Do Libertarians Really Want a Free Market in Banking?

[wizardwatson]

Fractional Reserve Banking is not fraud. When you deposit money with a bank you know what the reserve ratio is. If they claimed that they would keep 100% money in their reserves but then did not, that would be fraud. But no banks claim that.

Likewise, in a free market banks would be free to set whatever reserve ratio they want. When a customer deposits money with them, they are accepting the reserve ratio. Only if the bank enters into a contract to store money at a certain reserve ratio, and then later changes this ratio without legally amending or changing the contract with the depositor has the bank committed fraud.

In a free market, reserve ratio's would be set similarly to how interest rates would be set.

One bank may chose to have a very low reserve ratio. This will allow them to reduce customer fees and pay more interest on deposits. However it also will cause them to have to pay more money for insurance on the deposits. If they don't purchase insurance, then the rational person will not deposit money they cannot afford to risk with the bank.

On the other hand, some banks may chose a very high reserve ratio. This bank will have to charge the customers substantial fees for the services the low reserve ratio bank offers for free. They also won't be able to offer interest on deposits. But the bank will have to pay much less for insurance.

Ultimately, the private deposit insurance companies that replace the FDIC will have a sliding scale of insurance costs depending on a banks reserve ratio. Through the competition among the private insurance companies, ultimately the market will be setting the ideal reserve ratio.

I don't have any problem with this as long as the non-FRB money is identifiable from the FRB money, so that I can avoid using it. But then, we can already do this in a way. What's lacking is a non-FRB banking system.

I don't think FRB's are 'fraud' in the sense that someone one is criminally defrauding someone. I think it is fraud because it creates a logical contradiction of property rights.

 

[tremendoustie]

Fractional Reserve Banking is not fraud. When you deposit money with a bank you know what the reserve ratio is. If they claimed that they would keep 100% money in their reserves but then did not, that would be fraud. But no banks claim that.

Likewise, in a free market banks would be free to set whatever reserve ratio they want. When a customer deposits money with them, they are accepting the reserve ratio. Only if the bank enters into a contract to store money at a certain reserve ratio, and then later changes this ratio without legally amending or changing the contract with the depositor has the bank committed fraud.

In a free market, reserve ratio's would be set similarly to how interest rates would be set.

One bank may chose to have a very low reserve ratio. This will allow them to reduce customer fees and pay more interest on deposits. However it also will cause them to have to pay more money for insurance on the deposits. If they don't purchase insurance, then the rational person will not deposit money they cannot afford to risk with the bank.

On the other hand, some banks may chose a very high reserve ratio. This bank will have to charge the customers substantial fees for the services the low reserve ratio bank offers for free. They also won't be able to offer interest on deposits. But the bank will have to pay much less for insurance.

Ultimately, the private deposit insurance companies that replace the FDIC will have a sliding scale of insurance costs depending on a banks reserve ratio. Through the competition among the private insurance companies, ultimately the market will be setting the ideal reserve ratio.

And banks that don't get insurance essentially will be just like any other investment company.

Yep, and I agree that fractional reserve could exist in a free market.

But, there would have to be laws that make sure that if the insurance company claims that they can guarantee all deposits, they actually have enough to guarantee them. This would require them to have so much money on hand that the whole system would be equivalent to full reserve banking.

For that reason, I don't think insurance helps - except perhaps, partial insurance could be used as a way to pool risk among banks (that is, if many banks fail, the insurance wouldn't help). If people wanted to use fractional reserve banks, they would ultimately have to accept the risk.

 

[tremendoustie]

I don't have any problem with this as long as the non-FRB money is identifiable from the FRB money, so that I can avoid using it. But then, we can already do this in a way. What's lacking is a non-FRB banking system.

I don't think FRB's are 'fraud' in the sense that someone one is criminally defrauding someone. I think it is fraud because it creates a logical contradiction of property rights.

Government involvement, and lack of honest disclosure, it's what's wrong. We already have "non-FRB money" -- that's what debit cards are.

 

[brandon]

Fractional Reserve Banking is not fraud. When you deposit money with a bank you know what the reserve ratio is. If they claimed that they would keep 100% money in their reserves but then did not, that would be fraud. But no banks claim that.

Likewise, in a free market banks would be free to set whatever reserve ratio they want. When a customer deposits money with them, they are accepting the reserve ratio. Only if the bank enters into a contract to store money at a certain reserve ratio, and then later changes this ratio without legally amending or changing the contract with the depositor has the bank committed fraud.

In a free market, reserve ratio's would be set similarly to how interest rates would be set.

One bank may chose to have a very low reserve ratio. This will allow them to reduce customer fees and pay more interest on deposits. However it also will cause them to have to pay more money for insurance on the deposits. If they don't purchase insurance, then the rational person will not deposit money they cannot afford to risk with the bank.

On the other hand, some banks may chose a very high reserve ratio. This bank will have to charge the customers substantial fees for the services the low reserve ratio bank offers for free. They also won't be able to offer interest on deposits. But the bank will have to pay much less for insurance.

Ultimately, the private deposit insurance companies that replace the FDIC will have a sliding scale of insurance costs depending on a banks reserve ratio. Through the competition among the private insurance companies, ultimately the market will be setting the ideal reserve ratio.

And banks that don't get insurance essentially will be just like any other investment company.

I'm rethinking what I just wrote and having some second thoughts.

I honestly don't see a need for deposit insurance companies in the absence of a mandated reserve ratio.

Full reserve banks will not need insurance. (except maybe theft insurance/fire insurance which all banks will need in equal amounts)

And if fractional reserve banks paid for the insurance then whatever profits they would have realized through fractional reserve lending will be consumed by the cost of the insurance. That makes this business model inefficient, so it won't exist.

So fractional reserve banks will not be insured, but the depositor will understand the inherent risk of doing business with the bank. They will be willing to accept the risk in the hopes of getting possible gains, the same as when one invests money anywhere that carries risk.

In conclusion, the only reason fractional reserve banking exists as it does today is due to the FDIC providing artificially low insurance costs.

 

[tremendoustie]

I'm rethinking what I just wrote and having some second thoughts.

I honestly don't see a need for deposit insurance companies in the absence of a mandated reserve ratio.

Full reserve banks will not need insurance. (except maybe theft insurance/fire insurance which all banks will need in equal amounts)

And if fractional reserve banks paid for the insurance then whatever profits they would have realized through fractional reserve lending will be consumed by the cost of the insurance. That makes this business model inefficient, so it won't exist.

So fractional reserve banks will not be insured, but the depositor will understand the inherent risk of doing business with the bank. They will be willing to accept the risk in the hopes of getting possible gains, the same as when one invests money anywhere that carries risk.

In conclusion, the only reason fractional reserve banking exists as it does today is due to the FDIC providing artificially low insurance costs.

+1

 

[wizardwatson]

Government involvement, and lack of honest disclosure, it's what's wrong. We already have "non-FRB money" -- that's what debit cards are.

I disagree. You have no way of distinguishing any debit card balance, or credit card balance from being inside or outside the Federal Reserve FRB system. The only way to positively say that your money is not contributing to FRB system is to deal in cash, specie or in 100% reserve backed banking. And if you are still using FRN's you are still subjected to FRN inflation even if you participate in 100% FRN reserve backed bank.

A check, or digital account balance is nothing but a warehouse receipt even if it's a 'debit' card.

 

[tremendoustie]

I disagree. You have no way of distinguishing any debit card balance, or credit card balance from being inside or outside the Federal Reserve FRB system. The only way to positively say that your money is not contributing to FRB system is to deal in cash, specie or in 100% reserve backed banking. And if you are still using FRN's you are still subjected to FRN inflation even if you participate in 100% FRN reserve backed bank.

A check, or digital account balance is nothing but a warehouse receipt even if it's a 'debit' card.

You're completely right, I replied too quickly without reading carefully. The "non fractional reserve" currency is physical cash. The "fractional reserve" currency would be bank credit, or debit cards.

Myself, I prefer "non federal reserve system" money, or gold+silver .

 

[Zippyjuan]

I have no problems with fractional reserve banking as long as the percentage of reserves is set, audited and posted publicly.
The fraud happens when customers think that the bank is just storing their money, but the bank is investing it instead.

The reserve requirement is published information. It is ten percent for most institutions. They do get audited on it and are required to meet the reserve requirements daily. That is why the Fed has overnight lending for banks (or they can borrow from another bank which may have excess reserves) to bring their reserves to match what would be required to meet the 10% requirement. I do not think you will find anybody who does not think that a bank might be lending out their money- that is what banks do. There is no fraud here.

In another thread somewhere, I ran some numbers about how things might be different if banks had to hold reserves on all of their demand accounts (things like passbook accounts or checking accounts- ones where the balance may change daily) and only made loans based on their time deposits like CDs. What I looked at was the Fed money supply numbers. M1 is demand deposits plus the amout of cash in circulation and they posted in the article I had linked to how much was cash (M0 actually). M2 is M1 plus time deposits plus a couple smaller things like money market accounts (which can be held at banks) and came to a remarkable conclusion.

According to those figures, if a bank was not allowed to make any loans against demand deposits and only able to make loans against time deposits (where the bank knows when the person is going to expect it back- unless they make an early withdrawl and pay the bank a penalty to do so), we come to the same point of a ten percent reserve requirement. I would have to search through some of my older threads to find it.

 

[The_Orlonater]

This is an impossible task to do. For one, we can go to jail, and not everybody in society is a libertarian or believes in sound money and there isn't a libertarian for every good or service. Even if there were, we're kind of split up.

We're not "posers."

 

[Nationwide]

May I just say: Yes, this is a good idea, and yes this is do-able.
Just to clarify what you're talking: a sound money, PM-backed, digitally distributed (RipplePay) Bank/Warehouse/eCurrency. I think there's growing interest in this, especially among liberty-lovers; build it and they will come. GoldMoney comes closest to this and they've got $400+ million in reserves. They consider themselves not a bank (no loans) but a 'money service business' - I suppose our equivalent of a 'money transmittal service.' But this may be just a semantic difference since they do the things we want a bank to do – store our wealth & help us transmit pieces of it to buy/sell things.
Thing is... it's in the UK and its central, not Peer2Peer.

LEGAL vs UNDERGROUND
Sounds like some debate over whether to build it legally with the proper registrations, or to just build it bombproof without regard to the state. According to that Wallenwein article, it can be built legally within the US, but reserves must be limited to US Mint silver/gold coins (lawful money) since others cannot be legal tender or currency. I say build it legally & bombproof.

TAXES – non-issue really. Just put the standard disclaimer in the user agreement. Although the initial conversion/purchase of FRNs for gold, is that a taxable transaction?

STORAGE FEES- PM holdings will probably have a small storage fee since the service must pay for itself somehow and there will be no fractional reserve banking (which is very profitable).

STRONG VERIFICATION – Unfortunately, criminals are everywhere and a strong identity verification system is necessary with a 1 person 1 account type limitation.

DISTRIBUTED RESERVES & reserve holders. I'm envisioning local “Reserve Holders” or “vaults” with whom initial coin deposits are made and to handle settlements or PM withdrawals. Isn't this the key to the whole thing?

 

[krazy kaju]

So, like, what the hell is this thread about? All that I see is too much teenage angst and some kind of bullshit rant without any logical structure. The sad thing is that I'm not trying to be mean. This thread is completely unintelligible.

 

[wizardwatson]

This is an impossible task to do. For one, we can go to jail, and not everybody in society is a libertarian or believes in sound money and there isn't a libertarian for every good or service. Even if there were, we're kind of split up.

We're not "posers."

Well, I did say 90%. I'm working on a complete plan, this thread was mainly to get an idea of what other people thought about it.

 

[wizardwatson]

May I just say: Yes, this is a good idea, and yes this is do-able.
Just to clarify what you're talking: a sound money, PM-backed, digitally distributed (RipplePay) Bank/Warehouse/eCurrency. I think there's growing interest in this, especially among liberty-lovers; build it and they will come. GoldMoney comes closest to this and they've got $400+ million in reserves. They consider themselves not a bank (no loans) but a 'money service business' - I suppose our equivalent of a 'money transmittal service.' But this may be just a semantic difference since they do the things we want a bank to do – store our wealth & help us transmit pieces of it to buy/sell things.
Thing is... it's in the UK and its central, not Peer2Peer.

LEGAL vs UNDERGROUND
Sounds like some debate over whether to build it legally with the proper registrations, or to just build it bombproof without regard to the state. According to that Wallenwein article, it can be built legally within the US, but reserves must be limited to US Mint silver/gold coins (lawful money) since others cannot be legal tender or currency. I say build it legally & bombproof.

TAXES – non-issue really. Just put the standard disclaimer in the user agreement. Although the initial conversion/purchase of FRNs for gold, is that a taxable transaction?

STORAGE FEES- PM holdings will probably have a small storage fee since the service must pay for itself somehow and there will be no fractional reserve banking (which is very profitable).

STRONG VERIFICATION – Unfortunately, criminals are everywhere and a strong identity verification system is necessary with a 1 person 1 account type limitation.

DISTRIBUTED RESERVES & reserve holders. I'm envisioning local “Reserve Holders” or “vaults” with whom initial coin deposits are made and to handle settlements or PM withdrawals. Isn't this the key to the whole thing?

I with you on everything here. Except I've actually changed my mind about PM backed currency as the primary currency. I no longer think it is ideal.

 

[wizardwatson]

So, like, what the hell is this thread about? All that I see is too much teenage angst and some kind of bullshit rant without any logical structure. The sad thing is that I'm not trying to be mean. This thread is completely unintelligible.

How would a monetary system function in an anarcho-capitalist world?

That's the main question. I don't believe it's adequately dealt with even by Rothbard. Rothbard's main purpose in writing his banking books was to demonstrate the failures and flaws of the current and past systems.

Anyway, this thread is just a rant. I was fairly frustrated one day and decided to write inflammatory stuff. But I am working on an actual clear and precise plan of my own, rather than presenting half a plan and flaming everyone for having no plan.

Logical structure is on its way.

 

[krazy kaju]

Rothbard, Hayek, Selgin, and others have described what a free market monetary system would look like. I don't see the dealio here. Banks and mints would compete to provide adequate currency and fiduciary services. What else is to say?

 

[wizardwatson]

Rothbard, Hayek, Selgin, and others have described what a free market monetary system would look like. I don't see the dealio here. Banks and mints would compete to provide adequate currency and fiduciary services. What else is to say?

Well, my personal opinion is that PM backed 100% reserve banking would have a very big elasticity problem. In that, I think I'm more aligned with neo-classical economists.

But that isn't really what this thread was about. I was trying show that 100% PM backed reserve banking as a strategy to achieve liberty was an avenue that is open and is not being used.

It's a moot point now though as even I'm not on that current line of thinking. I think community currencies and the monetary system are central to a strategy but is incomplete by itself. And there are other issues, like that land problem which is completely ignored by Austrians.

 

[danberkeley]

Well, my personal opinion is that PM backed 100% reserve banking would have a very big elasticity problem. In that, I think I'm more aligned with neo-classical economists.

But that isn't really what this thread was about. I was trying show that 100% PM backed reserve banking as a strategy to achieve liberty was an avenue that is open and is not being used.

It's a moot point now though as even I'm not on that current line of thinking. I think community currencies and the monetary system are central to a strategy but is incomplete by itself. And there are other issues, like that land problem which is completely ignored by Austrians.

What's the elasticity problem you see?

 

[wizardwatson]

This is an impossible task to do. For one, we can go to jail, and not everybody in society is a libertarian or believes in sound money and there isn't a libertarian for every good or service. Even if there were, we're kind of split up.

We're not "posers."

Well, original intent of this thread was to annoy/agitate and then spark discussion. Calling libertiarian's posers who didn't agree with what I was saying was part of that.

As for the first part, you are absolutely correct. The division of minds in general, not just on the issue of monetary theory, is so polarized along every possible axis, getting enough minds together to spawn the type of money system I envision borders on the impossible (even if you have working theory, which I believe we do). Even among the liberty minded, there is no consensus on what the best strategy to take is.

So with threads like these, I'm only trying to discover a way to build a consensus on what the best economic scientific solution is, given the economic information and evidence that we have. In other words, what are our primary problems, what are the causes, and what scientific/strategic solutions do we have to solve those problems.

We have to at least move in that 'consensus building' direction if we act in no other way. We must find the patterns in our problems and how it relates to the problems of others we're interacting with in order to build relationships, on top of which solutions can be implemented. The consensus and relationship precedes the solution.

 

[TGGRV]

People really don't understand a lot of things. So, three of my neighbors want to get three washing machines for 100$ each, but they don't have the money. I have an acquaintance who is selling washing machines so I tell him that I will give him 350$ if he is ok with getting the money in half an year and he accepts, getting an IOU from me. Now, each of my neighbors will have to give me monthly installments combined to 130$ each until the 6 months period expires. I just created 300$ that I destroyed when all the debt was paid.

The problem with the FRS it isn't the system itself, which is a good theoretical idea, it is related to transparency and the fact that it's really hard to manage properly in real life.

People, please tell me you don't believe garbage like the perpetual debt crap? That shows the lack of understanding of basic economics. Ugh, I remember when I used to believe that. lol

 

[Nationwide]

Short answer, Yes we do want free market banking.

After reflecting, I keep coming back to the one currency/asset that's right under our noses - silver/gold US coins. They're instantly recognizable, true worth is easily calculated, they're plentiful (over 24 million silver dimes were minted in 1964 alone), and 90% or more pure coins are still being minted. They're legal tender AND sound money all in one. While anything can be counterfeited, the penalties for messing with the US stuff are severe enough to limit it.

But I'm moving away from the idea of a "bank" in the traditional sense, a vault of metal, as that's just too much of a target for Federal (read banking cartel) raid under a trumped up charge. Instead of a storage fee, could we not instead have a small transaction fee, and have the seller of goods/service pay ship cost of coins from buyer to seller (if desired in lieu of 'credits'), with a libertarian group/bank to oversee it?