I was listening to Peter Schiff, and I heard him say that you don’t have to give up a fractional reserve system as long as you tie it to gold. However, I thought you would want a 100% reserve currency because otherwise the money supply could still change based on the amount of credit in the system and there could still be runs on banks. However, that’s simply my opinion, and I was curious what everyone else thought.
There’s nothing wrong with fractional deposits, what’s wrong with them currently is the fractional deposits now are demand deposits (at least in this case).
What fractional deposits OUGHT to be are deposits using the bank as an intermediary to loan out accumulated credit while you gain interest on what you deposit. These deposits would represent a certain time preference. Example: I deposit money at Bank A promising not to withdraw it for B ammount of time receiving C% interest on my investment.
Demand deposits (deposits that are immediately withdrawable) ought to work somewhat like a warehouse. There would be a flat fee (or perhapse an indexed fee) on deposits, and depositers would pay banks to manage and guard their savings.
The system we have today doesn’t work like that. If you invest savings in a bank, most of it will be loaned out almost immediately. Gold is irrelevant, you still have credit expansion which isn’t backed up by time investment. Also, In the 1930s they still had a gold standard.
What you described is basically what I assumed the term 100% reserve system to mean. The business of returning time deposits with interest would not result in an expansion of the money supply because no one could plan to use that money during the time in deposit other than the person it was being loaned to. Also, the time deposit should be looked at more like a mutual fund. If a few loans go south, no-one with time deposits would be worse off, only the bank would lose profits, but individuals with time deposits would also need to recognize ahead of time that if a lot of loans go bad, they are not garenteed to get all of their money back. There is no such thing as risk free if you’re gaining interest. Is there a different description of a 100% reserve currency that I am unaware of?
When Peter Schiff was talking about not needing to get rid of the fractional reserve system, I assumed he ment not get rid of demand deposits that could also be used as the banks reserves for loans.
Peter Schiff is wrong on this one. Fractional Reserve is as wrong as me taking money directly from you. It is injustice. It is stealing upon the purchasing power of everyone else and loaning it out with interest.
The depositors are not informed that their money is loaned out, and they are not informed that they cannot receive their money immediately.
The free market would place an appropriate interest rate and appropriate deposit fee under a 100% reserve currency system. So banks wouldn’t be out anything. It’s just that they need to be brought to justice when they are violating property rights. Currency is property and so by expanding it through fractional reserve banking, to do that requires that everyone else lose part of their currency’s purchasing power. That stolen purchasing power is now competing for the same pool of goods and resources. The pool of resources didn’t increase when they created the new money. It just got unevenly allocated to those who haven’t worked for it. It is the same reason why counterfeiting is injustice.
However, if the depositors are informed that their money is being loaned out and it will not be paid back until the loan has matured, then they will be able to voluntarily reject that contract. This type of contract would be similar to a current day CD. The incentive for the depositor would be that they receive just compensation(interest) on the loan. In this situation no new money is created. This is not fractional reserve banking. Lending still occurs. But no injustice is created.
Injustice needs to be punished by our government. Not licensed by it.
Here is where you can read on the New York Federal Reserve website all about current fractional reserve policies in the United States.
But then it wouldn’t be a demand deposit.
Why exactly? People voluntarily agreed to it, because pays interest and convenient.
Stealing purchasing power? Seems like a right to property value.
They can, of course. And not informed in what way? How do they think it pays interest?
Where is the violation?
Oh, right to value of property again.
How can you “voluntarily agree” to do something which is impossible?
Well, the current FRB system is in fact far from consentual.
-Jon
I apologize for the confusion. I am speaking of fractional reserve banking as the Federal Reserve describes it.
If we are talking about fractional reserve banking from their definitions, this is the ability of a bank to take money that people wish to only store in the bank. The bank loans it out at interest. These are NOT time deposits(i.e. CDs) OR savings accounts.
Savings accounts and time deposits work differently and actually compound the situation. We haven’t even started dealing with how the banks use those. That even expands the amount of injustice occurring.
So, back to fractional reserve banking: If I asked you to house some potatoes for me until I’m ready to use them, and you said you would just house them(read a checking account contract) but you then instead loaned them out to someone else, you have violated my property and the contract. It did not become your property just because you agreed to house it. It is still my property.
When you have government actions that institutionalize fractional reserve banking, it is bad. This creates greater and greater amounts of credit, so that the value of money/credit declines.
Without the government to institutionalize it, credit greater than reserves actually decreases as well as increases. The value of money is preserved in the long run, although banks do temporarily put themselves at risk.
Notice the largest panics in the US were due to government intervention allowing fractional reserve banking to become institutionalized, such as in 1819 (post-war ban on redemption of notes for specie), 1907 (control of money supply through banking regulation since the civil war), and 1933 (central banking).
I believe that you or someone with similar opinions has, in other threads, discussed how if the fractional reserve nature of the deposit is free and fully informed, then there is not a right’s violation. Thus (paraphrasing your position, please correct if I misuse), it is not fractional reserve banking that it wrong, it is the mandatory nature of it that is wrong. Please forgive me if you are not one who has contributed to those other threads.
I have always wanted to ask: How is this different than me counterfeiting money? I make a note that looks exactly like the “real” one. I then use it to buy stuff, but since it isn’t a real note I have defrauded the other party to the transaction. So the note looks like money, and can perhaps be used as money, but it isn’t the real thing and use of it constitutes fraud. In fractional reserve banking the original $100 of money can magically become $1000 of (money + credit). So there is $900 of credit that really doesn’t exist out there in the market chasing investments and goods, driving up prices and competing with my (assuming I did not participate in the $900 of credit inflation) REAL money. To me it appears that there must be a difference in character between the original $100 and the created $900, and that character is the difference between non-fraud when spending the $100 and fraud when spending the $900.
So, just to wrap up, the question I am asking about isn’t the bank loaning out the depositor’s money - I will accept that can be done if under voluntary contract (but at the depositor’s risk). Aren’t the people who have to compete with the created $900 being disadvantaged? The same way I would be if a person competed against me in an auction but paid with counterfeit bills?
Jason, here’s the thing - are you talking about a regulated banking industry?
Without regulation, each bank would have to issue its own bank notes and have those bank notes fixed to something that couldn’t be counterfeited, like gold. If a single bank issues too many notes, this will become apparent as they start losing value, compared to the bank notes of other banks, or gold itself. In a free market of banking, fractional reserve banking has no tendency to constantly expand and create excessive amounts of credit. While some situations encourage banks to issue credit beyond reserves, others encourage them to do just the opposite. Unbacked credit plays only a small part in fundamental money supply expansion → you are more likely to see more gold mined from the Earth.
Banks given the privilege of suspending redemption of notes for gold will result in excessive credit.
Banks being required to accept their competitors’ notes and redeem them for gold will result in excessive credit.
Trying to protect such a system with central banking only encourages even more excessive credit.
Trying to protect that system with fiat currency encourages even more excessive credit.
Not counterfeiting because those are not fake, but real banknotes issued by the bank, obliging itself to redeem them on demand. Also it is not mandatory, as far as I know there are fully backed reserves available if you want, people just rather earn interest than pay for warehousing.
A time deposit is NOT fraction reserve. Fractional reserve banking is where you warehouse your money expecting to be able to get back out what you deposited but instead they have loaned out 90% of your money. To pay you on demand they have to take from someone else’s money who expects to be paid on demand. They have to steal someone’s property to accomplish this.
I think there is a lot of confusion here. If you choose to make a contract with them where you will allow them to loan out your money and pay you interest but they can’t redeem it back to you until either:
The debt is paid
OR
Someone else purchases that loan(through opening a similar account)
This activity would be fine and NOT fractional reserve banking. In this situation the bank always has the amount of reserves on hand to meet all demand deposits it has agreed to. In this situation if you wanted your deposit back out before the debt was paid, you would go to the bank and tell them and they would then take any who wished to create a similar account and sell the remainder of the loan to them for their money(if they so choose to provide such a provision). Then they redeem this money to you as soon as they have the available funds from others making this same arrangement, but do not use that money to make new loans with. It is to maintain the deposits on the current loan. Then no more money is in circulation then was before. No inflation occurs. But more importantly, no injustice occurs.
In a free market, banks that practice fractional reserve banking will eventually fail. It is logical to assume that without government promotion of fractional reserve banking via cheap government loans, regulation, and bailouts, banks would instead turn towards full reserve banking.
The proper operation of government is to punish injustice. If individuals who’s property was violated brought these things to the judicial system as soon as there was any sign of funny business, then others see that bank get sued and punished for the violation of property they have committed. No need for regulations, cheap government loans, bailouts, fractional reserve banking, etc. Just let justice prevail and the problem is solved. A bank that violates people’s property needs to recompense them for the violation. It is a justice issue.
No different then a factory or pig farm damaging your property through polluting. They are violating your property, your money, when using it for things you have not permitted them to use it for. A simple respect for property rights will solve this problem.
Even without government enforcement, banks would turn to full reserve banking due to the danger of going bankrupt.
Without loans, regulations, bailouts banks operated with low reserve ratios, about 2 percent in Scotland, 20 in Switzerland due to more foreign exchange.
Source, please.
The problem is there was no injustice, because it was contractual. The improper operation of governments was when they allowed banks to suspend redemption, a contract violation.