Fractional reserve lending versus.... what?

[Domalais]

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?

To take this another step:

If the Bank of Madison issues one thousand Madison Dollars for its one thousand ounces of gold and will redeem one dollar for one ounce, it doesn't matter if the Banks of Derpville, Herptown, and Duhborough all fail. I can take my Madison Dollar back to the Bank of Madison and get my gold. If I choose to deposit my Madison Dollar with the Bank of Derpville and it fails, it has no impact on the integrity of the Bank of Madison or the Madison Dollar. I can attempt to get my money back in a number of ways, but the bottom line is that I made an unwise economic decision in my business relationship with an unsound bank, and I am reaping the consequences of that unwise decision.

 

[Travlyr]

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?

Yes. It is no different from an individual who tries to cheat others by claiming his gold coin is .999 pure when in fact it is only a fraction of that. It is fraud.

 

[The Gold Standard]

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?

No, because banks can't fractionally reserve lend gold coins. If they loan out the gold coins you deposited, you can't withdraw them. They can't print more, so those coins are gone. If you put them in a demand account where you were supposed to have access to that money whenever you want, then the bank defaults if it can't redeem your deposit. Your gold didn't lose its purchase power. You just lost your gold.

 

[Madison320]

Yes. It is no different from an individual who tries to cheat others by claiming his gold coin is .999 pure when in fact it is only a fraction of that. It is fraud.

Can you show any evidence of this in history? Where physical gold lost value due to fractional reserve banking?

 

[Madison320]

No, because banks can't fractionally reserve lend gold coins. If they loan out the gold coins you deposited, you can't withdraw them. They can't print more, so those coins are gone. If you put them in a demand account where you were supposed to have access to that money whenever you want, then the bank defaults if it can't redeem your deposit. Your gold didn't lose its purchase power. You just lost your gold.

Exactly. This is why I believe the problem is with printing phony notes, not fractional reserve banking.

 

[The Gold Standard]

To take this another step:

If the Bank of Madison issues one thousand Madison Dollars for its one thousand ounces of gold and will redeem one dollar for one ounce, it doesn't matter if the Banks of Derpville, Herptown, and Duhborough all fail. I can take my Madison Dollar back to the Bank of Madison and get my gold. If I choose to deposit my Madison Dollar with the Bank of Derpville and it fails, it has no impact on the integrity of the Bank of Madison or the Madison Dollar. I can attempt to get my money back in a number of ways, but the bottom line is that I made an unwise economic decision in my business relationship with an unsound bank, and I am reaping the consequences of that unwise decision.

It may have been an unwise decision, but you were still defrauded and the bank that defrauded you should be forced to reconcile the situation. Just like if you buy a used car off of Craigslist for $10,000 and they claimed it had certain specs and you come to find out later that they deceived you. You should have known better than to make that deal with some strange guy on Craigslist, but you were still defrauded and have recourse.

 

[The Gold Standard]

Exactly. This is why I believe the problem is with printing phony notes, not fractional reserve banking.

The only way fractional reserve banking is possible is with phony notes. If you oppose one you oppose them both.

 

[Madison320]

The only way fractional reserve banking is possible is with phony notes. If you oppose one you oppose them both.

Then I must have the wrong definition of fractional reserve banking.

Suppose there are no paper notes, no electrons. You can only carry gold around physically. Fred deposits 100 ounces of gold in Bank A. Bank A then lends out 90 ounces of that gold to John. John then deposits that 90 ounces of physical gold into Bank B, etc. Is that not fractional reserve banking?

 

[Travlyr]

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?

The difference is money vs. currency. Money is a valuable commodity. Gold, fish, corn, land, cars, tangibles are money. Currency is what is used to trade. Land is valuable but it is not a good currency and neither is fish for obvious reasons. Copper is a good currency except it gets heavy for larger purchases. Silver and gold are better because they are more scarce and therefore more valuable per ounce.

Paper has very little value as money because it is not scarce, but it functions quite well as currency, as long as, it is 100% redeemable. Anything less than 100% redeemable means that the paper currency is only worth a fraction of the real value backing the paper. Whoever is responsible for printing paper currency at less than 100% redeemable is cheating the system. Fractional reserve banking cheats the system.

 

[The Gold Standard]

Then I must have the wrong definition of fractional reserve banking.

Suppose there are no paper notes, no electrons. You can only carry gold around physically. Fred deposits 100 ounces of gold in Bank A. Bank A then lends out 90 ounces of that gold to John. John then deposits that 90 ounces of physical gold into Bank B, etc. Is that not fractional reserve banking?

If you put that money in an account with an agreement that you don't have access to it for a period of time, then no it is not technically fractionally reserve banking, although I guess the terminology could be debated. That situation is nothing like what we have today.

If you put that money in an account that you expect to be able to withdraw from it whenever you want to, when you go to the bank to get your coins and they don't have them, that is fraud.

 

[Domalais]

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.

I think things are slightly more complicated than you suggest.

First, obviously, consumers are only responsible for the supply side of the equation. A change in demand, which could occur for a range of reasons, will change the interest rate without any change in consumer preferences or expectation. This could be a temporary change in demand, and rates will eventually return to their prior position, or this could be a permanent change which establishes a new equilibrium rate.

Second, unless we're talking about a very simple/small economy where individual suppliers of loanable funds are directly lending to entrepreneurs, there will be a complex market of aggregators, brokers, agents, and what-have-you. This will add complexity to the supply of credit.

 

[The Gold Standard]

Obviously no one can predict the future and nothing is perfect. All this theory does is explain how savings and spending coordinates resources for sustainable growth. If interest rates were low and a bunch of projects started and drove up interest rates while you were still on the sidelines, then obviously they used up the resources that were saved and you have to wait. It doesn't matter how complex the market is. Real money that is saved is money that isn't being spent. That means you have capital, labor, and resources available for your long term projects without having to bid up prices against other actors in the market. When there are little savings, then long term investments aren't profitable and capital, labor, and resources are tied up serving the consumer who is blowing all of their money right now. There will be some hit and miss and some failed companies and what not, but you would not have widespread booms and busts as a result of this.

 

[Steven Douglas]

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?

Of course it has. Where do you think the VAST majority of currency inflation and money creation comes from in the economy? It's not from the Fed. It's not from the warfare/welfare deficit borrowing and spending side. The vast majority of currency inflation is from the commercial banks and fractional reserve lending side! Don't take my word for it - the Fed itself doesn't deny it. READ HERE

Or, go back one page. Did you look the chart I created? That can be $100 in gold specie. With fractional reserve lending between two banks, $100 in real gold is multiplied into $800 in circulating bank notes -- "paper notes for gold IT DOES NOT HAVE", but which are all being passed off no differently than the coins they misrepresent, which is "clearly fraud".

Let's say that you and I are in an isolated economy, with only $200 in gold total in existence, hard specie, and only two banks. You are a holder of $100, and have nothing to do with banks. I have the other $100 - which I deposit with Bank A (see chart).

Over a relatively short period of time, between me, the banks, and everyone who borrowed and deposited money between the two banks, there is now $800 circulating, "gold claims" which are masquerading as real gold in the form of bank notes. However, the banks in reality only have less than $100 between them as actual reserves. Meanwhile, the notes, all circulating simultaneously, each claim to represent real gold, and are promises to pay such on demand --- 90% of which the banks do not have. Fortunately for the banks, less than 10% of the notes are actually presented to the bank for hard specie payment. The rest of the notes continue to circulate on faith, and so long as that happens, the very real fraud goes undetected.

Now here you are, having held onto your $100 in gold coins, a full 50% of all the gold in existence. You waited, but now decide to spend some of them. However, since the bank notes are circulating as EQUAL in value to your coins, your $100 is now competing against $800 in fully gold redeemable bank notes. How much is your $100 of hard specie worth now? Do you think it might have lost just a wee bit of its purchasing power in this process? That's fractional reserve lending even under a gold standard.

This is precisely why Roosevelt declared a bank holiday. It was not because of a central bank. The Fed was created as cover for this type of banking embezzling, and was not the original criminal, but only an accomplice to a crime - an accessory after the fact - a facilitator which had failed to do its job in providing cover for banks. There were runs on banks that truly did not have the gold that the bank's demand notes claimed to represent. The banks really did not have it! NOT BECAUSE IT WAS LENT OUT TO OTHERS, hard at work in the economy, but rather the SAME GOLD had been lent out to MULTIPLE OTHERS SIMULTANEOUSLY (again, see the chart I made). Multiple claims on the same gold were in multiple places in the same time, all at once.

Even if you have sound currency in an otherwise free market, if fractional reserve lending (the ability to loan/create and circulate multiple claims to the same specie to multiple parties simultaneously), you still have two problems, only one of which is the fraud, instability and inherent insolvency of the banks and banking system itself. The bigger problem is that innocent holders of currency, the ones who have nothing to do with such banks, have had their purchasing power eroded by a hidden tax that borrowed value from all other like specie in existence - without making you, the specie holder, a party of interest.

 

[Madison320]

Now here you are, having held onto your $100 in gold coins, a full 50% of all the gold in existence. You waited, but now decide to spend some of them. However, since the bank notes are circulating as EQUAL in value to your coins, your $100 is now competing against $800 in fully gold redeemable bank notes. How much is your $100 of hard specie worth now? Do you think it might have lost just a wee bit of its purchasing power in this process? That's fractional reserve lending even under a gold standard.

This is precisely why Roosevelt declared a bank holiday. It was not because of a central bank. The Fed was created as cover for this type of banking embezzling, and was not the original criminal, but only an accomplice to a crime - an accessory after the fact - a facilitator which had failed to do its job in providing cover for banks. There were runs on banks that truly did not have the gold that the bank's demand notes claimed to represent. The banks really did not have it! NOT BECAUSE IT WAS LENT OUT TO OTHERS, hard at work in the economy, but rather the SAME GOLD had been lent out to MULTIPLE OTHERS SIMULTANEOUSLY (again, see the chart I made). Multiple claims on the same gold were in multiple places in the same time, all at once.

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

 

[Travlyr]

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

This is not true. We have clearly demonstrated throughout this thread that fractional reserve is theft. Selling something you don't own is fraud.

In the case of the fractional reserve grain elevators for example. The farmer spent 9 months and tilled the soil, sowed the seeds, watered the plants, protected them against predators, harvested the grain, and put the grain in storage as food to feed pigs and make bacon. For his work he was paid $75,000. The elevator operators sold grain they did not grow and did not have for $338,509 and did absolute nothing for it except sell grain that did not exist. That's fraud.

 

[Travlyr]

For those who really want to see how selling fractional reserve paper silver is theft, read this.

The Coming Paradigm Shift in Silver

That is fractional reserve.

 

[fisharmor]

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

Ok, Ben, here's a simple question: Is gold money?
If not, why not?
If so, why would we choose to use paper money?

 

[Domalais]

Real money that is saved is money that isn't being spent. That means you have capital, labor, and resources available for your long term projects without having to bid up prices against other actors in the market.

You've lost me. Of course you bid up prices against other actors in the market. Were it not for your purchase of that capital, prices would have been lower.

When there are little savings, then long term investments aren't profitable and capital, labor, and resources are tied up serving the consumer who is blowing all of their money right now.

Still lost. Investments are still profitable so long as the rate of return exceeds the cost of capital! It has nothing to do with short term or long term.

 

[The Gold Standard]

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

If the paper is redeemable in a fixed amount of gold, then fractional reserve banking can, at least temporarily until the bank collapses, lower the value of the gold. If the paper is redeemable at the market gold price then it wouldn't. This is not considering any legal tender laws or other government coercion.

 

[Madison320]

If the paper is redeemable in a fixed amount of gold, then fractional reserve banking can, at least temporarily until the bank collapses, lower the value of the gold. If the paper is redeemable at the market gold price then it wouldn't. This is not considering any legal tender laws or other government coercion.

Yes. The problem is not fractional reserve banking. The problem is a government controlled monopoly of the currency. As long as the government doesn't force me to use paper my gold will keep it's value.