Out of curiosity would FRB still be considered fraud if I agreed on a contract that said that I recognise that the bank practises FRB and agree to it?
Scineram, It seems in a completely free environment, store of value is one of the most important properties desired in a currency. As the market chose gold and silver, they chose a substance that had harsh limits on supply growth, and one that was not able to be manipulated centrally by any market participant.
The main PURPOSE of money is definitely exchange. And no substance can perfectly maintain a store of wealth. I believe exchange and saving value go hand in hand.
Fiduciary media, as you say, works well in that it seems good for both purposes. but when redemption is denied, it no longer maintains its store of value, and is subsequently rejected as money.
The Problem with the current monetary system is that it’s use is coerced in order to regulate income tax, nothing more. Most investors already know that their money is being lent out by banks, and it’s not really a myth that money is printed on demand.
Wow.
Haven’t been on in a day and I have a lot to read now. 
Libertarians traditionally hold that government is instituted for securing the rights of the governed. Thomas Jefferson believed this as he espoused in the Declaration of Independence. So the pivotal point of my argument is that this is an issue of injustice that needs to punished by the institution we established for securing justice. I am making the point that it is a violation of property, and if that be true, from the libertarian stand point this must be punished by government.
First, for the sake of commerce, money is a commodity we use to reference all other commodities. So if we decided that cigarettes were money, we would then price everything according to cigarettes. If we decided TVs were money, then we would reference the value of things in TVs. So for the sake of commerce, money gets special treatment by the parties utilizing it. The free market has consistently favored commodities which are transportable and rare(precious metals).
But money, like all other commodities, is equally under the same gravity of justice. It is property like any other property. A bank is an institution that warehouses money. They should be viewed no differently in the eyes of justice as the elevator that houses corn. (Unfortunately bankers have been very successful at decieving people into believing they are somehow exempt from these basics of justice.)
If I went to the elevator and asked them to house my corn and they gave me a receipt, that receipt represents the corn I placed in that elevator(whether there is a fee for doing so is irrelevant). Now, if they printed up a receipt that didn’t represent anyone’s corn, and they loaned it to a new farmer(farmer A) in town, with the requirement that they receive X amount more after the harvest, for him to redeem that receipt requires they take someone else’s corn. So farmer B, who’s corn was taken to give to farmer A, now redeems his receipt and the elevator takes from someone else’s corn to give to farmer B. This keeps happening and happening, property violations. But none of the farmers wanted their corn given away(unless the farmer made an agreement with the elevator granting them permission to loan out their corn in which they would not receive it back until it was given back to the elevator; if the farmer goes in to get it back early, they would have to take someone else’s corn who didn’t agree to loan theirs out).
This is the essence of the injustice that occurs with fractional reserve banking. The only difference is the name of the commodity is money(the generally accepted commerce reference commodity for trade). It should receive no special treatment in the eyes of justice.
Also, someone had said that such a bank participating in fractional reserve banking would have to charge a higher interest rate. That is incorrect. In fact, they can charge a much, much lower rate and give back a higher return to depositors. It does give them a serious competitive edge but at the cost of injustice. I’ll give you an example:
Bank A has $10000 of demand deposits and $1000 of CDs.
Bank B has $10000 of demand deposits and $1000 of CDs.
Both banks have $100 operating costs.
Bank A, our common law abiding bank, can only loan $1000 out.
Bank B, with 3% reserve requirement and 25% non-demand deposit requirement, can loan out $13,700($9,700+$4,000)[this is the current financial scheme we have in the U.S. for most banks].
Bank A needs to charge 0.1%($10) housing fee for demand depositors and 14%($140) interest on loans to give CD depositors 4%($40) and to have 10% growth($140-$40[CD interest]+checking fees($10)=$110-$100 operating costs=$10 profit)
Bank B can give demand depositors 1%($100) interest and give CD depositors 5%($50) interest, charge 13%($1,781) for loans and make 1,531% profit.
Bank B charged less interest on loans, gave interest to demand depositors, gave more interest to CD depositors and still made more than 150X the profit. (The truth be known, the depositors actually paid interest in terms of value lost in their currency through this process; depositors believed they made more but really lost significant purchasing power and share an aggregate loss greater than if they only did business with banks like Bank A.)
But Bank B created a whooping $12,700 through violating the property of it’s depositors.
So we can see it’s very profitable and competitive to take the route of Bank B, but I contend it violates the property of others and needs to be punished and those violated recompensed.
That’s a contradictory statement. If government, an institution who’s very existance violates rights, is supposed to be implemented to protect rights, It must protect people from it’s own existence.
Thomas Jefferson was a hypocrite and complete rhetorician. If you are arguing to protect from injustice, the government is hardly the institution fit to carry it out. Also, WE didn’t establish it. 55 Elites and 9 state governments 200 years ago did.
Property can only be physical. Value is not property, it is a psychological and subjective characteristic based on the hirearchy of wants.
A bank can also coin, and loan money.
False analogy. You’ve based your whole scenario on a contractual agreement that was violated. There would be nothing wrong with this situation if you had agreed that the warehouse could loan out your corn in advance. This would be fraud.
If I had agreed before hand that I would only withdraw X corn in any given period of time and then allowed them to loan out the rest (a fractional reserve on my deposit) there would be no problem.
That’s an assumption made by fiat money advocates. It’s not a fact, just an assumption.
That’s just an assertion. As a matter of fact, fiat money is the cause of the business cycle and this has been known for a long time. Look up, for instance, the british currency school.
So it can be manipulated, eh ? Fiat-money advocates should think about the origin of central banking and legal tender. It’s obvious that those measures were put in place by politicians and bankers in order to prop up FRB, which is an inherently bankrupt system. So IMO it doesn’t make much sense for libertarians to defend a system which can only work if the state backs it.
But that’s not what FR banks do. FR bankers promise to pay back your money on demand and at the same time they loan your money to somebody else. However, it turns out that a given thing can’t be in two places at the same time…
Not really. You keep referring to what government currently is. What I’m referring to is government that naturally occurs. People bringing together their individual right of self-defense to protect each other is nothing set up for injustice. The institution I espouse is one where the only rights of anyone violated are those who have violated the rights of others.
Banned, if you violate my rights, my right to self-defense means I can violate your rights through the process of protecting my own. This voluntary unification of self-defense is no different. If you steal my neighbors car and we hold a meeting together and go to take back that which is his, we may have violated your rights in the process but it is justifiable when done so in defense of one’s own rights. If you attempt to punch me and I twist your arm behind your back, I have violated your person but it is justifiable because you have attempted to harm my person.
Granted what we have today is nothing like what I am talking about. What I’m speaking of happens on a local basis. It is not centralized and need not be. What I am speaking of would not require any taxes. It is something that would be funded solely by those who violate the rights of others through fines and property seizure. That is perfectly justifiable when someone has violated the rights of another. It is only self-defense.
If you are an anarchist that is fine. But I am speaking from a libertarian frame. If you don’t like that frame, I respect that and can appreciate your view that you believe no institution should be established for punishing injustice. But your belief about that will NOT stop me from unifying my right of self-defense with that of others.
I did not say value. There was a violation of contract and thus violation of property.
So can anyone. So what? You can take corn and put it into bushels of corn. Elevators do that. And they can loan out corn if it is theirs or they have permission of the farmer who it belongs to. What’s your point? It’s still a commodity.
That’s not fractional reserve banking by the furthest stretch of the imagination. Fractional reserve banking is where they loan out that which is housed as an ON DEMAND DEPOSIT. The percent they keep for demand deposits is the “reserve” amount. Not savings, not CDs; those fall under different rules in the current banking system.
I think the anarchist in you likes to be disagreeable but I hope you see that we aren’t too far apart on this. [:P]
therealjjj - remember that barring government intervention, no two banks will use (redeem) the same bank notes while one of them practices rampant FRB and the other does not. Also, while FRB may appear to generate huge profits, this is quite nominal, not real. And without government protection, it can only do so at extreme risk to its future.
plus, i think your math is a little off. fractional reserves are not negative reserves. Bank B would have < $11,000 to loan out, not > $13,000.
Also, banks cannot simply lend out greater than the amount of their reserves at any point in time. The artificial credit they loan must be deposited freely by another individual into the bank. While this doesn’t make the system any more sound, it at least forces inflation to spread its work over time. A large failure of the Federal Reserve system is that it cannot control the larger aggregates of money supply. It must plan its goals for money supply far in advance. In any case, the full potential inflation of FRB requires a good amount of time to realize, both in money and price terms.
Juan, I think you are conflating things. Fractional reserve banking is not fiat currency. We have had business cycles long before fiat currencies came to rule. The most severe downturns involved government intervention in banking, currencies, and credit. Fiat currency is simply one form of this. The Federal Reserve and central banking is another. Currency regulations are another. The bottom line is that the institutionalization through government force of continually expanding the supply of artificial credit will culminate in a large-scale business cycle.
I think you are thinking that we are talking about a free market bank constantly expanding artificial credit. This is an impossibility in a free market. However, this does not mean there will not be FRB. It simply means that banks will both expand artificial credit and reduce it. In the long run, they would be quite even. Customers could tolerate it, as long as it was not inherently inflationary and thus a permanent transfer of wealth.
Many people here would say that true libertarianism requires anarchism. Any monopoly government requires taxes, which are a violation of a truly free market. They would refer to you as a “big-L Libertarian”.
Indeed, especially if one defines libertarianism as the NAP. It’s minarchism, not market anarchism, that is suspect.
BTW a point regarding money, is that in its capacity as such it is a medium of exchange and nothing more. Any commodity can be a store of value. But nothing precludes money from also being a good store of value, like gold.
-Jon
Bank B has 97% of the on demand deposits to loan out(3% reserve policy) and 4x the CD deposits to loan out(at least this is what I heard they are able to do with Cert of Deposits). This is where I came up with that number. CD deposits are loaned back out at 4x the amount deposited.
The person on whom the taxes are imposed will determine if any injustice is occurring. For instance, if taxes are only paid on a fine basis by those who violate the rights of others, then this is perfectly justifiable and a good monopoly of government. This punishes those who do harmful things to the free market with the responsibility of taxation. That’s great for the free market as it discourages these activities of injustice which harm the free market.
When trust is high in the free market and people aren’t ripping each other off, then government is almost non-existent. If someone violates the rights of others, they are the only ones punished after they make restitution to parties they damaged. So those who don’t want to play by the rules of justice are the only ones to suffer.
I have this theory that the less injustice there is in a society, the better the economy and free market will function. When people aren’t stealing each other’s property or violating others liberties, and the institution to secure justice isn’t hindering liberties or stealing people’s property, then the only way people can be best rewarded is through contributing to the economy in the most efficient way.
If a contract is made towards a 100% reserve deposit, it’s a violation of property, I’ve already said that. However, there’s nothing implicitly wrong with the institution of fractional reserve banking. If the client consents, they accept the liabilities.
You made it sound as if a bank’s only purpose is as a storage facility, when historically that has not been the case. They have served multiple purposes.
It totally is fractional reserve banking. It’s only different in the fact that there’s a time limit on withdrawals to offset the liabilities of a fractional reserve since, on a free market, fractional reserve banking on demand deposits will fail. There’s nothing wrong with either practice though, since it’s implicitly consensual.
FRB is a way to create fiat money - I’m not conflating anything.
I don’t know what a free-market-bank is. I do know what happens when people issue unbacked paper. It doesn’t matter if the issuer is a government or a ‘private’ bank, or a grocery-store owner - the consequences are the same.
How do you know ?
expanding artificial credit is an euphemism for issuing unbacked notes - fraud in other words.
Who would be even ? The banks ? What’s that supposed to mean ?
What do you mean ? How do you know ? Could ? Why ? Should customers ‘tolerate’ fraud ?
Fiat money/“artificial credit” are inherently inflationary.
And why exactly does this government get restitution for aggressive action instead of the victim?
So how does the government fund it’s ability to enforce fines without having money beforehand?
It is illegitimate to assume criminals owe something more after they have paid restitution. If the victim is content, any further action in removing property from the criminal is itself criminal.
Haha! You do have a sense of justice! I knew it. 
Both ought to, first the victim and then the institution. The institution, though, is not getting restitution but covering operating costs. The costs for the jurors, the costs for the place where the trials take place, the costs for the hired guns, if necessary, to force restitution back to the victim.
Sounds like you like my idea! Really, it’s not my idea. This is historically what happens. The size of the community is what will determine whether a full time administrator is needed or if it be voluntary. That’s entirely up to that community how they choose to do these things. I would imagine that the jurors would contribute their time with the expectation that they would get paid when finished and that this pay would come from either the defendant or the plaintiff depending on which way they decide. Or maybe they do so voluntarily. It really is up to that particular community. The problem where government needs to be stopped and overthrown is when it is violating the liberties, person, or rights of law abiding citizens. Taxes, tariffs, regulations, etc.: all of these are reasons to alter or overthrow that government and to replace it with one that is only funded and acts according to the precepts it is instituted for: securing justice. Those who violate the rights of others seem like perfect candidates for funding the justice imposed on them.
Removing property from the criminal for paying jurors, pay for the rent where the trials took place, paying for an administrator if necessary, and paying for hired guns if necessary should be paid by the person violating the rights of others. That is a just consequence in my view. Anything more, of course, would be unjust. I’m going to quote the Constitution but please don’t castrate me [:P] :
Amendment VIII
Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.
A free market by definition must lack both government force and crime. It is utopian and no basis of what I’m saying. A situation where government funds itself by imposing fines on criminals isn’t a free market, because there is already crime. Only in anarchy can there be a free market, but there probably will never be one, so it’s kind of a moot point.
A good monopoly of government is easily interrupted. Let’s say only criminals pay government revenue. Ok. I want to be a government. I catch somebody I accuse of a crime, try him, convict him, and force him to pay me taxes. What stops me from doing this? A bigger government? What if I catch criminals the bigger government doesn’t? What if I can catch criminals at a cheaper rate than the bigger government? What if I catch the injustices of the bigger government?
A coercively monopolist government does not allow free competition in the provision of government services. It is coercively regulating this market. More likely than not, it will convict innocent men (or make just acts illegal) to provide itself with greater revenue.
Anarchists would argue that any conception of monopoly government relies on a futile attempt to separate economics from justice. Yet government requires economic power to put boots on the ground. Also, government decisions change economic conditions. The point is - the provision of government services is fundamentally bound to market positions and decisions. Any use of coercion, especially monopolist, in providing such services will result in the institutionalization of injustice.
You clearly don’t understand what fractional reserve banking means. If there’s a time limit on withdrawls (i.e., the customer is making a loan to the bank), there’s no reason for the bank to keep any in reserve at all - in fact, they’d have to be idiots to do so! It doesn’t make sense to talk about “fractional reserves” on term deposits. The whole point of keeping some cash in the vault is to pay out to people who want to make withdrawls - if they’re precluded from making withdrawls until some time in the future, why keep the cash on hand today?
Well, exactly! “fractional reserve banking on demand deposits” is what “fractional reserve banking” means! And you admit it would fail. QED.
Juan, fiat money, as I understand it, is money that is given purchasing power by government decree. This can be price fixing some good to it, legal tender law, prohibition of alternatives, etc. Bank notes not fully backed by gold are not fiat currency - their purchasing power can represent the value of their backing rather than the proclaimed redemption value in the market.
Fraud is not a government decree, nor is FRB always fraud. FRB is usually exposed when a bank note trades for gold in the market at a different rate than its redemption value. This would cause a panic and force that bank into bankruptcy. The only means to sustainably use fractional reserve banking is to not continually reduce reserve ratios, and prevent any redemption value from fluctuating away from market value. That’s why perpetually inflationary FRB couldn’t become institutionalized without government interventions, such as preventing bankruptcy through redemption suspensions.
It’s not fraud if the depositors understand that the bank operates in such a manner. They can assume risk that the bank might not have the means to redeem their notes for gold, despite what the notes say.
In some situations, it is blatantly fraudulent, such as the wildcat banks. Banks could also promise depositors full reserves and then practice with fractional ones.
Here’s the thing: how do you know if a bank is operating with FRs? Do you have audits? Do you have regulation? It seems like the market would demand the appropriate amount of auditing depending on their risk concern, choosing banks that provide a satisfactory level at a reasonable cost. Also, the market would regulate the banks by demanding higher prices to the ones who were more reputable - who were known to keep a stable and preserved value to their notes.
Having government regulate full reserves allows government to do all kinds of other things, like selectively enforce regulations, change the regulations (thus institutionalizing FRB), and creating barriers to entry or other artificial economies of scale.
While politically, FRB may lead to fiat currency, as a means to preserve the system, it does not mean it creates it.
“in the long-run they’d be quite even,” - I meant that increases to the money supply through FRB would equal decreases to the money supply by removing the artificial credit once the loan has been repaid. I’m not necessarily saying its the best way to put credit on the market, but it is not necessarily a forceful transfer of wealth.