running a google search for “banks do not lend deposits” yields only one link on the first page of results (at the bottom) that even mentions this.
I see that in today’s daily article in the speech given it is mentioned that banks keep a tiny fraction of the deposits and lend out the rest…
I thought austrians were aware of the fact that banks do not lend deposits. deposits cover some small fraction of the checkbook money that loans create.
Has anyone found a decent explanation of fractional reserve banking online?
just read the relevant parts of The Mystery of Banking by Rothbard and he makes the “out of thin air” fallacy. A loan does not create value out of thin air, it is a piece of paper that says “I will pay you x dollars over y time”. Depending on who signed it this piece of paper has a lot of value. How can an austrian say that such a contract isn’t valuable?
A loan made in a 100% reserve system is the transfer of property rights to real savings - it represents real goods and services: real wealth.
A loan made in a fractional reserve system represents fictional, nominal wealth: “wealth” created “out of thin air” (mostly so - a certain small portion of it represents real wealth).
Anything is valuable. It’s more about what the value brings in returns when it comes to the economy. Too much credit signed off as loans creates bubbles. Where’s all the money coming from in the first place to pay off these loans? Are there more loans than actual money in circulation? I say yes in FRB. Without a government to back up or a Federal Reserve to push the button to create more money to cover the bank’s balance sheets lot’s malinvestments occur and loans are not paid back as promised. Foreclosures on houses or what have you - happens. FRB leads to bubbles. It can go on, but it is not efficient for the market and leads to increased risk to stay afloat as the increasing non-paid loans hurt the bank (lender).
funny you mention “searching the internet for truth”. My 69 year old dad has NO idea what the internet is. He asked me one day, “How do you know it’s telling the truth?” He thought the internet was one big computer that you could ask questions.
no disrespect intended toward my dad. He certainly has more understanding in certain regards about things I’m clueless about. Just funny to have a little insight about something and then witness someone else’s total cluelessness. [:D]
if the vast majority of people are in fact paying back their loans I don’t see how this affects wealth. it is merely a mutually beneficial exchange between people with differing time preferences. of course if a bank makes loans that aren’t paid back the bank should pay the price.
“out of thin air” fallacy? Is this thread now going to become FRB fraud or not fraud part III?
As I believe even Selgin agreed in the previous thread from the other day, when the multiplier effect is present as a result of credit expansion in an FRB system, money IS created “out of thin air”. It is not a fallacy. Selgin I think claims FRB in free banking can exist without the multiplier effect. At least that is what I think he is saying. If not, I hope he corrects me so I don’t spread false rumors.
You cannot loan something (wealth) that you do not have, or in this case saved. Do not be so biased against this concept. Rothbard shows that this is indeed the case more clearly then anyone I have ever read. If he cannot convince you, then I do not have any further suggestions.
Maybe it would be more accurate to say that the loan is money created out of thin air, not wealth created out of thin air. Nobody can magically create wealth, but creating phony money is rather easy.
To be precise, the 900£ is not created out of thin air. It is created out of liabilities or equity (i.e. the 100£ deposit). “Out of thin air” means that something is created out of nothing. The 900£ is not created out of nothing; it is created out of the original 100£ deposit.
Ah…Magic ! You’ve 100 pounds and by magical accounting you end up with 1000 pounds. It’s true, 900 pounds were not created “out of thin air” - they were created using real accounting magic.
um…like i said, you can’t disregard the creation of loans (checkbook money) and the payment of this checkbook money + interest back when talking about monetary expansion. There is no magic involved. FRB is fraudulent because it treats liabilities as asets and is thus illiquid all the time.
“the 90 can be/is deposited back and so again 10% can be kept and 90% loaned out.”
You don’t seem to have a sound understanding of basic money and banking. In a system of many banks (and the discussion isn’t about a monopoly), it is highly unlikely that lent funds will be redeposited in the very bank that lent them to begin with. (Of course ifyour assumption were literally true, banks wouldn’t need reserves, fractional or otherwise, and each bank could lend without any limit at all!) In all treatments such redeposits are regarded as of trivial importance. Read C.A. Phillips Bank Credit, or Macleod’s Principles of Financial Intermediation, or any standard money and banking text, and you will find no support for your claim as one relevant to competitive banking. It may convince some people on this list, of course. But that’s another matter.
No, Juan: relevant to any banking system were there are large numbers of banks.
But of course, you know more about the theory of money supply than I do, or C.A. Philips (whom you’ve probably never heard of–though he is the man who invented the theory of the money multiplier), or any of the many textbook writers I referred to.
Or perhaps not. But that’s the wonderful thing about blogs. Any fool can contribute to them.