Actually, you are equivocating.
Actually I’m not. But thanks for not knowing what equivocating means.
Elaborate on what you don’t understand.
Under a 100% reserve system, people would keep a certain amount of their money in warehouses and a certain amount in time deposits. Under FRB they keep all of their money in demand deposits. Please don’t equivoate over the defenition of demand deposit; we are talking about the current system. Instead of having two separate accounts, there is one and it is up to the banker to figure out the correct ratio (which would correspond to the ratio of money in warehouses and money in time deposits in the 100% reserve system).
Oh really? You keep repeating your preferred defenition of demand deposit when we are obviously discussing something else, so yeah you are.
No we’re not. We’re discussing what a demand deposit is. We’re discussing the nature of demand deposits. Maybe you’re just not able to move into the higher conceptual realms. Maybe you’re just stuck in legal positivist land. I don’t know, and I really don’t care.
See my previous post,
but also: The Money Multiplyer: Myth or Reality?
OK, so what’s your point? How does this make timed deposits and demand deposits one in the same? Here you are claiming that in a fractional reserve banking system depositors keep all their money in demand deposits (which I am not sure is true), not that demand deposits and timed deposits are the same. You are simply saying that there are no timed deposits.
We are not talking about the current system. The original claim was that distortions in time preference would not occur if a loan was made from a timed deposit, as opposed to from a demand deposit. This is not the case. You are not addressing the arguments which were made. You are simply arguing a tangent, which is ultimately irrelevant to the topic at hand.
We are discussing the current system, in which deposits are fractionally lent out. These deposits are called demand deposits. I don’t care if Rothbard felt they were not really demand deposits. Call them something else if you like.
No, WE are not. You might be unable to think in wider concepts, but I have no such failing. You might want to work on that.
Honestly, what is your problem? I started this thread to have a discussion about the differences in the current system and a certain version of the 100% reserve system. You either failed to understand what this conversation was about or you have deliberately attempted to lead it elsewhere. If you don’t like the way I use the term demand deposit, say so and move on. Otherwise, please stop interfering in the conversation.
The point is the money supply is the same under FRB and 100% reserves. Resources are also distributed in basically the same way.
That you don’t understand the nature of demand deposits.
No it’s not. You failed to address my argument on the topic a couple of posts back, and then bring it back up again ignoring what I had said earlier. But, I will repeat myself (although, I will agree to disagree if you continue to do the same thing). If the depositor deposits his money in a demand deposit that depositor has the right, by contract, to demand money at whatever time for whatever reason. The bank is under contract to have that money available for the depositor whenever he feels he needs it. And so, if the bank loans that money out it no longer can fulfill the contract, because it does not have the money to give the original depositor (the deposit was loaned out). So, the depositor demands a certain quantity of the money and the bank meets the demand by opening up a new balance sheet and annotating that a certain amount of the deposit was returned to the depositor, but has also technically been loaned out. If the original deposit was for $1,000, and $900 were loaned out, but the depositor took out $200 on demand, there is now $100 that effectively do not really exist but are still in circulation.
In a timed deposit this cannot happen, because the depositor cannot redeem his money until the end of the contract, which is when the business the money was loaned to has to pay back to loan plus interest. So, there was an original deposit of $1,000, which is in part loaned out to a business (or in full, it doesn’t matter). There is no chance for there to be more money in circulation than was actually deposited because the depositor cannot redeem those funds. The money supply remains exactly the same.
Then you don’t understand the nature of the current system, or 100% reserves for that matter.
I’ll still be here if you wish to contribute anything.
I actually do. And for the record: your OP did not state anything about the current system. It was just about FRB and demand/time deposits.
I’ll still be here when you want to learn about that which you are posting.
I think Avram has made the best argument so far against 100% reserve banking:
A couple of questions:
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Can this be explained further (especially where “12” comes from)?
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So, the depositor can use the certificate as money? I assume this is based on the general trust in the bank’s solvency, and that that money will be made available on that date. In that case, I am sure that it is bound to happen, just as fractional reserve banking is bound to happen. The issue is whether or not it will continue to happen once people lose trust in those certificates, since it is inherently risky to accept a certificate as payment if that certificate has not been fulfilled.
Is this the only depositor? If it isn’t then there is no problem. There are still reserves and perhaps someone else has deposited an equivalent amount at the same time. If this is the only depositor then the bank must pay the $100 out of its own capital. The bank has taken a loss due to its calculation error.
You are using the term demand deposit in a different way than I am. I am simply referring to the current checking account system.
Also, as Avram has just pointed out in another post, time deposit contracts will trade on the market like money.
The problem is not with individual losses. It is with the “cluster of errors”, as argued by Murray Rothbard. As I had originally pointed out, now the argument is whether or not demand deposits which are loaned out (fractional reserves) create a distortion in time preference and/or the market. If this is true, then the majority of loans turn out to be insolvent and the bank cannot cover all the demand for money.
I see where you are coming from. You are saying that if loans create distortions in the market then a loan made from a timed deposit should do the same. The increase in demand for money does not come about until it is clear that the bank is insolvent. The problem with your analysis, I believe, is that what you aren’t considering is that there actually has not been an increase in savings—people are using money stored in demand deposits to buy consumer goods. The money being loaned out is not being saved—people are demanding more money than the banks have on reserve.
If the depositor had put that money in a timed deposit, the depositor cannot spend the money because he has surrendered rights to that money for a specified period of time. When the specified period of time is up the depositor can decide to spend or continue to save, and at that point interest rates increase or decrease, signaling a general trend towards a decrease or increase in investment. But, the money was saved and not spent, so there is no distortion.
I am referring to the term demand deposit as it should be referred to. Current checking account systems are not sound.
What people who support 100% reserves and time deposits at the same time don’t seem to understand or at least from what I gather is that time deposit certificates will circulate the same way as FRB liabilities. So you’d make a deposit of $1000 and you’d get a certificate saying $1200 redeemable February 4th 2012 or something. The interest is already there so people will trade that certificate as if it were the $1000 originally deposited. As I explained earlier there will probably be the same multiple of claims to the same original $1000 as there would be under the institution of Free Banking, maybe even higher due to reduced risk, all at different dates. In fact, judging historically where token coins were traded not by specie value but by face value I wouldn’t be surprised if these certificates started being traded at $1200. This is an even worse situation than originally in FRB if you take the view point that extra claims to money are bad and probably even if you don’t!
I think if you want to support 100% reserves, and I actually believe there may be good reasons for doing so, you have to drink the kool-aid and realize that modern finance and banking as we know it has to bite the bullet. If you admit time-deposit certificates are valid then all you have done is created a more rigid system of fractional reserve banking but you have not solved the “problem” of multiple claims to the same money as it exists in that much despised system.
EDIT: I copied this out from another thread into this one, some posts above it actually refer to this same post but in another thread. Apologies for confusion.
Only by the borrower of the money. The lender has surrendered that tittle. Think of it as real Gold that A has borrowed from B. B must wait for A to repay.
Not so for FRB. Both A and B retain ownership and using just the claims for the gold, they both are able to trade. The different banks will clear their books one against the other so that they don’t have to transfer any gold (or cash), thus FRB, increases the money supply, where time deposits do not.