Fractional reserve lending versus.... what?

[The Gold Standard]

2) Fractional banking causes business cycles.

The logic here is, roughly, the market is perfect, therefore let's go find things that the government does that we don't agree with and pin the blame for market error on them.

The assumption of a perfect 'invisible hand of the market' assumes human perfection. Human beings are not prescient. Study of psychology and behavioral economics will show you that people are predictably wrong in economic decision making, and easily influenced by even the simplest manipulation of these flaws. As just one example, human behavior becomes quite irrational as price of a good approaches zero. In addition to this, consumer confidence and economic expectations are affected by non-market forces which would have no impact on the decision of a perfectly rational actor.

Based upon this, I assume nearly the opposite: Market behavior is not as perfectly rational as ECON 101 would lead you to believe. The invisible hand of the market is only perfect in the extreme long run. Economic actors are perfectly capable of creating irrational bubbles as well as irrational recessions.

I see you have zero knowledge of the Austrian business cycle theory. None. The logic behind it is that people are imperfect and can not predict the future, so they need to rely on prices to tell them the information they need to know. When those prices are distorted they are given the wrong information and invest their money in unsustainable projects. Unsustainable because if prices were accurate it would be clear to the investor that there aren't enough resources to finish them. It is the opposite of your ridiculous portrayal.

 

[Domalais]

Question: If the dollar was backed by gold, then a 10% fractional reserve would require 10% gold holdings. Since the fiat dollar is not backed by anything but faith, is 10% faith enough?

The size of the reserve holding has nothing to do with faith in the currency. If you believe the dollar is going to lose value, it doesn't matter if that dollar is in the bank or in your back pocket. The loss of value is the same. As long as the rate at which the dollar is losing value is vaguely constant and/or predictable, it wouldn't cause a bank run.


The more important consideration is the money multiplier. There's an exponential effect as the required reserve ratio drops. Take a look at the difference in terms of money supply expansion between 10% and 20% reserve.

I do not believe 10% is enough, not because of faith in the dollar, but because a higher rate would create more stability with regard to the size of the money supply.

 

[Voluntary Man]

Question: If the dollar was backed by gold, then a 10% fractional reserve would require 10% gold holdings. Since the fiat dollar is not backed by anything but faith, is 10% faith enough?

Under the current system, 10% faith results in 1000% inflation.

 

[Domalais]

I see you have zero knowledge of the Austrian business cycle theory. None.

Why are you assuming that I'm speaking of Austrian economics? Support of the banking system does not mean opposition to Austrian economic models, and not every Austrian economist supports the abolition of fractional reserve banking.

 

[Travlyr]

The size of the reserve holding has nothing to do with faith in the currency. If you believe the dollar is going to lose value, it doesn't matter if that dollar is in the bank or in your back pocket. The loss of value is the same. As long as the rate at which the dollar is losing value is vaguely constant and/or predictable, it wouldn't cause a bank run.


The more important consideration is the money multiplier. There's an exponential effect as the required reserve ratio drops. Take a look at the difference in terms of money supply expansion between 10% and 20% reserve.

I do not believe 10% is enough, not because of faith in the dollar, but because a higher rate would create more stability with regard to the size of the money supply.

That in bold is quite telling. For insiders, it's easy. Insiders will know ahead of time when the bank runs will be. The rest of us just have to guess.

Financial Collapse

How does a higher rate of paper reserves make any difference at all? Fiat is backed by nothing. 10% of nothing = 90% of nothing = Nothing

 

[fisharmor]

No. I believe that I have the right to enter into a business relationship.

Am I free to end this "business relationship" with the United States Federal Government?
Am I free to transact in money which is not Federal Reserve notes?

People who insist that I should not have that right because I am too stupid to understand how and why banking systems function (or any other reason) are, IMHO, not proponents of the free market.

I thought I implied in my last post that I think you're perfectly free to enter into any relationship you think fit. The problem is that *I* am not.
Given that you're cheerleading for the side that thinks we ought not to be able to enter into business relationships, I assume you're not a proponent of the free market.

1) They don't really have your money there waiting for you.

You yourself have said that they don't have your money waiting for you. E.g.:

A) As I've said throughout this thread, every industry and every market involves demand forecasting.

B) If the argument is that the "sheeple" do not understand how banks work, that's a combination of insulting and irrelevant.

C) As free market proponents, we should understand that if there was a demand for 100% reserve banks, they would already exist and have customers.

e-gold: forced into a plea bargain in which they pled guilty to operating an unlicensed money-transmitting business, in a plea deal to only have to pay millions in fines (as oppsed to getting raped in prison).

E-Bullion: facing felony charges of conducting unlicensed money transactions.

Liberty Dollar: Bernard von Nothaus is facing 15 years in prison, $250,000 in fines, and has to turn over $7 million in precious metal to the federal government.

(ETA: In case you don't see what I'm getting at, these were all viable businesses with real customers, which were shut down.)

2) Fractional banking causes business cycles.

The logic here is, roughly, the market is perfect, therefore let's go find things that the government does that we don't agree with and pin the blame for market error on them.

I never claimed the market is anywhere close to perfect. Nobody else did either. You accuse others of using strawmen? At least we have some kind of reasoning behind assuming you're in favor of cartel central banking (your arguing in favor of it is a reasonable indicator, I think).
The claim is that the market will decide winners and losers.
I repeat: If you think that central cartel banking is so great, have the confidence in it to allow competition.
Stop putting people who are attempting alternatives in prison.

The rest of your post, frankly, is you beating the stuffing out of the sort of straw man arguments that are so absurd that they don't even warrant a response. If you want to reduce any form of dissent with your view with 'you must think that communism is great and that we should all be in FEMA camps,' you might as well buy a hand puppet and talk to yourself.

Do you know what a straw man argument is? It's a real thing, not just something people throw around on forums as an insult.
It's when you accuse people of talking about FEMA camps when the reality is that person has concrete evidence that people are going to regular prison.

 

[The Gold Standard]

Why are you assuming that I'm speaking of Austrian economics? Support of the banking system does not mean opposition to Austrian economic models, and not every Austrian economist supports the abolition of fractional reserve banking.

Austrian business cycle theory states that inflation of the money/credit supply either by the printing press or by fractional reserve banking distorts the market and causes booms and busts. I never said anything about opposition to the other Austrian models or if they all support abolishing fractional reserve banking.

You claimed the inflation that results from fractional reserve banking does not cause business cycles. Austrian business cycle theory says it does, and it is backed up with a lot more logic than you provided against it. When you were refuted you start attacking something else.

 

[Domalais]

How does a higher rate of paper reserves make any difference at all? Fiat is backed by nothing. 10% of nothing = 90% of nothing = Nothing

The difference is an exponential increase in the supply of loanable funds. The same is true if the money was backed by gold. Origin of currency and method of central banking has nearly nothing to do with whether or not fraction reserve banking is a good idea. They're completely seperate.

 

[fisharmor]

The difference is an exponential increase in the supply of loanable funds. The same is true if the money was backed by gold. Origin of currency and method of central banking has nearly nothing to do with whether or not fraction reserve banking is a good idea. They're completely seperate.

What if I don't believe that money is something backed by something, but instead believe that money is the thing itself?
What if I believe that including "store of value" in the standard definition of money is in fact relevant to its purpose?

 

[Domalais]

Austrian business cycle theory states that inflation of the money/credit supply either by the printing press or by fractional reserve banking distorts the market and causes booms and busts. I never said anything about opposition to the other Austrian models or if they all support abolishing fractional reserve banking.

You're relating two things that are actually rather seperate. Fractional reserve banking can not cause a continual inflation of the money supply. Instead, it increases the effect of the printing press.

If the size of the money supply is fixed by the central bank or other currency issuer, it would still be fixed with fractional reserve banking. The size of the reserve would determine the maximum size of the money supply after the money multiplier effect of fractional reserves. So long as the required reserve ratio remains the same, no inflation is possible beyond that point. If the currency issuer has knowledge of the reserve ratio, they know how much currency needs to be issued in order to meet their money supply goal.

You claimed the inflation that results from fractional reserve banking does not cause business cycles. Austrian business cycle theory says it does, and it is backed up with a lot more logic than you provided against it. When you were refuted you start attacking something else.

I won't claim to have perfect knowledge of Austrian economics, but my understanding of the theory is that unpredictable, artificial changes in the size of the money supply cause changes in the supply of credit (loanable funds). This, in turn, leads to poor investment decisions based on unsustainable interest rates. A glut of investment causes the boom, and the bust occurs when the investments become unprofitable. The assumption, therefore, is that perfect knowledge of interest rates would yield perfect investment and continual, stable growth.

As I explained above, fractional reserve banking does not result in unpredictable, artificial, or unsustainable changes in the size of the money supply. Austrian-based central banking will create an Austrian-based market environment with or without fractional reserve banking.

 

[Domalais]

What if I don't believe that money is something backed by something, but instead believe that money is the thing itself?
What if I believe that including "store of value" in the standard definition of money is in fact relevant to its purpose?

If, for example, we traded directly with gold instead of dollars, every bank would still need to forecast how much gold each of their branches would need to have available for their customers. The only difference that fractional reserves would make is whether they loan out their excess or warehouse it. The result is the same.

 

[Travlyr]

If, for example, we traded directly with gold instead of dollars, every bank would still need to forecast how much gold each of their branches would need to have available for their customers. The only difference that fractional reserves would make is whether they loan out their excess or warehouse it. The result is the same.

If real money was legal to use without penalties, then what would be a banker's sales pitch to a rich man to convince him to put his gold in the bank if the rich man knew the banker was going to lend 90% of it out? I don't understand why anybody would do that. Why not just keep it at home? Why make the banker wealthy at the expense of the rich guy?

 

[The Gold Standard]

You're relating two things that are actually rather seperate. Fractional reserve banking can not cause a continual inflation of the money supply. Instead, it increases the effect of the printing press.

If the size of the money supply is fixed by the central bank or other currency issuer, it would still be fixed with fractional reserve banking. The size of the reserve would determine the maximum size of the money supply after the money multiplier effect of fractional reserves. So long as the required reserve ratio remains the same, no inflation is possible beyond that point. If the currency issuer has knowledge of the reserve ratio, they know how much currency needs to be issued in order to meet their money supply goal.

I won't claim to have perfect knowledge of Austrian economics, but my understanding of the theory is that unpredictable, artificial changes in the size of the money supply cause changes in the supply of credit (loanable funds). This, in turn, leads to poor investment decisions based on unsustainable interest rates. A glut of investment causes the boom, and the bust occurs when the investments become unprofitable. The assumption, therefore, is that perfect knowledge of interest rates would yield perfect investment and continual, stable growth.

As I explained above, fractional reserve banking does not result in unpredictable, artificial, or unsustainable changes in the size of the money supply. Austrian-based central banking will create an Austrian-based market environment with or without fractional reserve banking.

Without increasing the monetary base there is a limit on the inflation that fractional reserve banking can accomplish, but the very act of creating money out of thin air and lending beyond your reserves lowers interest rates below what the rates would be if they were based only on available savings. This means that eventually the projects that were undertaken to take advantage of the lower interest rates would turn out not be to profitable as the prices of inputs rise for the projects rise, so the need to borrow more money increases and makes available capital more scarce and increases the interest rates that you now rely on to finish the unsustainable project.

Now without a central bank or printing press to pyramid on top of this or inflate the monetary base it does limit the damage that can be done by the business cycle. That is why the depressions in the 1800s were not nearly as severe as the Great Depression or what we have today.

 

[Domalais]

If real money was legal to use without penalties, then what would be a banker's sales pitch to a rich man to convince him to put his gold in the bank if the rich man knew the banker was going to lend 90% of it out? I don't understand why anybody would do that. Why not just keep it at home? Why make the banker wealthy at the expense of the rich guy?

Exactly the same as now: The banker would pay that a percentage of his profits on the loan of the funds. Interest.

There's also the matter of things like letters of credit, payroll, and other conveniencies. When purchasing expensive items, just as in ye olden times, it's highly unlikely that you are going to physically pay. Instead, you would write a check or the bank would provide a letter of credit.

 

[Paul Or Nothing II]

Yes, what an idiot I must be to misuse an acronym like FRB, which clearly has a strong, defined, and singular meaning in economic and banking circles.

That meaning, by the way, is not fractional reserve banking.

http://lmgtfy.com/?q=frb

So you're saying that in 1870s banks used to keep all their demand-deposits on hand without lending them? What a ridiculous argument is this? If they had been doing that then there wouldn't have been so many "panics" that occurred because YES, banks even then did engage in FRB & lent out most of their demand-deposits & then one of the banks would usually be found out by its customers since it wouldn't be able to restore the depositors in gold aka bank-run, & then that would cause others to question themselves if their bank has the gold they've deposited & then so on a series of bank-runs would ensue because banks did engage in FRB & thereby inflated the moneysupply, causing markets to act as if there's more money than there actually was & then a bust would follow once the fraud is found out & then overinflated moneysupply would shrink back causing a bust so again, please learn some history

I guess the reason you're here is because you like at least something about Ron Paul or may be you're his detractor or may be you're just here on an intellectual persuit or whatever - whatever the case, I'd like to urge you to go to http://www.mises.org/ & learn Austrian Economics & its positions before you go on trying to criticising it, there is plenty of good & simple articles on that website for you to get started Good luck

You claim that it is government who established these legal banking cartels. I claim that it is bankers who did it without government's authority. I might have missed where the bankers got their authority to take-over the government. What "Article" or "Clause" in the Constitution authorized Jay Cooke and Salmon P. Chase to begin selling bonds? The Coinage Act of 1792 called for the death penalty for anyone caught debasing currency. When was that repealed? I have not been able to find it in my searches, yet.

The bankers have relied on the "appearance" of the State (hiding behind the curtain of the State) not through the legitimate authority of the State itself. Again, be specific. The U.S. Constitution established the republic governments in America. The Constitution specifically prohibited bills of credit from being created. When was that repealed? Where exactly in the Constitution are bills of credit authorized? Point being that Cooke & Chase, et. al., subverted the republic form of government not co-opted it.

I agree that the entire bunch acted without authority. Just because Lincoln became President did not mean he became legal dictator who could do whatever he wanted to do. That is what they did but they did not have the authority to do it... they had guns and an ever increasing money supply. My claim is that it was a coup d'état by bankers and friends in order to profit from war activities and counterfeiting operations.

Look, the issue I think is that you think government CAN be honest & angelic, which I'm afraid is simply not true if we look at history of governments, democratically elected or otherwise. Governments are ALWAYS corrupt because people are self-interested so if they're sitting on a coercive monopoly that can rob & dictate people aka "government" then those on it will no doubt try to use such power to benefit themselves, which is exactly why governments make "legal" FRB, "corporate personhood" & so on, it's because government has always been corrupt & helping the special interests, be it bankers or whoever, benefits them & that's always going to be true more or less

Yes, Lincoln misused power & he didn't have the authority to do it either BUT the bottomline remains that he was government so blaming only the "evil bankers" is futile without blaming the "evil government" who legatimizes the system

Here's the deal, many people here & elsewhere keep saying "Fed is private" (it really isn't, it's more llike a "hybrid" of private & government sector) so why not go sue them for stealing purchasing-power? What will happen do you think? Of course, government will protect them so one must see that the government is the problem - even when Paul talks about issues, he doesn't go on rants about "evil bankers", he blames the government, he blames Fed which again is a part of government one way or another so if we want to win a war then we must know who the real enemy is & to me & obviously to Paul, it's the government, if the government is reigned in then all those exploiting its power will be left powerless anyway, be it bankers or corrupt corporations or whoever

Which court decision rendered the constitutionality of the Federal Reserve System?

Do you think courts are so honest & angelic that they can't be bought even though most of the government clearly is bought? Again, bring a suit & see what happens! And what these coercive courts say is irrelevant because let's say they deem it "Constitutional", will that make it so? I don't think so. So what's the point of bringing up courts? They won't go out of business if they're making wrong decisions so they've little incentive to do that anyway so they'd rather take money & use their coercive "legal" power to justify positions of those who will make them rich.

Again, sorry but the supposition that government was all honest & angelic until a "coup d'etat" took place is unrealistic in my opinion, government is pretty much a synonym for corruption & that has pretty much always been the case because they're a coercive monopoly of power

Alexis de Tocqueville was a classical liberal... not a progressive.

Sorry that wasn't my point, I just happen to have immense hatred for the word "democracy" & what it stands for, & more so when it's used to described United States

Segregation of time deposits and demand deposits by itself isn't enough.

My view is that many of the opponents of FRB are hung-up on the wrong thing. The most important issue is not the idea that depositors can't all get their money back on demand. By itself, that's an issue that well-run banks and their customers could manage, without requiring a central bank to back them up.

The real problem is that banks create money; they don't just loan it out. Creating money also results in leverage, which in turn is a major cause of instability in the banking system. The way things are today, if bank customers were to withdraw just 10% of their deposits in cash, a bank will collapse; without the FDIC or the Fed to back them up, every customer of the bank would lose their deposits as a result.

YES, segregation of time-deposits & demand-deposits IS important because they "create money" through FRB, I've already explained it, so has "Gold Standard" & even "Steven Douglas" so please look up his chart as to how this happens

So banks not being able to meet their obligations & the lending of the demand-deposits has EVERYTHING to do with increase in moneysupply & causing bubbles & boom-bust-cycles. The whole fractional-reserve vs full-reserve debate IS about demand-deposits, their lending & thus, inability of banks to pay up.

 

[fisharmor]

Exactly the same as now: The banker would pay that a percentage of his profits on the loan of the funds. Interest.

There's also the matter of things like letters of credit, payroll, and other conveniencies. When purchasing expensive items, just as in ye olden times, it's highly unlikely that you are going to physically pay. Instead, you would write a check or the bank would provide a letter of credit.

Ok, riddle me this.
Suppose the federal government wasn't throwing people who start competing currencies in a rape dungeon, and that e-gold and e-bullion took off.
Suppose other companies start similar ventures.
Suppose PayPal gets on the bandwagon.
Suppose Visa starts an e-gold account.
I don't think these are huge suppositions considering those entities are going to go where the money is.

At that point, if I hold an electronic gold account, where the stated purpose from the beginning was only to transfer gold shares between account holders, and the clearinghouses also hold e-gold accounts, and they're working in a framework where it's already assumed that the card issuer is going to charge a premium for use (which is built into the cost of the goods and services by their vendors),
then where is the impetus to engage in fractional reserve banking?

E-gold and E-bullion both had systems where they had X amount of gold, they sold it to account holders, and transfers only happened between account holders.
There were no external entities involved and therefore the "lending" shell game was an unnecessary complication of their business model.
If the shell game is really only there to cover up the problems caused by fractional reserve banking, and we can demonstrate that the shell game is unnecessary, then how does that make fractional reserves necessary?
If it's unnecessary, why are men going to prison for balking at it?

 

[Travlyr]

Exactly the same as now: The banker would pay that a percentage of his profits on the loan of the funds. Interest.

There's also the matter of things like letters of credit, payroll, and other conveniencies. When purchasing expensive items, just as in ye olden times, it's highly unlikely that you are going to physically pay. Instead, you would write a check or the bank would provide a letter of credit.

As a matter of fact I would take silver or gold as payment right now if it were not for legal tender laws and capital gains tax on real money. I don't need no stinking banker.

It really wouldn't be exactly as it is now, would it? FDIC guarantees $250k paper things will be returned to the customer if the banker over extends their lending practices. Paper backing paper is a little different than paper backed by something of value.

In a sound money system, the FDIC wouldn't do that for commodities. Sure the banker might offer 1.08% to the rich guy for holding his gold and then loan it out to somebody at 9% or more, but why wouldn't the rich guy just bypass the banker and make the higher interest himself?

Oh yeah. It is because the protection of the banking industry to allow bankers the right to loan money they don't have (fractional reserve) while the rich guy goes to jail for counterfeiting if he tries it, isn't it? It is like special privilege to get wealthy by stealing from customers, isn't it? How handy. The law favors the banker and punishes the customer. That's kind of the root of our beef with the bankers.

How can we opt out of the theft? Oh, that's right... we can't. Ron Paul tried to audit the bankers, he has tried to allow people the right to competing currencies... but no matter what... the bankers just keep stealing, obfuscating, and lying. Do you suppose the guillotine will have to make a comeback before anything changes?

 

[Domalais]

Without increasing the monetary base there is a limit on the inflation that fractional reserve banking can accomplish, but the very act of creating money out of thin air and lending beyond your reserves lowers interest rates below what the rates would be if they were based only on available savings.

No. In order for the monetary base to inflate beyond the targeted size of the issuer, the required reserve ratio would have to change.

This means that eventually the projects that were undertaken to take advantage of the lower interest rates would turn out not be to profitable as the prices of inputs rise for the projects rise, so the need to borrow more money increases and makes available capital more scarce and increases the interest rates that you now rely on to finish the unsustainable project.

You're vaguely on the right track here, but you're mistaking cause for effecct.

It doesn't matter what the interest rate is. There's no such thing as 'the interest rate was too low.' It only matters that the interest rate is sustainable without devaluing the currency. More loanable funds will cause lower interest rates. As long as the cause of the loanable funds is not the continuous expansion of the money supply, that is fine. The inflation is the problem. If there's no inflation, it doesn't matter if the interest rate is 1% or 50%. So long as it's predictable and sustainable, it will not cause misguided investment.

Now without a central bank or printing press to pyramid on top of this or inflate the monetary base it does limit the damage that can be done by the business cycle. That is why the depressions in the 1800s were not nearly as severe as the Great Depression or what we have today.

Wait - what?

At the beginning of the 1800s, the Treasury was printing as fast as it could, with no targets or goals other than paying for the war.

In the mid 1800s, individual banks were printing as fast as they could, with no targets or goals other than a vague approximation of what they had in their vaults (sometimes).

In the late 1800s, banks held reserves in Treasury bonds... which the Treasury was printing as fast as it could to finance the war and reconstruction.

There's no point in the 1800s that you can point at and say 'look, there, the money supply was stable, the currency was sound, it's fractional reserve banking's fault.' You're blaming the compounding effect (fractional reserve), when you should be blaming the source of the problem (unsound money).

 

[Domalais]

As a matter of fact I would take silver or gold as payment right now if it were not for legal tender laws and capital gains tax on real money. I don't need no stinking banker.

It really wouldn't be exactly as it is now, would it?

Similar, but different. Like I said, for large purchases you would likely have your gold on deposit with a mutually trusted third party such as a bank, and exhange a letter of credit rather than physically move large quantities around. Your bank and their bank would settle accounts directly.

The difference is where the trust lies. You and your business partner are mutually choosing to honor the guarantee of a known bank. If they didn't trust the bank, they wouldn't accept the credit. Currently, you don't have the choice to honor or not honor the guarantee behind a dollar.

In a sound money system, the FDIC wouldn't do that for commodities. Sure the banker might offer 1.08% to the rich guy for holding his gold and then loan it out to somebody at 9% or more, but why wouldn't the rich guy just bypass the banker and make the higher interest himself?

Time and risk.

The amount of time required to find, interview, and evaluate loan applicants may not be worth the 8% to rich guy. If he could make double/triple/more by doing whatever it is that made him rich in the first place, why wouldn't he allow the banker to do the work for him? Rich guy isn't going to waste his time physically purchasing stocks at the stock exchange either, he's going to pay a broker to do it. No difference.

The bank also assumes the risk of the loan. Individual loan failures would not directly affect the customers of the bank; the bank's failure to choose good recipients of the money comes out of the bank's profit, not rich guy's account.

 

[fisharmor]

Currently, you don't have the choice to honor or not honor the guarantee behind a dollar.

And it bears repeating as much as possible that you also don't have a choice to honor anything other than dollars.

The amount of time required to find, interview, and evaluate loan applicants may not be worth the 8% to rich guy. If he could make double/triple/more by doing whatever it is that made him rich in the first place, why wouldn't he allow the banker to do the work for him? Rich guy isn't going to waste his time physically purchasing stocks at the stock exchange either, he's going to pay a broker to do it. No difference.

Poppycock. Sure there's no difference between stock brokers and bankers: both are cartel industries with serious barriers to entry.
That is the only thing that makes banking special.
If the rich man had the option of loaning the money directly, and if the law would back him up in this venture - perhaps by offering legal protection of contracts - instead of threatening him with prison if he signs those contracts - he'd lend money in a heartbeat.

The bank also assumes the risk of the loan. Individual loan failures would not directly affect the customers of the bank; the bank's failure to choose good recipients of the money comes out of the bank's profit, not rich guy's account.

So, the barriers to entry are about keeping rich people from taking risks? How are they allowed to play the stock market?