“I’m studying Austrian Economics and trying to understand how a full reserve banking system avoids the business cycle when time deposits seem to suffer the same shortcomings as fractional reserve banking.”
Walter Block and William Barnett co-authored a paper that is to be published shortly and which they presented at the Austrian Scholars Conference on March 13, 2009 that sorta gets at a related point - that enough loaning of time deposits for longer than the bank holds title to the time deposit is a credit expansion that can cause a business cycle.
So they argue you can have a business cycle in the absence of fractional reserve banking if enough time deposits are loaned out for longer than the bank holds title. Their presentation of the paper is like 17 minutes long and can be heard here : http://media.mises.org/mp3/ASC2009/ASC09_Block_Barnett.mp3
It may not directly address your point but I hope it helps lend an insight and understanding into Austrian theory (at least as advanced by many Austrians associated with the Mises institute) on time desposits and the business cycle.
How does that refute FRB as fraud? He even says fraud is inherent fraud in the sense that I am taking your money (that you have given me under the idea that I will provide a certain service) and end up not providing that good/ service. How is this not applicable to FRB?
I’m not sure who you think the sides are but it seems to me that scineram and Max advocate fiat currencies and inflation, although whether they fully understand their own positions or not is debatable.
I’m not sure you fully understand their position either ?
Time deposits can’t work as money substitutes as was explained ad nauseam .
If you see inflation, then you should also see that inflation is the result of issuing ‘partially’ backed ‘money substitutes’, which are just a kind of fiat money. Fiat money/inflation are two facets of the same phenomenon.
I was under the impression that fiat meant a currency was subsidized by law to serve as money over other currencies. If banks are permitted to violate their contracts and thus practice FRB, i’d consider this fiat currency. However, I wouldn’t simply call any FRB fiat currency.
I’m a little confued as to what is being argued but its my understanding that the Austrians associated with the Mises Institute take the postion that fractional reserve banking is illicit. The following is a rough excerpt from Walter Block’s portion of the lecture I posted above. Its the first 2 minutes if you want to listen. Its available here: http://media.mises.org/mp3/ASC2009/ASC09_Block_Barnett.mp3
The illicitness comes from the preeminent belief in property rights. If a contract is incompatible with property rights it is illegitimate per se.
In the same sense that a contract to commit murder is illicit and immoral, or a contract to sell a square circle is illicit as there is no such thing as a square circle, so to is a contract to exchange title to non-existent property rights.
Block postulates a small town with 10,000 cars and 10,000 property titles to cars, and points out that if someone where to start printing and attempting to circulate extra property titles to cars (other than as a joke), that is per se fraud and illegitimate.
Block then presents and explains a hypothetical banking scenario flowing from the deposit of 100 gold ounces into a bank (demand deposit) with a 10% reserve ratio. The bank then then loans out 90 gold ounces. Block then points out there are claims on 190 ounces of gold, and only 100 ounces are in the system. He comments that as Ayn Rand is famous for saying, “rights can’t conflict,” but here they do, as there are property rights to 190 ounces of gold but only 100 ounces of gold are in the system.
Borrowing short and lending long is the essence of the problem.
If the bank is actually giving out the gold when it is loaned then there are not claims of 190 ounces only 100. If the bank is giving out bank notes when it says it is loaning the gold then you have 190 ounces of claims but that doesn’t result in any inherent insolvency.
Deposit of 100 ounces. 10 ounces on reserve. 90 ounces are loaned to party A who then uses the 90 ounces to buy a car from party B. The only claim on the 100 ounces of gold is the original depositor. Nobody else has a claim on the gold. Party A owes the bank 90 ounces of gold and party B has the 90 ounces of gold.
If the bank gives bank notes when they loan out the gold then you have the following: Deposit 100 ounces of gold. 10 ounces on reserve. 90 ounces of bank notes are loaned to Party A who buys a car from Party B. Party B has 90 ounces of claims which he redeems for 90 ounces of gold which leaves a 10 ounce reserve and 90 ounces of loan assets to repay the 100 ounces of the original depositor.
The only thing the Austrians have correct is that if the bank agrees to always hold the gold for the client then the above scenario is not permissable.
This is why the question of what constitutes a demand deposit is so important. If demand deposits can be turned into time deposits by 20 minute delays in redemption then banks will create technical time deposits that will for all practical purposes trade as demand deposits and they then will loan out these technical time deposits and use fractional reserves to meet redemptions. That is why this notion that the Austrians have about banking is so flawed, the market will find away around it because it is potentially much more profitable for the bank to be able to loan out these technical time deposits.
It seems that one mistake Block is making is saying that the bank is required to identically match every time deposit to a specific loan of equal maturation. The bank has no requirement to do this. The bank is only required to pay you back on the agreed upon terms. The bank may have other sources of income which it pays back loans that are due prior to other loans maturing. In short it is the banks problem to pay you back. When the bank borrows your money it is not making any obligation to loan out the funds for a specific term. The bank has no other burden than any other business to meet it’s obligations.
Max, you seem to have this idea that the more money there is in society, the better off society is. With FRB, you are satisfied, because people can not only continue to make their everyday purchases, but they can secure loans too. No need to worry about real production or savings, people - we’ve got a printing press.
How else could we “get around” property rights? We can rob people! Or we can start a government.
It is more profitable to bank and customer only when both are fraudulently representing that they own more gold than they do - presenting the banknotes as titles to money. This is like saying counterfeiters and those willing to spend the money into circulation will find a way around the law, because these operations are profitable. Yes, but they are only profitable through purposeful misrepresentation about what property they actually own.
If the banknotes were presented as debts collateralized by houses, cars, etc., they would obviously not represent instant claims to commodity money and probably find little acceptance as money.
Also, the doctrine of holding liquid assets, rather than equal-length maturity, against time deposits is flawed at its foundation. If the bank was ever unable to redeem the notes instantly, the notes would no longer represent a de facto claim to present money and would no longer be accepted as money. Thus, this is deflationary, which will push down prices. This ensures that the bank is unable to sell its assets at a high enough price to cover its deposits.
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If you want to base your economy on a game of hot potato, be my guest. If you want to carry on about nonsense, please take it somewhere else. It seems like you have never read the responses to your own arguments directly from Austrian economists like Hoppe and Hulsmann, so let me simply say they’ve got you covered.
No. You seem to have the idea that a fixed amount of a specific good in the economy for eternity is somehow the optimal thing but this is not true for any other good. This seems wrong and inconsistent. It would also imply that the production of money is one of the most basic market failures.
FRB is fraud, it’s not production of money as a good.
That’s a pretty nasty strawman.
In a free market, people are not constrained by the amount of gold or silver. They can exchange non-fiduciary or non-monetary instruments in trade. They can engage in direct barter because there is no over-arching requirement for legal tender.
Why dont we let the market determine that instead of prohibiting it? Is that too much to ask?
Banks do not have to redeem notes instantly, this is just an artifical constraint you have created. Banks have to comply with the terms of their contracts. My arguement is simple banks will create technical time deposits that will be generally accepted as demand deposits. If the delay between redemption is small enough the distinction between time deposits and demand deposits as a practical matter fades away. Also, there is no requirement that any loan be required to be matched to another loan with the exact maturation of the original loan.
For example, you loan $10 to your friend who promises to pay you back tomorrow. Your friend takes the $10 and buys lunch. Tomorrow he pays you back $10. Your friend hasn’ t committed fraud because he didnt the loan money out at a specific maturation equal to repayment.