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 Those concepts are no longer valid.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.

[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]

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?

[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.

[Zippyjuan]

What is fractional reserve banking? That is when a bank takes in money via deposits (basically borrowing it from people) and then using a fraction of that money to lend out at a higher rate than what they are paying the depositor so that they can make a profit (and stay in business). A FRACTION is kept on reserve to meet potential demands for withdrawl of money- this is where the term comes from. So what would be potential alternatives to fractional reserve banking? Since fractional reserve means keeping some of the deposits around, the alternatives would be either zero reserves (lending out everything which comes in from depositors) or 100% reserves where no deposits are lent out. Anything else would be by definition fractional reserve banking.

How can a bank exist under a full reserve system? How would they make money? They would not be using deposits to make loans so they would have to be fee based- charging fees for everything including fees to keep your deposits for you (they have to cover the costs of their employees and property and equipment). But would you put your money into a bank where you had to pay them to keep it for you? Perhaps if you were worried about theft you might.

[Steven Douglas]

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?

Something to remember: Fractional reserve lending may be a form of "money out of thin air", but it is not "value out of thin air". The value of fractional reserve debt money that is lent into circulation comes directly from the currency supply itself. AKA SAVINGS. The value of everyone's savings is tapped/taxed/diluted in value to finance fractional reserve commerce.

In an economy with sound money, and without fractional reserve lending, private accumulation of capital (SAVINGS) are not taxed with this hidden tax, and can very much compete. When you save, you can put your own money to work (as privately accumulated capital, the value of which was not siphoned), by investing it directly, or by lending it to a financing institution (like a savings & loan - where, back in the day, passbook savings actually yielded interest payments).

By creating the Fed, commercial bankers found a way to cut out Privately Accumulated Capital as a form of competition. They still have to woo your money for their reserve requirement balances, and for reserve multipliers that kick in as they lend, but they don't need your actual savings to lend out directly, so you are NOT as substantial a party of interest in any of the loans they make. They don't have to ask permission to lend out their customers' savings. Fractional reserve lending IS A DE FACTO TAX ON SAVINGS. No permission required. Some deposit, virtually no return. The only real return you get is the promise that the bank will eventually destroy the principle it created (which temporarily diluted and inflated the currency supply) as loans are repaid. But that is no return at all, because as quickly as the loans are repaid, other EXPANDED loans are made...which in turn assures the perpetual expansion of the rate of inflation for the currency itself.

Ending fractional reserve lending only means that banks actually have to woo you in order to make use of the only product they deal in, of which money holders are the only suppliers. They'll have takers who want to borrow, like before, but they'll have to actually cultivate a relationship with the real suppliers, who have long since been robbed, completely cut out of the picture.

[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.

[The Gold Standard]

100% reserve banking means that banks would have to keep 100% of demand deposits available for withdrawal. They can still lend out time deposits, like CDs or what have you, where your money isn't available to withdraw for a period of time. They could charge fees for checking accounts and what not, and lend out the time deposits to make money on the interest. The bankers wouldn't starve. Don't worry.

[onlyrp]

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?

you notice how you keep asking the wrong question? Why do you assume we NEED loans and credit?
What happens, if starting tomorrow, we had no car loans, home loans, credit cards?
Don't you think one or few of these things will happen?
Demand for goods drop, costs and profits drop, production drops, waste drops. It'll hurt lots of people who want to profit off loans, houses, cars and credit cards, but is that a bad thing? Isn't a good society one which less people are employed to finance loaning, and more people are employed to either produce good or reduce wasteful products?