I got into an argument with a Libertarian (yes, my mistake) who insisted Full Reserve was preferable to Fractional Reserve.
If I may pile on:
If the banking system switched to a full reserve system, how would it differ from having a system of deposit boxes?
How would the bank make revenues off the clients’ deposits?
Damn, that is a great question. I wish I had thought of it. And why would a bank pay interest on “deposits” it cannot loan out?
In the real world Libertarianism quickly crumbles. Their anti-central bank idiocy is shallow.
FWIW, libertarian thought has no objection to fractional reserve banking, and a central bank is not required to have fractional reserve banking (we did it in this country for around 80 years.)
And many libertarians have no objection to central banks, either.
Sounds like you were talking to one of those nutbars who thinks the Federal Reserve is an illegal conspiracy. Probably thinks income taxes are illegal, too.
In such a system you would pay a fee to the bank to keep your money. People would still use banks, but only as a convenience (i.e. having a bank and a debit card is more convenient than carrying a bunch of cash). Investment would be handled by other institutions, and would probably not be “risk-free” like bank account interest is, although some institutions would probably invest conservatively enough to be effectively risk-free, and people would use those institutions essentially exactly like they use banks now.
Clicking on the Wikipedia link I was amused to read
So Pinochet’s mentor is acknowledged, by Wikipedia, as non-mainstream. (And, BTW, even Pinochet didn’t adopt “Full Reserve.”)
I’d not be surprised if your friend is above average in intelligence. (Dumb people can’t even spell “Libertarian.”) I blame the Internet. The kind of zany thinking we see lately would have trouble making its way into any respectable book, but the gibberish in Web blogs has turned into a race to the bottom.
American political “thinking” has become so insane that it may turn into self-fulfilling prophecy.
In a true libertarian society, why would there be banking rules, or a central bank?
If you allowed “low risk investment institutions” as well as banks, why would a libertarian society forbid them from permitting credit or debit cards drawn on the accounts?
I thought the whole point of libertarian philosophy is “the fewer rules the better”. It’s basically “buyer beware” permeates every aspect of life. How very late 1800’s. Except the libertarians would probably worship the robber barons rather than prosecute them…
When you hear someone say they are libertarian … except they would forbid such-and-such … tjey are simply part of that modern yet old disease, “there oughta be a law against what irritates me”.
Since when are all books respectable? Handbills, magazines (ever hear of John W. Campbell?), and, yes, respectable-looking books have been promoting stuff wackier than this since time immemorial.
Ironically, in some cases they’re saying “there oughta be a law against making laws against things”.
"how would it differ from having a system of deposit boxes? "
See fullreservebanking.com for an explanation. Watch the video and take a look at the definition link too.
No. There has not been in the past 200 years, or ever, a successful full-reserve financial intermediary – if you define success as its ability to make a profit as a competitive financial intermediary, and not from government monopoly powers. All “full-reserve” banks have always been, and will always be, creatures of strict government regulation. A free banking system, existing in a free market, would never produce a full-reserve institution. Full-reserve banking is a government entity, not a free market entity. People who advocate full-reserves are advocates of extraordinarily stiff regulation.
In the context of private, non-governmental banking, fractional-reserve banking is a redundancy. Another term for fractional-reserve banking is banking.
Seems to me a depositor, in order to earn interest on their deposit, would agree to allow the bank to lend out their deposit and split the interest on that loan which would rapidly devolve into a fractional-reserve system.
Just as an FYI here, it seems that some people in this thread misunderstand fractional reserve banking. Fractional reserve banking doesn’t mean that you can lend out what has been deposited, it means that you can lend out the deposits multiple times which leads to money creation. And that is what some (Austrian school) economists oppose in theory, and what some non-economists get all frothy about when they think they understand (they usually don’t actually understand it, of course). I should note that I do not oppose fractional reserve banking at all, and I consider myself somewhat libertarian, or at least I did until the term started attracting a bunch of insane people and thereby getting libertarianism associated with a bunch of weird fringe beliefs.
Anyway, back on point. Fractional reserves lead to money creation in the following way - I deposit $100 at my bank. The bank puts $10 in their vault, lends out $90 to Person B, and writes me an IOU for $100. Person B puts their money in the bank. That bank puts $9 in their vault, loans out $81 to Person C, and writes an IOU for $90 to Person B. Person C then deposits their money with a bank, which puts $8 in their vault, loans out $73 to Person D, and writes an IOU for $81 to person C. Even if we stop here, we would see that now:
Person A has a $100 account balance.
Person B has a $90 account balance.
Person C has a $81 account balance.
Person D has $73 in cash.
The banks have a total of $27 in cash.
So, the banks have only $27 to cover their $271 in accounts, or 10% (that’s the number we chose to use, actual reserve requirements are not so straight forward but the US is around 10% - see here). Which, whatever, as long as your confident that there won’t be a run, it doesn’t matter. What the Austrians gripe about isn’t the liquidity, necessarily, but the fact that you are creating money out of whole cloth - of course, that’s what mainstream economists like about it. You can use it to regulate the money supply. The above example actually allows for the creation of up to $1,000 based on the $100 loan. Small changes in the reserve requirements can allow the government to manipulate the money supply, and gives regulators another “lever” in terms of inflation, exchange rates, etc.
Here’s some more detail in Wiki form:
eta: the reason this sometimes gets associated with libertarianism is because liberterianism is often associated with the Austrian school of economics, but the two things are hardly the same.
Missed edit window - the link that I meant to insert into that parenthetical is here:
It shows some countries’, including the US’s, reserve requirements.
Easy: charge them for it.
And when you get someone who starts yelling “give me my tuppence!”, you get the Spanish government’s takeover of the first Rumasa (Feb 23, 1983).
Things started, at least as perceived by the general public, with rumors that “Rumasa banks do not keep at hand as much money as has been deposited”; my father (an accountant by training) would rant at the TV “that’s called banking, you morons!”, but most people didn’t understand it. Panic ensued, people started taking money out, things started snowballing, the government “stepped in to avoid further troubles, as a matter of public interest”.
The question Dad got sick of asking people was “where do you think the bank got the money for your mortgage, from trees?”
Just to keep the misinformation at bay…as some people have said already: Not all libertarians support full reserve banking, and not all all are even opposed to the central bank.
No idea the convo, but just from you are saying sounds like you were talking to someone from the “Austrian School” which is…out there lol
Even for libertarians they are pretty fringe (though in the US we only have one real big name so EVERYONE who’s getting a taste of libertarianism is automatically buying into Austrian School).
Anywho, yeah most economists…including limited government ones reject the Austrian School.
I only say this because I consider myself pretty libertarian but most of those Austrian School guys are out there for me!
It hasn’t worked in the last 200 years but no one has tried it. To be fair I see the appeal of full reserve and strategies exist as to how they can be profitable.
While I see the appeal, especially that it would limit the Fed to a reduced role it’s crazy unrealistic. It’s obvious why banks like fractional reserve and left to a free market I just don’t see how the Austrian notion they will naturally form can happen.
It would NEED government backing, which is ironic. Full reserve seems more like liberal populism to me!
(snipped)
“Robber Baron” is a interesting game for guys like Vanderbilt and Rockefeller.
Vanderbilt broke down state enfored monopolies and brought the prices of transport massivley down wherever he operated.
Rockerfeller reduced the price of kerosense and oil (and saved the sperm whale in the process)
How can you be against guys who massively decrease the price of really important items for the consumers?
I’m sorry, but that’s nonsense. Fractional reserve banking means that banks only keep a fraction of their depositors’ money as reserves, and lend out the rest. The net effect of this is money creation, but that’s because the money that lends out gets re-deposited in a bank, a fraction of which is lent out again, etc, etc.
However, an individual bank cannot take a $100 deposit and loan out more than $100. It’s impossible; they don’t have the money. The banking system can, assuming that the loaned out money returns to the banking system as deposits.
Also, note that the ratio of outstanding loans to deposits will be less than 1(and will equal the banks’ reserve ratio). The banks cannot lend out more than they have in deposits. The economic benefit of fractional reserve banking – and the reason that it creates money – is that the amount of deposits in the banking system exceeds the amount of currency in circulation.
May I hijack this thread slightly to ask a question?
I may have first become aware of “fractional-reserve banking” at age 12 (when I read an encyclopedia cover-to-cover :smack: ). In the ensuing decades the topic came up once every 3 years or so, in conversation or reading magazines. When it did come up it was a matter of “Ho hum. Here are the boring mechanical details.”
Suddenly, talking about fiat money and fractional reserves is all the rage! Misconceptions abound. In one thread (about Social Security, not banking) one Doper focused on Federal Reserve Notes as “real money”, seeming to suggest that the Trust Fund cash its bonds to get Real Money (and stow it under a mattress?) :smack:
My question is: Is this confusion about the nature of money a recent phenomenon, or was I just out-of-touch throughout much of the 20th century?