I know the theory is that fractional reserve banking increases total spending. But does it increase spending over time? I don’t see how it can. Suppose John Smith earns 1 million dollars over his adult lifetime. If he borrows 500k and spends it when he is 18 then that means he is going to spend 500k less over the rest of his life. In other words the ability to borrow money does not increase the net amount you can spend over your lifetime. All it does is shift the time horizon. So I would think that all fractional reserve banking would do is shift the spending forward in time, not change the net amount.
I do not really get your example… can you explain it a bit more?
Very good question. Shows an active mind.
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What about businesses? They don’t die. What about dying with debt? It happens.
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Let us move aside the curtain of money and see what is happening behind the scenes. First we will talk about businesses.
Absent FRB, the money available to borrow comes from people saving their money and putting it in a bank. This is called underconsumption, meaning there are going to be resources that will not be consumed right now. The banks lend that money to businesses, who use it to buy those unconsumed resources to make tools etc. and increase production. With their increased production, which is hopefully a higher percent than the interest and principal they are paying on the loan, they pay off the loan. Society benefits from the increased rpoduction, since the wealth of a nation is it’s goodies.
If we introduce FRB, there is money available to people that did not get into the bank from depositors, and so does not represent underconsumption, and so there is no increased supply of resources to draw from. Thus the businesses will have to compete for the existing few resources. They have plenty of money to spend, having borrowed it from the banks, so that prices for those resources will rise. In other words, enter inflation.
Some businesses will lose money because of this change in prices. Rather than paying off the loan with their new profits, they will go bankrupt, because there are no profits.
So that FRB does more than shift the time horizon. It inflates the money supply, a very damaging thing.
As for a consumer borrowing from the bank to consume, he shouldn’t be there in the first place. He will have to repay that money with interest, but will not be using the borrowed money to increase his wealth. FRB allows the banks to increase their pool of suckers.
Izzy,
How do you turn the url in your signature into a link?
html code…
so for example,
if I wanted to do this : Click here to go to mises.org
the html code would be: Click here to go to mises.org
Thanks, worked like a charm.
The net effect of fractional-reserve banking (monetary expansion through inter-bank loans) is to increase the money supply which reduces time preference which, in turn, results in capital consumption. The more successful the State’s revenuers are (by whatever means), the more urgently one must spend what one has before it is seized through inflation, taxes or other State measures. Better to buy bread today than save for a breadmaker tomorrow only to have the money stolen and end up with neither bread nor a breadmaker.
Clayton -
I assume you mean some sort of time deposit, otherwise this is FRB.
As Clayton wrote, money (more accurately, credit) is created out of thin air when banks lend to other banks, because the latter banks can turn right around and lend that money out to people - or other banks!
That’s it. I can’t take it anymore. This website’s software totally sucks. I just had another post vanish. It’s a shame because the topics and users are the best I’ve found on the net. Unfortunately the forum’s software is pitiful.
Sadly, this is true and doesnt look to be changing soon. The best advice I can give is to always copy your post content before hitting submit.
There’s hope… they’re transitioning to community.mises.org
Unfortunately, you have to re-register.
Clayton -