Can economies grow without Fractional Reserve Banking?

[nobody's_hero]

Well, I recently posted a topic in General Politics forum about Georgia's HB-3, sound money bill. Part of that bill includes a transfer back to gold/silver-backed currency, and the other part attacks the fractional reserve banking system.

I'm already told by naysayers that a return to gold/silver will cause massive deflation and crash the economy (mostly folks who refuse to admit that the dollar has lost 95% of its purchasing power since 1913).

Now I'm told ''economies can't grow without fractional reserve banking.'' Thus, the poll question. I'd like to know whether or not economies have ever grown without fractional reserve banking.

My first inclination is that fractional reserve banking is inherently fraudulent. You can't loan out money that doesn't exist on a 9-to-1 ratio and not ultimately crash the economy via inflationary effects, but I was wondering what others had to say about the system.

Follow up question:
Is there such a thing, or has there ever been, a non-fractional reserve banking system, and if so, how did it work?

 

[sratiug]

A bank is a place that stores money. Therefore a fractional reserve bank is a misnomer, it is not a bank.

 

[TonySutton]

Did any economy ever grow before Fractional Reserve Banking? the answer is yes

Fractional Reserve Banking might allow for more robust growth, but robust growth often equals a bubble.

 

[sratiug]

Saying an economy can't grow without debt, is that the same as saying an economy can't shrink without savings?

 

[newbitech]

yep, maybe not as fast, chaotic, and unpredictable. Slow, steady, and predictable is fine with me. Banking is not a requirement for growth in macro economies.

 

[Mogambo Guru]

yep, maybe not as fast, chaotic, and unpredictable. Slow, steady, and predictable is fine with me. Banking is not a requirement for growth in macro economies.

I agree, and I personally think it would lead to much more efficient growth... instead of growing just to keep growing (mostly because of our current monetary system) by adding more debt, we would be growing as a result of effecient/productive endeavors. In my opinion, inflation is what allows inefficient growth, and its also what keeps us going further and further into debt.

Another question may be, do we actually NEED to keep expanding?? Is it to our benefit? (think about our resources)The only reason we currently NEED to keep expanding is because of the harnesses of debt and our money created as debt system. If we dont keep expanding, it collapses.. In a real sound economy that would not be the case.

 

[hugolp]

Fractional Reserve banking without a central bank is not bad and does not generates bubbles, as history and theory proves. In fact fractional reserve without a central bank accomodates changes in the demand for money and transmit savings into investment efficiently, favoring sustainable growth.

The problem is the central bank. When you put a central bank, the fractional reserve banks dont need to behave and can expand credit without customer control because the central bank will cover them. There is where you get the big credit expansions and the bubbles.

 

[Fox McCloud]

Full-reserve banking != no loans.

This is something that most don't seem to get yet, at least, in the mainstream--there's currently a battle over at Wikipedia...between a Mises.org individual and a number of standard wikipedians over just this--the wikipedians are citing mainstream textbooks, whiele the Misesean is citing a number of papers (some mainstream)...oddly enough, they're very resistant to the idea that full reserve banking could mean there would still be loan...no idea why.


In any event, under full reserve banking, you could still make loans, but they'd have to be made via time deposits, such as CDs; this would force the interest rate to reflect real time preference as opposed to a function of money supply, as it currently is.

The problem is the central bank. When you put a central bank, the fractional reserve banks dont need to behave and can expand credit without customer control because the central bank will cover them. There is where you get the big credit expansions and the bubbles.

Well...you'd also have to remove deposit insurance as well to be able for them to "behave themselves", or else they'll just continue being "stupid" with their money (thanks to prisoner's dilemma).

That said, under such as system, as you describe, you'll likely end up having a private central bank/clearing house (much different than public central banks with a legal monopoly), which makes it very difficult to have a large amount of fractional reserves---in addition, it makes competing currencies viable by making them trade at par with each other (so much for "monetary chaos" under "competing currencies!").

 

[hugolp]

FWell...you'd also have to remove deposit insurance as well to be able for them to "behave themselves", or else they'll just continue being "stupid" with their money (thanks to prisoner's dilemma).

Yep. FDIC had to go too. And any other regulation for that matter.

That said, under such as system, as you describe, you'll likely end up having a private central bank/clearing house (much different than public central banks with a legal monopoly), which makes it very difficult to have a large amount of fractional reserves---in addition, it makes competing currencies viable by making them trade at par with each other (so much for "monetary chaos" under "competing currencies!").

There are even examples in history of such thing: Suffolk bank.

 

[enjerth]

What do you call it when the growth in a fractional-reserve system collapses and regresses? When it does, do you consider the growth worth the crash? Do you even really still call it growth? I would call such growth a symptom of a disease.

Fractional-reserve banking is a parasite that grows with its host. It may stimulate the host, but when the host faces illness, the parasite's demands threaten to kill the host. Is it worth it?

Growth in a system absent of fractional-reserve banking would be much slower, but would be honest and more stable growth.

 

[Zippyjuan]

Full-reserve banking != no loans.

This is something that most don't seem to get yet, at least, in the mainstream--there's currently a battle over at Wikipedia...between a Mises.org individual and a number of standard wikipedians over just this--the wikipedians are citing mainstream textbooks, whiele the Misesean is citing a number of papers (some mainstream)...oddly enough, they're very resistant to the idea that full reserve banking could mean there would still be loan...no idea why.


In any event, under full reserve banking, you could still make loans, but they'd have to be made via time deposits, such as CDs; this would force the interest rate to reflect real time preference as opposed to a function of money supply, as it currently is.




Well...you'd also have to remove deposit insurance as well to be able for them to "behave themselves", or else they'll just continue being "stupid" with their money (thanks to prisoner's dilemma).

That said, under such as system, as you describe, you'll likely end up having a private central bank/clearing house (much different than public central banks with a legal monopoly), which makes it very difficult to have a large amount of fractional reserves---in addition, it makes competing currencies viable by making them trade at par with each other (so much for "monetary chaos" under "competing currencies!").

If you go with the absolute definiton of Fractional Reserve Banking which says a bank can loan out a percent (the fractional part) of their deposits then a truely non-fractional reserve could be one of two things- either have no restrictions on the portions of deposits they can lend out (ie a zero reserve bank) or they can loan out none of their deposits (a full reserve bank required to keep ALL deposits on hand).


Interestingly, we are pretty close to what you suggest could happen as a "partially fractional reserve banking system".
I don't have the time to pull up the numbers right now but how I calculated it was to take the Fed money supply definitions and measurements and calculate what percent of all deposits at banks were in time deposits vs those in demand accounts (like say checking) and it came out to be about ten percent were in the latter- which coresponds with today's reserve requirement so basically we are where you would like things to be right now.

 

[hugolp]

Interestingly, we are pretty close to what you suggest could happen as a "partially fractional reserve banking system".
I don't have the time to pull up the numbers right now but how I calculated it was to take the Fed money supply definitions and measurements and calculate what percent of all deposits at banks were in time deposits vs those in demand accounts (like say checking) and it came out to be about ten percent were in the latter- which coresponds with today's reserve requirement so basically we are where you would like things to be right now.

But this is only circumstancial because the banks are not lending and the Fed has flooded them with reserves. Most of the time under a central bank system the ratio is way lower.

 

[Travlyr]

Fractional Reserve Farming

Fractional reserve is a calculated risk. It may be okay as long as it is carefully managed. But, sometimes the risk is not controllable, so then the managers must pay the piper when due - unless of course the manager has unlimited backing (money out of nothing using a money printing press).

What would happen if Elevators were allowed to fractional reserve their grain?
​

A farmer raises 10,000 bushels of wheat and puts it in a grain bin, then his honest work (mixing land and labor) has netted him a valuable asset. 10,000 bu/wheat = ~ $75,000 at today's prices.

They could try fractional reserve like the banks do...​

Now if the farmer stored his wheat in a 10% fractional reserve CO-OP, then the CO-OP would give the farmer a deposit receipt for 10,000 bu. wheat and loan out 9000 bu to another Elevator. So in effect they keep a 10% fraction on reserve (1000 bu.) and pocket $7.50 x 9000 bu = $67,500

The Elevator who borrowed the 9000 bu. of wheat could store 900 bu. and loan 8100 to another fractional reserve Elevator. They pocket $7.50 x 8100 bu = $60,750.

• Fractional reserve Elevator #3 - store 810 bu and loan 7290 bu = $54,675
• Fractional reserve Elevator #4 - store 729 bu and loan 6561 bu = $49,207
• Fractional reserve Elevator #5 - store 656 bu and loan 5905 bu = $44,287
• Fractional reserve Elevator #6 - store 590 bu and loan 5315 bu = $39,859
• Fractional reserve Elevator #7 - store 531 bu and loan 4784 bu = $35,880
• Fractional reserve Elevator #8 - store 479 bu and loan 4305 bu = $32,288
• Fractional reserve Elevator #9 - store 430 bu and loan 3875 bu = $29,063
• Fractional reserve Elevator #and on and on...

Now the Grain Banks have grossed more than $413,509 on loans of 100,000 bu. of wheat (of which 90,000 bu. does not really exist) ... and since wheat loans do not have an interest factor... we'll ignore those profits.

The problem comes in when the farmer unexpectedly stops by the CO-OP and wants to withdraw his grain. There is only 10% available. It is even a bigger problem if next year's crop is destroyed by hail. Nobody gets their wheat... ugh...

So what do you do? The banker calls the Federal Reserve Chairman for some quantitative easing. But the CO-OP has a bigger problem. How do you create wheat out of thin air? The CO-OP has to call Jim Casey at The Zeitgeist Movement to see if their Super Computer can produce 90,000 bushels of wheat out of nothing. I'm guessing that the technology is not really developed, yet.

The Elevators have made out like bandits ... just like the bankers.

Fractional reserve did not create any more wheat ... only more profits for the Elevators. It's not honest work.

 

[Fox McCloud]

If you go with the absolute definiton of Fractional Reserve Banking which says a bank can loan out a percent (the fractional part) of their deposits then a truely non-fractional reserve could be one of two things- either have no restrictions on the portions of deposits they can lend out (ie a zero reserve bank) or they can loan out none of their deposits (a full reserve bank required to keep ALL deposits on hand).

a no-reserve ratio is still filed under fractional reserve banking; whenever I or anyone else suggest that an economy could do well under a system of "no fractional reserves" its safe to assume that they mean a full-reserve system...I'm not sure if I've ever seen a "no fractional reserve banking economy" mentioned in the same breath as "zero reserves"--ever.

Interestingly, we are pretty close to what you suggest could happen as a "partially fractional reserve banking system".
I don't have the time to pull up the numbers right now but how I calculated it was to take the Fed money supply definitions and measurements and calculate what percent of all deposits at banks were in time deposits vs those in demand accounts (like say checking) and it came out to be about ten percent were in the latter- which coresponds with today's reserve requirement so basically we are where you would like things to be right now.

I'm not really sure where you're going with this--I'm not advocating a partially fractional reserve system at all, nor do I even like the idea of it--could you please clarify, a bit?

 

[angelatc]

In any event, under full reserve banking, you could still make loans, but they'd have to be made via time deposits, such as CDs; this would force the interest rate to reflect real time preference as opposed to a function of money supply, as it currently is.

HOw does that work? I put $1000 into a CD. You agree to pay me 5% interest on that $1000. Then you loan out $100 at 10%. So technically, I only have $900 in my CD, but am getting paid interest on $1000. Isn't that fractional reserve banking?

 

[Zippyjuan]

I'm not really sure where you're going with this--I'm not advocating a partially fractional reserve system at all, nor do I even like the idea of it--could you please clarify, a bit?

I was responding to this:

In any event, under full reserve banking, you could still make loans, but they'd have to be made via time deposits, such as CDs; this would force the interest rate to reflect real time preference as opposed to a function of money supply, as it currently is.

Lending against time deposits would be a "partial reserve" bank- though you choose not to call it that. It is not technically a full reserve banking system if you allow that. If you only allowed to lend against time deposits, this would mean you could loan out about 90% of deposits (90% of funds in banks are in time deposits according to the money measurements I took from Fed figures)- which is the same as having a ten percent reserve requirement which is in place today.

 

[Fox McCloud]

HOw does that work? I put $1000 into a CD. You agree to pay me 5% interest on that $1000. Then you loan out $100 at 10%. So technically, I only have $900 in my CD, but am getting paid interest on $1000. Isn't that fractional reserve banking?

In a CD, they loan out all of the money you put into a CD (AFAIK), with the stipulation you can't withdraw it without having penalties.

 

[hazek]

Well, I recently posted a topic in General Politics forum about Georgia's HB-3, sound money bill. Part of that bill includes a transfer back to gold/silver-backed currency, and the other part attacks the fractional reserve banking system.

I'm already told by naysayers that a return to gold/silver will cause massive deflation and crash the economy (mostly folks who refuse to admit that the dollar has lost 95% of its purchasing power since 1913).


Now I'm told ''economies can't grow without fractional reserve banking.'' Thus, the poll question. I'd like to know whether or not economies have ever grown without fractional reserve banking.

My first inclination is that fractional reserve banking is inherently fraudulent. You can't loan out money that doesn't exist on a 9-to-1 ratio and not ultimately crash the economy via inflationary effects, but I was wondering what others had to say about the system.

Follow up question:
Is there such a thing, or has there ever been, a non-fractional reserve banking system, and if so, how did it work?

I suggest you read: 100% Reserve Gold Standard Banking and Loans - The Mises Community

And in fact there's a real life example of an economy slowly starting to grow without banking at all right now: bitcoin.org

 

[nobody's_hero]

Full-reserve banking != no loans.

In any event, under full reserve banking, you could still make loans, but they'd have to be made via time deposits, such as CDs; this would force the interest rate to reflect real time preference as opposed to a function of money supply, as it currently is.

That's along the lines of what I was thinking.

CD's and similar 'contracts' would have to be in effect but I think they would work. Of course, I guess that would make the banks still fractional with their reserves. A wise bank would probably keep half of its depositors' money in a vault and use the other half to try to make a profit. Loan interest rates would rise, but so would savings rates (which means it would actually be worthwhile to start saving money again). As long as the system doesn't involve repeatedly loaning out money at a 9-to-1 (or more) ratio, it would be a better system.

CD's benefit both the bank and the depositors, since banks know they have a specific time frame to utilize the capital in savings to earn interest on a loan, and depositors know that the money won't be available to them for 6-12 months or more. The benefit is in this mutual understanding. Because CD's have early withdrawal penalties, there's no depositing one week's paycheck and then withdrawing the money the very next week, like what we see now (which isn't a big deal to anyone since the bailouts have demonstrated that banks don't even need depositors to loan the funny-money, they can just get it from the Fed).

 

[nobody's_hero]

Thanks to all for the replies.

Keep 'em coming if you have something to add.