Correct me if I’m wrong here: Under 100% reserve banking, a bank would not be able to do anything profitable with money deposited into demand accounts (i.e., lend it out as loans) Therefore, they wouldn’t pay interest on demand savings accounts, and would probably even charge the account holder for the service of running their account.
Yes and charging the money owner to hold his money would make it profitable.
Most likely, most commercial banks would offer BOTH deposit banking and loan banking services.
So you could take you warehouse receipts for your demand deposits, walk over to the loan banking desk and deposit these warehouse receipts into a loan deposit <i.e. certificate of deposit, etc.>, which the bank could, in turn, loan out.
I should add that there would, of course, be a strict firewall between the deposit banking and the loan banking.
You are right Harksaw, which is why 100% reserve banking is fundamentally flawed.
When an individual puts his money in a bank, he wants two things:1. His money to be safe and 2. To gain interest on that money.
100% reserve banking ignores that second part. If banks didn’t offer any interest, people would just store their money for free in their own safes under their bed or something of that nature. Why pay a bank to store your money if it can be stored for free?
Free reserve banking is by far the better solution. Allow the market to decide what reserve rate it prefers. If an individual wants a 1% reserve rate and a lot more interest on his deposit – why outlaw that? If an individual wants a 75% reserve rate with a lower rate of interest – why outlaw that?
In my opinion, a government enforced 100% reserve rate is extremely un-Austrian and anti-free market.
What is free reserve banking? The banks reserve is set at whatever they want it to be set at?
I don’t make a dime of interest on my checking account and I have to pay monthly fees (round 5 euros a month), and I don’t even have a 100% reserve bank!
That’s correct. Free reserve banking works until it doesn’t, and the bank gets run on. Then depositors lose a part of their deposit in the liquidation of the bank.
Basically, yes. Banks can set their reserve rate at whatever they want. It does not have to be totalitarian. Different customers may want different reserve rate plans – allow this.
The Fed or any kind of safety net system must be abolished for free banking to work. If there is a safety net to bail out a bank, banks would theoretically keep 0% reserves. If there is no safety net at all, banks will tend to be more conservative with the money they lend out.
Check out this site: http://mars.superlink.net/~neptune/BankFAQ.html
Of course this is always a possibility, but banks and customers tend to be much more conservative with their money if there is no Fed to bail them out.
Read some of Richard Salsman’s work
It is not a possibility, it is an inevitability. You cannot indefinitely grant multiple people the claim to the same assets without someone getting spooked eventually resulting in a cascading spooking of the client base.
Even being fully capitalised in other assets is not enough if those assets suddenly lose “liquidity” as we saw with Northern Rock and Bear Stearns.
I’m not sure I agree. When an individual puts money in his bank he wants it to be safe (agreed - otherwise he’d keep it under his matress).
When an individual lends his money to someone else he wants to gain interest on the money.
However, the two are not necessarily the same thing… indeed people have been theorizing recently about the possibility of people taking negative yeild on bonds precisely because they’re worried about the security of putting their money in banks. Banks today basically only fill the second role (pay interest, and a meagre sum at that) without giving you the warm fuzzy feeling that your money is in fact secure.
There is nothing “fundamental” about 100% reserve banking to prevent people from lending money at interest so there is nothing “fundamentally flawed” about reserve banking at all. Ideally individuals would be able to choose whether they were putting money away safely or lending it (attracting interest but at the cost of a certain risk). Fractional reserve banking blurs the fact that individuals are in fact taking a risk when they put there money somewhere they think is safe. But that’s not it’s main problem - the main problem with fractional reserve banking is that it allows bankers to inflate, by creating money that doesn’t exist through a process that in other industries we would call embezzlement (Rothbard’s “The Case Against the Fed” explains this quite well with some very well chosen analogies to grain elevators). This form of inflation, as it’s proper name of embezzlement implies, is simply a subtle form of theft.
Under a 100% reserve requirment banks could still offer interest on fixed term accounts. Essentially the real type of savings, the ones you cannot automatically withdraw from the bank. This prevents an overlap in the economy between money for immeadiate consumption vs. money defered to future use. In the past this lack of a 100% reserve requirement was one of the things that led to inflation and bank runs under the old gold standard since the bank would make loans with money they did not have completely under their authority (not loaned to them under a fixed term). A 100% reserve requirement would still come about under an anarchist regime since the most stable and successful banks would have such a reserve demand.
If you are that pessimistic about free banking you could deposit your money in a 100% reserve account – which would exist in free banking, but it would be expensive and you would get no interest.
If an individual voluntarily decides to put his money into a bank with a 50% reserve rate why take that choice and freedom away from him? A mandated 100% reserve rate has the traits of socialism that Austrians are usually so opposed to. It is totalitarian, it takes power away from the free market and gives it to the government.
This is wrong.
"The claim that free banks are inherently unstable lacks a theoretical or empirical foundation. From a theoretical point of view, free banks have an incentive to be stable – to keep customers and investors. Unstable banks are less likely to attract depositors and investors. Their more stable rivals will take their business away from them, all other things being equal. In the rare event that all banks are less stable, people would switch to the money standard. (There are no historical examples of all banks failing or being unstable under free banking.)
The historical record is quite clear: free banks are more stable than regulated and central banks. When bad banks are allowed to fail, good banks remain and both customers and investors become aware of signals on how to separate quality from its lack in banking. Under such a regime, both customers and investors have a strong incentive as well to pay attention to such signals to insure quality. (See the works of Dowd, Selgin, and White listed below for more on historical studies of free banks. See also Schwartz 1999 on how on a global scale, central banking creates instabilities.)"
If the gold standard is truly as good as many Austrians say it is, those Austrians should support free banking. If the gold standard is the best, the free banking market will choose the gold standard. Why not let the market decide?
If a pro-gold Austrian is anti-free banking, that means he/she is not truly confident that the gold standard is the best solution.
(this may end up being a double post… a few of my posts seem to have not made it through. sorry in advance if it is)
"The claim that free banks are inherently unstable lacks a theoretical or empirical foundation. From a theoretical point of view, free banks have an incentive to be stable – to keep customers and investors. Unstable banks are less likely to attract depositors and investors. Their more stable rivals will take their business away from them, all other things being equal. In the rare event that all banks are less stable, people would switch to the money standard. (There are no historical examples of all banks failing or being unstable under free banking.)
The historical record is quite clear: free banks are more stable than regulated and central banks. When bad banks are allowed to fail, good banks remain and both customers and investors become aware of signals on how to separate quality from its lack in banking. Under such a regime, both customers and investors have a strong incentive as well to pay attention to such signals to insure quality. (See the works of Dowd, Selgin, and White listed below for more on historical studies of free banks. See also Schwartz 1999 on how on a global scale, central banking creates instabilities.)"
Who here said they were anti-free banking? Free banking would be fantastic because it would expose the banks that don’t use 100% reserve requirements as fraudulent and insolvent and the market would weed them out.
Who’s to say the market wouldn’t decide that a 50% reserve rate is the best?
I am against any legislation regarding what reserve rates banks should keep. The market should decide.
I’m also against any bailing out of banks by the gov’t (as I would assume you all are, too).
If austrians support the gold standard I think they do so because they see gold as the best method available of preventing inflation.
A lot of theorizing has been done as to whether or not the market would naturally select good money or bad (Hayek did a lot of work on this I believe) and I think the answer is that it would select good money… so yes, a free market very likely would end up using gold backed currencies.
Would it end up using currencies maintained by banks that maintained 100% reserves? That’s a trickier question, but it’s also a little bit disingenious… it’s a little bit like asking if someone would buy a television legally at the local store or if they’d prefer to buy it cheaper from a guy who claimed it fell off the back of a truck. The money you can borrow from banks that conduct fractional reserve banking will very likely come cheaper because it is, by it’s very nature, stolen - most of it doesn’t belong to the man who’s lending it to you. Perhaps eventually depositors would refuse to use these banks becuase of this, I’m not sure. Whether they would or not I think is irrelevant though since fractional reserve banking is itself, regardless of whether it is a profitable crime is still no different from making up fake grain certificates or any other number of activities that are today deamed criminal.
What if A, who “wants 10% reserves” (assuming he could both understand what was going on and want that at the same time…kind of like doublethink) goes to buy eggs from B, who “wants 75% reserves”? Either A has to get some 75%-reserve-money that differs from the 10%-reserve-money (using the word “money” here to refer to the non-specie money substitute put in circulation by the banks) or B has to accept 10%-reserve-money (knowing what it is), or B gets defrauded (not knowing that the money he’s accepting is 10% rather than 75% money). But he obviously won’t accept 10% money at face value and, if he accepts it at all, will immediately withdraw specie from the 10% bank - and any exchanger would do the same - so either there’s massive fraud inherent in “free reserve banking” or there’ll be inconvenient multiple “monies” trading at different values wrt one another (barely beyond barter), and the 10% banks will quickly be stripped of their reserves. Eventually one most-common money will arise out of this mess (and it obviously won’t be the bad (10%) money whose banks are constantly crashing and whose customers are constantly losing their shirts…)