Fractional reserve lending versus.... what?

[Domalais]

Interest rates directly tells consumer time preference, because the only thing that affects interest rates is the supply and demand of loanable funds.

What you are saying is that other things affect interest rates. Yes, that is the case today or in any centrally planned system or fractional reserve system. Not in a free market with 100% reserve banking and sound money.

I think things are slightly more complicated than you suggest.

First, obviously, consumers are only responsible for the supply side of the equation. A change in demand, which could occur for a range of reasons, will change the interest rate without any change in consumer preferences or expectation. This could be a temporary change in demand, and rates will eventually return to their prior position, or this could be a permanent change which establishes a new equilibrium rate.

Second, unless we're talking about a very simple/small economy where individual suppliers of loanable funds are directly lending to entrepreneurs, there will be a complex market of aggregators, brokers, agents, and what-have-you. This will add complexity to the supply of credit.

[The Gold Standard]

Obviously no one can predict the future and nothing is perfect. All this theory does is explain how savings and spending coordinates resources for sustainable growth. If interest rates were low and a bunch of projects started and drove up interest rates while you were still on the sidelines, then obviously they used up the resources that were saved and you have to wait. It doesn't matter how complex the market is. Real money that is saved is money that isn't being spent. That means you have capital, labor, and resources available for your long term projects without having to bid up prices against other actors in the market. When there are little savings, then long term investments aren't profitable and capital, labor, and resources are tied up serving the consumer who is blowing all of their money right now. There will be some hit and miss and some failed companies and what not, but you would not have widespread booms and busts as a result of this.

[Steven Douglas]

Travlyr,Gold Standard,Stephen Douglas: I think the confusion is between paper notes and physical gold. If a bank is printing paper notes for gold IT DOES NOT HAVE, then that is clearly fraud. But as long as we are talking about a free market banking system and the banks are using gold as currency, I see nothing wrong with fractional reserve banking.

Question: Suppose you are holding an ounce of gold. Then the banks start doing fractional reserve banking. Are you claiming that your physical ounce of gold has now lost purchasing power because of the fractional reserve lending?

Of course it has. Where do you think the VAST majority of currency inflation and money creation comes from in the economy? It's not from the Fed. It's not from the warfare/welfare deficit borrowing and spending side. The vast majority of currency inflation is from the commercial banks and fractional reserve lending side! Don't take my word for it - the Fed itself doesn't deny it. READ HERE

Or, go back one page. Did you look the chart I created? That can be $100 in gold specie. With fractional reserve lending between two banks, $100 in real gold is multiplied into $800 in circulating bank notes -- "paper notes for gold IT DOES NOT HAVE", but which are all being passed off no differently than the coins they misrepresent, which is "clearly fraud".

Let's say that you and I are in an isolated economy, with only $200 in gold total in existence, hard specie, and only two banks. You are a holder of $100, and have nothing to do with banks. I have the other $100 - which I deposit with Bank A (see chart).

Over a relatively short period of time, between me, the banks, and everyone who borrowed and deposited money between the two banks, there is now $800 circulating, "gold claims" which are masquerading as real gold in the form of bank notes. However, the banks in reality only have less than $100 between them as actual reserves. Meanwhile, the notes, all circulating simultaneously, each claim to represent real gold, and are promises to pay such on demand --- 90% of which the banks do not have. Fortunately for the banks, less than 10% of the notes are actually presented to the bank for hard specie payment. The rest of the notes continue to circulate on faith, and so long as that happens, the very real fraud goes undetected.

Now here you are, having held onto your $100 in gold coins, a full 50% of all the gold in existence. You waited, but now decide to spend some of them. However, since the bank notes are circulating as EQUAL in value to your coins, your $100 is now competing against $800 in fully gold redeemable bank notes. How much is your $100 of hard specie worth now? Do you think it might have lost just a wee bit of its purchasing power in this process? That's fractional reserve lending even under a gold standard.

This is precisely why Roosevelt declared a bank holiday. It was not because of a central bank. The Fed was created as cover for this type of banking embezzling, and was not the original criminal, but only an accomplice to a crime - an accessory after the fact - a facilitator which had failed to do its job in providing cover for banks. There were runs on banks that truly did not have the gold that the bank's demand notes claimed to represent. The banks really did not have it! NOT BECAUSE IT WAS LENT OUT TO OTHERS, hard at work in the economy, but rather the SAME GOLD had been lent out to MULTIPLE OTHERS SIMULTANEOUSLY (again, see the chart I made). Multiple claims on the same gold were in multiple places in the same time, all at once.

Even if you have sound currency in an otherwise free market, if fractional reserve lending (the ability to loan/create and circulate multiple claims to the same specie to multiple parties simultaneously), you still have two problems, only one of which is the fraud, instability and inherent insolvency of the banks and banking system itself. The bigger problem is that innocent holders of currency, the ones who have nothing to do with such banks, have had their purchasing power eroded by a hidden tax that borrowed value from all other like specie in existence - without making you, the specie holder, a party of interest.

[Madison320]

Now here you are, having held onto your $100 in gold coins, a full 50% of all the gold in existence. You waited, but now decide to spend some of them. However, since the bank notes are circulating as EQUAL in value to your coins, your $100 is now competing against $800 in fully gold redeemable bank notes. How much is your $100 of hard specie worth now? Do you think it might have lost just a wee bit of its purchasing power in this process? That's fractional reserve lending even under a gold standard.

This is precisely why Roosevelt declared a bank holiday. It was not because of a central bank. The Fed was created as cover for this type of banking embezzling, and was not the original criminal, but only an accomplice to a crime - an accessory after the fact - a facilitator which had failed to do its job in providing cover for banks. There were runs on banks that truly did not have the gold that the bank's demand notes claimed to represent. The banks really did not have it! NOT BECAUSE IT WAS LENT OUT TO OTHERS, hard at work in the economy, but rather the SAME GOLD had been lent out to MULTIPLE OTHERS SIMULTANEOUSLY (again, see the chart I made). Multiple claims on the same gold were in multiple places in the same time, all at once.

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

[Travlyr]

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

This is not true. We have clearly demonstrated throughout this thread that fractional reserve is theft. Selling something you don't own is fraud.

In the case of the fractional reserve grain elevators for example. The farmer spent 9 months and tilled the soil, sowed the seeds, watered the plants, protected them against predators, harvested the grain, and put the grain in storage as food to feed pigs and make bacon. For his work he was paid $75,000. The elevator operators sold grain they did not grow and did not have for $338,509 and did absolute nothing for it except sell grain that did not exist. That's fraud.

[Travlyr]

For those who really want to see how selling fractional reserve paper silver is theft, read this.

The Coming Paradigm Shift in Silver

That is fractional reserve.

[fisharmor]

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

Ok, Ben, here's a simple question: Is gold money?
If not, why not?
If so, why would we choose to use paper money?

[Domalais]

Real money that is saved is money that isn't being spent. That means you have capital, labor, and resources available for your long term projects without having to bid up prices against other actors in the market.

You've lost me. Of course you bid up prices against other actors in the market. Were it not for your purchase of that capital, prices would have been lower.

When there are little savings, then long term investments aren't profitable and capital, labor, and resources are tied up serving the consumer who is blowing all of their money right now.

Still lost. Investments are still profitable so long as the rate of return exceeds the cost of capital! It has nothing to do with short term or long term.

[The Gold Standard]

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

If the paper is redeemable in a fixed amount of gold, then fractional reserve banking can, at least temporarily until the bank collapses, lower the value of the gold. If the paper is redeemable at the market gold price then it wouldn't. This is not considering any legal tender laws or other government coercion.

[Madison320]

If the paper is redeemable in a fixed amount of gold, then fractional reserve banking can, at least temporarily until the bank collapses, lower the value of the gold. If the paper is redeemable at the market gold price then it wouldn't. This is not considering any legal tender laws or other government coercion.

Yes. The problem is not fractional reserve banking. The problem is a government controlled monopoly of the currency. As long as the government doesn't force me to use paper my gold will keep it's value.

[The Gold Standard]

You've lost me. Of course you bid up prices against other actors in the market. Were it not for your purchase of that capital, prices would have been lower.

If consumers are spending every penny they have then people are employed in retail stores or whatever and businesses are making products to put on the shelves. If interest rates are low at this point and it would be profitable to build a new factory while all of that is going on then they would have to compete for the materials and labor, driving up their costs and ultimately showing that the project was not so profitable. If people are not spending and they are saving their money, then people being laid off from Walmart are available to go build the new factory or work in the new factory and the materials not being used to put products on the shelves are available and cheap.

Still lost. Investments are still profitable so long as the rate of return exceeds the cost of capital! It has nothing to do with short term or long term.

Fine. Most investments aren't as profitable. Some investments would be profitable no matter what the interest rates are, but some are very sensitive to the cost of capital.

[The Gold Standard]

Yes. The problem is not fractional reserve banking. The problem is a government controlled monopoly of the currency. As long as the government doesn't force me to use paper my gold will keep it's value.

Again, without paper money there is no fractional reserve banking, so you can not be a fan of gold money and fractional reserve banking.

[Madison320]

Again, without paper money there is no fractional reserve banking, so you can not be a fan of gold money and fractional reserve banking.

OK, then I'm a fan of gold and that other thing not called fractional reserve banking where you can put your money in a bank and they pay you interest from loaning your money to other customers.

[Travlyr]

OK, then I'm a fan of gold and that other thing not called fractional reserve banking where you can put your money in a bank and they pay you interest from loaning your money to other customers.

Same for me. As long as the banks don't start loaning money they don't have ... more power to them.

[Madison320]

Same for me. As long as the banks don't start loaning money they don't have ... more power to them.

I agree. Peace.

[Steven Douglas]

Wrong. You don't have $100 worth of gold. You have 100 ounces of physical gold. If the paper money representing that gold gets depreciated thru printing or fractional reserve lending you have not lost purchasing power. When you redeem your gold you will get more dollars than before the inflation started.

You know, I had a whole two paragraphs written to stipulate that $100 (not 100 ounces) was 'valued' by WEIGHT - not "worth" (in what?!), but I deleted them, assuming that you understood the concept of hard specie. I could have said ounces, but didn't. Now I see that I should have, because you see a dollar sign, and don't realize that under a gold standard and sound currency, a dollar sign IS A UNIT OF WEIGHT AND PURITY. Only. Not price, not exchange value, not "worth", unless you are talking strictly units of equivalent weight and purity.

My mistake.

The paper is losing value, not the gold. That's why oil went from $4 to $107 a barrel but is CHEAPER in terms of gold. That 100 ounces of gold back in 1970 buys twice as much oil now as back then. You've GAINED purchasing power.

Now you're off in la-la land, having not read or comprehended a thing I wrote. And you even identified YOUR problem, when you said:

I think the confusion is between paper notes and physical gold.

Correct. But it's not only your confusion. It's the market's confusion, as when paper notes (fictitious, untenable, fraudulent claims) are conflated with physical gold, confused by the market as being of equal value. And the ONLY reason for that: the market does not test that value. If everyone suddenly demanded physical, the fraud would be uncovered. However, while the fraud may go undetected, the effects of the fraud on the value of all other physical is palpable and real. That you can't see it clearly is mind-boggling.

Bottom line: Fractional reserve banking does not lower the value or purchasing power of physical gold.

You're saying "bottom line" as an assertion, without actually critically examining any of the real bottom lines. What I am saying is not controversial. It is based on fundamentals that most any economist would agree with, and I'll prove it to you.

You're on an island in an economy that has 100 ounces of gold total (and I won't ever make the mistake of using $ signs with you again). So far it's all the known gold in existence. Part of its value ("purchasing power") is based on its scarcity. Indeed, if all sand in the world was pure gold, your gold would have very little "purchasing power". Maybe twice that of sand, because it's prettier and more useful. Why would anyone trade their goods or services with you for something they can go into their backyard, or the nearest beach or desert, and scoop up by the truckloads themselves? Do you understand that scarcity is not only a factor, but a requirement for market value?

Now here you are in an economy with 100 ounces of gold freely circulating. But now 900 ounces of newly mined, freshly minted gold arrives and makes its way into the economy. It is natural inflation. As this new gold freely circulates, it places downward pressure on the market value, or purchasing power of the original gold, which is diluted by upwards of 90%. You can see that, right? That's what happened during the Gold Rush. The market value, or purchasing power of gold on the whole in the economy dropped.

That's physical versus physical, no notes required.

When paper claims on the same existing gold are issued multiple times to multiple parties as redeemable bank notes, every one of them are valued no differently than the physical they misrepresent. They are fraudulent because not all of them can be redeemed at once, even though everyone has the same legal claim to the same existing gold. Meanwhile, the market does not distinguish (i.e., "is confused") between paper and physical. A merchant will make no distinction between a customer with an ounce of gold and another customer with a Demand Note that is fully and instantly redeemable in an ounce of gold. Both are treated as physical in the market place. The merchant can go to the bank and demand the ounce of gold based on the note, and he will receive it. He can do this because less than 10% of the market even does this. Most merchants will simply pass this note onto others, who will also accept the note without redemption, so the very real fraud is not detected. And because the 9 times the amount of fraudulent paper notes are passed off as ("confused for", or "conflated with") real physical gold, it is NO DIFFERENT than if nine times the amount of real physical gold had been circulated -- either of which can, AND DO, place downward pressure on the value, or purchasing power, of the original physical gold.

Again, this is elementary, and not controversial at all. Mainstream (and even some Austrian) economists may have their own reasons for defending fractional reserve lending, but the notion that it does not have an effect on the purchasing power of other like units - claims or physical - is not one of them.

[Madison320]

You know, I had a whole two paragraphs written to stipulate that $100 (not 100 ounces) was 'valued' by WEIGHT - not "worth" (in what?!), but I deleted them, assuming that you understood the concept of hard specie. I could have said ounces, but didn't. Now I see that I should have, because you see a dollar sign, and don't realize that under a gold standard and sound currency, a dollar sign IS A UNIT OF WEIGHT AND PURITY. Only. Not price, not exchange value, not "worth", unless you are talking strictly units of equivalent weight and purity.

My mistake.



Now you're off in la-la land, having not read or comprehended a thing I wrote. And you even identified YOUR problem, when you said:



Correct. But it's not only your confusion. It's the market's confusion, as when paper notes (fictitious, untenable, fraudulent claims) are conflated with physical gold, confused by the market as being of equal value. And the ONLY reason for that: the market does not test that value. If everyone suddenly demanded physical, the fraud would be uncovered. However, while the fraud may go undetected, the effects of the fraud on the value of all other physical is palpable and real. That you can't see it clearly is mind-boggling.



You're saying "bottom line" as an assertion, without actually critically examining any of the real bottom lines. What I am saying is not controversial. It is based on fundamentals that most any economist would agree with, and I'll prove it to you.

You're on an island in an economy that has 100 ounces of gold total (and I won't ever make the mistake of using $ signs with you again). So far it's all the known gold in existence. Part of its value ("purchasing power") is based on its scarcity. Indeed, if all sand in the world was pure gold, your gold would have very little "purchasing power". Maybe twice that of sand, because it's prettier and more useful. Why would anyone trade their goods or services with you for something they can go into their backyard, or the nearest beach or desert, and scoop up by the truckloads themselves? Do you understand that scarcity is not only a factor, but a requirement for market value?

Now here you are in an economy with 100 ounces of gold freely circulating. But now 900 ounces of newly mined, freshly minted gold arrives and makes its way into the economy. It is natural inflation. As this new gold freely circulates, it places downward pressure on the market value, or purchasing power of the original gold, which is diluted by upwards of 90%. You can see that, right? That's what happened during the Gold Rush. The market value, or purchasing power of gold on the whole in the economy dropped.

That's physical versus physical, no notes required.

When paper claims on the same existing gold are issued multiple times to multiple parties as redeemable bank notes, every one of them are valued no differently than the physical they misrepresent. They are fraudulent because not all of them can be redeemed at once, even though everyone has the same legal claim to the same existing gold. Meanwhile, the market does not distinguish (i.e., "is confused") between paper and physical. A merchant will make no distinction between a customer with an ounce of gold and another customer with a Demand Note that is fully and instantly redeemable in an ounce of gold. Both are treated as physical in the market place. The merchant can go to the bank and demand the ounce of gold based on the note, and he will receive it. He can do this because less than 10% of the market even does this. Most merchants will simply pass this note onto others, who will also accept the note without redemption, so the very real fraud is not detected. And because the 9 times the amount of fraudulent paper notes are passed off as ("confused for", or "conflated with") real physical gold, it is NO DIFFERENT than if nine times the amount of real physical gold had been circulated -- either of which can, AND DO, place downward pressure on the value, or purchasing power, of the original physical gold.

Again, this is elementary, and not controversial at all. Mainstream (and even some Austrian) economists may have their own reasons for defending fractional reserve lending, but the notion that it does not have an effect on the purchasing power of other like units - claims or physical - is not one of them.

Ok, just tell me when this has ever happened in the real world. When did fractional reserve banking lower the purchasing power of gold?

[Steven Douglas]

Ok, just tell me when this has ever happened in the real world. When did fractional reserve banking lower the purchasing power of gold?

At all times when gold was monetized and fractional reserve banking was practiced.

Do you understand that the bank run panic of 1907 (exploited as a reason for creating the Fed), along with bank runs that led to Roosevelt's bank holiday were ALL due to fractional reserve lending under a gold standard?

Inflated bank notes (counter-party claims to the same existing wealth) were naturally pegged to (read=nominally valued at) the value of hard specie, and have always been treated as such in the free market. They were fungible. Interchangeable. Treated as like units of exchange. Any change in the supply of these bank notes affected the value/purchasing power of gold, and vice versa, any change in the supply of gold affected the market value of bank notes.

Bank notes from fractional reserve lending have always been inflationary to whatever it represents and is redeemable for, including gold, because the market makes no differentiation between the two, and sees them as one and the same! So long as they are coupled in this way, they are not separately valued. Without fractional reserve notes, both gold (hard specie) and notes based on 100% reserve requirements (which really are gold, and not just promises to pay in future gold) would have had far more purchasing power. The only thing that kept them relatively stable, with "gold inflation" not getting out of hand, is that fractional reserve lending would eventually lead to bank failures, as the business cycle (a fully formed economic web based on counter-party claims throughout banks in the economy) would test the most unstable of the banks, and with enough failures, the domino effect as fraudulent insolvency is revealed.

[Travlyr]

Ok, just tell me when this has ever happened in the real world. When did fractional reserve banking lower the purchasing power of gold?

It happens all the time ... constantly. The purchasing power of one ounce of gold is currently so distorted that nobody really knows the true purchasing value of an Eagle except that it contains .9167 pure gold and weighs 1 oz. What it will actually buy varies dramatically from day to day because most everything is priced according to irredeemable fiat paper not valuable commodities such as gold or silver. Paper silver is virtually worthless if the people printing the silver paper don't back it with silver. That is what I was trying to share with everybody in the article: The Coming Paradigm Shift in Silver Paper silver is not 100% redeemable.

To answer your question, let's look at a hypothetical closed system for clarity.
Our Town of free markets have two banking competitors and a fully functioning economy. Bank A and Bank B. Both banks use the same currency and, as it turns out, gold is their choice. Gold circulates in Eagle gold coins and 100% redeemable paper certificates called Eagle certificates. There are 1/2, 1/4, 1/8, 1/16, Eagles, etc. so that matching certificates can be used depending on the weight & purity of the gold coin. Shopping is easy in either paper or gold and change can easily be made. Anytime anybody wants to take their Eagle certificate to the bank, then they can and exchange their paper Eagle certificate for an Eagle coin. 100% redeemable.

Both Bank A and Bank B have 10 branches throughout town and no other banks exist. 10 customers deposit 100 Eagles each into each of Bank A's various 10 branches. Bank A1 has 1000 Eagles, Bank A2 has 1000 Eagles, etc. The total deposit into all of Bank A's branches is 10,000 Eagles. Same with Bank B. Bank B has on deposit 10,000 Eagles. The total number of gold Eagles in Our Town is 20,000 Eagles. Therefore, all goods and services in Our Town are valued at 20,000 gold Eagles.

Bank A allows fractional reserve banking at 10% reserve requirement and pays interest on deposits by making loans. Bank B does not allow fractional reserve banking and pays interest only on loans that are agreed upon to be lent out in the form of time deposits where the customer understands his money is loaned out and is not available until the time deposit contract is up.

At 10% reserve requirement, Bank A1 can loan a borrower 900 Eagles and keep 100 as reserves. That borrower takes his 900 Eagles and deposits into Bank A2. Bank A2 now has 1900 Eagles and can loan 1710 of them to a borrower while keeping 190 in reserve. That borrower makes a deposit of 1710 to Bank A3 which brings their total deposits up to 2710 Eagles. They can loan out 2439 Eagles and keep 271 on deposit. That borrower takes 2439 Eagles to Bank A4 which brings their total to 3439 Eagles. Bank A4 loans 3095 Eagles to a borrower who deposits it into Bank A5. Bank A5 now has 4095 Eagles and can loan 3685 Eagles out and keep 410 Eagles on reserve. That borrower takes his loan of 3685 Eagles and deposits into Bank A6. Bank A6 has 4685 Eagles on deposit and loans out 4216 Eagles to a borrower who takes them to Bank A7. Bank A7 now has 5216 Eagles on deposit so loans 4694 Eagles to a borrower who deposits them in Bank A8. Bank A8 has 5694 Eagles on deposit and can loan 5125 Eagles to a borrower who takes them to Bank A9 which now has 6125 Eagles on deposit. Bank A9 loans 5512 Eagles to a borrower who deposits them in Bank A10. Bank A10 now has 6512 Eagles on deposit and loans 5861 Eagles to a borrower who deposits them in Bank A1... and on and on. Add it up at the end of the day...

Bank A's 10 branches now have 10,000 Eagles on deposit (reserve) and 37,237 Eagles loans outstanding for a total worth of 47,237 Eagles.
Bank B still has 10,000 Eagles on deposit.

Our Town still has a total of 20,000 real gold Eagles but now has a 57,237 gold Eagle economy. Prices of everything goes up. A gold Eagle just doesn't go as far as it used to. Now the town has 57,237 Eagle paper certificates chasing 20,000 gold coins. The certificates are no longer 100% redeemable. They are only worth a fraction of what they once were. Whoever deposited money in Bank B lost out. The owners of Bank A made out like bandits.

Bank C comes to town. They decide to have completely irredeemable currency. They monetize whatever debt is incurred. Before long even Bank A is out-of-business. The gold Eagle coins are still .9167 pure and weigh an ounce but the Eagle certificates are virtually worthless.

[Paul Or Nothing II]

Can you show any evidence of this in history? Where physical gold lost value due to fractional reserve banking?

Exactly. This is why I believe the problem is with printing phony notes, not fractional reserve banking.

OK, then I'm a fan of gold and that other thing not called fractional reserve banking where you can put your money in a bank and they pay you interest from loaning your money to other customers.

Then I must have the wrong definition of fractional reserve banking.

Suppose there are no paper notes, no electrons. You can only carry gold around physically. Fred deposits 100 ounces of gold in Bank A. Bank A then lends out 90 ounces of that gold to John. John then deposits that 90 ounces of physical gold into Bank B, etc. Is that not fractional reserve banking?

What you're describing isn't fractional-reserve-banking the way Austrians see it because in this case ACTUAL MONEY is being used & no fiduciary media; it's when banks lend fiduciary-media/money-substitutes for holding a fraction of ACTUAL MONEY that leads to inflationary effects & boom-bust cycles

Futher, there are a couple of things in your example - The gold deposited by Fred, is it a time-deposit or demand-deposit, if it's a time-deposit then it's ok to lend it out but if it's a demand-deposit & bank is lending out its demand-deposits like this then bank would be unable to pay up more than 10% of the deposit of demand-depositors as the rest will have already been lent out & that would amount to fraud

Now, if we'd free-banking, without any central-banks or any other government interference & the bank is explicit about its FRB-ness to all its demand-depositors then that would be fine since the depositors would know that their "demand-deposits" with this bank are "subject to availability" (which somewhat undermines the point of having a demand-deposit but whatever........)

Please read the following & I think you'd understand that you're probably NOT in conflict with the rest of us

[QUOTE=Paul Or Nothing II;4230584]

Fractional reserve lending is OK until there is a run on the bank. Discussion of fractional reserve banking in this particular interview begins around 7:50. The commentator asks Ron if the bank must have an amount in reserves equal to the amount of the loan. To which Ron says "No, uh, uh...yah." But I believe this would still be fractional reserve banking with a 50% reserve requirement. Ron then says if the bank keeps $100 for 3 months then it can loan out $100 for 3 months. But that seems like fractional reserve banking to me, too. I think it just means that the depositor isn't allowed to demand his money for that 90 days (like a Cd or something..). But maybe I misunderstood.

Again, fractional vs full reserve debate is concentrated on DEMAND-DEPOSITS, that is, deposits that the banks must pay up on demand & under full-reserve-banking, will bear no interest

Time-deposits will still be lent because depositors will have granted authority to loan them & will have given up it's possession for the period of the time-deposits in return for the interest

And no, there's no perfect correlation between time & demand deposits to be 50-50 percent, lending of all deposits don't have the same impact on the economy

NOTE : Consider the initial "$100" in green color as "100 ounces" of gold & then watch the magic of fiduciary media

Yes, and for reasons I already explained. A "gold standard" only means that gold is "valued" in weight and purity - not "price" (the exchange value against anything else).

Fractional reserve lending is a mechanism to circumvent the gold standard, thus artificially manipulating the value of gold. The exchange value of gold is distorted and manipulated by conflating mathematically, physically impossible contradictory claims to the same gold, and future promises to pay, albeit with future gold. Under fractional reserve lending, it is possible for the paper (or column entries) that deliberately MISrepresents the amount real gold to outnumber the real gold many times over. It is not a case where real money happens to be in use by others. It is a case where FICTIONAL money is in use by others, but passing itself off as real money, and all because it has a trail leading back to an original deposit -- which was loaned out over and over again to different parties over the same time period.

Again, see how FRB works - even under a gold standard - slightly different than the one I posted earlier, note the red arrows showing the first part of the cycle, and the bottom line numbers, how $100 (or 100 ANYTHING) is inflated by FRB:

[Black Flag]

Again, fractional vs full reserve debate is concentrated on DEMAND-DEPOSITS, that is, deposits that the banks must pay up on demand & under full-reserve-banking, will bear no interest

Exactly.

The "borrow short/lend long" scenario is precisely the threat to any fractional reserve system - for there exists a circumstance where there can be two, independent, and rightful claims on the same deposited funds - the depositor asking for it back, while the actual funds sits in a borrowers wallet or different bank account.

[Madison320]

OK, you guys have me totally confused. I suspect what I'm calling fractional reserve, you're calling time deposits. And what I'm calling fraud, you're calling fractional reserve. But I'm not sure.

Suppose there no paper, no electrons. John deposits 100 ounces of gold in Bank A with the understanding that his gold may not be available for a certain period of time. Bank A loans out 80 ounces of John's gold to Fred. This is what I consider fractional reserve banking. Now here is the tricky part. If you introduce paper or electrons it shouldn't change the logic, as long as the paper is merely being used as a temporary substitute for the actual gold. The logic should be the same although I have to admit it hurts my head when I start thinking about the possibilities when using paper. Anyway what I believe is fraud is not when you start using paper but when you misrepresent how much gold you actually have. So in my example if Bank A gives Fred 80 ounces of gold notes instead of 80 ounces of gold, then there's no crime. But if Bank A gives Fred 150 ounces of gold notes, that's fraud because Bank A only has 100 ounces of gold to loan out.


Couple questions:

What specifically is the difference between harmless time deposits and evil fractional reserve?

Which step specifically is the crime in fractional reserve banking? Please keep your example as simple if possible. If it's a crime after 10 iterations, it's a crime after 1.

I still maintain that for a global commodity like gold you are not going to be able to reduce it's purchasing power with fractional reserve lending. Only the paper behind it. Whatever slight of hand banks perform with paper the fact is that gold is scarce and you can't change the actual physical supply of it. Therefore I don't think you can change it's value by very much.

[The Gold Standard]

What specifically is the difference between harmless time deposits and evil fractional reserve?

A time deposit is when you deposit money in a bank for the purpose of saving that money for set period of time and get paid a set interest rate. You do not have free access to that money during that time.

A demand deposit is when you put money in an account with the intention of just holding it there but you have every right to spend it immediately. Like a checking account. You deposit your paycheck and then use the debit card or write checks off of that.

In sound banking, only time deposits can be loaned out because the bank controls that money for the time period you agreed upon with them. When they lend it they are simply taking your money and giving it to someone else for a time.

Which step specifically is the crime in fractional reserve banking? Please keep your example as simple if possible. If it's a crime after 10 iterations, it's a crime after 1.

In fractional reserve banking they don't lend out just time deposits, they also lend out a fraction of your demand deposits (today it is 90%). When they do this the you still have access to that money, so if you spend it while it is loaned to someone else, the bank has to create the money that you spend out of thin air. That same money that you deposited is being spent by two different people at the same time.

[Black Flag]

A time deposit is when you deposit money in a bank for the purpose of saving that money for set period of time and get paid a set interest rate. You do not have free access to that money during that time.

A demand deposit is when you put money in an account with the intention of just holding it there but you have every right to spend it immediately. Like a checking account. You deposit your paycheck and then use the debit card or write checks off of that.

In sound banking, only time deposits can be loaned out because the bank controls that money for the time period you agreed upon with them. When they lend it they are simply taking your money and giving it to someone else for a time.



In fractional reserve banking they don't lend out just time deposits, they also lend out a fraction of your demand deposits (today it is 90%). When they do this the you still have access to that money, so if you spend it while it is loaned to someone else, the bank has to create the money that you spend out of thin air. That same money that you deposited is being spent by two different people at the same time.

Madison,

Gold is correct, right up until the last paragraph, where he goes totally wrong.

Yes, you have access to your demand deposit.
Yes, the bank has lent a percentage of the demand deposit "long" (that is, for a fixed period of time at a profit)
Yes, that means there is two, concurrent but exclusive demands on the same deposit dollar - the depositor and the borrower.

Yes, there is a serious problem if both demand the same money at the same time.

But NO, the bank does not make money out of thin air to cover this condition.

The bank fails - called a bank run. It is taken over by the FDIC, its assets are sold off to its competitors, the FDIC pays out the depositors, and the bank doors are closed.

[Black Flag]

I still maintain that for a global commodity like gold you are not going to be able to reduce it's purchasing power with fractional reserve lending. Only the paper behind it. Whatever slight of hand banks perform with paper the fact is that gold is scarce and you can't change the actual physical supply of it. Therefore I don't think you can change it's value by very much.

Time to think clearly here.

Let's go to a 100% gold economy, with gold coins as our medium.

I deposit 100 gold coins in a demand account.
The bank takes 10 of those coins and puts them in a reserve fund, and lends out 90 gold coins.

So far, you believe this is ok, because we are using gold instead of Federal Reserve Notes.

But the same problem exists for gold as for the FRN - you have lent out long (a loan) from a deposit that is short (demand deposit).

It does not matter whether it is gold or paper, this is the actual problem within your banking system.

2nd case:
I deposit 100 coins for a contracted fix period of time, say 5 years. I cannot access the coins for 5 years.
The bank takes 10 coins and puts them in a reserve and lends out 90 of them for 5 years.

Where is the problem? (Answer: there is none).
There are NOT two concurrent claims on the coins. The coins for 5 years are the borrowers, than after 5 years, they are mine again.

So do NOT get fixated on the paper vs gold vs fractional reserve banking. Fractional reserve banking has nothing to do with the medium of the currency - but the threat of lending long but borrowing short.

Gold vs paper is an issue in CREATING money at the FED reserve. FED hasn't yet discovered how to mutate gold out of lead - so there is a finite supply available for money creation. This physical limitation does not exist with digital money created by the FED.

But this is a wholly DIFFERENT issue than fractional reserve banking.

[Madison320]

Time to think clearly here.

Let's go to a 100% gold economy, with gold coins as our medium.

I deposit 100 gold coins in a demand account.
The bank takes 10 of those coins and puts them in a reserve fund, and lends out 90 gold coins.

So far, you believe this is ok, because we are using gold instead of Federal Reserve Notes.

But the same problem exists for gold as for the FRN - you have lent out long (a loan) from a deposit that is short (demand deposit).

It does not matter whether it is gold or paper, this is the actual problem within your banking system.

2nd case:
I deposit 100 coins for a contracted fix period of time, say 5 years. I cannot access the coins for 5 years.
The bank takes 10 coins and puts them in a reserve and lends out 90 of them for 5 years.

Where is the problem? (Answer: there is none).
There are NOT two concurrent claims on the coins. The coins for 5 years are the borrowers, than after 5 years, they are mine again.

So do NOT get fixated on the paper vs gold vs fractional reserve banking. Fractional reserve banking has nothing to do with the medium of the currency - but the threat of lending long but borrowing short.

Gold vs paper is an issue in CREATING money at the FED reserve. FED hasn't yet discovered how to mutate gold out of lead - so there is a finite supply available for money creation. This physical limitation does not exist with digital money created by the FED.

But this is a wholly DIFFERENT issue than fractional reserve banking.

OK, this is starting to make some sense to me. Let me see if you agree with this:

Back to my example. Bank A is just starting out, they have no assets no liabilities.

The following I would consider legal:

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred.

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred but gives Fred 80 ounces of notes that can be redeemed at any time.

The following I would consider illegal:

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred but gives Fred 80 ounces of notes that can be redeemed at any time. John withdraws his 100 ounces of gold. This would be a crime because Bank A only has 20 ounces of gold available to give to John. Bank A needs to keep 80 ounces of gold to cover the outstanding notes that Fred holds.

-John demand deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred. This would be a crime because Bank A needs to be able to cover John's demand deposit.

If you agree with the above then isn't this simply a matter of contracts between the bank and it's customers? It seems to me that demand deposits and notes require the bank by contract to hold that same amount in gold. With a time deposit the customer may have to wait to get his money by contractual agreement. It would also seem that a free market banking system would solve most of this.

[Black Flag]

OK, this is starting to make some sense to me. Let me see if you agree with this:

Back to my example. Bank A is just starting out, they have no assets no liabilities.

The following I would consider legal:

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred.

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred but gives Fred 80 ounces of notes that can be redeemed at any time.

The abstraction of providing a note instead of physical money does not change the transaction itself - check! We agree.

But just a note of attention, it does change the RISK - the abstraction will need to be reconciled one day - and you have to trust that on that day, the bank will make good their promise ... a situation that the first example does not suffer. ("Counter-party risk" is the concept)

The following I would consider illegal:

-John time deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred but gives Fred 80 ounces of notes that can be redeemed at any time. John withdraws his 100 ounces of gold. This would be a crime because Bank A only has 20 ounces of gold available to give to John. Bank A needs to keep 80 ounces of gold to cover the outstanding notes that Fred holds.

-John demand deposits 100 ounces of gold into Bank A. Bank A loans 80 ounces to Fred. This would be a crime because Bank A needs to be able to cover John's demand deposit.

Check!

Well, I wouldn't label things "legal" or "illegal" - the gobberment could (and has) made this "legal" -- I suppose the better term would be moral/immoral or right/wrong or lawful/criminal - regardless, we are on the same conceptual page.

If you agree with the above then isn't this simply a matter of contracts between the bank and it's customers? It seems to me that demand deposits and notes require the bank by contract to hold that same amount in gold. With a time deposit the customer may have to wait to get his money by contractual agreement. It would also seem that a free market banking system would solve most of this.

Check!

...with additions.

Those contracts exist today, called Term Deposits. So it isn't like this is something new we two guys just invented. And it is also true that there is no conceptual or moral problem with Term Deposits and the banking function of lending on those term deposits.

HOWEVER....

...because the lending system applies to demand deposits as equally as it does to term deposits, it is here that creates the banking system risk which directly impacts the ability of the banking system to also honor the term deposit contracts too.

A bank that goes bankrupt due to the loss of demand deposits takes out the owners of the term deposits too!

So, whether or not the free market banking exists, we - The People - must express ourselves very clearly about the immoral practice of lending long on short borrowing.

[Madison320]

Exactly.

The "borrow short/lend long" scenario is precisely the threat to any fractional reserve system - for there exists a circumstance where there can be two, independent, and rightful claims on the same deposited funds - the depositor asking for it back, while the actual funds sits in a borrowers wallet or different bank account.

Ah! Fractional reserve is only talking about demand deposits. That was the crucial piece of info I missed. I went back and read the original post and sure enough it did mention demand deposits. I totally agree. The bank should be able to redeem 100% of its demand deposits by law. Otherwise it's clearly fraud.

I still don't like the argument that fractional reserve banking should be illegal because it inflates currency. That's more of an after effect. The true crime is a contractual violation. The demand depositor has an agreement with the bank that the bank will hold all of his money. That's a simple violation of a contract. That's sort of like arguing that mugging should be illegal because it violates everyone's feeling of safety. It's illegal because you stole something at gunpoint.

[Steven Douglas]

Ah! Fractional reserve is only talking about demand deposits. That was the crucial piece of info I missed. I went back and read the original post and sure enough it did mention demand deposits. I totally agree. The bank should be able to redeem 100% of its demand deposits by law. Otherwise it's clearly fraud.

I still don't like the argument that fractional reserve banking should be illegal because it inflates currency. That's more of an after effect. The true crime is a contractual violation. The demand depositor has an agreement with the bank that the bank will hold all of his money. That's a simple violation of a contract. That's sort of like arguing that mugging should be illegal because it violates everyone's feeling of safety. It's illegal because you stole something at gunpoint.

The fraud is not confined to the banking system, but extends into the marketplace as well.

The marketplace is a poker table. You are playing with cash, not chips. You have your coins in front of you. Normally, you would be playing heads up with another player, who bought in for $100 and is playing with chips, but through the magic of fractional reserve lending, 30 other players are also at the table, each using chips that are tied to claims on the same $100. So it's your $100 against MYRIAD other players who are playing with various amounts which total in the aggregate $1,000. The house, on the other hand, has $100 in the kitty.

Now that's a fraud in and of itself, because if one of those players cashes out $100, the others are obviously left with nothing but a house with bankruptcy protection. But that's between the house and those players, right? You aren't harmed, because your money is in your possession. It's not like your money can be used to cash anyone else out.

But what if you won against all these players, and took everyone's chips at once? Hurrah, you're rich! But you wouldn't be able to cash out, any more than they all could, as it would be quickly revealed that there was only $100 between the lot of them. Lucky for them, however, and the house, that the ODDS WERE STACKED AGAINST YOU. You versus thirty other players means that you are going to win, on average, 1 out of 30 hands, not 1 out of 2.

How does that translate in the real world?

I have a factory that makes a Grand Expensive Wonderful Perishable Widget. Thirty customers place purchase orders, all honest, all in good faith, all having "available funds", and I enter into a binding contract with each of them. My Widgets are perishable, expensive to produce, and my profit margin is very small. I already have equipment, but I invest all my own funds (which I put on the table) into materials and labor. My funds are from savings, or privately accumulated capital, because I deal in cash and have nothing to do with banks or private lending institutions.

Now, what I don't know, and what none of my customers even know, is that all of these people bank with the same bank, and have borrowed via fractional reserve multiplier claims on the same existing wealth, which just happens to represent the sum total of all outstanding loans to that same bank. So the bank is now the house, and multiple players are playing with $1,000 in chips tied to multiple claims on the same $100.

Now the widgets are finished. I have complied with the performance terms of all my contracts, and the widgets are ready for COD delivery. Now I won't deliver until a check clears, but it doesn't matter at this point whether they all wrote me a check, only one of which would be good (to all their surprise), or I insisted on cash or a cashier's check (only one of which could be issued or honored). Those orders, and my demand for cash for all of them as payment, represented a run on that bank. By me if they all wrote me a check.

So now the bank is bankrupt, and perhaps one customer (the lucky first to get me cash and take physical delivery) gets one widget. Meanwhile, I am now completely wiped out, because my widgets are perishable, and nobody else wants to buy them. My customers didn't do anything wrong. They were all trustworthy, hard working long term customers, all known to me. All had acted in good faith, and thought the funds were available. In the end, I was a counter-party to the bank's fraud. There is no distancing of the bank from me, by trying to lay it on my customers as "bad investors". It was filthy, $#@!ty bank fraud that enveloped us all. They all truly thought they had "available funds", and I had no reason to disbelieve them.

Meanwhile, that fraud resulted in a distortion of my entire market. There is no way of knowing how many of my widgets would have been in demand, or ordered, or what price I would have needed to charge had there been one sound-money customer rather than thirty malinvesting bank fraud victims - making me the 31st, as the bank would be named as a counter-party in any subsequent lawsuit.

So no, it goes beyond a mere "feeling of safety". Otherwise, not even the bank customers who were wiped out would be entitled to protection on that same argument. There is a reason why certain crimes, like fraud, embezzlement, thefts of all kinds are considered in criminal (NOT CIVIL) court as "crimes against the public" - a reason why the government tries such cases as "The People vs. _____". Because they really do affect everyone, and are "affected by the public interest".

[juleswin]

I remember growing up in Nigeria, during christmas time kids would go around asking for presents from family friends and they would give us money as present. At the end of the season, my parents would take that money and put it into a specials savings account. The account works in this way, you are required to pick from certain times peroid before you can withraw your money. The longer time peroid you pick, the higher interest you get.

That is one way to do it. Then again even if we dont have a system thought out doesnt mean we should continue with the fraudulent fractional reserve system.