Preventing FRB in free markets

[JoshE]

I have no problem with Fractional Reserve Banking as long as it is fully disclosed; i.e., “This Bank has a policy of keeping 90% [or whatever] of deposited money loaned out on a constant basis. Funds in your account may not be available during unexpectedly high demands, or if our loan schemes aren’t paying off like we’d planned.”

For agreeing to deposit his money under these risks, the depositor would at least receive some interest on the account. I mean, if both parties agree, what is the problem?

[DanielMuffinburg]

@Josh

I have no problem with Fractional Reserve Banking as long as it is fully disclosed; i.e., “This Bank has a policy of keeping 90% [or whatever] of deposited money loaned out on a constant basis. Funds in your account may not be available during unexpectedly high demands, or if our loan schemes aren’t paying off like we’d planned.”

For agreeing to deposit his money under these risks, the depositor would at least receive some interest on the account. I mean, if both parties agree, what is the problem?

So, this scheme would rule out demand deposits since the deposits are not necessarily, per the contract, available on demand?

[z1235]

@JackCuyler

It still would be fraud against the recipient(s) of the loaned funds. For example, say you deposit $25,000 in the bank, which then loans $20,000 to Wheylous. Wheylous writes a check to purchase a car from me. I now own that money, without any contractual agreement that the bank “does its best” to give it to me. If enough depositors withdraw even some of their money, the bank will not be able to satisfy its obligations to me.

Sure, unless the bank-note itself states the conditions under which it may or may not be redeemable by the bank that has issued it. So you may add a “crappy note premium” to your car’s sale price vs. a payment in gold, or in notes from a bank with sounder practices (certificates of gold deposits that are actually there at all times), or you may not even accept any notes in exchange for your car altogether.

[Autolykos]

@.500NE

Ah, but you have to add all those provisos to the point that FRB is no longer FRB banking as it is commonly known.

FRB as is commonly known engages in inflationary practices through money creation. To me this is the real fraud.

Why make things complicated? Why have all the different provisos and contract clauses?

100% reserves banking works with transparent simplicity. Banks make loans by offering cd’s and such of varying maturities, or out of their own profits made by charging fees for storing money.

I have a hard time understanding the need by some to complicate things when a simple solution is readily avaliable.

Maybe a good way to think about it is in terms of the division of labor. As economic activity in general becomes more elaborate, presuambly financial services in particular also becomes more elaborate.

[Autolykos]

@z1235

Sure, unless the bank-note itself states the conditions under which it may or may not be redeemable by the bank that has issued it. So you may add a “crappy note premium” to your car’s sale price vs. a payment in gold, or in notes from a bank with sounder practices (certificates of gold deposits that are actually there at all times), or you may not even accept any notes in exchange for your car altogether.

This reminds me of what I wrote earlier in the thread:

@Me

On another note, I see no reason why different banks’ bank notes must all be considered equally fungible with one another. If free banking does arise in a free-market, stateless society, I wonder if there might be different exchange rates between the bank notes of different banks and gold (for example). These exchange rates would reflect people’s attitudes about the stability and creditworthiness of the different banks.

Actually, the start of the second sentence there should read “If fractional-reserve banking does arise in a free-market, stateless society…” I just realized that mistake. Oh well.

Anyways, not only do I think there could be different “exchange rates” between different bank notes, I also think there could be some bank notes that many/most people don’t accept at all in financial transactions. So Jack Cuyler would be within his rights to refuse payment in “MadoffMarks” from Wheylous.

Indeed, I figure that well-established banks would require loan payments to be made either in commodity money itself or in the form of bank notes from one or more other well-established banks.