I just read this:
http://mises.org/journals/rae/pdf/RAE9_2_5.pdf
And I’m a little confused by Selgin and White’s argument. They are essentially saying that people may prefer to save, and one means of accomodating this is for banks to offer time deposits.
They then say that the banks would correspondingly have to increase demand deposits or bank notes if that is what savers prefer. And they argue that not providing such will cause a business cycle.
Ok, but I don’t get why they are defending fiduciary media in this case. If more people are demanding demand deposits or bank notes, doesn’t that mean they are supplying more gold, etc? Why would the ratio of money claims have to increase relative to the amount of underlying money?
They are demanding deposits that pay interest. Not ones that require storage fees to be paid.
The problem is that real interest rates worldwide are very low, they are actually negative in several countries. Being inflation higher than interest rates, it is more profitable for people to consume, get into debt and to buy durable goods instead of kkeping mopney idle in a bank which will be worth less and less every other day. So it is a vicious circle
I think I understand.
Let’s say there are many banks, each offering a different interest rate on deposits. If one’s rate is too low (or negative, as a storage fee), the bank will have low demand, and be unable to make enough revenue to cover its costs. If this rate is too high, the bank will find too great of demand, unable to find enough investments that yeild high enough growth to afford its deposit rate.
A bank must balance deposit earning rates, deposit demand, interest rates, money/credit expansion rates, reserve levels, and redemption demand to earn real profits without becoming bankrupt.
I see how they can consider the prohibition of fractional reserve banking as a distortion of the market. I have a lot more to read to understand the underlying principles though.