Let’s examine how the Austrian model is supposed to work in a free society. You say to me Max, ok if you want to start a bank, there are only two types of deposits, Demand deposits which are immediately redeemable in the underlying asset commodity and time deposits which are not. Also, demand deposits can not be loaned out but time deposits can. So I say ok fine. I will make all my deposits at the bank not immediately redeemable and loanable so by the Austrian defintion they are default time deposits. In fact I put in the contract that redemption may take up to two additional hours after the demand for redemption is made. My bank has no demand deposits and therefore I am free to loan out the all the deposited funds. Now whatever piece of paper I give in exchange for these time deposits may or not be accepted as payment but I have a strong inclination that a two hour delay will not deter sufficient people from accepting these notes as in effect demand instruments even though technically they are time deposits.
If that scenario is acceptable to you then we have no dispute. If it is not then please explain the fraud.
I never said otherwise (although the risk is likely to be very small) but that’s not the point and you probably know it. We’re talking about the risk of default created by practices like frb.
I personally don’t think that banning any financial practice/scam is a good idea. I’m not sure how ‘banking laws’(?) would be handled in a stateless society, but banning doesn’t seem very likely to me.
Really? I want to see this. In any case, when discussing FRB, it is relevant. Since FRB is by definition the conflation of time deposits and demand deposits.
Because if you state that it is only up to two hours and not beyond that you will experience an inability to withdraw the underlying assets, you could well be wrong. You cannot be sure that you will not experience such a shortage of liquidity that means that you will not be able to honour your demands within two hours. So that would be fraudelant.
Therefore when you say:
This might not be true if people know they might have to wait for more than two hours two gain the funds they wish to. In fact, if people believe that they will not have access to the cash for several hours they would be less likely to accept that (or only at a discount) than they will be to accept money certificates (which are perfectly liquid).
Moreover, you have not demonstrated why this would be the case as opposed to showing how it could be the case. Once again, you’re not doing too well here. Give up.
Even assuming that demand deposits are not titles to property but debts, this doesn’t mean that there is now no fraud in the banking industry. If a contract’s obligations require the bank to function in one manner and it functions in another, this is fraud.
Now, for the case of option clauses, which seems to be what is discussed. The bank is practicing fraud is it acts in a manner that leaves it incapable of satisfying its obligations. In the case of a 2 hour redemption wait, this would mean that the bank would need to be able to collect enough gold to satisfy all of its redemption claims in a 2 hour period. Without rather large reserve holdings, this is impossible, and should be considered fraud.
If a bank offered actual time deposits with a firm maturity date and went bankrupt because it never planned to redeem them on their maturity dates but to simply roll them over, that could be considered fraud as well.
The only way the bank can do this without it being fraud is if there was a clear, reasonable plan for the bank to meet its obligations. Time deposits with fixed maturity dates most easily fit into this context. By matching liabilities and assets both by size and by maturity date, the bank has a clear plan to meet its obligations.
Similarly, in the case of option clauses, the bank must match its assets to its liabilities. If the bank has a 2 month redemption clause on notes/deposits, then it must have reserves plus assets maturing in < 2 months that are > its outstanding notes. If the bank wanted to make a long-term loan, it would have to buy back some of its outstanding 2-month option notes/deposits with its reserves and offer notes/deposits with a an equal length redemption clause.
FRB on demand deposits is fraud because there is no possible method for the bank to meet redemption claims during a bank run. Its liabilities mature instantly while its assets do not. In other words, the contracts require that the banks act in an impossible manner - holding full reserves while loaning those same reserves and earning interest on them.
You are asserting that he is arguing that time deposists are no different from gold certificates instantly redeemable and actually backed by gold. He is doing no such thing. He is arguing that a debt instrument can possibly be used as a form of payment. I saw no assertion from him that they would trade at par with the commodity they represent upon maturity.
It seems to me that in a free market, time deposists or CD’s would not be used often as a general means of indirect exchange, due to market preferences. However, there is no legal restriction against such, and it would occasionally happen.
There is always the possibility that you may not be able to redeem your notes for gold. This is true of a bank note that is 100% redemption commodity backed as well. This possibility of default can be reduced but not eliminated. Nobody can guarantee that they will have the liquidity all that can be said is that in general some models will have more risk than others. That is not an inherent fraud. The fact I could be wrong about the liquidity is something you accept when you accept the bank note, it is the inherent risk in any contract, the possibility the other party may not be able to perform contract for some reason. Just because you think it is unlikely I could meet redemption requirements in two hours does not make it fraud. It would only be fraud if you could prove it is imposible in all cases.
Maybe but there is no guarantee of your assertion and current human behavior suggests that in most financial transactions people are indifferent to delays of even a few days, ie checks are normally accepted as demand instruments even though they often have delays up to ten days before payment and at least a day in most cases. Credit Cards are another example of payments accepted as cash equivalents that normally have at least a day. At any rate the fact that in some cases they may be less likely to accept it does not mean it would not be accepted.
Yes, but all I am required to demonstrate is that it could exist without being fraud. You are the one originally proposing that it will be fraud if it exists and as I have demonstrated and you now are conceding it is not in fact fraud.
The distinction is obvious. A demand deposit is a contract designed in which the bank performs the function of guarding the good in question and as such it must be available on demand. A time deposit is one in which future goods are exchanged for present goods and as such the goods will only be required to be available after the period of time specified in the contract, even if it may be available beforehand.
It is true, that no 100% reserve bank will always be able to honour its agreements. Contrary to a FRB bank it will not take any actions that may make it insolvent. A bank practising FRB will be increasing its likelihood of defaulting by its own actions.
As stated above, not true.
This is false, you are not wrong about liquidity, the bank has made claims and put them into a contract when it has, by its own actions, made sure that it will not always be able to honour them, this is fraud.
The fact that it is unlikely is neither here nor there. As explained above.
Time preference says otherwise. Ceteris paribus people prefer things sooner as opposed to later, now if you want to show why people will be willing be accept later goods you’re going to have to show why the ceteris aren’t paribus.
In fact, the entire burden of proof is on you here, not me. You have to show why people would accept these things.
What could exist? CDs could be traded in place of cash? Nobody has ever denied that. All I’ve denied is that a) they could assure that they would be able to honour their contracts within a given time period and b) FRB is illegal.
Since you’ve explicitely admitted FRB is fraud (recanting your earlier position) and that it would not be practised (at least, legitimately) I do not understand what you’re trying to acheive. So you have demonstrated that something is not fraudulent, yes, I’m not sure what this “something” is or where I’ve denied that it is legitimate.
Yes, and by changing the contract just slightly with a two hour window I have eliminated all the restrictions of your"demand" deposits and retained all of the functional benefits that is the relative immediate redemption. Now if I closed the window even further to say thirty minutes or 5 minutes, are you really going to argue that a five minute delay will trade at a discount to instant or won’t be accepted?
Yes, the bank is required to honour the terms of the contract. The mere fact a contract is not honoured however is not fraud. You certainly have a case for breech but not fraud. As in the example of the bank being robbed, clearly they bank is in breech of the contract because they no longer have the gold but they are not guilty of fraud.
Fraud requires intentional deception or misrepresentation. Breech only requires failing to meet the terms of the contract, which could occur for a lot of reasons that would not rise to the level of fraud.
There is no inconsistency in my previous and current statements.
This can be demonstrated and has been that a non100% reserve bank can honour all of its agreements.
You can’t guarantee the bank will never be robbed.
This is just your assertion. You can not prove that the exmples I have provided are inherently fraudulent.
Yes, it is completely relevant, probablity versus impossibility is very important.
People do have time preferences but if those time preferences can be so small that they are for practical purposes irrelevant for decision making purposes. For example it is hard to calculate the discount for accepting a dollar now or in one second. This is an example of the failure of your demand deposit definition, it doesn’t really exist because the piece of paper isn’t gold but we would agree you are accepting it as if it is despite the time preference delay from receiving actual gold.
You can not prove that they will be unable to honour their contracts and FRB as you have defined it doesn’t really exist, it is dependent on your arbitrary definitions and once those definitions can be demonstrated to be inherently false then your arguement falters.
What I am achieving is demonstrating that your definitions are arbitrary and unsustainable and as such can not be the basis for prohibition of anything in a free society. If you look at the example I provided to ninghram you can see a demonstration of the impractical nature of your definitions and how they would not limit banks as you propose they would in a free society.
I am not losing here, I have already won. No one is fooled by your rear-guard action for the retreating Austrians.
Yes, and the fact of the matter is that it can never be sure, as a result of its own actions, that the bank will be able to honour its obligations in within a given time period. It may not be impossible, but there is no assurance that it will always be possible. If it is not always possible, and the bank is aware of this (moreover, aware that this is the case as a result of its own actions) then to say that it can always do this is fraud.
It is nonsensical to write that I have a case for breach and not fraud, since the latter is defined in terms of the former. Fraud is implicit theft, which is exactly what happens when a bank makes a contract that it cannot honour. In other words, when the bank makes a contract, and takes money for it, and then does not provide the service in question. That is fraud, if you believe otherwise please provide a reasonable defition of fraud that proves otherwise. In fact, even by your own representation, it is fraud, since they are deceiving the customer (into believing that they can honour their contract, when they know that they cannot do so) and they are misrepresenting the service they provide.
If we presume individuals should not act fraudulently, yes, there is.
Since:
This implies that banks should not honour their obligations, or needn’t do so.
You are confusing not having 100% redeemable reserve commodity with not having sufficient liquid assets to meet redemptions. I have provided several examples where a bank can have more than sufficient liquid assets to convert for redemptions and have zero of the specific redeemable commodity. Generally when banks fail it is usually the result of other people’s actions and not the banks ie loan defaults. People defaulting on loans is not inherently the fault of the bank.
They are not misrepresenting the contract. I agree if the bank lies then it is fraud, but you haven’t proven that the bank has to be lying and is therefore always committing fraud. I have demonstrated quite plainly very reasonable scenarios that you declare inherent fraud are not. Breech is an inherent part of fraud but breech can occur without fraud. Fraud requires intent.
No, it simply says that all contracts are required to be honoured but that failure to honour a contract is not inherent fraud. It appears your real world experiences are limited as in business it is not infrequent that contracts get broken for one reason or another but that isn’t fraud. Contracts often involve long chains of activities to occur in order for them to fully function, some very normal events will cause these to be broken.
the FRB banks, intentions, before catastrophe is to endeavour to be sure to NOT have enough funds on hand to cover all their obligations should all their obligations be called at once. even though this is a definite possibility. what do you call this?
Neither of you are “winning”. A bank distributing options-claused notes would be required to hold assets that matured just as quickly or were incredibly liquid. Otherwise, there is no indication the bank was acting purposefully to consistently honor its contracts - this is fraud.
If the bank is operating on the probability that it only needs to fulfill a fraction of its contractual obligations, it is operating fraudulently. It is not taking actions to ensure it is able to meet its obligations as they fall due. This is true for both time deposits and demand deposits.
If the bank makes an error of judgment, such as making a loan that defaults, this is not fraudulent. This is the risk depositors must take. If the bank simply refuses to match assets and liabilities, decidedly playing a game of hot potato, it is operating fraudulently. This is not the risk depositors signed up for.