The Fractional Reserve Banking Debate

[teacherone]

K then this is not really FRB, it is a variation of a loan.

???

you make no sense here.

when you deposit money in a savings account at a bank you are of course loaning that bank your money. the interest rate you receive on your account is what you charge the bank to use your money as reserves to create new loans to other parties.

you know, and i know, and practically anyone with a pulse knows already that the bank does not keep all your money in a box with your name on it ready to give back to you upon demand. this is common knowledge.

if you don't like it, rent a storage compartment and store your money there.

or participate in the "fraud" and earn some interest while you're at it.

 

[AlexMerced]

As far a 100% Federal Reserve Banking goes, listen to the most recent Lew Rockwell podcast, and Joe Salerno makes a pretty good case why FRB should not exist period.

But I don't think anyone made any counter argument to the Property Rights issue, that even if the depositors consent and it's not fraud, that by leveraging their depositors they are still destroying the purchasing power of their non-depositors which is destruction of property.

Given natural price level changes will occur due to productivity gains and losses, but that's not the fault of one particular economic actor, credit expansion has a culprit.

Still no response to the porperty rights issue inherent in FRB

 

[mczerone]

Still no response to the porperty rights issue inherent in FRB

My personal take on FRB is that it is like any other "futures" contract: A promise to pay something that you may or may not have in the future. A small rate of FRB may be allowable if the banker is suspect to market pressure and has a reputation for returning positive investments.

The property rights issue you have seems to be identical to that placed on any loan transaction: If you promised to repay someone 12 gold pieces at some future point to use their 10 gold pieces now, you have seemed to created by fiat 2 gold pieces. But part of that contract is what you may have in the future, some of your labor that you intend to use to secure the extra 2 gold pieces, and the risk of loss.

For FRB contracts the banker is promising to pay "on demand" the whole deposit of the depositor, even though in the present he has spent some of it. Part of the "property" exchanged is the banker's labor that is expected to be used to repay the depositor.

None of this addresses the actuarial viability of such a scheme, as "on demand" cannot be statistically measured, but there is no violation of either libertarian philosophy or the laws of thermodynamics in FRB (or interest loans, short selling, performance contracts, et al).

 

[AlexMerced]

My personal take on FRB is that it is like any other "futures" contract: A promise to pay something that you may or may not have in the future. A small rate of FRB may be allowable if the banker is suspect to market pressure and has a reputation for returning positive investments.

The property rights issue you have seems to be identical to that placed on any loan transaction: If you promised to repay someone 12 gold pieces at some future point to use their 10 gold pieces now, you have seemed to created by fiat 2 gold pieces. But part of that contract is what you may have in the future, some of your labor that you intend to use to secure the extra 2 gold pieces, and the risk of loss.

For FRB contracts the banker is promising to pay "on demand" the whole deposit of the depositor, even though in the present he has spent some of it. Part of the "property" exchanged is the banker's labor that is expected to be used to repay the depositor.

None of this addresses the actuarial viability of such a scheme, as "on demand" cannot be statistically measured, but there is no violation of either libertarian philosophy or the laws of thermodynamics in FRB (or interest loans, short selling, performance contracts, et al).

Ok, I understand that, but what I'm saying the the effect of the contract on non-depositors who didn't consent for value to be stolen by them through credit expansion.

Although, one might say that then producing any good then is considered theft cause every unit produced steals value from the unit produced prior to which I disagree, good arn't purchased as a store of value, money is, so if the money cannot steal value cause it's stolen cause of credit expansion then that property destruction.

 

[mczerone]

Ok, I understand that, but what I'm saying the the effect of the contract on non-depositors who didn't consent for value to be stolen by them through credit expansion.

Although, one might say that then producing any good then is considered theft cause every unit produced steals value from the unit produced prior to which I disagree, good arn't purchased as a store of value, money is, so if the money cannot steal value cause it's stolen cause of credit expansion then that property destruction.

You don't own value. You own assets, property. That property can be exchanged with others, who will value it by agreeing to an exchange.

Money is used as a store of value because its overall supply is generally stable, making the marginal value rather constant in the minds of purchasers. If FRB on the market works to change the percieved supply sufficiently to affect the marginal value, the FRB bankers will soon be insolvent and need to expose the real value of their notes (or rather, the real market value of the assets backing their notes). Those who held money outside the FRB system may be in a worse position while the FRB's are in the early phases of an expansion, but they will be better off in the long run as long as the FRBs are allowed to fail and devalue their notes to their bankruptcy value.

In short, a true money market would allow FRB only to the extent that real resources are reliably accruing to the bank, and if the bank over-extends its liabilities the market signals will force correction long before non-FRB banks suffer. Further, the more the FRBs over-extend, the more the non-FRB model is the winning strategy - benefiting the class of savers with which you are concerned.

 

[fisharmor]

You don't own value. You own assets, property. That property can be exchanged with others, who will value it by agreeing to an exchange.

Money is used as a store of value because its overall supply is generally stable, making the marginal value rather constant in the minds of purchasers. If FRB on the market works to change the percieved supply sufficiently to affect the marginal value, the FRB bankers will soon be insolvent and need to expose the real value of their notes (or rather, the real market value of the assets backing their notes). Those who held money outside the FRB system may be in a worse position while the FRB's are in the early phases of an expansion, but they will be better off in the long run as long as the FRBs are allowed to fail and devalue their notes to their bankruptcy value.

In short, a true money market would allow FRB only to the extent that real resources are reliably accruing to the bank, and if the bank over-extends its liabilities the market signals will force correction long before non-FRB banks suffer. Further, the more the FRBs over-extend, the more the non-FRB model is the winning strategy - benefiting the class of savers with which you are concerned.

Even the corrupted money market allows instruments that mimic real FRB. Certificates of Deposit, for instance, and Bonds, and other instruments which are generally not payable on demand.


I think in a free money market that would be the only type of fractional reserve banking going on, there would be less misrepresentation of what is actually happening, and there would be no laws encouraging the borrower not to keep enough funds on hand.

I would have no problem with this limited FRB in the same manner that I would have no problem with individuals messing around with gold markets in other ways (like making electronic components and shooting them into space). I also think that in a situation with free commodity currency, individuals would be much less likely to mess around with their commodity's value, for the simple reason that in a free society other individuals would be perfectly free not to use their commodity if they changed its value too severely, whether it be down OR up.

 

[IceForester]

Stary Hickory 's case is 100% clear.

FRB is a fraud, and not only does the loan expand the money supply but Im amazed people can keep a straight face about this when the money supply expansion is not 10% of deposits, or 40%, or even 180%, its freaking 900%! The overwelming majority of the money supply is fluffy fraud debt money, and people also need to understand that the fraud works just as well with "gold" backed "sound" money.

 

[ninepointfive]

There is a real easy way to sum the whole thing.

Is a Fractional Reserve Banking System in any way shape or form a part of an HONEST MONEY SYSTEM? I think not.

same system madoff used!

 

[CryLibertyOrDeath]

Ok, I understand that, but what I'm saying the the effect of the contract on non-depositors who didn't consent for value to be stolen by them through credit expansion.

Although, one might say that then producing any good then is considered theft cause every unit produced steals value from the unit produced prior to which I disagree, good arn't purchased as a store of value, money is, so if the money cannot steal value cause it's stolen cause of credit expansion then that property destruction.

You have no right to guaranteed level of supply/demand that maintains the market value of your assets. Just because FRB is one way that the relationship between supply and demand can be altered doesn't necessarily mean anything about FRB.

 

[AlexMerced]

You have no right to guaranteed level of supply/demand that maintains the market value of your assets. Just because FRB is one way that the relationship between supply and demand can be altered doesn't necessarily mean anything about FRB.

I agree but let's apply it to another good... baseball cards

If I print more of particularly rare baseball card then the supply has truly changed and the price changes are legitimate.

Although If I just sell claims to the rare baseball card, yet don't have the supply to honor all those claims, I'm committing fraud that'll effect the value of those who actually physically own the good in question not cause of any actual change in supply and demand.


Again, it's not thatI don't think a free abnking FRB system isn't sustainable, it probably is, I just don't think it's ethical still or has any particular advantages.




Although, I would be alright with something like the following, where the government uses it's setting standard measurements power to establish that all money sustitutes have standard measures meants, and are graded based on the banks reserve ratio.

For example, all mony substutues are dollar = 1/40 ounce of gold

class 1 dollars = 75%-100% reserves
Class 2 dollars = 50%-75% reserves
class 3 dollars = 25% - 50% reserves
class 4 dollars = 0%-25% reserves

This way a store ownercan check each dollar with an online database as the quality of the reserves and can take the level of dollars he will accept.

this will create tiers in the economy, there will be level of the economy that will only work with class 1 money and will genrally pay lower nominal prices and have lower yields on their savings

while tier 4 actors will have higher prices, yet they will have hgiher and more risky yields from their investments.

This way it's clear to the consumer at which risk level they want to play in.



This is Constitutional use of setting standards, is not regulating or telling anyone to do anything, yet makes the money market more transparent for consumers to manage risk.

 

[CryLibertyOrDeath]

I agree but let's apply it to another good... baseball cards

If I print more of particularly rare baseball card then the supply has truly changed and the price changes are legitimate.

Although If I just sell claims to the rare baseball card, yet don't have the supply to honor all those claims, I'm committing fraud that'll effect the value of those who actually physically own the good in question not cause of any actual change in supply and demand.


Again, it's not thatI don't think a free abnking FRB system isn't sustainable, it probably is, I just don't think it's ethical still or has any particular advantages.




Although, I would be alright with something like the following, where the government uses it's setting standard measurements power to establish that all money sustitutes have standard measures meants, and are graded based on the banks reserve ratio.

For example, all mony substutues are dollar = 1/40 ounce of gold

class 1 dollars = 75%-100% reserves
Class 2 dollars = 50%-75% reserves
class 3 dollars = 25% - 50% reserves
class 4 dollars = 0%-25% reserves

This way a store ownercan check each dollar with an online database as the quality of the reserves and can take the level of dollars he will accept.

this will create tiers in the economy, there will be level of the economy that will only work with class 1 money and will genrally pay lower nominal prices and have lower yields on their savings

while tier 4 actors will have higher prices, yet they will have hgiher and more risky yields from their investments.

This way it's clear to the consumer at which risk level they want to play in.



This is Constitutional use of setting standards, is not regulating or telling anyone to do anything, yet makes the money market more transparent for consumers to manage risk.

That is an interesting idea, but I don't think it's necessary and less likely to be achieved than the relatively modest steps of instituting a free market interest rate regime and establishing a currency standard or commodity index.

FRB by itself doesn't change the money supply over time, unless the reserve standard changes. That is, there is a theoretical credit maximum originating from FRB relative to the deposits.

FRB only magnifies the effects of changing the monetary base, which is the minting/printing of the Fed.

Furthermore, I would argue that there are relationships between the ratio of reserve/unreserved deposits, interest rates, and the expectations of future economic performance that would prevent distortions if we let the market set interest rates. I think that the existence of FRB lets people take on more risk, if they choose, and that is the benefit, because there are many investments that are well-worth the leverage in most cases, yet this financing would not otherwise be available.

 

[AlexMerced]

That is an interesting idea, but I don't think it's necessary and less likely to be achieved than the relatively modest steps of instituting a free market interest rate regime and establishing a currency standard or commodity index.

FRB by itself doesn't change the money supply over time, unless the reserve standard changes. That is, there is a theoretical credit maximum originating from FRB relative to the deposits.

FRB only magnifies the effects of changing the monetary base, which is the minting/printing of the Fed.

Furthermore, I would argue that there are relationships between the ratio of reserve/unreserved deposits, interest rates, and the expectations of future economic performance that would prevent distortions if we let the market set interest rates. I think that the existence of FRB lets people take on more risk, if they choose, and that is the benefit, because there are many investments that are well-worth the leverage in most cases, yet this financing would not otherwise be available.

Yeah, it's not asimple thing to get to, but it would shield modest investors if all dollars arn't "equal" despit the institution it's from, cause let's say one bank does have a failure it'd cause a reaction across the entire banking system cause most people don't understand it.

But if you have class 1 money, and you hear a class 4 bank failed, your not rushing to make a withdrawal afterwards.

 

[CryLibertyOrDeath]

We are subject to others' expectations in the pricing system anyway, FRB just allows us to make magnified decisions. I don't think the existence of FRB is as much of a problem as full deployment of deposits in investment bank underwriting/mortgage trading at the minimum reserves being the only game in town.

The answer to different risk appetites is specialized banks. There would be the old-school, "classy" banks where people keep their dear deposits and other banks where people want higher interest rate returns and more versatile service, due to their scale (like most banks today). Instead, we are getting less and less banks due to the environment created by certain banking regulations and taxes.

 

[AlexMerced]

We are subject to others' expectations in the pricing system anyway, FRB just allows us to make magnified decisions. I don't think the existence of FRB is as much of a problem as full deployment of deposits in investment bank underwriting/mortgage trading at the minimum reserves being the only game in town.

The answer to different risk appetites is specialized banks. There would be the old-school, "classy" banks where people keep their dear deposits and other banks where people want higher interest rate returns and more versatile service, due to their scale (like most banks today). Instead, we are getting less and less banks due to the environment created by certain banking regulations and taxes.

I would agree, but what I'm advocating is creating a sort of common knowledge terminology, so that even grandma can tell the old school bank from the risky one... I'm just trying to enhance the information in the market which should enhance the stability of the FRB system and actually create the comfort for people to save which would increase investment

other standard and labels would be born from the market, I'm just saying it'd follow constitutional limit of government to set such standards.

 

[Stary Hickory]

In the end, it comes down to this - *tons* of high-profile Austrians (along with the FOUNDER, Ludwig Von Mises) have no problem with Free Banking, and history has shown (when it was actually practiced) that is one of, if not the, most stable financial systems for money in existence. This is free-market money, through and through, and respects property rights under contract. The only way to enforce a full, 100% Reserve banking system (which, again, is not banking but warehousing) would be a VIOLATION of the free market and a VIOLATION of property rights - since you'd need a government agency to say - NO, you cannot engage in such a contract. That is ABSURD. Again, I love Rothbard to death on virtually everything else, but I - among *many* very notable Austrian economists, rightly disagree with him on this.

So I also ask - are you *for* the free-market, or against it?

Listen you need to stop throwing around the straw man term just because you to not want to DEAL with a rational argument. Mises was a supporter of free banking to the extent it limited the fraudulent activities of banking. He also expicitly said that the creation of fiduciary media was never beneficial and supported laws that prevented banks from extending credit.

In all this time of "debate" you have contradicted yourself and simply ignored arguments by calling them "strawmen" without defining how they are. If you are not here to actually debate then I will not keep wasting my time with you. I have shown you many times how FRB is fraudulent and harmful to the economy. Somehow we are to believe it is fine in small doses yet harmful in large doses.

I have tried to convey to you in a simple manner how FRB works and how money works. Yet you will not acknowledge anything. You are not here to discuss anything, but to rant. I will try once more, but you are not hear to learn, I can see this already.

You should understand the role money plays in an economy. It is how we ACCOUNT for everything in our economy. Every subjective market participant conveys information about his value scale in the one medium we call money. When everyone using this money conduct their affairs with this money over an extended period of time money acquires a natural price ratio for a range of goods and services.

The information relayed through money is imperfect and always changing. This is because of varying factors, like some people dying off, some people entering into the market, people changing their tastes, or new technology and so on. However it still is a very accurate and useful way for everyone to coordinate their efforts and plan a production structure that meets the needs of the market. Money is invaluable as a tool for accounting.

Now here you are arguing that it is fine to distort the unit of accounting in the free market. That somehow increasing credit using fiduciary means is acceptable. The minute a bank engages in this activity, the minute they create new credit there is inflation. Can you argue against this? Can you really? No you cannot but you will pull out the strawman argument to avoid discussing it.

The ratio of money to goods and services changes immediately when banks create new money. However as you should understand this is not immediately conveyed in prices. Therefore we have market participants who are planning economic activity around a currency that will devalue. This is why in the extreme cases of booms and busts there are malinvestments.

Now here you argue that it is only bad when there is A LOT of fake money created. But yet on a smaller scale it is beneficial. This is not logical whatsoever. The effects are just the same. A stable money supply is essential for accurate accounting in the economy. Society requires that rational minds make informed decisions regarding economic activity to be more efficient and productive. A bank distorting the unit of account by creating credit makes it that much more difficult for rational economic activity.

The bank alters the entire value scale secretly by producing more money. FRB introduces more inaccuracy into system, people become poorer who did not expect it due to inflation, entrepreneurs using artificially created money make mistakes in predicting future market conditions, because of inflation which reveals itself only AFTER much time, effort, and resources have been committed. These are the benefits of FRB.

It serves no one but the banks who engage in it. It circumvents the will of honest market participants and deceives people causing hardship and miscalculations to the extent the credit expansion continues.

You attempt to give a moral sheen to something that is repulsive and wrong. Banks who engage in FRB can very easily go bust. When things go wrong due to inflationary busts banks yell and scream that they were simply engaging in honest economic activity in the free market. When they were engaging in fraud all along. Next you have interventions and attempts to coordinate "inflation" in a ever increasing attempts to give people no way to escape a devaluing currency.

FRB is wrong, it is fraudulent. It is the equivalent of construction company planning a project based on the length of a foot when after a few months the length of a foot is changed to 13 inches. Now the entire building plan is screwed because the unit of measurement was changed without anyone understanding that it would.

We do not need to introduce accounting errors into our economy and certainly not for the benefit of bankers. It is fraud under any other name. Fractional Reserve Banking should be as illegal as any other scam with deceives people so that they cannot make rational and informed decisions. Like a madoff or ponzi scam, or anything of this nature where the truth is distorted for economic benefit.

 

[Stary Hickory]

We are subject to others' expectations in the pricing system anyway, FRB just allows us to make magnified decisions. I don't think the existence of FRB is as much of a problem as full deployment of deposits in investment bank underwriting/mortgage trading at the minimum reserves being the only game in town.

The answer to different risk appetites is specialized banks. There would be the old-school, "classy" banks where people keep their dear deposits and other banks where people want higher interest rate returns and more versatile service, due to their scale (like most banks today). Instead, we are getting less and less banks due to the environment created by certain banking regulations and taxes.

Define magnified decisions......what is this? And why is it beneficial? How is it ok that a man working a job now be able to purchase less because of some banker who decided they had the right to "magnify" their owned desired economic activity?

Did the people consent to having their wages devalued?

 

[BarryDonegan]

With a full 100 percent reserve banking system set by rules by government force, the market will not be able to increase its currency and interest rates when a legitimately valuable new technology comes along. The way to stop this problem, is to not apply force.

Simply require all banks to report their reserve ratios and any changes thereof to their accountholders. In such a case, most banks would be 1:1, but some other banks might hold riskier ratios in exchange for a greater return... aka, a higher interest rate. This allows the market to slightly adjust interest rates at the edge of the population, while maintaining stability with the vast majority of people preferring the safety of 1:1 backed by gold where daily living expenses and savings accounts are concerned.

 

[BarryDonegan]

by require, i meant private citizens require it, but the government prosecutes via fraud any attempt of a bank to misrepresent the nature of their reserves to accountholders.

 

[AlexMerced]

With a full 100 percent reserve banking system set by rules by government force, the market will not be able to increase its currency and interest rates when a legitimately valuable new technology comes along. The way to stop this problem, is to not apply force.

Simply require all banks to report their reserve ratios and any changes thereof to their accountholders. In such a case, most banks would be 1:1, but some other banks might hold riskier ratios in exchange for a greater return... aka, a higher interest rate. This allows the market to slightly adjust interest rates at the edge of the population, while maintaining stability with the vast majority of people preferring the safety of 1:1 backed by gold where daily living expenses and savings accounts are concerned.

this is basically what I'm advocating by making banks report their reserve ratios and defining them by class 1-4

Greshams Law take into place (bad money crowds out good money), everyone will save class I notes they come by so Class 1 banks will naturally become the home of savings while Class 4 banks will be notes that are used for consumption and be the home of demand deposits (checking accounts)

So when a bust occurs, it'll most likely only effect class 4 banks and cause withdrawals which will get redeposited in class 1 banks prompting the savings needed to get out of the bust nice and swift.

What's the difference between having the labels and not having the labels? The ease of the laymen being able to understand where is a good place for savings versus spending money.

Most people may not understand what reserve ratios, but I think they can understand class I safe but inaccessible for quick withdrawals versus class 4 which is volatile but available on demand.

 

[AlexMerced]

by require, i meant private citizens require it, but the government prosecutes via fraud any attempt of a bank to misrepresent the nature of their reserves to accountholders.

Collecting and Information to me would be a fair function of government, as long as they don't make rules based on the information, it's just data private companies can use to develop systems with.

(I.E. a device that scans notes and matches it up against the central database to see the quality of bank it's issued from)

What people want to do with the information is up to them, but gathering information for market transparency doesn't violate anyones autonomy and actually improves market performance (more knowledge, better expectations, better risk taking)