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 air
• when anyone in an economy creates money out of thin air they effectively steal goods and services from everyone else holding the same money
• not 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.

 

[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

 

[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.

 

[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"

 

[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?

 

[thoughtomator]

fractional reserve = legalized counterfeiting

 

[hazek]

fractional reserve = legalized counterfeiting

Precisely.

 

[Travlyr]

Fractional Reserve Banking is Fraud

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

 

[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=player_embedded&v=40MBdt1BQgE

tomwoods.com/dollar

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

 

[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.

 

[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.

 

[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.

 

[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?

 

[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.

 

[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)...

 

[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.

 

[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).

 

[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.

 

[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.

 

[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?