Fractional reserve lending is NOT inherently fraudulent

[fgd]

(facepalm)

More crap that needs to be corrected. FRL isn't inflationary at all - it's artificially low interest rates caused by central banksters, as well as a policy of not letting anyone any time anywhere fail, ever. Debt being defaulted is deflationary, creating debt is inflationary. So if you bail out everyone that would otherwise default, that's inflationary. If you smash interest rates into the floor as a central bankster, then that's inflationary too.

FRB/FRL IS NOT INHERENTLY BAD AND WE NEED TO STOP THINKING IT IS.

I am reminded by this thread how RP and his supporters started my financial education, but I feel like economically RPF is stuck in grade school. tickerforum, Mish, and other places are much more educational and you need to go there if you want to keep your financial education going.

 

[gonegolfin]

(facepalm)

More crap that needs to be corrected. FRL isn't inflationary at all

Executing a loan in a fractional reserve system is inflationary as it increases deposit money (and thus narrow money supply).

- it's artificially low interest rates caused by central banksters,

Central bank manipulation of the supply of money and credit is achieved by adding or draining reserves from the banking system. The interest rate (federal funds rate) is just the target they are attempting to achieve. Creation of additional reserves in and of itself is not inflationary.

as well as a policy of not letting anyone any time anywhere fail, ever. Debt being defaulted is deflationary, creating debt is inflationary.

Debt defaults are not deflationary ... that is ... they do not decrease money supply. Repayment of debt does extinguish money and thus decreases money supply.

Brian

 

[Feenix566]

NO, you're not both right, YOU are wrong.

There's a difference between adding all sums of loans in a series of banks and series of events to BECOME $450 from $100.
vs.
multiplying $100 to $500 INSTANTLY. (in which case the next step is $2500, then $125,000 ad infinitum)

You're right. I was mistaken.

 

[tmosley]

You're right. I was mistaken.

You're a big man Feenix, and I mean that sincerely.

 

[Feenix566]

You're a big man Feenix, and I mean that sincerely.

Thanks

But I'm still not sure about whether or not it's fraudulent and/or inflationary. It still seems fraudulent to me for the bank to have $19 in demand deposits outstanding, and only $10 in reserves. I think the combination of demand deposits and fractional reserve lending may constitute fraud. If a bank were to issue time deposits while practicing fractional reserve lending, that would not be fraudulent.

 

[Optatron]

(facepalm)

More crap that needs to be corrected. FRL isn't inflationary at all - it's artificially low interest rates caused by central banksters, as well as a policy of not letting anyone any time anywhere fail, ever. Debt being defaulted is deflationary, creating debt is inflationary. So if you bail out everyone that would otherwise default, that's inflationary. If you smash interest rates into the floor as a central bankster, then that's inflationary too.

FRB/FRL IS NOT INHERENTLY BAD AND WE NEED TO STOP THINKING IT IS.

Oh, so you mean you are so arrogant you can say you know better than Conza? He's read dozens of books and memorizes them in his head you know!

I am reminded by this thread how RP and his supporters started my financial education, but I feel like economically RPF is stuck in grade school. tickerforum, Mish, and other places are much more educational and you need to go there if you want to keep your financial education going.

But Conza told me everybody but him & his Rothbard books, is mistaken or lying, he can't be anything but good intentioned and serious, right?

 

[Optatron]

Actually no, now that I did some more reading, I realize that I was right the first time. The system described by the OP in option A is fractional reserve lending. Option B is multiple reserve lending (ie lending out of money at multiples of reserves), and Option C is full reserve "banking", where the bank simply acts as a vault. Fractional reserve banking does not permanently increase the money supply. As there are runs on the banks, the amount of credit in the economy contracts back to the amount that it was prior to those loans being made (this can also be accomplished through repayment of loans). This happened during the Great Depression (you know, that deflationary depression that everyone is afraid of now).

My question is this: Do we now have fractional reserve lending, or do we have "multiple reserve lending"?

Would rate of inflation be controlled if we had the latter?

Some may have such priveleges, but to say or think all banks can do that is to undermine the authority and need for the Fed, ain't it?

Fractional reserve lending does not and can not create permanent inflation (as was shown in the Great Depression). It can be accomplished under a gold standard (as was the case at the time), therefore it CAN'T be inflationary. If we now have multiple reserve lending, as I suspect we do, then THAT is the cause of the inflation we are seeing now, and even with repayment or bankruptcy, the money supply doesn't contract back to the proper level, but it rather contracts either by 1/9th or ~1/500th (depending on whether the "domino effect" takes hold, and the bankruptcy of one bank leads to bankruptcy for the other banks along the multiple reserve lending chain.

Again, it can't be fraud, so long as all participants are fully informed.

Are you sure you did your reading? Because Conza's confidence is making me nervous!

 

[Optatron]

You're right. I was mistaken.

Thanks for your admission.

 

[Optatron]

Thanks

But I'm still not sure about whether or not it's fraudulent and/or inflationary. It still seems fraudulent to me for the bank to have $19 in demand deposits outstanding, and only $10 in reserves. I think the combination of demand deposits and fractional reserve lending may constitute fraud. If a bank were to issue time deposits while practicing fractional reserve lending, that would not be fraudulent.

In other words, you understand the difference between outright fraud and misleading information or secrecy in operation. You understand risk of devalue as opposed to guarantee of devaluation. You understand there's a difference between NOT telling you something, telling you something wrong.

............in short : you can think, good!

 

[Omphfullas Zamboni]

Howdy,

Is there a great video, online, that explains how money works? (Something that would help a person pass a 101 college Econ class?)

Thank you.

Sincerely,
Omphfullas Zamboni

 

[axiomata]

Howdy,

Is there a great video, online, that explains how money works? (Something that would help a person pass a 101 college Econ class?)

Thank you.

Sincerely,
Omphfullas Zamboni

This type of stuff is not covered in econ 101. I'd hazard to guess that most econ majors don't understand the banking system. Just study your static equilibrium idealizations.

 

[Brian4Liberty]

Howdy,

Is there a great video, online, that explains how money works? (Something that would help a person pass a 101 college Econ class?)

Thank you.

Sincerely,
Omphfullas Zamboni

I posted this one. Not sure how accurate it is. No one posted any specific comments on it. I have read criticism that it is too simplified and some of the multiples he uses are wrong, yet the general idea is correct (of course each countries central bank probably works a little differently).

Part 2 gets into the topics of this thread.

YouTube - Money As Debt - 2-5

Found it. 5 parts. Pretty interesting.

YouTube - Money As Debt 1-5

 

[FindLiberty]

The Mandrake Mechanism From Wikipedia, the free encyclopedia

The Mandrake Mechanism is a term coined by Edward Griffin in his book entitled The Creature from Jekyll Island. Mandrake the Magician was a comic strip character from the 1940s. He had the ability to magically create things and, when appropriate, make them disappear. Thus, the Mandrake Mechanism was aptly named in his honor.

The Mandrake Mechanism is the method by which the Federal Reserve creates money backed by debt. Using this fractional reserve method, any financial system is able to create almost limitless money through the Monetization of debt via the manipulation of the reserve requirement amongst banks.

The "magical" quality of this mechanism is really just a simple mathematical limit (mathematics). When banks loan money, they don't actually loan existing money. Rather, they allocate money to loan, but they are limited by how much money they can create. The law basically says that, for each dollar a bank has on hand in one of its savings accounts, it is allowed to create another 90 cents to give out as a loan. (The dollar from the savings account is still there, and can still be spent by the person who owns the savings account.) This loan is then spent, and the recipient puts it into another bank, and that bank can now loan 90 cents times 0.9 = 81 cents. This can be repeated roughly 30 times, over the course of a few years, until it reaches its mathematical limit of 10 dollars.

For example, when the Federal Reserve holds on deposit 1 billion in marketable United States Treasury security then the banks in the banking system, public and private, and bound by US financial law, are ultimately able to generate 10 billion in new debt.

 

[Thesemindz]

Pointless

This discussion is nothing more than mental masturbation.

In order for fractional reserve banking to be an honest means of doing business, you would have to have three components.

1. Universal understanding of how it works.
2. A monetary free market where currencies competed for customers.
3. The elimination of all legal tender laws.

Under these conditions, fractional reserve banking would be completely honest and fair. Everyone would know what they were getting involved with, no one would be required to participate if they didn't want to, and there would be a wide variety of options for people who wanted to choose some other means of exchange.

But under these conditions, no one would participate in fractional reserve banking. Who would choose to purchase fiat currency that is constantly losing value as it's continuously printed in increasing amounts? What vender would accept that currency in exchange for their goods or services when it would be worth less almost as soon as they put it in the cash register if they weren't being forced to at gunpoint?

If everyone really understood fractional reserve currency, and wasn't forced to participate in it, who would?

So the only situation wherein it wouldn't be inherently fraudulent, would be under such a set of conditions that no one would use it. In any set of circumstances where it would be used, either because people failed to understand it, or because they were forced to at gunpoint, it is inherently fraudulent.

Saying it isn't fraudulent as long as someone knows what they're getting into and agrees to it is like saying rape isn't violent and immoral as long as the victim knows they are going to get raped and agrees to it ahead of time. Which would of course be true. But then it's not rape.

And neither would fractional reserve banking be rape under those circumstances. It wouldn't be anything.

Because if people really knew what was going on, and had a choice, they wouldn't participate in it at all, and then it wouldn't exist.


-Rob

 

[Optatron]

This discussion is nothing more than mental masturbation.

In order for fractional reserve banking to be an honest means of doing business, you would have to have three components.

1. Universal understanding of how it works.

No, just those who use it

2. A monetary free market where currencies competed for customers.

We do, look at the world.

3. The elimination of all legal tender laws.

Quite necessary.

Under these conditions, fractional reserve banking would be completely honest and fair. Everyone would know what they were getting involved with, no one would be required to participate if they didn't want to, and there would be a wide variety of options for people who wanted to choose some other means of exchange.

But under these conditions, no one would participate in fractional reserve banking.

That's all I've been saying this whole time, no matter how retarded it is, it's not fraud.

 

[Thesemindz]

No, just those who use it

Which currently is everyone in the civilized world.

We do, look at the world.

Are you then arguing that because I can choose to abandon the fiat currency offered by my federal reserve bank in exchange for the fiat currency offered by somone else's federal reserve bank we have some kind of monetary free market? Really? That's your position.

Quite necessary.

Indeed. But unlikely ever to occur.

That's all I've been saying this whole time, no matter how retarded it is, it's not fraud.

Sure it is. It wouldn't be if you had all those things in place, but since you don't, it is. And if you did, it wouldn't exist.

Which is why it's a pointless argument in the first place.


-Rob

 

[Conza88]

Actually no, now that I did some more reading, I realize that I was right the first time. The system described by the OP in option A is fractional reserve lending. Option B is multiple reserve lending (ie lending out of money at multiples of reserves), and Option C is full reserve "banking", where the bank simply acts as a vault. Fractional reserve banking does not permanently increase the money supply. As there are runs on the banks, the amount of credit in the economy contracts back to the amount that it was prior to those loans being made (this can also be accomplished through repayment of loans). This happened during the Great Depression (you know, that deflationary depression that everyone is afraid of now).

Negative. FRB does increase the money supply, permanently. ORLY, which Great Depression was that? The one in bizarro world?

How about you go read America's Great Depression by Rothbard and come back when you have a clue.

Hmm.. look at the gold price.. and the value of the US dollar... looks like inflation is pretty permanent to me..

How do you even define inflation? Serious question. Rhetorical of course.

My question is this: Do we now have fractional reserve lending, or do we have "multiple reserve lending"?

And what do you imagine is the difference?

Fractional reserve lending does not and can not create permanent inflation (as was shown in the Great Depression). It can be accomplished under a gold standard (as was the case at the time), therefore it CAN'T be inflationary. If we now have multiple reserve lending, as I suspect we do, then THAT is the cause of the inflation we are seeing now, and even with repayment or bankruptcy, the money supply doesn't contract back to the proper level, but it rather contracts either by 1/9th or ~1/500th (depending on whether the "domino effect" takes hold, and the bankruptcy of one bank leads to bankruptcy for the other banks along the multiple reserve lending chain.

Again, it can't be fraud, so long as all participants are fully informed.

Wrong wrong wrong...

Fractional Reserve Banking

Let's see how the fractional reserve process works, in the absence of a central bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether gold or government paper does not matter here). Then I "lend out" $10,000 to someone, either for consumer spending or to invest in his business. How can I "lend out" far more than I have? Ahh, that's the magic of the "fraction" in the fractional reserve. I simply open up a checking account of $10,000 which I am happy to lend to Mr. Jones. Why does Jones borrow from me? Well, for one thing, I can charge a lower rate of interest than savers would. I don't have to save up the money myself, but simply can counterfeit it out of thin air. (In the nineteenth century, I would have been able to issue bank notes, but the Federal Reserve now monopolizes note issues.) Since demand deposits at the Rothbard Bank function as equivalent to cash, the nation's money supply has just, by magic, increased by $10,000. The inflationary, counterfeiting process is under way.

The nineteenth-century English economist Thomas Tooke correctly stated that "free trade in banking is tantamount to free trade in swindling." But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed "free banking." First: why should anyone trust me? Why should anyone accept the checking deposits of the Rothbard Bank? But second, even if I were trusted, and I were able to con my way into the trust of the gullible, there is another severe problem, caused by the fact that the banking system is competitive, with free entry into the field. After all, the Rothbard Bank is limited in its clientele. After Jones borrows checking deposits from me, he is going to spend it. Why else pay money for a loan? Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of some other bank, say the Rockwell Bank. The Rockwell Bank is not particularly interested in holding checking accounts on my bank; it wants reserves so that it can pyramid its own counterfeiting on top of cash reserves. And so if, to make the case simple, the Rockwell Bank gets a $10,000 check on the Rothbard Bank, it is going to demand cash so that it can do some inflationary counterfeit-pyramiding of its own. But, I, of course, can't pay the $10,000, so I'm finished. Bankrupt. Found out. By rights, I should be in jail as an embezzler, but at least my phoney checking deposits and I are out of the game, and out of the money supply.

Hence, under free competition, and without government support and enforcement, there will only be limited scope for fractional-reserve counterfeiting. Banks could form cartels to prop each other up, but generally cartels on the market don't work well without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing competing banks to pay up.

 

[Optatron]

Which currently is everyone in the civilized world.

No, just those who participate in the bank's business.

Not to be difficult, but sounds like you're confusing the Federal Reserve's constant printing of money with local banks lending a fraction of their reserves to others.

Are you then arguing that because I can choose to abandon the fiat currency offered by my federal reserve bank in exchange for the fiat currency offered by somone else's federal reserve bank we have some kind of monetary free market? Really? That's your position.

No, I'm saying you can exchange US notes with Japanese notes, or other things you find valuable.

Indeed. But unlikely ever to occur.



Sure it is. It wouldn't be if you had all those things in place, but since you don't, it is. And if you did, it wouldn't exist.

Which is why it's a pointless argument in the first place.


-Rob

 

[Optatron]

Negative. FRB does increase the money supply, permanently. ORLY, which Great Depression was that? The one in bizarro world?

How about you go read America's Great Depression by Rothbard and come back when you have a clue.

Hmm.. look at the gold price.. and the value of the US dollar... looks like inflation is pretty permanent to me..

permanent as in it's gone one direction, but not permanent as in it's what it's going to be 10 years from now (or you can predict it).

How do you even define inflation? Serious question. Rhetorical of course.

Increase in money supply, decrease in value of money, loss of purchasing power.

Serious AND rhetorical?

And what do you imagine is the difference?

FRL increases the money supply, or circulation of money by 10x AFTER ALL SERIES OF LOANS ARE ADDED UP.
Multiple reserve lending multiplies and inflations the supply INSTANTLY.

Yeah, no difference, my bad!

 

[Conza88]

11 Banks are “inherently bankrupt” because they issue far more warehouse
receipts to cash (nowadays in the form of “deposits” redeemable in cash on
demand) than they have cash available. Hence, they are always vulnerable to bank
runs. These runs are not like any other business failures, because they simply consist
of depositors claiming their own rightful property, which the banks do not
have. “Inherent bankruptcy,” then, is an essential feature of any “fractional
reserve” banking system. As Frank Graham stated:

The attempt of the banks to realize the inconsistent aims of lending cash,
or merely multiplied claims to cash, and still to represent that cash is available
on demand is even more preposterous than . . . eating one’s cake and
counting on it for future consumption. . . . The alleged convertibility is a
delusion dependent upon the right’s not being unduly exercised.
Frank D. Graham, “Partial Reserve Money and the 100% Proposal,”
American Economic Review (September, 1936): 436.

But a 100 percent gold reserve requirement would not be just
another administrative control by government; it would be part
and parcel of the general libertarian legal prohibition against
fraud. Everyone except absolute pacifists concedes that violence
against person and property should be outlawed, and that agencies,
operating under this general law, should defend person and property
against attack. Libertarians, advocates of laissez-faire, believe
that “governments” should confine themselves to being defense
agencies only. Fraud is equivalent to theft, for fraud is committed
when one part of an exchange contract is deliberately not fulfilled
after the other’s property has been taken. Banks that issue receipts
to non-existent gold are really committing fraud, because it is then
impossible for all property owners (of claims to gold) to claim their
rightful property. Therefore, prohibition of such practices would
not be an act of government intervention in the free market; it
would be part of the general legal defense of property against attack
which a free market requires.28, 29