Deposits vs. Debentures?

Economics Economics Questions
1

Hi all,

I recently re-read Rothbard’s “What has Government Done to Our Money?” and “The Case For a 100 Percent Gold Dollar”. I came across a section on page 162 that I have not been able to quite understand. I may be missing something obvious, as I am still relatively new to Austrian Economics, so please bear with me.

This is the section that I do not quite understand:

“To those who persist in believing that the bulk of bank deposits are really saved funds voluntarily left with the banks to invest for savers, and are not just kept as monetary cash balances, I would like to lay down this challenge: I what you say is true, why not agree to alter the banking structure to change these deposits to debentures of varying maturities? A shift from uncovered deposits to debentures will of course mean an enormous drop in the supply of money; but if these deposits are simply another form of credit, then the depositors should not object and we 100 percent theorists will be satisfied.”

Here goes my question:

Why would a switch from deposits to debentures mean “an enormous drop in the supply of money”?

2

Look at a debenture (with a given maturity) as what a CD is today. When you place $100 into a 12-month CD you cannot spend it for 12 months. Only the borrower to whom the bank had lent your money can spend it. The way banks work today (fractional reserve + central banking), in the case of a standard checking/savings account deposit, BOTH you and the borrower can spend the same $90 ($100 minus the $10 kept at the bank as reserves). The latter scenario increases the supply of money seen by the market vs the former (CD, debenture) one.

Z.

3

“…and we 100 percent theorists will be satisfied.”

im not quite sure what that mean either. satisfied wiht what??

4

Thanks z1235,

your post pointed me in the right direction, and after some further research into debentures this makes sense now.

cret,

the reason 100% theorists would be happy, I believe, is that if debentures replaced demand deposit accounts, it would force the banking system onto 100% reserve system.

5

That’s easy. Why would we agree to a unilateral forced intervention into finance, overriding already existing voluntary contracts?

6

""cret,

the reason 100% theorists would be happy, I believe, is that if debentures replaced demand deposit accounts, it would force the banking system onto 100% reserve system.“”

is a theorist differnt from an advocate??? and why force the banking system to 100 reserves?? to accomplish what economically??

do you believe that the curent banking system isnt 100 percent reserves???

“The only standard money that the banks had available with which to redeem their checking deposits was $42.7 billion in standard money “reserves.” These $42.7 billion of “reserves” were the standard-money backing for a total of $6108.2 billion checking deposits, i.e., deposits equal to the sum of $42.7 billion + $6065.5 billion. To say the same thing in different words, there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media.”

jl April 23, 2010 at 7:38 pm

“The vast majority of reserves are held as bookkeeping entries at the Fed Reserve banks. Currency in circulation is cash in bank vaults, but most of it is out in people’s pockets, mattresses, cash registers, and so on. I hear that half of the currency is outside the U.S.”"

the above links indicate that there are standard mney reserves…is that what would make the 100 percent theorists happy??? and there are reserves that are just tbook keeping entries at teh fed. similar, from what i understand, to teh bookkeeping entries at commercial banks for standard money, also known as cash???

does the fed basically call teh current system of non paper reserves (if the info is true..do you know??) and paper reservs a 100 percent system???

personally, the bank i go to calls one thing a depost says you might get funds later and never uses the word dollars or money or currency. and thats confusing.