Fractional reserve lending versus.... what?

[Madison320]

No one wants to put a government regulator in each bank branch to make sure they aren't fractional reserve lending, but a simple solution would just that the bank owners are personally charged with fraud if a bank can not redeem a customers deposits. That should solve the problem pretty well.

Would the bank have to redeem the deposit immediately?

What if the bank has a contract with it's customers to redeem savings deposits within a certain time limit.

I think if a bank loans out more than it has in reserves, that would obviously be fraud. For example if you deposit 100 ounces of gold in a newly formed bank, and then the bank loans out 150 ounces of gold (with fraudulent notes), that would be fraud.

But if you deposit 100 ounces of gold in a newly formed bank with a contractual agreement that you are may not get all your money back for a year, and that bank loans out 50 ounces of that gold, that should be legal.

In a free market banking system I'm perfectly willing to let the bank loan out my money knowing I'm going to benefit from the interest. I'm wondering if some of the opposition to this concept is because interest rates have been held artificially low for so long that you guys are too young to remember when you could earn pretty good interest in a bank.

 

[The Gold Standard]

Would the bank have to redeem the deposit immediately?

What if the bank has a contract with it's customers to redeem savings deposits within a certain time limit.

This is fine. That is where all bank loans should come from. Time deposits.

I think if a bank loans out more than it has in reserves, that would obviously be fraud. For example if you deposit 100 ounces of gold in a newly formed bank, and then the bank loans out 150 ounces of gold (with fraudulent notes), that would be fraud.

But if you deposit 100 ounces of gold in a newly formed bank with a contractual agreement that you are may not get all your money back for a year, and that bank loans out 50 ounces of that gold, that should be legal.

That is fine. I don't think that is even considered fractional reserve banking, because the money they are lending aren't really reserves anyway. They are just investing money someone put in their care.

In a free market banking system I'm perfectly willing to let the bank loan out my money knowing I'm going to benefit from the interest. I'm wondering if some of the opposition to this concept is because interest rates have been held artificially low for so long that you guys are too young to remember when you could earn pretty good interest in a bank.

Most people feel that way. We just don't want the bank lending your checking account and then creating money out of thin air to send to the grocery store when you go buy food.

 

[Steven Douglas]

Hold up. I was not talking about a monopoly banking system like the federal reserve where you are forced to use their currency. I said a totally free market banking system, no government currency whatsoever. I think history shows and logic will tell you that in a totally free market banking system the currency of choice will be gold. The competing banks may use notes to represent the gold but that doesn't change the fact that gold will be the primary currency.

So with a totally free market banking system, would you make fractional reserve banking illegal?

Yes, and for reasons I already explained. A "gold standard" only means that gold is "valued" in weight and purity - not "price" (the exchange value against anything else).

Fractional reserve lending is a mechanism to circumvent the gold standard, thus artificially manipulating the value of gold. The exchange value of gold is distorted and manipulated by conflating mathematically, physically impossible contradictory claims to the same gold, and future promises to pay, albeit with future gold. Under fractional reserve lending, it is possible for the paper (or column entries) that deliberately MISrepresents the amount real gold to outnumber the real gold many times over. It is not a case where real money happens to be in use by others. It is a case where FICTIONAL money is in use by others, but passing itself off as real money, and all because it has a trail leading back to an original deposit -- which was loaned out over and over again to different parties over the same time period.

Again, see how FRB works - even under a gold standard - slightly different than the one I posted earlier, note the red arrows showing the first part of the cycle, and the bottom line numbers, how $100 (or 100 ANYTHING) is inflated by FRB:

 

[Travlyr]

What would happen if Elevators were allowed to fractional reserve their grain?
​

A farmer raises 10,000 bushels of corn and puts it in a grain bin, then his honest hard work has netted him a valuable asset. 10,000 bu/corn = ~ $75,000 at today's prices.

They Could Try Fractional Reserve Like the Banks Do​

Now if the farmer stored his corn, made a deposit of 10k bu. in a 10% fractional reserve CO-OP, then the CO-OP would give the farmer a deposit receipt for 10,000 bu. corn. Because the Elevators are protected by fractional reserve privilege laws, then they could loan 9000 bu to another Elevator. So in effect they keep a 10% fraction on reserve, 1000 bu., and loan $7.50 x 9000 bu = $67,500 worth of corn to Elevator #2.

Elevator #2 who borrowed the 9000 bu. of corn could store 900 bu. and loan 8100 to another fractional reserve Elevator. They loan $7.50 x 8100 bu = $60,750 worth of corn. And so on.

• Fractional reserve Elevator #3 - store 810 bu and loan 7290 bu = $54,675
• Fractional reserve Elevator #4 - store 729 bu and loan 6561 bu = $49,207
• Fractional reserve Elevator #5 - store 656 bu and loan 5905 bu = $44,287
• Fractional reserve Elevator #6 - store 590 bu and loan 5315 bu = $39,859
• Fractional reserve Elevator #7 - store 531 bu and loan 4784 bu = $35,880
• Fractional reserve Elevator #8 - store 479 bu and loan 4305 bu = $32,288
• Fractional reserve Elevator #9 - store 430 bu and loan 3875 bu = $29,063
• Fractional reserve Elevator #and on and on...

Now the Grain Elevator Storage Banks have grossed more than $413,509 on loans of 100,000 bu. of corn (of which 90,000 bu. does not really exist).

The problem comes in when the farmer unexpectedly stops by the CO-OP and wants to withdraw his grain. Instead of 10k bu. There is only 10% available. 1k bu. available. In reality, several farmers are participating so he gets his grain. But if they all come at once, make a run on the Elevators, and they all want their grain, then the Elevators just don't have it. It is even a bigger problem if next year's crop is destroyed by hail. Nobody gets their corn and the pigs go hungry. Everybody goes broke and has to live without bacon.

So what do you do? The banker calls the Federal Reserve Chairman for some quantitative easing. But the CO-OP has a bigger problem. How do you create corn out of thin air? You don't. Just like you can't create gold out of thin air.

The Elevators have made out like bandits by turning the farmer's $75,000 worth of corn into $413,509 of which most doesn't exist. They ripped the farmer off to the tune of $338,509 because his 10k bu. of corn was really worth the $413,509 in the marketplace. They made out like bandits just like the bankers do.

Fractional reserve storage did not create any more corn. It made more profits for the Elevators who have the privilege of the law. Why not just let the farmer earn the profits? Fractional reserve is not honest work.

 

[Madison320]

What would happen if Elevators were allowed to fractional reserve their grain?
​

A farmer raises 10,000 bushels of corn and puts it in a grain bin, then his honest hard work has netted him a valuable asset. 10,000 bu/corn = ~ $75,000 at today's prices.

They Could Try Fractional Reserve Like the Banks Do​

Now if the farmer stored his corn, made a deposit of 10k bu. in a 10% fractional reserve CO-OP, then the CO-OP would give the farmer a deposit receipt for 10,000 bu. corn. Because the Elevators are protected by fractional reserve privilege laws, then they could loan 9000 bu to another Elevator. So in effect they keep a 10% fraction on reserve, 1000 bu., and loan $7.50 x 9000 bu = $67,500 worth of corn to Elevator #2.

Elevator #2 who borrowed the 9000 bu. of corn could store 900 bu. and loan 8100 to another fractional reserve Elevator. They loan $7.50 x 8100 bu = $60,750 worth of corn. And so on.

• Fractional reserve Elevator #3 - store 810 bu and loan 7290 bu = $54,675
• Fractional reserve Elevator #4 - store 729 bu and loan 6561 bu = $49,207
• Fractional reserve Elevator #5 - store 656 bu and loan 5905 bu = $44,287
• Fractional reserve Elevator #6 - store 590 bu and loan 5315 bu = $39,859
• Fractional reserve Elevator #7 - store 531 bu and loan 4784 bu = $35,880
• Fractional reserve Elevator #8 - store 479 bu and loan 4305 bu = $32,288
• Fractional reserve Elevator #9 - store 430 bu and loan 3875 bu = $29,063
• Fractional reserve Elevator #and on and on...

Now the Grain Elevator Storage Banks have grossed more than $413,509 on loans of 100,000 bu. of corn (of which 90,000 bu. does not really exist).

The problem comes in when the farmer unexpectedly stops by the CO-OP and wants to withdraw his grain. Instead of 10k bu. There is only 10% available. 1k bu. available. In reality, several farmers are participating so he gets his grain. But if they all come at once, make a run on the Elevators, and they all want their grain, then the Elevators just don't have it. It is even a bigger problem if next year's crop is destroyed by hail. Nobody gets their corn and the pigs go hungry. Everybody goes broke and has to live without bacon.

So what do you do? The banker calls the Federal Reserve Chairman for some quantitative easing. But the CO-OP has a bigger problem. How do you create corn out of thin air? You don't. Just like you can't create gold out of thin air.






The Elevators have made out like bandits by turning the farmer's $75,000 worth of corn into $413,509 of which most doesn't exist. They ripped the farmer off to the tune of $338,509 because his 10k bu. of corn was really worth the $413,509 in the marketplace. They made out like bandits just like the bankers do.

Fractional reserve storage did not create any more corn. It made more profits for the Elevators who have the privilege of the law. Why not just let the farmer earn the profits? Fractional reserve is not honest work.

For one thing I object to the phrase "Because the Elevators are protected by fractional reserve privilege laws". How is loaning out something a privilege in a free society?

I just don't see the crime here. If a farmer wants to store his grain under whatever contractual conditions he agrees to, what's the problem? If a "run on grain elevators" is a concern the farmer is free to not use a grain elevator.

 

[Travlyr]

For one thing I object to the phrase "Because the Elevators are protected by fractional reserve privilege laws". How is loaning out something a privilege in a free society?

I just don't see the crime here. If a farmer wants to store his grain under whatever contractual conditions he agrees to, what's the problem? If a "run on grain elevators" is a concern the farmer is free to not use a grain elevator.

They are selling corn that doesn't exist for profit. If the Elevators can loan corn they don't have, then why not let the farmer do it? If all the farmers and Elevators sell corn that does not exist, then where is the honesty? Eventually, the farmers wouldn't bother growing corn... they'd just sell it. Just like the bankers wouldn't bother having any gold to back their currency. Eventually it becomes paper backing paper.

 

[Steven Douglas]

For one thing I object to the phrase "Because the Elevators are protected by fractional reserve privilege laws". How is loaning out something a privilege in a free society?

I just don't see the crime here.

Is counterfeiting a crime? Should it be, even? Serious question - why is counterfeiting wrong? If there were no laws against counterfeiting money, would you argue against any proposal to make it illegal?

What if I made counterfeits of half the wealth of a tiny country, duplicating its notes in a way that is detectable only to me - and spending them into circulation? No loan, no debt, no interest to collect. And here's my generous kicker: a few years later - I will redeemed them all, every last one of them, at full face value PLUS SOME INTEREST. I will replace them with real notes, honestly acquired, from that same country. What would be the harm in that?

Furthermore, what if the government of that country gave me permission to do just that? I could even pay the interest to them. Would that be a problem?

 

[Paul Or Nothing II]

That is simply not true. Governments are not ALWAYS corrupt. Until we get a critical mass of people to unlearn that lie our liberty will be elusive. Power comes from authority. If a big brute claims to be in charge, then he may be in charge until somebody comes along with a weapon. Then the person with the weapon is in charge, until somebody comes along with a bigger badder weapon... on and on, etc. Then it becomes whoever has the most weapons, biggest military, or police state. That takes money. Fiat money is tyrannical while sound money is liberating.

Which world do you live in? Look at the world, there are so many democracies around & people nearly always elect corrupt people into government because
1) because people at large are self-interested like everyone so they don't care about mundane ideas like "liberty", if someone tells them that they'll give them "free" stuff by stealing it from "those rich evil bastards" then they're all on-board because they see it in their self-interest, they don't care if a rich person has earned his money legitimately or not - even Founders had realized this that's why they'd limited the voting rights to only propertied people

2) Since the government is a coercive monopoly with power to rob, it necessarily attracts people who want to use that power to their benefit while honest people stay away mostly because they aren't interested in using the coercive monopoly to their benefit & besides, they know they're going to get flogged by majority of the dishonest people within the government, just look at Ron Paul - even Founders knew that governments are ALWAYS corrupt that's why they argued for a limited one but they didn't go far enough with the concept by still allowing it the power to rob, which takes away government's incentives to provide a good service

In a sound money system, (separation of money and government) government power is limited to whatever the taxes will buy. Power brokers can't inflate their way to tyranny. That is why counterfeiters take-over governments. Governments without money are small. Power is elusive. Rulers with the power to create unlimited amounts of money are tyrannical. That's what happened in 1861. In order to transform the great experiment in liberty into a tyrannical Union/Empire, they had to subvert the government (the constitution) and start printing money. Debasement of currency usurped the constitution. Not all by itself; however, it was the principle factor. The bankers risked being hanged for their conspiracy. I don't know why they weren't.

What incentive would government have if they can just STEAL money from people by way of taxes? What if, a milkman could extract "milk-taxes" from you at the barrel of a gun, would he have much incentive to provide a good service? What if a grocer could extract "grocery-tax" from you at the barrel of a gun, would he have much incentive to provide a good service? And so on for all the other goods - the answer is NO, that's why we believe that nobody should be able to steal from anybody because then they don't need to provide a good service!

Here are the facts: Governments are simply a means to order. Laws of the land are required if landownership is allowed. There is no escaping that fact in the 21st century. Laws of the land create governments. There is no way around it. So, if property ownership is to be embraced, then government must be embraced. There is no way around it. The trick is to keep it as honest and lest oppressive in people's lives as possible. That's the hard part. Keeping the bankers mitts out of it is the key. Unfortunately, statelessness is a lie that stands in the way of liberty, peace, and prosperity. Sadly, now it is even a fad.

Well, I'm a minarchist & have NEVER been an anarchist so I'd agree to that extent BUT if you don't address the universal that people are driven by perceived self-interest & incentives then you're disregarding the whole free market theory because self-interest principle is what all free-market theories are based upon. Under the free markets, people provide good services, not necessarily because they're honest & angelic but because that's what allows them to make money & serve their self-interest so if someone can ROB others at the barrel of a gun then they have little incentive to provide a good service

Even in the video you posted earlier in the thread, Rothbard said that the 20 years prior to Lincoln's war was a time of free banking. So, Rothbard doesn't even agree with you on that point.

Yeah, there was supposedly free-banking but how does that prove government wasn't corrupt? That's like saying US government isn't corrupt & Chinese government is because in US, you don't necessarily get thrown into jail for reproaching the government

Again, if government "can" be so "good" & it can be "tricked into being honest" then why not allow it to issue money? Why not let it produce all the goods & services in the economy instead of the "evil businesses"?

The bankers are unlawful. They do not obey the supreme law of the land ... the constitution. They are pretending to be legitimate. They have the power of printing money (unconstitutionally), the military industrial complex (unconstitutionally), CIA, FBI, IRS, etc. (all unconstitutional) and the power of media which they own.

What allows them to pass themselves off as legitimate - government

Of course Ron Paul doesn't go on public rants about "evil bankers." He is trying to get elected. He doesn't go around saying 9/11 was an inside job either, but he knows it was. Separating the language is tough while telling the truth. A lot of people can't handle the truth. When Ron Paul talks about the government being the problem, he means the illegitimate unconstitutional government.

Well, he rants all the time in public about government, government, government so sure as hell he can do thatwith banks too BUT he does NOT because he understands that the banks are able to do what they can because government legitimizes their activities & hence he focuses on the ROOT OF THE PROBLEM - government

And no, he isn't a truther, if he was then he'd openly admit it - if he can take on Fed, openly support legalization of drugs, prostitution, gay-marriage then sure he can be candid about his feelings on 9/11 - he's never been a man who'd hide his views just so that he could get elected (unless you believe he's lying to get elected) I think he's a reasonable man & understands that sweeping assertions like that can't be made

Not to mention, he FIRMLY believes that 9/11 was a result of US involvement overseas so how can he be a truther?

Ron Paul is one of the strongest advocates for government in the world today. The U.S. Constitution formed our republics. Ron Paul - "I am an advocate a very strong advocate of following very strictly the rule of law the Constitution of the United States." It doesn't get much clearer than that.

He's the strongest OPPONENT of governments in the world, there's no politician out there who opposes government as much as he does - because he doesn't conflate "need for governance" with "need for government" - most people make that mistake & it's like conflating "supporting wars" with "supporting the troops"

Rothbard agrees,
Separating the money from the State (getting rid of the central bank) is the key to liberty. Separation of money and government ends the tyrannical abusive power of the State. That's what Rothbard is saying and that is what Ron Paul is working towards.

Here is how it is done. Not by hating the State but by embracing it. The Purse & The Sword by Dr. Edwin Vieira Jr.

So now you're going to bring in Rothbard to justify the problems caused by the State? He was an anarchist (which I'm NOT as such) but here's the deal - since you believe that government can be "tricked into being honest" then why don't you trust them with issuing money? Why not trust them to produce all the goods & services people need?

I do not think courts have always been honest. At least they haven't been honest since the people quit enforcing Article VI Clause 3 on the judges, but I think there is a way to force honesty into the court system. The solution is to enforce Article VI Clause 3 again.

What incentive would they have to be honest if they're run on stolen money? And whom do you expect to enforce the said clause? Rest of the thieves???

I find the United States to be a great experiment in liberty, peace, and prosperity, but it wasn't perfect. It needs to be obeyed to be effective and amended to meet the challenges of the 21st century. That is the only reason I support Ron Paul, "The Champion of the Constitution." If he believed that all governments were corrupt, then I would not support his bid for president.

I feel the same way about democracies, but in this case it was simply the name of his book.

When I say all governments are corrupt, it's NOT to be taken as if each & every person in it is corrupt but that vast majority of them are because that's how markets work, coercive monopolies attract those who want to use coercive monopolies to their advantage

I think you far underestimate the role of government in creation of Fed, because again, it's the government that legitimizes it BECAUSE government greatly benefits from them, by way of bribes, financing their election-campaigns & without Fed, government would be handicapped as it wouldn't be able to keep issuing debt but having Fed allows them keep on doing that while Fed monetizes it & government gets to make all the grandiose promises to BUY VOTES - be it welfare or warfare

Again, it's not JUST about bankers, it's a symbiotic relationship between the government & bankers

That's not quite what the monetary base is. Assuming that there are no central bank reserves, the monetary base is the total value of all bills and coins that have been issued.

I'll try to explain in a different way.

No more dollars. No central bank. You and I are going to create a new currency tomorrow. PaulBux. We get to decide how big of a monetary base to print/mint. No matter if we have fractional reserve banking or not, we have just as much control over the total size of the money supply.

So we do some math, and we decide that based on the number of people we expect to use our currency, and the area we are supplying with currency, and the amount of gold we have in our vaults, that 5,000 PaulBux (PB) will give us the quantity and value (PB / oz) we want. We print it.

If the required reserve ratio is 100% (no fractional reserve banking), then 5,000 PB is both the monetary base (total currency) and the total size of the money supply. There's no expansion, and there are no 'electronic PaulBux.' Every person or bank that has a PaulBux on their books has one in their hand/safe/etc.

If the required reserve ratio is 20%, then 5,000 PB is the monetary base, but once that's in our banking system, the total size of the money supply is limited to 25,000 PB. It can never get any bigger than that. If we still wanted that 5,000 PB number as the size of our total money supply, we would have only issued 1,000 PB instead of 5,000 PB.

My point is that we, as the currency issuer, know both of those numbers. No matter what the reserve ratio is, we know both how big the monetary base is and how big the money supply is. We control it, still. We know what needs to be in our vaults to back that money.

It all sounds so fine & dandy, doesn't it! That these omniscient, angelic people bereft of any self-interest work the moneysupply "just right"

You miss the fact that these omniscient angelic people don't have all the information needed to central-plan the price of money & that's precisely why centrally planning ALWAYS fails because prices are products of the market, of interaction between supply & demand & perceptions of millions & billions of people, central-planners sitting in their AC rooms can't do that

Let's for the sake argument, say that Fed determines a certain moneysupply to be "just right" with magic crystal-ball, they issue 1/10th of it & of course, then expect banks to pyramid it BUT as "Gold Standard" has said, pyramid doesn't always stretch itself completely because it depends on how much people are willing to borrow & how much banks are willing to lend, & as I've said before, central-banks can't always make them do that (& for good reasons ) Just like how the good ol' Ben wants to increase moneysupply, he's even paying interest on excess reserve but the market is overburdened with debt & therefore doesn't want to pyramid anymore & hence the moneysupply is collapsing

Another reason FRB causes boom-bust-cycles is because market-participants are fooled into believing that there's more money than there ACTUALLY is. Because when someone puts money in a demand-deposit, they believe they can get ALL of ANY TIME they want but of course, that is lent out so it's not there. Now, if the depositor had known that his spending habits would be different, for example, in case of a time-deposit, he knows he can't access that money immediately so he'll be spending more cautiously while if it's a demand-deposit then he thinks it'll be available any time he wants so he spends more lavishly pushing up the demand & prices for goods/services & of course, on the other side, the person who has received that demand-deposit as loan spends that money & causes the demand & prices of goods/services to rise as well & this whole process is what leads to inflationary boom where people THINK they're much better off than they ACTUALLY are & of course, sooner rather than later, the reality start setting in which results in deflationary bust, until the process starts once again from square one on its way to the next boom-bust-cycle.

This is exactly how FRB fools the market-participants & that's why it's important to stop the lending of demand-deposits if we're to work towards a more stable economic model.

If you don't have fractional reserves, then the interest rate is not based on real savings, because those savings are not available to be loaned.

*facepalm* YES, savings ARE available to be loaned as time-deposits!

 

[Paul Or Nothing II]

If it debases my currency, then that is theft. Yes, theft should be against the law. As long as it doesn't debase my currency against my will then it makes no difference to me. i.e. as long as Bank A prints their own ... I don't care. If Bank A and Bank B both use the same currency, then Bank A's action would inflate everybody's currency. That's not honest or fair.

+1

Nicely put

WRONG. Why do you think Roosevelt declared a bank holiday? We were on a gold standard, and the currency had been debased. Lincoln's Greenbacks debased the currency, by conflating future promises with existing wealth. In other words, HE BORROWED AGAINST EVERYONE'S EXISTING HOLDINGS. That is where the value of that currency was STOLEN - not borrowed - because the currency holders themselves were not parties of interest.

Long after the civil war, Greenbacks could finally be redeemed...by their bearers, and only after the damage to the currency was done.

Of course it is, no different than Greenbacks, which used future promises to pay in order to borrow real value against existing real holdings. It forces ALL currency holders into a lending situation where they are being borrowed from, but are not parties of interest to the loan. So they are not being borrowed from at all. They are being stolen from. You don't conflate debt with real money, and you don't equate a promise to pay with payment.

Fractional reserve lending is a form of temporal counterfeiting, or collisional check kiting against real currency, akin to selling hundreds of percent of shares (promises to pay) in the same company, on the understanding that you will buy back those shares from your profits before anyone notices that contradictory counter-party claims on the same wealth were issued. Meanwhile, the value of those shares did not come out of thin air - it came from the dilution of everyone else's REAL holdings, and the deliberate distortion of the value thereof.

So yes, it is a form of theft - against all currency holders. Nothing subtle about it.

+1

This post is too good

It puts a limit on the inflation of roughly ten times the money supply. If you think that is moral that is up to you. Your claim that this doesn't induce business cycles is wrong though.

According to Austrians, in a free market interest rates serve the function of coordinating time preferences through the economy. If interest rates are high that means spending is high and savings are low. People are spending their money now and not worried about spending in the future. When savings (real savings, like CDs or long term investment accounts, not checking accounts) rise, that increases the supply of loanable funds and lowers interest rates. Businesses know that consumers are more geared toward consuming in the future, so it is a green light to take on longer term projects that will bear fruit in the future.

With fractional reserve banking, interest rates will be affected by people moving money in and out of demand accounts that they fully intend to consume with now, but if enough people load their checking accounts it will drive down interest rates and lead entrepreneurs to believe that people are saving for future consumption, when they aren't.

Also just because the limit is 10 times the money supply doesn't mean the credit supply will always be that much. It will fluctuate based on any number of factors, and affect interest rates in ways that do nothing but hide the real information businesses need.

I suppose in theory if the money supply was completely constant and outstanding credit was always 10 times the money supply and demand deposits were banned from being loaned out, the market could still determine the real interest rates and make wise decisions. That would never happen in practice though.

+1

Another good post

 

[Paul Revered]

STOP!!!! DO THIS IF YOU WANT TO WIN!! WA!!

http://www.ronpaulforums.com/showthread.php?364229-STOP!!!!-DO-THIS-IF-YOU-WANT-TO-WIN!!-WA!!

 

[Domalais]

It puts a limit on the inflation of roughly ten times the money supply.

You're not reading what I'm posting, and you do not understand the terms that you are using. It's ten times the monetary base, not ten times the money supply. It is the money supply.

If the targeted money supply is $10,000,000, and you print $1,000,000 and a have 10% required reserve ratio, you hit your target. If you print $10,000,000 and have 100% reserve, you hit your target. It is two different ways to get to exactly the same end result. It doesn't get any bigger than your target. It doesn't continue growing over time.

This applies whether the issuer of money is the Fed or a private company issuing its own currency in a market with multiple currencies.

According to Austrians, in a free market interest rates serve the function of coordinating time preferences through the economy.

Businesses know that consumers are more geared toward consuming in the future, so it is a green light to take on longer term projects that will bear fruit in the future.

...if enough people load their checking accounts it will drive down interest rates and lead entrepreneurs to believe that people are saving for future consumption, when they aren't.

Again, I think you are mistaking cause for effect. The problem isn't whether consumers are consuming now or consuming later. The problem is projected rate of return of a particular investment versus cost (interest rate) of loanable funds.

-If interest is 1% and inflation is 0%, then entrepreneurs will take loans to begin projects which have a projected rate of return of 2% or more. They are expecting a profit. (Note that this step both entrepreneurs and bankers to believe that interest rates will stay this low forever.)

-If the interest rate is that low because the central bank is expanding the money supply beyond natural growth, inflation will occur. To counteract/mitigate the inflation, the central bank will either slow or stop its expansion of the money supply.

-Interest rates rise because the artificial downward pressure on the rate has lessened or stopped.

-Now, the interest rate is 5% and the rate of inflation is 2%.

-The projects/businesses/etc. that entrepreneurs started to take advantage of 1% interest and 0% inflation are now losing money. They are not profitable under the market's real interest rates and real rates of inflation. The credit they need to run their business costs more than the business makes, and they aren't outearning inflation.

-Businesses fail, people lose jobs. The bubble has burst.

-Part B: In response to the burst bubble, the central bank starts expanding the money supply to attempt to prevent a recession. Go back to step 1 and repeat.

Also just because the limit is 10 times the money supply doesn't mean the credit supply will always be that much. It will fluctuate based on any number of factors, and affect interest rates in ways that do nothing but hide the real information businesses need.

That is true regardless of whether fractional reserve banking is used or not. As consumer expectations, confidence, and/or preferences for spending and saving change, the supply of loanable funds is affected. Fractional reserves may affect the magnitude of the change (arguable), but they do not cause the fluctuation. Consumers cause the fluctuation.

 

[The Gold Standard]

You're not reading what I'm posting, and you do not understand the terms that you are using. It's ten times the monetary base, not ten times the money supply. It is the money supply.

If the targeted money supply is $10,000,000, and you print $1,000,000 and a have 10% required reserve ratio, you hit your target. If you print $10,000,000 and have 100% reserve, you hit your target. It is two different ways to get to exactly the same end result. It doesn't get any bigger than your target. It doesn't continue growing over time.

This applies whether the issuer of money is the Fed or a private company issuing its own currency in a market with multiple currencies.

You're right, I misspoke. I meant monetary base. Everything else I said still applies.

Again, I think you are mistaking cause for effect. The problem isn't whether consumers are consuming now or consuming later. The problem is projected rate of return of a particular investment versus cost (interest rate) of loanable funds.

-If interest is 1% and inflation is 0%, then entrepreneurs will take loans to begin projects which have a projected rate of return of 2% or more. They are expecting a profit. (Note that this step both entrepreneurs and bankers to believe that interest rates will stay this low forever.)

-If the interest rate is that low because the central bank is expanding the money supply beyond natural growth, inflation will occur. To counteract/mitigate the inflation, the central bank will either slow or stop its expansion of the money supply.

-Interest rates rise because the artificial downward pressure on the rate has lessened or stopped.

-Now, the interest rate is 5% and the rate of inflation is 2%.

-The projects/businesses/etc. that entrepreneurs started to take advantage of 1% interest and 0% inflation are now losing money. They are not profitable under the market's real interest rates and real rates of inflation. The credit they need to run their business costs more than the business makes, and they aren't outearning inflation.

-Businesses fail, people lose jobs. The bubble has burst.

-Part B: In response to the burst bubble, the central bank starts expanding the money supply to attempt to prevent a recession. Go back to step 1 and repeat.

It is you who is confusing cause and effect. Whether consumers are spending or saving is what determines the interest rates. Interest rates are real prices, not just a number set by a central planner. The more real savings people put away, the more loanable funds are available, which lowers the price of those funds. Fewer savings means fewer loanable funds which means a higher price. The consumer's time preference is what determines the interest rates and therefore the profitability of projects.

That is true regardless of whether fractional reserve banking is used or not. As consumer expectations, confidence, and/or preferences for spending and saving change, the supply of loanable funds is affected. Fractional reserves may affect the magnitude of the change (arguable), but they do not cause the fluctuation. Consumers cause the fluctuation.

Without fractional reserve banking, interest rates would fluctuate based on actual long term savings and would therefore give entrepreneurs valuable information. With fractional reserve banking, interest rates could fall if a lot of people make checking account deposits, which does nothing to show the consumer's time preference.

 

[Domalais]

Central planning cartel collude collude fucked cartel fuck state planning rape cages monstrous communist ruining imprisoning

I enjoy discussing economic theory. If you would like to join in the discussion, I would be happy to reply with agreements or disagreements on whatever input or criticism you have as I have with other intelligent, thoughtful posters in this thread. I have no desire to engage in flamethrowing, blind repetition of rhetoric, or the types of discussions where everyone assumes that anyone who disagrees with them is Hitler. I will not reply to or engage in the type of conversation you are attempting to start.

 

[Travlyr]

I enjoy discussing economic theory.

Economic theory? It is very simple. One is theft and the other is honest trade.

• Unsound currency funds central planning and is based on counterfeiting (theft) to control societies. It perpetuates "divine rights of elite" while starving and controlling "lesser" beings. The result is tyranny, democide, and extreme rich vs. poor classism.
• Sound monetary policy is an honest system of trade that promotes liberty, peace, and prosperity equability for all based on effort and opportunity.

 

[fisharmor]

I'M NOT LISTENING I'M NOT LISTENING LALALALALA MY FINGERS ARE IN MY EARS YOU BIG MEANIE MY GOD HOW I LOVE STRAWMEN DESPITE ACCUSING OTHER PEOPLE OF USING THEM

Your economic theory requires men getting raped in prison for lending money, and it requires men getting raped in prison for engaging in full reserve banking.
This is an unanswerable fact. If you want to ignore it, fine. You're hopeless. I'm bringing it up for everyone else.

 

[Domalais]

It is you who is confusing cause and effect. Whether consumers are spending or saving is what determines the interest rates. Interest rates are real prices, not just a number set by a central planner. The more real savings people put away, the more loanable funds are available, which lowers the price of those funds. Fewer savings means fewer loanable funds which means a higher price. The consumer's time preference is what determines the interest rates and therefore the profitability of projects.

I agree with you. Consumer preference is absolutely the primary driver for interest rates. My disagreement is that entrepreneurs are not directly reacting to consumer preference, they are reacting to interest rate. Consumer preference is only one of many things that affect the supply of loanable funds, and thus there are other factors that affect interest rates.

To me, it's like saying I'm eating plankton when I'm actually eating whale.

Without fractional reserve banking, interest rates would fluctuate based on actual long term savings and would therefore give entrepreneurs valuable information. With fractional reserve banking, interest rates could fall if a lot of people make checking account deposits, which does nothing to show the consumer's time preference.

Your use of the word time preference is a real hangup for me. It is not a matter of consume now versus consume later, or a delay of purchase that drives an entrepreneur to embark on long term projects if the interest rate is low or short term projects if the interest rate is high. The issue is efficiency. In economic terms, the most efficient project is the one that earns the highest rate of return. Simplified, it must be what consumers want most because they are willing to pay the highest markup for it.

If the rate of return on an investment exceeds the cost of money to fund that investment, then a rational actor will make the investment. Time has nothing to do with it.


I do agree with you that fractional reserve banking causes funds which are more liquid to enter the market for loanable funds.

 

[Madison320]

Travlyr,Gold Standard,Stephen Douglas: I think the confusion is between paper notes and physical gold. If a bank is printing paper notes for gold IT DOES NOT HAVE, then that is clearly fraud. But as long as we are talking about a free market banking system and the banks are using gold as currency, I see nothing wrong with fractional reserve banking.

Question: Suppose you are holding an ounce of gold. Then the banks start doing fractional reserve banking. Are you claiming that your physical ounce of gold has now lost purchasing power because of the fractional reserve lending?

 

[The Gold Standard]

I agree with you. Consumer preference is absolutely the primary driver for interest rates. My disagreement is that entrepreneurs are not directly reacting to consumer preference, they are reacting to interest rate. Consumer preference is only one of many things that affect the supply of loanable funds, and thus there are other factors that affect interest rates.

To me, it's like saying I'm eating plankton when I'm actually eating whale.

Your use of the word time preference is a real hangup for me. It is not a matter of consume now versus consume later, or a delay of purchase that drives an entrepreneur to embark on long term projects if the interest rate is low or short term projects if the interest rate is high. The issue is efficiency. In economic terms, the most efficient project is the one that earns the highest rate of return. Simplified, it must be what consumers want most because they are willing to pay the highest markup for it.

If the rate of return on an investment exceeds the cost of money to fund that investment, then a rational actor will make the investment. Time has nothing to do with it.


I do agree with you that fractional reserve banking causes funds which are more liquid to enter the market for loanable funds.

We're getting closer now. Here is the conclusion.

Yes entrepreneurs make decisions based on interest rates, not necessarily consumer time preference. In a free market with sound money and 100% reserve banking, they tell you the same thing. Interest rates directly tells consumer time preference, because the only thing that affects interest rates is the supply and demand of loanable funds.

What you are saying is that other things affect interest rates. Yes, that is the case today or in any centrally planned system or fractional reserve system. Not in a free market with 100% reserve banking and sound money.

 

[fisharmor]

Travlyr,Gold Standard,Stephen Douglas: I think the confusion is between paper notes and physical gold. If a bank is printing paper notes for gold IT DOES NOT HAVE, then that is clearly fraud. But as long as we are talking about a free market banking system and the banks are using gold as currency, I see nothing wrong with fractional reserve banking.

Question: Suppose you are holding an ounce of gold. Then the banks start doing fractional reserve banking. Are you claiming that your physical ounce of gold has now lost purchasing power because of the fractional reserve lending?

Question:
What is the functional difference between
a) holding one ounce of gold and nine gold-plated tungsten slugs I claim are gold
b) holding one ounce of gold and claiming that I hold 10 ounces of gold

 

[Domalais]

• Unsound currency funds central planning and is based on counterfeiting (theft) to control societies. It perpetuates "divine rights of elite" while starving and controlling "lesser" beings. The result is tyranny, democide, and extreme rich vs. poor classism.
• Sound monetary policy is an honest system of trade that promotes liberty, peace, and prosperity equability for all based on effort and opportunity.

You'll get no disagreement from me on either of your points. Unsound currency prioritizes the survival, continuation, and power of the government over the economic power and welfare of the people. My opinion, which I've supported in this thread, is that a sound currency will lead to a sound banking system with or without fractional reserve banking. Here's what I think:

• There are two issues at hand: the integrity of the currency issuer and the integrity of the banking system.
• The trustworthiness of the banking system depends on the trustworthiness of the currency. You cannot make a sound bank with an unsound currency.
• The opposite is not true: A currency is either sound or unsound on its own merits. If a bank fails, its customers may lose money but it does not take a single gram of gold out of the vault of the currency issuer.

Disagreements?