macsnafu on June 08, 2012, 10:34:29 am
i thought it was understood that we were referring to demand deposits. if one were to try to withdraw a time deposit, one would forfeit not only the interest already accrued but also have to pay a percentage of the principal as penalty.

as for free banking, it is morally reprehensible since it attempts to legitimize the fraudulent practice of fractional reserve banking. free bankers claim that theres nothing wrong with FRB when it is the direct cause of inflation. abolishing a central bank will not end inflation, since paper money is still being printed, only now its in a decentralized manner.  a bank cannot loan out money it does not have. and making agreements with borrowers to be paid back in real money after lending out paper money is just plain fraud.

the difference between 100% reserve banking advocates and free bankers is whether printing money certificates in excess of loanable funds (also referred to as fiduciary media) is fraud. 100% advocates claim it is and that bankers found guilty of it should face criminal charges. FRB is not harmless by any means, and those who sought to profit from it should face the consequences.

There is quite a lot of confusion to clear up. If you look at the history of free banking in Scotland and Canada you will notice a decide lack of of panics and runs and that's because the system worked very well and the customers knew there was very little risk of losing their money. Below I talk of the era from @1700 to 1844 in Scotland.

Firstly, it is not FRB. Historically the banknotes that were issued were as loans that were backed by the collateral of the person getting the loan. In other wrods a person had wealth but was not liquid and did not want to sell his stuff so he took out a loan on the value. Standard stuff. Then the bank would issue him notes for that amount. These notes were general claims on the asset of the bank not for gold specifically.

Secondly, the banks discovered that they could hold less than 2% of their assets as specie (one bank was as low as 1/2%) because there was so little demand for coins. Instead they purchased interest-bearing securities such as stocks, bonds, annuities, and bills of exchange. This could be easily liquidated if there was a sudden need for gold. Why should the bank forgo the interest they could earn and pay the storage costs for gold that most people did not want? The 100% reservists have a fetish for a lousy business model and they demand everyone adhere to it.

...

Nor am I saying  that people must reject 100% reserve banking. To each his own and all that. Just know that 100% liquidity does not imply solvency just as 2% liquidity does not imply insolvency.  And it's solvency that counts, not how much gold is sitting in the vault.

Heh.  Are you clearing up confusion, or adding to the confusion? 100% reserves only applies to demand deposit accounts.  Loans such as you describe would technically not be demand deposits, as the user is getting cash by putting up collateral, not depositing cash, although the collateral offered is, of course, the functional reserve for such a loan.

Also, holding the reserves in a different form shouldn't be a problem as long as it is still easily and quickly convertible for payouts--the problem with fractional reserve banking is that the bank loans it out, they aren't holding anything in any form for the depositor.

There's no reason a bank can't have 100% reserves for demand deposits, and also have time deposits that they loan out. The time deposits, of course, are specifically for loaning out, and thus don't require reserves.

Finally, as I already noted in a previous post, there's a relatively simple way for fractional reserve banking to avoid being fraudulent.  But you aren't talking about fractional reserve banking, so what does that matter in relation to your post?
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

Warren on June 08, 2012, 02:54:43 pm
Time deposits and demand deposits are immaterial distinctions.

Mechanically, the clearing of notes is what kept banks in check. It did not matter what the reserve was for demand deposits because if a bank over issued notes they would be punished via clearing so they were incentivized to not over issue because they did not want the the public to see them losing first gold and then capital. So  the clearing system automatically did everything that the 100%GR-ists want gold to do and it allowed the banks to gain interest and be healthier,  be a better investment and attract others to the trade thus increasing the utility of banking and making it available to more people  at a lower cost or increased returns.

Prior to the creation of federal deposit insurance in the US banks would advertise how much capital they were backed with. The more in relation to deposits the better, gold did not play a large part.

And it wouldn't in a free-market system. It's total assets, not total gold that matters.


A few more broader questions:


There was no law in the US, Canada, Scotland/UK, or anywhere else that prevented the establishing of 100% banks so why were they not founded? If a 100%GR was best why didn't banks based on it out compete the 2%GR(+98% capital) banks?

Why does it even matter? For people claiming to be individualists 100%GR folks spend a lot of time treating banking as a collectivist notion in the sense that we all have to do the same thing or else; woe be to us, the society is a collapsin"!

If a person reading this is a 100%GR advocate what are you willing to do if you found a bank that was not run along those lines? What if you could not find a single customer of said bank that was dissatisfied, what would be your plan for dealing with the bank, it's owners, employees and customers?



myrkul999 on June 08, 2012, 03:21:09 pm
All your questions can be answered here:

https://www.freelakotabank.com/index.asp

macsnafu on June 08, 2012, 04:26:41 pm
Time deposits and demand deposits are immaterial distinctions.

Time deposits are specifically for loaning out, while demand deposits are specifically for the depositor's convenience.  If that's not an important distinction, I don't know what is.
Quote
If a person reading this is a 100%GR advocate what are you willing to do if you found a bank that was not run along those lines? What if you could not find a single customer of said bank that was dissatisfied, what would be your plan for dealing with the bank, it's owners, employees and customers?

I'm not a 100% gold reserve advocate, merely a 100% reserve advocate.  However, as I already said, there's no reason a bank can't have 100% reserves for demand deposits and still have time deposits, which of course would not have any reserves, as they are loaned out.  Or you could have banks that focus on merely one or the other, although I think that less likely.
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

Warren on June 08, 2012, 04:50:59 pm
All your questions can be answered here:

https://www.freelakotabank.com/index.asp


There's one. Cool, though I wouldn't say it answered all of my questions.


Quote
Time deposits are specifically for loaning out, while demand deposits are specifically for the depositor's convenience.  If that's not an important distinction, I don't know what is.

What I meant was there is no difference if the backing capital is allocated or unallocated. If there is enough that's what matters.

Is your position that a bank should carry all those  demand deposits gold reserves even though they know from experience that 98% of them will not be called for and that they should weaken themselves by both paying the costs of the storage and giving up the interest  they could earn by investing in capital?


Warren on June 10, 2012, 04:59:02 pm

Thirdly, deposits were very safe.   Very little money was lost, one study covering 40 years of activity  found losses  averaged around a 1000 Pounds a year total over a population of some 3 million which compared to the gain from having an interest bearing account is virtually no risk at all for individual customers.


This is incorrect. According to page 32 of http://analyseeconomique.files.wordpress.com/2011/07/kevin-dowd-the-experience-of-free-banking.pdf it was actually 32,000 pounds over a 100 years. So about  300 pounds a year divided by 3 million people. Which is what, one one-thousandth of a pound?  

Also in that document on page 5 it points out that in the time that Free Banking existed in Scotland their average income more than doubled and the almost  caught up to England despite not having the advantages that England enjoyed.

So...
No depositor risk,
No bank runs or panics,
A huge increase in the standard of living,
No inflation
Multiple generations worth of stable money

Would a bank run on Rothbardian principles have done any better?
« Last Edit: June 11, 2012, 01:06:07 am by Warren »

sam on June 11, 2012, 02:31:04 am
I'll help you out on that one small point.  A gold standard does not
prevent inflation when you allow unsecured debt.

Here is the evolution:

1) Carrying gold around is inconvenient, so people bring it to a bank
   where it is stored in a vault.  They get a piece of paper proving
   their ownership of X units of gold in the vault.

2) People accept the pieces of paper as payment, since going to the
   vault to retrieve the actual gold is inconvienient.

3) The bank will lend gold at interest, offering either actual gold
   or the paper.  The paper is far more convenient.

4) The bank realizes that they can loan gold that belongs to depositors.
   People rarely come for the real gold, so no one is the wiser.
   This practice doubles the amount of paper representing gold - inflation.

You left out step five:

There is a run on the bank.  The bankers tell the government that people running on the bank is very bad, neglecting to say that bankers being unable to meet a run on the bank is very bad.  The government then excuses the banks from meeting their financial obligations.

I think if runs were followed by horsewhippings, bankers would usually keep a substantial fraction in actual gold.


myrkul999 on June 11, 2012, 03:53:01 am
I think if runs were followed by horsewhippings, bankers would usually keep a substantial fraction in actual gold.

Not a bad idea, but simple restitution, if fully executed, would be sufficient. After the first bank president spent the rest of his days as a branch manager to pay off his debt, the rest should march in line.

Andreas on June 11, 2012, 06:00:41 am
These are bankers, not einsteins... so after the first ten thousand bank presidents have spent the rest of their lives as branch managers to pay off the debts, the flow may begin to slow.
People become bankers in the first place because they enjoy playing with Other People's Money... OPM is a hard habit to break.

macsnafu on June 11, 2012, 10:42:34 am


Quote
Time deposits are specifically for loaning out, while demand deposits are specifically for the depositor's convenience.  If that's not an important distinction, I don't know what is.

What I meant was there is no difference if the backing capital is allocated or unallocated. If there is enough that's what matters.

Is your position that a bank should carry all those  demand deposits gold reserves even though they know from experience that 98% of them will not be called for and that they should weaken themselves by both paying the costs of the storage and giving up the interest  they could earn by investing in capital?

If the money used is gold, and I deposit gold with the bank into a demand deposit account, then yes, I expect the bank to actually store the gold somewhere for me, and that I can go to the bank and withdraw the gold at anytime, if I so choose, less whatever I've spent via checks or gold certificates. 

Of course, since a demand deposit account is a convenience to me, then I expect to pay a fee relative to the costs of storage, and not to have "free checking".  If I want to earn interest on my money, I wouldn't put it in a demand deposit account, but into a time deposit account, instead, knowing full well that there would be limitations on my being able to access my money, as it would not be available "on demand". 

A full reserve is not weakening the bank, but keeping it strong.  With a full reserve, it's hard to imagine why there would be a bank run in the first place, but if there were, then there's no problem with them providing the demand depositors with their money.

There are different types of fraud possible with banks.  One would be claiming that depositors' money is available "on demand" while in fact some of it has been loaned out to earn interest.

But, as I've already noted, your historical example about the farmers were loans backed by collateral, not actual demand deposits.  That's a part of banking that is, or should be, entirely unrelated to demand deposits or reserves, as the money loaned out should come from time deposits, not from demand deposits or fiat money printed out of thin air.  And if gold is used as money, would the bank be loaning out actual gold?  Or would they more likely be loaning out gold certficates?  Another form of fraud would be loaning out gold certificates redeemable for a certain amount of gold, while the bank doesn't actually have the gold that the certificates represent.

It is the relationship between how much people are willing to save and put into time deposits, versus how much people are wanting to borrow money, that creates the market rate of interest. 
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

myrkul999 on June 11, 2012, 11:17:20 am
These are bankers, not einsteins... so after the first ten thousand bank presidents have spent the rest of their lives as branch managers to pay off the debts, the flow may begin to slow.
People become bankers in the first place because they enjoy playing with Other People's Money... OPM is a hard habit to break.

Well, as long as the people who were harmed get their money back, it really doesn't matter if it's 10, 100, or 10,000. Play with other people's money as much as you want, so long as you pay them back.

Warren on June 11, 2012, 03:39:56 pm
Quote
A full reserve is not weakening the bank, but keeping it strong.  With a full reserve, it's hard to imagine why there would be a bank run in the first place, but if there were, then there's no problem with them providing the demand depositors with their money.

Can you point me to where actual runs were a problem under free banking? If there were no such issues then how could 100% be a palliative? 


Quote
These are bankers, not einsteins... so after the first ten thousand bank presidents have spent the rest of their lives as branch managers to pay off the debts, the flow may begin to slow.
People become bankers in the first place because they enjoy playing with Other People's Money... OPM is a hard habit to break.

And now you're using the exact kind of rhetoric that we would find coming from an Occupier. Businessmen bad! Must regulate! Even though the evidence does not support the assertion of wrongdoing being a problem.

No one here is engaging with the actual history.

It's like you say: Theory theory theory theory theory.

I come in and say: History history evidence history.

And you respond with: Theory theory horsewhipping theory!


I know most of you are free-marketeers and so should realize that markets clear, not just for labor and products but for incompetent, or corrupt businesses as well. Those sorts of operations get filtered out as they provide no value to people. If fractional gold reserve banking was a liability it would have faded away. Instead, millions of people seeking their own best interest saw it as a valuable tool to advance their position in life. So to deny FGRB is to deny the legitimacy of their choices and to treat them as imbeciles. Were they? Are you an elitist that knows what's better for the little man then they themselves do?

Also, can someone point out all the 100% reserve banks that existed alongside the FGR banks? Scotland had 29 FGRBs at one point but how many 100% banks were there? Canada also had a load of note issuing banks, but how many 100% banks?  And if you can't find them can you explain why they didn't exist? It's not like they were illegal.

macsnafu on June 11, 2012, 05:33:55 pm
Quote
A full reserve is not weakening the bank, but keeping it strong.  With a full reserve, it's hard to imagine why there would be a bank run in the first place, but if there were, then there's no problem with them providing the demand depositors with their money.

Can you point me to where actual runs were a problem under free banking? If there were no such issues then how could 100% be a palliative? 
....

I know most of you are free-marketeers and so should realize that markets clear, not just for labor and products but for incompetent, or corrupt businesses as well. Those sorts of operations get filtered out as they provide no value to people. If fractional gold reserve banking was a liability it would have faded away. Instead, millions of people seeking their own best interest saw it as a valuable tool to advance their position in life. So to deny FGRB is to deny the legitimacy of their choices and to treat them as imbeciles. Were they? Are you an elitist that knows what's better for the little man then they themselves do?

Free banking, per Wikipedia
Quote
Free banking refers to a monetary arrangement in which banks are subject to no special regulations beyond those applicable to most enterprises, and in which they also are free to issue their own paper currency (banknotes). In a free banking system, market forces control the supply of total quantity of banknotes and deposits that can be supported by any given stock of cash reserves, where such reserves consist either of a scarce commodity (such as gold) or of an artificially limited stock of "fiat" money issued by a central bank. In the strictest versions of free banking, however, there either is no role at all for a central bank, or the supply of central bank money is supposed to be permanently "frozen." There is, therefore, no agency capable of serving as a "lender of last resort" in the usually understood sense of the term. Nor is there any government insurance of banknotes or bank deposit accounts.

So my first comment is that I don't see any particular conflict with free banking and full reserves.  Again, I don't see where you specifically provided examples of fractional reserve banking under demand deposit accounts--did I miss those examples?

And perhaps a better question is why, as government regulation of banks and central banking grew, banks almost completely became fractional reserve banks? If FRB banks don't have problems, then why greater regulations and central banking?  Doesn't the Fed control how much reserves banks have to have? Isn't part of the problem that led to the Great Depression the fact that the Fed forced banks to maintain lower reserves than they had at the time? 

In short, I don't think there's as much conflict between us as there is confusion about the semantics related to banking.
I love mankind.  It's PEOPLE I can't stand!  - Linus Van Pelt.

Andreas on June 11, 2012, 11:27:44 pm
Warren: Now you're engaging in the exact kind of rhetoric one can expect from a corrupt banker "Oooh, Occupiers Bad".
Are you saying that people enter into the Government of Money for other reasons that 1) Enriching themselves and 2) Getting to play with OPM?

Do you claim that there are high-ranking bankers out there that have nothing but a genuine concern for ensuring that their clients are given the best monetary service possible?

That said, I agree that the wrong kind of regulations have been in effect. The brokers' employers ought to be fixing the problem; short-term incentives for long-term advice. Let the brokers receive benefits in the form of the stuff they actually sell to others; bound for a period relative to the kind of commodity involved.
« Last Edit: June 12, 2012, 12:07:16 am by Andreas »

Warren on June 11, 2012, 11:34:24 pm
If there is disagreement it's tertiary, not to the substance of the idea.  Most of this isn't aimed at you but rather is for general consumption.

First, the Wiki article mentions a lack of lender of last resort mechanism. The author(s) of the article fail to realize that free banking needs no such creature. But its Wikipedia, so I'm not going to get worked up over it.

Second, I do not know the day-to-day operational details of these banks so I do not know  exactly how they treated deposits but given that at the end of the era gold reserves were less than 2% on average I'd have to assume that deposits were not fully backed yet it was not a problem. Which means that for examples I would just say all banks in Scotland or Canada. (Though there were some early note issuing banks that did not take deposits. I don't which ones they were or if that persisted throughout the era.)

Third, banks started as FGR banks only their reserves were higher in the beginning.  It was the regulations that made the banks less capable and prone to error. Not that the banks were having problems and needed to be saved from themselves.

And why central banking and regulations and the end of free banking? This is government we're talking about. Why does it do anything?

In the PDF I linked to starting on page 40 there is a chart that lists why free banking ended in the various places it was. "Crisis" gets a few entries but it's mostly "theory" and "seigniorage" get the bulk. So in the former the politicians got talked into something and in the latter they wanted to be able to grab the profits from printing and spending money into the economy.

In short it wasn't a failure of free banking but the usual idiocy and corruption that are  the hallmarks of government that led to its demise.

 

anything