100% Reserve Demand Banking vs Fractional Reserve Banking and inflation

Economics Economics Questions
101

If IOU’s are being used to indirectly exchange present goods and services, then this debt IS money, and there IS inflation. The inflation is not from one CD being used as multiple payments. It is because if CD’s were as good as cash, cash would disappear and CD’s would be the standard money. All cash would be turned into CD’s by banks. Banks would keep lending out the cash they received in exchange for CD’s, but the recipients would quickly convert to CD. People would not redeem CD’s - they would roll them over, or request new ones. CD’s would become exactly like demand deposits currently are, being issued expansively against a static or less-slowly-expanding cash/demand deposit base.

Why? If CD’s are accepted as money, there is no point to use cash. CD’s earn more interest than cash, checking, NOW, and other spendable accounts. They will never trade at a risk premium because they are ensured by the government against the bank’s failure. They will never trade at a time premium because there is no time premium between a present good and another present good. The only reason the time premium exists to begin with is because CD’s are not accepted as a general medium of indirect exchange.

The only difference between CD’s and demand deposits is that CD’s are not legal tender and are not necessarily instantly convertible into such; however, their payment of interest may partially make up for this.

What we are missing is that banks and governments alone do not create inflation. People’s willingness to accept additional currencies denominated in the same units, including debt instruments, is inflationary. This willingness may come from government guarantees, but the only reason government can do such, is because people accept government. They supply it the means they need to suppress dissenters.

102

I agree that CDs would not work like cash and it is absurd to suggest that they would. The point of the previous discussion is to show that in the rare instances where someone does trade a CD for a good, it is not inflationary. I know for myself that it would not create inflation. I guess you handful of people can think that it will if you want to. lol

103

This is a time deposit CD. It cannot be just deposited into a savings, checking or demand account like cash and it can’t be used like cash. The bank would never be able to make loans to other customers based upon a premature time deposit CD. This CD would be held in more of a safe deposit box style way, rather than being held in an account.

104

whats really interesting is if for some reason you could use a cd as you would cash it would be you the depositor and not the bank that were creating the inflation.

105

I’m sorry but you have not collapsed my entire argument. By your reasoning if I had to wait a day to receive payment it would not be a demand deposit. Well If I had to wait an hour, a minute or a second then it would also be a time deposit and there would essentially be no such thing as a demand deposit. A demand deposit means that I have access to the money deposited whenever I choose to claim it. Now you would probably say that "well if the bank closes for business at 5pm and is closed on weekends then it is also not a demand deposit. That would be a contract or agreement that you made with the bank before depositing your money. It still would be a demand deposit. A CD is a loan for a certain duration of time. I cannot buy anything with the CD because during the duration it is loaned to the bank I do not have claim to the CD, the bank does. The bank can buy something with the money in the CD but you cannot. You cannot buy a car or anything else with money you loaned to someone else.

Also, if I loan gold to a bank and we have an agreement to be repaid in gold then the bank cannot repay me in anything else that they consider to be of the same value. It is the same as If I have a safe deposit box at the bank stored with a gun, my passport, a diamond ring. I would expect those items on demand from the bank. Not some items that the bank considers to be of equal value.

May I suggest instead of spending your time posting on this forum, try reading up on the subject. “The mystery of banking” and “The case against the Fed” both by Murray Rothbard are good books for this.

106

inflation - an increase of money supply. monetizing ANYTHING is inherently inflationary unless it is matched by equal demonetization. and yes, it will increase prices

the situation you have described is that a CD is used as money, and then it isn’t - you must admit it was temporarily inflationary. Given the absence of using the CD as money, the car may not have sold until new cars were ready for the lot, and the dealer would have lowered his price. If the dealer turns around and sells the CD for more cars, you see how this alters demand and supply schedules, and thus prices.

This is no different than option clauses. The bank can possibly lower interest rates and cause a business cycle, and when its loans don’t perform, it will invoke its clauses, but have little able to sell off to meet obligations and go bankrupt.

Again, ultimately, the people have to prevent inflation by refusing to accept money substitutes and debts whose backing is dubious. If government privileges such instruments legally, people must refuse government authority. Otherwise, it is easy in a freely competitive environment. It is obvious that gold was chosen as money because its difficulty in manipulating its available supply. Given free currency and banking, people will refuse inflationary ones.

107

Sure it’s inflationary if someone chooses to accept it, but there are several differences:

1 - People are far more likely to accept a check, credit card, or cash

2 - Fractions of it can’t be lent out repeatedly. A bank cannot accept a CD and then lend out 90% of it’s value to a customer. They just can’t. However, they CAN make a loan against a deposit, which gets spent by the borrower, and then deposited by the new receiver, who deposits it again, and then 90% of that can be lent out, and so on. Eventually $100 in an initial deposit results in $1000 in new demand deposits, which can all be spent.

So a CD is at most a little bit inflationary IF SOMEONE ACCEPTS it as cash or a cash equivalent (remember pretty much everyone accepts a checking card as a cash equivalent). But there’s the catch, most people don’t, and even if they do, 90% of it can’t be lent out again and again and again to new customers.

Even if most people would accept CDs as payment (and they don’t), it still wouldn’t be nearly as inflationary as fractional reserve banking.

108

Barter in a market economy is not inflationary. singular instances of people accepting a cd in exchange for goods or services is not going to be inflationary. If the cd were to become money or a money substitute that would be a different story. With a demand deposit i have 100% ownership to all of my money units whatever they be fiat currency, gold, fish heads it doesn’t matter. If for administrative purpose’s(the bank is closed or the vault is 600 miles away for security reasons) the bank cannot give me my money instantly, this does not create a time deposit situation or inflation I am still the only one who has ownership to the money. If the bank loans out a fraction of my money then it creates an issue where my money unit is represented twice once in my account and once in someone elses account or in their pocket. Now there is more money. In the case of a time deposit which is what a cd is i sign a contract releasing the purchasing power of my money to the bank. I give the bank full owner ship of the money if only temporarily. Since it is no longer in my account there is no increase in the money supply. The banks have subterfuge on their side we can’t tell the difference between a once owned or twice owned dollar. However to say that i could sign a contract temporarily relinquishing ownership of my money and then present that contract to a merchant and that merchant would accept it as if it were the money I had relinquished is frankly rather silly.

109

Remember the keY point in the Austrian arguement is that if anyone does this and accepts a CD as money then they are engaging in fraud. Presumably with penalties of incarceration or maybe death. So it matters a great deal in a free society the difference between what is better for banks and individuals and what banks and individuals are prohibited from doing.

110

There is no requirement that if you deposit Gold in a bank that the bank has to maintain your deposit in gold. This is an agreement between you and the bank. If you don’t mind that the bank will immdeiately sell your gold and convert it to another asset why should a third party claim this is fraud? All you the depositor are concerned with is A: Can I reedem my bank notes for gold on the terms I have agreed with the bank? and B: Does the bank have sufficient assets to cover its liabilities?

The following scenario in your view is fraud:

Person A deposits $1,000 in gold into bank B. Person A and Bank B agree that the gold will be sold and converted to a different asset and that physical redemption has a minimum two day waiting period and a max waiting period of 60 days. Person A receives his bank notes. Bank now loans $1,000 gold to person C.

Person A buys stuff from Person D. Person D goes back to bank and wants his gold and waits the two days and the bank converts some of it’s other assets and gives him his gold.

Who exactly is the victim here? Where is the fraud? The Austrians are willing potentially to kill the people operating the bank over this scenario.

111

But if I transfer $5000 from my time deposit to the car owner’s account, which means he gets the 5000 plus interest when it is due, then it obviously does increase prices. Someone else to whom the bank loaned the money from my time deposit might have wanted to purchase the same car, so the money I put in my deposit is competing with my CD I paid with. The car dealer then again can use the time deposited 5000 to buy something from someone else, if there is a willing seller. So my CD can be used as medium of exchange in transactions, driving prices higher.

112

Barter is not indirect exchange; in a barter economy there is no money, a medium of indirect exchange. Without money, there is no such thing as inflation, even when crudely defined as price inflation. All you have is a huge array of pairs of goods and their exchange ratios. There is no such thing as general prices. Prices are simply another word for the exchange ratio between some good and money.

As I explained, it is temporarily inflationary because the CD is temporarily used as money…and then it isn’t. Only if you define inflation as expansion of money AND credit would it not be in any form, because the CD already exists as credit, but not money. In such a case, there can be inflation without any effect on prices.

113

I should point out that credit cards aren’t a means of payment, only a transferal of debt. Instead of owing the vendor for the product, you owe the credit card company, who pays the vendor. Anyhoo, that’s not totally important here.

As I said in my above post, in a free market, people are quite restrictive of what they will accept in terms of payment. Most individuals will reserve themselves to accepting currencies that are less inflationary than others. Ultimately, however, it is not some outside force, but the people themselves, that constitute government and deny the free market from working.

Now imagine making CD’s legal tender. Or mortgage-backed securities from F Mae and F Mac. Obviously, this is inflationary. It expands what people will accept as payment through force.

What if a bank operates identical to how you see FRB, except its “demand deposits” have option clauses (I don’t even see how these can be called demand deposits)? This is identical to using CD’s as money. It works…until it doesn’t. The only real difference between a demand deposit and a CD, besides the amount of interest paid, is that CD’s are not legal tender. If they were, it would be CD’s instead of demand deposits that are pyramided against cash and FED reserves. There would be no point to prefer a demand deposit or cash over a CD, as they are functionally equivalent. There would be no point to someone selling a CD for less than its face value when it can be used at face value to legally pay any debt.

Picture it like this → If a demand deposit is functionally equivalent to cash, in terms of legal usage and risk, why would anyone accept a loss on their demand deposit to turn it into cash? They don’t - such is pointless. Why would a CD or deposit with an option clause be any different? Why would anyone prefer the cash they cannot currently redeem their CD for over the CD itself? The only conceivable means to think about it would be that CD’s were not usable as a means of current payment. If they were, either by free market acceptance, or government fiat, then they are present goods just as much as fractionally-backed bank notes or demand deposits are.

Finally, read Rothbard’s America’s Great Depression. He includes CD’s as part of the money supply! Why? Because they were frequently cashed out before maturity without penalty - a de facto demand deposit that earns interest. This is a more general definition than I am limiting my argument to.

114

You are making up scenarios that do not exist to make your argument. Under your make believe constructs perhaps it wouldnt be unethical. Under the way the banking system actually works and how people actually use money, time and demand deposits it is unethical. You are making your point with hypothetical situations that would not happen in real life. The little analogies you are using you are actually describing something other than demand deposits in your stories. You’re comparing apples with oranges.

115

I would agree there is no fraud, unless Person A fraudulently claimed that the bank would cash his bank note on demand, or claimed it was a property title to the gold. However, I would suspect debts would always trade at a discount compared to present goods - taking into account time preference and risk.

Of course, this is different from traditional FRB, which IS an invalid contract. Contracts are designed to coordinate property use to avoid conflict. Allow me to quote Hulsmann,

116

Your scenario is nonsense. All that has happened here is person A has sold their gold to the bank. FRB doesn’t require gold redemption to take place. Forget about bank notes gold standards all that. we will say widgets are money. I put my widgets in the bank under the impression I can withdraw at any time(a demand deposit). If I make any other agreements with the bank that allow them to loan out my money then I am investing I am not saving and therefore would assume the risk associated with it. So if there are any other little caviats you want to add it no longer becomes a demand deposit so forget about that. If the bank then takes my widgets and loans them to someone else this is fraud. You can say if I agree to it upfront then there is no fraud. The problem is how can I agree to have my money available and have it loaned out. The answer of course is I can’t and more importantly why would I. i can’t let my friend borrow my car and it also be parked in my garage for me to use at my discretion all at the same time now can I.

117

This is the point there is no need for the bank to have demand deposits. I can simply place a two day waiting period on redemption and I have turned all deposits into time deposits which then allows me to loan out your money while you are using the bank notes that are based on the underlying asset of the bank.

Hardly, this is exactly what happens right now and is the most likely scenario in a free market.

So grow up and assume the risk, why should we outlaw that.

You and the Austrian cult are under the assumption that banks are required to have demand deposits, wrong. I can demonstrate that the type of bank that i propose will exist will be the dominant form of banking in a free society.

Don’t forget you are the one talking prohibition not me. In a free society, just like now, you have the choice of deciding what bank you want to use and what you accept as payment.

Finally, the demand deposit arguement is a fiction. Banks don’t have demand deposits now nor will most of them in the future in a free society.

118

You are missing the point. The point is not what you could do or how long it takes me to have physical access to my money. It is what you are doing with it while I am under the assumption it is in my account.

119

Then you are a moron, since it is written in the contract, pays otherwise impossible interest, and you are talking about it anyway.

120

You’re not here to advance the scholarship of liberty in the Austrian tradition Maxy boy?