All food can be put to use right now without Fractional Reserve Banking. Money is not equivalent to food (or any other form of wealth), so the food (or other previously produced resources) are made available for investment the minute you decide not to consume it, regardless of the form of money savings,i.e., hoarding or investment. It is a fallacy that hoarding is detrimental.
Modern Fractional Reserve Banking coordinated by a central authority engages in a uniform credit expansion that results in an amount of loans that is multiple times greater then the amount of available real savings. This mismatch results in the boom/bust cycle. There is no benefit to Fractional Reserve Banking. If there was (hypothetically), perhaps in a free banking environment with legalized fractional reserves, it would have to be grounded on different economic reasons then what you proposed.
Whoa, hang on a second … money is not equivalent to food? You’re joking right? Oh, you’re not. Well, what am I going to do for lunch now? I only brought money.
I can lend out (or invest) all my excess food on my own without this Ponzi refrigerator, thank you very much. How nice of the fridge owner to lend out other people’s food as if it’s his own, receiving all the the upside of every borrower repaying their loans but coming back with a mere “Ooops! Market’s are risky, you know!” to the depositors if his loans go bust. Makes a ton of sense.
Which makes him a fraud. Simple logic is needed to conclude that the sum of his promises is ALWAYS larger than what he can deliver. Calling this a Ponzi scheme and a fraud is not a mere play with words. It satisfies both definitions completely.
Everything must eventually fail. What’s your point? Here are some facts:
Fractional reserve banks naturally emerged.
People prefer getting paid interest rather than paying “storage warehouse fees.”
100% reserve ratios only existed in the middle east where they were FORCED on that society (sharia law). And people got around it.
If I ask my banker about the safety of my deposit, and if he tells me that there’s a chance that someday, it may not be there on demand, in its entirety, is he then still guilty of fraud?
Okay first, it’s not true that all is lost when a bank fails; there will be a liquidation, and people will get paid. But I don’t understand your position here. Are you saying that the government needs to completely regulate the banking industry because of potential entrepreneurial error? Entrepreneurial error has adverse effects; welcome to the real world. But the ramifications of entrepreneurial error in the banking industry pale in comparison to those in, say, the automotive industry, or airline industry, where people lose their lives. Do we need to completely regulate them as well? Toyota explicitly said that there cars were safe, but they weren’t.
Shut up. Your bullshit analogies are not arguments. Implicit guarantees are not actual guarantees. The Rothbardians, like the Marxists, like to purposely obfuscate language, in order to defend their ridiculous positions. The free banking position is the only libertarian position (if it leads to 100% reserves, then so be it).
There is a difference between the potential failure of Fractional Reserve Banking and any other business. I’m quoting Kinsella here only because he phrased it very eloquently in response to Steven Horwitz
Horwitz: “And yes, the contract should make no stronger claims about the bank’s obligation to redeem on demand being fulfilled than any other contract should about its terms being fulfilled. If you agree to hire me to perform a task, I can’t “guarantee” that I will perform it, I can only promise or agree to.”
Kinsella:
I agree with this, unless by your choice of words you mean to imply that even a depositary can’t “guarantee” it either. I mean I agree with you, so long as you recognize the categorical distinction between the ability of the depositary-custodian in the case of an irregular deposit, to repay, and the ability to guarantee it in the case of fractional reserves. They are similar only in that in both cases it’s possible for the bank to be unable to meet its promise–but in the case of the irregular deposit this can happen only if there is a violation of the depositary contract (embezzlement), or some kind of random accident (fire) that could be insured against.
It is clear that z is referring to the case of a “depositary” and you are not.
Rothbard wanted no special privileges to banking. Mises wanted this also. The point of view from Rothbard about the 100% reserves is different from the one you are taking. FRB is viewed as a present reality only because contracts in the banking industry are not enforced in the same way as all other businesses.
From this perspective, it is FRB that is not free banking and 100% that is.
It depends on regularity of word useage. If there were no implicit agreements any contracts could be nullified by a simple claim that a promise was in a different language that just sounds a lot like English.
No, you can’t, at least not profitably. Specialisation through the division of labour enables some to act as financial intermedieries, bringing together saver and borrower where they otherwise would be unable to trade profitably.
Ideally, none of us would store anything, i.e. everything that we are not presently using would be lent out to someone else until we need it. That would eliminate the costs of storage, perhaps earn some interest, and free up resources for other uses. Unfortunately, the cost of actually satisfying these required transactions is impossible to do proftably in the real world, so we store some things instead. But with regard to money, and the pooling of risk achieved by fractional reserve banks, it is possible to reduce storage costs to a bare minimum. Since, all else being equal, people would rather not store anything if the costs and risks of lending it were low enough–fractional reserve refrigeration would emerge in a free market if it were practical to pool risks and transfer food as easily as money.
The major difference between a Ponzi scheme and fractional reserve banking is that the latter can meet withdrawal demands in the long run, i.e. a Ponzi scheme is unsustainable, but fractional reserve banking is not. If a bank invests its funds unwisely, then it may fail to meet the demands of its creditors; unlike a Ponzi scheme (which by definition invests its funds unwisely–by not investing them at all), a bank may actually invest its funds wisely and satisfy all demands by depositors.
That’s way over the top. Completely not necessary. I mean what do you call this sentence of yours seeing that it obfuscated language in order to defend your position. Are you a Marxist or a Rothbardian to use your own defintion?
Because it’s true. The fact that it’s controversial is meaningless to me. The Rothbardian critique of fractional reserve banking is very similar to the Marxian critique of capitalism (the way the arguments are put forth, and not the actual substance, of course). Both are able to somehow see into the future, and reveal how “it will be,” under perfect conditions; both incorporate their own ethics and value judgments into their arguments (alienation for Marx, and what constitutes theft for the Rothbardians); and both conflate terms in order to make their points. The Rothbardian’s, for example, says that there’s some implicit guarantee, which, in their eyes, is the same as an explicit guarantee. But they (a) fail to show why this “implicit guarantee” a priori exists and (b) why it matters even if it does exist. Marx, on the other hand, conflates coercion with persuasion.
Fractional reserve banking is, by definition, fraud; and labor is, by definition, exploited.
The term “Rothbardian” is quite unfortunate, but I’m really just referring to the anti-frb position.
Ever heard of stocks, bonds, stock funds, bond funds, hedge funds, ETFs, and investment advisors?
A fractional reserve bank cannot meet it’s obligations now. Those “deposits” are there to be available on demand, and yet they are also lent out, at the same time. Can my car that’s parked in my garage be BOTH available to me on demand AND rented (lent) out to be available to someone else, at the same time?
I bolded the important part above. Those are not the bank’s funds to play with and this is the second large problem with FRB. The FRB’s siren song of having your cake (deposit available on demand) and eating it too (same deposit being lent out for interest) has bamboozled you to think that it’s OK for the FRB bank to print new money on top of YOURS and use the whole lot as if it’s THEIRS. Do you think people are really that stupid that they are unable to decide for themselves how much money they need available on demand (stored safely in a 100% reserve bank) and how much they can save (lend/invest) for later via the financial products and services I listed above for a fee? Why on Earth would you prefer a Ponzi refrigerator where its owner largely participates in the upside of lending your money as if it was his, but isn’t exposed to none of the downside?
Available on demand does not mean 100% liquidity. This would only be the case if people demanded all of their money, at all times. In such a case, you would not have banking. Banking, by its very nature, presupposes that fact that 100% liquidity is unnecessary. No one is that risk averse. The job of banks, again, is to measure this demand.