Confusion about fractional reserve banking

[bborg 0]

I’m very confused by the idea that fractional reserve banking leads to inflation of the money supply, which I’ve heard from multiple sources. So I’m going to describe what I understand of the system, and please let me know where or if I’ve gone wrong.

Fractional reserve banking means that a bank holds only a portion of its deposits, and lends out the remaining with the expectation of earning back interest. It could certainly issue credit in amounts above that held in the bank, but not in excess of its total assets (what is held in reserve plus the amount lent and the expected interest earned). So, if we were talking about banking on the gold standard, a bank could issue notes for more gold than it has, but not more than it expects collect.

From what I’ve read, the “inflation” refers to the fact that the original depositor was given a note of credit for their gold, and now the person receiving the loan has also received one. So they both received a note to claim the same gold. But that’s what creates the debt! The amount of notes in excess of the amount of gold represents the money that it is owed by customers. I think what’s missing here is the bank didn’t pretend to create money, it created a debt of that amount of gold, which the debtor is responsible for repaying. Say he borrowed the money to start a business. Well, he spends the money he got, but then he earns it back from his customers and pays it to the bank – plus interest. So in the end all of those notes are accounted for. And just as what happened during the time of silver and gold certificates issued by the Treasury, if someone redeems a note by taking gold out of the bank, that note is destroyed.

The only ways I know of that fractional reserve can lead to inflation is through 1) bank accounting fraud or 2) fiat money, since the notes would never be redeemed for anything and re-circulated instead.

And I thought fractional reserve banking was what made bank loans even possible. If a bank has to keep 100% of its deposits in reserve, then where is it getting the money to loan out?

The main reason I wanted to start this topic is an Objectivist I know was arguing against the fractional reserve system, but he didn’t seem to understand anything I was saying and resorted to intimidation. If I’m wrong about this I’d like to know, but I can’t deal with people like that.

[Arnold 0]

I'm no expert either, but there are different types of deposits in a bank. For example, money in your cheque account must be available on demand, and one cannot have more than one demand on it. However, some term deposits are made with the understanding that they are lent for a term, and the bank is free to lend that money out. Once again though, to loan the same deposit to more than one party strikes me as inflationary; the money is not there to lend, yet it is being spent. The fact that it will be paid back is besides the point as far as I can see.

[Bob G 0]

bborg, I have seen the modern economist argue that private banks increase the money supply because of fractional banking, but they alwasy start with a new dollar in their example. New dollars are something that happens rarely or slowly in a precious metal money system but often and in large quantites when the government controls the money. Inflation is caused by governments. The critics of fractional banking are concerned about bank failures and thus people losing their deposits. Certainly, when banks are poorly managed or when the governemnt is playing games, the risk is high. Capilalist defenders of fracional banking do insist that every depositor in a bank practicing fractional banking needs to know what the bank is doing. When done above board, in a precious metal money context, by real bankers, fractional banking works (sorry, off the top of my head I don't have the references for you). If fractional banking wasn't practiced, the bank would become more of a warehouse than what we think of as a bank. Lending would have to come from funds that was put into the bank by the owners (capital), or from money lent to the bank, i.e., savind deposits or bonds.

One of my popular blog posts is a detailed description of how the U.S. Federal Reserve System works, See http://krazyeconomy.blogspot.com/2009/09/federal-reserve-board-and-money-supply.html

[Paul's Here 0]

http://mises.org/daily/4880

Now let us turn to fractional-reserve banking. It means that a bank lends out money that clients have deposited with it. Fractional-reserve banking thus leads to a situation in which two individuals are made owners of the same thing.

Fractional-reserve banking thus creates a legal impossibility: through bank lending, the borrower and the depositor become owners of the same money. Fractional-reserve banking leads to contractual obligations that cannot be fulfilled from the outset.

--------

Austrian economists, and Ludwig von Mises in particular, have shown that fractional-reserve banking under commodity money necessarily causes economic problems on a grand scale. This is because banks then engage in circulation-credit expansion — that is, they issue money through lending that is not backed by real savings.

Circulation bank credit is inflationary, and it causes economic disequilibria and overindebtedness of the private sector — in particular on the part of governments. It is also the very cause of the "boom-and-bust" cycle.

[Paul's Here 0]

Bank lending

Recall that gold warehouses are storage facilities. An individual depositing money at a warehouse does not relinquish his or her ownership of it, and more importantly, does not relinquish his or her claim on real wealth. The money is still theirs to spend, it is just being safeguarded. This arrangement is a checking account. Alternately, the depositor may instruct the warehouse to lend out their money through a savings account. Here, a depositor relinquishes his or her ownership of the money to the lending institution and thus the would-be borrower. Restated, the depositor relinquishes his or her claim on real wealth in favor of the borrower. In this manner, real wealth is saved, and lent out. The transaction is still a trade of real wealth where money is merely the intermediary.

[Bob G 0]

Paul, I have heard those legal arguments before and not been impressed. I would like to hear what a legal authority had to say and none of the people who I have seen make that argument have that training or experience. In addition, the argument does not take into consideration the actual agreement between the depositor and the bank. To me, the very fact that a deposit was made in a bank that practiced fractional banking would discredit any attempt to use that argument in the first place.

Please be careful in this issue, everyone. Fractional reserve banking and government fiat currency are two different things. A government can inflate the money supply without fractional reserve banking. It is just easier with fractional reserve banking in place. In a precious metal money context, there is a limit to how much the money supply can expand and thus you cannot have year-in-year-out inflation. The issue that causes difficulties in the context of a precious metal currency and fractional reserve banking is the safety of the banks. If a bank is poorly managed it can go bust. If it is just a warehouse, that can't happen.

[Paul's Here 0]

Paul, I have heard those legal arguments before and not been impressed. I would like to hear what a legal authority had to say and none of the people who I have seen make that argument have that training or experience. In addition, the argument does not take into consideration the actual agreement between the depositor and the bank. To me, the very fact that a deposit was made in a bank that practiced fractional banking would discredit any attempt to use that argument in the first place.

Please be careful in this issue, everyone. Fractional reserve banking and government fiat currency are two different things. A government can inflate the money supply without fractional reserve banking. It is just easier with fractional reserve banking in place. In a precious metal money context, there is a limit to how much the money supply can expand and thus you cannot have year-in-year-out inflation. The issue that causes difficulties in the context of a precious metal currency and fractional reserve banking is the safety of the banks. If a bank is poorly managed it can go bust. If it is just a warehouse, that can't happen.

Bob, participation in a bank that used fractional reserve banking would mean that the loaned money could no longer be claimed, on demand, by the depositor. Meaning that the money is no longer his in the present but the promise of interest is his. How many banks acknowledge to their depositors that they will no longer be able to withdraw their money on demand? As far as I know, bank policies state that one's money is available on demand with some slight delay, such as when a check is cashed: for example, see Putnam Bank policy. Please demonstrate a (private) bank policy that says you may not withdraw your own money or close an account whenever you decide to close it. In other words, is there a bank that acknowledges what it is doing and what fractional reserve banking means to the depositor? Certainly, anyone is free to loan his money to his neighbor, but then one does not go to the neighbor and demand one's money back with the expectation that the neighbor has to immediately sell his house and become homeless. If fractional reserve banking is just a matter of agreement between bank and depositor, then why are there laws required allowing banks to do it? In the history of fractional banking, banks have deceived their depositors about its meaning, so the government had to come in to legalize it.

[Preponomics 0]

I contend that fractional reserve banking defies property rights more egregiously than it harms macroeconomic equilibrium. It encroaches upon what is individual property. Base money is property, and inside money printed upon it, is a promise guaranteed with someone else’s property. Even if society were to all sign a contract allowing for their property to be manipulated, the convolution involved in finding equilibrium with precautionary reserves is too difficult for individual contracts to support. Thus you must have a banking "system", the Fed, FDIC etc... to print-them, barrow-them out of trouble, which increases the money supply. Upside down economics.

I would even argue that in a free market fractional reserve banking system, that a central bank is inevitable due to the arduous task of keeping an overall equilibrium with the precautionary reserves.

[Betsy Speicher 0]

Welcome to THE FORUM, Preponomics.

I contend that fractional reserve banking defies property rights more egregiously than it harms macroeconomic equilibrium. It encroaches upon what is individual property. Base money is property, and inside money printed upon it, is a promise guaranteed with someone else’s property. Even if society were to all sign a contract allowing for their property to be manipulated, the convolution involved in finding equilibrium with precautionary reserves is too difficult for individual contracts to support. Thus you must have a banking "system", the Fed, FDIC etc... to print-them, barrow-them out of trouble, which increases the money supply. Upside down economics.

I would even argue that in a free market fractional reserve banking system, that a central bank is inevitable due to the arduous task of keeping an overall equilibrium with the precautionary reserves.

I'm having a hard time following what you wrote because I'm not sure what you are referring to. Could you define what you mean by "macro-economic equilibrium," "base money," "inside money," and "precautionary reserves?" Some examples would help.

[Preponomics 0]

Welcome to THE FORUM, Preponomics.

I contend that fractional reserve banking defies property rights more egregiously than it harms macroeconomic equilibrium. It encroaches upon what is individual property. Base money is property, and inside money printed upon it, is a promise guaranteed with someone else’s property. Even if society were to all sign a contract allowing for their property to be manipulated, the convolution involved in finding equilibrium with precautionary reserves is too difficult for individual contracts to support. Thus you must have a banking "system", the Fed, FDIC etc... to print-them, barrow-them out of trouble, which increases the money supply. Upside down economics.

I would even argue that in a free market fractional reserve banking system, that a central bank is inevitable due to the arduous task of keeping an overall equilibrium with the precautionary reserves.

I'm having a hard time following what you wrote because I'm not sure what you are referring to. Could you define what you mean by "macro-economic equilibrium," "base money," "inside money," and "precautionary reserves?" Some examples would help.

Thank you for the warm welcome

Macroeconomics meaning (economics overall - "large - whole"), can exist with an equilibrium, thus in extremes you would have a boom or a bust cycle. Booms and busts are natural, but easily will self correct in a free market economy, if left alone. However managed economies (Keynesian) will cause devastation with propped up booms, and detrimental collapse.

When an economy is managed (or attempted to be managed in reality) using a fractional reserve system, the base money is what is actually deposited as real money in the bank. Today however, as you may well know, we have a Keynesian economy running with fiat currency. Wilson, FDR, and Nixon all played a role in eliminating "real money" (gold).

In the earlier days of our country (US), real money (base money) was bi-metalism (silver/gold) coins that were deposited. Then they would print notes "inside money" that reflect the base money, There should be an exact amount of notes to reflect the amount of gold. If the bank then is lawfully allowed, or if they decided to scrupulously print more notes than they had gold, then upon being caught with too little base money, a run on the bank can occur like we see in the movie, "It’s a Wonderful Life".

[Betsy Speicher 0]

What you wrote helps a little, but I'm still not sure what you mean. What I'm looking for are genus and differentia definitions and concrete, specific examples.

Macroeconomics meaning (economics overall - "large - whole"),

"Whole" what? All human activity or only that pertaining to the production and trade of material goods? Only that exchanged for money but not including barter? Taken as an aggregate ignoring individual actions?

can exist with an equilibrium,

Of what? What is being balanced?

thus in extremes you would have a boom or a bust cycle.

OK, I think I know what that is.

Booms and busts are natural,but easily will self correct in a free market economy, if left alone. However managed economies (Keynesian) will cause devastation with propped up booms, and detrimental collapse.

Are you saying that booms and busts are good, bad, or neutral ? Only when they get beyond certain limits? What defines those limits?

When an economy is managed (or attempted to be managed in reality) using a fractional reserve system, the base money is what is actually deposited as real money in the bank.

Are you saying that fractional reserve banking is ONLY caused by Keynesian economics and would not exist in a completely free economy that was not managed or regulated by the government? If "base money" is "real money," how would you define "real money" in terms of genus and differentia.

Today however, as you may well know, we have a Keynesian economy running with fiat currency. Wilson, FDR, and Nixon all played a role in eliminating "real money" (gold).

So are you saying that "real money" is gold and that "base money," if it is actually fiat money, ISN'T "real money."

In the earlier days of our country (US), real money (base money) was bi-metalism (silver/gold) coins that were deposited. Then they would print notes "inside money" that reflect the base money,

So then is "base money" any value deposited in a bank including gold or silver, notes promising delivery of gold or silver on demand, or fiat currency? Is "inside money" ANY printed note promissory or not? How does inside money "reflect" the base money?

There should be an exact amount of notes to reflect the amount of gold. If the bank then is lawfully allowed, or if they decided to scrupulously print more notes than they had gold, then upon being caught with too little base money, a run on the bank can occur like we see in the movie, "It’s a Wonderful Life".

So? In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

[ewv 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

[PhilO 0]

This is the problem with having proxies for the real thing. Notice that the problem evaporates if you only used real money, e.g., gold and silver coins. Then a lender could never lend beyond their actual resources. What if a lender desired to have more to lend? Then it needs more assets to lend. This *might* come from a still bigger lender, who might lend some sizable amount to the smaller lender from a more sizable asset base.

An organization might issue pieces of paper that state a claim from that organization for a certain amount of real money, and people might accept it in lieu of the real thing (as occurred with private banks in the 19th century), but they run a real risk that the promise will be broken if the organization can't actually convert the paper to the real thing.

On a real money (i.e. precious metal) based system, real expansion of the money supply simply comes from mining operations, or conversion of unstructured metal into a structured form (i.e. melting down and refining scrap jewelry into a standardized mass and form.)

[Preponomics 0]

What you wrote helps a little, but I'm still not sure what you mean. What I'm looking for are genus and differentia definitions and concrete, specific examples.

Preponomics quoted – “Macroeconomics meaning (economics overall - "large - whole")”

Betsy said - "Whole" what? All human activity or only that pertaining to the production and trade of material goods?

Typically a countries economy overall within its borders where a lawful standard is applied regarding the money (which is unfortunate, as I believe in separation of economics and state). Microeconomics is the opposite, which is typically referenced as the economics surrounding a specific company, person, or even a contained business market.

However, today our world has been interwoven unto Keynesian manipulation internationally, where bail-outs and quantitative easing have become a standard of mass distortion, which lead to unsustainable ends.

Betsy said - Only that exchanged for money but not including barter?

What is money? Money is essentially anything worth value that is exchanged, for the purpose of trade. Textiles, trinkets, gold, silver, precious stones, commodities, or anything that a society will see in common as something valuable to trade. Upon standards of what is a lawful base money, then will it serve the purpose of what is lawfully exchangeable. Thus to answer this line, the whole economy as it trades overall.

Betsy said - Taken as an aggregate ignoring individual actions?

You make a wise point regarding the individual. If indeed the money is lawfully managed, then shall those who control the money, also control a nation, who uses it. Therefore individual action, or natural praxeological action are truncated, and distortions in the market occur with a perverted economy.

Preponomics said – “can exist with an equilibrium,”

Betsy said - Of what? What is being balanced?

The economy.

For example the Federal Reserve has been blessed with lawful control over interest rates and increasing our money supply. The Keynesian model attempts to cause "equilibrium" in the economy where recession, stagflation and depressions are attempted to be avoided. They claim that they can "manage" a business cycle, and the overall health of an economy. However in the Austrian tradition (Mises), they cause all three consistently. The Great Depression was a Keynesian fabrication with many of the lawful interventionist policies that are used now.

Preponomics said – “thus in extremes you would have a boom or a bust cycle.”

Betsy said - OK, I think I know what that is.

Preponomics said – “Booms and busts are natural,but easily will self correct in a free market economy, if left alone. However managed economies (Keynesian) will cause devastation with propped up booms, and detrimental collapse”

Betsy said - Are you saying that booms and busts are good, bad, or neutral ? Only when they get beyond certain limits? What defines those limits?

A boom is when sublime prosperity, jobs, and business will increase to optimum levels and saturate society with a strong influx of wealth. Shall we all say that this would be a euphoric constant; we would all like to stay in. However a boom is unfortunately not a main-stay in any economy, as natural market forces are at play. For example: a new technology may dispose of old technology and alter the demand, which also affects existing established business. Upon these transformations in the market place, a transition of labor, prices, and supply can change, where the economy will fluctuate.

Upon a bust, can we all sit back and comfortably blame the Keynesian and the economic interventionist, or at least that is my contention. A bust is where people find recessionary decline, unto monetary crises, where so many are then blamed unto fairness. I feel myself that distorted supply leads to a perverted demand and disallows for a free market economy to function. Shall I again assign blame to the economic interventionist, who disallows individual action to flow effortlessly in a free market economy?

Preponomics said – “When an economy is managed (or attempted to be managed in reality) using a fractional reserve system, the base money is what is actually deposited as real money in the bank”

Betsy said - Are you saying that fractional reserve banking is ONLY caused by Keynesian economics and would not exist in a completely free economy that was not managed or regulated by the government?

On the contrary Keynesians will wield it to their benefit, but free market fractional reserve banking is a strategy that even some Austrian economists have toyed with. However the Austrian tradition denounces it formally with most sources. Also let my view be skewed, and not to be trusted by the Keynesian, who loves transfer, as I am sold upon the principles of sound money, Laissez Fiare, and private property.

I contend in my individual arrogance as a critic, that it is a manipulation of private property, where precautionary reserves are too difficult to manage between banks, and will end up with an eloquent deluge of theft, or it will simply create a new central bank instead. Can we all agree that it would be just one more time in history, where those who economically intervene upon society will transfer individual wealth?

Betsy said - If "base money" is "real money," how would you define "real money" in terms of genus and differentia.

What a dream, and a pleasure it would be to hear gold jingle in my pocket, and upon pulling it out to purchase goods, to not see the economic interventionist nearby to clip a piece of it off.

Gold would do well to serve as real money.

Preponomics said – “Today however, as you may well know, we have a Keynesian economy running with fiat currency. Wilson, FDR, and Nixon all played a role in eliminating "real money" (gold).”

Betsy said - So are you saying that "real money" is gold and that "base money," if it is actually fiat money, ISN'T "real money."

With precision you bring attention to the fact, that fiat money is indeed not real money. Let us look at the vapor above a hot pan of water, and realize its similarity to the printed promises that inundate our society.

Preponomics said – “In the earlier days of our country (US), real money (base money) was bi-metalism (silver/gold) coins that were deposited. Then they would print notes "inside money" that reflect the base money,”

Betsy said - So then is "base money" any value deposited in a bank including gold or silver, notes promising delivery of gold or silver on demand, or fiat currency? Is "inside money" ANY printed note promissory or not? How does inside money "reflect" the base money?

In a sound money economy and providing that gold was a standard, the gold would be the reserves (base money), inside money would be issued notes on top of it and reflect it exactly. In a fiat currency economy, reserves could be more paper. Fractional reserves means that the reserves does not have to exist upon its entirety, thus a fraction of it only has to exist.

Preponomics said – “There should be an exact amount of notes to reflect the amount of gold. If the bank then is lawfully allowed, or if they decided to scrupulously print more notes than they had gold, then upon being caught with too little base money, a run on the bank can occur like we see in the movie, "It’s a Wonderful Life"

Betsy said - So? In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

Your point wise and presents a challenge, but may I put the example in a different light?

Let’s say that the book you purchased belonged to someone else. It is not amazon’s book they sell, but another individual’s who contracts with amazon upon your purchase, and will collect upon a sale to you. The owner of the book contractually agreed to allow Amazon to sell you the book providing Amazon send them the wholesale cost, which covers their cost of the book. You get the book, Amazon gets a percentage for selling it, and the original owner gets a wholesale price for the book. Two contracts with two individuals, one company, and all is well.

However amazon (hypothetically) transfigures into a scrupulous company, who now sells the wholesalers book to ten people but with only having one book in stock. Amazon in this hypothetical scenario already knows that there will be no more books, and chooses to over-sell them anyway getting the money of ten people contractually up front, and with no way to deliver. So Amazon says, to the nine, we “promise” you the book in time, if it comes available.

I contend that gold deposited in a sound money economy is “property” of the individual.

[Betsy Speicher 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

Indeed it is -- today. I was trying make the point that in a laissez faire system there would be demand deposits backed by a contractual agreement to deliver at a later date when asked and that the party making the promise might be unable to deliver for a number of different reasons resulting in a run on the bank.

[Betsy Speicher 0]

Preponomics has raised several interesting points, but the posts have gotten so long that I will break up my responses into many separate posts -- tomorrow. It's late and I have a busy day tomorrow, but I will post as time allows.

[ruveyn ben yosef 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

You don't say? Then how am I able to buy groceries, gasoline and order books from Amazon Dot Com?

ruveyn

[Preponomics 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

You don't say? Then how am I able to buy groceries, gasoline and order books from Amazon Dot Com?

ruveyn

Shall it be differentiated that money, and promises of money are two different things.You are able to buy groceries, and order books because "promises" are tradeable, when people put their faith in those promises for trade. Yet the promises are like the shadow your body casts from fhe sun, and then when the stormclouds of a broken monitary system mature, the promises will dissapear. Can it be possible that someones faith in such a promise, can only be tangible, and tradeable until everyone loses faith that the delivery is real?

[ruveyn ben yosef 0]

Shall it be differentiated that money, and promises of money are two different things.You are able to buy groceries, and order books because "promises" are tradeable, when people put their faith in those promises for trade. Yet the promises are like the shadow your body casts from fhe sun, and then when the stormclouds of a broken monitary system mature, the promises will dissapear. Can it be possible that someones faith in such a promise, can only be tangible, and tradeable until everyone loses faith that the delivery is real?

Listen. If you want to send me some of those "worthless promises" I will be glad to take them off of your hands.

ruveyn

[softwareGuru 0]

Preponomics, The essence of your point seems to be this: the government should step in and prevent people from contracting with each other on terms they consider desirable (whether they are trading for promises, shells, of homeopathic medicines), because the government knows better than these private people.

[Preponomics 0]

Preponomics, The essence of your point seems to be this: the government should step in and prevent people from contracting with each other on terms they consider desirable (whether they are trading for promises, shells, of homeopathic medicines), because the government knows better than these private people.

On the contrary friend, may I call myself a pure-blood economic non-interventionist in every category, save local society via propositional vote to regulate themselves. Though I do believe in government, if it were up to me, they would have no affairs with banks and be restricted unto stillness.

I agree with you that two individuals may contractually do anything they want that does not harm anyone else, or plunder anyone else. However in the world of fractional reserve banking that is exactly what it does.

Lets say that a local bank in a small society, where gold is the standard for money, opens their door for business. However there is no FDIC, no Fed and no central bank. For a month a lot of people come in and deposit their gold and receive printed notes from the bank. The total deposit was 20K, and everyone loves the bank and everyone in the local society are trading the issued notes successfully from business to business.

Now so far because no loans have been made, there is exactly the same amount of gold in the bank as there are issued notes with the people (20K). Then a person walks in, and asks to barrow money from the bank to buy a car for 10K and the banker agrees. We need to now ascertain where does the banker get the money to lend? Can we agree that its not the people’s money/property that he lends out, but the "banks reserves" or it is supposed to be with sound money that is property. The bank will lend its own money out and make interest off of it.

Your argument is, if understand you correctly, is that the bank can contractually say, "I only have 5k of gold in my vault (bank reserves), but I will print you 10k of issued notes for your car loan", Then the person barrowing the money can also shake on it and say "I agree". Two people simply making a contract, and if the bank, and the individual agree to this then all is well.

However can you see the purity of what this fractional reserve loan does to all the other people, who have issued notes? Their notes are now worth "less" thus their property is worth less. The banker has "taken" part of their property buy giving it to someone else up front and then getting it back for the bank in the form of interest. So for the bank to do this "scrupulously" is theft.

The magic of it is that the fractional reserve bankers does not steal one persons money, but instead steals societies money consisting of individuals.

Now lets get creative. The same bank, same scenario, but this time the bank advertises on a big massive sign - I am a fractional reserve bank. Then as the depositors come in to receive notes the banker says,"in order for you deposit your gold here, you must sign a contract that says your notes may decrease in value as I loan out money." In this case I could agree with you, but do you think any frugal minded individual would do it if they understood the scheme?

Now another scenario - Lets say the banker loans out a depositors money with the depositors blessing? Then would not the depositor have to bring in their notes, in order for the bank to give it to the person barrowing? If the banker princts notes on top of the same property twice, the even more theft.

Sound money doesn’t increase with a press

[ewv 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

You don't say? Then how am I able to buy groceries, gasoline and order books from Amazon Dot Com?

Usually with a credit card number.

[ewv 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

Indeed it is -- today. I was trying make the point that in a laissez faire system there would be demand deposits backed by a contractual agreement to deliver at a later date when asked and that the party making the promise might be unable to deliver for a number of different reasons resulting in a run on the bank.

Delivering something at a later date that exists is not "our" fractional reserve system. There is always a risk in investment. Routinely printing money with nothing to back it and loaning that which doesn't exist isn't economic risk; it's fraud perpetrated by government.

But analyzing details of the fractional reserve system doesn't get us much. The whole system is such a byzantine, manipulated house of cards filled with so much corruption that it all falls into the category of "don't bother to examine a folly, ask only what it accomplishes".

Money representing value has been replaced by a psychology of believing money is worth something because other people keep taking it, pulling cause out from under effect. Government exploits that to manipulate the whole economic system, counting on people not noticing the inflationary devaluing over time, which inflation government uses to send false economic signals and to pay off part of its debt sucked out of the economy in devalued currency, perpetuating the fraud, controls and theft. The details aren't economics, but the manipulations of a shell game.

[ruveyn ben yosef 0]

... In a free market system, people make contracts all the time for goods they may not have yet at the time they make the contract. They only promise to deliver the goods later in exchange for a value or the promise of a value. Most such contracts are fulfilled, but not always. If I pay Amazon money for a book and that's out of stock and can't deliver -- something that happens from time to time -- how is that different from money not being in a bank when I want to withdraw it?

The money isn't out of stock. It doesn't exist. It's not a question of delayed delivery, but hoping people don't claim what they are promised. Printing a new copy of a book is production; inflationary printing of money is fraud.

You don't say? Then how am I able to buy groceries, gasoline and order books from Amazon Dot Com?

Usually with a credit card number.

A pay for my groceries with "fraudulent promises" colored green. I try not to use my credit card anymore than I must.

ruveyn

[softwareGuru 0]

Now lets get creative. The same bank, same scenario, but this time the bank advertises on a big massive sign - I am a fractional reserve bank. Then as the depositors come in to receive notes the banker says,"in order for you deposit your gold here, you must sign a contract that says your notes may decrease in value as I loan out money." In this case I could agree with you, but do you think any frugal minded individual would do it if they understood the scheme?

Now another scenario - Lets say the banker loans out a depositors money with the depositors blessing? Then would not the depositor have to bring in their notes, in order for the bank to give it to the person barrowing? If the banker princts notes on top of the same property twice, the even more theft.

So, you're against a fractional reserve system where the system is unclear to the parties? You seem to say that no frugal minded person would deposit their money in a bank that they knew was running as a fractional reserve bank. Maybe you meant something else, because history shows that most people were happy to deposit their money in fractional reserve banks, with full knowledge of how the system worked.