well as for the FRB crowd, I still haven’t figured out how they are saying 10 real apples are 100 apples.[:^)]
That 10 dollars deposited in another bank, then loaned out again, etc… Money is created through the credit expansion process of FRB.
for a 10% reserve ratio, each bank will end up loaning out $100 worth of newly created money with $10 in reserves
This is very different from saying that a bank with 10 dollars in deposits can loan out 100 dollars. In the first story time preference determines the reserve ratio while in the second story the ratio is exogenously determined, or least that is how you make it sound.
How is this different from individuals making loans without banks?
As far as I understand the argument; that’s irrelevant. We are talking about liabilities. There can be more liabilities then there are actual physical goods to back it up. (Wether that is fraud is a seperate question.)This is because of the time element: not everyone comes to demand his liability claims all at once.
when individuals loan directly, they must forego that which they are lending. not so for fractional banks whose depositors only forego fractions of what they are lending.
No but it doesn’t just accommodate an increase in demand for money. Are you making the same argument that Jake just made? That a bank only loans out the $10 deposited (or $9 for a 10% reserve)?
Because this clearly isn’t the case with FRB. $10 is used to pyramid $100 worth of new money, thus, the example with the 10 apples saved and 100 apples worth of claims loaned out.
Demand for money means people want to hold money. I think you are assuming that the bank will channel that equivalent amount of money to investments, and then shrink back that new money if the demand for money goes low again.
If there is a demand to hold 10 apples (in a warehouse), then the assumption is that those 9 apples will be loaned out in the assumption that the holder will not wish to claim more then 1 apple all at once.
This is clearly not how FRB works, since in the monetary economy, that $10 (assume the price of an apple is $1) is used to create new $100, thus, the interest rate distortion. The interest is obviously determined on the basis of the $100 (which is what the bank can lend on the basis of the $10).
This is why FRB causes a boom without a central bank, as it always had prior to central banking. central banks make the process more “efficient” and more severe. I don’t know what Rothbard you’ve read that you are referencing him to your advantage, but I suggest “The Mystery of Banking”.
And yes, the concept of velocity is practically meaningless in economics.
It’s been just posted but I’ll repost it for you.
Rothbard: Banking and the Business Cycle
What? In the example with no banks, the loan by the individual is used to pay the wages of workers who then loan part of it out again. Whatever they don’t loan out (save) is used in consumption which becomes income for someone else. This new recipient then either loans it out (saves it) or consumers it etc. This is equivalent to a banking system with no reserve requirement. The amount of money (really liabilities) in the economy “multiplies” in the same way as under FRB.
Lol, I noticed DD5 missed my last post.
I don’t think that’s irrelevant. I think that’s the heart of the debate.
-
It seems the FRB crowd is arguing 10 real apples are 100 apples.
-
The 100% reserve crowd is arguing 10 real apples are 10 real apples.
I don’t even know if the FRB crowd acknowledges #2. That’s what I’m lurking to find out.
no you are wrong.
when you loan something out. you stop having it and someone else has it. in exchange they give you things back later.
whereas, in fractional reserve banking you put your money in an account. you still posess and can spend all that money in the account, but magically somone else gets a loan from it and they too can posses and spend.
this is multiplication that frb is all about. I thought you knew the basics? guess not.
There could be an infinite number claims to 1 apple. The banking system creates the claims through lending. The amount of loans made is equal to the time preference of depositors or, to put it differently, the amount of investment is based on the desired savings of the depositors. This ocurs whether there is FRB or not. Banks are just a more efficient way of doing in the real world what would be done in an ideal world without banks.
now you are arguing that a commons is an effective arrangment for economic progress… keep talking jake…
If you were the only depositor then taking that money out and spending it would be the equivalent of a bank run. If all of the money had already been loaned out you wouldn’t be able to get it back until the loan was repaid. In a world with multiple depositors the changing time preferences of individuals might lead to small fluctuations in the reserve ratio but generally the total time preference “pool” will be stable.
If what you are saying is true then bank runs wouldn’t be possible.
non-sequitur
?
If both depositors and debtors could use the money at them same time there could be no bank runs. How is that unrelated. If all the depositors come to claim their money the bank would not be able to pay them, therefore depositors and lenders cannot use the money at the same time in the real world.
yes, precisely, in the real world, depositors and creditors cannot use the same money simultaneously. but Fractional Reserve Banking, is the institutionalisation of a system, that ignores this truth and gives both depositors and creditors ‘legal’ claims to use the same money simultaneously.
this has the effects of credit led boom followed by bust. illusion of prosperity now. bank runs later.
I’m not afraid to ask the obvious question (that my simpleton economics mind doesn’t have the answer to).
Then how do 100% reserve banks hand out loans?
Of course, it’s easy to get through a PhD in economics without knowing the difference between 10 and 100! Look, people aren’t going to do your reading for you, if you want to know the answer to a question that is obvious, go do your research on FRB. There’s no shortage of books on the subjecvt out there.
A challenge to the 100% reserves crowd:
Imagine a world in which prices do not adjust immediately to the shifts in either the supply or demand curves, in other words, there is some price rigidity in both directions. Now, imagine that in this society there is 100% reserves in banking and suppose for the moment that the traditional Austrian theory of the business cycle holds true.
Let’s say that a substantial number of individuals in society wish to reduce their saving preference (raise their time preference) and do so in the form of disinvesting from their cash balances. Now, they can either do this by taking money out of their warehouses or simply spending currency that they’re holding. In the traditional Austrian story these people would begin spending their money on consumers goods thus bidding up the prices and setting in motion the Ricardo effect that Hayek talked about, the spread of prices between the stages of production would rise and so to would the interest rate. However, none of this happens instantly (unless you’re some sort of Walrasian), prices in the consumers good markets may take some time to rise and even following the rise of the prices of consumer goods the interest rate wouldn’t follow immediately. Now, what this would essentially mean is that the market rate would be set below the new, higher, natural rate. Of course, I’m sure even Austrian laymen are aware of the results of such circumstances.
On the other hand, in a fractional reserve environment, the decreased demand for money would manifest itself as currency being returned to the bank for clearing more often. Thus sending a message to the bank that it should increase its reserve ratio (echoing Jake’s important point that the reserve ratio is a function of time preference) and in doing so the interest rate. Now, under FRB there occur no problems concerning the relationship between the natural and the market rate.
maybe it is