Quote:
Originally Posted by Poker879
Here is the problem, the banks don't just magically print money. They are acting as the middlemen between depositors(lenders) and borrowers. For example, I posted this in another thread:
The money is not created. If we start out with say 1B, and it is all deposited and then 10B is loaned out, the personal balance sheets of parties involved: 1) the original depositor of the 1B, 2) the bank and 3) the receivers of the 10B dollars; will all sum to a grand total of still $1B.
The parties involved know this and are willing to accept it, as should be allowed in a free society, free exchange of goods and sevices.
this is how the total of 10B is created.
1. 1B deposited
2. the bank is then allowed at a 10% reserve ratio to lend of $.9B
3. Eventually that .9B is deposited back
4. now the bank can lend 90% of the .9B, so .81B
5. The process continues until a total of .9+.81+.729 ... is lent out our equal to {1/(reserve ratio) - 1}.
at the first step of 1B deposited and then .9B lent out, this is perfectly acceptable, as the bank is simply acting as a mediator between the depositor and a borrower. The depositor is in effect investing his money as a lender into the borrower, but the bank is acting as a go between mediator. This process is then repeated as indicated above until the total is lent out.
Please show me where I am either a) incorrect, or b) showing a moral or legal fallacy in the process.
There are several problems here. First, the bank as you describe it is inherently insolvent. There is a mismatch between the time structure of their "assets" (the loans) and their deposits. The former have a maturity, the latter are demand deposits. Hence, depositors can show up at the same time and demand their deposits, which the bank does not have, and the bank is revealed in its insolvent glory.
Second, the bank is definitely inflationary. Just claiming that the newly created money balances the loan debt does not change this. To see this, imagine that person A deposits 100 oz of gold in an FRB bank and recieves a checkbook with which he can write checks off of his account. Then the bank makes a loan of 90 oz of gold to person B, and gives him a checkbook to write checks with as well. There are now 190oz of checks that can be written where there are only 100oz in existence. Without the creation of the additional 90oz of checkbook money, only 100oz could have been spent. Now, 190oz can be.
Let's say that, in the absence of the loan made to B, person A would purchase a flat screen TV for 1oz. Person B could not afford the TV. But after the loan, person B is willing to pay 1.5oz to bid the TV away from A. A must either give up the TV, or increase his bid until B gives up. In either case,
A has been made poorer by the loan to B. Hence monetary inflation via fractional reserve banking not only tends to increase prices but it redistributes wealth.
All of this is trivially avoided by a 100% reserve system. You pay the bank a small fee to house and protect your demand deposits, and they pay you interest to loan out your time deposits. If you write a check for 1oz on your demand deposits, it cannot be loaned out to expand the supply of fiduciary media. If you have your 100oz on time deposit, then you cannot write a check on it. The consumer/saver is free to choose what proportion of funds to keep on demand and what proportion to loan at interest.
I understand the point of the free bankers with competitive note issuance, but in my opinion, without the government supports, 100% reserve banks would drive FR banks out of business via competition. But I'm willing to let the market sort it out.