How do time deposits avoid the business cycle?

[nirgrahamUK]

@Maxliberty

If I have a bank that has a very simple policy that says in the contract that any physical redemption in gold can take up to two days then the bank has two days to convert any non-gold asset into gold in order to meet the redemption demand. Mind you that some sort of delay for physical redemption is quite likely if for nothing else but logistics.

such an account would not be an on demand account, but rather a 2 days after demand account. is this the phrase you wish to coin?

@Maxliberty

Also, there are always physical limitations to “demand” deposits such as when the bank is closed but I assume you would not consider that to be fraud.

i work in a bank. we are open for business 24hours. maybe in the bad old days before indoor lighting, but come on…

@Maxliberty

The bank having other assets that it converts to gold does not make the bank inherently insolvent nor is the bank required to agree that it will only hold gold.

agreed. but it must keep enough assets readily convertable to gold otherwise it simply cant hope to deliver on demand. this is trivial stuff.

@Maxliberty

As long as the bank and customer are aware of the banks activities there is no fraud. Thus your arguement that only 100% gold storage for bank notes redeemable in gold is a requirement and anything else is fraudulent is false

your assuming that it is made explicit to customers who deposit into ‘demand deposit’ accounts, that their funds will be loaned out. I cant tell you that in the bank i work for, there is compliance, there are things i am legally obliged to tell the cm about the features of our accounts, i talk about rights to cancel, i explain if withdrawing money at certain times, or bringing the balancve below certain amounts effects the interest rate they can earn. i am never obliged to tell them that the bank are loaning out all but a reserve portion of their balance. Often customers will come up and talk to me about it being ‘their money’ in the account. they’ll say ‘its my money, and you are giving a rotten interest rate, im taking my money else where’. im afraid if i was honest and said, since you deposited it with us, its not your money, we leant it out to other people, i would loose my job very quickly. do you take it from this that customers are fully aware that their funds are loaned out???

@Maxliberty

The bank is only in violation of its contract if it fails to meet its contractual obligation to redeem the bank note for gold and even then the bank is not inherently insolvent.

although a bank may be able to meet some of its contractual obligations it will not be able to meet all its contractual obligations once it starts to loan out what is excess to the reserve requirement. its not the the bank has one contract, it has thousands of contracts. it commits fraud when it knowingly breaches 1 of them, even if it does so to service the other hundreds of accounts at a profit.

[scineram]

@nirgrahamUK

on demand means demandable at any time means any possible time.

i’d encourage you to rethink your position in light of this clarification or else convince me that ‘on demand’ doesnt mean, ‘whenever its demanded’ which therefore would have ‘on demand’ meaning other than ‘when its demanded at any possible time’

Demandable any time does not mean it will always be demanded. But only then must the funds be available. Whenever a bank run does not happen means the obligations have been met.

[nirgrahamUK]

@Maxliberty

Is the bank required to give you the gold all the time or when you ask for it?

please. think.

is it possible for person A to give person B item X if A does not have X when B asks for it?

B could ask for X at any time, when should A make sure to have X?

lets say we know C doesnt have X. if B demanded X from C, c must say no!, i have not got it, i will go get it first, and then after, i can give it to you.

how can C give X to B when B demands it? (by always having X)

[nirgrahamUK]

@scineram

Demandable any time does not mean it will always be demanded. But only then must the funds be available. Whenever a bank run does not happen means the obligations have been met.

of course, no one is alleging that the depositor constantly demands it. that woud imply that its never deposited, its always with the potential depositor.

the funds must always be available, so that the depositor could possibly demand it at some unpredictable time.

if the funds are not always available, we know that there are some times that the depositor could not demand his funds.

but by the nature of the contract this is impossible, the depositor has a right to witdraw whenever i.e. at all times i.e. there should be no time when the depositor cant withdraw it (the last expresses it with a double negative)

the contradiction between at all times and not quite all times is glaring and obvious, i would hope.

as i said earlier the fact that withdrawels are rare and so the bank can hide its contract breaking, is the definition of a scam. the bank are able to give the illusion that they are honouring all contracts, when we know by logic that by their logical entailment of their actions, they cannot.

when there is a bank run, they are found out. but they were criminals not because they suffered a run, but because they made a run possible. they loaned out what was excess of their reserve requirements.

[J_Russell_Wagner]

@scineram

If they can pay due to sufficient reserves when someone asks then fine. If not then breach of contract should be prosecuted.

I actually agree with this to some extent: the bank should have to pay the depositor on demand in the amount they desire (so long as this is allowed by their contract, of course; I assume CODs are not being discussed) and the bank should be open to lawsuit for breaching contract due to inability to render those funds to the depositor. However, how would the bank be able to predict when and in what amount the reserves were to be made available to return to the depositor?

[scineram]

@J. Russell Wagner

However, how would the bank be able to predict when and in what amount the reserves were to be made available to return to the depositor?

Apparently they did. And they still do.

[nirgrahamUK]

@scineram

Apparently they did. And they still do.

when they dont they get reserves from the government… but stealing from tax payers and people who posess dollars is just another crime to replace defrauding depositors.

[sthomper]

i am unclear to the meaning of teh question…"how do time deposits avoid teh business cycle?

i dont know that they do.

$100 goes into a time deposit..a 1 year term for instance, for 1year your 100 dollars is on loan…at the end of 1 year you hopefully have 100 dollars plus an agreed upon interest amount with it.

if the lending institution made bad loans with the ‘time deposit’ i guues a few people would be s.o.l.

bad loans stemming from malinvestments, for instance.

did i understand your question correctly?

[WisR]

The Austrians FRB cult has no clear definition of what a time deposit is, ie how much time in delay of redemption equals a time deposit.

A time deposit is one with a clearly specified time to maturity. A true time deposit would either disallow cashing in before maturity or would carry a penalty that prevented most people from treating it as a demand deposit. The penalty bit is treated at length by Rothbard in America’s Great Depression, and I think is also addressed in de Soto’s Money, Bank Credit, and Economic Cycles.

Time deposits can be used to purchase things thus not eliminating the possibility of “dual” use.

Yes, but time deposits are not money. They represent a future promise to money. And beyond the point, as I already pointed out to you in the other discussion, a time deposit cannot be deposited and then have most of it’s “value” be lent out repeatedly until there are 10 time deposits for the original 1 deposited. The same cannot be said about fractional reserve banking - a $1 cash deposit will turn into $10 or more ($33 if you look at the percentage of reserves of banks today) of checking deposits. That can’t happen with a time deposit.

There is no requirement for banks to offer demand deposits and most banks do not offer them now contrary to what the Autrian cult preaches.

Of course they don’t offer them now. The value of the ‘dollars’ would be inflated away by their competitors through lending. In a free market, banks could compete by issuing their own currency backed 100% with deposits of gold or whatever commodity they wanted to use. That is illegal today, and there are legal tender laws which force people to accept dollars as payment (there are also capital gains taxes if you chose to ‘sell’ gold after it goes up in value)

You can be damn sure there would be competing currencies backed up 100% with commodities in a truly free market in banking.

Banks that hold fractional redeemable reserves are not inherently insolvent, contrary to what the Austrian Cult preaches.

Yes they are inherently insolvent. Anytime too many depositors rush to get their money they go out of business, without the support of the government or central bank. There is no comparable business that could go out of business just because all of their customers wanted to redeem at once.

The bank can use other assets to back it’s liabilities besides gold, despite what the Austrian cult preaches.

This has already been addressed. Sure there are, but gold and silver have several thousand years of history showing they would be the most likely backing.

So move along folks nothing to see here, step over the dead corpse of Austrian cult FRB if you must.

Your comments are arrogant and out of place for someone who hasn’t addressed many of the arguments addressed directly to you. You also seem to have an inability to imagine the world without a central bank, legal tender laws, and other government privileges for banks which prevent competing 100% reserve backed currencies from coming into existence. Doing some reading might help expand your imagination, I recommend Jesus Huerta de Soto’s Money, Bank Credit, and Economic Cycles.

[hayekianxyz]

@Maxliberty

No, your point is based on any other bank than a 100% reserve reserve of the redeemable commodity is fraud is what we are discussing

Well, yes, although I would have thought that it’s obvious that any bank that agrees to honour its obligations and becomes unable to do so is commiting fraud.

@Maxliberty

Again, we are discussing banking in a free society, please stop interjecting the government to make your arguement.

Well, you mentioned now and as far as I am aware the state hasn’t collapsed just yet.

[Thedesolateone]

Maxliberty, scineram

You are missing the point of contention entirely. If banks were to sign contracts with their depositors that included the possibility of their money not being in the vault at some point in time then we don’t oppose this type of contract. As libertarians we only oppose actions that are coercive and these voluntarily signed contracts are not. But these cannot correctly be called demand deposits. Demand deposits by definition must be redeemable on demand. Perhaps it is strictly incorrect for a bank to have any closing hours for them to fulfil the criteria of being a demand deposit. However, as nirgraham pointed out, some banks do stay open 24 hours. Anyway, we tend to argue about theory rather than the practical world we happen to sadly find ourselves in nowadays.

We in no way are arguing that suddenly the inviolability of contracts should be rescinded. But you are ignoring the point. For a bank to sign a contract saying they will store someone’s money, and then to at one point to not have that money is fraud. For a bank to print notes which state that this bank has the reserves they promise on the note is fraud.

Listen: if the bank is to write notes which don’t guarantee payment on demand, and instead state that payment may not come for some time, or they might not at certain times be able to pay, or that ability to pay is at the bank’s discretion, then it seems they could issue more notes than they have reserves. And we would not oppose this, because it is contractually fine. Indeed those notes would trade at a discount with respect to fully-backed reserve/warehouse notes. And this is no problem.

So get the issue: We do not ever oppose noncoercive contracts. You are advocating fraud by saying bank’s should not have to fulfil their contractual requirements with regards to reserves in demand deposit banking.

[hayekianxyz]

@Thedesolateone

You are missing the point of contention entirely.

MaxLiberty isn’t, he’s here to troll and he’s doing it well, and I will moderate him if it continues.

[Maxliberty]

@GilesStratton

@Thedesolateone

You are missing the point of contention entirely.

MaxLiberty isn’t, he’s here to troll and he’s doing it well, and I will moderate him if it continues.

Yes, you are losing the battle intellectually, so now the voices of logic and reason must be banned.

[Maxliberty]

@nirgrahamUK

such an account would not be an on demand account, but rather a 2 days after demand account. is this the phrase you wish to coin?

And if the delay is thirty seconds is that not a demand deposit then as well, see any delay means it is not a demand deposit. So any time the bank is closed or needs to get money from the downtown vault or any other reason that you are delayed from receiving your money means that it is not a demand deposit. In the example above with a possible two day delay, since it is no longer a demand deposit I would then be free to loan out the funds, without violating your theoretical FRB fraud, right?

@nirgrahamUK

i work in a bank. we are open for business 24hours. maybe in the bad old days before indoor lighting, but come on…

So you have to add this to your requirements in a free society that any 100% redeemable reserve bank has to be open 24 hours a day 365 days a year and furthermore every branch of the bank has to have the ability to fill all the redemption demands of the entire bank’s customers. So if a bank has 1000 branches then each branch has to have the ability to redeem all of the banks depositors, so in this case the bank would actually need 1000 times the amount of gold on actual deposit otherwise the bank is committing fraud, right?

@nirgrahamUK

your assuming that it is made explicit to customers who deposit into ‘demand deposit’ accounts, that their funds will be loaned out.

Yes, that is right the banks can not lie to the customer.

@nirgrahamUK

although a bank may be able to meet some of its contractual obligations it will not be able to meet all its contractual obligations once it starts to loan out what is excess to the reserve requirement. its not the the bank has one contract, it has thousands of contracts. it commits fraud when it knowingly breaches 1 of them, even if it does so to service the other hundreds of accounts at a profit.

If I can prove this to be false, that banks can have the type of system I suggest without having to breach any contract in at least one case, then will you concede that fractional reserve redemption is not inherently fraudulent?

[Maxliberty]

@nirgrahamUK

@scineram

Apparently they did. And they still do.

when they dont they get reserves from the government… but stealing from tax payers and people who posess dollars is just another crime to replace defrauding depositors.

Once again, only you and Giles bring up the government.

[Maxliberty]

@WisR

A time deposit is one with a clearly specified time to maturity. A true time deposit would either disallow cashing in before maturity or would carry a penalty that prevented most people from treating it as a demand deposit.

So if I have a time deposit that does not have a penalty or does allow the possibility of early redemption then I am committing fraud, is that right?

@WisR

a time deposit cannot be deposited

Yes, a time deposit can be deposited in another bank. Please prove it is impossible.

@WisR

Banks that hold fractional redeemable reserves are not inherently insolvent, contrary to what the Austrian Cult preaches.

Yes they are inherently insolvent. Anytime too many depositors rush to get their money they go out of business, without the support of the government or central bank. There is no comparable business that could go out of business just because all of their customers wanted to redeem at once.

I can prove that they are not. If I can prove they are not in at least one case will you concede they are not inherently insolvent and thus not inherently fraudulent?

@WisR

Your comments are arrogant and out of place for someone who hasn’t addressed many of the arguments addressed directly to you. You also seem to have an inability to imagine the world without a central bank, legal tender laws, and other government privileges for banks which prevent competing 100% reserve backed currencies from coming into existence. Doing some reading might help expand your imagination, I recommend Jesus Huerta de Soto’s Money, Bank Credit, and Economic Cycles.

I have addressed all of your arguements and defeated every one of them. I suggest you think through the actual processes rather than regurgitating what someone else has written.

[Maxliberty]

@Thedesolateone

Demand deposits by definition must be redeemable on demand.

As you define it, in most cases it is an impossibility even with 100% redeemable commodity reserves it will be impossible. If any delay means it is not a demand deposit then even the clerk reaching under the counter to give you the gold would make it not instantaneous. Perhaps you need a new word.

@Thedesolateone

Anyway, we tend to argue about theory rather than the practical world

So if your theory is incompatible with the practical world of what use is it? In a ll seriousness if what people are actually doing defeats your theory then what good is it?

@Thedesolateone

Listen: if the bank is to write notes which don’t guarantee payment on demand, and instead state that payment may not come for some time, or they might not at certain times be able to pay, or that ability to pay is at the bank’s discretion, then it seems they could issue more notes than they have reserves. And we would not oppose this, because it is contractually fine. Indeed those notes would trade at a discount with respect to fully-backed reserve/warehouse notes. And this is no problem.

But by creating some possible delay in redemption, I can then do all the things that you say are fraudulent in FRB is that right?

[nirgrahamUK]

you are fixated on the practical delay inherent in servicing a customers withdrawal request, and conflating that with a delay that a bank would need to loan out and earn some interest on some money. the two are not properly comparable.

i’ll play your game and illustrate why… lets assume that a bank formally declares in its advertising and contracts that its 'on demand deposit ’ accounts are ‘within 24hours demand deposit accounts’ such that whenever a customer wishes to withrdaw their deposits the bank can stall up to max 24hours, but not a second longer. what is the maximum lending the bank can perform if they receive a seed deposit of say 1000$?

well, for A to withdraw X from B , within 24 hours of any time, B must be sure to have X accessable within 24hours.

so what kind of loans can B make to C?

it must make a fair assesment how long it would practically take to have the deposit transferred to the withdrawal location the cm has selected, lets imagine that no borrower is more than 2 hours away from any branch, then it could make loans that last for 22hours. I would have no problem with a bank formally lending 1000$ (the full amount of the depositors deposit) with a strict loan agreement that stipulates that the loan must be repaid within 22hours to a good credit risk, maybe taking some security against the loan. i would leave it open as a question to be discovered by legitimate financial intermediaries. (but one may use ones experience of current mixed-makret conditions, and be somewhat skeptical that there is a large market for such short term loans, and decent profits to be made there.

are there any other alternatives? yes. the banks could offer loans, with some more lengthy term than the 24hours, but if so then they must insist on a Call Option, allowing them to demand full repaymnet of the outstanding loan on the demand of the bank (perhaps the borrower would require some pre-agreed evidence that the saver has called his deposit and that it therefore was not a ploy by the bank to be difficult). but again one can wonder at the investment opportunities that might be afforded by investments that can be called at such short notice. while reasonable for savers, they dont seem to be reasonable to borrows, so it may be that savers wont get their savings converted to investments, if the savers require with 24 hour demand accounts.

but such a world in which banks must behave so responsibly should still satisfy customers, and allow for substantial investments,since banks can provide 24hour demand accounts for savers who simply want to store wealth, and it can offer superior terms in timed deposit accounts for savers who are willing to invest and forego their funds for some definite period.

please note, that the ‘on demand within 24 hours deposit account’ is strictly different from a time deposit account, and yet only marginally different from ‘on demand deposit accounts’

it is not true that a bank offering the 24hour options will lead to ABCT, or suffer runs etc because they would have made lending under strict lending covenants that would elimante those problems. this is remarkably different from current FRB .

so

@Maxliberty

But by creating some possible delay in redemption, I can then do all the things that you say are fraudulent in FRB is that right?

no. as i have explained.

[hayekianxyz]

@Maxliberty

Yes, you are losing the battle intellectually, so now the voices of logic and reason must be banned.

You didn’t answer my last point.

[Juan]

@MaxLiberty

@Giles

MaxLiberty isn't, he's here to troll and he's doing it well, and I will moderate him if it continues.

Yes, you are losing the battle intellectually, so now the voices of logic and reason must be banned.

In reality all you do is post sophisms, such as pretending that if a TD has a short enough maturity period then it’s a demand deposit. It would be nice to stop reading your fallacies, but moderating you is a bad idea, as it would give you the chance to claim that you’re being persecuted for your love of truth (a quality you’re lacking for the time being).