I believe that a bank which has declared honestly that they will be keeping x% of reserves available for the customers, and honestly follow it, are simply emulating a full reserve bank who splits your money into Savings and Current accounts by x%.

That is, a bank which promises to keep 25% Reserve, and promises to pay 25% at least at any given point of demand is emulating a full reserve bank which puts 25% of your money in a savings account, and 75% in a current account.

So if you deposit $100,000 in the above Fractional Reserve bank, then that’s equivalent of depositing $25,000 of your money in a savings account, and $75,000 in a current account of a Full reserve bank.

This means that I can choose what reserve ratio I want(if the Free Banking supporters believe in non-fraudulent fractional reserve banking) by manually depositing x% of my money in a savings account and (100-x)% in a current account.

Whenever I hear the expressions “needs of trade” or “need of business” I am sure there is something fishy about the argument containing them.:)

Here author says:

“Full reserve banking would involve no curtailment of credit. Businesses would still have full access to funding based on either equity or time deposits. Adherence to 100 percent reserves fulfills legal obligations, thus diminishing the ambiguity of modern banking. In no way does this also entail a denial of financing for businesses in need.”

Based on this, it seems that maturity mismatching (by using time deposits to create loans) is considered a good thing that allows financing of the businesses that need money. However, in the paper, authors say about maturity mismatching the following:

“Moreover, loan maturity mismatching can be the cause of an Austrian Business Cycle when coupled with fractional reserve banking and its inherent credit creation. As such, the present crisis which is characterized by a huge amount of maturity mismatching is at least partially caused by this exact process, and the entrepreneurial errors it has bred.”

Now, I am puzzled a little bit, because it is not clear whether maturity mismatching is a useful banking procedure that allows businesses to borrow and survive (to satisfy their legitimate “needs”) as claimed in the blog post; or it is a source of the Austrian Business Cycle, i.e inter-temporal misallocation of resources leading to the financial crises, as claimed in the paper. It cannot be both in the same time.

Two points:

First, the banking system as currently constituted is inherently bankrupt since the time structure of assets does not match the time structure of liabilities. This applies both to fractional reserve demand deposits, and to time deposits where banks typically borrow short but lend long.

Secondly, why should the “needs of business” be treated any differently than the “needs of consumers?” Consumers would love to have more purchasing power available to them to pursue their ends. Why not provide this purchasing power to consumers in addition to business? However, any purchasing power, including that provided for business needs, that results from legally protected financial machinations and not from prior production is theft and economically destabilizing.

those interested should first listen to barnett/block on the same issue, viz. duration mismatch.

http://mises.org/media/3052

Lending would exist through time deposits and companies could seek equity financing. What’s the point exactly? 100% reserves are still a regulation on voluntary and mutually beneficial transactions. Does the world still operate in the face of intense regulation? Of course, but inefficiently.

what then is the argument ‘against’ the current fed/frb/credit expansion paradigm???

“Of course, but inefficiently.”

“when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s….”
http://blog.mises.org/archives/010741.asp

is the above inefficient?

Maturity Mismatching would still occur in 100% Reserve Banks between “Time Deposits” maturity and the assets that are being leveraged, but this would be an honest business decision.

Also, 100% Reserve Banks would have to have reserves against their “time deposits”. This means that a 100% Reserve Bank would be in fact a “>100% Reserve Bank” to cover the risk of “time deposits” simply expiring (no rollover).

from what i have read at this site and lrc….the demand deposit in a 100 % scheme would seem to indicate that whatever amount is deposited would have to be on a bank property when demanded….i have heard that various deposit agreements may indicate a less than on-demand response time. to the extent that they are ambiguous is i guess the banks doing and the depositors accepting.

“if” im still not certain of this…the govt and people at this board have lied to me before, banks truly never have enough paper/token-coin cash to satisfy the demands of all customers then it seems they offer a false product that works for a lot of people.

also from what i read though it doesnt seem like there is much difference economically in the paper-dollar and the fiduciary-dollar (spawned from fractional banking…if such actually occurs)….iow, both are at this point regulated by govt decree and paper and digits probobly dont have much of a cost differential and wouldnt require the crazy task of scrounging a bunch of gold/silver to ease spooked depositors.

i have read at the mises and lrc sites that monetary inflation is an ill…and referred to as a disease even.

i am still trying to find out if that is the case….
“when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car’than they did during the early 1970s.”
http://blog.mises.org/archives/010741.asp

i assume the mentioned price decreases (if true), when adjusted, occurred in the diseased and ill frb/federal reserve/inflationary system that now exists.

A “Time deposit” is a credit contract and as such a “promise of payment” which carry the risk of default. But a Demand Deposit must be a … civil deposit or change it´s name.

A “100% Reserve Bank” would still have to decide (and could announce to the public) what amount of reserves or general policy would apply to the risk of “time deposits” being mature without renewal which would mean that it would add to “demand deposit” at maturity and so by contract the bank will have to comply with a “100% Reserve” immediately.

But this, contrary to the “free banking” with supposed fungibles notes with “100% reserve banks” (my point it that it is not in legal terms and economically a promise of payment must be labeled as such and that would mean to carry a discount) thesis would be natural and honest business decision.

But this, contrary to the “free banking” with supposed fungibles notes with “100% reserve banks” (my point it that it is not in legal terms and economically a promise of payment must be labeled as such and that would mean to carry a discount) thesis would be natural and honest business decision.

I agree entirely.

I have been on a dozen or so threads here at Mises.org, in which Mike Sproul churns out his usual nonsense about the Real Bills Doctrine, and I counter with the proposal that, to avoid fraud, banknotes MUST disclose, on their face, the extent to which they are redeemable on demand by reserves, and thus disclose the extent to which they are essentially a time deposit note (i.e., a loan).

A 10%-reserve gold note would trade at a discount in the market against a 50%-reserve silver note, and both of those would trade at a discount compared to a 100%-reserve gold note.

The bank would be required to disclose its reserves at any or all times, to ensure that at no time did the total face value of all of its outstanding notes drop below the reserve percentage stated on the face of those notes.

The same bank could issue multiple notes in multiple reserve fractions — 10% silver notes, 50% gold notes, 100% platinum notes, etc. Each reserve would be held and accounted for separately.

A bank could even issue 10% bond notes, for example, backed up by nothing more than more more paper and promises to pay in still more paper.

My guess is that fractional bond-reserve notes would trade at the deepest discount of all, compared to notes issued against reserves (either fractional or full) that denominated in commodity money.

The bank would always be bound by the promise to eventually pay the full face value of the note in coin (or whatever), within, say, 30 days, but only the stated percentage would be guaranteed to be immediately available on demand, paid out of reserves.

In fact, various banknotes could also vary the time for the delay in full redemption — there might be a 50% reserve silver note with 30 days for redemption in full, and another note that is a 50% reserve silver note with 10 days for full redemption, and another for 60 days, and another for 180 days, etc.

The market would then decide what all the various forms of notes were worth in trade, and how much risk people could tolerate (which would vary from time to time and from person to person), and thus how much of a time delay for redemption that the market would tolerate.

But full disclosure on the face of the note is the only way to prevent the banker-fraud that has been perpetrated on the rest of the non-banker world for centuries.

@scott t

When prices are adjusted for inflation during period X is not a definitive statement about anything. We may be paying less because of inflation, that is, reductions in real incomes which are causing re-allocations towards other activities (College for your kids, for example). Furthermore, the last part of the last decade saw enormous leaps in commodity prices and food shortages around the world. Thus, this statement is useless.

“I have been on a dozen or so threads here at Mises.org, in which Mike Sproul churns out his usual nonsense about the Real Bills Doctrine, and I counter with the proposal that, to avoid fraud, banknotes MUST disclose, on their face, the extent to which they are redeemable on demand by reserves, and thus disclose the extent to which they are essentially a time deposit note (i.e., a loan).”

I’ve been on more threads than that with Mike and I’ve never seen an Austrian convincingly refute his arguments. Perhaps you should read a couple of his papers.

He uses a very convincing arbitrage idea… if note issue of $100 is backed by collateral worth 100 ounces of silver causes inflation as the QT would argue, – say to 0.99 ounces a note, then arbitrageurs could buy up the notes for 0.99 ounce and present them to the bank for an ounce worth of assts, earning .01 ounce a note.

Good to hear from you again, Mike.

“when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car than they did during the early 1970s….”

unless it isnt true, it sounds definitive to me.

if you were around in the 70′s and noted your wages then and what they are now and the inflated price of the goods mentioned then and what they are now and you pay less once adjusted for inflation than 30 plus years ago then it sounds like prices have declined.

do you currently make judgements on prices and your income and how they have either dropped or risen? if you do, then i would think that the info i posted would definitively say that food and many other items are less expensive.

i will pray for you.

Free bankers argue that fractional reserves are necessary and beneficial for a healthy financial system…..

has a non-fractional reserve system brought about the declining inflation-adjusted prices for the goods mentioned in the posted link?

if not, then it sounds like certain bankers (if they are arguing) have taken part in bringing about about declining prices for many desired goods.

scott t ,

“Free bankers argue that fractional reserves are necessary and beneficial for a healthy financial system…..”

Right.

“has a non-fractional reserve system brought about the declining inflation-adjusted prices for the goods mentioned in the posted link?”

I don’t know, but what’s the connection? Do you understand economics? There could have been major technological improvements in food production, causing an increase in supply, leading to a decline in relative prices. Or maybe something else is the cause; your position only can only make sense ceteris paribus (and even then it may not). But we have increasing general prices and business cycles. So what’s your point? You seem very confused.

Central to all of Mike Sprouls ravings is a completely untenable idea, that there can exist a type of money that will have a constant value no matter how much of it there is. This money that is immune to the law of supply and demand is a fantasy.
At the heart of RBD is the assertion that if credit expansion is backed by adequate collateral for the new loans, then the money, or money substitutes, thus created have real value, and therefore will not cause inflation or lead to the business cycle as described in ABCT. The money, or money substitutes, have value because the collateral used to guarantee the loans has value.
Some of the less sophisticated proponents of RBD assert that when the new money, or money substitutes, are created then an equivalent value assett is also created, namely the loan itself, which can be traded at the push of a button. That loans are traded this way is irrelevant however; the critical point is, was a new assett actually created? When a loan is made, say on a home, the homeowner gives up part of their claim to the property in exchange for present money, the loan represents the claim they surrendered to the bank. Instead of a new assett coming into being, what has actually happened is that an existing assett has been divided between two entities. To argue otherwise would amount to asserting the right of homeowners to take out a loan on their home and still be able to use the equity thus encumbered as they please. They could sell it and pocket the money, they could take out as many loans as they wanted against that same equity, there would be no limit to their claim to the collateral. That is clearly not the case.
RBD proponents are offended when it is claimed that the credit expansion that occurs under their system results in “money being created out of thin air”. People who make this claim point to the fact that after the credit expansion occurs the only new assets (please see previous paragraph) are the new money or money substitutes. RBD hinges on the claim that the value of the collateral creates the value of the money, or money substitutes, that come into existence with the credit expansion.
Their are two basic divisions in the discussion of value, there is the objective theory of value and the subjective theory of value. The objective theory of value asserts that objects have intrinsic value apart from the opinions of humans and that it should be possible to measure objectively this ‘value’. There are many different schools of objective value theory, even though not one of them has ever successfully been able to measure ‘value’. The subjective theory of value, the one at the core of Austrian economics, holds that value is determined differently by every individual and that no object has an intrinsic ‘value’ apart from the opinions of individuals.
RBD proponents must explain their assertion that the value of the money, or money substitutes, created under their system derives from the value of the collateral behind the loans, using one of these two basic philosophies of ‘value’. If they choose the objective theory of value they should be able to define the value of the collateral without reference to money, after all, the value of the money comes from the collateral, it is a derivative of the value of the collateral. They should also be able to explain what constant unit of measure is appropriate to ‘value’.
More often RBD proponents follow somewhat of a subjective theory of value, but there is a serious problem with this approach. They use the term ‘value’ extensively, but, when pressed, they admit that what they really mean is the money price of the collateral behind the credit expansion that creates the new money, or money substitutes. So the ‘value’ that establishes the ‘value’ of the money, or money substitutes, is in fact the money price of the collateral. But the money price of the collateral would depend entirely on the ‘value’ of the money, and the ‘value’ (or money price) of the collateral is what establishes the ‘value’ of the money. It is an endless circular argument.
What one is left with is the Austrian explanation of prices and their function in the free market. The ‘value’ of money, or money substitutes, adjust, along with every other item in the market, in order to clear the market. Clearly the abundance of any item in this world will be reflected in its ‘value’, including money.

One of the problems with Mike Sprouls argument is his use of words like ‘value’ and ‘worth’. For example he says: “But if the green paper dollar is backed by stuff worth 1 oz. of silver,…”. What does he mean by this? The dollar he refers to is not backed by the 1 ounce of silver, he says so, it is backed by the “stuff”, which he claims is “worth” 1 ounce of silver. One confusion here is that the dollar really would be “worth” 1 ounce of silver if it were reliably redeemable directly for 1 ounce of silver. In that case its actual value could change just as the value of 1 ounce of silver can change. But what does he mean when he says the “stuff” is worth 1 ounce of silver? He doesn’t mean that someone is guaranteeing to always exchange the “stuff” for 1 ounce of silver either. He means the current silver price of the “stuff” is 1 ounce. The point he wants you to ignore is that the silver price of the stuff is based on the supply and demand for silver and “stuff”. But somehow he insists that this does not result in the dollars based on this system being subject to supply and demand. At this point he is actually postulating that a subjective value system of supply and demand can establish an objective value for dollars. Everything on the market is subject to the effects of supply and demand, there is no such thing as an objectively determined value, not even for dollars.

RBD explained!
It seems that Oberon, the king of the fairies, is so impressed with good banking practises that he rewards those who protect their credit expansion by obtaining adequate collateral. This reward consists of sending forth hordes of little fairies who sprinkle magic dust on all of the new money created this way, which protects this money (but not other money created in evil ways) from the influence of the law of supply and demand!

“if prices for vital goods have dropped relative to wages with technology paid for via inflationary finance….there is a healthful aspect to that.”

Substitute “counterfeiting” for “inflationary finance.”
The increase in the money supply (counterfeiting) can create a *temporary* boom since it steals a little from everyone and funnels it to a few.

But the increase in the money (counterfeit) supply
itself confers no social benefit. What happens is mere wealth redistribution. Any “stimulus” provided to the few is funded by theft from the many forced to carry the currency.

If you think you can explain how increasing the money supply through counterfeiting confers a general benefit, then go ahead.

When you’re done, explain why more and more
counterfeiting confers more and more benefits upon society. Argue for the abolition of anti-counterfeiting laws so that the whole world can
experience the benefits of counterfeiting. Why limit it to just one group of privileged counterfeiters?

This is an exercise which ought to demonstrate to
you that real economics is not a shell game. You must be able to explain some isolated human action rationally and not merely advert to data where it
is unclear that everything else has remained the
same. The phrase, ceteris paribus, is what is used
to express the idea of “all things being equal”. If
you don’t argue for the effects of an action in this
way, then it’s very easy to fall into the trap of
merely citing statistics as you leave unaddressed
all the myriad other factors which might affect them.
And so you’ll end up with nothing but an ad hoc argument.

So if you think counterfeiting is good, explain
why this is so from only the effects that it directly causes. To do this you must rationally isolate that particular action and then describe the first effects, and then describe how those effects cause other effects. This will help you see the whole picture instead of just any immediate perceived gains.

If it seems fairly obvious to you that counterfeiting
is NOT something which is good for everyone if
everyone does it, then hopefully you will have a clue
as to why that is. Then you will be able to apply
it to a legal monopoly of counterfeiting and see
that it does not change its nature simply by
making it a privilege of a few rather than many.
It merely allows the theft to continue rather than
blow up immediately as it would if everyone were
issuing unbacked paper. Who would take it, right?
Trade would cease in such paper overnight, would it not? Why? Think.

Now why would this wealth destroying practice become a wealth producing one when a small group of counterfeiters are able to prevent others from entering the con game? Explain that.

“maybe he is a fraud or liar”

Or maybe you don’t understand economics?

Carlos, the “free bankers” claim that we can actually look at history to see that fractional-reserve banks outcompeted 100% reserve ones. There has never been a law prohibiting 100% reserve banking, consumers just prefer fractional reserves.

That’s because, for the short-term, fractional-reserve banking customers get to participate in the fraud.

Then, when there’s a run on the bank, and there are insufficient reserves to pay the so-called “demand depositors” (who find that they are actually unsecured creditors to an insolvent company), these same customers scream bloody murder about how unfair fractional reserve banking is. Wars have been fought for less.

The only way to really tell if bank customers (and the people who take the customers’ notes in trade) genuinely prefer fractional reserve banks is DISCLOSURE, on the face of all the bank’s notes, of the fraction held in reserve (and thus also disclosure of the fraction that is not).

Do that, and then you’ll see whose money is good and whose is not, and whether people prefer fractional reserve banking or 100% reserve banking.

does the current system cause more harm and inequality than a previous ‘go for the gold’ way risking time and money to get money out of the ground?

In light of the Great Depression, and the Greater Depression we are facing, I’d say the answer is: yes.

TGGP

Magnus have given the right explanation; the problem of the free-banking historical argument is that notes and deposits with full disclosure policy and different policies are not fungible in economic and legal terms.

So a 100% Reserve Note (or demand deposit) could be labeled “1 ounce of gold” but a “Partial Reserve Note” should be labeled “Promise of Payment of 1 ounce of gold with the policy of a minimum x% reserve…”.

So, there has been historically a bad legal analysis (part of the Jesús Huerta de Soto argument) that it is not innocent. The banks profit from that, and you could add a kind of Game Theory to explain how in the face of that bad legal analysis automatically competition sets the inevitability of fractional reserve banking driving out good money (100% reserve notes and demand deposits).

But my argument is that in the face of clear contractual disclosure (“100% reserve notes” versus “promises of payment”) good money would instead drive out bad money.

“Now why would this wealth destroying practice become a wealth producing one when a small group of counterfeiters are able to prevent others from entering the con game? Explain that.”

“”when prices are adjusted for inflation, Americans today spend ’40% less on clothes, 20% less on food, more than 50% less on appliances, about 25% less on owning and maintaining a car than they did during the early 1970s….”
is that wealth destroying or do lowering prices adjusted for “inflationary finance” behave as a hidden savings account over time….instead of a hidden tax?
buying the same amount or more of clothing and having cost 40 percent less….doesnt that create more wealth?? more clothes for the consumer?