it's money that THE BANK owes to someone, not the other way around.


He seems to have no grasp of what liabilities mean, at least with respect to banking, look, I spent 10 pages trying to make him realize that items on Fed's Liabilities side are liabilities because they don't belong to Fed - http://www.ronpaulforums.com/showthr...bilities/page4

People who base their whole worldview on conspiracy theories are blind to facts & objectivity 

Look at how "Hazak" realized his mistake & admitted it, it takes courage to do that, not to mention an open & objective mind that's not clogged with all kinds of conspiracies that hinder one's ability to look at things as they stand

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## rpwi

> Oh, so central-banks are part of free banking now?


The gold era Fed practiced fractional deposits just like private banks today do.  If you acknowledge that that created inflation, you must acknowledge that private banks creating fractional deposits creates inflation.




> No, it IS a monopoly because Americans weren't allowed to hold gold,


Before 1933, Americans were allowed to hold gold.  Was that ok?  If all the banks in the US merged into one super deposit...then would we have inflation from FRB?  




> as far as other countries are concerned, they knew what was going on, all along, it was hardly a secret


Yes and no...  Regardless...when the Fed created more deposits than they had in gold (which was redeemable at one point only to other governments), did that cause inflation?




> The thing is you don't understand the difference between central-banks & other banks; central-banks can create money,


In the 1920s, the gold was the monetary base, right?  When the Fed created deposits in excess of what they had in gold, were these deposits money?




> other banks can only lend money that they have acquired through deposits & such, they can't "create" it,


Say we we have two corporations.  Each makes a security or bond...and they swap them with each other.  Is that possible?  It that dependent on reserves/cash on hand?  Now say a bank swaps a deposit liability for a home mortgage loan...why would reserves matter, unless withdrawn or transferred to another bank?




> what they do "create" is "commercial-bank-money" which are just entries to show how many times CENTRAL-BANK-MONEY has been spent into the economy, the faster the money is spent the more TEMPORARY price-inflation will be felt but that will be neutralized when loans are repaid


Deposits are liquidity in and of themselves.  Banks create their own liquidity...yes sometimes it has to be converted into base money which puts constraints on how much deposits are created...but that doesn't negate that banks can expand the money supply (M1 and M2).  You talk about bank-money creating inflation and then neutralized when repaid (not counting interest).  You're right!  But the problem is that bank money is never repaid in the aggregate.  Therefore we are always stuck with bank money inflation.




> ONLY central-banks can create inflation in the LONG-RUN because "commercial-bank-money" is created when new loans are made through acquired deposits & when the loans are repaid, that "money" is destroyed


So when the gold-era fed created extra gold deposits, that was accounted for by your money velocity/short term inflation?  What happened when the banks demanded gold from the Fed...?  What happened to a gold-era bank in which customers demanded gold in exchange for their deposits?

I don't buy the long term inflation argument...because look at today's Fed...they can contract the MB too...so is the inflation they create just 'short term'?




> And the following chart perfectly shows how FRB has no effect on long-term inflation because "commercial-bank-money" (book entries) are created when loans are made & it is destroyed when loans are repaid, the problem is that you only focus on the former & ignore the latter


The banking system multiplies the monetary base.  So the higher the monetary base, the more banks can create money.  Plus the Fed over the years has worked to create an efficient money market and this has really propped up FRB.

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## rpwi

> But those conspiracy theories say that banks just "create deposits" so that has to be true


Can corporations 'just create bonds'?  Say there is a buyout situation...  I'm offered 10 million in corporate bonds if I exchange my shares to the company...how is this possible if the corporation didn't just 'create the bonds'?

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## rpwi

> The Fed got away with this by counting the gold deposits as liabilities and the securities acquired with these deposits as assets.
> 			
> 		
> 
> Again, you've no clue what you're talking about; gold belonging to Fed against which "money" was issued, has always been on the Assets side & it still is


Where have I argued that gold has not or is not being held as an asset to the Fed?  You need to read more carefully.

There are two transactions of note for the gold era Fed.

One is which a bank deposits gold at the Fed.  The Fed counts the gold as an asset the gold deposit as a liability.  This is fine.

Then there is the transaction in which the Fed creates gold deposits in excess of what they have in physical gold.  This is not so fine.  The Fed would have created the gold deposit (liability) and balanced this with the assets they acquired (say t-bills).  Sense there are more gold deposits than gold...the Fed has practiced in essence fractional banking and created fraud/inflation just likes banks do.




> NO, banks must first have money to lend it out


The bank only needs to have reserves to meet average withdrawals and average check clearing.  Again with my bond example.  You're saying a corporation would have to have cash (aka reserves) on hand before they created a bond to trade for some shares?




> And who is anyone to judge how much risk anyone can take?


The depositor.  The ponzi scheme victim.  In present day context...the tax payer who has to bailout banks.




> Under a free banking system, people would be free to choose how much risk they want to take, whether they want to deposit with FRB & earn an interest or whether they want to deposit with a full-reserve-bank & thereby earn no interest plus pay a fee to the bank for sefe-keeping


FRB is not a practical nor feasible business model without external aid.  No more than a ponzi scheme is.   In a free market, individuals seek to maximize personal gain, right?  So why would individuals want to leave reserves in a bank overbooked by reserves.  They know if they withdrawal now...they will be fine.  If they withdrawal at the end...they will lose their money.  So logically, a profit maximizing individual would not store their liquidity with an entity that can't meet liquidity claims in the aggregate.




> In a free society, people should be free to engage in voluntary action as they please, they can take risks & reap rewards or bear losses, it's nobody else's business


Should ponzi schemes be outlawed?




> As I've said before, there's no issue with FRB under free banking because if you deposit 10 ounces in a bank, you'll be entitled to receive 10 ounces (plus interest, if any) as per the terms of the agreement, whether the bank is full-reserve or fractional-reserve is of little relevance; what IS of relevance in a free society is FREEDOM TO CHOOSE


A free market FRB system is a joke.  If we remove government aid to the banking system (which we should do), the banks collapse and take down your deposits, my deposits, the deposits of our business and more.  If this happens many people will be hurt and there will be the call to for government to step in and aid the banks.  It is only with understanding that FRB is fraud that we can free ourselves of this situation.  Government could create a system in which each year reserve ratios increase...until they reach 100%.  They could also create a one time system in which the public could trade in their bank deposits for Fed deposits from the banks that inevitably go bankrupt and the Fed could collect the interest on the liquidated assets.  Not the greatest situation, but at least we have the bank and it's FRB out of the equation.  It would be one form of money for another so it wouldn't be inflationary.

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## Paul Or Nothing II

> Deposits are liquidity in and of themselves.  Banks create their own liquidity...yes sometimes it has to be converted into base money which puts constraints on how much deposits are created...but that doesn't negate that banks can expand the money supply (M1 and M2).  You talk about bank-money creating inflation and then neutralized when repaid (not counting interest).  You're right!  But the problem is that bank money is never repaid in the aggregate.  Therefore we are always stuck with bank money inflation.


Ok, let's say there's 1 trillion in central-bank-money, reserve-ratio is 10% so let's say that money can be spent into the economy upto 10 trillions through the commercial banks' process of re-depositting & re-lending, now, central-bank says no more central-bank-money will ever be issued, now, considering that economy still continues to grow steadily, there would an average deflation, the point is there's still FRB, they are creating & destroying "commercial-bank-money" (book entries) but there would be no average LONG-TERM inflation because monetary base isn't increasing at all so again, all long-term inflation comes from base-money, the base-money could be central-bank-money or gold or whatever, long-term inflation has nothing to do with FRB, FRB merely reacts with short-term demand for money




> FRB is not a practical nor feasible business model without external aid.  No more than a ponzi scheme is.   In a free market, individuals seek to maximize personal gain, right?  So why would individuals want to leave reserves in a bank overbooked by reserves.  They know if they withdrawal now...they will be fine.  If they withdrawal at the end...they will lose their money.  So logically, a profit maximizing individual would not store their liquidity with an entity that can't meet liquidity claims in the aggregate.


Whether it's practical or feasible or not is upto FRB bankers & their depositors to decide, so long as the bank informs its depositors that it's an FRB, it's none of anyone's business otherwise it's like saying people shouldn't be able to 

Again, an FRB bank which has largely made sound loans is completely capable of meeting all its depositors' claims but just not all at the same time, which means it's may be ILLIQUID at times, not necessarily insolvent in the truest sense & there are plenty of explanations by Austrian Economists on how an FRB bank can negotiate with its depositors BEFOREHAND with regards to subject to availability of funds clause by offering them a higher interest for the period they were unable to access the funds immediately & so on




> If we remove government aid to the banking system (which we should do), the banks collapse and take down your deposits, my deposits, the deposits of our business and more. If this happens many people will be hurt and there will be the call to for government to step in and aid the banks. It is only with understanding that FRB is fraud that we can free ourselves of this situation.


This is your problem, you criticize things without even understanding how they work; what you're arguing is like arguing that under free market there will be poor people so we can't have free market & we must have welfare-State instead of recognizing that mostly it's the lack of free market that increases the numbers of poor people more than anything else; the problem is that you are misplacing the cause & effect, banks take on bigger risks, make bad loans & thereby bigger collapse occurs BECAUSE of government intervention be it regulations, Fed, FDIC & security of bailouts, Housing Bubble is a prime example where government pumped in excess credit, forced banks to make bad loans through bad legislation, Freddie & Fannie created the moral hazard & bailouts were almost inevitable; these aren't problems associated with fractional reserve free banking but with government controlled banking

As I've said before, *under free banking*, an FRB which has largely made sound loans is fully capable of repaying its depositors, it may be ILLIQUID at times but not necessarily insolvent & negotiations will be made with the depositors while opening accounts with them




> A free market FRB system is a joke.


Yes, such a bad joke that idiots like F A Hayek explicitly supported Fractional Reserve Free Banking; it's a joke to those who don't understand it as much as free markets are a "joke" to the liberals but the truth eludes them

As I've said, *under free banking*, if you put 10 ounces into a bank then you're entitled to receive that (plus interest, if any) as per the terms of the agreement, whether it's a FRB or full-reserve bank & if you don't trust banks then keep your money in your house, simple as that

Bottomline - The difference between fractional & full reserve banking *under free banking system* is that with a full-reserve-bank, you can access your demand-deposit any time you want since they don't lend it so you get no interest & pay a safe-keeping fee; with FRB since they lend their demand-deposits as well, you mayn't be able to access it any time you want but only when bank has funds available & for this inconvenience, you receive an interest from them & pay no fees; in either case, there are risks only if the bank has made a lot of bad loans, if not, then both are reliable so long as they have made good loans

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## rpwi

> Ok, let's say there's 1 trillion in central-bank-money, reserve-ratio is 10% so let's say that money can be spent into the economy upto 10 trillions through the commercial banks' process of re-depositting & re-lending, now, central-bank says no more central-bank-money will ever be issued, now, considering that economy still continues to grow steadily, there would an average deflation, the point is there's still FRB, they are creating & destroying "commercial-bank-money" (book entries) but there would be no average LONG-TERM inflation because monetary base isn't increasing at all so again, all long-term inflation comes from base-money, the base-money could be central-bank-money or gold or whatever, long-term inflation has nothing to do with FRB, FRB merely reacts with short-term demand for money


Inflation would not climb (in general) because banks would not have the Fed Funds available to create deposit money.  Given a stringent reserve ratio and a fixed supply of base money...yes...that will probably put the brakes on inflation.  But the point remains if the economy grows and prices go down (a great thing)...they will not go down as much as they would, had we no FRB.

If the government were to license a counterfeiter to create 1 million dollars (but only that much), we would experience net-inflation from that.  Sure...if the economy outgrew the money supply, we could experience dropping prices...but not as much had the counterfeiter not done his thing.  The crime of FRB is mostly created in the past...and what we need now is proper restitution.  When the supply of deposit money grows, that represents new crimes/inflation/mal-investment.

One caveat...I would not say absolutely, that the money supply (as broadly defined) would shrink if FRB were locked as was the base money supply.  There are what are called near demand deposits...and these could grow to compensate for the lack of growth in deposits.  In fact anything can be money...it's what we accept as means of exchange and and as a store of value.  Stocks could be money...sea-shells could be money...  Deposit money is special because it is so ingrained in our culture, it has legal tender support and it clearly promises liquidity on demand which is not possible in the aggregate.




> Whether it's practical or feasible or not is upto FRB bankers & their depositors to decide, so long as the bank informs its depositors that it's an FRB, it's none of anyone's business otherwise it's like saying people shouldn't be able to


Well...if the public properly understood FRB and chose to participant...then yes...that would be their choice.  The key is properly understanding though.  That they chose to participate in FRB demonstrates that they do not understand the system though.  I mean I can choose to buy watered-gas in a free market...but the surest measure of whether I understood what I bought, was whether I actually purchased the watered-gas.




> Again, an FRB bank which has largely made sound loans is completely capable of meeting all its depositors' claims but just not all at the same time, which means it's may be ILLIQUID at times, not necessarily insolvent in the truest sense & there are plenty of explanations by Austrian Economists on how an FRB bank can negotiate with its depositors BEFOREHAND with regards to subject to availability of funds clause by offering them a higher interest for the period they were unable to access the funds immediately & so on


A clearly contracted system which spelled out how/why/when funds would be unavailable would be available would be an improvement over what we have now, but would not be satisfactory in my opinion.

I mean what you are proposing is that demand deposits could be converted to time deposits at the discretion of the bank.  I can't pay the bills in time-deposits, so I'm not sure how popular this would be in the aggregate.  In a liquidity crunch (which would happen) demand deposits would be their most valuable...yet would be least available to customers.  A bank makes money again by mismatching low-yield short term liabilities to higher-yielding longer term assets.  So the problem is greater than just insolvency...it is bankruptcy.  While a bank could perhaps justify no interest on demand deposits, they couldn't for time deposits.  




> If we remove government aid to the banking system (which we should do), the banks collapse and take down your deposits, my deposits, the deposits of our business and more.
> 			
> 		
> 
> This is your problem, you criticize things without even understanding how they work; what you're arguing is like arguing that under free market there will be poor people so we can't have free market & we must have welfare-State instead of recognizing that mostly it's the lack of free market that increases the numbers of poor people more than anything else;


There is a justice to rewarding smart decisions and to letting those who make dumb decisions suffer the natural consequences.  I think fraud is another matter though.  The FRB is committing fraud because their 'demand deposits' are not demand deposits.  When Corzine raided the gold and silver accounts to finance his speculating...and robbed them of their ware-house receipt claims...wasn't that fraud?  




> the problem is that you are misplacing the cause & effect, banks take on bigger risks, make bad loans & thereby bigger collapse occurs BECAUSE of government intervention be it regulations, Fed, FDIC & security of bailouts, Housing Bubble is a prime example where government pumped in excess credit, forced banks to make bad loans through bad legislation, Freddie & Fannie created the moral hazard & bailouts were almost inevitable; these aren't problems associated with fractional reserve free banking but with government controlled banking


These were absolutely caused by FRB.  The government certainly acted as a catalyst and shares a fair degree of blame...especially so, as FRB can't really survive in a modern economy without government aid.




> As I've said before, *under free banking*, an FRB which has largely made sound loans is fully capable of repaying its depositors, it may be ILLIQUID at times but not necessarily insolvent & negotiations will be made with the depositors while opening accounts with them


It would absolutely be insolvent.  Insolvency means you don't have the case to meet payments...even though your balance-sheet may show net-equity.

If the banking system in the aggregate has x in reserves, 10x in deposits and 9x in financial assets...this is not a sustainable situation.  It can only perpetuate by clients rolling over their deposits or if the banking system obtains external non-banking funds during a liquidity crisis.   And a liquidity crisis would absolutely happen.  It's more than just you and I that deposit in a bank.  Savvy investors, corporations, and foreign governments do as well.  When they see deposits overbooked 10 to 1...and no Shepard to guard the sheep from the wolves...they WILL withdrawal and this WILL create a positive feedback loop that create a liquidity crisis and a banking collapse.  Could a bank sell assets to regain solvency?  Doubtful...as during a liquidity crisis, everybody is selling assets and there is less money around...so you would be selling assets for a pittance and this would lead to bankruptcy.  

In fact...when other smaller countries practice FRB...bigger financial institutions can actually expose and crack the egg of FRB to consume the yolk.  All they have to do is pull a lot of money out of the banking system...watch interest rates soar as the banks scramble for scarce reserves...then they re-insert their money and enjoy much higher yields than they would have before.  The banking system recovers....yields go down...and the speculators sell their high-yield assets for big bucks.

They key is not to have a Sheppard (FDIC/Open Market) to protect the sheep...it's not to have the sheep at all.  IMO the best possible reform we can take would be to enact a national depository...which negates the need for bank deposits.  If we have 1000 dollars in fed funds...we HAVE 1000 dollars in fed funds and they aren't being loaned out or over-promised irresponsibly.  There is no logical need to have our money be loaned out behind our backs...and direct access to fed funds is a perfect solution to our FRB mess.  (see my other thread on this)




> Bottomline - The difference between fractional & full reserve banking *under free banking system* is that with a full-reserve-bank, you can access your demand-deposit any time you want since they don't lend it so you get no interest & pay a safe-keeping fee; with FRB since they lend their demand-deposits as well, you mayn't be able to access it any time you want but only when bank has funds available & for this inconvenience, you receive an interest from them & pay no fees; in either case, there are risks only if the bank has made a lot of bad loans, if not, then both are reliable so long as they have made good loans


I don't think the public would be as receptive to demand deposits being sporadically available as you would imagine.  You look to pay rent...and surprise!  Because the bank over-booked your money 10-1...your money won't be available for another month.  So you get kicked out while you try to explain the benefits of free-market banking to the landlord...  I doubt the bank would be able to borrow the reserves from other banks to finance your liquidity...as everybody will have scarce reserves.  Sure the bank could say...well...we can't meet your deposits...but we'll be able to provide you the money in 10 years when our home mortgage balloon payments come in!

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