Oops. Sorry about the duplicate post. This was my first one, so I guess I kind of goofed.
The process of fractional reserve banking is quite lucrative in comparison to only lending out money that is actually yours. If you can earn interest on loans from all the money you have as well as some of the money your depositors have then clearly there is more of an earning potential. If there is no central banking system it will be more difficult to inflate the money and banks would be forced to hold more of their depositors money in reserve or suffer the dreaded bank run. Either way banks will always have the temptation to use other peoples money to turn a profit and history has shown they usually give in to it. We need to see fractional reserve banking for the fraudulent scheme it is and not tolerate it.
Not always. There were reserve ratios 2 or 3% way before central banks came.
which just goes to show that whether fractional reserve banking is practiced from a centrally planned banking syndicate or on a bank by bank basis it is a fraudulent scheme that benefits bankers and early recipients of the “new” money at the expense of the rest of us.
How does a given reserve ratio manages to accomplish such feat?
I would have to disagree with Shawn77 on one point.
There is nothing inherently wrong about a fractional reserve banking system. The problem with today’s fractional reserve banking system is this:
There is a monopoly on the production of money and a misrepresentation of what the money is. It’s the misrepresentation that is fraudulent not the idea of fractional reserve banking.
If there were no legal tender laws, then I don’t see any problem with fractional reserve banks coexisting with 100% reserve banks. This would especially be helpful for banks currently employing fractional reserves to transition to a 100% reserve system without having to shut down their businesses altogether which have built valuable relationships with consumers and are reputable (assuming you could consider any current fractional reserve bank reputable). To avoid any claims to fraud, the fractional reserve banks should make clear that they are a fractional reserve bank and that they don’t actually have all funds for demand deposits on hand. They would probably need to change the description from “demand deposit” to something more clear such as “might be there when you want it deposit” or something that sounds more commercially appealing. No one should have the right to interfere with two individuals who want to engage in such a contract. Of course I don’t see the benefit of a fractional reserve money myself, but people should have the choice is the point. The market will determine which monies suit their needs best. The bank notes themselves should clearly state what they are, demand deposit or other.
The idea of a smooth transition I think is paramount in convincing people to consider changing the legal tender law. If fractional reserve banking were made illegal overnight, all the biggest banks would have to liquidate their accounts and dump trillions of dollars onto their customers all at once. People would be lugging home suitcases full of money until new fractional reserve banks opened up months down the line. Many would lose a lot of their money. These fractional reserve banks would need time to deleverage to avoid chaos I think.
I’d like to hear some more thoughts on this.
I’ve been wrestling with this issue a bit on my own, but I’ve yet to come to a satisfying conclusion. Sure, the contract between the bank and the customer is voluntary, no problem there, but why would people accept currency issued by a fractional reserve bank? At least, they would have to exchange at a discount relative to notes issued by full reserve banks, because of the inherent risk in fractional reserve banking. Also, as the fractional reserve bank would have to schedule its issuance of currency, its liabilities to customers and the recovery of currency in a rather complicated way, so it would be at a competitive disadvantage against the full reserve banks. After all, the bank could not leave its notes floating around in the economy in the case of withdrawal of the funds by a customer - it would mean that there are money substitutes used that are not backed by even fractional reserves. I think that this is a inherent problem, that would be very hard to solve.
All in all, it is not clear to me that the gains from fractional reserve banking would be such that it would offset the extra cost. At least the profit margins would be rather slim and thus, at least on the margin, increase the relative gains achievable via fraud. Moral hazard is a very real issue in any kind of fractional banking system - even a free one.
For questions pertaining to whether you can voluntarily enter into an agreement for a bank to hold fractional reserves and answers to most questions about FRB read this- Against Fiduciary Media.
It’s co-writtem by Hoppe, Block and Hulsmann. It doesn’t get better than this.
Didn’t Huerta de Soto also write it?
Nope. He wrote something along the lines of The Uneasy Case for FRB but it doesn’t seem still to be hosted on the Mises site. Do you recommend de Soto’s Banking and Business Cycle book?
I thought he did coauthor it for some reason. In any case, yes I strongly recommend it.
I would have to disagree with you on this. Fractional Reserve banking IS inherently criminal and fraudulent. Fractional reserve banking violates private property rights. Under the fractional reserve system both the original depositor and whoever the bank then later lends the money out to both have a legitimate claim to the same property. If we believe in private property rights then only one individual can claim full ownership of something. Under FRB system multiple people would have claims to the same property. The only way fractional reserve banking works is due to money’s fungibility. It will not work if you deposited an item which is not easily substitutable. If you decided to store a diamond ring at the bank and could demand it at anytime you would want your exact ring back and not someone else’s. The bank cannot lend your diamond ring to someone to do what they wish with and also let you have claim to it during the same period. This agreement would create a dual claim on ownership of the same property. The contract itself would be fraudulent even if both parties were aware.
Hi Joe,
Under that logic, a timeshare is a fraudulent activity because own person does not own the property outright at all times. The point I was making is that in order to avoid fraud, the banker could not call a note an “On Demand” note availble for redemption under all circumstances at anytime. It would be a note contingent upon terms agreed upon between the two parties. The fact that the owner cannot redeem their note at anytime they want does not constitute fraud if both parties agreed to those terms. According to the agreement between depositor and banker, the depositor would have to wait until the bank did have the means of payment if it didn’t have them on hand. Because of this inconvenience perhaps the depositor can expect a bigger return on their deposit than otherwise possible with a 100% reserve bank. As I already mentioned, I don’t quite see the benefit in taking that risk but others might.
no, timeshare explicitly states when the different parties have ownership, analgous to time deposit accounts. this is different from demand deposit acounts and public parks.
What you will find is this is basically a cult topic for a lot of Austrians. For example, You (person A) loan your friend (Person B) $100. You both agree that the money is to be paid back in 60 days. After 30 days You ask your friend if he has the monay and can pay you back now, your friend says yes he does and gives you the $100 back. At this point the Austrian “free” banking police swoop in and arrest your friend for practicing fractional reserve banking. If you think that the police are right and this is fraud then welcome to Austrian “free” banking. If you think this sounds insane and that you and your friend did nothing wrong then you might want to think twice before you sip the “free” bankng Kool-aid.
this is so off the mark its outrageous.
Quite right. Timeshares are future goods whereas money is necessarily a present good. It is held due to the lack of perfect information. If there were perfect infomation there would be no need for a media of exchange since you would know what goods people wished to consume and in what quantities and would trade accordingly. Thus FRB makes it so two or more people own the same ounce of silver, for example, at the same time. This is fraudulent and against the free market.
You can’t be serious…
Whilst person B has the money it is to him an asset and to A a liability. This swaps round when the money is paid back. Fractional reserve banking only appears when both two claim that $100 to be an asset at the same time. This is not the case in your example.