So if banks do EXACTLY what is fractional reserve banking, except they print that on their gold notes, then it’s completely legal, except you will refuse to CALL it fractional reserve banking, and insist on calling it a lottery, even if they never actually run out of money to give depositors.
Right?
Note that the banks did not run out of money in the panic of 1907, because of an organization of private enterprises acting as a lender of last resort to banks suffering runs. That means they backed all of the banks’ liabilities during any runs.
Today, with our electronic banking technology, this means we could have fractional reserve banks handing out notes for gold, and NEVER have a bank run that could not be fulfilled…because there could be an entire private industry built up around temporarily backing any bank suffering a run, to 100% of their deposits. “Hold on, the LLR Armored Car is five minutes away, with enough gold to cover 100% of our notes”, or “please take this note to the address listed as the payer of last resort on its back”.
So how about that? The details of the bank’s reserve are on the certificates, AND there’s no danger of being unable to fulfill the note, anyway.
As long as we let you pretend it’s not a fractional reserve bank, that’s 100% legit, right?
Following this and your two most recent posts to me, would you agree that a contract which cannot be fulfilled at any given time, but only at certain times, and which times are not stipulated in the contract, is an unenforceable and thus fraudulent contract?
So it’s never fraud, unless you can get the bank owner on tape saying “I intend to have a bank run tomorrow and not pay this specific deposit”.
Obviously, the bank is functioning, perhaps for years, without any such incident. There is no apparent willful effort. No fraud at all. Again the “frb is fraud” argument is pure fallacy.
And if the note says “10% reserves” on it, then it’s not even negligence unless the bank only has 9% reserves at the time of the run.
Kaz, I just read this thread from start to finish. I think you are agruing semantics at this point. DD5’s points are more logical.
Let’s say that you tell someone: “You can come by at any random moment in time and have a beer.”
So if you promise this to 70 people and have 25 beers, once you promised this to the 26th person, then this statement is FALSE. The 26th person CANNOT come by at any random moment in time and have a beer (for obvious reasons). You cannot affirm that the person can have a beer at any time when you know that may not end up to be true.
And yes, AdrianHealey, the statement is false even if that 26th person shows up and does get a beer (if you want to argue about the use of the word ‘can’ versus ‘may’ versus ‘will be able to’ then we essentially agree and you are arguing semantics).
The point is that if a bank tells a consumer that he can redeem his money at any point, but does not clearly tell them that the money might not be there, then this is a FALSE claim. If you don’t want to call it fraudulent or negligent then I can’t really argue because I don’t know how those words are used specifically as legal terms, but you are just aruging semantics.
Is there a legal claim to my property when 25 people show up or not? You seem to be saying yes, but deny that there is fraud if only 24 people show up. The fraudulent behavior is inherent to action itself. It is impossible for you to meet your obligations when 25 people show up regardless of how many people actually show up. It is logically impossible for the nature of the claim to change as a result of its consequence (aftermath). This type of consequentialist argument is a logical fallacy.
You are having to pretend that the very specific “what if the market failed” scenario you’re presenting was inevitable, when banks have functioned for decades without it ever happening. In fact, lack of runs is the norm. Runs are the exception. When they say “there were runs on 46 banks during the panic of 18XX”, you need to remember that there were hundreds, perhaps thousands of banks in the US at that time, and there’d been no runs since the LAST depression, typically a decade or more before that.
And what about an industry of companies who back banks during runs, acting as Lenders of Last Resort, like in 1907?
Then there will be no real danger of inability to fulfill, even when 11% of all holders show up on one day…or even 100% of them.
Said a different way, in FRB, a banker can tell one of his clients both of the following statements, and only one can be true…
“You can redeem your money at any point in time.”
“You cannot redeem your money at any point in time.”
Only the second statement is true, because there are potentially times where the client could go to redeem and not get his money back… making the first statement false.
A bank in which you can deposit gold, that gives you a certificate redeemable in gold, but which does not keep 100% of the deposited gold in a vault. In effect, you are buying the note. To be realistic, today you may simply deposit the gold, and have it electronically available to you via a debit card, et cetera…but it is only keeping a percentage uncommitted to other uses.
A bank in which you deposit money, for example dollars today, that does not keep all of your dollars reserved for you, but keeps immediate access to a given percentage of all dollars deposited, much as with the gold notes above.
Obviously it’s actually one thing, and whether it’s gold or notes is irrelevant, but the above addresses the two real-world applications we’re likely to discuss, thereby keeping anyone from thinking their version doesn’t count.
Sorry for taking so long to get to this. Some of it may be moot by now.
I understand that, when I open a savings account and “deposit” money into it, I’m actually giving it to the bank to invest on my behalf. Based on the investment, I’d get all or part of the interest paid. Technically, however, the money is gone, and what the bank is calling “the money in the savings account” is actually the monetary value (i.e. price) of the asset(s) the bank invested in on my behalf.
As I and others have already noted, the bank may be contractually obligated to give me actual money in exchange for the note whenever I show up to redeem it, but it may not be able to do so at the time. There’s also the question as to whether I explicitly agreed to transfer actual ownership of my actual money to the bank.
I’d say the fact that debts have repayment periods, while bank notes do not, is the essential difference between the two. Bank notes are treated as “on-demand” by their holders, but debts aren’t treated as such by their lenders.
I think fractional-reserve banks would face worse consequences than simply going out of business in the event of bank runs. Thus I’d say there would be two elements keeping banks honest: competition and (potential) litigation.
To be honest, I’m not sure how many people today actually understand the nature of banking. I wouldn’t be surprised if most people actually operate under the assumption that banks keep enough dollars in their vaults to satisfy all of their customers.
Trading in gold for paper or digital certificates that can be redeemed for gold at any time – except when they can’t – is tantamount to taking a gamble, as DD5 pointed out. I can’t imagine most people have that in mind when they open a checking account with a bank.
I don’t see how a stateless society could ban fractional-reserve banking outright. Maybe I misunderstand what you mean by “banned” in this context.
“Any time you like” and “pending demand levels” contradict one another. The stipulation would have to be something like “whenever we have enough gold on hand to satisfy your request”. Of course, that makes it clear that people are essentially buying into a lottery, as DD5 pointed out.
But they don’t have “100% perfect access to the deposited money, any time they wish” if it’s pending demand levels.
No, not really. The only thing that matters is that it’s enforceable on that moment in time which is stipulated. And it is: the time is when the person who holds the banknote wants it. If it can’t be enforced than, it’s (at least) negligence, possibly fraud.
Again: who gets to sue who for fraud, as long as everyone gets what he wants as stipulated in the contract?
If you stipulate that redemption depends upon existing supply and that a certain percentage of the actual money is kept in reserve at all times, then it isn’t fraud unless you violate those stipulations.
However, depositing money in such a bank is tantamount to taking a gamble. In fact, if the bank advertises anything about keeping customers’ money safe, it could be held liable for fraudulent advertising at the very least.
I wouldn’t say it’s pure fallacy. From what I understand, fractional-reserve banks historically did not (explicitly) make those stipulations.
That depends on whether the bank’s agents intentionally loaned out more of the actual money than they were contractually allowed to. If they did so intentionally, then it’s fraud. Mens rea is the key here.
So if you contract something that might go wrong, it’s fraud? A lot of contracts are uncertain, but we don’t call them fraud because of it. We call them fraud when the terms stipulated are not respected. But, again, as long as everyone ‘get’s his beer’, who gets to sue who for what?
The point you have to keep in mind is that it’s not ‘his money’ as such. What he has is a bankliability, which is like a contract to ‘pay the bearer on demand’. The moment the bearer cannot be paid, the bank is braking it’s contract. (By the way; that is why, historically, there were time provisions on banknotes.)
You are correct in saying when a bank says it will function as a wharehouse, it should function as a wharehouse. But when it functions with bankliabilities, it works just as that: with a liability and the moment the bank doesn’t pay up, it’s in the wrong.
#2, my real problem with Fractional Reserve Banking is that people would never agree to this type of contract with a bank in a totally free market. It essentially says that “hey you might get your money back, you might not.” The reason that people do go along with FRB today is because they trust that the FDIC/Federal Reserve/Federal Goverment will back up one of their banks if there is a run and it goes bankrupt.
The real argument is this: is it more beneficial, for the purposes of increasing exchanges in society (i.e. the economy, business activity, etc.), to have FRB and to also have a governmental backstop which will monitor banks and provide funds for when bank runs occur, than to hav no FRB?
Bottomline, you cannot have FRB without a governmental backstop, because bank clients would never go along with it without one.
Again: what you own is the bank liability. As soon as the bank doesn’t pay up, it’s in the wrong. You don’t ‘own’ the stuff at the bank. You own the bank liability which state that the bank has to give you something on demand. (The difference (with a wharehouse) is this: as long as you don’t show up, it’s the bank’s property and it’s free to use it as it sees fit.)
It’s logically impossible to pay 25 people when I only have enough beers for 24. That is true. Why does it follow that it’s logically impossible to give 24 people their beer? And another 24 tomorrow when they show up? I don’t really see how ‘the nature of the claim follows’. The claim remains the same. What is fraudulent behavior, is not respecting contracts - which might or might not happen in this case.
Again: who get’s to sue the bank when exactly?
Because it made a promise it ‘might’ not deliver, even if it does? Well; ‘fraud’ seems to imply that someone didn’t deliver, not that ‘he might not deliver’.