I see what you’re saying, and it raises an interesting point. Maybe Marx was right, the introduction of money must lead to business cycles. X_x
Sure about that, are you?
In a 100% reserve system with time deposits there is the same chance that the bank does not have enough capital to meet its obligation to a certain customer the moment he comes to claim his time deposit certificate as there is the chance that a Fractional Reserve Bank does not have enough capital to meet its liabilities when its customers come to claim them.
There is nothing about instituting a time deposit regime that makes bankers more risk averse.
There may, however, be an argument saying that its easier for an entrepreneur to predict and manage the time structure of his liabilities under a time deposit system but I think that if people’s attitude towards risk doesn’t change, all that would happen is you’d see a higher multiplier of claims to capital.
This depends on expectations. The money in demand deposits (or checking accounts if you like) comes from two components: the demand for money and the demand for saving (or the demand for warehouse receipts and the demand for time deposits in a 100% reserve system). Depositors expect to buy future goods with a portion of these deposits, hence the reserve ratio. The ratio emerges from the bank’s perception of the ratio of money demand to saving demand within the checking account. In the real world, of course, demand for saving manifests itself in other ways as well but a portion of checking account balances can be seen as being reserved for the future. This system is effecient because of its flexibility. An individual depositor might have volatile time preference but the aggregate time preference of all depositors is likely to be stable.
True though this is, I would argue that a bank has no obligation to prematurely redeem a time deposit if they are financially incapable of doing so (although I’m sure that current time deposit contracts/terms stipulate that they always will).
Hello, thank you for reading my post.
I have since edited it and removed the reference to 12, I just picked that number arbitrarily. I think I explain how multiple claims to the same money arise in the second quotation of the OP (the one where I do a little Rothbardian talk about Smiths and Browns and the like). So if you didn’t understand how I thought more claims to future money than there is present money would come about I suggest you read that, and if you disagree tell me! I like discussion
The amount of claims to future money (time deposit certificates in this case) divided by the amount of current money is called the multiplier. What this multiplier would be I don’t know. I chose 12 arbitrarily. However, I do know that the amount of these claims (time deposit certificates) will rise till the marginal benefit associated with issuing another time deposit falls below the marginal disutiliy of the risk associated (as perceived by the bank owner). I believe that under a 100% reserve with time deposits system, since managing the time structure of bank liabilities becomes easier than under fractional reserve banking, you will see a slightly greater value for the multiplier than you would under FRB. I have not given this much thought but I tend to think the value would be approximately equal and it would definitely not be less.
It need not be premature, I was referring to the case where the guy shows up on the maturity date and can’t get his money.
Why must B wait? B can trade the paper certificate A gave him in return for the gold as long as someone is willing to take it. Let me explain.
B (the lender) gives $1000 to A (the bank/borrower) and A promises B a sum of money ($1500) in the future (4 years time) and gives him a certificate indicating this.
Now B can use this certificate as a medium of a exchange because another person will say “well look you’re giving me a certificate for $1500 in gold which I may claim in four years time and according to my time preference schedule I value that as $1000 now so I will sell you this $900 fridge and give you $100 change”
Meanwhile A can lend the money B deposited with him to someone else call him C. C can then use this money to buy something from D and then D can go make a time deposit with A using the money B originally deposited! This means that D too has a time deposit certificate, as well as A both “backed” by the original $1000 B deposited.
A can also loan out these $1000 again to lets say E who then buys something from F who deposits the money to A again etc. This will keep going till A eventually says “look I have about $40,000 worth of claims coming at me within four years time, I am not going to make any more time deposits till I get some more capital” When A will say this and how many time deposit certificates will be circulating in relation to capital I do not know.
I will direct you to the post above where I briefly deal with the concept of the multiplier.
Anyway, this is how $1000 can become many claims to future sums of money under the institution of time deposits. These claims can easily be traded and there is no reason why they would not be, especially as time deposit claims have a face value with accrued interest on them.
It is likely they will trade at the monetary value (or gold weight if you prefer) of the deposit, increasing in value as the certificate gets closer to date of redemption, or trading at future value to begin with.
No idea where the “12” comes from, but no, they are not used as money (what is this “would be” language, as if CDs don’t exist today??), any more than, say, stock certificates are generally traded as money. Like stock certificates, they can perhaps be traded, but there’s only ever one single outstanding claim on each dollar.
It seems to me that time-deposits would not have the business cycle effect of demand deposits as are because they involve explicit interest rates per service. The present demand deposit system is an avoidance of paying interest. That is the whole point to doing it.
Currently, you are usually paid interest on the money you hold in your bank deposit account
Not enough.
As I have explained and you have neglected to read, this is not the case. There will, indeed, inevitably be multiple future claims (even the same time in the future) to the same money. See four posts above
Time deposit certificates, commercial bills, bonds and other such financial instruments are often used as means of payment for some (larger) transactions today. In a world where bank notes are restricted, time deposits are likely to fill the void for all transactions. I think you would see a standardizing of these certificates. For example you could deposit $1000 in gold and receive 100 $12-in-four-years-time time deposit certificates in return.
lol who is to say?
Besides, it has little to do with the creation of new credit and the like.
I haven’t “neglected to read”; I didn’t take it into account because you’re wrong.
So? People swap houses today. Doesn’t mean houses are a form a money.
The fact of rates for the two types as they exist now are to say.
It has everything to do with creation of new credit. Lending from time deposits is merely accumulating small amounts of funds from large numbers of people who want to lend but can’t individually. It isn’t really “banking” at all. it does not create new credit. No interest rate distortion. If time deposits could cause business cycles, lending per se must cause them.
In that case, what you said isn’t true. The risk of bankruptcy increases as the reserve ratio decreases. A bank not having money with which to redeem a matured time deposit is significantly less likely than a bank not having money for withdrawals from accounts whose balances are partly loaned out. (Did that last sentence make semantic sense?)
The risk for both is identical. It’s a matter of whether the bank makes gains or losses.
This may be true in the current banking system, but I have already voiced my opinion that this system is unsound. Banks offer generally the same interest rate for checking and savings (at least, mine does), and savings accounts aren’t even real savings account. I can transfer money from my savings to my checkings suffering no penalty. These are not true timed deposits. In fact, I should not even be receiving interest for my checking; I should be paying the bank for safeguard my money (as it used to be).
I will take myself for example. I deposit my paycheck in a checkings account, and yes I save much of it. However, this is not a long-term savings preference. I am under the expectations that I can withdraw that cash whenever I want and spend it. I keep it in a checkings account to give me that flexibility. If I were interested in long-term savings I would put the money in a timed deposit, because I would feel that long-term future goods are more valuable than present-goods. In both cases I might be putting off current consumption, but the difference is that in the latter case I can, under no circumstances, consume until the timed deposit contract has been fulfilled, at which time the business’ loan contract would also be fulfilled. In the former case I can change my mind and spend my money, while the money is still be loaned out, creating credit out of thin air.
Obviously, it has not shown to be very stable, unless we have different views on why busts take place.
I’ll give you credit, you make a good argument. But you are mistaken in your reasoning. You are now confusing the money commodity with any financial instrument commodity or other commodities in general, i.e., chairs, cars, watches, etc…. you must ignore a vital function of the money commodity in order to make the above argument. #############################
If the Time Deposit (CD) is sold for its market value, it is no different then any other financial instrument that can be bought and sold. Say a CD is sold for a $1000, there has been no increase in the money supply: The buyer has transferred $1000 to the seller. The seller has gained $1000 of purchasing power, but the buyer has lost that purchasing power. The CD is not recognized by the market as money. Not everything is money! You don’t take your cooperate bonds to the supermarket, do you? But you can sell them on the bonds market. Your argument can be made for any commodity (charis, hats,…) but those commodities are not recognized as money by the market. They are themselves exchanged for money. When you buy a chair and then go out and sell it, do you increase the money supply?#################################
With demand deposits, the fiduciary media parade as real money.