When someone “deposits” in a fractional reserve bank they are exhanging something (let’s prusume gold) for bank liabilities. Ownership of the gold is transferred from the “depositor” to the fractional reserve bank; the “depositor” then owns bank liabilities. Although these bank liabilities often behave like, and are usually called, demand deposits, unlike warehouse banking demand deposits, they have risk attached. Why would a “depositor” accept risky “demand deposits”? The risk is compensated for by the elimination of sotrage fees and even, when fractional reserve banks compete, interest payments. In other words, the “depositor” is really a creditor. For the system to run smoothly, all that is required is that banks correctly anticipate the rate of redemption of their liabilities and invest their creditors money wisely. When they do not, bank runs may occur or option clauses may be invoked; and this is why fractional reserve bank demand deposits are not quite the same as warehouse banking demand deposits.
Bank runs occur precisely because “depositors” in fractional reserve banks understand that their money is not really in the bank (and because most governments have made option clauses illegal). If people were being defrauded, believing fractional reserve banks to be warehouse banks, then they would perceive no incentive to run on the bank in the first place.
this argument is absurd. assume an actual warehousing arrangement. now i tell you that the owners of the warehouse are unscrupulous and i have evidence that they have been illegally selling of portions of the warehoused stock (that is not theirs). do you refrain from going to the warehouse to withdraw your deposit, given that you ‘know’ its a warehouse, and well, warehouses keep your money… right…?
Yes, there may be an incentive to run on a criminal warehouse bank; my comment assumed that no suspicion of criminal behavior is present.
My point was that no incentive would exist for “depositors” to run on a fractional reserve bank which fraudulently, and successfully, presented itself as a (non-criminal) warehouse bank. I am suggesting that “depositors” in fractional reserve banks – for the most part, albeit imperfectly – understand their money is not really in the bank and they are exposed to risk – which they accept because they are relieved of storage fees and may even enjoy interest on their account.
My point was that no incentive would exist for “depositors” to run on a fractional reserve bank which fraudulently, and successfully, presented itself as a (non-criminal) warehouse bank
actually most people understand that their deposits are insured and the government is bailout happy. so even if wealth isn’t redistributed in time to keep a bank solvent and it goes under. eventually the depositor will be reimbursed, and runs are because people don’t want the pain of waiting for their insurance claims to pay out. what can you deduce from that?
I am not talking about the current system. To whatevet extent my argument applies to history, it is before organisations like the FDIC or Federal Reserve (and their analogous institutions in other nations). This should have been quite evident when I brought up the issue of gold as bank reserves, i.e. I was a assuming a free market in banking and money.
What you guys have to swallow is that people do patronize fractional reserve banks, always did. If you keep on ignoring objective reality so will the rest of the world do to you.
An examle of fractional reserve banking would be if person A signs a contract stipulating that his money will be available on demand (which makes it a demand deposit) and the banks only holds a fraction of his reserves (the rest being loaned out). If he signs a contract saying the bank can loan out his money and he gives up his right to demand it at any time then this is not a demand deposit which means it is not fractional reserve banking. That’s what xahrx has been trying to say the whole time.
Thats where I plainly said a contract would be signed stipulating no reserves? Did you even read what that was in reply to?
The statement has absolutely nothing at all to do with the reserves held in the bank, it was whether its fraud even if you’ve agreed to it. If you follow the chain he says it still is.