Page 1 of 7 123 ... LastLast
Results 1 to 30 of 195

Thread: Fractional reserve lending versus.... what?

  1. #1

    Default Fractional reserve lending versus.... what?

    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?
    Last edited by Jamesiv1; 02-26-2012 at 01:15 PM.
    1. Don't lie.
    2. Don't cheat.
    3. Don't steal.
    4. Don't kill.
    5. Don't commit adultery.
    6. Don't covet what your neighbor has, especially his wife.
    7. Honor your father and mother.
    8. Spend a full day of rest per week in loving service to God and to your fellows.
    9. Donít use your Higher Power's name in vain, or anyone else's.
    10. Do unto others as you would have them do to you.

    "For the love of money is the root of all evil..."
    I Timothy 6:10, KJV



  2. Remove this section of ads by registering.
  3. #2

    Default

    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 Those concepts are no longer valid.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.
    "Everyone who believes in freedom must work diligently for sound money, fully redeemable. Nothing else is compatible with the humanitarian goals of peace and prosperity." -- Ron Paul

    Brother Jonathan

  4. #3

    Default

    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.
    My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right, tend to be unwilling or unable to accept blame )

  5. #4

    Default

    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?
    1. Don't lie.
    2. Don't cheat.
    3. Don't steal.
    4. Don't kill.
    5. Don't commit adultery.
    6. Don't covet what your neighbor has, especially his wife.
    7. Honor your father and mother.
    8. Spend a full day of rest per week in loving service to God and to your fellows.
    9. Donít use your Higher Power's name in vain, or anyone else's.
    10. Do unto others as you would have them do to you.

    "For the love of money is the root of all evil..."
    I Timothy 6:10, KJV

  6. #5

    Default

    Quote Originally Posted by hazek View Post
    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.
    1. Don't lie.
    2. Don't cheat.
    3. Don't steal.
    4. Don't kill.
    5. Don't commit adultery.
    6. Don't covet what your neighbor has, especially his wife.
    7. Honor your father and mother.
    8. Spend a full day of rest per week in loving service to God and to your fellows.
    9. Donít use your Higher Power's name in vain, or anyone else's.
    10. Do unto others as you would have them do to you.

    "For the love of money is the root of all evil..."
    I Timothy 6:10, KJV

  7. #6
    Member Zippyjuan's Avatar
    Join Date
    Feb 2008
    Location
    Out Of This World
    Posts
    20,192

    Default

    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.
    I am Zippy and I approve of this message. But you don't have to.

  8. #7

    Default

    Quote Originally Posted by Jamesiv1 View Post
    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.

  9. #8

    Default

    Quote Originally Posted by hazek View Post
    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.

  10. #9

    Default

    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.

  11. #10

    Default

    Quote Originally Posted by Jamesiv1 View Post
    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?

  12. #11
    Member Zippyjuan's Avatar
    Join Date
    Feb 2008
    Location
    Out Of This World
    Posts
    20,192

    Default

    Quote Originally Posted by The Gold Standard View Post
    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.
    Lending out time deposits is still a form of fractional reserve banking. They are keeping a fraction of their deposits on reserve and lending out another fraction (the time deposits).
    I am Zippy and I approve of this message. But you don't have to.

  13. #12

    Default

    Quote Originally Posted by Zippyjuan View Post
    Lending out time deposits is still a form of fractional reserve banking. They are keeping a fraction of their deposits on reserve and lending out another fraction (the time deposits).
    That's debatable and is a semantic argument. If they have 100% of all deposits available for withdrawal at any given time, then the bank can't fail and no one can be robbed. If you put your money in a CD for 5 years, the bank can lend that out as long as they have it back in time for when it is available to you.

  14. #13

    Default

    Fractional reserve banking basically means banks are giving out more investments than they have in savings. This is not necessarily a bad thing. If the banks are taking the appropriate risks and make smart investments then there's no issue... Just like if you the consumer make a smart investment... in your education or your house, for example. Banks then can make the money to cover their overhead costs and smart investing grows the stock market.

    However, when the federal reserve can guarantee virtually free money to banks because it's not tied to a commodity, then it creates the hazard. This encourages banks to make risks that they normally would not/could not make. During the housing bubble, everyone thought that was real prosperity and real growth, when really it was all bad investment, just waiting to all collapse on itself.

  15. #14

    Default

    Furthermore, bailing out these banks is also a hazard. The government has compounded the problem by rewarding bad investment, and continuing to keep rates low. We re-inflated the bubble, and it will burst yet again.

  16. #15
    Member
    Join Date
    Apr 2010
    Location
    Wallingford, CT & Eastern Shore, VA
    Posts
    1,625

    Default

    Quote Originally Posted by Jamesiv1 View Post
    In a Ron Paul world, what would a system of 'sound money' be like?
    This:

    Quote Originally Posted by The Gold Standard View Post
    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.
    You would have two basic accounts. One where you could withdraw funds immediately, for writing checks or whatever, but which would pay no interest. That would be 100% reserves - no risk of loss. And the other would be fractional reserve and would pay you interest for the use of your savings. They would lend the money out and you would be paid interest as the loans are repaid; the banks would keep a percentage. That would also come with the risk of loss and time restrictions on withdrawals. There would be no FDIC, Federal Reserve, or bank bailouts.

    Under the current system, with FDIC insurance and bailouts, there is no risk of loss to the nominal amount in your personal bank account, but you still pay for the risk at a system wide level through devaluation of your savings. In a Ron Paul world you would have control over the amount of risk you would like to take while under the current system you are forced to take risk on behalf of the bankers and debtors.
    Last edited by enoch150; 02-26-2012 at 06:18 PM.
    "Government is not the solution to our problem; government is the problem."
    Ronald Reagan, 1981

  17. #16

    Default

    Quote Originally Posted by enoch150 View Post
    You would have two basic accounts. One where you could withdraw funds immediately, for writing checks or whatever, but which would pay no interest. That would be 100% reserves - no risk of loss. And the other would be fractional reserve and would pay you interest for the use of your savings. They would lend the money out and you would be paid interest as the loans are repaid; the banks would keep a percentage. That would also come with the risk of loss and time restrictions on withdrawals. There would be no FDIC, Federal Reserve, or bank bailouts.

    Under the current system, with FDIC insurance and bailouts, there is no risk of loss to the nominal amount in your personal bank account, but you still pay for the risk at a system wide level through devaluation of your savings. In a Ron Paul world you would have control over the amount of risk you would like to take while under the current system you are forced to take risk on behalf of the bankers and debtors.
    I don't know if you can call it fractional reserve, but whatever you call it, the reason it works is that the money the bank lends is unavailable to the saver during that time, so you aren't creating money out of thin air. When the banks lend out your checking account, you are still using that money, so to lend it out the bank has to create new money from nothing.
    Last edited by The Gold Standard; 02-26-2012 at 07:04 PM.

  18. #17

    Default

    Quote Originally Posted by The Gold Standard View Post
    I don't know if you can call it fractional reserve, but whatever you call it, the reason it works is that the money the bank lends is unavailable to the saver during that time, so you aren't creating money out of thin air. When the banks lend out your checking account, you are still using that money, so to lend it out the bank has to create new money from nothing.
    CDs are still available to the saver during the length of their deposit. The bank, based on historical data, estimates what percentage of CDs will be withdrawn during a particular month of the year and retains as a fractional reserve at least this much money - plus or minus additional amounts based on other economic factors.


    There is no functional difference between the two systems you are suggesting.

  19. #18

    Default

    Quote Originally Posted by Domalais View Post
    CDs are still available to the saver during the length of their deposit. The bank, based on historical data, estimates what percentage of CDs will be withdrawn during a particular month of the year and retains as a fractional reserve at least this much money - plus or minus additional amounts based on other economic factors.


    There is no functional difference between the two systems you are suggesting.
    Just because that is how they do it now doesn't mean that is how they have to do it. If the money was not available to the customer while in the CD then no new money would be created out of thin air and no business cycle would result.

  20. #19
    Member
    Join Date
    Dec 2011
    Location
    Newark, Delawhere
    Posts
    250

    Default

    Quote Originally Posted by onlyrp View Post
    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?
    In a free economic society, loans and credit will always be available - as they should be. If someone needs capital to start a new business, and has a feasible plan to pay back the money and make more profit in the long run, they should have that option. One of the problems with fractional banking is that it's becoming impossible to determine the true interest rate for loaned money because banks have a near unlimited access to funds. Banks that loan money can (and should) be able to make a profit in a non fractional reserve economy through offering CD's and other savings tools to customers, and in turn, loaning that money out at a premium to those who need it.

    Fractional Reserve Banking advocates will argue that without reserve banking, loans will be harder and more expensive to get. Which is true, but it's better than right now where the dollar is in a constant state of deflation due to the banking system, therefore taxing us all.

  21. #20

    Default

    If bankers had to earn their money rather than "create" it out of nothing, then producers/workers would have a lot more money. That's the thing. Bankers don't "create" money out of nothing ... debasement of currency through fractional reserve banking is pure unadulterated theft. Plain and simple.

    Not one man in a million can see it.

    "By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft." - Lord John Maynard Keynes, "Economic Consequences of Peace"
    "Our goal is gradually to absorb the wealth of the world." - Cecil Rhodes, "The secret banking cabal"

  22. #21

    Default

    Quote Originally Posted by The Gold Standard View Post
    Just because that is how they do it now doesn't mean that is how they have to do it. If the money was not available to the customer while in the CD then no new money would be created out of thin air and no business cycle would result.
    Business cycles existed before modern banking.

  23. #22

    Default

    Quote Originally Posted by Domalais View Post
    Business cycles existed before modern banking.
    Not before fractional reserve banking and/or currency debasement.

  24. #23

  25. #24

    Default

    Quote Originally Posted by onlyrp View Post
    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?
    Demand might drop temporarily if the Fed was unable to loan out more money. However, private companies and private capital would quickly flow in to create new financing opportunities. It might be less glitzy, better background checks, higher downpayment, higher APRs (most likely). More people would be turned away for having bad or no credit or bad finances or no down payment.

    Why we "NEED loans and credit" is of zero relevance. In Economics 101, needs and wants are unlimited. Whether essentials or luxuries, their nature is the same: un-effing-limited. It is resources that are limited and the free market, not the Fed, is supposed to be the allocator (e.g., determine the cost of money).

  26. #25
    Member newbitech's Avatar
    Join Date
    Nov 2007
    Location
    Tampa, FL
    Posts
    8,383
    Blog Entries
    3

    Default

    consumer loans need to go.

  27. #26

    Default

    Quote Originally Posted by GeorgiaAvenger View Post
    One question I get is how are large projects going to be funded without large banks?
    Sandbox vs. Beach.

    How do you get a beach without beach sized sandboxes?

    I can't think of a single project the local community can't do.

  28. #27

    Default

    Quote Originally Posted by Jamesiv1 View Post
    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?
    The person who holds an asset(like a house) and is trying to sell it would create a note, and hold it. The purchaser would make payments. There's no reason to get a banker involved.

  29. #28

    Default

    Quote Originally Posted by GeorgiaAvenger View Post
    One question I get is how are large projects going to be funded without large banks?
    The time-honored old fashioned way: only with money that actually exists, the usage of which banks acquire from others, and pay to use, with no competing malinvestments in the mix.

  30. #29

    Default

    The radical idea is the legalized counterfeiting of the fractional reserve system.

    A person should not be allowed to lend that which he does not have - that's called fraud. Being a banker is no excuse!
    ďIf ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen.Ē

    - SAMUEL ADAMS

  31. #30
    Member Zippyjuan's Avatar
    Join Date
    Feb 2008
    Location
    Out Of This World
    Posts
    20,192

    Default

    Quote Originally Posted by The Gold Standard View Post
    Not before fractional reserve banking and/or currency debasement.
    Busniess cycles have existed under all economic and monetary systems throughout history.
    I am Zippy and I approve of this message. But you don't have to.

Page 1 of 7 123 ... LastLast




« Previous Thread | Next Thread »


Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •