Do you really think the same people who don’t understand banking do understand the etymological origins of the word “deposit”? I bet most people rarely use “deposit” in their lives except to refer to banking. If the purpose was really to mislead, then wouldn’t a word like “storage” or “stocking” have been a much better choice? This is bad even as conspiracy theories go.
You are back to assuming that depositors own whatever they give to the bank. People are exercising their property rights whether the bank survives or fails. “Depositors” are execersing their rights as holders of the bank’s debts, and the bank is exercising its rights as the owner of the deposited funds. Whether the bank fails has nothing to do with people exercising their rights, but with how the bank is run and what precautions it takes against various risks.
When a bank “fails”, it’s not the banker that fails. When a butcher shop fails, it’s the butcher that fails. Language is everything. Playing strictly by the Orwellian playbook, every word in the English language assumes a completely different meaning when entering the mysterious realm of FracR banking.
The thing is, if banks truly succeeded in fooling depositors into believing they were offering warehousing services, then what possible motive could its depositors have to run on the bank? The premise of a bank run is that depositors know the bank may run out of money to repay them. But if depositors believe, rightly or wrongly, that the bank has all the money securely held in its vault, then there is no incentive to run in the first place. Selgin tried to make this point earlier: it is difficult to reconcile the existence of bank runs with the hypothesis that people are completely unaware of the risks of holding bank accounts.
What are you talking about? That is a customary way of talking about these matters, proponent of 100% reserve banking or not. And you actually quote my next comment, “but with how the bank is run and what precautions it takes against various risks.” Who do you think runs the bank but the bankers? Seriously, how old are you? And it wasn’t even a response to anything I wrote.
Modus, people also play musical chairs games (Ponzi, pyramidal, chain letters, house flipping, tech stock flipping, etc.) fully aware that there will not be enough chairs for everyone when the music stops. They just hope they’ll be among the ones getting a chair. The more one brainwashes them into wildly underestimating the risks of not getting a chair, the more likely would they be willing to play. Either way, it’s never the game organizer (Frac R banker) that implodes (fails).
Problem is not actually run or no-run on banks, but more importantly, that change in loanable funds without proportional change in value of capital goods in terms of money causes overproduction of some things and underproduction of others (these “others” are consumption goods if one-sided increase in loanble funds, but capital goods if one-sided decrease in loanable funds).
Production provides fewer losses where institutions eliminate business cycles, and these in the limit can be expected to outcompete other institutions.
There is case for x < 100% reserves as well, unless I am mistaken. Suppose we borrow Hayek’s 1978 idea. This requires that each bank used its own money (each money being convertable into any other by changing ratios) and had fractional reserves, there is no problem. One-sided expansion in loanable funds means people will take them, sure, but at same time, hold less of that money and accept that money at lower rate in terms of other money. In limit, no business cycles.
That is, in limit, either (a) repeal legal tender laws (let there be competing currencies) or (b) free market will tend to 100% reserves (if there is only one money).
Yes, it has been customary that FracR bankers have abused language for centuries. Doesn’t mean they will/should/can continue to do so.
The butcher runs what he owns, and he loses what he owns if/when he fails. The FracR banker runs and profits from what he doesn’t own. Heads he wins, tails his “depositors” lose. The sweetest gig around.
I don’t see how anyone’s age is of any relevance whatsoever.
But going to see their stock is not the same as bank run. We’ve all seen the old movies and read the old articles. People knew the banks didn’t have enough money to repay everyone and wanted to call in their debts before anyone else. Perhaps they didn’t understand this in detail, but they were aware of a potential problem. In the days before fiat money, central banking, and deposit insurance, depositors usually knew a lot more about how banks worked and the kind of risks involved when becoming a depositor – the evidence is in the information that banks published to their depositors. Once things like the FDIC came along, depositors no longer paid any attention, banks stopped publishing that kind of information, and today few people know or care what the words “FDIC Insured” mean.
In any case, the relationship between a depositor and bank is spelled out in all contracts. Anyone on the internet can find out in a matter of moments what kind of financial arrangement they have with their bank. Even when opening my first bank account, I was vaguely aware that the bank was not just storing my money – afterall, the bank had to make a profit somehow. Most people do not understand the specific terms and conditions of the majority of transactions and deals they make everyday, e.g. bills, reward cards, leases, etc. People don’t care to know because most of the time it doesn’t make any difference in their lives – for better or worse, that is the case with prevailing banking institutions.
But going to see their stock is not the same as bank run.
actually it is.
People knew the banks didn’t have enough money to repay everyone and wanted to call in their debts before anyone else
If I know that 1 of the grain silo’s got demolished by a hurricane, I would go claim my portion of seeds before anyone else, lest I be the last one to the scene and left with no grain. When its a fungible good like money, and a significant portion of the main stock is believed absent, so that not all will get back their bailments, you bet there can be runs ! (i.e. an emptying out)
Anyone on the internet can find out in a matter of moments what kind of financial arrangement they have with their bank.
I can only assume you are not a native speaker of the english language. Where I am from, it would be entirely normal to say “the butchers shop on the high street failed.” I have never been to any english speaking location where a similar sentence would not be completely normal. The suggestion that advocates of fractional reserve banking are somehow perpetrating some Orwellian corruption of language is absurd; I imagine that other members of the forum, whether they agree with me on other matters or not, also see this.
As for your other comments, it is obvious that you do not understand how fractional reserve banking works. Suggesting that a banker wins regardless of whether his depositors win or lose, and, before that, claiming that it is akin to a Ponzi scheme demonstrate an utter lack of knowledge on your part. These are not claims that I am going to spend time arguing about. There are good arguments against fractional reserve banking, even though I believe them to be mistaken, but the arguments you offer a nothing but a mix of ignorance and incoherency.
Perhaps there may be runs in the case that money is not stored specifically for each depositor. I had in mind the alternate scenario. Not that it alters much.
As for your other comments, it is obvious that you do not understand how fractional reserve banking works.
Lee (if I may?),
The problem is a lack of understanding of how fractional reserve banking, in Selgin’s model, works. This isn’t true for everyone posting here, but I’m a little perplexed at Z’s arguments since they don’t actually reflect on Selgin’s model. I know that I’ve linked to this before on this forum, but I suggest that Z review this post of mine on fractional reserve banking. I think it provides a generally good overview.
With that said, there’s no comparison between Selgin’s model and the present monopolized banking model. Selgin goes over this in his book The Theory of Free Banking, which everyone partaking in this debate must genuinely read and understand (whether you agree with it or not).
Lee Kelly, thank you for your dogged persistence on this issue. It is unfortunate that many amateur Austrians are unable to escape from this anti-FRB ideology.
What about the argument that FRB can create a stable equilibrium without bank runs? Suppose, for example, that a bank will not fail as long as more than p=.5 of depositors beleive it is able to meet their withdrawal requirements. Then, if the current fraction p’>p, the bank will be stable, without any bank runs. Seeing this, others will reassess the bank, leading to p’‘>p’. This continues until p*=1. This super simple model shows that there could be two stable equilibrium: roughly complete faith in the bank and total bank failure (p=0).
There are other models of this, from neoclassical economics, but the idea is simple enough (to be fair, the most prominent model shows banking is unstable). The true nature of bank property may not have much to do with peoples’ expectations and possible equilibria.
The Cobden Centre poll was ill-conceived. It should be understood that a bvank deposit balances is also “money” in the standard modern use of the term. However, it isn’t base money. The questions as put doesn’t actually allow respondents to indicate whether or not they are in fact holding IOUs against their banks.
This isn’t surprising, after all: the Cobden Center is under the influence of 100-percenters, who wanted to claim that banbk customers din’t know they were making loans to banks. It is they, not I, who implicitly treat the British public as morons–morons who think bankers provide them with interest and transactions services and storage to boot out of the goodness of their little hearts, who and pay deposit insurance premiums for no reason (unless it’s protection against theft!). I’m trying to work on them, too!
Also it is common for banks to charge to perform various services, it is not moronic to think that a bank might be able to make money on other products and services even without the ability to lend out ones cheque or savings account balances which one did not decide to lock up in an investment vehicle.
So the fact that I prefer earning interest and using bank money (which is still money, and quite convenient), rather than depositing my money in a “storage warehouse” and paying fees, somehow proves that I’m brainwashed. Thank you for this penetrating insight.
Can we ignore conspiracy theories for a moment and focus on economics?
What are you talking about? Banks have shareholders and managers, just like any corporation. Both shareholders and managers lose out when their organization fails.
Bank runs may potentially occur whenever the bank fails to adequately anticipate changes in the demand for money (one of its primary functions) and act accordingly. There are natural market mechanisms which prevent continuous monetary disequilibrium, but such mechanisms cannot eliminate entrepreneurial failure. A bank run is simply an entrepreneurial failure, no different from other entrepreneurial failures that frequently occur in all other sectors.
Wonderful. So the bank deposit balances are “money” (property?) that both the FracR banker and the customer (depositor? creditor?) can use to buy stuff. Mo’ “money” rocks, especially when there’s “demand” for it.
Why should they care? As it is explained to them by FracRB proponents, it is not the money (property) that anyone ever needs – they need the stuff that such money (property) buys them.
Ah, the poly-logism defense. Never fails. Honestly, you will continue to suggest that most people know that the money (property) they have deposited (stored, saved) in their bank deposit accounts is not actually theirs?
You treat them as morons by convincing them that the “services” they receive would be commensurate with the risks to which their property is being exposed in a free market. And I don’t blame you. The ones you do convince would be morons.
Do you deny that there’s a demand for money? Do you understand that money is an economic good?
Do you understand that money, under normal circumstances, is solely demanded because of its ability to facilitate exchange, i.e., its liquidity?
Are you saying that my desire to hold bank money over money proper, and earn interest rather than pay storage fees, somehow makes me an idiot? Who are you to critique my subjective preferences?