So I have had some discussions about this with my friends and wonder if anyone here might be interested in providing some more input on the topic.
It seems that outlawing fractional reserve banking could very well create system of loan banks that operate just as banks do today.
With no government protection for fraudulent activity the banks would not be trading in money but in IOUs … which is perfectly fine if I understod right.
Before the digital age these IOUs would have been traded at a substantial discount for sure. But with modern electronic payment systems it is very easy to instantly move them around to where they are needed and so forth.
So it seems they might be so close to money that stores and such might accept the IOUs and don’t even bother to discount them. Because it costs them money to use exchange rates between IOUs and real money in there systems. Thus you would end up with a massive stock of IOUs traded at the same value as money in the system … much like today.
Seems this might create the same problem that fractional reserve banks do with votilitiy in the money supply and so forth. Anyone have any thoughts on this or can explain how it is different in economic reality from FRB?
These IOUs look like the bonds that banks issue regularly. And banks do lend 100% of these bonds as the only time the banks need the money is when the principal is due to be paid to the bond holder. But this is not the same as a fractioned DEMAND deposit. A fractioned deposit has multiple owners, really claims on that deposit. If the bank sells a bond then it takes ownership of the cash and the owner gets the new bond (Really a contracted payment scheme). At any given moment there is one owner of the cash and one owner of the bond. If the bank lends the entire amount of the bond then the same relationship holds true. It is not the same for a fractioned demand deposit. The depositor owns the deposit. When the bank lends a portion of that out, the lender now owns that portion of deposit at the same time as the original depositor. In other words, the depositor has an extremely current claim on an asset of the bank that will not be paid in the same time frame.
The default process is also the different for the bank between the 100% lended bond and the fractioned demand deposit. If the bank can not pay the bond then only the bond hold is stuck. But if the bank can not pay off a fractional deposit then the whole system unravels.
Thanks.
Still if there are 2 owners of $100 or 1 owner of $100 + 1 owner of a bond trading at $100 the money supply has been effectivly doubled in booth cases.
The only difference would be that you could probably not take this bond and deposit it in another bank.
But the bank does not have to give you an IOU when you want to trade with your savings account. They could pay you in cash, essentially issuing you a loan with your savings balance as saftey at no interest. (Of course there will be interest but the bank might charge for this service by lowering interest rate on all savings that has this pre-withdrawal service rather then for the specific loan). Once the saving is due they will automatically repay the loan for you.
Then you could take the money to another loan bank and you got loan bank and they will lend it to someone else giving you the same option of instant withdrawl by taking a loan against you balance. This could expand the money supply just as much as FRB if it works well enough that you actually get these loans against the savings balance approved in 99.999…% of cases.
It is not true that IOUs traded at a discount, except where geography limited redemption possibilities or brach banking restrictions.