If their reserve is 25%, then after compounded into infinitum by re-entering the bank as a new CD and being re-loaned out at 75% again, the result will eventually be 4 times the initial CD.
For a 3% reserve, this would eventually create 33 1/3 times the initial deposit. This is why banks also remove currency from circulation.
But it will cause price inflation, plus it will cause capital misallocations. Many loans may go to default. This would shrink the real profits.
The initial loan would be $750 + $9,700 = $10,450.
I would definitely agree it is more profitable, nonetheless. On the other hand, it is also more risky.
Well, that’s fine. That’s exactly what would happen in a free market. Notes which are not fully backed will trade at a discount.
Now, the bankers who issue those notes claim that the notes trade for $X when in fact they trade for $X - discount. The bankers of course want people to believe, or have faith (fiat) in their ability to pay - but in reality the bankers can’t redeem the notes at face value.
For the scam to work, bankers must behave properly for a while so that people ‘believe’ in the system, and then start counterfeiting notes. That’s how FRB has historically worked.
Fine - but that never happened. Do you think any sane person would deposit 1 ounce of gold in a bank in exchange for a note he knows will trade for less than 1 ounce ?
Because its notes trade at a discount.
Why not ?
In a free-market ? =]
I don’t think I ever said that government must regulate banking. I can hardly say that since I believe government is not a legitimate institution.
I don’t think it works that way.
It doesn’t put ‘credit’ on the market. It creates bogus property titles and misallocates resources. Credit only exists if there are real savings to be lent. Issuing notes (that trade at a discount!!) is not credit.
Of course; why would you expect a reserve requirement on a term deposit? That’s a loan to the bank - you don’t loan money to someone expecting them to keep the cash in their possession, right?
There is no reserve requirement on CDs. They just get to expand it by a certain multiple. It works differently then fractional reserve banking and is just as inflationary.
As the issuer bank reddems them on face value there is no incentive to trade them for less.
They did trade at face value, see above. How on earth could any of you expect that when you open your account and it pays interest the bank is just warehousing it??
There are no bogus property titles. People loan money to the bank and it reloans it. It is also not inflatoinary as long as the reserves are constant.
But this is what redeemable at sight means, I have the right to redeem it any time I choose. So if all checking account holders have that very right, they can use it any time they want. If that happens, not enough money is there to fulfill the contract. And you as a banker know upfront that you can not fulfill a contract. So against at least a part of your trading partners (depending on your reserves) you can not fulfill the contract and you know it upfront. Which constitutes fraud.
Oh, fraud is only fraud when it is encountered? So, given I grab into the petty cash and take $ 100 having the intend to put it back before the next revision is due, this is not theft than? Strange way to look at things. What if the next revision (bank run) comes out of the blue, am I aquitted because I intedet to replace the $ 100 before the next “regular” revision was due? Good luck in finding a judge that would accept that argumentation
If I cannot repay a loan that is not fraud. An insurer cannot pay all claims at the same time yet it is not fraud. As long as all requests actually made are satisfied there is no problem.
wildcat banking was clearly fraud, but that was a lot different than what we’re talking about.
If a bank goes bankrupt due to FRB, the bankers themselves will sacrifice a good bit of their expected personal wealth to their depositors. I don’t see why anyone would want to do this. This is why the wildcat banks didn’t stick around and fled by night.
Statistically speaking, many banks that practiced FRB did not fail. And high withdrawal demands are very rare. It is reasonable to say that bankers practicing FRB aren’t intentionally breaching their contract because they can reasonably expect that they will be able to uphold their contracts.
potentially, they are insolvent. and i’m not a fan of FRB. but i think cries of fraud and all this are a little extreme, especially when most depositors have a vague understanding of what banks do with their money yet still use them.
Why could you not? Managers usually did well enough that made sure they have enought reserves to satisfy redemption demands. That is why there were not too many failures in free banking systems.
Whatever the terms of contract as long as the obligations are not misrepresented there is no fraud. Like when I cannot repay a huge loan with enourmus interest.
But the issuer bank can’t redeem them on face value because the issuer bank does not have enough gold to do so.
This can go on forever. You just assert, contrary to basic economics and evidence, that paper is a good as gold. It is not.
I explained how that works. You just glossed over my previous post.
I never said I expect that.
People loan $1 to the bank and the bank ‘loans’ out $10 creating bogus property titles for $9 (or whatever number they can get away with).
FRB is not insurance. Confusing the two means you are confused.
Call it whatever you please. The problem won’t go away regardless of the name you use for the action.
Unproven assertion which goes against basic economic theory. FRB causes all sorts of damage and will ultimately fail, unless propped up by government. History clearly illustrates this point.
The current system is not free banking by any stretch of the imagination. People now use FRB because other options are outlawed.
They can and they did. Bank runs were very rare in free banking systems.
Then you know that it reloans it.
Under free banking the bank loans out what people loaned to it but lenders can recall their loans.
Look, I have an accoutn which pays small interest. But I can withdraw any time.
It was an analogy. The inability to pay all demands in a hypothetical scenario is insufficient for fraud.
There is nothing to go way but state intervention.
A fact you chose to ignore along with the experiences of scottish, swedish, suiss, american, canadian examples of free banking.
Must be an interesting economic theory that is constantly being falsified since medieval times.
AMEN!
I don’t think so. You can place money or anything in a bank for safekeeping and pay the fees. I don’t think alternatives were ever outlawed. I wonder why people rather earn interest than pay for warehousing. [8-)]
Which means that money is at the same time loaned and available on demand, but that is a logical and physical impossibility, so FRB is doomed to failure.
Under real free banking there would probably exist
fee-based warehousing
loans funded by timed deposits
To confuse these two arrangements as you seem to be doing, is nonsense.
Are you kidding ? Are you defending the current wholly bankrupt fiat-money-based system ? I thought you were defending so called scottish free banking ? (which never worked as you claim it did anyway)
Sure. And FRB can’t work unless propped by the state.
Here’s some data on American ‘free’ banking during the 19th century. Separation of Banking and State - Leggett 1834
You should get some information about the british currency school as well.
You can put fiat money in a safe, yes. So what ?
Right. Gold was never confiscated by roosevelt and co.. You can still exchange 20.67 US dollars for an ounce, no ?
Welcome to the discussion. I am looking at it purely from a justice standpoint. We both agree. Don’t get me wrong. We both agree that federal reserve banking is a injustice issue.
The part you quoted me from was in response to someone stating that they contracted with the bank to get this note that really isn’t backed by the commodity it states. They were making the argument that if the person receiving the note from the banker understood it wasn’t backed by anything, then this would be lawful. I was stating that in such a situation then if that person spent such a note, they would be using fraud upon the person they spent it with unless that person also agreed that they would take it for their property under the understanding that it wasn’t redeemable.
But if the bank did redeem it for gold, then the bank is guilty of violating the property of the person who’s gold they gave away(unless it was their own gold and if that’s the case it was backed then).
Studying societies around the world, I’ve noticed an interesting trend. A country in which taxes and regulations are low or non-existent actually results in higher morality(respect for the rights of others) and more efficient economic growth. The society need not have an organized institution for justice.
Trial by jury. If you accuse someone wrongfully, then you make restitution to them and pay for the administration and time of the jurors.
The whole premise requires that people in the society value justice.
For example, in my store today I was sitting in my office reading the news about our politicians trying to rob the taxpayers when in my restaurant a young man came and stole some money from my tip jar. It was only two bucks and the risk I would place myself in by pursuing him and confronting him was far greater then two dollars. However, because I value justice above the monetary loss, I found him and confronted him anyway. I managed to get the money back and told him to never come in my store again. By confronting him and showing him that I valued my property rights, he is less likely now to repeat the same behavior. That’s worth it to me as now he is no longer a threat to my store and is a lower threat to my community.
So if you wonder why I try to sell the principles of justice, this is because I strongly believe that justice is the core of a true free market. If injustice prevails(like we have in the USA with the actions of the criminal organization of the United States government), then the free market cannot function. Likewise, anarchy is like having no immune system(no justice). I know some will disagree with that statement and say that the free market can put a price on justice. But I would say justice is above price. How does the poor widow pay for justice? If I see injustice, I feel obligated to do something about it regardless of pay. If I see someone getting physically beaten, I do everything in my power to stop the aggressor. You don’t have to pay me to do that. If I see someone getting robbed, I will do everything in my power to stop that situation. There was no price for that. In fact, most people would do likewise. It’s not forced on me to do that and I don’t need pay for it. It’s simply because I have a strong belief that it is wrong to violate the person, property, or liberties of others. These are things ingrained in the very essence of our humanity. This is what makes us civilized. Even my 11 month old baby realizes when he has physically hurt someone and feels remorse. You don’t have to explain to a two year old property rights when he/she takes possession of a toy. “Mine”. They certainly understand property. [:P]
Justice is ingrained in humanity and has no price.
Also, what I’m espousing involves no monopoly on justice. Everyone still retains their right of self-defense. We are just voluntarily agreeing to use that right to protect others as well. However, that community self-defense is only a last resort. First one confront the aggressor and if the aggressor refuses to make restitution then the victim assess if they have enough individual force to make the aggressor make restitution. If not then they get as many as they need together to confront the aggressor and hear both sides and then find the appropriate resolution.
