John James, while you might not agree with it, you might be interested in giving this a read over (I wrote it for these types of debates).
It is also obviously not a fractional reserve bank. The notion of voluntary FRB can be shown to be logically impossible. See for example here:
https://forum.freecapitalists.org/t/kaz-on-free-banking/16861/10
Also, the argument over whether it is fraud isn’t an ethical argument as some have asserted here. Fraud is a means to an end (although it could be also an end). One can conclude that FRB is fraud without making value judgments. Such an argument must be made on the baiss of praxeolgoy. It just so happens that practically everybody considers fraud as an immoral act.
I don’t know anyone who doesn’t realise this, but I tend not to talk to too many dimwits.
They may know that each individual branch does not keep all the money ever deposited on hand, but do they really understand how our banking system works… doubtful.
Since every bank in the world, pretty much, does this and has for decades then this is their own fault.
I think you may be holding others to a standard that no one can achieve. Most of us don’t understand the hows and whys of most of what goes on around us everyday. That like saying if you don’t know where your food comes from its your own fault if you get sick eating it. How many of us truly know where our food comes from and how it gets to market.
We trust those who deal in food to get it to us. The same way we trust bankers. If they lead us to believe their products and services are safe, but in fact are not (ex: The food you buy from us is fresh and wont make you sick, when really its days old and hasn’t been properly stored). Well thats fraud. You cant blame the victim.
Knowing how everything works is an impossibility. Everyday millions of people get into a car and turn the key and have no idea how or why the car cranks up. Does that make them stupid?
Anyone who knows this little about the banking industry has no business doing business with them.
If this is true then no one has any business doing business with any industry. Or do you understand every business that you buy from? If so, my hats off to you.
“They don’t have to be able to.”
If they make you a guarantee and part of their terms state you can withdraw all your cash in x amount of days, then yes, they do have to.
If you go to pull your money out and they don’t give it to you in the number of days they agreed to, that is fraud.
At additional cost plus other problems. Any business based solely on the principle of having an unduplicable product is asking a lot of favour from the gods. The only viable option for FRB is personally identifying notes linked to an account. These notes are definitely not money.
At additional cost plus other problems.
It’s also an additional cost to provide a warranty on a product, to compete with other producers. These costs are incurred for the sake of staying in business, but if you can still profit then it still makes sense to incur the cost (unless you can make a greater profit elsewhere).
Any business based solely on the principle of having an unduplicable product is asking a lot of favour from the gods.
Duplicated to what degree? There prob. will be a number of businesses offering the same product (inside money). That doesn’t mean that there won’t be product differentiation.
The only viable option for FRB is personally identifying notes linked to an account. These notes are definitely not money.
I don’t understand the connection. In any case, negotionable notes tend to replace promissory notes, not the other way around.
A warranty is a service to clients, plain and simple. Nothing about FRB is plain and simple. It’s a service that can’t make up its mind about what it is serving. Is it a literal bank or is it an investment fund? Do depositers want transactional facility or return on investment? That brings us to…
Models of a free bank presuppose anti-counterfeit state controls, the controls that make generic notes viable. That’s why we have these controls. Free banking theorists seem to envision something that looks less like “free banking” and more like “free banks”.
In this case it’s binary. It either looks “genuine” to most people or it doesn’t.
The easiest way to determine whether someone understands FRB: if he says it’s not fraud, he doesn’t.
^^This.
There’s NOTHING that FracRB (supposedly) does which cannot also be achieved through (1) full reserve banking/transactional services + (2) investment funds/services/instruments but without pulling wool over anyone’s eyes as to the location and ownership of the assets involved. In a free market that facilitates a plethora of alternatives for (1) and (2) only morons would “deposit” (or lend?) their assets to a FracRB outfit. In this light, FracRB is as much a fraud as would be taking advantage of a moron by trading one of your candy for two of his.
Z.
A warranty is a service to clients, plain and simple. Nothing about FRB is plain and simple. It’s a service that can’t make up its mind about what it is serving. Is it a literal bank or is it an investment fund? Do depositers want transactional facility or return on investment? That brings us to…
We’re not talking about fractional reserve banking anymore. We’re talking about the issuance of inside notes. You can issue inside notes without practicing fractional reserve banking. An inside note is a product that you are offering the client, that the client accepts because the client prefers to hold a bank note than to gold for any number of reasons (easier to carry, lighter, et cetera).
Models of a free bank presuppose anti-counterfeit state controls, the controls that make generic notes viable.
No they don’t.
In this case it’s binary. It either looks “genuine” to most people or it doesn’t.
That doesn’t answer my question. But, it in fact has to look genuine both to the holder, to the business which accepts it as payment, and to the bank. There is a reason to impliment as many techniques to avoid counterfeiting as possible - it’s within the interests of the banks, because it’s within the itnerests of their clientele.
It’s not fraud if the depositors understand the possibility of bank runs, but the practicality of such an arrangement is debatable.
What I don’t get is the camp that claims Mises did not see FRB as inflationary or an expander of credit. It is quite clear that the increase in available credit would have its effect on the bidding of prices and thus initiate a boom-bust cycle.
So, I don’t know whether this came up already, but I thought this was the right thread to ask. By loaning money into existence, does fractional reserve banking lead to an increase in the money supply? And does this lead to economic bubbles in the same way as if government had printed money?
My answer to both questions is “Yes.” In fact, I’m not sure what would prevent fractional-reserve free-bankers from printing (literally or digitally) as many bank notes as they want, aside from the threat of insolvency.
I lost track of this thread earlier. What z1235 said is what I was going to say. Deposit accounts can’t be taken seriously as an investment. Indeed, only morons would contribute to a blind fund. In the present system if a mutual fund seller sold someone into something like that it would mean losing his license or worse. Those regulations are written more or less by people from banks. They essentially define their own business practice as unethical. They just don’t bother mentioning that the deposit system logically falls in the category of investment funds and hope that nobody notices the contradiction.
I was talking about FRB notes, not inside notes in general. My argument has always been that personally identifying inside notes without FRB is the only viable solution. In other words, a transactional service without the investment aspect tacked on.
Deposit accounts can’t be taken seriously as an investment.
I agree, in general, but this misses the point. The fact is that during periods of healthy economic activity, the demand for money is not likely to suddenly rise in some dramatic magnitude, and so the idea that banks will suddenly have to increase the supply of fiduciary media is a bit absurd. The most likely situation is where the supply of inside money is constantly changing, but mostly staying around a similar level. On the other hand, this doesn’t mean that banks won’t be operating on fractional reserves — the second facet of the free banker’s argument is that because of the higher use of inside money, banks will get rid of outside money to save on costs (since less outside money is being used in clearings).
In the present system…
Let’s get something straight. Selgin’s model of free banking does not resemble the present system.
I was talking about FRB notes, not inside notes in general. My argument has always been that personally identifying inside notes without FRB is the only viable solution. In other words, a transactional service without the investment aspect tacked on.
We were talking about bank notes. There’s not difference between inside money and ‘FRB notes’. ‘FRB notes’ are just fiduciary media. Fiduciary media is a branch of money substitute, which is what a bank note (inside money) is.
You have to me a little confused. My narrow argument concludes that the greater risk of losing the deposit from lower reserves is not matched by the supposed benefit of the interest paid on it. Therefore, FRB is not a service on the margin in that respect. I’m responding to the argument that it is.
I made a booboo. Personally identifying notes are not money. The reason that this would not suffer the problem of mass copying is that you would have to steal them individually to gain. You couldn’t just have one and engineer it. There would be no reason to copy it. Only one is useful.
One thing I didn’t explain before is the economics of copy. The issuing bank gains from its note only the interest margin. A copier gains the entire face value. Therefore, a copier can gain yet spend far more per unit to produce it. Same deal with software. If a boxed software item is selling for $50 Scrooge will benefit by spending up to $49.99 trying acquire it by alternative method. The publisher can’t spend $49.99 preventing copy.
???
You guys are redefining FRB with regards to the “FRB is fraud argument,” which defines the deposits in FRB as demand deposits, not timed deposits as in CDs or “I’ll pay you when I gets da money.”
Caley,
I think you lost sight of what you and I were actually arguing. This was your original comment,
The strongest argument is that you can’t make money from images on paper in a world with photocopiers.
Like I’ve said before, this isn’t an argument against fractional reserve banking. This is an argument against the issuance of inside money (paper banknotes). You then said that it didn’t make sense to introduce techniques to avoid counterfeit note production, but I responded that this criticism is nonsensical since competition is what drives firms to accept higher costs, as long as they can still profit sufficiently from selling the product (which is what a paper banknote is).
That a counterfeiter has more to gain from producing a fake note than a bank producing a real note (whether true or not) is absolutely irrelevant.
Regarding fractional reserve banking, which is a topic I’ve tried to avoid arguing on this thread (except for the last post), you have to consider the possibility that the risk of not being able to cope with an increase in interbank clearings falls proportionally to the fall in the volume of returning bank notes (a byproduct of an increase in demand for money). If you don’t think this is true, then you have to explain why not.
Daniel,
Who is?
The OP. (I should have specified)