Fractional reserve lending versus.... what?

[Jamesiv1]

I am very new to the Ron Paul/Liberty movement (about 4 months) - and was prior to that a self-confessed "head in the sand" kind of guy.

I have learned soooo much in the past few months my brain hurts.

But the whole sound money/evil banking thing still has me puzzled. From what I've learned so far, Central Banks + fractional reserve lending = Evil. Yes?

I'm an artist and musician, and really bad at numbers and economic theory, so at best I'm just trying to get my head around the big picture.

I find Wikipedia quite good for big picture overviews, and so based in the wiki article I've put together this little chart on how fractional reserve lending works:



My question is: If we don't have fractional reserve lending, exactly how would banks make loans? And if it is possible to eliminate usury/interest on loans, then how would a bank make a profit and stay in business?

[Travlyr]

Banking is evil. "Banking was conceived in iniquity and born in sin." Their initial job was to store money because it was hard to keep money safe in a cave or while traveling. Those concepts are no longer valid. Home safes are safe and it is easy in modern times to travel without getting molested. Money is either mined, grown, or sewn. Understanding that concept is vital. Saving it for a rainy day is valuable too because natural disasters happen. Excessive rain floods crops, tornados destroy crops, earthquakes destroy property. Money is a good commodity to use to rebuild if one has to.

"Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them but leave them the power to create money, and, with the flick of a pen, they will create enough money to buy it back again. Take this great power away from them and all great fortunes like mine will disappear and they ought to disappear, for then this would be a better and happier world to live in. But, if you want to continue to be the slave of the bankers and pay the cost of your own slavery, then let the bankers continue to create money and control credit." - Sir Josiah Stamp, President, Bank of England (2nd richest man in England)

Money is real. Banking may have a place in the future, but bankers have to learn to be honest, first.

Sound Money: Commodities. All available productive land, water, and mineral rights are owned by individuals. Sound money is mined, grown, or sewn and become valuable through honest efforts of producers. Gold, silver, oil, and other resources are mined and have real value. Grains, livestock, cotton, linen, hemp, etc. are all grown and have real value. Cars, electronics, houses, clothes, toys, etc. are all sewn and have real value. Paper money is 100% redeemable. For example, an Eagle paper gold certificate can be exchanged for a pure gold Eagle and vice versa.

So, in a system of sound money inflation is regulated by producers. The laws of supply and demand apply for goods and services with money as simply another valuable commodity. If a manufacturer builds too many cars, or there are too many car manufactures, then they "inflated" society with more cars than needed so the value of cars go down. The same with gold, oil, food, electronics, etc. Inflation is controlled by natural occurrences, efforts of work, and honest exchanges. Sound money creates a self-regulating free-market. If taxes are too high, then simply stop paying them. Sound money transactions are untraceable. Individuals control the money supply and therefore create a self-regulating free society.

[Madison320]

Banking is evil. "Banking was conceived in iniquity and born in sin." Their initial job was to store money because it was hard to keep money safe in a cave or while traveling. Those concepts are no longer valid. Home safes are safe and it is easy in modern times to travel without getting molested.

Your home safe does not pay interest.

I've never understood why many who believe in austrian economics have a problem with fractional reserve banking. For the record I like just about everything else about austrian economics, just not the the aversion to fractional reserve banking.

Assume you have a totally free market economy with free market banking:

Bank A has a long standing excellent reputation, a sound credit rating and practices fractional reserve banking. They offer 8% annual interest for their saving's account.

Bank B also has a long standing excellent reputation, a sound credit rating and but does not practice fractional reserve banking. They offer 2% annual interest for their saving's account.

Which bank are you going to put your money? I'm taking my chances and going with Bank A.

[Travlyr]

Your home safe does not pay interest.

I've never understood why many who believe in austrian economics have a problem with fractional reserve banking. For the record I like just about everything else about austrian economics, just not the the aversion to fractional reserve banking.

Assume you have a totally free market economy with free market banking:

Bank A has a long standing excellent reputation, a sound credit rating and practices fractional reserve banking. They offer 8% annual interest for their saving's account.

Bank B also has a long standing excellent reputation, a sound credit rating and but does not practice fractional reserve banking. They offer 2% annual interest for their saving's account.

Which bank are you going to put your money? I'm taking my chances and going with Bank A.

For the record, I do not consider myself an Austrian. I've read some of their stuff. That's all.

Bank A is expanding the money supply at the expense of everyone else unless they have their own currency. If they have their own currency, then Bank A currency can expand to whatever limits the bank owners want. I don't think I would trust Bank A currency because it is inflating away, but that would be our individual choices. If you wanted to participate, it wouldn't bother me. If their customers couldn't pay their loans for some reason, a flood or other natural disaster, then Bank A loses and so does everybody holding Bank A currency. I'd rather not worry about that.

Maybe I would make loans that pay 10% interest to people I trust with my savings. It would be up to me. I could be the banker.

[Madison320]

For the record, I do not consider myself an Austrian. I've read some of their stuff. That's all.

Bank A is expanding the money supply at the expense of everyone else unless they have their own currency. If they have their own currency, then Bank A currency can expand to whatever limits the bank owners want. I don't think I would trust Bank A currency because it is inflating away, but that would be our individual choices. If you wanted to participate, it wouldn't bother me. If their customers couldn't pay their loans for some reason, a flood or other natural disaster, then Bank A loses and so does everybody holding Bank A currency. I'd rather not worry about that.

Maybe I would make 10% loans to people I trust with my savings. It would be up to me.

In a free market banking system I feel pretty confident that the currency would be gold or silver. Are you saying that a bank that uses gold as currency and practices fractional reserve banking is inflating the money supply? Would you prohibit that by law?

[Travlyr]

In a free market banking system I feel pretty confident that the currency would be gold or silver. Are you saying that a bank that uses gold as currency and practices fractional reserve banking is inflating the money supply? Would you prohibit that by law?

If it debases my currency, then that is theft. Yes, theft should be against the law. As long as it doesn't debase my currency against my will then it makes no difference to me. i.e. as long as Bank A prints their own ... I don't care. If Bank A and Bank B both use the same currency, then Bank A's action would inflate everybody's currency. That's not honest or fair.

[hazek]

If you want to do your brain ache any good stop thinking in terms of evil and good and start thinking in terms of honest and dishonest.

Once you understand how dishonest the central baking monetary system + fractional reserve banking is you'll understand why we are in this mess we're in today and why the vast majority of us despise CBs + fractional reserver banking.

Honest lending would mean I need to have capital on hand and once I lend it to you, I cannot pretend I can still return it to the initial depositor before you payed back your loan.

[Jamesiv1]

If you want to do your brain ache any good stop thinking in terms of evil and good and start thinking in terms of honest and dishonest.

Good advice. Thank you sir.

[Sola_Fide]

If you want to do your brain ache any good stop thinking in terms of evil and good and start thinking in terms of honest and dishonest.

That makes no sense at all. If you were to think like this, then dishonesty could be considered "good".

Dishonesty is evil. You cannot separate objective morality from money.

[Jamesiv1]

Thank you Travlr for responding.

So ideally, the banks go away (until they become honest). So what do we do for loans and/or credit?

If I need $200, I borrow from a friend? If I need $20,000, I borrow from a rich friend?

In a Ron Paul world, what would a system of 'sound money' be like?