Thursday, May 19, 2011

More on Fractional Reserve Banking

Posted by bionic mosquito on 05/18/11 02:42 PM

I find this video worthwhile for those not yet exposed to the systematic depredations of the monetary system. In other words, a good introductory video.

The fixation of the Mises Institute (or at least many people associated with it) on the "fraud" of fractional reserve banking is like a lead weight around the neck of this very fine institution. Read the contract. The money is not yours once you deposit it. Understand bankruptcy law as relates banking - you do not have first claim on your deposits, you get to stand in line with the other creditors, many of whom have claims senior to yours.

FRB certainly can be viewed as inflationary to the money supply; FRB certainly adds risk to the enterprise and those doing business with it. But it isn't fraud. Therefore I find no reason by which to "stop" it in a free-market-based system.

Posted by bionic mosquito on 05/19/11 09:25 AM
In reply to: Posted by John Danforth on 05/19/11 08:44 AM

"This is the reality, but this is not how it is sold. It is sold to people as if the bank is a storehouse for their savings and a way to turn their paycheck into usable currency. Not one in ten knows what the real relationship between themselves and their bank really is."

Not to be too blunt, but ignorance of the contract and the law does not allow us to enjoy a contract of our wishes.

Why on earth do depositors need FDIC insurance if they, in fact, have first claim on their deposits? When the FDIC decides to take down an insolvent bank, the good assets go to another institution, the "insurance" pays off the depositors. Why don't the good assets just get sold to pay off the depositors? Why, in fact, is the money not there in the first place? Where did it go if it is mine? How can I get paid interest unless the bank has lent the money to someone on my behalf? Why don't I have to pay a fee for storage for my assets, if in fact the bank is storing them for my use on demand?

"Again, the local bank lends funds that are not someone's savings nor their own: in payment for doing a few hours paperwork they hold title to your real estate, and if you miss a few payments, they end up with the physical asset. What has happened? What has happened was the consummation of a fraud. The fake money itself is fraudulent. The way it is legitimized is fraudulent. The laws that make it legal tender are evil. Perhaps in free banking the practice could be decriminalized, but only if the fraud element is removed, so people know exactly what they are getting into and have the choice to opt out."

There are many practices around the system of banking that a) only occur in an extreme magnitude due to government dictate and protection, and b) may also be fraudulent. But fractional reserve banking, in and of itself, is not one of these.

FRB, in a free market system, is a perfectly viable option for banking and money / credit. If a bank gets carried away with the practice, it will fail; its notes would trade at a great discount. This discipline of failure will be the best check and balance on the system; additionally, strip away the government created idea of limited personal liability and the system will very well discipline itself.

Even today, I would have no complaint about FRB absent the government backing of the entire cartel via the Fed and FDIC (to name two of many enabling agencies). The crime is in the government protection, not in the practice itself.

Of course, I would continue to state that FRB is inflationary to the money supply, but the impact will be only to members of society that utilize or transact in the specific currency being overly expanded. Here again, the crime today is the legal tender laws, giving us little choice, at least little choice absent large risks and consequences.

Such is my view of Real Bills; it is also fractional reserve banking (watch Ingo come out of his chair when he reads that, telling me some law passed by some legislature can defy economic reality). My only point and criticism with real bills is that it is an inflationary expansion of credit (well that and the false idea that there is not enough gold for a modern economy to function. Well probably a couple of other fallacious notions, but that is beside the point). That people choose to use it is entirely up to them in a free market. I even might find use for real bills, if we ever see free banking again, and if free banking results in market participants creating credit in this way (here again, watch Ingo jump).

Same for FRB: in a free market, there will certainly be fractional reserve banks. Mises himself seems to have accepted this. He also accepted the idea that the market would keep the excesses in check.