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Confusion about fractional reserve banking

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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.

My friend, I cannont dissagree with you under our current economic landscape. You are wise to point out that an entire nation swallowed the grifters trick of fractional reserve banking, and to add to your premise, those here in the US unaware, also swallowed an entire central banking system to go with it. Yet I feel the next few generations will not be so easily dupped, in the same way that the grifter snake-oil salesman is no longer having good success on the side of the street in a developed country in these modern times. or I shall continue to hope

I imagine that I dream of a proper local society in the near future, where people will pull back thier individual sovereignty away from the interventionist, and will truly be able to one day exchange with each other without punishment unto poverty. A time where no laws prohibit the banker's contractual scam, but a society too wise to support it. If they however do fractional reserve tactics without conscent of the depositor, then it should be treated like a mass robbery of theft, where a proper law would address their act of plunder.

I do think it will take time though.

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... ... You are wise to point out that an entire nation swallowed the grifters trick of fractional reserve banking, and to add to your premise, those here in the US unaware, also swallowed an entire central banking system to go with it. ... ...

If everyone becomes convinced that fractional reserve banks are a bad idea, then there will not be any such banks in a free economy. However, if people think it is a fine idea, they have the right and freedom to engage in it. No fraud is involved as long as the participants are clear about what they are agreeing to.

I think it is a pretty good bet that fractional reserve banking will be one of the many choices that would thrive in a free-economy. Before the Fed was created, the U.S. had a few banks that kept a 100% reserve, and a few others that kept extremely high reserves. It also had banks that kept very low reserves. As long as both remain legal, and customers have a choice about what bank they wish to use, I'm fine with that. As long as fractional-banking is not banned by law, I', fine with the political side of it.

As for the wisdom of fractional reserve banking: actually it is a great idea, though it needs some clarification in its contracts and its terms.

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... ... You are wise to point out that an entire nation swallowed the grifters trick of fractional reserve banking, and to add to your premise, those here in the US unaware, also swallowed an entire central banking system to go with it. ... ...

If everyone becomes convinced that fractional reserve banks are a bad idea, then there will not be any such banks in a free economy. However, if people think it is a fine idea, they have the right and freedom to engage in it. No fraud is involved as long as the participants are clear about what they are agreeing to.

I think it is a pretty good bet that fractional reserve banking will be one of the many choices that would thrive in a free-economy. Before the Fed was created, the U.S. had a few banks that kept a 100% reserve, and a few others that kept extremely high reserves. It also had banks that kept very low reserves. As long as both remain legal, and customers have a choice about what bank they wish to use, I'm fine with that. As long as fractional-banking is not banned by law, I', fine with the political side of it.

As for the wisdom of fractional reserve banking: actually it is a great idea, though it needs some clarification in its contracts and its terms.

I should say that it is indeed a magnificent idea for a scrupulous banker who will indeed prosper at the consistent expense of the depositor. Fractional Reserve Embezzlement (banking), is based on the concept that perverts the reality of what is property that belongs to the individual who deposits for safe-keeping.

Shall the deposit be called a bailment or a loan to the bank? If it is indeed property of the individual then it is a bailment that resides for safekeeping with the bank, but if the law intervenes with perversion, the individual’s money deposited shall be called a loan to the bank, where the bank then adds the deposit to their own asset balance sheets. A contractual maneuver fit for a polished grifter in a fine suit. It is an irrefutable fact , that a fractional reserve bank cannot honor all its contracts using real money, and must find a polished printing press, or a new set of unwary people to presto-magically make the new money appear to make their obligations sound.

In a free market, fractional reserve banking is but a volatile system that can only sustain itself if the precautionary reserves can be strategically manipulated with every bank who participates in concert to prop up the bank who falls to poor performance; while all of society is held firmly in its grasp to support the rescuing system of pushing and moving money to each underperforming bank. This of course is a reality, as the individual’s property deteriorates in the process.

It also will soon have the support of the interventionist who will stand up and sign a vicious bill in order to save society from an insolvent banking system, giving the free people a new contract of economic slavery, declaring by law what is money and that all of society must use it. A necessity of great importance you see, as society will lose all, and their savings must be saved, as critical rescue is warranted. Seats of power are discovered times a hundred, and this very old swindle is forever consistent in constructing a formidable foundation of economic interventionism.

Now to perhaps rationalize the steps further, It is then, just a matter of time that it becomes unsustainable yet again, and would even suppose that a few in the right places could secretly meet on a remote island and come up with the perfect rescue plan that would concoct the perfect reserve for all banks. A grand plan of rescue suited for bankers and politicians of all kinds. Then will this rescue provide a new shiny press to be larger than all printing presses before it, and produce so many new notes that a mere human would be unable to count the output. Can the notes then be stacked unto the moon many times and even then lure the banker in every nation to bring the scandal to every living soul on earth.

Can we at least read the history of Europe and the United states and not see plainly that bankers and politicians are predictable? Will not a lion bite down hard on its prey for an easy meal? Is not this example repeated in history more times that we can study it? Can a fiat currency ever be called real money? I say it’s impossible and can only promise to represent real money.

History delivers to us all good knowledge that banks manipulate the individual many more times than not, and fractional reserve banking gives them pure opportunity to not only injure property of the individual but also leverages the bank to swindle society unto an unsustainable economic position.

However again “if” you could get every depositor, to be in one accord contractually, in order to be recipients of loss, due to the systems perversion of property, and then they also give contractual consent to the bank to win at their expense, then the depositors with a sound-mind deserves the swindle. Also in this scenario I should reason that its proper, that the individual who does not consent to this banking system of plunder be allowed to use competing currencies that use “real money”, which would eventually put the inferior banking system out of business with an educated society. This of course with non-interventionism practiced in purity where no government will give the bank an advantage over the individual.

Just know dear friend that my enthusiasm to be free from economic interventionism and scandalous banking is in no way a directed insult to you, as you deliver good rebuttal, that causes me to ponder a response.

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In a properly-run fractional reserve bank, the amount in your bank account, the checks a customer writes on a bank and the notes issued by a bank are not money. They are credit. They are more than 100% backed by real assets (homes, cars, factories and money) and to some extent by the future earning-power of people who have borrowed from the bank. It is essential that the legal code recognize and clarify this position -- i.e. that bank-notes etc. are not receipts for bailed goods that are expected to be kept in custody. The legal code also needs to clarify terms and conditions around the contract -- not specify the terms, but clarify them.

If we have such a system in place, fractional banking is a useful system because it monetizes assets that cannot otherwise be monetized.

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Any expanding economy (including capitalist economies) needs a method of expanding money supply to front capital for creating new facilities to produce goods and services. This is done by means of credit. The new goods and services produce then "back" the front money that was supplied. As long as the money in circulation (be it metal, paper or i.o.u.s ) matches the goods and services produced over the medium and long run, then the media of exchange are sound.

ruveyn

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SoftwareGuru - quote - "In a properly-run fractional reserve bank, the amount in your bank account, the checks a customer writes on a bank and the notes issued by a bank are not money. They are credit."

Shall the barrower and the depositor own the same real money (property)? If a person’s money is not their property by law (a bailment), and is instead called a credit by the lawful interventionist for the bankers gain, is this not a violation of a person’s property rights according to Lockean Natural Law?

SoftwareGuru - quote - "They are more than 100% backed by real assets (homes, cars, factories and money) and to some extent by the future earning-power of people who have borrowed from the bank."

Can we agree that it’s not the Bankers assets that provide the backing but the individual’s bailment converted to their own asset column (credit), embezzled to manipulate scrupulously, and can we also agree that it’s done immorally?

SoftwareGuru - quote - "It is essential that the legal code recognize and clarify this position -- i.e. that bank-notes etc. are not receipts for bailed goods that are expected to be kept in custody. The legal code also needs to clarify terms and conditions around the contract -- not specify the terms, but clarify them."

Shall we all get a new economic interventionist to write us a new law stating as such? Shall we elect a hundred seats of power to define that the individual property is not their own?

SoftwareGuru - quote - "If we have such a system in place, fractional banking is a useful system because it monetizes assets that cannot otherwise be monetized."

Indeed a true statement but unto this monetization of things that are not their own property is a thousand ways to manipulate another person’s property and plunder society unto total collapse. If all bankers were pure unto virtuous perfection, then a great system it would be, but due to their historic record, I contend that their actions are predictable unto calamity. Should society trust their property unto a bankers advantage, allowing the law to favor some the greatest thieves of all time? Though some banks have integrity, how far shall we look to find an infestation of plunder, and to lawfully empower them an advantage is unwise?

If a dictator could be pure and virtuous then he too could run a better society but how many innocent millions are dead due to the inclination of those in power? Shall a code, or a law intervene to empower banks to make things better? I say in no way it should.

Then if by chance this scheme is to manifest in a local pocket of a true free society and the individual is willing to lose to the grifter’s touch contractually, then it is but their choice to be swindled. However unto a financially sober society, who is wise, the scheme will no longer be tangible unto liberty and will prevent the interventionist from making uncountable economic laws to empower a favored system.

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Any expanding economy (including capitalist economies) needs a method of expanding money supply to front capital for creating new facilities to produce goods and services. This is done by means of credit. The new goods and services produce then "back" the front money that was supplied. As long as the money in circulation (be it metal, paper or i.o.u.s ) matches the goods and services produced over the medium and long run, then the media of exchange are sound.

ruveyn

I contend that free-market-money, in a free-market-economy, that is backed upon a solid commodity, wil empower prosperity much quicker, and unsustainable insolvent systems based on fiat currencies that plunder will no longer be present with any kind of economic momentum.

I dont argue that Keynesian principle doest have certain resolves, just that it ends in plunder and collapse upon maturity. Also it does violate private property principles in the Lockean tradition.

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The trade value of gold, silver or other precious metals has little to do with their physical utility. Consider gold. Aside from jewlery, dentures, plating for electrical switches and a decorative shiny covering for domes and walls, what -use- does gold have. Its main use is as an exchange medium. It is accepted not because of any inherent value, but because it is durable, divisible, and relatively scarce. Use of gold for exchange is a convention and a protocol. It is handy since any commodity can be traded for gold and gold for any commodity. Hence the arithmetic complexity of strict bartering of useful goods and services is rendered simple. N commodities trading for M commodities would result in N*M types of transactions. Making gold (or some other metal) a universally accept trade medium reduces the combinatorial complexity to N + M types of transactions.

I point out the same simplification is produced with fiat currency as well, as long as its trade value remains reasonably stable.

The problem with fiat currency is that it is succeptable to fiddling by bankers and politicians. Whereas gold, being a natural element cannot be expanded in quantity except by mining or extracting more of it from the earth and sea. Score one for gold (or silver or other scarce metal), its quantity is controlled mostly by nature and partially by mining and extracting technology. Whereas fiat currency can be gamed, fiddled and printed with virtually no transaction cost. Even more so with fiat currency in the form of credit markers stored in a computer file.

For capital to be readily available to fuel new technologies and other innovations some kind of man-made "future money" has to be available. That is where credit comes in. Creating instruments of trade that are universally acceptable for people who will make the credit good by producing the goods that the credit capitalizes is how we can expand the economy safely. Later on the gold and the prices can be re-adjusted by the market to give metallic backing to the instruments of credit. To put a point on it, we need an expanding money supply to buy and sell an expanding inventory of goods and services. As long as the money supply does not outrun (in the steady state) the goods and services produces we have price stability and sound trade currency.

ruveyn1

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Shall the barrower and the depositor own the same real money (property)?

The banker and depositor do not own the same real property. The money deposited in the bank is a loan to the bank -- that is not some fraud or sleight-of-hand, but the standard accounting treatment. You should think of a fractional-reserve banks as being closer to a mutual fund. The key difference is that the owners of the fund with a multi-layered capital structure: the bank owners put in reserves that take the first risk, traditionally bank owner's personal capital was a second layer, then come buyers of bank bonds, and finally those who have lent the bank money by making deposits. This is the traditional structure -- a free-market may see a more varied structure evolve.

A fractional reserve bank means the amount owed to depositor is not backed by 100% gold etc. However, they may still be backed more than 100% by real assets. Depositors pool their gold, and a large chunk of it is lent out to people who want to buy (say) homes. Those people borrow, and the banks gets a mortgage on the house. In terms of real goods, the house now backs a part of the deposits. Legally, it should not be much different from a depositor making a loan to someone who wants to buy a house. Of course, it is not practical for a depositor to do this himself. Pooling money via a bank facilitates the process, and this allows a depositor to earn interest on his funds instead of simply keeping them as a sterile store of value. Through a chain, the house actually becomes a store of value for the depositor.

However, the depositor's relationship is as a creditor. The bank owes him money and the mortgagee owes money to the bank. As part of its normal functioning, the bank keeps a certain amount of funds on hand, to pay out depositors who want their money. If the bank claims to keep 100% on hand, and do not, this is fraud. If they claim to keep at least 20%, and do so, there is no fraud. However, the terms of their agreement with their depositors ought to foresee a condition where the withdrawals exceed this reserve, and ought to specify how such a situation will be handled.

This does not preclude 100%-reserve banks. There will also be a need for pure bailment, particularly for large-value accounts.

A good book on early English banking is Walter Bagehot's "Lombard Street" (http://www.gutenberg.org/ebooks/4359)

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Preponomics – quote – “Shall the barrower and the depositor own the same real money (property)?”

SoftwareGuru – quote – “The banker and depositor do not own the same real property. The money deposited in the bank is a loan to the bank -- that is not some fraud or sleight-of-hand, but the standard accounting treatment.

Sir, I must stand firmly in disagreement and declare that Fractional Reserve Banking most certainly causes the depositor and barrower to both share ownership of the same deposited money, where the bank does indeed claim the deposited money as belonging to their own asset sheets in the form of a loan, and then upon perversion invest it without permission. It violates what constitutes individual property, and is one of the modern lawful plunders of the ages.

I agree it is a standard for many nations in this modern era, in their ingenious plot to remove that which is property, and money from the individual’s hand. An excellent standard for wolves, who consistently embark on a lawful hunt with an exposed prey in the open. How diabolical it is for a lawful despot to have an advantage, and for the economic interventionist to say to the individual, “You shall not call your property your own, but it is mine to invest, to loan, and to manipulate unto my control without your permission.”

I contend that fractional reserve banking violates the foundational principles of what is individual property in the Lockean tradition, and will swindle that property into routed economic advantageous gain for some at first, and the economic interventionist control over the economy second. A strangle hold will mature over society by a few and mass robbery manifest.

I contend that my argument is not about advantages or disadvantages of banking strategy; it’s about private property ownership and that fractional reserve banking indeed perverts “what is individual property”.

SoftwareGuru – quote – “You should think of a fractional-reserve banks as being closer to a mutual fund. The key difference is that the owners of the fund with a multi-layered capital structure: the bank owners put in reserves that take the first risk, traditionally bank owner's personal capital was a second layer, then come buyers of bank bonds, and finally those who have lent the bank money by making deposits. This is the traditional structure -- a free-market may see a more varied structure evolve.
A fractional reserve bank means the amount owed to depositor is not backed by 100% gold etc. However, they may still be backed more than 100% by real assets. Depositors pool their gold, and a large chunk of it is lent out to people who want to buy (say) homes. Those people borrow, and the banks gets a mortgage on the house. In terms of real goods, the house now backs a part of the deposits. Legally, it should not be much different from a depositor making a loan to someone who wants to buy a house. Of course, it is not practical for a depositor to do this himself. Pooling money via a bank facilitates the process, and this allows a depositor to earn interest on his funds instead of simply keeping them as a sterile store of value. Through a chain, the house actually becomes a store of value for the depositor.”

I concede that the strategy of fractional reserve banking can be advantageous capitalistically, or that it can be backed by assets (immorally obtained), however I still stand firm that its immoral theft from the individual to do it. A perversion of what is property.

It would be foolish of me to say that the lion is not efficient when it severs the jugular of its prey, when the weaker animal is held still by the lion’s powerful claws, but I will quickly warn the prey that the lion approaches, as I have been warned in the same way by the prudent Austrian economist.

Is it not plain to see in history the demise and calamity that strikes the soul of individual liberty, which manifest from the strategies of printed paper? I find your argument steeped in the precision of banking possibilities, a strong premise for possible good outcomes, but I wish to appeal to your prudence regarding consistent inclinations of despotic power, that moves across a nation swiftly with such a strategy.

Can fractional reserve banking work? I will concede to you now, you win sir regarding its capability as a formidable strategy unto increase, but with a disclaimer it should be known, that the balance of power in society is tipped to a few, as the individual has no claim over their own property in its fullness upon this immoral printing. A very familiar historic reoccurrence will be evident, where the individual will once again be plundered by those who wield economic law to their favor.

SoftwareGuru – quote – “However, the depositor's relationship is as a creditor. The bank owes him money and the mortgagee owes money to the bank. As part of its normal functioning, the bank keeps a certain amount of funds on hand, to pay out depositors who want their money. If the bank claims to keep 100% on hand, and do not, this is fraud. If they claim to keep at least 20%, and do so, there is no fraud. However, the terms of their agreement with their depositors ought to foresee a condition where the withdrawals exceed this reserve, and ought to specify how such a situation will be handled.
This does not preclude 100%-reserve banks. There will also be a need for pure bailment, particularly for large-value accounts.”

Also will I concede that Fractional Reserve Banking can bring the individual benefit, but must we also understand with vigilance that it’s a value which is delivered from upon high from an economic interventionist looking down, when a law or standards are enforced. Like a dictator will promise the poor a promising rescue and sublime fairness unto destruction, will banks also offer value to society with a deadly cost. But upon this expansion of credit, that is not their own, will prosperity move the needle of power from the individual to bankers, and the economic interventionist.

I believe in true separation of Economics and State, and with this premise there is no place for an economic interventionist to set any rules for how such a system is to work. Therefore in my proposed economy will the Fractional Reserve Banker simply make a deal with a willing soul to give the bank control of their property contractually one at a time, and all who trade the notes printed will be swindled their property value. However the competing medium of exchange, which would probably be metals, would simply outlast the unsustainable swindles of printed money.

SoftwareGuru – quote – “A good book on early English banking is Walter Bagehot's "Lombard Street"

I find Bagehots contribution a testament to the persuasions of State sovereignty and one of the founding fathers of bail-out banking. He provides a foundation for the Keynesian principles to rest firmly in place to transfer a society’s wealth unto mass plunder. I suggest the economics of Rand, Rothbard, Hazlit, or Mises, who all will regard economics to support the individual first, and foremost using the principles of sound money.


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ruveyn - quotes - "The trade value of gold, silver or other precious metals has little to do with their physical utility. Consider gold. Aside from jewlery, dentures, plating for electrical switches and a decorative shiny covering for domes and walls, what -use- does gold have. Its main use is as an exchange medium. It is accepted not because of any inherent value, but because it is durable, divisible, and relatively scarce. Use of gold for exchange is a convention and a protocol. It is handy since any commodity can be traded for gold and gold for any commodity. Hence the arithmetic complexity of strict bartering of useful goods and services is rendered simple. N commodities trading for M commodities would result in N*M types of transactions. Making gold (or some other metal) a universally accept trade medium reduces the combinatorial complexity to N + M types of transactions."

I agree that you allocate gold as a low-monetized metal, which cannot be compared to silver or copper which is highly monetized in a myriad of industries. However would you agree that a medium of exchange is simply that, “a medium of exchange”. If the shoemaker sells shoes, and the coat maker sells coats, then if gold or anything else is exchanged it works no different than a fiat currency as a median for the simple exchange?

Your point to be taken with wisdom, it’s but a protocol that people believe in. Can we also agree that gold has a six thousand year legacy of being trusted, even to this day in every nation on earth?

I also do agree it is “rendered simple” as well.

ruveyn - quotes - "The problem with fiat currency is that it is succeptable to fiddling by bankers and politicians. Whereas gold, being a natural element cannot be expanded in quantity except by mining or extracting more of it from the earth and sea. Score one for gold (or silver or other scarce metal), its quantity is controlled mostly by nature and partially by mining and extracting technology. Whereas fiat currency can be gamed, fiddled and printed with virtually no transaction cost. Even more so with fiat currency in the form of credit markers stored in a computer file

Not that you asked for my approval, but I find this statement profoundly wise. I too agree that fiat currencies are highly addictive to be “fiddled with”.

ruveyn - quotes - "For capital to be readily available to fuel new technologies and other innovations some kind of man-made "future money" has to be available. That is where credit comes in. Creating instruments of trade that are universally acceptable for people who will make the credit good by producing the goods that the credit capitalizes is how we can expand the economy safely.

Later on the gold and the prices can be re-adjusted by the market to give metallic backing to the instruments of credit. To put a point on it, we need an expanding money supply to buy and sell an expanding inventory of goods and services. As long as the money supply does not outrun (in the steady state) the goods and services produces we have price stability and sound trade currency.

I do think in a true Separation of Economics and State economy, that individuals will contractually do what they wish with each other, and to become creative with credit and contracts would happen on every side. However each individual would be inclined in such a market to become very contractual in protecting themselves with inventive financial strategy. I agree that gold backed instuments would expand naturally.

I even think that in a Separation of Economics and State economy that fiat strategies would also try to start in many different ways as well but would go out of business unable to compete with other strategies like you suggest where there is one hundred percent backing.

Now I will predict wildly and dream upon what might be!
I also would suggest that society has been addicted to the current styled “banking model” we have now, that has inundated our societies now for hundreds of years. I believe it possible with true Laissez Faire that individuals would naturally become the primary competitors of banks. Individuals will have no restraints on lending to anyone, anytime they wish, and will come together with lending strategies that would rival banks. Imagine ten people shaking hands in concert to finance something in society, where they are not punished to loan and prosper, even if its not their primary business?

I would also hope the future medium of exchange will be connected to gold but upon incremental creativity by weight. Instead of calling something a “dollar” or a “quarter”, it would be named by weight. I find the wisdom of Jean-Baptiste Say profound in this regard.

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Preponomics – quote – “Shall the barrower and the depositor own the same real money (property)?”

SoftwareGuru – quote – “The banker and depositor do not own the same real property. The money deposited in the bank is a loan to the bank -- that is not some fraud or sleight-of-hand, but the standard accounting treatment.

Sir, I must stand firmly in disagreement and declare that Fractional Reserve Banking most certainly causes the depositor and barrower to both share ownership of the same deposited money, where the bank does indeed claim the deposited money as belonging to their own asset sheets in the form of a loan, and then upon perversion invest it without permission. It violates what constitutes individual property, and is one of the modern lawful plunders of the ages.

I agree it is a standard for many nations in this modern era, in their ingenious plot to remove that which is property, and money from the individual’s hand. An excellent standard for wolves, who consistently embark on a lawful hunt with an exposed prey in the open. How diabolical it is for a lawful despot to have an advantage, and for the economic interventionist to say to the individual, “You shall not call your property your own, but it is mine to invest, to loan, and to manipulate unto my control without your permission.”

I contend that fractional reserve banking violates the foundational principles of what is individual property in the Lockean tradition, and will swindle that property into routed economic advantageous gain for some at first, and the economic interventionist control over the economy second. A strangle hold will mature over society by a few and mass robbery manifest.

I contend that my argument is not about advantages or disadvantages of banking strategy; it’s about private property ownership and that fractional reserve banking indeed perverts “what is individual property”.

I see a lot of negative characterizations of fractional reserve banking, but no reasons why it is wrong or evil. If it is simply a loan to the bank that both parties freely contract for, how does that cause a situation "where the bank does indeed claim the deposited money as belonging to their own asset sheets in the form of a loan, and then upon perversion invest it without permission. It violates what constitutes individual property, and is one of the modern lawful plunders of the ages?"

What are you saying here? That it is not a loan -- even though both the borrower and lender agree that it is a loan -- or that all loans are perverse and violate property rights?

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Betsy Speicher – quote – “I see a lot of negative characterizations of fractional reserve banking, but no reasons why it is wrong or evil.
If it is simply a loan to the bank that both parties freely contract for, how does that cause a situation

Preponomics quote - "where the bank does indeed claim the deposited money as belonging to their own asset sheets in the form of a loan, and then upon perversion invest it without permission. It violates what constitutes individual property, and is one of the modern lawful plunders of the ages?"

Betsy Speicher – quote – “What are you saying here? That it is not a loan -- even though both the borrower and lender agree that it is a loan -- or that all loans are perverse and violate property rights?

Let me first say, that I want to commend SoftwareGuru for being astute, perspicacious and completely acute in the defense of Fractional Reserve Banking, as he does indeed provide for a formidable defense regarding strategy.

However it is correct that I must gather with all motivation a foundation of persuasion in regard to the negative impacts of Fractional Reserve Banking, especially when a lawful interventionist will force a monopoly on “what is money”. There are two different outcomes in this discussion from my perspective, one unto immorality and the other unto poor decision. One being under an interventionist lawful system that forces the immoral theft, and second if it is indeed the practice of two free individuals, who both agree to it contractually in a separation-of-economics-and-state economy, becomes a very poor choice for the individual. However with or without consent it perverts individual private property.

I have taken the time to break down a proposed fictional set of events to illustrate both scenarios.


SCENARIO - LAWFUL INTERVENTION ISM

John-Banker says to Sally-Gold Owner, “I will gladly store your thousand dollars of gold in my bank and will charge you a small fee to safely store “your property (a bailment)”. I will also issue you notes that reflect your gold amount exactly, that businesses here in town locally, will gladly accept because they trust that my bank indeed keeps the gold secure, if they choose to redeem the issued notes here. Sally-Gold Owner agrees, and is excited to handle the manageable notes instead of the heavy bullion.

However, then a law is passed that says, that the safekeeping of bailment’s (gold property) in banks are now in fact able to be “loans” to the bank and not Sally-Gold Owners property.
The law then says further that John-Banker if he chooses may lend out to someone else more new issued notes that can lay claim to the same gold that is owned by Sally Gold Owner. This of course issues two sets of notes claiming the same gold.

Now John-Banker gains a new customer named Fred-Barrower, who wants a new loan, and he loans the new printed notes to Fred-Barrower, who can now officially lay claim to Sally-Gold Owner’s gold as well. (thus the fraction occurs, as now there are more notes in play than there is gold). If Fred-Barrower and Sally-Gold Owner run to the bank at the same time with their issued notes then there will not be enough gold for them both, which means that the bank is insolvent.

Therefore the banker will need the support of an economic interventionist with the law to declare that either they can’t claim the gold, make gold illegal, or that the new printed money instead of gold must satisfy both parties. Thus banking and government are tied at the hip in history.

Then indeed another law is passed that says, all of the new issued notes, which are in larger supply, than the gold reserves, is now deemed the “ new official money” and the old real money, which was gold, is no longer allowed to be money. People now must use the new official money which is printed paper back with little gold or no gold at all. Gold can be sold for notes if owned outside the bank, but it can’t be used as money lawfully, and old official gold money will either be illegalized, confiscated, or its value will force it out of circulation (Gresham’s Law).

Then due to insolvency issues with many banks, another law is passed, that a central bank is needed for keeping these new notes “stable”, by manipulating interest rates, and increasing the money supply at will, so that insolvency won’t occur with the poor performing, and now propped up banks.

Sally-New Paper Owner (use to be gold owner) protests, and says to John-Banker, “This is not how I want my real money or property, as I wish to keep my gold property (a bailment).” Then John-Banker says, “I am sorry but all people who store bailments are now contributors by law to loan me money that I can print extra notes off of, for new loans that will benefit only me. I shall use your loan (what was your property) for my benefit in interest, and it is no longer your choice to disallow me to make money off your property. I also now am the gatekeeper of money, you shall not exchange without my notes, and all money creation comes through me. A monopoly that is sublime for me the banker.

Sally-New Paper Owner weeps that her property has been manipulated from her, and that John-Banker can print against her taken property lawfully without her permission. Also that she is no longer able to trade real money in a free market economy, and that John-Banker controls her financial life in various ways.

Sally-New Paper owner then goes into town to also discover that eggs are ten times higher because the money supply has been increased unto perverted levels. She then also discovers that her 401K, and financial investments are all being devalued against her permission, with the ever increasing money supply.

Then Sally New-Paper Owner writes a book on the perversions of Fractional Reserve Banking at the hands of despots.

--------------------------------------

Though lawful intervention is unique in each financial controlled society this strategy of Fractional Reserve Banking ends up consistently destroying liberty. Many nations have fallen and the individual has suffered immeasurable harm due to printed paper and calling it money lawfully.

In my next update will I give historical accounts of these perversions if desired?

SEPARATION OF ECONOMICS AND STATE SCENARIO – (true free market economy)

John-Banker says to Sally-Gold Owner, “I will gladly store your thousand dollars of gold in my bank and will charge you a small fee to safely store “your property (a bailment)”. I will also issue you notes that reflect your gold amount exactly, that businesses here in town locally, will gladly accept because they trust that my bank indeed keeps the gold secure, if they choose to redeem the issued notes here. Sally-Gold Owner agrees, and is excited to handle the manageable notes instead of the heavy bullion.

Then John-Banker says to Sally-Gold Owner, “May I call your deposit a “loan”? Sally says why do you want a loan? John says, I have a client named Fred-Barrower, who wants a loan and I would like to loan him the money. Sally says, “How much will I be appreciated in the interest of this loan? John says, “Nothing, however I have an ingenious plan. The notes that I have issued to you, will still be yours to spend; however I will print a second set of notes the same as yours and loan those to Fred instead of the gold. Sally replies, “That doesn’t sound right, will not Fred and I both spend these notes in town and upon them all coming back here to your bank, will there not be a deficit in gold? John says, “I do this so much that I think we can get away with it.”

--------------------------------------

Upon this strategy in a true Laissez Faire economy, the businesses in town will soon lose faith in the bank who prints too many notes and will reject them as soon as its common knowledge that it’s a scam.

Thus Fractional Reserve Banking will fail in a true Free Market Economy but in an interventionist market like we have today; banking strategy can work efficiently for “bankers” for long periods of time as it transfers wealth slowly, will devalue the individual’s investments, decrease purchase power, and will also prevent society from having a sound competing currency lawfully.

Here is my reason, its forced theft in a lawful interventionist economy, and is a poor decision for an individual in a true free market economy where sound money is practiced.

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In a way fractional reserved is akin to selling stock for 200 percent of a firms assets.

This, by the way, is the comedy premise of the movie -The Producers-. They gulled old ladies into buying 200 percent of a broadway show which they planned to be a flop. No one would try to redeem their share from a failed show. The show was "Springtime for Hitler".

ruveyn

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It just occurred to me that government managed fractional reserves cannot function without a legal tender law. This law requires anyone buying or selling to denominate their contracts in terms of government issued greenbacks be they ever so worthless.

ruveyn

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Now John-Banker gains a new customer named Fred-Barrower, who wants a new loan, and he loans the new printed notes to Fred-Barrower, who can now officially lay claim to Sally-Gold Owner’s gold as well. (thus the fraction occurs, as now there are more notes in play than there is gold). If Fred-Barrower and Sally-Gold Owner run to the bank at the same time with their issued notes then there will not be enough gold for them both, which means that the bank is insolvent.

No, it doesn't. The bank can obtain the money needed to pay the depositors from other assets besides the gold on deposit in the same way that any business gets money to pay its debts when due.

This includes selling assets it owns (like buildings, furniture, or mortgage loans on the books), dipping into the owner's personal assets, using funds loaned to the business by bondholders, taking out short-term loans on future receivables, etc.

In this way, a bank is no different than a business that makes shoes or someone paying their household bills. If he has the money (or gold) to pay his creditors, he does. If he doesn't, he sells stuff that he owns or takes out a loan from someone willing to lend him money. If he has no assets and can't get a loan because he doesn't repay them, then he is insolvent and will default and that's a bad thing, but that's not a situation unique to banking or to fractional reserve banking.

Thus to claim that fractional reserve banking is immoral because the bank can default is no different than saying that borrowing money or buying with a credit card is immoral because the borrower may not repay what he owes when it is due.

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Economist Richard Salsman, staunch advocate of the gold standard, author of "Gold and Liberty," crusader for the total separation of state and economics, frequent speaker at Objectivist conferences, contributor to many Objectivist publications, and columnist for Forbes (link) regards fractional reserve banking as a normal and proper result of true laissez faire capitalism. In a post on THE FORUM he explained how fractional reserve banking evolved historically under the gold standard (link).

In the history of free banking systems and gold-convertible currency, reserve ratios were roughly 30%. Today, under fiat-paper money schemes reserves for most banks are usually less than 5%. I disagree with your premise that keeping 100% reserves was not (or could not be) practical, for it is simply "warehouse banking" and it persists today in the safe-deposit-box departments of banks. Under such warehousing arrangements the bank doesn't know (or care) what's in your box and it doesn't lend its contents; as a result, the bank earns no interest income and thus can't pay you interest on your "deposit." As a result, under warehousing you must pay the bank a monthly fee for storage, insurance and security expenses. Fractional reserve banking largely displaced warehousing because banks, facing borrowing requests, realized they could offer depositors the prospect of no longer paying warehouse expenses; instead, the bank would pay interest on deposits; and to do so, the bank had to receive interest income from borrowers of gold. Hence a system of fractional reserves - a mutually beneficial arrangement (and not "inherently fraudulent," despite what some Austrian critics claim). Currency and checking deposits were then partly backed by gold and partly by loan assets. The banks still promised convertibility into gold on demand. Based on the law of large numbers (the fact that not all depositors would simultaneously demand all of their gold at once) they issued currency and checking deposits in a safe and secure manner, profiting by the "interest-rate spread" (say, interest of 5% received on loans, minus interest of 3% paid on deposits).

The key to fostering trust and reputation under this system was not so much the size of the fraction of gold reserves held but the repeated and unquestioned ability and willingness of a bank to redeem its currency and deposits in gold whenever demanded by its depositors - and to hold sound loans. But a bank with high reserves and higher-quality loans which nevertheless occasionally suspended convertibility was a badly-run (and fraudulent) bank, while a low-fraction bank with lower-quality loans which nonetheless always met its obligations (by maintaining gold convertibility) was a well-run, well-trusted and profitable bank.

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What happens when the bank issue more "warehouse chits" than there are real assets in the warehouse and not only that so many that the bank can't raise the additional assets if everyone shows up at once. Sounds like a classical bank run to me.

ruveyn

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Preponomics – quote – “Now John-Banker gains a new customer named Fred-Barrower, who wants a new loan, and he loans the new printed notes to Fred-Barrower, who can now officially lay claim to Sally-Gold Owner’s gold as well. (thus the fraction occurs, as now there are more notes in play than there is gold). If Fred-Barrower and Sally-Gold Owner run to the bank at the same time with their issued notes then there will not be enough gold for them both, which means that the bank is insolvent.”

Betsy Speicher – quote – “No, it doesn't. The bank can obtain the money needed to pay the depositors from other assets besides the gold on deposit in the same way that any business gets money to pay its debts when due.
This includes selling assets it owns (like buildings, furniture, or mortgage loans on the books), dipping into the owner's personal assets, using funds loaned to the business by bondholders, taking out short-term loans on future receivables, etc.

A formidable point, which causes me pause, yet will I argue: the context of my quotes and the virtue of the position you communicated.

Let’s first examine the context of my two scenarios, one unto intervention and the other absent of intervention. You quote my scenario where I assign that the interventionist rules the day, authorizing what banks can do to the individual against their will, and not what they should do in a free market. I contend that all bankers are not bad but many fall to temptation and if the law allows for temptation then they often will, as history has indicated.

Can we separate what is moral in this context based on lawful force vs. voluntary contractual action? Can we acknowledge that the interventionist will favor bankers over the individual for purpose of his own gains? The individual will surely be plundered beyond recognition against their will, providing that the banker is lawfully empowered to do so. An act of force, one that declares the banker empowered, to force the depositor to make their property to become a loan, instead of the individual agreeing for them to use it.

History is full of economic circumstance where the bank could choose to do what is honorable by using their own assets, but I contend with an economic interventionist at the helm, and bankers blurring the lines of property, a plunder of mass operation will be forced unto the destruction of individual liberty every time.

To your point of what banks “can do” in a non-interventionist economy.

In a true Laissez Faire, (Separation of Economics and State Economy), I agree with you that a bank could leverage their own assets, instead of seizing Sally-Gold Owner’s bailment, or using her loan, but unto the blur of promises it will go. Not a clear honest policy of virtue, but unto unclear, and scrupulous strategy where money is created from “possible” paid debt.

What of this debt in a free market? Is it a guarantee? Is it intrinsic, can a bank guarantee redemption of all deposits, or is it indeed a risk for the depositor. Not only to the depositor but to all who deal with the fiduciary media created. Is this not where the scheme becomes dishonest, as a bank will only tell the common customer this very critical information in the SMALL PRINT, and to conduct business upon arduous convolution, as all of society now exchanges with notes that “may be good”. Not intrinsic property ireserved, but promises of bank performance.

A perversion of clarity, as there is no guarantee that enough things intrinsic are going back to the depositor, as paid debt is not always certain. It’s just a matter of time before insolvency plagues the system upon poor decision. Upon the insolvency what is the solution? I declare there is only two choices, bank failure mixed with individual money lost, or a savior of economic intervention arrives on a tall white horse, pulling a shiny printing press with an endless supply of ink. Upon printing will there be inflation and upon intervention will there be slavery. Inflation is indirect force, and economic slavery is direct force.

As a true non-interventionist, I would agree that the grifter should be left alone to persuade the bystander on the sidewalk to put their twenty dollars on the table, where he makes it disappear with trickery, yet can we call grifting a vehicle of honesty and the money invested naive? If not honest then is it virtuous? Is it not a blur between fraud and trickery unto an individual’s risk, especially if the unwary customer can barely grasp the outcome? If we argue the grifter is legitimate by lifting a sign in advance that says, “You will lose your money to me upon my trickery” then can we also deem Fraction Reserve Banking an honest business in a non-interventionist economy if they clarify everyone’s risk/ loss up front.

Yet ultimately your point taken – A bank can operate upon a fraction in a free market economy if they contractually guarantee honestly that the deposit is one hundred percent backed with some kind of asset. I just argue it is scrupulous and deceptive, and empowers a few over the many. Is it not a ploy for a bankers gain, left unclear, that the customer is risking their money, and economy hidden within a common service of depositing money?

Betsy Speicher – quote – “In this way, a bank is no different than a business that makes shoes or someone paying their household bills. If he has the money (or gold) to pay his creditors, he does. If he doesn't, he sells stuff that he owns or takes out a loan from someone willing to lend him money. If he has no assets and can't get a loan because he doesn't repay them, then he is insolvent and will default and that's a bad thing, but that's not a situation unique to banking or to fractional reserve banking.

I agree completely

However if there is a bank that contractually operates with bailment’s and simply charges me a fee to operate as a warehouse for my gold (bailment/ property), and then upon their “own” physical reserves in gold, they loan out issued notes one hundred percent backed in their own gold, then that will be the bank I seek to do business with. As my property will contractually remain my property and not become a promise that upon good performance will pay me back.

Betsy Speicher – quote – “Thus to claim that fractional reserve banking is immoral because the bank can default is no different than saying that borrowing money or buying with a credit card is immoral because the borrower may not repay what he owes when it is due.

Again keep in mind that my assignment to what is “immoral” is when the economic interventionist forces a “lawful rule” that Sally-Gold Owner’s property (bailment) must (or can) become a loan upon John-Bankers choice, (against Sally-Gold Owner’s will), also where the money is a monopoly, preventing sound money from competing with the new bank notes deemed as the official money.

Fractional Reserve Banking under law affects a risk to an entire society without permission and upon decisions in the dark; they transfer wealth and punish society unto poverty while doing it. A monopoly of force, that causes every individual to surrender their property at the end of a gun.

In a true free market economy where we have no interventionism, then it’s not immoral (unless local society deems it fraudulent), but instead to my claim, a poor decision for the individual to engage in Fractional Reserve Banking. However to add, if the charge of counterfeiting money or fraud were to manifest in court, can we also agree that the depositor is now a party to the fraud?

May I ask a question? Do you feel that a fractional reserve bank would have a hard time, competing with other banks that do not use any fractional reserves, but are one hundred percent backed in gold reserves? Keep in mind that because this is a “non-interventionist free market economy” other banks could become insolvent with their fractional reserve temptations to print fiat notes. So also imagine that fractional reserve banks would start to incur a reputation for insolvency to some degree.

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Betsy Speicher – quote – “Economist Richard Salsman, staunch advocate of the gold standard, author of "Gold and Liberty," crusader for the total separation of state and economics, frequent speaker at Objectivist conferences, contributor to many Objectivist publications, and columnist for Forbes .
regards fractional reserve banking as a normal and proper result of true laissez faire capitalism. In a post on THE FORUM he explained how fractional reserve banking evolved historically under the gold standard.

I think he teaches a lot of good things but have a few objections to some of his principles.

Forgive me for being so blatantly honest.

My humility is present, I promise, but I find that my answers can be too forward sometimes.I find it highly enjoyable talking with people who know economics

I contend that Salsman is in contradiction to the pure principles of individual property rights

I contend that Salsman is in contradiction to Rand’s formidable stance for honesty as he advocates a fractionalist.view

I contend that inflation is an indirect use of force as Fractional Reserve Banking eventually causes inflation.

I contend that he supports a quasi gold standard as fractionalist principles are not based on a pure gold standard.

How do you feel about George Reisman? or are there other economist that are not fractionalist that you hold in high regard?

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Betsy Speicher – quote – “Economist Richard Salsman, staunch advocate of the gold standard, author of "Gold and Liberty," crusader for the total separation of state and economics, frequent speaker at Objectivist conferences, contributor to many Objectivist publications, and columnist for Forbes .

regards fractional reserve banking as a normal and proper result of true laissez faire capitalism. In a post on THE FORUM he explained how fractional reserve banking evolved historically under the gold standard.

I think he teaches a lot of good things but have a few objections to some of his principles.

Forgive me for being so blatantly honest.

My humility is present, I promise, but I find that my answers can be too forward sometimes.I find it highly enjoyable talking with people who know economics

I contend that Salsman is in contradiction to the pure principles of individual property rights

I contend that Salsman is in contradiction to Rand’s formidable stance for honesty as he advocates a fractionalist.view

I contend that inflation is an indirect use of force as Fractional Reserve Banking eventually causes inflation.

I contend that he supports a quasi gold standard as fractionalist principles are not based on a pure gold standard.

I understand you disagree with Salsman but WHY?

Why do Salsman's views contradict the principle of property rights?

Why is Salsman, in advocating fractional reserve banking for the reasons he does, dishonest?

Why would fractional reserve banking under a gold standard and without fiat money cause inflation?

Why aren't the historical examples Salsman cites of fractional reserve banking under a gold standard valid?

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How do you feel about George Reisman? or are there other economist that are not fractionalist that you hold in high regard?

I've known Reisman and his views for many years and I agree with almost all of them. I know Reisman was a friend, associate, and supporter of Murray Rothbard long after Ayn Rand and most Objectivists rejected Rothbard's anarchism and outspoken hostility to Ayn Rand.

Nowadays, Reisman still opposes fractional reserve banking as Rothbard did, but most Objectivists, like Salsman, disagree with him on that and so do some Austrian economists like F.A. Hayek. Personally, I've heard Reisman's arguments against fractional reserve banking on many occasions and I find them unconvincing.

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What happens when the bank issue more "warehouse chits" than there are real assets in the warehouse and not only that so many that the bank can't raise the additional assets if everyone shows up at once. Sounds like a classical bank run to me.

There is a distinction between fractional reserves and fractional existence, and between promising to convert deposits into gold "on demand" versus retrieving collateral for loans, which takes time and is limited by terms in the contracts of the loans. A bank can't loan someone money and then decide before the loan is due to seize the collateral and sell it for gold when it needs to return someone his deposit in accordance with his "demand".

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Let me say with prudence that my claims are indeed aimed at Salsman's views and not his person.

Betsy Speicher – quote – “Why do Salsman's views contradict the principle of property rights?

As mentioned above in the previous threads, supporting that a bank can lawfully take a person’s property (bailment) and without consent transform it into a loan lawfully without permission is a violation on individual property rights.(this of course is true in a our existing economy). This is theft because the individual shall not use any other competing currency or competing banking structure. It is a use of lawful force and securing individual submission unto legal plunder.

However, if a true separation of economics and state environment existed then it would not be immoral direct theft, but a poor decision for the individual contractually, as this measure of deceit uses indirect force instead of lawful direct force against property.

Betsy Speicher – quote – “Why is Salsman, in advocating fractional reserve banking for the reasons he does, dishonest?
Why would fractional reserve banking under a gold standard and without fiat money cause inflation?

Upon mutual agreement of the individual and the bank, in a non-interventionist economy, it is merely a deceitful attempt to route individual property with a scrupulous tactic. It is an “unclear” contractual handshake to take people’s property, and use it as their own. It is a tactic that blurs the lines of property and an appropriated loan that is then loaned again to others with no current tangible intrinsic money to back it. Thus it is all about promises with debt.

I am for any business to make money with no limits, but not using deceit. The common citizen does not grasp the difference in a bailment and a loan, and many times does not understand that they risk their property to a scrupulous tactic. I do feel that as society becomes more educated that people will defy it more, and more.

Therefore even in a non-interventionist economy, will there be eventually a subtraction of property, and inflation, the moment any bank under performs, unless it is bailed out by selling its own assets, or getting into even more debt. This of course is not what banks in this situation have done historically. They will instead often print more fiduciary notes and steal the individual’s investment property unto unlimited printing, and cause societies money to be devalued. Non-intrinsic investments will be devalued without the individuals permission and goods to be purchased of intrinsic value will skyrocket with price inflation due to the increase of the money supply. This is indirect force using deception. It is to me a fine line somewhere between trickery, and fraud, and is absolutely in direct contradiction of honest principles.

Betsy Speicher – quote – “Why aren't the historical examples Salsman cites of fractional reserve banking under a gold standard valid?

They ended up bankrupt or successful in transferring societies money to a few using deceit.

Please can you site me historic examples where Fractional Reserve Banking, without interventionism of any kind involved, did not provide economic advantage for the bank or set of banks? Where it was not a scheme, for causing the wealth to leave the many going to the few strategically? Or do you believe that capitalistic strategy that deceives the many is ok from a perspective of honesty?

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