Ok, so theres some things I don’t get about how fractional reserve banking creates money, or at least, why it would be bad if we were on a gold standard. First, I’ve heard 2 different things about how it works in the first place. For example if I put 100 dollars in the bank with a reserve rate of 10% they would loan out 90, then 81 and so on, but this physically creates no new money. The other is something to do with the Fed I think and the government banks. If a bank deposits 100 dollars in the Fed then they can take a loan of 1000 on it. This seems like a damn quick way of pumping the crap out of the money supply. Does the fed actually do anything with the 100 dollars it now has, or does it just sit there, disregard whatever money it really has except as collateral, and then just print as much as it wants under the constraints it sets to serve the banks? Also if you wanted more, couldn’t you turn around, throw the thousand back in, and take out 10000 on that?
The other question that I have is how FRB at the client-bank level can be inflationary. Assuming we had a gold standard (can’t just print money) and FRB existed (the customer knows that theres a chance his money wont be there but in return he gets a higher return, like any investment). So say I throw my 100 dollars of gold into the bank. They then loan out 90 (even though the reserve rate on a free market would probably be higher). This winds up back in the bank. Then 81 goes out and it continues. At the end of the day, there is still only 100 dollars in gold however. The bank will owe people less interest than it collects and make a profit. Theres always the chance of a run, but considering that would screw the bank massively and they have no bailout options they will do anything possible to avoid it. Basically the bank loaned the same money out many times, which is just a repeatable service, and collects profits from its service. There is still the same amount of money to chase the goods and services so how exactly is this inflationary?
In a fiat money system, there is no such thing as “physical” money for anyone. A checking account deposit is as real as a paper slip with a number and a president on it. If you deposit 100 dollars in the bank, and the bank takes advantage of that to create a 90 dollar deposit to loan out, it has created 90 dollars of new money by printing it up. It doesn’t matter that it has been printed in a computer database instead of paper.
If the customer knows that the money he placed in the bank can’t be withdrawn to make purchases, that means he knows that it doesn’t supply his demand for money. He will have to keep real money somewhere else to make his purchases. The FRB account is just a money-denominated asset, like a bond, that becomes highly discounted when the issuer runs into payment troubles. That is to say, the asset must first be exchanged for money before any purchases can be made with it, and it thus does not count as money.
If you deposit 100$ in a 10%-reserve bank, you will get 100$ gold certificates which you can spend as if you had 100$ buillion. If the bank lends 90$, a firm will get a 90$ gold certificates (a checking account redeemable at demand into gold). Than another 81$, and so so. At the end of the process there will be 1000$ gold certificates for 100$ buillion: money has been created because there are privates and firms and banks which can spend these 1000$ and convert them into non-existent gold at demand.
Why would one put money in the bank if he knew that it might not be there when he wants it? You are correct that at the end of the day, there is only 100 dollars in gold, but there several hundred dollars worth of demands on that gold. The reason it’s inflationary is that more than one person has claim to the same gold, those claims were created out of thin air by the bank.
“Anything possible” would be to stop loaning money from demand accounts and loan money only from the bank’s own savings as well as fixed time accounts, such as CD’s. Anything else runs the risk of insolvency due to a run or demands from other banks.
How is that possible? Say for example you deposit $1,000 in gold, and I, also a customer of that bank, borrow $900. The bank will increase my demand account balance by $900. If I happen to spend the $900 on something sold by you, and I write you a check, and you deposit it, your demand account balance will increase to $1,900. Tell me where that extra $900 came from. There’s still only $1,000 in gold in the bank.
Because that way you aren’t charged to store your money and you get a higher interest rate. People do it today, and even if the FDIC does back it, it never really has to be called to my knowledge, and if banks didn’t have the bailout system of the FDIC it would be in their best interest to make sure that they don’t get run by managing reserve requirements. If this was impossible then a 100% reserve would occur by market forces and we wouldn’t need to do anything about it. Also if depositing money into a FRB system is so idiotic as many libertarians think, it’s the guy’s problem and not yours. Plenty of morons don’t wear seatbelts, but I couldn’t care less.
The extra 900 the bank owes me will come from the money that, in the future, you will repay to the bank. In effect I have a demand on money in the bank, and the bank has a demand on money from you, so eventually it will flow from you to the bank and back to me. It’s like if I let my friend borrow my car saying “do whatever you want with it” and then he lends it to someone else. 2 people have a claim on the same car, he will retrieve it first and then give it back to me, but does this in any way change the number of cars? I also fail to see how if I give my money to the bank letting them do whatever they want with it, and knowing that unless they’re out of money they’ll give it back to me whenever I please (knowing they’ll lend it to other people) is something you can morally stop. In a completely free market I would allow banks to do this with my money.
The car analogy is false. The car is obviuosly 100% reserve. You aren’t lending out more cars than you actually have at any given time. While the car is in you buddy’s (or your buddy’s buddy’s) possession, it is not available for you to drive. Likewise, when your buddy lends the car to someone else, he his not claiming you can have it anytime, he is claiming you can have it when his buddy gives it back. (He may, of course, demand it back, because, hey, it’s yours, but still two of you cannot have the car at the same time) Conversely, when the $900 dollars is in my possession, the bank is claiming $1,000 is still available for you to use. We both have the same money at the same time.
Therefore, until I repay my debt, there is an additional $900 in the total money supply. When debts are called in, there will be deflation - that $900 will disappear. I’m not saying it won’t all work out in the end, I’m saying that the working out will cause booms and busts.
Of course you can allow the bank to lend your money in a completely free market, but you can’t expect the money to be available to you in a demand account. What you are describing would be fraud against the eventual recipient of the magic money - one who is expecting the loan to be backed by actual gold, not the eventual payment of someone else’s debt.