The conversation on a different thread went somewhat off topic and nobody ever responded to what I think is a great description of the difference between demand and time deposits. I’d like to restart the discussion here.
I give Avram full credit for the following.
For a fractional reserve banknote, you’re risking the loss of your deposit. If all depositors simultaneously demand withdrawal, then the bank is insolvent. There’s no way to resolve this fundamental flaw.
For a time deposit, a “run on the bank” can’t happen. Depositors have to wait until their note expires before they can redeem their balance.
If the bank is solvent, then the time deposit can be sold for the face amount plus accrued interest minus a transaction fee.
A fractional reserve banknote is fraudulently increasing the supply of demand money. Time deposit banking doesn’t do this.
Like all frauds, fractional reserve banking must have the backing of the State in order to be profitable. The fractional reserve bank owners are protected by the State. They might get a “banking holiday”. Limited liability incorporation might allow the bank to default on its promise to depositors.
Its called an option clause.
Don’t read anything about the history of banking. Your head might explode.
Yes, but that problem can potentially be solved by other means than a permanent switch to a time-deposit regime. Why don’t banks simply implement an option clause system?
Please don’t bring up the fraud issue. No one is going to be convinced either way and it isn’t relevant anyway.
im not going to tell you why banks dont do things. why do you think its up to me to tell you why banks dont do things?. Nir why dont banks do this? Nir why dont banks do that?
why dont you ask a decent question?
First, the comment wasn’t directed at you so I don’t know why you seem to take such offense at it. Second, it was a rhetorical question. Historically banks have implemented options clauses and I don’t see any reason why they wouldn’t emerge again.
In this case, the argument refers back to whether or not fractional reserve banking really leads to the “six macroeconomic processes” which catalyze a recession. Jesús Huerta de Soto covers option clauses and makes a point that I agree with (assuming that he is correct about fractional reserve banking). Option clauses are perfectly legal, as the depositor agreed to the contract when he or she deposited his or her money in that bank. However, while the bank would remain relatively safe during the crisis, there is still widespread malinvestment and therefore there is still an economic crisis. The banks might retain liquidity to a certain point, but at the expense of the depositors who can now no longer withdraw his or her deposit.
If that’s how you want to put it then yes, that is where I’m trying to move this discussion.
Yes but the secondary effects of the crash may be lessened.
A demand deposit is not a future claim on anything. It is a current claim. The banker is simply gambling that the depositors won’t want their money now.
A time deposit is a contract to deliver payments on a schedule to the depositor or the depositor will face penalties for early withdraw.
These are completely different. And it is unnecessary to fraction demand deposits as banks could always entice depositors to contract withdraw by making the interest rates high enough.
Also, ALL banks that fraction demand deposits are insolvent. Each one of these banks has current liabilities greater than current assets. So the banking industry does not use Generally Accepted Accounting Principals or they use a modified version for insolvent institutions.
It is claim for withdrawal at an unspecified date. A time deposit is a claim for withdrawal at a specified date.
It is hardly a gamble but that’s basically correct.
How is that? Liabilities and assets are equal, they just have differing levels of liquidity.
Nice topic, I think Avram sort of hit the nail on the head.
A few more points, as Avram and I have noted in regards to Walter Block, at least his is the consistent position. If the difference between fractional reserve banking and full reserve banking does come down to the formal nature of time deposits against the somewhat informal nature of demand deposits in a fractional reserve system then it must also be necessary to prevent any mismatching of loans and to outlaw the use of financial instruments such as loans with call and put options. Now, the fact of the matter is that in a financial system such as those in developed countries these instruments play a huge role.
Secondly, somebody commented that the bank “gambles” when it operates on a fractional reserve basis. What the banks do is actually analogous to what airlines do. In order to maximise their profits airlines will offer more tickets than there are seats, the amounts they will issue depends on the likelihood of all passengers showing up, the opportunity cost involved in an empty seat and the losses that would result if the airline had to compensate people for not having an available seat. Now, I’ve caught a lot of planes in my time and I can personally testify to the fact that I’ve never been told that there were no available seats. The fact of the matter is that airlines can, as banks would be able to, calculate very precisely how many people will turn out and what is the best way to maximise profits. Funnily enough, I don’t hear any Rothbardian rants about how evil airlines are.
Finally, restricting the issue of fudiciary media on behalf of banks would make the whole system far less able to meet the dynamic system of the market economy. If there was a large reduction in the demand for cash, it would be relatively easy for the banking system to accomodate for this is the case of fractional reserves. Full reserve systems, on the other hand, would have no indication that they should increase the interest rate. The system is analogous to any other market, when bureaucratic controls override the market price system and the actions of entrepreneurs the economy as a whole will suffer.
you do know that slavery in the south played a huge role, even though it cant be defended rationally on economic grounds without special pleading/mercantile fallacy ? right???
Even if they correctly distinguish between property titles(tickets) and property, all proposed analogies—between fractional reserve banking
on the one hand and airline overbooking, fractional reserve parking lots, lotteries,and insurance on the other hand—fail to recognize properly the fundamental distinction between present and future goods. The owner of a title to money owns a present good (money property)—an indirectly yet immediately serviceable good. The fractional reserve banker is found guilty of fraud; he issued and sold additional titles to an unchanged quantity of money property. In distinct contrast; the owner of an airline ticket owns a future good. Hence, in overbooking now (today) a flight at a future date (tomorrow), an airline cannot possibly have committed fraud already now (today). Fraud cannot occur until tomorrow, when the tickets must be actually redeemed, and only if the airline is then unable to satisfy each and every ticket holder’s claim.
In fact, airlines typically fulfill their contractual obligation: each ticket holder is assured a seat on the scheduled flight, because the airline is prepared to
pay every excess ticketholder off, that is, to repurchase his ticket at a price (by exchange of another good)that the holder considers more valuable than his present airline seat. And certainly,no airline typically oversells spot-tickets (titles to seats right now, that is, present goods) and assigns two people to occupy the same seat, which is essentially what fractional reserve banking amounts to.
Similarly, the owner of a fractionally covered parking permit (with more permitholders than parking spaces) does not own a present good. He owns the right to participate for a specified period of time in repeated search for parking space. The owner of the parking facility cannot possibly commit any fraud in selling his permits,unless he then refused entry to a valid permit holder when there was empty space available, or if he changed the contractually agreed upon rules of the game; that is,if he had agreed to print up to a maximum of 200 permits, for instance, but actually printed 300. It is only the owner of a spot parking ticket, or the owner of a reservedparking space, who are owners of a present good; and there is, of course, charac-teristically no overselling of spot spaces or of reserved parking.
The same reasoning applies to the case of lotteries. The holder of a lottery ticketdoes not own any present good. He owns the right to participate in the drawing of specified prizes, whereby it is self-understood among buyer and seller—as inherent in the nature of a lottery—that there are—and must be—more tickets than prizes.The lottery operator cannot possibly have committed any crime, unless he failed toredeem the winning tickets into the promised prizes or surreptitiously changed thepreannounced rules of the game. If this is rarely the case, it is practically unheardofthat a lottery would print more than one winning ticket for one and the same prize(present good), which would be likewise fraudulent, of course, and which isessentially what fractional reserve bankers do
-Thank You Mr Block
False analogy. There’s nothing coercive or involuntary about fractional reserve banking.
As regards the Block quote, yes, I’ve read that paper. I presume what Block is saying is that money serves as a present good since it gives yield in the form of availability. Airline tickets, however, don’t since the airplane will actually take off in the future. But unless the wonderful Dr Block can read minds, I’m not sure what he’s talking about, I can personally attest to the fact that I feel more comfortable when I know my airplane ticket is available. Now, lest I be accused of making a strawman the only other intepretation I can think of is that money in a bank can literally be used at any point in time whereas a ticket with an airline can only be used a specific date in the future. But once again, this isn’t true. By the very fact that the money is in the bank, it can’t be used right now. And unless you’re living in the Walrasian world (which I presume Dr Block isn’t) people actually have to go to a bank, or a store, to get their money in order to use it. So clearly, it isn’t a present good.
Now, what Dr Block might be saying is that the date at which money in a fractional reserve system is used is uncertain whereas the taking off of the airplane isn’t unknown, it’s relatively well established. But this doesn’t matter in the context of the argument. All that matters is that the money clearly isn’t always being used and neither are airline tickets.
Not that your original post was relevant, by the way, my point was that FRB isn’t just “gambling” it involves the carerful calculation of when, and how much, money will be withdrawn.
false. i can say Giles, now owns 5£ from whats in my bank account, to be delivered whenever. the transfer of ownership would happen then in the present. as i bequethed it , without requiring myself to motion towards a bank in the slightest.
gift giving at the speed of thought.
and horse race gamblers have systems which are carefully worked out to predict what horse will win.
the analogy was fine for the limited claim it was critiquing. you made no argument about the developed countries you were considerings ‘freedom’ attributes or how this is connected to the presence of that ‘instrument’; you merely asserted that presence of the instrument is proof of its merit without enquiring as to whether it is their through force or fraud, or otherwise. i was merely pointing out that saying, ‘this is important in out present system’ is a weak point , made on the unsupported with other claims way that you presented it.
The difference between demand and time deposits is that one is a bailment and the other a loan. It’s quite easy.
The cavalry has arrived!
and the latter cannot replace the former because peope who want bailment are not going to seek a loan.
He did point out, however, that if an airline happens to misjudge how many people will show up to claim their seats, it will essentially buy the ticket back from them. A bank that becomes insolvent has no way of compensating depositors who weren’t able to withdraw their money.
Are you saying what it should be or what it is? Demand deposits are not legally considered bailments. Besides, the legal status has no bearing on the economic effects.
And all the quibbling over analogies misses the point. “fsk” seems to understand which is why he brought up the problem of bank runs. If you believe fractional demand deposits are inherently distortionary then you must also believe time deposits are inherently distortionary.