I guess B would put the note from A in his bank, who would present the note to A’s bank and ask them to cough up with 100% of the gold that A’s note said it was worth… A’s bank would get into trouble pretty quickly if too many of it’s notes got presented to B’s bank.
I don’t think this is true. I haven’t read Rothbard’s Case Against the Fed, but I watched the youtube vid ‘Money as Debt’ (which is very similar to The Money Masters, only shorter and with cartoons). It claims that the Fed creates money out of thin air when someone takes out a loan. I asked my econ professor about this, and he said that is completely false; banks only lend out money they actually have on hand.
I tend to believe my professor because a) He’s very much pro-free market, was heavily influenced by the Chicago School and did some work with Milton Friedman and b)he’s worked for the Fed as well.
The reserve rate is not set by legislation but by the contract. If I enter into a deposit contract, then that contract requires my bank to hold the full reserve.
A 50% reserve rate contradicts the purpose of having money in the first place, which is to act as a medium of exchange, means of payments and store of value. If the bank only holds 50% of your deposit on reserve, that means that it has to liquidate the other 50% from other assets whenever you make a withdrawal. At some point this is going to fail and your account will no longer have the character of money.
In the long run, this conflict is a good thing. Different currencies should be subject to competition. I would predict that the market would settle on two currencies and stores would accept either just like they accept multiple brands of credit cards.
Yes I’ve seen that video and it’s complete rubbish. The Fed doesn’t create money when people take out loans, it creates money by buying assets from the market - and yes it does create the money out of thin air. The assets it typically buys are government treasuries, however, so in a sense the Fed creates money (most definitely out of thin air) when the government takes out a loan.
With all due respect to your econ professor (he may be a really nice guy) he’s wrong. Banks lend out money in multiples of what they have on hand. If you deposit $10 at your bank, they maintain $1 in reserve and loan out $9 to someone else, who spends it with someone else again who then takes it back and deposits it at the bank… which then lends out a further $8.10 on that deposit etc. Eventually the bank ends up with loans totaling $90 and deposits totaling $10 (i.e. exactly the same number of deposits they had in the first place, before making the $90 worth of loans). If any more than 1/9th of the depositors actually asked for their money back at the same time then the bank wouldn’t have their money and would be incapable of obtaining it from anywere, becuase it quite simply doesn’t exist - this is a bank run.
They’re both correct. If you deposit $100 in a bank, the bank might lend out $90 - that’s money that it actually has on hand; but the problem is that money now exists twice: the $100 you still have in your bank account, which is claimed to be available on demand, and the $90 they lent out - they’ve just created $90 out of thin air! And the guy who borrows the $90 deposits it in his bank, and they lend out $81, which gets deposited in another bank who lend out $72.90, and so on - the total amount of money in the system ends up as $1000, of which $100 is your initial deposit and the rest is “created out of thin air”
What conflict? The 10% reserve bank will be out of business in a week [:)] If fractional banks could survive long enough for the situation to settle down, 10% notes would circulate at 10% of their face value (assuming they make it obvious that they are 10% notes, and don’t try to defraud people by claiming to be 100% notes). Who would deposit $100 in specie in a bank where it’ll be worth $10 in spending power?
100% Reserve Savings + Potential Interest: You put some money into the bank on the condition that X% of the initial amount may be used for loans. You may only withdraw 100-X% of your money, plus whatever interest you gain from the loans made using your money. You may lose up to X% of your money, or you may gain X% or more in the long-term as loans pay out. Partial savings, partial investment.
100% Reserve Savings Only: You pay a storage fee, end of story.
Banks could offer both types of accounts, with variable X for the first type, allowing people to choose individually how much they’re willing to risk. The money that is withdrawn trades at face value because it’s always backed with a 100% reserve.
Yes, that’s not a demand deposit; nobody has a problem with term deposits (it doesn’t make sense to say “100% reserve savings” here; there’s 0% reserve for the loanable funds, and that’s perfectly OK since they’re not also usable by the depositor)
In a free society, no one would ever want to deposit money with a bank that is not 100% reserve banking.
I agree that the law should not force banks into 100% reserve banking.
Wrong. The reason people want to deposit money in banks is to protect it and so they do not have to carry it around to make transactions.
If people want to earn interest on money, in a free society, they would buy cd’s, invest in stocks or property, or a miriad of other things.
What about inflation? Don’t those who put their money in banks want to make enough interest so their money will not be worth less in 30 years? If it was 100% about them not having to “carry it around,” why would people not just rent out a storage space and put their money in the safe and lock the door?
Also – if 100& reserve banking is the superior choice, why do no banks offer that today? This is a question that a lot of ask me when I defend a gold standard or free banking and I usually respond: Because the Fed exists to bail out bad banks, banks have less incentive to be conservative and independent so they will naturally hold the minimum amount of reserves. Is that a good answer?
Doesn’t reserve banking appear like a ponzi scheme?
Monetary Inflation is caused by an increase in the money supply. Central Banks such as the Federal Reserve can increase the money supply easily, but in free banking with competition, there are stronger limits on the ability of individual banks to inflate their money.
As for the storage issue, it’s important to have a certificate or receipt showing that you own such-and-such asset that is in storage. Otherwise, who would give you goods simply on your sayso that you have such assets, or that you were transferring some part of your assets to the other person? Perhaps if your storage company issued such a receipt for you, that would work, but they would then need to limit or control your access to your asset–in short, the storage company would ‘become’ a bank. Why not just use a bank to do that, instead of recreating the wheel?
The banking laws and regulations specify what reserves a bank is legally allowed to hold, minimums and maximums, and how they can handle their money. In short, they are not legally allowed to have 100% reserves, and would suffer in competition with other banks if they did so. Bad bank bail-outs isn’t so much about the reserves, but about the moral hazards of the types of investments banks make, which are also regulated.
True, but traditionally banks have offered both checking accounts and savings accounts, which would accomodate both desires.
Do you believe that fractional reserve banking is directly responsible for the current subprime mortgage crisis? Could you back up that claim?
I would argue that it is, but would like to hear some other arguments and compare them to my own.
Say, for example, a bank has 1,000 customers, each with $1,000 deposited. The bank then has $1,000,000 on hand. It lends out $900,000, which, of course, it had on hand. 201 customers attempt to withdraw $500 each. The bank will not have the $100,500 to cover its obligations.
Directly responsible? No. A contributing factor? Certainly. We’ve had fractional reserve banking for decades, but the subprime mortgage crisis is a relatively recent phenomenon.
I perhaps should’ve put a comma after “Reserve”. By “100% Reserve” I meant all the issued currency is backed by a 100% reserve.
Monetary inflation IS an increase in the money supply. Price inflation is caused by it, or by natural or financial disaster resulting in an across-the-board rise in the scarcity of goods.
Depends on how you define directly responsible. If you define it as ‘absent this factor, xx could not have taken place’, then I would say fractional reserve banking is 100% responsible for the housing bubble / Subprime mortgage crisis (and Alt-A crisis to come), along with every true asset / financial bubble that has ever existed.
Sure, there were lots of other things that drove the housing bubble. Absent most of these other factors, the housing bubble wouldn’t have happened. But what most people don’t realize is that the massive increase in the money supply has to flow somewhere, and result in some kind of bubble. If the housing bubble hadn’t occured as the money supply was rapidly increased, some other bubble would have occured.
Without the massive increase in the money supply of both the 90s and following the bursting of the tech bubble, there just wouldn’t have been enough money available to significantly push up housing prices and push down lending standards .