Please tell me the last time you got a $90,000 loan in cash! No you don’t get it in cash, you get it in your bank account. You know that’s the thing that you get a statement that tells you what the bank owes you. And you know what? If that bank only had that one $100,000 deposit, and the depositor came in the next day and wanted his money. The bank would have to close or call in their loan and hope the guy hasn’t spent the money yet cause all it was was an entry in his bank account saying the bank owed him $90,000.
That sounds pretty "bank"rupt to me. Another way to put it is they are lending money they don’t have. This is exactly what the goldsmiths in the Middle Ages did. They issued fraudulent “deposit receipts” for gold that didn’t exist. This is the same thing banks do today.
Hey sept, banks want you the “call ahead” for large ACH withdrawals too. It’s not about the cash, it’s about the balance sheet. Large draws on their reserves be they cash or digital endanger the ongoing fraud. What brought down Lehman Brothers wasn’t cash withdrawals it was electronic withdrawals.
And I’ll use the “standard vocabulary” when banks stop calling loans to them “deposits”.
“the fools won’t all want to withdraw it at once.”
I corrected that for you. I consider an industry that the depends on its customers not requesting that they fulfill their obligations, fraudulent.
In the gold standard days banks lent gold to people that they didn’t have and hoped the real owners of that gold didn’t come in and ask for it back! How can you say that’s not fraudulent? If you lent me your gold or money for safekeeping and I loaned 90% of it to Charlie to buy a car and then you needed it to buy a car I think you’d be pretty pissed off that I didn’t have it to give you.
But you let banks get away with that real possibility every single day. Please tell me, what is it that makes you think it’s okay for some one or institution to make promises that I can’t possibly keep?
It also has nothing to do with your original question, as you phrased it. I was answering your question as it actually exists, not the question you intended to ask. Below is your original question. This was the question I was answering.
You wrote those words. I quoted those words. I then answered the question. There is nothing specifically about the Federal Reserve in that question.
I gave you the answer. You can. You absolutely can write someone an IOU for a hundred dollars when you only have 10, as long as they’re willing to accept it. That is simply a legal fact. I did not refer to the Federal Reserve in my answer, because you did not refer to the Federal Reserve in your question. And let’s be clear about this: every sentence of what I said is completely true. To repeat my full answer to your question.
Emphasis added.
Again, every word of that is true. I specified private banks. Now you want to talk about the Fed, but of course, the Federal Reserve System is not a private bank. It is a government institution. It now seems that you want to restrict your discussion to the central banking system of the United States, and that is fine. But if you want to ask about the central bank specifically, then you’re going to have to specify because central banks are extremely dissimilar from private banks.
If you want to rephrase your question now, you are free to do so.
Do you not believe in statistics? Because statistically there is almost no chance that everyone will want to withdraw their money at the same time unless a panic is involved. The reason for the FDIC is to remove the cause for panics. It has worked.
Let’s look at the type of bank you seem to want. Since the bank must have reserves of 100%, they cannot lend out a single penny of their deposits. If they don’t, their depositors will not get any interest. Businessmen won’t have a single place they can go to to get a loan based on accumulated savings. In fact, depositors, no matter how big, would have to pay the bank a fee for holding their money.
Remember all this began before Kickstarter.
I want to return to this comment because it seems like a complaint about legal tender laws, and legal tender laws mean very little.
There are two big things to say about this:
If you are careful about it, you could always demand silver payment up front. Legal tender laws are only for debts. They do not mean that all contracts must use legal tender as payment. You can demand payment in practically any medium you wish. If you’re a bartender who owns your own bar, you can demand that people hand over the silver before you serve them any refreshing beverage. They can’t legally demand service with Federal Reserve Notes, because they are never in your debt if you demand payment up front. You can tell them to go pound sand if all they carry is government money. That is not an advisable business strategy, but it is perfectly legal. No court will force you to accept greenbacks if you stipulate silver up front. That’s not how legal tender laws work.
Suppose you have a contract for silver payment, but you allow debt. You allow good customers to build up a bar tab in silver. Contractually, the bar tab is due at the end of the night. Suppose you are owed 100 ounces of silver from a big spender who kept buying everyone in the house a round. For simplicity, let’s say silver is priced today at 10 USD per ounce.
This is to say: You are owed 1,000 dollars worth of silver by current prices. This is a debt. Federal Reserve Notes are legal tender. The dude with the big bar tab has the option of resolving the debt owed to you by using the legal tender of the United States. They can give you greenbacks instead of shiny metal.
How many greenbacks must they give you?
They must give you 1,000 USD. That is the equivalent value of the silver they owe you. They need ten Bennies, and not a dollar less, to resolve the debt. If they offer anything less than that, then the courts will not declare that the debt has been satisfied. Now maybe you find that inconvenient. You would rather have the metal directly, instead of having to exchange the greenbacks for silver yourself. But it’s not like you’re being fundamentally cheated. You can take the cash and buy silver yourself. Paying in legal tender, rather than metal, is not some magical solution to avoid a debt in today’s legal and monetary environment. Under a fiat money regime, legal tender laws mean almost nothing. At most, it’s a way for a debtor to avoid exchange fees. And again, the whole “problem” could be avoided entirely by demanding payment up front.
If they don’t have silver, you can deny them service and refuse to allow them to get into debt. If for whatever reason you do allow them to get into debt with you, then they are legally allowed to use cash… but they still have to have enough cash to meet the debt. This might be inconvenient if you want silver, but it is not a ripoff.
Darn it! If I had asked that question four or five years ago gold would have won…
I don’t know if it was you who said it or it was someone else but I was accused of scaring people with exponential growth when it came to inflation. I guess it’s okay to use it when you’re talking about interest?
Rephrased:
Here’s a good question, if we are all supposedly equal under the law, how come I can’t write someone an IOU for hundred dollars when I only have 10 and have it considered the currency of the nation like the banks can?
I was referring to pieces of paper that the bank will give you to satisfy their debt to you, not invoking the Federal Reserve System.
Okay I’ll bite, how are central banks extremely dissimilar from private banks? Other than that they have way more power.
Of course a Federal Reserve Note–the paper money in your wallet–is just a fancy IOU. That’s the whole point. You’re not quite correct that the only thing backing them is force of law, the main thing backing them is the belief that they can be used as units of exchange, at least in the short term.
You are also correct that if you’re offered Federal Reserve notes in payment of a debt you are legally obligated to accept them.
The counterpoint to that is that you are never legally obligated to extend credit to anyone. Neither a borrower nor a lender be. Never lend someone silver coins and you’ll never have to accept paper money as settlement of the debt.
But I don’t understand your contention that once upon a time you could exchange paper money for real money (I assume you mean physical precious metal bullion/coins), but now can no longer do so. But of course you can do so. You can go down to any coin shop or jewelry shop and exchange your paper money for whatever amount of gold or silver you wish.
Of course it is true that the ratio between the value of the paper money and the gold or silver ingots might vary over time, but what’s wrong with that? If you prefer to use an ounce of silver as your universal unit of account and convert all prices anywhere and everywhere to that unit, you’re certainly free to do so. But if I pay you with Federal Reserve Notes, and today you take those notes down to the coin shop and trade them for precious metal bullion the value of the notes as measured in ounces of silver is unlikely to fluctuate by much as long as you don’t wait too long.
The biggest problem with people who oppose “fractional reserve banking” is that “fractional reserve banking” is just a word that means “banking”. Make fractional reserve banking illegal and we make banking illegal. What we’d have instead are two things, safety deposit boxes where you pay a fee every month to keep your money safe in a box at a secure location.
The other thing we’d have is venture capitalism. Want to borrow money? Find someone who has enough money to lend to you, and borrow from them. But a venture capitalist could only lend you an amount of money equal to the amount of money they actually had on hand.
But if a venture capitalist came across a great idea for lending money, and said he’d give you an IOU for that money, and everyone in town knew the venture capitalist was rich and would honor the IOU, then the VC has created money. Out of thin air. The amount of money he created was the amount of the IOU. This is all paper money and bank accounts amount to. The extending of credit. If we allow buying and selling on credit, we have created fictitious money out of thin air. To really kill “fractional reserve banking” we’d have to make credit illegal.
I still don’t understand your question. A private bank absolutely cannot write an IOU for a hundred dollars and have it considered “the currency of the nation”, as in the legal tender of the nation. That is not even remotely legal.
A private bank might give you cash. The cash is an IOU,* but it is not an IOU that was written by the private bank itself. They received it from elsewhere. In exactly the same sense, if you give away green paper to settle a debt, then you did not write the green paper IOU yourself. You must have received it from elsewhere. (Or else you’re a counterfeiter.) The ultimate source of the genuine green paper – the one and only institution allowed to issue it – is the Federal Reserve System. Government and not private. A private bank has no authority whatever to write cash IOUs. They can give away pieces of green paper that they previously received, but they have zero authority to write out new green IOUs on their own initiative. No private institution, not even a bank, is allowed to issue new banknotes. Only the government bank has this power.
*In a technical accounting sense. Modern cash is not an IOU by any normal definition of that word.
The first difference is mentioned above. Modern central banks have the power to issue banknotes, and private banks do not. (The only exception I can think of is certain private banks in Scotland which are allowed to issue pound sterling banknotes, but under very strong restrictions which the Bank of England does not share.)
But much more important than that is the nature of the liabilities. The liabilities could not possibly be more different. The liabilities of private banks are things like savings accounts and checking accounts. These are liabilities because they are promises to pay. Specifically, they are promises to pay green paper. The private bank does not write the green paper itself. They must receive it from elsewhere.
The liabilities of central banks are the pieces of green paper themselves, and also computer deposits which are in an accounting sense exactly equivalent to the green paper. This stuff hasn’t been printed yet since it’s still on the computer, but it can be converted into green paper at any time. As far as the accountants are concerned, there is no particular difference between the green central bank paper that is still on the hard drive and the green central bank paper that has already been printed. It is equivalent stuff. But practically speaking, the computerized version can be easier to handle since it can be manipulated with the push of a button.
The kind of money I’m talking about is issued by the central bank and only the central bank, and it is called the monetary base. Only the central bank is allowed to increase the total amount of the monetary base. (This is true even in Scotland.) This brings me to my footnote above. The monetary base is considered a liability by the accountants. But it does not act like a liability in any normal sense. If you’d like, you can check the Wikipedia article on financial liabilities:
Private bank liabilities fit here easily. A checking account is a liability to pay green paper on demand. It is a legal obligation.
Central bank liabilities do not fit any of these criteria. There is no legal obligation at all. This green “IOU” does not have a maturity. It does not carry a yield, unless the central banks wishes to do so. It is not convertible into another kind of asset. It merely exists on the books. It is a liability-in-name-only.
If you have a checking account at a private bank, and you demand green cash from that private bank, then they must give it to you because the liability is genuine. They are legally bound to give you the green paper that matches the number in your checking account. But if you have the green paper – a “liability” from the central bank – and you drive to your nearest Federal Reserve Bank and demand that they exchange that green paper for something else, then the people there will call security to escort you outside and then they will laugh about you amongst themselves later. The green paper carries no further promises by the central bank. It just exists. The accountants call it a liability in their books, but that might safely be called an accounting fiction. It is not a genuine liability in the same sense that a checking account is a genuine liability. It’s a vestigial remnant from the history of central banking.
That is an enormous difference. Central banks are fundamentally different institutions because their “liabilities” carry no legal obligation for the bank to the people who hold those liabilities.
Perhaps I suffer from the Imp of the Perverse, but I usually respond when addressed directly, so … one more try.
Welcome to the magic of compound interest. $35 earning 5% over 80 years produces 35*1.05^80 = $1734. That is more than $1200.
[/QUOTE]
Darn it! If I had asked that question four or five years ago gold would have won…
I don’t know if it was you who said it or it was someone else but I was accused of scaring people with exponential growth when it came to inflation. I guess it’s okay to use it when you’re talking about interest?
[/QUOTE]
You were the one asserting that 80 years of 5% interest couldn’t compete with gold price appreciation from $35 to $1200. Were you surprised? Was your ignorance fought? (Hint: this is a trick question. If you say No, we’ll know you’re incapable of learning and can treat your questions and comments with no more attention than they deserve.)
Yes, I accused you of trying to scare people when you implicitly conflate 2% inflation with 2000% Zimbabwe-stryle hyperinflation. (Do you conflate teenage acne with the Black Death?) That U.S. treasury bonds have outperfomed gold since Roosevelt’s Great Robbery of 1933 can be considered a fluke – it wouldn’t work with the paper of a country which lost a major war during those 80 years – but it should have enlightened you some. Did it?
You flit around from point to point. One poster described a scenario that specifically involved a debtor taking possession of FRB banknotes which you then called “money created by fraudulent banks.” When this error was pointed out you replied, in effect, who wants banknotes? A checkbook is more convenient! :smack: (I wonder if you knew this argues for banking, not against it.) But of course you’re also happy to complain that FRB-issued banknotes are just as fraudulent as the plastic debit cards issued by private banks. When pressed, you fall back on the truism that paper isn’t silver or gold.
And you insist on the word “fraudulent” even when directed to look at a dictionary. “Fraudulent” doesn’t mean evil, nor despicable, nor anything-Joe-disapproves-of. Words have meanings. Do you think it helps your case when you don’t know the meanings, or refuse to adhere to them?
The real reason for the FDIC is to remove the moral hazard of banks lending out more than they have. It’s also to assuage the populace that their money will be safe even if the bank closes. Heck if the banks were honest and didn’t lend out money that they didn’t have, we wouldn’t need insurance, they would.
Ha ha, what do you mean would have to pay fees? Seems to me banks have plenty of fees right now.
But seriously I’d be perfectly happy to keep large sums of money in the bank and pay a fee for storage. But just like there are CDs today, of course banks would have a function whereby you can actually loan them money out of your accumulated savings which they pool and loan out to those businesses or individuals, with the understanding that you may not withdraw that money without incurring a severe penalty. I have no problem with that, the bank takes your money and loans out that very same money to a borrower at interest and pays me a portion of that interest for my risk. That’s a system where interest rates would be market-driven rather than dictated by a quasi-governmental institution, and the money supply will remain relatively stable rather than constantly inflationary. Of course the banks would have to make solid loans with a high expectation of payback in order to make money and attract investors, but really should be a cinch for such powerful financial markets.
I don’t think you understand what a moral hazard is. The people getting made whole didn’t commit any sins. Typically banks which screw up enough for such a payment to get made get killed - sold to more sold banks. Their management gets fired. Their investors might lose money. If all those people got made whole, then we’d have a moral hazard. And yes, the concept does apply to the too big to fail banks.
But the FDIC is exactly to assure people that their money will be safe even if the bank closes. Since they are sure, they won’t rush to the bank to take out money they don’t need, and in most cases the bank will never have to close. Assuming a reasonable loan policy, of course, unlike that during the deregulation of the first Bush.
Not if you have enough in the bank. Or owe them enough. We got our accounts upgraded when we took out a mortgage at our bank.
Today we more or less loan them money from our savings, risk free to us. Clearly your scenario is not risk free. In fact it is more or less venture capitalism, which is practiced by those who have real savings, not your average guy.
In America today, maybe always, most people are not going to have a lot beyond their needed savings. How liquid would this money be? Would there be enough to lend to the local guy starting a small business? If the amount available goes down, then it will be harder to get loans and the interest rate will go up. What happens to job creation then? With jobs short, savings decrease, and we go into a death spiral. And if banks got averse to risk (which they did a few years ago) we have a further freeze out of small business owners.
Here’s the thing, though. The bank actually CAN’T lend out more money than it has. It’s balance sheet has to balance. You could open a bank or a credit union tomorrow, but that wouldn’t allow you to lend people money you didn’t have.
A bank doesn’t have to have enough cash on hand to pay all their creditors today, just like you don’t have to have enough cash on hand to pay off your mortgage today. Your problem is that you think a bank can just create pretend money. But the bank only has money to lend because people put money into the bank. If I borrow 10 ounces of silver from Bob, and then spend it on drinks from your bar, I don’t have the money when Bob comes to me tomorrow and asks for his silver back. I still owe him the money, it’s written right there on my balance sheet–“I owe Bob 10 ounces of silver”. Bob has that IOU in his hand.
But I can’t give him back his money until I get more money. If I was required to have on hand enough cash to pay off my creditors, why would I borrow money from them? I’d just spend the money I already had.
The bank is in a similar position. It really does have enough assets to pay off all its creditors (aka depositors). The problem is that it usually can’t liquidate its assets on demand. If I go into a bank and tell them I’m closing my account, they hand over the money. But if I have a mortgage at the bank, the bank can’t come to me and demand the full amount, that’s not the agreement we made. And so banks have assets–loans they made–that they can’t get right away, but liabilities that can be called on demand.
This is obviously what created bank runs in the past. Depositors would demand their money, the bank would not have enough cash on hand to cover all the withdrawals, and the bank would fail. If they bank could liquidate all the loans then they could pay off the depositors, but if that wasn’t possible the bank would fail.
FDIC is just insurance that the banks have to pay for that says if they have a bank run, the insurer will pay the depositors while the bank tries to figure out what will happen next–if it gets liquidated, bought out, goes through restructuring, taken over by creditors, or what have you. This doesn’t create any moral hazard, it is just an insurance scheme that protects depositors. And if depositors trust that the insurance will actually pay out, then they won’t rush to the bank to withdraw money at the first sign of bank trouble. And then the bank won’t be ruined in the first place.
Note that the FDIC is funded by bank insurance payments, not by taxpayer money, although it is possible that taxpayers might have to bail out depositors of failed banks. But this doesn’t protect the bank itself or the owners of the bank except indirectly, it protects the depositors.
I know this. I could ask people pay me in chicken wings for my services. Course you do realize that in places with sales tax, you have to use Federal Reserve notes to pay them, no matter what your accepted form of payment. I think that means way more than very little. Not to mention on April 15th, I would have to incur exchange charges to rustle up enough Federal Reserve notes to pay my income taxes. I think that’s a little bit more than almost nothing.
Actually I don’t even think your little scenario is legal. Bernard von NotHaus is in jail because of Liberty Dollars for “making, possessing, and selling his own currency”. Especially if the bar owner made deals with his beer suppliers to take silver in payment and that started to spread.
True, the government demands payments of its taxes using its own money. That is not nothing.
But it’s also not the least bit surprising or unusual.
Americans who receive large incomes in euros, from doing work in Europe, must still pay their taxes in dollars. It is not an undue burden for them to do a currency exchange in order to meet their legal obligation. The same would be true for any traders in silver.
It’s not illegal to stamp a numeric weight into a circular disc of precious metal to accurately label the mass of metal. But it is illegal to call these circular discs “coins”. If you want to privately mint precious metal, you must call them something innocuous like “rounds” because the US government has jealously reserved the word coin for its own output. And then to go even further than that? To not only make coins, but then to actually call that output a “dollar”?
It’s illegal to create “dollars”. I mean, obviously.
But it’s not illegal to trade silver rounds back and forth. There are some things that are pretty obviously not allowed, and some people jump flamboyantly over the line, and get smacked down. That doesn’t change the fact that minting metal is perfectly legal, as long as you don’t call the output coins or dollars, and it doesn’t change the fact that trading the resulting silver for a pint would be perfectly legal. Even so, you’re still not going to find anyone to trade with you. For all their perceived problems, dollars are more useful.
No I’m sorry I can’t exchange paper money for real money. I can exchange it for silver bullion coins or junk US silver coins or even silver shot. I can’t use those things to conduct business the same level as I could in 1885, in other words as the medium of exchange, because they’re not. We don’t have real money in this country, we have fiat paper money and all fiat paper money eventually returns to its intrinsic value which is about the number of BTUs you can get out of it when you burn it.
What’s wrong with paper money’s value against precious metals “varying over time”? Well for one thing its value invariably goes down. That’s called inflation; that’s called losing value. Currency, if nothing else, is a representation of labor. To have a system that demeans the value of labor is abhorrent. Not only is it undemocratic, the case can be made that since at least 95% of the people who are the victims of this scam are totally unaware of what’s going on, it’s inherently fraudulent.
I still don’t know why you guys support this kind of a system, unless of course you work for banks.
Come on, a venture capitalist writing an IOU for money he has is not creating money. If he wrote IOUs for more than he had in money, that would be creating money.
Banks could still be investment houses using money that people loaned to them to pool together to make major investments. Not as lucrative I admit, but why should they be able to convert my promise to repay into US currency, then make me pay them interest for their privilege?
I think you’re being a little Scarlet O’Hara here. There would still be credit. I could open a credit line with the bank that is using other people’s actual money that they purposely invested with the bank for that purpose. Is that so hard to understand?
The bottom line in your entire explanation, is that the dollar bill/Federal Reserve note is a worthless piece of paper. It’s a liability you can’t collect on.
I must say that in my mind you seem to be proving my point that fractional reserve banking (which is what the Fed does to the point that the fraction is zero) is fraud.
By the way, I can go into any bank and get metal in the value of almost 80% of my paper dollar. I can just ask for 20 nickels. But I’m sure it’ll put end to that soon and make nickels out of steel or something whatever is cheapest.
Like I said, five years ago when gold was 1800 and your outcome was somewhat less gold would have won. I understand how the value of pieces of paper fluctuate in respect to material goods.
You think I’m incapable of learning because I don’t see things your perverted way? Yes, I’m of the opinion that creating money out of thin air as debt is a perversion. And since every single fiat paper currency has returned to its intrinsic value of zero, what makes you think the dollar isn’t headed in that direction?
I keep asking why do you think it’s a good idea to allow private banks to create money as debt? Why should they have that privilege, to the detriment of the people?
You need to read for comprehension a little bit better. I did not say who wants bank notes, I said banks don’t give $90,000 loans in cash. Anyway focusing on dollar bills, with are only representative of the debt of the Federal Reserve system, of which practically all private banks in the United States are members of, so yes they create money which about 5 percent of the time is requested in Federal Reserve notes. FRN’s are only a representation of the fact that the Federal Reserve system owes you “something” that you can never collect.
Just to show you how silly this whole system is, today the stock market went down like one and a half percent, mainly because the FRB might raise rates! Probably even too .5%!!! Horror of horrors! You like that these bankers can trash your retirement account on a whim, immune to any supply and demand?
fraud - “deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.”
“sharp practice” - “Sharp practice is a pejorative phrase to describe sneaky or cunning behavior that is technically within the rules of the law but borders on being unethical.”
I know what words mean, thank you. I’ll give you a sharp practice right here, banks gathering mortgage loans into cdos and MBSs, selling them to unsuspecting investors then placing derivative bets that those instruments would go down in price.
I don’t know why you want these greedy psychopaths in charge of our monetary system.
