Can economies grow without Fractional Reserve Banking?

[Travlyr]

Can economies grow without fractional reserve banking?

I wanted to elaborate on my previous post because fractional reserve is stealing ... plain and simple. Of course economies grow without theft. The real problem is that without a system of theft, everybody would have to do some work. Legal stealing is easier than working. Without theft it would be tough to convince people to pay a banker enough money to make it worth his time to store electronic digits on his computer. Fractional reserve banking keeps the price of goods so high that borrowing money from the bank is the only way to fund a major purchase. Fractional reserve banking keeps the debtor society perpetuated.

Without fractional reserve theft producers would be the ones raking in the dough for their investments of time, labor, and resources. In my example above, without fractional reserve the farmer's wheat would be worth $41.35 per bushel. His 10k bu. of wheat (which he bought, or leased, the land, found the seed, planted the seed, watered the plants, guarded against predators, insured against hazards, invested in equipment, risked injury, risked employee liability, harvested and hauled his grain... his take "market price" of $7.50 per bushel. All the Grain Banks did was store 10% of the grain, inflated the price to more than $41.35/bu., pocketed the loot, and passed out bonuses.

Without fractional reserve ... the economy grows as the exact same rate. The only difference is in who profits. Fractional reserve... bankers profit. 100% honest ... producers profit.

 

[hugolp]

I wanted to elaborate on my previous post because fractional reserve is stealing ...

How is fractional reserve stealing?

If I go to a bank and deposit a $100 with the agreement that they can loan them out and that I can remove them from the bank at any time, who is stealing from who?

 

[sratiug]

How is fractional reserve stealing?

If I go to a bank and deposit a $100 with the agreement that they can loan them out and that I can remove them from the bank at any time, who is stealing from who?

If they loan them out, you cannot remove them at any time.

 

[hugolp]

If they loan them out, you cannot remove them at any time.

But the bank is not loaning all the money out, they keep a "buffer", a reserve, to pay the people that want to remove the money.

I dont see how its stealing.

 

[TomtheTinker]

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

Fractional reserve banking doesn't create robust growth it creates reckless expansion. Something tells me you already know this.

 

[sratiug]

But the bank is not loaning all the money out, they keep a "buffer", a reserve, to pay the people that want to remove the money.

I dont see how its stealing.

Don't you mean, they keep a reserve capable of paying back a few people to prevent a bank run, but if more than a few remove their money everyone else's money is gone.

A bank is a place to store things. A casino is where you go to gamble your current money on a chance to make more money.

 

[hugolp]

Don't you mean, they keep a reserve capable of paying back a few people to prevent a bank run, but if more than a few remove their money everyone else's money is gone.

A bank is a place to store things. A casino is where you go to gamble your current money on a chance to make more money.

Give the name you like it. I really think some of you are wrong in blaming fractional reserve. Free banking fractional reserve is a completely different system than central banking fractional reserve. The problem is the central bank.

As for your first sentence, history proves that fractional reserve, without government regulations creating moral hazards, are very stable.

To understand the ideas of free banking I like this pdf by George Selgin: http://www.independent.org/publications/tir/article.asp?a=774

 

[hugolp]

repetead

 

[sratiug]

Give the name you like it. I really think some of you are wrong in blaming fractional reserve. Free banking fractional reserve is a completely different system than central banking fractional reserve. The problem is the central bank.

As for your first sentence, history proves that fractional reserve, without government regulations creating moral hazards, are very stable.

To understand the ideas of free banking I like this pdf by George Selgin: http://www.independent.org/publications/tir/article.asp?a=774

Let's say I want to open a bank. And let's pretend again, I have 100 million dollars of my own money, you know, money that I own. I can build a large building with a large steel vault and alarms and guards. I can allow people to store their money in my vault, and I can loan my own money out, and I can call this business a bank. Then if I lose my money, I may be broke, but my customers still have their money. That is how any real bank would work. There are no reserve requirements on a real bank, a real bank can loan all the money that it owns. If a bank doesn't own money, why would anyone trust it with their money.

 

[Fox McCloud]

How is fractional reserve stealing?

If I go to a bank and deposit a $100 with the agreement that they can loan them out and that I can remove them from the bank at any time, who is stealing from who?

Because there is a dual claim to the same resource that didn't otherwise exist; the bank, by its very nature, has more money loaned out than it can provide to its customers--therefore, there is a double claim to some of the money that is held, which, as pointed out by Thorsten Polleit, Hoppe, and Block, is inherently fraudulent. A perfect example is what someone posted here in regards to the grain elevator.

further reading: http://mises.org/daily/4880/The-Faults-of-FractionalReserve-Banking

also, as pointed out by Rothbard, money is literally created out of thin air with FRB---the issue becomes even more problematic the further cartelized the banking system is; if the bank can guarantee that the person who will receive the loan money (not to be confused with who takes out the loan) is also in the same exact banking system (ie: same company), they can make a loan up to 9 times that what is held in reserves (thankfully, despite the Fed, we do have some competition, so this isn't commonplace).

 

[mczerone]

Fractional Reserve Banking: The practice of not keeping 100% of demand deposit funds available for immediate withdrawal.

There is nothing inherently illicit about this practice, no more than any other type of futures contract of uncertain duration. The problem that is plaguing the banking industry today is that there is a single central bank that endorses the practice and (1) makes its negative effects felt economy wide, and (2) ensures that its positive effects are felt only by those closest to the central bank.

To imagine free market FRB, one must first remember that depositors would have choices with what to do with their money. Some banks would offer more FRB, some would offer 100% demand reserves (and probably with a fee for maintaining the account). The bankers, with prior notice to the depositors, would be free to decide to take some (small) portion of the deposits to invest, either over a fixed term, or itself on a "demand" basis. The contract might read that "only 50% of withdrawal requests over $100,000 may be honored on demand, the balance available with 2 days notice." There is nothing wrong with this. The bankers who successfully find investments will be better rewarded, and may be able to extend the FRB a bit further. But this would depend on the depositor's willingness to open accounts with the bank, or to take their money to safer deposits.

FRB in its current state is a problem, but its effects are just a symptom of central planning, not of the practice itself. Imagine you jog 3 miles a day, everyday. But today you have a bad flu and you are dehydrated. Running 3 miles could literally kill you. But that doesn't mean that running 3 miles a day should be outlawed when you are healthy. In fact, running 3 miles a day might be a benefit to your system if you are not suffering from a debilitating illness. The state central banking system is the illness, FRB is running 3 miles a day. It could kill the entire economy in its current state, but with a healthy economy there may even be some benefit to FRB.

 

[mczerone]

Because there is a dual claim to the same resource that didn't otherwise exist; the bank, by its very nature, has more money loaned out than it can provide to its customers--therefore, there is a double claim to some of the money that is held, which, as pointed out by Thorsten Polleit, Hoppe, and Block, is inherently fraudulent. A perfect example is what someone posted here in regards to the grain elevator.

further reading: http://mises.org/daily/4880/The-Faults-of-FractionalReserve-Banking

also, as pointed out by Rothbard, money is literally created out of thin air with FRB---the issue becomes even more problematic the further cartelized the banking system is; if the bank can guarantee that the person who will receive the loan money (not to be confused with who takes out the loan) is also in the same exact banking system (ie: same company), they can make a loan up to 9 times that what is held in reserves (thankfully, despite the Fed, we do have some competition, so this isn't commonplace).

The problem isn't "dual claims to the same money". While the money is deposited there is no "claim" to it. There is merely the possibility of a claim. If the banker is able to fund a productive enterprise which returns 10% on the principle before the depositor demands the money, he will be able to share the interest with the depositor. If the banker can't meet the demand of the depositor, the depositor becomes a past-due creditor. The bank will fail if it cannot successfully meet the demands put upon it, just as with a grain elevator that cannot replenish its store of grain through wise investing. But those who can invest successfully have every right to tell their depositors that they will be seeking investments with the deposited funds, and that they run a risk by depositing there.

This is one area where I strongly disagree with the Rothbard camp who are essentially saying that risk should be "outlawed".

ETA: those against FRB, are you also in favor of outlawing the issuance of promissory notes that are payable on demand? What about options contracts? What about output/requirements contracts? All these are futures contracts that have uncertainty inherent in what shall be paid to whom, and when. If you would say that any of these are legitimate, what distinguishes them from FRB?

 

[Travlyr]

Let me see if I understand.
In a free market, fractional reserve banking would be a calculated risk based on a contractual agreement. If the risk failed to achieve the desired results, then whoever took the risk would lose their investment.

As it now stands, whoever takes the risk is rewarded with taxpayer funds. In other words, there is no risk because of the bailout feature.

Is that right?

 

[mczerone]

Let me see if I understand.
In a free market, fractional reserve banking would be a calculated risk based on a contractual agreement. If the risk failed to achieve the desired results, then whoever took the risk would lose their investment.

As it now stands, whoever takes the risk is rewarded with taxpayer funds. In other words, there is no risk because of the bailout feature.

Is that right?

That's right, but there is now still risk to the depositor, who will not receive more than the administratively-determined FDIC bailout should their deposits go unrenumerated. They don't even become an unsecured creditor to the bank, they just get a pre-determined fraction of their deposits from the government.

 

[hugolp]

Let me see if I understand.
In a free market, fractional reserve banking would be a calculated risk based on a contractual agreement. If the risk failed to achieve the desired results, then whoever took the risk would lose their investment.

As it now stands, whoever takes the risk is rewarded with taxpayer funds. In other words, there is no risk because of the bailout feature.

Is that right?

Exaclty. Btw, if you want your money in a 100% reserve deposit because you dont want to take the risk (or whatever) you can do it as well (paying for the service obvsiouly), you are not forced into a fractional reserve contract. In fact, the Lakota gold bank, allows you to choose the amount of gold you want stored and the amount you want available for lending.

Also, I want to repeat that a free banking fractional reserve system is not inflationary. Its only when you add a central bank or similar regulation that fractional reserve banks are allowed to go crazy like we see now.

 

[Fox McCloud]

Interesting points; I obviously disagree with a few of them, but I'll let it go, especially considering that even the Austrian school, itself, is quite divided on this issue.

I would point out, however, that under a system of fractional reserve banking, there could very well crop up "FRB Leagues" or something of similar name that intentionally deposit their money at a bank, only to withdraw it all later to attempt to keep the fractional amount as low as possible--they would also encourage organized bank runs to test the stability of a bank, as well.

 

[Travlyr]

Exaclty. Btw, if you want your money in a 100% reserve deposit because you dont want to take the risk (or whatever) you can do it as well (paying for the service obvsiouly), you are not forced into a fractional reserve contract. In fact, the Lakota gold bank, allows you to choose the amount of gold you want stored and the amount you want available for lending.

Also, I want to repeat that a free banking fractional reserve system is not inflationary. Its only when you add a central bank or similar regulation that fractional reserve banks are allowed to go crazy like we see now.

It seems that anytime money is created out of nothing that it is inherently inflationary.
It is good to know that the central banks are getting some real competition. I guess I wouldn't have a problem with fractional reserve banking as long as the terms of the agreement are understood, not changed during the term of the contract, and no taxpayer funded bailouts ever allowed.

 

[hugolp]

Interesting points; I obviously disagree with a few of them, but I'll let it go, especially considering that even the Austrian school, itself, is quite divided on this issue.

I would point out, however, that under a system of fractional reserve banking, there could very well crop up "FRB Leagues" or something of similar name that intentionally deposit their money at a bank, only to withdraw it all later to attempt to keep the fractional amount as low as possible--they would also encourage organized bank runs to test the stability of a bank, as well.

There are examples in history of very stable free banking system, like Canada during the XIX century or Scotland during the industrialization period. Almost no bankrupcies. Its hard and expensive to corner the market without government regulations.

It seems that anytime money is created out of nothing that it is inherently inflationary.
It is good to know that the central banks are getting some real competition. I guess I wouldn't have a problem with fractional reserve banking as long as the terms of the agreement are understood, not changed during the term of the contract, and no taxpayer funded bailouts ever allowed.

The thing is that free banking tends to keep the reserve ratio more or less at constant level and therefore there are not big changes in the money supply. In fact, the changes are only to respond to a change in the demand for cash, which is actually a good thing, or long term changes in the economy.

 

[archangel689]

in order to grow the economy, you have to mine more gold.


Fiat isn't inherently evil, but it is those who manage the currency. The amount of money needs to grow with the economy. Unless you can put restraint on these fuckin idiots, you're screwed. Those people who print money are the evil ones.

 

[hugolp]

in order to grow the economy, you have to mine more gold.

mmm, no.

Prices can go down as the economy grows.