I don’t know what you are talking about, you were the one who brought up Ponzi schemes. which are definitely a form of fraud. It certainly was related at any rate. And unless you are defining fractional reserve banking as something else, then no, I was definitely talking about FRB.
No, you weren’t. If I was talking about an African mammal with an unusually long nose that weighed a few tons and ate a lot of grass and leaves and made trumpeting sounds and called it a giraffe, that doesn’t change the fact that I am in fact talking about an elephant. It can’t be Fractional Reserve Banking if you’re preceeding the deposit with an explicit agreement that there will be no reserves held to cover the deposit. If it is stipulated that there need be no reserves held to back a deposit then what the hell are the words Frational and Reserve refering to in the term Fractional Reserve Banking?
And again, it doesn’t matter what its called, if people come to use the term “fractional-reserve banking” to describe no-reserve banking who cares? As long as it comes through voluntary agreements, similar to the case with demand deposits, it wouldn’t constitute any sort of fraud. Again, it isn’t the label that matters at all.
it doesnt matter what what is called?
Unless there is only one bank in existence, and ALL individuals prefer the bank’s money substitutes over commodity money, holding no reserves is a quick recipe for bankruptcy and serves no useful purpose in debate.
in practice FRBs experience constant redemption demand. They keep enough reserves to cover normal demand plus a buffer amount. If redemption demand increases so that reserves start to approach 0% and there is a fear of bankruptcy, the bank sells its credit-based assets into the open market to increase them.
If a FRB has issued more credit via fiduciary media than savings rates permit, it will find itself selling its credit-based assets at lower values than it needs to stay solvent. Eventually, it holds no assets, but still has liabilities to its “depositors” (actually lenders). It is insolvent. Even if the situation never gets that far, it may make less than expected on such assets, and fails to cover its administrative costs.
The question of fraud has to do with the involved parties. Is the bank de-frauding the customer? Are the customers defauding the public in using the money substitutes as payment? So long as the notes or account credit is not described as a demand deposit but a risk-bearing loan, there is no fraud.
I do not advocate FRB - I think it is a confused doctrine, economically inefficient. However, I do not think its very nature is necessary fraudulent or non-economic.
With regards to fraud, it doesn’t matter that the term “demand deposit” is used to refer to money in a chequing account that is really just a loan to the bank.
it matters, in the sense that it obfuscates, and makes impossible rational discussion on the topic of ‘what are acceptable banking pracitices over such forms of accounts as ‘demand deposits’ ‘time deposits’ ‘lottery deposits’ ‘bizarre arrangement deposits’ etc. ?’
Sure. However, as Rothbard has pointed out, as long as the commonly accepted definition is being used, there isn’t any misrepresentation. And demand deposit isn’t commonly accepted as meaning a 100% reserve bailment. Even Rothbard has stated that it is well known that banks have rarely held 100% reserves.
I follow the point but don’t agree overall because the process involves more than one exchange. Fractional Reserve Banking doesn’t just involve the bank and depositor, but also the receiver of unbacked claims to real property. Point being it’s a process in which, at some point, someone is getting a line of BS handed to them. If everything is stipulated in the begining via contract with all customers, then anything lacking a reserve is by definition not a demand deposit and you’re basically dealing with an investment banking situation where the company keeps some cash on hand for it’s customers demand for such, nothing more. More to the point it’s just not fractional reserve banking, because to engage in fractional reserve banking you need to hold a reserve that is a fraction of what’s required to cover demand deposits. Which means you have to have agreed to pay on demand to depositors whose property you do not necessarily have on hand to deliver on demand, and you have to have loaned out claims to property which are not actually backed by such property. Which is, by nature, fraud.
Now I’m not saying you can’t do that, but if you do it with everyone’s agreement that no reserves are guaranteed, where is the fractional reserve part come in? Of what amount are your reserves a fraction of if you’re not required to have any reserves to begin with? A fraction of… what? If you’re not required to have reserves, any you keep on are just a judgement call of what might be demanded at any given time. A bank can certainly operate along those lines, i’m not saying otherwise. I’m just saying if there’s an agreement no reserves need be held, you can’t implement a fractional reserve system.
I would again like to preface this by saying I’m against FRB. I would not accept a FRB note as money. I wouldn’t expect FRB to be widely practiced in a true free market, and if it did, it would likely be due to consumer myths and a persistence towards error. FRB has survived history not due to market merits but government subsidization.
X Bank practices FRB. If I use X Bank’s notes to purchase a toaster, and the recipient of the notes takes them with no questions asked, that’s not fraud. I made no attempt to convince him he was receiving anything other than a piece of paper. Now, if on the other hand, he asked, “Is that note a title or a debt?” and I replied, “A title,” I am the one committing fraud, not the bank. If the note itself said, “This is a title to ___ held at X Bank, redeemable on demand,” then the bank would be committing fraud. If it instead said, “This is an obligation on X Bank for ___, securable on demand,” then the bank would only be acting fraudulently if it purposefully failed to honor that claim.
If I borrow $10 from you today and agree to repay you $20 tomorrow, simply because I don’t have enough money to repay you today doesn’t mean I’m doing something illegal or fraudulent. Now, I might be. If I blow the $10 on candy and make no effort to earn your $20, that could be considered fraud. But if I invest the $10 in what I can demonstrably show I believed would result in a 100% return overnight, it doesn’t matter if I end up with the $20 the next day or not. There is no fraud - no purposeful misrepresentation. Now, if I don’t deliver the $20, I have breached the contract and I face legal mandates to resolve the dispute; however, these risks are acceptable and necessary for any form of credit to be legally permissible.
There is certainly risk that a FRB may face more redemption than it can handle in a short period of time. Yet, it owns assets which it believes are actually more valuable than its obligations. And when necessary it sells these assets to keep enough reserves on hand to satisfy expected redemption. Thus, it demonstrates a purposeful attempt to fulfill its contract.
The terms make things confusing. Normally, loans have a fixed term. The FRB contract is that the term is whenever you decide to redeem it. Thus, so long as the bank acts in a manner to keep enough reserves on hand to fulfill its logically expected redemption rate, it is not acting fraudulently, even if it fails to fulfill its contracts due to demonstrably unexpected rises in redemption rate or loan losses. Of course, it is NOT in the bank’s best interest to fail.
Same example as above. Simply because my investments are different from my obligations does not mean I am purposefully avoiding or incapable of fulfilling my obligations. I must simply sell or use my investments to generate what I am obligated to hand over, before such is due. The bank only needs reserves on hand when its notes/account credit are redeemed. This does not mean they must keep 100% reserves, otherwise, they are essentially obligated to keep repayment on hand before it falls due.
The only time you aren’t required to have reserves is if no one redeems any notes or credit for commodity money. Otherwise, the bank is demonstrating that it has no intention of honoring its contracts, as there is a historical and logical expectation for it to require some amount of reserves. This is more like wildcat banking, not FRB in general. In my above example, this is my using your $10 to buy candy rather than to bet on black.
Am I the only one that missed the fact that in his initial posts addressing this matter Aug quite plainly said a contract would be signed stipulating no reserves need be held, but still insists on calling the process fractional reserve banking?
Which is why I said, quite plainly I thought, that someone along the way is being handed a line of BS, and specifically pointed out that more than one transaction and two people/entities are involved… Repeat, if it is a demand deposit then it is a title to ___ held at X Bank, redeemable on demand. And have I not differentiated enough the idea of an actual demand deposit and something you simply call a demand deposit but which is, once more as stipulated in the very begining of this thread, something for which there is a contractual agreement stipulating nothing be delivered on demand and no reserves held for that purpose? I mean if I roll up in a truck and unload a mule and claim it’s a demand deposit, does that make it so, or is there a reality that kind of trumps labels that we should consider?
I have an idea. I’m going to call Paul Krugman Ludwig Von Mises and Austrian Economics the world cookery and explain that our current situation is just due to an overload of jelly donuts, which really refers to fiat money and credit with a nice sugary coating…
If they are engaging in Fractional Reserve Banking, they by definition do not have reserves on hand to meet all demand deposits. Hence, someone lied somewhere about what property is being held and where and when. Just because money is fungible and one fiat dollar is as good as any other doesn’t change the fact that if everyone came in and demanded their property at once, someone is going to get screwed. Now if they have a contract saying they can’t demand it, or they can but delivery isn’t guaranteed, again, what the hell does that have to do with Fractional Reserve Banking which refers to a specific way of banking in which fewer reserves are kept on hand than are needed to satisfy all outstanding demand deposits? If you can’t demand it, or the bank doesn’t have to satisfy the demand, it’s not a demand deposit. I agree not fraud. Also nothing to do with fractional reserve banking. Fractional Reserve Banking implies a reserve is held, and specifically that it isn’t enough to cover what the bank is obligated to pay out on demand. Not what it might sort of pay out, but doesn’t really have to.
You can call someone’s rear end the Federal Reserve and stick a hamster up there and claim it’s ten tons of gold bullion for all I care, that doesn’t mean it’s so or that the nature of what you are doing has changed. Label it whatever you want, having fewer reserves on hand to cover deposits you have agreed to satisfy on demand is fraud. You have taken someone else’s property and lent it out while promising to give it back to them when they show up. The fact that the property being warehoused is fungible and they can’t tell the difference doesn’t matter. And if you don’t promise to redeem on demand I AGREE IT’S NOT FRAUD. However it’s also NOT fractional reserve banking. You’re basically saying if the bank doesn’t get caught then it’s not fraud. Would you apply that standard to any other crime? Is a murder not a murder if the body is hidden well enough and there’s no evidence of foul play? Is a robbery not a robbery if you somehow manage to wipe out the victim’s memory? Is rape nto a rape because ‘technically’ the victim was given a choice? Nonsense. Murder is murder, robbery is robbery, rape is rape, and fraud, such as lending out property that isn’t yours as if it were, is fraud whether the perpetrator is caught or not.
How the hell does one practice fractional reserve banking if it’s already agreed by everyone involved no reserves will be kept and deposits don’t have to be delivered on demand? What is the reserve requirement, a fraction of what the magic 8 ball says or do we bust open a fortune cookie to find out and go by the day’s lucky numbers? And how the hell is it not fraud if I take your property and agree to give it back on demand at any time and then lend it out to someone else for a term? Whether or not the property is there or not when you demand it then is a matter of luck. It’s gambling with property that was given over with no intent of allowing that use.
Right, you’ve agreed to pay on demand. No more, no less. Once you default on that, you’ve commited fraud, I don’t know anybody who denies that.
Question, if i sell you a magic box from which infinite rabbits can be pulled out. have i committed fraud just the first time you try to pull out a rabbit and come up empty handed, or have i committed fraud when i first handed over the box to you, under the understanding that it is a magic box capable of dispensing an infinitude of rabbits.?
(questions concerning rabbits are a new tactic i am developing. rabbitori argumentation)
Who said that, now?
On what basis do you complain, if you have not encountered any limits to pulling out rabbits yet?
before i answer your question, can i take it that your question puts your assent to to the proposition that the fraud ‘happens’ when the first rabbit pullup is attempted, and not at the sale of the box?
You cannot say you were cheated before you find out you were actually cheated.
when was i cheated? if i wasn’t cheated at the point of the sale, then please state when was i cheated? was i cheated after the time of the sale?, the product is mine since that time, if it ‘let me down’ did i cheat myself ?
I say at time of sale.
so would you agree that the person who purchased the rabbit box, which will not give him rabbits, has been cheated at the point of sale, and not later on when he picks out ‘no rabbits’ from the box and says ‘here is empirical evidence that i was earlier cheated’?