No, the clock starts ticking once you demand the redemption. So the term of the loan is not dependent on being available within 24 hours and also there does not have to be any direct correlation between your deposit and any specific loan. There is nothing to restrict me from using other assets and converting those to gold and meeting your redemption. The bank only has the responsibility to meet the redemption within the specified time.
Now lets suppose that the bank kept 50% redeemable reserves and the other 50% of the reserves were backed by loan assets. In addition the bank has another 20% capital reserves not related to deposits (ie the intial capital to start the bank or retained profits). During the normal course of business far less than 50% of people are going to redeem their notes for gold. So under normal course of business there is always plenty of physical gold to meet redemptions. So we have no danger of violation of the 24 hour rule. Now the Austrian cult says yeah but what happens if everybody shows up and wants redemption. Simple, the answer is the bank has 24 hours to offer redemption.
The bank can use some of it’s capital reserves to cover redemption and it could sell loans in an emergency to cover its positions. Note the bank is not required to call it’s own loans only the ability to liquidate is necessary. Now lets suppose the bank fails to redeem in 24 hours, well it has breeched the contract but not necessarily committed fraud and it istill quite possible that all depositors will receive full redemption. So it is possible that the bank might be insolvent but not inherently so. Certainly, this banking would in general terms be riskier than having 100% redemption reserves but it is not inherently insolvent.
Finally, this bank is also doing the thing that the Austrian Cult says is impossible which is to loan the money out that people are also using as on “demand” bank notes.
Since you agree that this is a permissable possibility please reconcile this with the whole FRB causing the business cycle and dual use issues that are raised.
Not sure what the last point was. I guess it would be about the state collapsing, there is nothing stopping you from creating a 100% gold reserved bank and demonstrating the superior nature of your theory. The state is not preventing you from doing this. If that was the point you were making.
No what I do is think things through and challenge what people say will be prohibited in a free society to make sure that it actually warrants prohibition. i would encourage you to apply your own critical thinking instead and you will see that I am correct. The world in practice is more complicated and clever than you are willing to give it credit, by poking holes in your arbitrary line between time and demand deposits I am exposing the flaws in your thinking and your theory.
Well, I said more than once that as far as I’m concerned, banning frb is not worth it. It would be no different than banning witch doctors or revealed religions. Those are all scams, but banning them is not the way to show people why they are scams.
The problem is that you talk about things you don’t understand. You think that reality is as confused as you see it, but the confusion is in your mind. Oh well. You’re a true believer in so called ‘modern finance’…
Is this what you are babbling about? Becoming unable to honour your obligations is not fraud, fraud requires the intention to not honour your obligations when you make them. The physical act of not being able to honour your obligations is not fraud.
For example if your 100% redeemable reserve bank was robbed of its reserves by armed bandits this would not make the bank guilty of fraud to it’s depositors.
I suspect your level of experience in the modern world is hampering your ability to see how the world does not fit into your strict limitations and defintions that is why it is important to look at what is actually happening and could happen, not just the theory of what you think will happen.
Now then, please tell me how it is not a breach of confidence when the depositary has agreed to maintain availability of the liquid assets fails to do so? If, I sign a contract negotiating my right to a certain amount of liquid cash the bank has the converse duty to maintain the possibility of me withdrawing the amount of money I wish to at any time. If the bank purposefully acts so as to bring about a state of affairs in which they are unable to honour their obligations, it is a breach of confidence, or fraud. It is implicit theft, since they have not provided the good that I am paying for when I sign the contract, immediate availability of the money.
This is outside of their control, surely, slipping loans to people with money that they do not own by the very nature of a deposit contract is not out of their control?
Translation : I, MaxLiberty, am unable to understand how modern finance really works and why it’s flawed and so I just parrot what a goldman sachs scammer would parrot as sales pitch.
However, since intentions can’t really be known, that definition of fraud is kinda useless. You see, any fraudster worth his salt would claim that the purpose of his scheme was the betterment of humanity, not personal profit.
Do you intentionally misunderstand what I say? Clearly I meant that we talk about the theory of a free society, rather than the closed/quasi-totalitarian society we live in today. Also, a logically sound theory cannot be “refuted by reality”. You misunderstand the idea of logical argumentation, and thus, it seems pointless continuing this “debate”.
I’m not trying to get in a discussion of whether or not Austrian Economics is correct. I’m merely trying to understand the theory. I’m not telling others not to argue over its correctness either. I think I should rephrase the question.
In Fractional Reserve Banking, money is ‘created’ when a bank loans out a deposit and that deposit finds its’ way back into the banking system to be loaned out again, minus the fractional reserve requirement. For example, a $1000 deposit in a 10% reserve requirement system supports an initial loan of $900. That loan finds its way back into the banking system when the borrower purchases whatever and the sellers deposit the proceeds. There is now an additional $900 in deposits, supporting $810 in loans, which goes through the same cycle until the original $1000 deposit supports a total number of loans equivalent to ( $1000 + $910 + $819 + etc) = $10,000. More accurately, it is probably a little less as at each iteration some of the money is held as cash.
In Austrian Economics there is no lending of demand deposits, only time deposits. Presumably, there is no reserve requirement for time deposits though it doesn’t really matter. Now let’s say someone walks into a bank with a lucky $1,000 gold piece with what looks like a horse shoe scratched into its face. He deposits the coin into a one year time deposit and goes off on his merry way. A couple of minutes later, the bank loans this $1,000 gold coin to a customer, who goes out and purchases an ice cream machine with that coin. The ice cream machine maker rushes over to the bank and deposits the lucky $1,000 gold coin into a one year time deposit. Seconds later, the bank loans the same coin to another customer who runs out and uses the lucky coin to put a down payment on an organ grinder. The organ grinder maker rushes over to the bank and deposits the same coin into a one year time deposit. Moments later, the bank lends the very same coin to a customer who hires a barber to give him the world’s most awesome haircut, the same one John Edwards got. The barber then rushes to the bank and deposits the lucky coin, which the bank loans out.
It seems to me that this one lucky coin and one deposit of $1,000 is ultimately supporting the same pyramiding of loans as fractional reserve banking and the same creation of money limited instead of by fractional requirements, the amount that each person decides to hold in demand deposits instead of timed deposits and could be greater or lesser depending on the preference for time deposits to demand deposits.
If this is the case, then we are in fact back at the same starting point of credit creating money and therefore the business cycle.
So my question is what am I missing or getting wrong in Austrian FRB Theory? Someone referenced Soto earlier implying that this was a correct understanding, but I don’t pretend to know. I’m just trying to learn. Can anyone help me here and give me some direction? Thanks.
No, money is created when demand deposits are loaned out as if they were not demand deposits but timed deposits. The process can be recursive as you note, but the problem is not created by recursion, only exacerbated by it.
The difference in the examples you use above is the amount of money that can be spent in existence at any one time. In most cases, you can use the money in your checking and many modern savings accounts as if it were cash (and when you do, it conveniently stays in the banking system), by writing a check or using a check-card. Neither are timed deposits in the Austrian sense of the term, but are demand deposits.
Despite the debates to the contrary with Maxpot, I don’t know of any establishment that accepts “check, credit card, cash, or CDs”, although you could probably barter with a CD (but I doubt too many people would accept them at their full face value, if everyone did it would already be another cash equivalent in use today, and if that were the case lending against time deposits would be equally or more inflationary than lending against demand deposits.)
In the case of lending against demand deposits, there is more money being spent on the same amount of goods at any one time. In the case of lending against time deposits, there is no increase in the money being spent on the same amount of goods at any one time. The ‘money that can be spent’ at any one time stays the same no matter how many times it has been saved and relent out, because with each time deposit the saver is relinquishing current use of the money in exchange for a future promise to be paid.
You can probably imagine that a very large increase in money that can be spent at any one time (and is spent all of the time through checks and electronic means, you don’t need cash to spend money) would push prices much higher than a world in which there was never an artificial increase (a real increase would be an inflow of the commodity in question) in the amount of money that could be spent at any one time. In both cases people receive money and spend it continuously. But in the former, the amount of money being spent continuously is far higher.
The banks try to liquidate their assets when their reserves fall. If they would not there would be a bank run. But if they cannot a run is still possible. So they most definetly are trying, therefore no fraud.
I made no concession at all. The OP seemed to think that recursion was the problem but that’s not correct. What recursion does is repeat the original scam making things harder to track/understand, which is sensible from the scammer’s point of view since scams rely on obfuscation.