Savings in a 100% Reserve Economy

Economics Economics Questions
1

Ok, so my mind was wondering to 100% Reserve economy land as it does sometimes, which led me to ponder the nature of savings in such a setting.

As I understand it, in our current Fractional Reserve world, ‘savings’ is essentially any money an inidividual deposits in a bank, be it via a demand deposit, time deposit etc. Since banks aren’t legally required to hold most of our money on demand, most of what we deposit ends up being loaned out, earning some form of interest. ‘Hoarding’, in this context, would be any money NOT deposited within a bank (i.e. cash stuffed under a mattress).

However, in a 100% Reserve economy, these definitions would change significantly. You would essentially see banking split into two functions - one for warehousing purposes, and one for loans, and thus ‘hoarding’ would apply to former (because it would sit there idly, earning no interest) , whilst savings would apply to the latter. Is this correct? If so, wouldn’t we expect to see the overall levels of savings decrease in such a setting, since preusmably, people would like to set aside some cash for use on demand (i.e. ‘hoarding’ in this case)? I’m not implying that this is a bad thing at all, but wouldn’t we therefore expect to see lower levels of investments relative to FRB? Note that I’m trying to compare investments backed by real savings in both settings, thus excluding the mal-investments created by FRB.

Any help/clarification would be much appreciated.

2

Savings are savings, in the bank or under your mattress. It doesn’t matter who’s holding the money, the effects are the same. What’s important here is that money isn’t wealth, it’s a medium for the exchange of wealth. Under 100% reserve, what you have stuffed in your bed represents wealth that you have already created, and that can be put to productive use because you don’t want to be compensated for your efforts just yet. This indicates a preference for goods later as opposed to goods now. If people are doing this on a large scale, their time preferences will lower the interest rate, encouraging capital investment and higher production in the future. So, “hoarding” doesn’t really mean a lack of investment. Somebody who doesn’t anticipate needing the cash under their mattress could invest that as well in return for a potentially higher reward in the future, but choosing to hold the cash doesn’t rule out investment.

Note that under a fractional reserve system, money representing wealth is indistinguishable from money representing a bank’s database entry. You really can’t separate malinvestments from FRB, because when money is invested some of it will be backed by real savings and some of it will be backed by nothing. Still, you don’t need a central bank for fractional reserve, and that’s where the real malinvestments come into play. Finally, remember that the bankers are collecting interest on their “loans,” siphoning off a portion of society’s wealth for their own use without producing anything themselves. This reduces the amount of wealth that is available for savings.

3

Interesting question. Unfortunately, it can not be answered simply, so I will address it in parts.

  1. Hoarding vs. savings. Savings is the simple act of delaying consumption. This means that whether you store your money under a mattress, lend it out, or invest it directly, you are engaging in savings. So it is not a simple hoarding/saving dichotomy, they are just multiple manifestations of savings. A baker can put his bread in the cupboard for later eating, and that is just as much an act of saving as selling the bread and storing the cash, or loaning it to a friend.

  2. Hoarding vs. Investment. When you save, especially when you save in the form of cash, you have already done your productive work, and sold your resources. That means that whoever purchased them can use them however they will, including investment. Even if the baker puts his money under his bed, his bread has already been sold and can be used for further productive purposes. By delaying his consumption, there are more goods to go around for everyone else, lowering interest rates, and presumably prompting more investment. Just because you are hoarding does not mean that you are impeding investment.

Now that meanings of the terms are out of the way, I can try to answer your question.

Under the FRB system, there is initially more speculative activity than otherwise, because interest rates are artificially reduced. The inflation caused by FRB also stimulates investment, because otherwise people would be losing purchasing power over time. This increased rate of investment cannot last, however, because it is not backed by real savings. In the end, you get a boom/bust cycle, and malinvestment, as opposed to healthy economic growth.

However, if we were to switch to a 100% reserve system, investment would not necessarily decrease. Savings would be more attractive, because interest rates would be higher. Since there is no inflation, and no unbacked loans, real money has a better chance of competing. So bakers would be more likely to save, and less likely to spend their money, as it will be worth more in the future. But what about hoarding? Again, just because you are hoarding your cash, doesn’t mean that everyone else is hoarding your produce. Investment is done by entrepreneurs using real wealth, not cash. Investment can continue, and may even increase under a 100% reserve system, because the actual amount of saved wealth will be higher.

It is hard to say exactly what the results will be, but I can only presume that the current incentives against savings (namely, artificially low interest rates and inflation) would be reduced in a 100% system, and that investment would increase if such a system were to be used. This is not necessarily true, however, and the direction of the market is difficult to predict.

Will people buy more or fewer cars under a 100% reserve system? More or fewer houses? Very similar questions, but just as hard to answer.

4

i am not sure if ‘banking’ has meant (along with fractional-deposits) money storage and payment settlements from money storage and transfers.

i would guess that somwhere along the banking continuum there was 100% reserves or something similar where banks loaned out directed amounts of money without the money-credit creation.

i wondered about the economic effects of full reserve bank-like activity as well.

would more direct investment (ie, real time share sales, etc) with money take place outside of the bank-loan+credit creation paradigm that i have read takes place at the mises.org sites?

i was reading about a canadian uranium mining firm…they recently used 50 million dollars for additional mining. if this was a bank loan of 50 million would this not also mean that nearly 45 million in deposit-account credit may have been created?

economically would 45 million in credit-inflation have a different effect on other prices than if 20 thousand people had just invested 2500 dollars each of true-money; hoping for a profitable return?