Fractional reserve lending versus.... what?

[Travlyr]

There's little "modern" about FRB, it's been pretty much there for a long time in various periods, the only thing that's "modern" is centralization & cartelization of the whole thing, for which governments are fully responsible because it's the government's who have established these "legal" cartels.

You claim that it is government who established these legal banking cartels. I claim that it is bankers who did it without government's authority. I might have missed where the bankers got their authority to take-over the government. What "Article" or "Clause" in the Constitution authorized Jay Cooke and Salmon P. Chase to begin selling bonds? The Coinage Act of 1792 called for the death penalty for anyone caught debasing currency. When was that repealed? I have not been able to find it in my searches, yet.

You seem to emphasize too much on "evil bankers" while exonerating the MAIN CULPRIT in all this - The Government.
No private business has any legitimate power to force the people so throughout history banks have always relied on the State for legimimacy of their fraud.

The bankers have relied on the "appearance" of the State (hiding behind the curtain of the State) not through the legitimate authority of the State itself. Again, be specific. The U.S. Constitution established the republic governments in America. The Constitution specifically prohibited bills of credit from being created. When was that repealed? Where exactly in the Constitution are bills of credit authorized? Point being that Cooke & Chase, et. al., subverted the republic form of government not co-opted it.

If Chase is at fault then so is US government, especially Lincoln, who was a life-long supporter of cartelizing the banking, high taxes, favoritism to special interests; he was the one who issued the greencrap to fund an unnecessary war, he didn't care about slavery, he just wanted to save the Union & trample on principle of States Rights to centralize power, which he's clearly mentioned in his speeches that if he could save the Union without abolitshing slavery then he'd do it, he created the first income tax, he cartelized banking through 1864's National Banking Act, raised tariffs & what not so it would be naive of us to exonerate the government & only run after the "evil bankers"

I agree that the entire bunch acted without authority. Just because Lincoln became President did not mean he became legal dictator who could do whatever he wanted to do. That is what they did but they did not have the authority to do it... they had guns and an ever increasing money supply. My claim is that it was a coup d'état by bankers and friends in order to profit from war activities and counterfeiting operations.

Even today, the Fed exists by the authority of the US government otherwise it would have been burned down by people by now, it's "legality" & justification lies with US government so government's role in all this MUST be acknowledged if there's ever to be a free society.

Which court decision rendered the constitutionality of the Federal Reserve System?

[Travlyr]

Umm, America, a "democracy"? That's what progressives want, democracy = mob-rule so it's inconsistent with individual rights & liberty

Alexis de Tocqueville was a classical liberal... not a progressive.

Alexis-Charles-Henri Clérel de Tocqueville (French pronunciation: [alɛksi or alɛksis də tɔkvil]; 29 July 1805, Paris – 16 April 1859, Cannes) was a French political thinker and historian best known for his Democracy in America (appearing in two volumes: 1835 and 1840) and The Old Regime and the Revolution (1856). In both of these works, he explored the effects of the rising equality of social conditions on the individual and the state in western societies. Democracy in America (1835), his major work, published after his travels in the United States, is today considered an early work of sociology and political science.

An eminent representative of the classical liberal political tradition, Tocqueville was an active participant in French politics, first under the July Monarchy (1830–1848) and then during the Second Republic (1849–1851) which succeeded the February 1848 Revolution. He retired from political life after Louis Napoléon Bonaparte's 2 December 1851 coup, and thereafter began work on The Old Regime and the Revolution, Volume I.

[AceNZ]

So the solution to FRB is FRB?

Let's for simplicity's sake, say there's one bank & people re-deposit the money they earn :
Ok, lets say A deposits 100 oz into Bank B, Bank B loans 90oz to C, C buys machinary with it from D & then D deposits it into Bank B, then Bank B lends 81 oz to E who purchases car from F & F deposits with Bank B & then Bank B lends 72.9 oz to G & then he buys stuff & then it's re-deposited & so on & so on

See, Bank B actually has only 100 oz for real but but it has "deposits" which far exceed that amount which is what causes inflationary boom which ends in a bust once the market realizes that there's not as much as money as was once believed & there's a "correction"

Under an honest monetary system, there'd be segragation between time-deposits & demand-deposits & only time-deposits will be lent

Segregation of time deposits and demand deposits by itself isn't enough.

My view is that many of the opponents of FRB are hung-up on the wrong thing. The most important issue is not the idea that depositors can't all get their money back on demand. By itself, that's an issue that well-run banks and their customers could manage, without requiring a central bank to back them up.

The real problem is that banks create money; they don't just loan it out. Creating money also results in leverage, which in turn is a major cause of instability in the banking system. The way things are today, if bank customers were to withdraw just 10% of their deposits in cash, a bank will collapse; without the FDIC or the Fed to back them up, every customer of the bank would lose their deposits as a result.

[Zippyjuan]

This is strictly true, but it's also misleading.

There are other factors at play, which, IMO, are at the heart of what's wrong with FRB: first, when a bank makes a loan, they don't lend deposits. When a loan is funded, the bank creates brand new money, just for that purpose.

The second problem is that the newly created money can be deposited into another bank, where it becomes the foundation for another loan (creating even more money).

The net result with a 10% reserve is that a single $1000 cash deposit can expand into $9000 worth of loans (ever wonder why banks complain so much when you withdraw large amounts of cash?).

While I think the current banking and monetary systems are badly broken, I'm not in the camp that thinks all banks must always be evil or dishonest. There is a useful, honest way to do banking. The key to keeping it honest is to eliminate the multiplicative factor. One way to do this would be for banks to deduct loans from their reserves.

For example, if I deposit $1000 cash, that becomes bank reserves. With a 10% minimum reserve requirement, they would have $900 in "excess reserves," which could be loaned. With the current way of doing things, they would create $900 in new money to fund the loan. Instead, they should lend out $900 of the original deposit, without creating new money. The depositor might still see that they have $1000 on deposit. If the $900 loan gets deposited back into the same bank, the bank should still only have $1000 in deposits. Today, the way it works is that they would then have $1900 in deposits, and could loan 90% of that amount, even though they created $900 of those dollars from thin air.

The money supply is money in circulation- money being spent. Let's say I earned $100 through my labor That is potential money to be spent and add to the supply of circulating money. But I don't need or want to spend it right now. I could put that money under my mattress and it does not go into circulation. Or I could put it in a bank. Under fractional reserve banking with a ten percent reserve requirement, the bank is allowed to lend up to $90 of my money to somebody else who wants to spend money now. My potential $100 to spend is now $90 somebody else could potentially spend today. The other $10 is with the bank. I have zero of that money since I gave it to somebody else (the bank)- even temporarily. That $90 is less than the money I could have spent if I wanted to. That person didn't need the money today but perhaps tomorrow so the deposit their $90 in a bank. Now my bank has $10, his bank has $90 and we both have zero. Since his bank has $90, it would be allowed to lend out $81 and keep $9 on hand.

So what happens if I want my money back so I can spend it? My bank only has $10 and they have $90 loaned out. They are going to have to borrow $90 from somebody else (who could have spent it themselves). Their borrowing will reduce the money out there which could be spent by $90- which is the same as what my potential spending increased by. Plus the $10 the bank was still holding. They could try to get it from the guy they loaned it to or somebody else. Note that the potential money to be spent get smaller as each person puts money into the bank that they borrowed. The amount in the banks is rising while the money being spent (circculating) is going down. When all the borrowers pay back their loans and all the depositors take their money out, the money supply is back to where it would be without the bank (ignoring any interest or transaction costs). Money being spent has not actually multiplied.

To make this easier to picture, replace "bank" with "a friend".

I traded potentially spending money today for spending the money tomorrow. The other guy traded spending tomorrow for today. He got to spend it today but will have to give up having money to spend at a point in the future. He spent my money today and I will spend his money tomorrow.

[The Gold Standard]

The money supply is money in circulation- money being spent. Let's say I earned $100 through my labor That is potential money to be spent and add to the supply of circulating money. But I don't need or want to spend it right now. I could put that money under my mattress and it does not go into circulation. Or I could put it in a bank. Under fractional reserve banking with a ten percent reserve requirement, the bank is allowed to lend up to $90 of my money to somebody else who wants to spend money now. My potential $100 to spend is now $90 somebody else could potentially spend today. The other $10 is with the bank. I have zero of that money since I gave it to somebody else (the bank)- even temporarily. That $90 is less than the money I could have spent if I wanted to. That person didn't need the money today but perhaps tomorrow so the deposit their $90 in a bank. Now my bank has $10, his bank has $90 and we both have zero. Since his bank has $90, it would be allowed to lend out $81 and keep $9 on hand.

So what happens if I want my money back so I can spend it? My bank only has $10 and they have $90 loaned out. They are going to have to borrow $90 from somebody else (who could have spent it themselves). Their borrowing will reduce the money out there which could be spent by $90- which is the same as what my potential spending increased by. Plus the $10 the bank was still holding. They could try to get it from the guy they loaned it to or somebody else. Note that the potential money to be spent get smaller as each person puts money into the bank that they borrowed. The amount in the banks is rising while the money being spent (circculating) is going down. When all the borrowers pay back their loans and all the depositors take their money out, the money supply is back to where it would be without the bank (ignoring any interest or transaction costs). Money being spent has not actually multiplied.

To make this easier to picture, replace "bank" with "a friend".

I traded potentially spending money today for spending the money tomorrow. The other guy traded spending tomorrow for today. He got to spend it today but will have to give up having money to spend at a point in the future. He spent my money today and I will spend his money tomorrow.

Money in a checking account is no different than money in your pocket, unless you haven't heard of a debit card. You deposit $100, they lend $90 to someone else, who puts the money in their bank. Their bank lends $81 of that, which is deposited in some other bank which lends $72.90 of that, and so on until around $900 is created from thin air based on your $100 deposit.

Now you go to the grocery store and spend your $100. The bank doesn't have the money, but luckily for you they will just approve your debit card purchase. Everyone who borrowed that extra $900 also spends that money on something, because why else would they have borrowed it? So look at that, you spent your $100, and there are $900 counterfeit dollars floating around just from your temporary deposit.

Sure if everyone paid off their loan (or defaulted for that matter) at the same time the money supply would shrink back down. That is what gets folks like you in a panic, because the prices that were inflated will come crashing back down to where they should be.

[Steven Douglas]

The real problem is that banks create money; they don't just loan it out. Creating money also results in leverage, which in turn is a major cause of instability in the banking system. The way things are today, if bank customers were to withdraw just 10% of their deposits in cash, a bank will collapse; without the FDIC or the Fed to back them up, every customer of the bank would lose their deposits as a result.

^This.

And in the case where customers withdraw more than 10% of their deposits (under a 10% reserve regime), the bank will attempt the impossible, as the original deposit money is now represented in more than one place, but treated as two separate sources of money in the economy -- outside that bank.


Let's take the case of two banks only, and two parties - one party of interest to risk, and one with no risks, and no interest in anything the banks do.

Party A has $100 original money, hard specie. He isn't in the banking mix.
Party B gets the FRB ball rolling with $100 of original money, also hard specie, which he deposits into a bank.

The remaining parties are those who take out loans on the original amounts which, for the sake of illustration, happen to alternate, as what is borrowed from Bank A gets deposited into Bank B, and vice versa.



Debating FRB always has two focuses - the risks of those in the system, and the effects on those who are not direct participants of the system, and assumed no risks of their own.

Some like the focus to remain only on the instability of the banking system, and the attendant risks assumed by everyone, from the original depositor and all the borrowers and later depositors who have counter-party claims. But what have they risked? All said and done, the whole risk is $100, a bunch of promises to pay, and whatever collateral might have been posted along the way. But collateral is not a requirement. One can borrow fictitious money on their "good name" alone - exchanging the banks' promises to pay in exchange for their promises to pay in what is tantamount to a complex, institutionalized check kiting scheme.

Meanwhile, Party A, the poor idiot with original real money who isn't participating in the scheme, and isn't taking any risk, gets his $100 devalued by all the counterfeit counter-party claims to the same original money, all of which are conflated with and passing off as real money. In reality, it's like you are sitting at a poker table against one real gambler and 28 shills, in that if you somehow managed to beat the house, there's really less than $100 at the table. Everyone else is playing with markers. Future debt. Empty promises. Fraud. Not fraud on the parts of the shills - fraud on the part of both houses who created them.

[Zippyjuan]

When the money is taken out of the bank (deposits withrdrawn) the bank's balance sheet is off and they are required to restore it by the end of the day to meet their reserve requirements. If they have had more withdrawls than their outstanding loans allow, they have to borrow money (or recall loans) to get the proper ratio again. Their borrowing is taking money back out of circulation to offset the money depositors took out to spend in the economy.

[Steven Douglas]

When the money is taken out of the bank (deposits withrdrawn) the bank's balance sheet is off and they are required to restore it by the end of the day to meet their reserve requirements. If they have had more withdrawls than their outstanding loans allow, they have to borrow money (or recall loans) to get the proper ratio again. Their borrowing is taking money back out of circulation to offset the money depositors took out to spend in the economy.

Gee, that sounds almost stable. Kinda sorta...when you hold it up just so, and look it in a certain light.

Except for one small problem... (emphasis mine)

EXCERPT FROM HERE (highly recommend reading the entire article)

Because of competition from money market funds, banks began using fancy financial manipulation to get around reserve requirements. In the early 1990s, the Federal Reserve Board under Chairman Alan Greenspan took a controversial step and removed banks’ reserve requirements almost entirely. To do so, it first lowered to zero the reserve requirement on all accounts other than checking accounts. Then it let banks pretend that they have almost no checking account balances by allowing them to “sweep” those deposits into various savings accounts and money market funds at the end of each business day. Magically, when monitors check the banks’ balances at night, they find the value of checking accounts artificially understated by hundreds of billions of dollars. The net result is that banks today conveniently meet their nominally required reserves (currently about $45b.) with the cash in their vaults that they need to hold for everyday transactions anyway. [1st edition of Prechter's Conquer the Crash was published in 2002 -- Ed.]

By this change in regulation, the Fed essentially removed itself from the businesses of requiring banks to hold reserves and of manipulating the level of those reserves. This move took place during a recession and while S&P earnings per share were undergoing their biggest drop since the 1940s. The temporary cure for that economic contraction was the ultimate in “easy money.”

We still have a fractional reserve system on the books, but we do not have one in actuality. Now banks can lend out virtually all of their deposits. In fact, they can lend out more than all of their deposits, because banks’ parent companies can issue stock, bonds, commercial paper or any financial instrument and lend the proceeds to their subsidiary banks, upon which assets the banks can make new loans. In other words, to a limited degree, banks can arrange to create their own new money for lending purposes.

Today, U.S. banks have extended 25 percent more total credit than they have in total deposits ($5.4 trillion vs. $4.3 trillion). Since all banks do not engage in this practice, others must be quite aggressive at it. For more on this theme, see Chapter 19 [of Conquer the Crash].

Recall that when banks lend money, it gets deposited in other banks, which can lend it out again. Without a reserve requirement, the multiplier effect is no longer restricted to ten times deposits; it is virtually unlimited. Every new dollar deposited can be lent over and over throughout the system: A deposit becomes a loan becomes a deposit becomes a loan, and so on.

As you can see, the fiat money system has encouraged inflation via both money creation and the expansion of credit. This dual growth has been the monetary engine of the historic uptrend of stock prices in wave (V) from 1932. The stupendous growth in bank credit since 1975 (see graphs in Chapter 11 [of Conquer the Crash]) has provided the monetary fuel for its final advance, wave V. The effective elimination of reserve requirements a decade ago extended that trend to one of historic proportion.

[The Gold Standard]

When the money is taken out of the bank (deposits withrdrawn) the bank's balance sheet is off and they are required to restore it by the end of the day to meet their reserve requirements. If they have had more withdrawls than their outstanding loans allow, they have to borrow money (or recall loans) to get the proper ratio again. Their borrowing is taking money back out of circulation to offset the money depositors took out to spend in the economy.

That obviously would depend on who they are borrowing from. I know they aren't borrowing from people like you and me, which would take money out of the money supply.

What the banks were doing was just increasing the value of their mortgage backed securities on their books to meet capital requirements. Because our ridiculous system allows banks to use things other than money to meet reserve requirements, that is all they needed to do to give them the ability to inflate forever. Now that those instruments our worthless and all of these banks are insolvent, they are borrowing at 0% from the Federal Reserve to meet capital requirements. Again, counterfeit reserves fueling endless money creation.

[Zippyjuan]

In most cases, the banks would borrow from another bank which had more in deposits than their outstanding loans required. Or they could borrow from the Fed. Banks increased their excess reserves kept on deposit with the Fed to about $2 trillion during the crisis.