quadibloc on November 07, 2010, 05:39:51 pm
Just noticed, he paid 24 oz for rooms that cost 12 g per week.  How long was he expecting to stay?
My guess is two weeks and it's a typo.

SandySandfort on November 07, 2010, 07:35:42 pm
I'm guessing that's the cartoon equivalent of a typo. It is likely that "24 grams" was intended.

It's like herding cats, Terry, like herding cats.  ::)

Karadan on November 07, 2010, 09:22:47 pm
I'm guessing that's the cartoon equivalent of a typo. It is likely that "24 grams" was intended.

It's like herding cats, Terry, like herding cats.  ::)
Meow?

Just think, now you can go back and correct it and the comic will be that much better :P

NotDebonair on November 10, 2010, 05:25:32 am
In an AnCap society, I'm going to assume at least a "free banking" rule where banks are not protected by law against bank runs, and therefore must have much higher reserve standards than are the norm today. An educated populace would demand - and get - 100% reserve banking. In a 100% reserve banking system, every transaction would be backed 100% by gold, silver, or some other acceptable medium of exchange. This would increase demand for gold and other precious metals. I'd expect a fair number of transactions using actual physical gold, for a variety of reasons: the joy of handling such beautiful coins, a desire to keep bankers honest, a preference for anonymity, and/or to avoid the fees of 100% reserve banks. ( A 100% reserve bank cannot possibly offer "free checking." )

I would have two questions concerning this:

1)  How (this probably reveals my deep economic ignorance) would the bank make loans or any other profitable investment and still have said 100% reserve?

2) How would the banking public verify the 100% reserve's existence?

J Thomas on November 10, 2010, 07:06:12 am

I would have two questions concerning this:

1)  How (this probably reveals my deep economic ignorance) would the bank make loans or any other profitable investment and still have said 100% reserve?

I can answer that one. Banks would not be in the business of making loans. However, any of their depositors who want to could lend their money to someone else. Banks might help to coordinate those loans. At least, if you want a loan and your bank connects you with a possible lender, you can be sure that your prospect does have the money.

Quote
2) How would the banking public verify the 100% reserve's existence?

I don't know. There are various possibilities. The bank might let somebody who's generally regarded as trustworthy look at all the money. If the bank is really conscientious, they could treat  your deposits as if they're in a safety deposit box, and always return to you the same coins you deposited. If you mark your coins in subtle ways and then confirm that you always get back the same coins you deposited, then probably everybody else gets back the same coins they deposited too. Whenever you deposit a check they would of course give you the coins and let you deposit them after you've held them.

I kind of like the idea of having webcams looking at all the gold. It doesn't really prove anything but it would probably increase confidence a lot.

If privacy isn't an issue you could have a database showing who each unit of gold belongs to. The database wouldn't have two owners for the same hundredth of a gram of gold, so it would be 100% reserves. If the bank says they have your money but the database doesn't say which money is yours, then they don't really have your money. However, you'd need some way to deal with heap fragmentation. And if you don't want anybody but you to know how much gold you have in the bank, then it doesn't work. If the bank knows who you are before they show you the database, the database could lie to you personally and you'd never know unless you compared notes with the wrong customer.

In general, if you keep depositors' information secret then you have the same problems you'd have proving that a secret ballot election was not rigged. For an open election that's mostly trivial, but for secret ballot it is not.

Remember the giant stone coins of Yap? They sit in one place and don't get moved, and people remember when the ownership of a fraction of one of them changes. They hardly fit common definitions of money, and yet everybody who finds out about them instantly knows that they are in fact money. Gold could be that way. You leave your gold deposited in the bank, and you spend tokens that represent your gold. What keeps it from being fractional reserve is that each token represents a specific location on a specific gold bar. Find two tokens that point to the same gold, and one of them must be counterfeit. How to prevent counterfeiting is an exercise left to the bank.

NeitherRuleNorBeRuled on November 10, 2010, 11:28:31 am
How (this probably reveals my deep economic ignorance) would the bank make loans or any other profitable investment and still have said 100% reserve?

I can answer that one. Banks would not be in the business of making loans. However, any of their depositors who want to could lend their money to someone else. Banks might help to coordinate those loans. At least, if you want a loan and your bank connects you with a possible lender, you can be sure that your prospect does have the money.

It's far more likely that banks would be in the business of making loans, given that much of the infrastructure for a 100% reserve bank would also be applicable to a fractional reserve bank.

Rather, one would expect most banks to offer accounts with a set of reserve levels: say 10%, 25% 50%, 80%, and 100% -- the 100% of course requiring the customer to pay for the service, and the lesser fractions providing both greater risk and rates of return.  Their may also be a dimension of risk beyond simply the reserved fraction, since not all loans have the same degree of risk.  Few people would want 100% fractional reserve banking for all their capital for extended periods of time, especially since limited liability public corporations (as we know them) would not exist and hence "stock markets" would be substantially different.

macsnafu on November 10, 2010, 04:25:25 pm
How (this probably reveals my deep economic ignorance) would the bank make loans or any other profitable investment and still have said 100% reserve?

I can answer that one. Banks would not be in the business of making loans. However, any of their depositors who want to could lend their money to someone else. Banks might help to coordinate those loans. At least, if you want a loan and your bank connects you with a possible lender, you can be sure that your prospect does have the money.

It's far more likely that banks would be in the business of making loans, given that much of the infrastructure for a 100% reserve bank would also be applicable to a fractional reserve bank.

Banks would offer two different types of accounts: demand deposits and time deposits.  These are much like current checking and savings accounts, except...Demand deposits are not loaned out but are part of the bank's reserves, available on demand  (hence the name) by the account holder.  Time deposits, like a certificate of deposit, are loaned out, and interest is paid to the depositor, but the money is not available on demand, because it's been loaned out by the bank.  Much like a cd, the depositor could not access the money for a certain period of time, or possibly they can, but only with a heavy penalty for doing so.   

There's no need for fractional reserve banking.
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

ZeissIkon on November 10, 2010, 05:16:04 pm
Even with verifiable (i.e. non-private) 100% reserve banking, there's still risk -- where will the bank find an insurer who can cover 100% of the value of their deposits against robbery or disaster?  Sure, if it's a small bank, they can probably find a bookie who'll give them livable odds -- but then, how do they know they can trust the bookie?  And after all, that's all an insurer is: a bookie who'll cover your bet against yourself at good enough odds to (you hope) be worth the vigorish.

Still, there were banks long, LONG before there were reserve requirements; Medici Florence had a banking system modern in all but issuance of plastic (and of electronic fiat currency) in the 15th century.  Those bankers were lenders, but their loans were backed by depositors (Lorenzo the Magnificent, for instance), as suggested above; those banks were also scrupulously honest, in a world in which making a major deposit feel fleeced or robbed was a death sentence for the bank manager.  I honestly don't recall how they insured against robbery (beyond having the biggest, nastiest bravos in town as lobby guards); it seems to me they did more lending than deposit banking (i.e. they had a few large depositors who gave permission to lend their money in return for keeping it safe).

In most of the rest of Europe in those days, BTW, lending was limited to an ethnic group who could be periodically rounded up and driven out of town, thus repudiating any debts they owned.  The Medici system was a huge improvement -- as long as you kept up with your payments.

NeitherRuleNorBeRuled on November 10, 2010, 09:02:35 pm

Banks would offer two different types of accounts: demand deposits and time deposits.  These are much like current checking and savings accounts, except...Demand deposits are not loaned out but are part of the bank's reserves, available on demand  (hence the name) by the account holder.  Time deposits, like a certificate of deposit, are loaned out, and interest is paid to the depositor, but the money is not available on demand, because it's been loaned out by the bank.  Much like a cd, the depositor could not access the money for a certain period of time, or possibly they can, but only with a heavy penalty for doing so.   

There's no need for fractional reserve banking.

There's no reason they might not also offer a time deposit based service, like a CD;  however, there is no reason that they wouldn't offer fractional reserve accounts as well.   Fractional reserve accounts would simply be another option that customers may wish to utilize, and offer a different balance of risk/reward.

There is nothing inherently wrong with fractional reserve banking.  The problem is that most people don't understand it, and hence assume that $X in such an account has a value of $X, when in fact it is somewhat less.

Fractional reserve banking is to money what virtual memory is to memory in an Operating System.  It gives the illusion, for the most part, of a greater amount of actual memory than is physically available on a given computer system.  It is somewhat slower (lower value) than an all real-memory system, and in some -- usually rare -- cases it can fail, with the result generally being a dramatic loss of "supposed memory" by one or more users.  With fractional reserve banking such a rare condition would be a "bank run" with depositors unwilling to wait for the money to become available.

Outside of "embedded systems" (e.g., the computer running your car's power train), most computers use Operating Systems  that implement virtual memory as the default.  Many of them also allow some or all of the memory to be fixed for a given process (running program -- more accurately, address space) such that real memory is always 100% dedicated to it.   In most cases, however, this isn't done because it is inefficient.

Similarly, most banks would reasonably be expected to offer a Fractional Reserve account as the default.  They would also be expected to make provision for some or all of a customer's account-set to be 100% backed.  Most customers would reasonably see that overly large amounts being 100% backed would be inefficient.

The exception in both would be where an unpredictable delay in accessing a memory location/portion of physical capital would be unacceptable.  In computer systems these are known as "real-time" systems.  Such systems explicitly accept the inefficiency in exchange for the guarantee; however these are less common than one might expect.


wdg3rd on November 10, 2010, 11:02:59 pm

Fractional reserve banking is to money what virtual memory is to memory in an Operating System.  It gives the illusion, for the most part, of a greater amount of actual memory than is physically available on a given computer system.  It is somewhat slower (lower value) than an all real-memory system, and in some -- usually rare -- cases it can fail, with the result generally being a dramatic loss of "supposed memory" by one or more users.  With fractional reserve banking such a rare condition would be a "bank run" with depositors unwilling to wait for the money to become available.


"Oooh!!!  Virtual memory!  Now I can have a really big RAM-Disk!."  (It's not in the New Hacker's Dictionary aka Jargon File maintained by fellow anarchist ESR, I don't recall where I first heard or read it (probably back in the early 80s, when much of what I read (the best part) was edited by David Ahl or Wayne Green, I certainly didn't originate it).  But it's similar to what most current folks in banking and bank regulation seem to think they use.  And of course the investors and consumers who follow along.
Ward Griffiths        wdg3rd@aol.com

Men will never be free until the last king is strangled with the entrails of the last priest.  --  Denis Diderot

terry_freeman on November 11, 2010, 07:01:09 am
One possibility is that lending banks would act as brokers. You want to park some money for a period of time - say, five years. You agree to lend out your money for a comparable amount of time. The bank puts your funds into a "five year pool".

I believe there are already a few web sites based on similar ideas - they act a go-between. If you want to borrow $5000 for two years, ten or twenty investors take a piece of your loan. They base their decision on whom to lend to upon credit rating, term, interest rate, etc.

J Thomas on November 11, 2010, 08:00:21 am
How (this probably reveals my deep economic ignorance) would the bank make loans or any other profitable investment and still have said 100% reserve?

I can answer that one. Banks would not be in the business of making loans. However, any of their depositors who want to could lend their money to someone else. Banks might help to coordinate those loans. At least, if you want a loan and your bank connects you with a possible lender, you can be sure that your prospect does have the money.

It's far more likely that banks would be in the business of making loans, given that much of the infrastructure for a 100% reserve bank would also be applicable to a fractional reserve bank.

Banks would offer two different types of accounts: demand deposits and time deposits.  These are much like current checking and savings accounts, except...Demand deposits are not loaned out but are part of the bank's reserves, available on demand  (hence the name) by the account holder.  Time deposits, like a certificate of deposit, are loaned out, and interest is paid to the depositor, but the money is not available on demand, because it's been loaned out by the bank.  Much like a cd, the depositor could not access the money for a certain period of time, or possibly they can, but only with a heavy penalty for doing so.   

There's no need for fractional reserve banking.


If a bank were to have demand deposits, it could get away with quite a lot of fractional-reserve on that, allowing them to loan more. It might be generally agreed that this is a crime.

If a bank lends time deposits, it could use them as fractional reserve also. There is a subtle philosophical difference between the two, but it needn't matter in practice.

Without fractional reserve, a bank couldn't lend from demand deposits, and could only lend timed deposits in a way that balanced out the times. It would be far harder to borrow money.

Is there any way to justify fractional-reserve banking? I think I can make a sort of justification for their results, if not for the particular way they achieve those results.

I'll talk as if our resources are only renewable or non-renewable, and our products are things that are either consumed, or are used without deteriorating.

At any one time, everybody owns whatever they happen to have and they can trade with each other. They can inspect whatever they want to buy and see whether it's really what they want. All fair, no big secrets. Nobody has to buy a pig in a poke. But what if you don't want something now, but you will want something in the future. You could make a future contract -- you promise to provide something the other guy wants then, and he will give you what you want then. Why should you make the agreement now, when neither of you truly knows what you will have to trade then? Why not wait and make the agreement when the time comes for it? Maybe you both have secret information that leaves you thinking you'll get a better deal now?

The worst case is when you have something to trade now, and what you want is a promise for later. You give up something that there is no uncertainty about, something you have right now, and in return you get a promise that might be kept or might not. Often that is still a good deal. If you have extra food, food that will spoil before you'll be ready to eat it, you can give it to somebody else and get a promise they'll give you food later. If they have extra food sometime when you don't have enough, you come out way ahead. And if it's a famine time and they're starving too, it cost you hardly anything to try. But when you get promises for the future, you never know how much they'll be fulfilled.

If you have something to use, that isn't harmed by use, and you're not using it -- why not let somebody else use it? You can get it back when you want it. They could give you promises in exchange for you letting them use your stuff now. And if you have consumables that you don't need, that will go to waste, why not let somebody else have them in return for promises? You have nothing to lose. And you'd rather get promises from the people who're most likely to redeem them.

Money *is* promises. It isn't specific -- you don't know how much it will buy of what you want until you find out. And you won't know what it will buy tomorrow unless you already have a contract for tomorrow. It's a general promise.

Bankers are promise specialists. They are good at deciding who is more likely to fulfill their promises. (And knowing lots of secrets, they can often decide who will be able to fulfill their promises. They can be a tremendous help to your competitors who want to drive you out of business, if they choose to.)

So, you leave promises owed to you with them, because you don't want to use them now. They use them and they decide who gets to use all the stuff that isn't currently being used by it owners. Your promises will still be waiting for you when you want to call them in. And it doesn't really matter to you that they are in the business of selling promises of promises, and their promises-of-promises raise prices for everybody. If you sell more than you buy then that's *good* for you. You collect more promises than you redeem, so when bankers inflate the promise supply ... maybe that isn't so good for you. If there were fewer promises-of-promises going around then your promises would be worth more. But that doesn't matter right now, because you aren't collecting on those promises anyway....

Well, if bankers see that there are lots of people who need stuff, who could redeem their promises if they got the stuff now that would let them make stuff -- stuff that would not be made otherwise because you're sitting on the resources and not using them -- why not create the promises that let those people create prosperity? If they make extra promises and keep them, then by the time you want to collect on your own promises there will be more stuff for you to have. What's wrong with that?

What's wrong is if it doesn't work out. You let bankers lend your promises to people who collect unused resources and make stuff, and then for one reason or another it does not work. They cannot redeem their promises on average, and the bankers come up short. There is not as much to go around when you want to collect. Grrrr.

Like the dot.com bust. A lot of people *believed* that there was a whole lot of money to be made. So they "invested" in stuff that in reality could not make money. The investments were gone. The loans could not be paid.

Or the housing bust. People were clueless how to make valuable stuff, but they thought their houses would keep getting more valuable, and the banks went along with it. As long as the houses kept selling for more, everybody had more promises to spend and to invest in better houses that would keep being worth more. Until there was nobody left to buy the cheap houses, so they had to find sucker who really could not redeem their promises to buy the cheap houses so the people who already had those could move up to the next level. Everybody should have known that it would fail. But each month they thought it wouldn't fail that month, so they could get a little more out of it. A massive failure of imagination, by people who saw no better alternative.

Was that because of bankers? They certainly had their part in it. But -- if we had some fixed number of promises, would that help? In a severe depression people find themselves stuck with the amount of cooperation, the amount of trading surplus stuff for promises, that they would have had without banks in the first place. It's like having a car engine that cuts out every now and then. That's bad, but if the alternative is an engine that cuts out *all the time*....

Fractional reserve banking might be getting us some good results. i wouldn 't at all mind finding some other approach to getting those same good results, or better ones.

macsnafu on November 11, 2010, 09:06:03 am

Banks would offer two different types of accounts: demand deposits and time deposits.  These are much like current checking and savings accounts, except...Demand deposits are not loaned out but are part of the bank's reserves, available on demand  (hence the name) by the account holder.  Time deposits, like a certificate of deposit, are loaned out, and interest is paid to the depositor, but the money is not available on demand, because it's been loaned out by the bank.  Much like a cd, the depositor could not access the money for a certain period of time, or possibly they can, but only with a heavy penalty for doing so.   

There's no need for fractional reserve banking.

There is nothing inherently wrong with fractional reserve banking.  The problem is that most people don't understand it, and hence assume that $X in such an account has a value of $X, when in fact it is somewhat less.

I would agree that there's nothing wrong with FRB *if* fractional reserve notes can be easily identified.  Otherwise people receiving fractional reserve notes might think that they are receiving fully-backed notes.  If FRB money can be identified, then people have the option of not accepting it or taking the discount into consideration.   

But this raises a question: if, for example, a person tries to spend a fractional reserve note that's 50% covered, and the receiver discounts the face value of the note by 50%, then what is the point of having fractional reserve notes?  The only advantage of FRB is creating more "liquidity", or money out of thin air, and if the money out of thin air is discounted by receivers to nothing, then there's no reason to create money out of thin air.  It's only useful if you can persuade or defraud people out of that discount.
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

J Thomas on November 11, 2010, 10:23:56 am

There is nothing inherently wrong with fractional reserve banking.  The problem is that most people don't understand it, and hence assume that $X in such an account has a value of $X, when in fact it is somewhat less.

I would agree that there's nothing wrong with FRB *if* fractional reserve notes can be easily identified.  Otherwise people receiving fractional reserve notes might think that they are receiving fully-backed notes.  If FRB money can be identified, then people have the option of not accepting it or taking the discount into consideration.

Say that you are buying a house in a place where there are hurricanes. Ttwo houses, one you buy as-is, one has insurance -- if your house is destroyed by a hurricane they rebuild it. How much more should you pay for the house with the insurance?

Bank failures in which people lose their bank accounts are rare -- kind of like hurricanes. And they tend to happen in big clusters -- kind of like hurricane damage. That insurance is worth something, but how much?

If the same bank is doing 100% reserves for some things but fractional reserves for others, the big problem comes when the bank is -- bankrupt. What if you find out they have no reserves left? It's a crime and you might get them punished, but your money is gone.

Better 100% reserve banks, or fractional reserve banks, but not both. Certainly not a single bank pretending it does both.

So, a 100% reserve bank. Unannounced inspections. They count the cash and they check the books that show how much depositors are owed. If it isn't cash but just money on the books, there's nothing to keep the bank from keeping 2 sets of books except the honesty of the employees. If it is gold coins, still what keeps them from having secret books with the real accounts?

I think the best and simplest way to make it work is gold coins, and public records. If everybody's bank accounts are on the public internet, there are no secret books. What the bank owes you is what everybody knows the bank owes you.

Alternatively, we could have a trusted organization that does banking, one that we can trust not to do fractional reserves, and that single organization would be so trusted that no other bank could compete. We could turn banking into a monopoly run by the federal government. 

 








;) ( I thought that joke was hilarious. Hope nobody took it too seriously.)

terry_freeman on November 12, 2010, 03:52:13 am
Fractional Reserve Banks don't really deliver as much as promised; they're based upon an effort to "fool all the people all the time", since every FRB is fundamentally insolvent; it is never possible for all the depositors to have all their deposits at the same time.

As someone mentioned, if people could distinguish fractional notes versus 100% notes, fractional notes would be discounted sharply. This used to be the case when gold coins circulated as money - in inflationary times, paper prices would go up, gold prices would remain stable. California used gold coins during the War Against Southern Independence, and the competing Greenbacks were discounted.

FRBs exist because governments and "nobles" or "politicians" really hate to live within their means. For the rest of us, "liquidity" is not as important as one might suppose. I have not borrowed a single dime for about five years now - paying cash for everything, including big-ticket purchases such as computers and electronics. This eliminates interest costs and encourages more careful shopping. I am told that, where homes are usually purchased with cash, housing prices are much more affordable. As for "liquidity", it's just a matter of increasing one's preference for savings; it does not take long to build enough of a "rainy day fund" to manage life's little emergencies. My daughter and son-in-law paid for the birth of their fifth child with cash - and their income is below median income in the US of A. I used to live next door to a horse breeder who raised big draft horses; many of his customers were Amish farmers who paid large sums with suitcases full of cash.