Are you done being a pedant? You know full well that I meant they cannot be sure of that.
Prove it.
What’s wrong the definition provided? And yes, thank you, I’ve read Kinsella.
Yes, it is a question of liquidity not whether the bank is holding 100% specific redemption commodity.
Absolutely right.
Correct again. Exactly what I have been saying.
Prove that is true in all cases that we have discussed anymore than 100% reserve banks.
What are we drinking today ?
of course the bank can not know what price other assets (aside from those orginally deposited by the depositors) might fetch on the market should the bank need to reimburse any subset of customers, so it takes an unnecessary risk that if not explicitly agreed to with customers (involving explicit limited liability and the like) constitutes intentional negligence. lack of duty of care. active fraud.
Haha, do bank runs, the Fed, and the FDIC Insurance Act mean nothing to you? Put the pieces together. Not maintaining 100% reserves creates the necessary conditions that lead to a lack of liquidity. It’s like insuring something a person can control, it simply isn’t viable–thus, government must step in.
You’re hopeless.
By the way, if your mind is even remotely still open, read de Soto’s book. He answers and refutes all of your hopeless arguments.
Not to mention loss of the dollar’s value. It took 20 dollars to buy an ounce of gold in 1933 now it takes…? So $20 / $ 900 → The dollar is what 98% down ?
I just wanted to pop in again. I’ve been reading De Soto but he is very long-winded. The thing I am interested in is the business cycle. The ‘fraud’ topic really doesn’t interest me at all. As long as expectations are set and depositors know what they are getting into, I don’t see how it could be fraud. I know when I deposit money in to a bank that it is going to be there unless there is a bank run and the governement decides not to pay out on deposit insurance. It is a risk I understand, and judge to be so small that I don’t worry about it. Now, if things go really bad, I might reassess. But it is no secret to me, or anyone who bothers to look, that the bank is going to lend out my deposit.
I’m not commenting on the way it should be, only the way it is now. I also don’t mean to tell others not to discuss the possibly fraudulent nature of Fractional Reserve Banking. I just want try to understand how FRB and time deposits effect the business cycle. It would help if Austrian Economics wasn’t so averse to real life examples. Can anyone tell me what a fifth order good might be? I think a weedeater might be qa second order good, but I can’t even get that confirmed so far.
But thanks for all the comments so far. I appreciate them.
Sorry, is the money going to “be there” or is going to be lent out ?
You’re not reading the right sources. Try Rothbard. He did historical analysis, which should satisfy your needs for “real world” examples. Also articles @ mises.org by Bob Murphy and Mark Thornton may help you.
Well, I would think a fifth order good for one product might be a second order good for another. For example, take glass. It can be a consumer’s good, used as a window. It could also be part of a microscope, used to deliver research, to create technology, etc. I would think raw materials would easily be a higher order good. Thus, the capital goods required to mine, refine, and mold them would all be even higher order goods.
Yeah, a weedeater is a capital good, used to get a nice looking lawn, a consumer good…unless you just enjoy weedeating [*-)].
When money supply increases through the credit market, usually and most powerfully through FRB, this first drives interest rates down. This normally allows investors to invest in long-term projects that will not generate any income for a pro-longed period of time. A lower interest rate also indicates increased savings, meaning there is more current production than current consumption. In our modern economy, most of this investment is directed towards extending the production structure, developing new capital goods that allow business to operate more efficiently. This takes time.
In normal circumstances, a drop in the interest rate means that people are saving more, which would mean more consumer goods are being created than are being consumed, at normal prices, quantities, and profit margins. When businesses borrow the money savings from banks and spend it on their investment projects, the workers and related industries spend much of the money on consumer goods. Consumer demand slumps a little, but at the same time marginal resources are shifted away from producing consumers goods to working on higher order goods due to the investments. In this way the economy balances itself along with time preference. If people increase their savings, this drives down the interest rate and makes long-term investments that increase productivity more profitable than short-term ones that expand retail stock. Also, more production is devoted to future consumption, allowing current production and consumption to match again.
However, if FRB is responsible for lowering the interest rate, several things go wrong. First, interest rates do not represent time preference. Marginal savers now become consumers or speculators. Thus, there is no decrease in consumer demand, and high production levels of consumer goods will remain profitable. This, along with the increased money supply, causes investors to face higher and higher costs for their projects, facing competition for resources from both other investors and an expanding existing production structure. Naturally, many investors are not prepared for or cannot gauge these cost increases. Some will find themselves stuck in an unprofitable investment and be forced to liquidate. Others may wish to complete their project, but they will require more credit. Should the interest rate rise before extending their credit, they will also be shown to be unprofitable. The larger the FRB and distortion of interest rates, the higher they’ll need to go to be in line with time preference, and the greater the number of business failures. To try to keep pressing on and on despite declining savings rates and price inflation will lead to wild speculative bubbles and a currency collapse.
If time deposits truly represent a loan, not an alternate form of present money, they are not an increase to the money supply, and they will not cause a business cycle. If they are simply a higher-interest demand deposit, especially if convertible into other fractionally backed bank money, they are part of the money supply, will effect business cycles, and can cause business cycles. It seems to me that banks wouldn’t make loans by entering time deposits into someone’s account. But I guess they could. In any case, they could loan via demand deposit, and the borrower could simply convert what he didn’t need to be instantly liquid into a time deposit. Thus, as long as they can increase without corresponding real savings, they can cause a business cycle.
I should have clarified. If the bank’s loan fails but the bank does not fail, it will likely be obligated to fulfill your time deposit. But there is the chance the bank may fail, and it may not have enough assets to filfull its obligations to you. This was the risk I was refering to. I was assuming we still have today’s limited liability for businesses.
Only with demand deposits. He is refering to a note with an option clause I believe, which would be a time deposit. His argument is that if the bank is going to run the risk of having all its notes turned in at once, it must purposefully maintain an asset portfolio that will either mature or can be liquidated at > the price of its liabilities in less time than the option clauses permit denial of redemption.
However, I think his other point is that the notes should be used as money, in addition to the gold, which I assume is lent out. Thus, this is inflationary and would likely cause business cycles, with interest rates detached from savings rates. For the money to remain usable as money, however, the option clause could not be invoked. Once it was, this would likely be highly deflationary, lead to massive loan defaults, and render the bank insolvent anyway. I would think it would be an error not oft repeated in a free market.
Yes, nor has that been disputed, however, that cannot be assured, as it can with 100% reserve banks (assuming no unexpected events).
And? The fact is, by its own actions the FRB bank sets in motion events that will put its liquidity in danger.
Nor need I, the examples you’ve provided do not represent FRB. You’ve just said that the bank who makes a demand deposit contract with its customer must honour its obligations, now you’re saying it needn’t. Which is it?
When you assure your customers that you will always be able to meet your obligations what matters is that you have not, by your own actions, done anything to make that impossible. FRB makes it impossible that you will always be able to, in all events and circumstances (that you can foresee), honour your obligations. So no, you’re wrong.
Yes, time preference may be negligible, but other things being equal they will rather sooner goods than future ones. Moreover, they will rather a good which they can be sure to have over one that is inherently risky, such as the CD you mention. It is up to you to make sure the ceteris are not paribus in order to make you’re case, which as of now you’re not even attempting.
As for the demand deposit, you miss the point. The bank note for a demand deposit is a perfect money substitute, it is perfectly liquid. You can redeem it in demand for the same amount of money that the note says. This is not possible with a time deposit in which they is going to be a waiting period, moreover, you cannot be sure that that you will be able to redeem it within two hours unless the loan matures at that time.
FRB is exactly how I’ve defined it and that is how it has historically existed. My argument falters? No, you’re just attacking a strawman because FRB is, by definition, the misappropriation of demand deposits.
And no, I don’t need to prove that they will, under all circumstances, fail to meet their obligations. You’re shifting the burden of proof inappopriately, it is you that must prove that the FRB bank will always be able to honour their obligations. And when I say FRB bank, I mean exactly that, I do not mean that you can call whatever contract you desire “fractional reserve banking”, since that label refers to a specific arrangments, one in which a bank grants loans out of its demand deposits.
There is a great difference between a DD and a TD. In the former the contract is one for the purpose of safekeeping, no future goods are being exchanged for present goods. The notes are redeemable on demand. In the latter, the contract is made for the specific purpose of exchanging future goods for present goods, moreover, the notes are not redeemable on demand. Or, more specifically, the bank , in order to meet its obligations, needn’t make the notes redeemable on demand.
Yes, we should agree that the arguement will have to be settled with violence in a free society. You and your group will attempt to use violence to stop my bank as I have described it and I and people like scineram will use violence to prevent you from doing so. I will not be convinced what is clearly not fraud is fraud nor are you going to change your position.
So violent resolution is the only option.
It’s amazing this debate is still going on with the same characters.
In a free market, FRB and Full Reserve Banks would be two separate banking systems. It is unlikely full reserve banks would clear with FRB banks, primarily because they counterfeit. It’s likely they would use their own receipt system.
Someone might try to do the clearing, but they would need 100% transparency of the FRB firms to do so ( to establish ratios of exchange), and that would prove the FRB firms to be insolvent. I could see FRB being possible if people treated it like a lottery, or a public ponzi scheme. Get your money in, but don’t be the last one to get your money out. It might not be there.
Is FRB really better than full reserve? Not for time deposits. So what about demand deposits? Theoretically, FRB firms could pay out interest while full reserve banks would have to charge a maintenance fee (although they could charge transaction fees instead). But if you understand that the banking systems (currency base) would likely separate themselves, you would be receiving interest on fiat money, and time and experience have already proven, that the interest earned on fiat, does not make up for it’s loss of purchasing power AND time.
FRB is possible, there will always be people who will be suckers for fraud. Some may even participate voluntarily with full knowledge they are gambling their purchasing power with no upside. Anyway, it’s a ridiculous argument. I’m sure it will still be going on 6 months from now, with the same characters.
Well, ‘we’ either let scineram and Max talk as if they knew what they are talking about, or else try to debunk their hundreds of posts. Both options sound unappealing to me…
Here is a good refutation thread of fraud by the greatest living libertarian theorist.
Whether frb is ‘technically’ fraud (according to lawyers…) or not is not really the point. The confused system you and Max confusedly describe and fail to fully understand is doomed for economic reasons.
To be honest, I don’t think you guys are really talking about very different things, if at all.
Let me pose it this way.
Even those who do not want FRB liable for fraud outright would still consider banks that operate in an illiquid manner, purposefully unable to meet its short-term obligations, basically betting on low redemption demand would consider such activity fraud.
Those who want FRB liable for fraud would still allow time deposits of any maturity length, so long as the bank intends to remains liquid enough and has the proper assets to satisfy these obligations.
I don’t think either “side” wants inflation or fiat currency or regulated banking. I don’t think limited liability either.