19 Oct 2013

“The Biggest Scam in the History of Mankind”

Debt, Federal Reserve, Nick Rowe 129 Comments

This video is pretty neat; it’s racking up views very quickly. It’s very well done, but unfortunately there are a few things that I think they get wrong.

Some of my objections:

==> The guy a few times says “I” when he should say “me.”

==> I understand where he’s coming from, but I don’t think it works to say that the fiat dollar is just currency, not really money. That certainly won’t line up with the Misesian approach to monetary theory; fiat money really is money. It’s fiat, of course, but it’s money, hence the name: fiat money.

==> I really don’t like the stuff about the government needs to create more money in order to pay interest on existing debt. I walk through the problems with that kind of approach here. More generally, in the book I co-authored with Carlos Lara, I acknowledge the truth that yes, there is a sense in which our modern monetary system is intricately tied to debt, but it doesn’t mean quite what a lot of the people pushing this line think it means.

==> Finally, at one point in the video they imply that the U.S. Constitution forbids the government from issuing anything other than gold and silver coin. However, the clause is from Section 10 of Article I, which are prohibitions on the State governments. Don’t get me wrong, I’m not saying the Constitution gives the federal government the authority to issue fiat money, but my point is that it’s not quite right to point to the prohibitions on State governments as the smoking gun for what the federal government is allowed to do, regarding money. (For my views on this stuff, again I point you to my book with Carlos Lara.)

* * *

Partly I’m listing the above objections just because I want to balance my main message, which is that this is a very cool video, and I’m glad to see it gaining so much attention so quickly.

Oh, one last tidbit: Based off of a quote from the video, I realize that Thomas Jefferson was walking through the issue of government debt burdening future generations even before Nick Rowe had his PhD. It’s pretty sophisticated; check it out.

129 Responses to ““The Biggest Scam in the History of Mankind””

  1. Jim PM says:

    I watched it, and was confused about the assertion that deficits are necessary because that there is more interest owed than money in existence

    If that’s wrong, I think it pretty much crumbles his whole thesis.

    I’ve heard that same thing before, but it’s always confused me. Sounds somewhat similar to what Mosler was arguing in the MMT debate.

    • Bill Woolsey says:

      The assumption is that velocity is one… but not one per year, one per…day… hour…. instant? This would make effective velocity 1/365 or less, approaching zero. Usually, it is substantially greater than one (per year.) That is, on average, each dollar is spent more than one time per year. That way, the flow of spending on output per year can be substantially greater than the quantity of money that exists at any point in time.

      Interest payments are a flow through time and the stock of money is an amount at a point in time.

      Those receiving interest payments can spend money to buy bread. Those selling bread can pay wages. Those earning wages can pay rent and interest. As for government debt, some of the money can be used to pay taxes and then the government has more money to pay interest on government debt.

      • James says:

        Bill, that only works if all interest income is spent.

        If the population tries to increase its financial savings over time, by for example not spending interest earned, this can only be achieved through increased debt.

        • Tel says:

          The concept of “financial saving” is nothing more than pairing up a person who wants to save with a person who wants to borrow. If the person wants to save but there is no available companion wanting to borrow then there is no way to use the financial system as a savings vehicle.

          Yes the government can step in and offer to be the borrower, but this is really a promise made on behalf of future taxpayers, no guarantee the promise will be kept. For that matter, buying bonds during times of exceptionally low interest is dangerous because it leaves you open to any increase in interest rates.

      • Jim PM says:

        Ok, I think I understand this, but what would happen if we balanced the budget, or even had a surplus which was used to pay down the debt? Would it slow down velocity enough to have an impact on the economy or the currency? Would private debt have to increase to make up the difference?

    • Gamble says:

      It is true. That is why there is never enough and most of always feel trapped. MMT is more like what have than is sound money. Some people just do not want to admit how bad things really are.

      I will ask the same question I always ask yet everybody seems to shrug me off.

      IF a Country were total socialism, what WOULD their economic system look like? I mean, somehow they would have to distribute the fruits of production even if only for their own benefit. Somehow things would have to move around. It would never be like Radars of the Lost Ark, whips, chains, slaves. They know better than that. It has to be softer, invisible.

      I say the answer is simple. Look to America for your answer.. Look to Global Digital Fiat Frac Reserve Banking with ZERO reserves. Because these people have no reserves if you look at the true ratio.

      It is here, hello. Why do you think people are so cranky and tired. They are swinging an inadequate weapon at an invisible beat, never the less they know something is amiss…

      Stop being such gullible sheep, there is no freedom.

      AD00-1913 LADY LIBERTY R.I.P.

  2. joe says:

    Video is childish and full of misinformation. At 6:36 it’s obvious that he believes he is talking to a group of morons. Who does not know that a savings account is a loan to the bank? Do people actually not know the difference between a savings account and a safe deposit box?

    It’s just a “buy gold” infomercial. It links to a site selling the ridiculous pegasus coin.

    • Chris P says:

      I’m sure most people do know that a savings account is a loan to the bank. But can we say the same thing for checking accounts? I can honestly say when I was a teenager I was under the impression that the bank didn’t loan out my checking account since it didn’t pay me interest. Had I been like most people and never studied economics, I would probably still be under that impression.

      It’s true the video didn’t make clear that the deposits were checking deposits and not savings deposits, but I knew what it was implying.

  3. John S says:

    So Bob, you have no problem with the narrator equating fractional reserve banking to “stealing” 90% of depositors’ money to lend it out and make a profit?

    FRL is a contractual arrangement. If some people want to pay for money warehousing services, fine. But if others voluntarily choose to deposit at banks engaging in FRL, what’s the problem?

    • jack says:

      I’m sorry, am I choosing voluntarily in fiat/LTL framework? Have you ever heard of Friedman’s network effect? It takes a butterfly piss to make people to use one currency over the other.

  4. AcePL says:

    Bob,

    Use of “I” is proper, as I was led to understand some time ago during English lessons. 🙂
    Second-I think use of term “currency” is for clarity. I see Irwin Schiff influence here. And I don’t agree with you-dollar is not money. Fiat money to money is like artificial sweetener to sugar. Same function but one is”empty”
    Last-if I understand US constitution federal government cannot have powers other than granted them by the States? If so, video is correct.

    Jim, its not assertion, but logical conclusion.
    joe, John – FRL may be contractual, but what happens when you want all your money back and bank doesn’t have it? Or there is a bank no more?

    • James says:

      in the same paragraph the Constitution says that the States may not coin money. But the power to coin money is explicitly given to Congress.

    • John S says:

      “what happens when you want all your money back and bank doesn’t have it?”

      A bank that can’t satisfy its liquidity obligations will go out of business. It is up to the depositors to carefully screen a bank for soundness before they entrust their savings.

      However, depositor losses from bank runs and failures were historically low in free banking systems w/o a lender of last resort. Example: free banking Canada had zero failures during the Great Depression, while the US under the Fed had 9,000.

      This is a great book, esp. the chapters on Canada and Scotland. The US chapter is also a good summary of the flaws of the American banking system from the end of the 2nd Bank of the United States until the Civil War:

      http://menghusblog.files.wordpress.com/2012/02/the-experience-of-free-banking.pdf

      • AcePL says:

        As far as I know, in US bank which cannot pay out customer’s money can refuse to pay him. Legally.
        Also, there is an FDIC which guarantees a fraction of deposit walue?

        But that’s only in certain conditions, so I agree that speaking of theft in FRL is a bit over the top. So… Uncle. Sorry for flaming.

  5. Jeremy R. Hammond says:

    Bob, what Mike is saying is that the definition of “money” includes it being a store of value. Federal Reserve Notes aren’t. Hence, by definition, not “money”.

    joe, “Who does not know that a savings account is a loan to the bank?” I would venture to guess that the vast majority of the population don’t see it that way. They rather think of it in terms of the bank “keeping” their money safe for them, and they expect it to always be there if they ever want it back.

    John S, I would have to agree with Mike that lending money created out of thin air and charging interest for its use and engaging in legalized counterfeiting is effectively fraud and theft.

    • James says:

      Everyone but the most ignorant knows that banks ‘lend out’ the money that people deposit with them. That is the whole point of banks – they make loans. That’s why they can afford to pay interest on deposits. If the money just sits in a vault doing nothing, where does the interest come from?

    • Major_Freedom says:

      Fiat notes are a store of value. Sure, the value steadily decreases if you hold them over time, since the essence of fiat money is for the controllers to inflate them at will for their and their friend’s benefit, but steadily decreasing value is not the same thing as no store of value at all.

      Besides, in a free market monetary economy, where the value of money tends to steadily rise as productivity tends to increase, there is no guarantee of this. It is possible for production to decline over a period of time, thus making a given dollar held during that time decrease in value as well.

    • James says:

      Banks don’t lend money that they create out of thin air. They create deposits, which are loans from depositors to the bank.

      When they create a deposit they are going into debt to the depositor, i.e. borrowing from the depositor. There isn’t anything fraudulent about that, nor is it theft.

      • Major_Freedom says:

        James, granting a loan by issuing a deposit sum to an individual, a loan that is not backed by prior saving, where those loans are enforced as legal tender, is indeed lending money out of thin air.

        Yes, it’s also a liability to grant a deposit to the depositor, but you’re ignoring the asset created by the loan: principal plus interest, which belongs to the bank.

        • James says:

          When the deposit is created, the depositor can ask to withdraw the money. If they choose not to do that, then they are lending the money to the bank instead.

          Banks don’t start out with zero money and then create it out of nothing. They start with some initial capital, which they then leverage by borrowing, in part, from depositors.

          When a bank makes a loan and creates a new deposit, they are borrowing from the depositor (the person taking out the loan). When that person uses the deposit to pay another customer at the same bank, the bank is then borrowing from that other customer.

          In essence the person who took out the loan is borrowing from the person he then paid with the deposit.

          • Major_Freedom says:

            “When the deposit is created, the depositor can ask to withdraw the money.”

            No, after a deposit is created, the depositor withdraws not the deposit itself, but either cash, which is not the form of the original deposit, or a check or money order, in which case there is no withdrawal, but a transfer of liability from that bank to another bank that accepts the check or money order.

            Either way, the credit creation is not what is subsequently withdrawn.

            “If they choose not to do that, then they are lending the money to the bank instead.”

            Not necessarily. It depends on the understanding of both the client and the bank. In many cases in the real world, the client is NOT with the understanding that the money is the bank’s property, but instead the client’s property.

            “Banks don’t start out with zero money and then create it out of nothing. They start with some initial capital, which they then leverage by borrowing, in part, from depositors.”

            You’re ignoring the credit creation that is not backed by anything the bank owns. Banks don’t only borrow.

            “When a bank makes a loan and creates a new deposit, they are borrowing from the depositor (the person taking out the loan).”

            Not necessarily. See above.

            “When that person uses the deposit to pay another customer at the same bank, the bank is then borrowing from that other customer.”

            Not necessarily. See above.

            “In essence the person who took out the loan is borrowing from the person he then paid with the deposit.”

            See above.

            • James says:

              A deposit is a bank debt, a promise made by the bank to pay money. So when a deposit is created, the depositor can ask to withdraw the money that is promised. Or they can transfer the deposit to another bank. Or they can leave the deposit as it is and continue to lend money to the bank.

              “In many cases in the real world, the client is NOT with the understanding that the money is the bank’s property”

              The deposit is their property. If they think that banks are just places where money sits in vaults doing nothing then frankly they’re dumb. They only need to ask, or read the terms and conditions, or just think, to realize that banks borrow and lend money.

              “credit creation that is not backed by anything the bank owns”.

              It’s backed by the bank’s assets, including its reserves.

              • Major_Freedom says:

                “A deposit is a bank debt, a promise made by the bank to pay money. So when a deposit is created, the depositor can ask to withdraw the money that is promised. Or they can transfer the deposit to another bank. Or they can leave the deposit as it is and continue to lend money to the bank.”

                This assumes the depositor understands the activity taking place.

                This is not always the case. It’s likely in the minority of cases.

                “The deposit is their property. If they think that banks are just places where money sits in vaults doing nothing then frankly they’re dumb.”

                Blame the victim, huh?

                “They only need to ask, or read the terms and conditions, or just think, to realize that banks borrow and lend money.”

                Why doesn’t the bank make it clear without being asked?

                If I sell you a Big Mac, and I put a chemical in it that makes you have indegestion, would it be justified for me to say “you are dumb” for not finding out 100% of the ingredients by asking me?

                “It’s backed by the bank’s assets, including its reserves.”

                Not 100%

              • James says:

                They’re not victims. I genuinely don’t know anyone who believes that when they deposit money in a bank it just sits in a vault gathering dust. Everyone knows that banks lend money. I don’t know who these clueless people are that you are talking about. Where do they think the interest paid on deposits comes from? Why do they think they get paid interest if the money is just sitting in a vault doing nothing?

                When you buy a Big Mac it doesn’t say “we killed a cow, cut up its body into little pieces, ground them up, cooked it a bit, and then put it between these two pieces of bread. Most people know what “beef” means.

                “Not 100%”

                Bank assets normally exceed their liabilities (which includes deposits). If a bank’s liabilities exceed its assets then it is insolvent and could be declared bankrupt.

              • Major_Freedom says:

                “They’re not victims.”

                I am not saying they all are. Just those who don’t understand, and are misled.

                “I genuinely don’t know anyone who believes that when they deposit money in a bank it just sits in a vault gathering dust.”

                I genuinely know that your personal experience does not constitute disproof.

                “Everyone knows that banks lend money.”

                Not everyone knows that banks lend demand deposite money.

                “I don’t know who these clueless people are that you are talking about.”

                You haven’t been looking.

                “Where do they think the interest paid on deposits comes from?”

                Interest earned on loans from money lent to the bank, for example.

                “Why do they think they get paid interest if the money is just sitting in a vault doing nothing?”

                Banks don’t only hold money.

              • James says:

                “Interest earned on loans from money lent to the bank, for example.”

                That’s what a ‘deposit’ is – money lent to the bank.

              • Major_Freedom says:

                “That’s what a ‘deposit’ is – money lent to the bank.”

                No, that is a loan.

                Not all deposits are loans, in the minds of the depositors.

              • James says:

                Citibank:

                “Unless otherwise expressly agreed in writing, our relationship with you will be that of debtor and creditor. That is, we owe you the amount of your deposit. No fiduciary, quasi-fiduciary or other special relationship exists between you and us.”

                https://online.citibank.com/US/JRS/pands/detail.do?ID=ChkBasicChecking

                Bank of America:

                “Our deposit relationship with you is that of debtor and creditor. This Agreement and the deposit relationship do not create a fiduciary, quasi­fiduciary or special relationship between us.”

                https://www.bankofamerica.com/deposits/resources/deposit-agreements.go

                Wells Fargo:

                “The Bank’s relationship with you concerning your account is that of debtor and creditor; no fiduciary, quasi-fiduciary, or special relationship exists between you and the Bank.”

                https://www.wellsfargo.com/downloads/pdf/online_disclosures/CAA/CAA-EN.pdf

              • James says:

                Citibank:

                “Unless otherwise expressly agreed in writing, our relationship with you will be that of debtor and creditor. That is, we owe you the amount of your deposit. No fiduciary, quasi-fiduciary or other special relationship exists between you and us.”

                Bank of America:

                “Our deposit relationship with you is that of debtor and creditor. This Agreement and the deposit relationship do not create a fiduciary, quasi­fiduciary or special relationship between us.”

                Wells Fargo:

                “The Bank’s relationship with you concerning your account is that of debtor and creditor; no fiduciary, quasi-fiduciary, or special relationship exists between you and the Bank.”

                (Above quotes from customer deposit account agreements)

              • Major_Freedom says:

                James:

                Legally those banks are not breaking any laws.

                This is besides the point. I was not making an argument that such banks were breaking laws.

                My point has to do with understanding, or lack thereof, and the effects of it.

              • James says:

                “A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly by loaning or indirectly through capital markets. A bank links together customers that have capital deficits and customers with capital surpluses.”

                http://en.wikipedia.org/wiki/Bank

              • Major_Freedom says:

                That’s not all banks do. Banks do more than just lend to others what was lent to them first.

                This definition you posted misses the mark.

              • James says:

                I posted a definition from Wikipedia because it’s so obvious. I don’t know how anyone can believe that when you deposit money in bank it just sits in a vault until you come back for it. There might be the odd person out there who has never read anything about banks and knows absolutely nothing about banks, who might for some reason believe that, but I don’t really see why their ignorance is that important to a debate about banking.

              • Major_Freedom says:

                James:

                “I posted a definition from Wikipedia because it’s so obvious.”

                Sure, that aspect of banking is obvious. But again, that is not all that banks do. The credit expansion that banks engage in is something that is not so obvious.

                “I don’t know how anyone can believe that when you deposit money in bank it just sits in a vault until you come back for it. There might be the odd person out there who has never read anything about banks and knows absolutely nothing about banks, who might for some reason believe that, but I don’t really see why their ignorance is that important to a debate about banking.”

                I can appreciate your frustration on people’s ignorance concerning fractional reserve banking. I’m being serious.

                But the point that matters here is that the real world isn’t 100% full of people who understand FRB. Economic effects are caused by what actually happens, not necessarily what should happen.

                In the real world, which I believe should improve a great deal by the way, contains a vast population of market actors who do not understand that when they deposit money into a bank, the bank is considered the legal owner of those funds, and that the bank lends those funds to third parties.

                The result of this ignorance is an exacerbation of distortions to economic calculation. When you have two people believing they are owners of the same dollar, economic calculation errors are inevitable.

        • Lord Keynes says:

          Writing a negotiable bill of exchange or negotiable promissory note is also creating money out of thin air. It’s a fundamental part of capitalism and private sector exchange, fool.

          • Major_Freedom says:

            Not if those notes are not enforced as legal tender you moron, which you have no basis for claiming will occur in a free market of money.

            I can’t pay my taxes, or settle a debt in a court, by paying the plaintiff these “negotiable bills of exchange.”

            • Lord Keynes says:

              Which suggests that you concede that private sector agents are perfectly capable of creating new money, an admission which refutes your point above.

              • Razer says:

                Read his statement again, Dummkopf. It may create new money that also will heavily discounted at face value, since eugenics-loving enforcers won’t be standing by to force innocent bystanders to accept these hokey new private notes. do you follow, Lord Dummkopf?

              • Major_Freedom says:

                Of course the private sector is capable of creating new money.

                That is what I want.

                That is what I consider to be optimal.

                But the crucial point you are missing is that in a free market of money, no individual is coerced into using that money. They can deny it without any threat of violence against them.

                Constrast this with the money banks create in our economy and political context. Here, such money is forced as legal tender. We are forced to pay taxes and when bank credit is the only “money” people own, they MUST pay a portion of it in taxes. This is what “monetizes” this credit.

                This “admission” does not in any way “refute” my point above. It remains consistent.

                You need to identify and distinguish between money created and enforced in some way by the state, and money created and remaining optional as a medium of exchange.

  6. John S says:

    Jeremy Hammond,

    I don’t mean to be argumentative. But I have a serious question: would you ban fractional reserve lending, if given the chance? If the law said that all depositors opening a new account had to be given a brochure explaining the workings of FRB and customers still agreed to open accounts in order to receive interest, what would be your justification for stopping such a voluntary contractual agreement?

    Also, without fractional reserve lending, how would you pay interest on deposits? If the Fed were abolished and a free banking system were set up instead, I don’t see how non-FRB banks could compete with interest paying banks practicing FRL.

    • Bob Roddis says:

      I think it is possible for the depositor and banker to work out some kind of agreement on the nature of the beast. Where it all falls apart is when presenting a note to a third party as payment. The FRB note is nothing more than a paper contract which misstates the actual agreement because the specie promised by the note is not really in the bank. If the note explained the truth of the situation, few people would take the notes which should, in fact, be discounted more than or at least as much as a personal check. Recall that it is a crime to write a check when you do not have the money in the bank.

      http://factsandotherstubbornthings.blogspot.com/2012/07/bob-roddis-makes-bad-argument.html?showComment=1342710030818#c2618524232434861358

      • Chris P says:

        I tend to agree with Bob on this. FR notes are essentially financial instruments carrying a credit risk and liquidity risk. It’s hard to see how, in a genuine free market, they could become more liquid than the very commodity they’re denominated in and trade as money.

        I wrote a rather long a rambling blog post on this a little bit ago.
        http://chrispacia.wordpress.com/2013/09/10/is-fractional-reserve-banking-compatible-with-bitcoin/

      • Lord Keynes says:

        “Where it all falls apart is when presenting a note to a third party as payment. The FRB note is nothing more than a paper contract which misstates the actual agreement because the specie promised by the note is not really in the bank.”

        Wrong and ignorant. A FRB note is nothing but an IOU — a credit/debt instrument — not a certificate of bailment.

        ” If the note explained the truth of the situation, few people would take the notes”

        Roddis knows this by magic or telepathy, it seems. Despite the fact that throughout modern history before the 1930s and the phasing out of private bank notes, any savvy person — especially business people — would know that you accept a private banknote at your own risk, just like a cheque, yet private banknotes were ubiquitous.

        “Recall that it is a crime to write a check when you do not have the money in the bank. “

        Normally it is only a criminal case IF there was deliberate intent to defraud, and anyway, through overdrafts and other means, banks usually make an effort to avoid these problems by putting an account into debit status.

        Otherwise, a bounced check is just a matter of civil law: it means a private suit to make a person repay their debts, since a cheque is an IOU.

        • James says:

          An FRB note is a loan to the issuing bank, just like a bank deposit.

          The specie isn’t all there in the bank’s vault because the bank has lent it out. It wouldn’t borrow the specie just to leave it sitting in its vault, would it.

        • Major_Freedom says:

          “A FRB note is nothing but an IOU — a credit/debt instrument — not a certificate of bailment.”

          This does not contradict the statement you quoted from Roddis.

          The bank is making promises to pay at any time, but the bank does not actually have what it promises to pay on hand. The bank is gambling that its clients will not all exercise their option to withdraw at the same time.

          “If the note explained the truth of the situation, few people would take the notes”

          “Roddis knows this by magic or telepathy, it seems.”

          No, it has empirical foundation. Banks and the government tend to not make this aspect of their operations clear, precisely because if it were clear, they’d have fewer FRB deposits. A bank can suddenly experience a run, with no fundamental changes in its own books, but there was a change in the perception of the bank due to its clients learning the bank doesn’t actually have the money it has promised to make available at all times. Bank runs are examples of clients NOT wanting to be FRB clients.

          • James says:

            “The bank is making promises to pay at any time”

            Not true. Banks always specify that large withdrawals usually need advance notice.

            If a bank can’t meet all of its depositors withdrawals at exactly the same time, this doesn’t mean it’s insolvent, it means it’s illiquid. It needs some time to sell enough assets, or borrow, or receive enough payments, to meet all the withdrawals.

            Bank runs are not examples of people not wanting to be FRB clients, they are examples of people afraid that their bank might be on the brink of insolvency, due to a collapse in the value of its assets.

            • Major_Freedom says:

              “Not true. Banks always specify that large withdrawals usually need advance notice.”

              These are not demand deposits. These are actually short term loans.

              The context I am referring to are demand deposits.

              “If a bank can’t meet all of its depositors withdrawals at exactly the same time, this doesn’t mean it’s insolvent, it means it’s illiquid. It needs some time to sell enough assets, or borrow, or receive enough payments, to meet all the withdrawals.”

              What if the quantity of demand deposits exceeds its assets, which is 99.999% of the time for all banks?

              “Bank runs are not examples of people not wanting to be FRB clients, they are examples of people afraid that their bank might be on the brink of insolvency, due to a collapse in the value of its assets.”

              No, they are examples of people no longer wanting to be FRB clients, but physical holders of money.

              • James says:

                Even with demand deposits banks can require notice for large withdrawals. It’s in the terms and conditions.

                “What if the quantity of demand deposits exceeds its assets”

                If a bank’s liabilities exceed its assets then it is insolvent. This isn’t normally the case, obviously.

                People are quite happy to leave their money in a bank so long as it’s safe and they are getting decent service and a return on their money. They withdraw their money when they think the bank is at genuine risk. This happens when the value of its assets collapses, which can be caused by borrowers defaulting en masse, or by the bank losing large amounts on investments that turn sour, etc.

              • Major_Freedom says:

                “Even with demand deposits banks can require notice for large withdrawals. It’s in the terms and conditions.”

                Those are not demand deposits, even if they call it as such.

                “If a bank’s liabilities exceed its assets then it is insolvent. This isn’t normally the case, obviously.”

                That is ALWAYS the case with FRB banks. It’s the very essence of FRB. To create more loans than could otherwise be created on the basis of bank assets alone.

                “People are quite happy to leave their money in a bank so long as it’s safe and they are getting decent service and a return on their money.”

                Again, this assumes the people have an understanding of the nature of FRB activity. Happiness is predicated on what people think. If they think they are the owner, and that the money is actually at the bank, they’ll tend to feel a lot safer.

                “They withdraw their money when they think the bank is at genuine risk.”

                Banks are always at genuine risk. All it takes is for enough people to exercise a basic right of their contract.

                “This happens when the value of its assets collapses, which can be caused by borrowers defaulting en masse, or by the bank losing large amounts on investments that turn sour, etc”

                Or when there is but a perception of bank problems.

              • James says:

                “Those are not demand deposits, even if they call it as such.”

                Well that’s what they are usually called. Normally you can withdraw your money without notice, but banks reserve the right to require notice in certain cases. This standard across all banks, even if they don’t often do it, and it’s in the T&Cs.

                “That is ALWAYS the case with FRB banks.”

                No of course it is. A bank’s assets includes its loans. Like any business, bank assets normally exceed liabilities, otherwise they are insolvent.

              • James says:

                *No of course it isn’t.

              • James says:

                A bank balance sheet has things like loans and reserves on the asset side, and deposits and other borrowings on the liability side, and the excess of its assets over its liabilities is its equity.

                http://www.investopedia.com/articles/stocks/07/bankfinancials.asp

              • Major_Freedom says:

                “Well that’s what they are usually called.”

                What things are called are not always representative of what things are, given common understanding of terms.

                “Normally you can withdraw your money without notice, but banks reserve the right to require notice in certain cases.”

                Sure, but these are loans.

                “This standard across all banks, even if they don’t often do it, and it’s in the T&Cs.”

                How many people understand 24 page demand deposit contracts?

                “That is ALWAYS the case with FRB banks.”

                “No of course it is. A bank’s assets includes its loans.”

                No, of course it is. The reason why regular bank runs bankrupt banks is precisely because these demand deposits exceed the bank’s assets.

                “Like any business, bank assets normally exceed liabilities, otherwise they are insolvent.”

                Again, banks are always insolvent in this respect. FRB banks always have liabilities greater than assets. It’s the whole point of FRB.

              • Major_Freedom says:

                “A bank balance sheet has things like loans and reserves on the asset side, and deposits and other borrowings on the liability side, and the excess of its assets over its liabilities is its equity.”

                The fact that banks are allowed to account for things in a way that makes it look like they’re solvent, doesn’t mean they are actually solvent.

              • James says:

                “The reason why regular bank runs bankrupt banks is precisely because
                these demand deposits exceed the bank’s assets.”

                For any normal bank, its assets are far in excess of its demand deposits. Most bank deposits are actually saving or time deposits, not demand deposits anyway.

                A loan is an ASSET. I don’t know why you find this difficult to understand, it’s just basic accounting.

                “banks are always insolvent in this respect”

                No they’re not. There’s really no point in you making stuff up, because no-one who actually understands banking or accounting will ever take you seriously.

              • Bob Roddis says:

                I’ve said numerous times that the FRB contract between the depositor and the bank can be resolved however they like. What I do not understand is the opposition from the pro FRB crowd to stating on the face of the note exactly the nature of the transaction for the benefit of the payee. This is the only contract I can think of where in the meeting of the minds the parties allegedly imagine a different contract than that which is actually described on the note. Considering the battles-to-the-death between the pro and anti FRB sides that occur about the nature of these notes, I fail to understand the opposition from the pro-FRB side to clearly stating the nature of the beast on the note. Once the payee has been clearly warned on the face of the note, he takes his chances.

              • Bob Roddis says:

                And since the vicious pro-FRB side always claims that the payee ALWAYS knows the true nature of the FRB note, it really couldn’t hurt to describe the precise nature of the note on its face, now could it?

              • Major_Freedom says:

                “For any normal bank, its assets are far in excess of its demand deposits. Most bank deposits are actually saving or time deposits, not demand deposits anyway.”

                No, for any normal bank, its demand deposit liabilities are FAR in excess of its assets. It’s the very reason why FDIC prevents bankruptcies from withdrawals of demand deposits.

                “A loan is an ASSET. I don’t know why you find this difficult to understand, it’s just basic accounting.”

                Your confusion stems from a misunderstanding of the terms as they pertain to banking.

                Yes, a loan is an asset, but you are having trouble grasping that these loans a bank has on its books are vastly exceeded by the demand deposit liabilities the bank also has on its books.

                If I have an outstanding loan on my balance sheet as an asset, but I promise to pay 10 times that on demand, when my depositors request withdrawals, then it doesn’t matter that I have the loan as an asset. My depositors are asking for money, not my loan assets. I can’t make good withdrawal requests using these loans.

                You don’t seem to be able to parse reality out of accounting numbers. The fact that a bank balance sheet has equal assets and liabilities says nothing about its actual solvency.

                “banks are always insolvent in this respect”

                “No they’re not.”

                Yes, they are. The fact that banks rely on FDIC should have clued you in.

                “There’s really no point in you making stuff up, because no-one who actually understands banking or accounting will ever take you seriously.”

                I am not making anything up. You’re just wrong. And I don’t care who you believe takes me seriously. I am interested in truth, not what gets nods from people who, like you, don’t understand banking.

              • Major_Freedom says:

                Roddis:

                Pro-FRB advocates know that if the true nature of FRB activity were known, there would be a distinct drop in the number of such deposits they would be able to attract.

                This is why they tend to be vehemently against any increase in transparency.

              • James says:

                “Yes, a loan is an asset, but you are having trouble grasping that these loans a bank has on its books are vastly exceeded by the demand deposit liabilities the bank also has on its books.”

                I don’t know where you picked up this completely erroneous idea.

                A solvent bank has assets in excess of its liabilities. A bank’s assets are basically loans and other securities, and reserves. Its liabilities are basically deposits and other borrowings. Its demand deposits do not exceed its assets. Banks hold more savings and time deposits than demand deposits.

              • Lord Keynes says:

                “I fail to understand the opposition from the pro-FRB side to clearly stating the nature of the beast on the note”

                Private FR banknotes no longer exist.

                Apparently roddis is so stupid he forgot that.

                And even when they did exist, they usually DID state that they were IOUs and mere promises to pay (” I promise to pay/repay on demand the sum of..”).

                A promise to pay/repay on demand is NOT a promise of bailment or to warehouse anything.

                And who is so stupid that they do not realise that cheques are mere promises and orders to pay?

              • Lord Keynes says:

                James,

                MF is an ignorant fool. He is ignorant of the basic facts about FR banking, or even double entry bookkeeping.

                He showed this a long time ago on my blog under one of his many aliases as “Christof”:

                http://socialdemocracy21stcentury.blogspot.com/2011/12/future-goods-and-fractional-reserve.html?showComment=1323982885398#c7200812521364792813

              • Major_Freedom says:

                James:

                “I don’t know where you picked up this completely erroneous idea.”

                It’s not erroneous. It’s correct.

                “A solvent bank has assets in excess of its liabilities.”

                FRB banks have liabilities greater than their assets, and are thus insolvent.

                “A bank’s assets are basically loans and other securities, and reserves. Its liabilities are basically deposits and other borrowings. Its demand deposits do not exceed its assets.”

                Yes, they do. Their liabilities are always greater than their assets.

                “Banks hold more savings and time deposits than demand deposits.”

                No, they hold more demand deposits.

              • Major_Freedom says:

                LK:

                I’m not “Christof”.

                Fool? I correct you virtually every time you post your drivel on this blog. If that makes me an ignorant fool, then you’re one step above mentally braindead.

              • Bob Murphy says:

                Here’s a thought: Let’s not insult each other in the comments. It’s conceivable some people might be reading this stuff.

              • Lord Keynes says:

                Just like you’re not David, Pete PetePete, Private_Freedom, or George … But wait, you’ve already admitted posting under multiple handles … liar.

              • Major_Freedom says:

                I’ve “admitted” to using multiple aliases in succession, one at a time.

                Prior to me being MF, I was Captain_Freedom.

                Prior to that, I was Private_Freedom.

                Prior to that, I can’t remember.

                But at no time have I posted under “Christof.” What a dumb name anyway.

                But this is neither here nor there. You still have your errors to deal with.

          • Lord Keynes says:

            “The bank is making promises to pay at any time, but the bank does not actually have what it promises to pay on hand.”

            Its reserves normally cover all withdrawals (read: repayment of debts) that arise on a daily basis. When it falls short it simply borrows.

            “The bank is gambling that its clients will not all exercise their option to withdraw at the same time.”

            Well, duh. You can say the same thing about insurance companies. Yet the insurance industry is not fraudulent.

            And the fact that all people normally do not demand repayment of the bank’s debts at the same time is an empirically proven fact,

            Since deposit insurance and central banking from the 1930s, bank runs have been reduced to virtually zero throughout the Western world.

            • Tel says:

              Well, duh. You can say the same thing about insurance companies. Yet the insurance industry is not fraudulent.

              Not exactly. To make a “withdrawal” from an insurance company requires some physical event like an earthquake or flood or similar. However, withdrawal from a bank is arbitrary personal whim.

              • Lord Keynes says:

                I do not deny that difference.

                But the analogy is still very strong, despite the contingent nature of the claims made by insurance company clients.

                A “bank run” has a direct analogy in the insurance industry: some huge natural disaster that causes mass claims.

              • skylien says:

                The real issue is the excessive risk taking by depositors and banks due to explicit and implicit guarantees that the tax payer will take the losses (one way or another if TSHTF*).

                A thing I’d hope LK should be able to agree on.

                The rest is really contractual.

                *Whenever real risks (subject to human behavior) are pooled by general compulsory arbitrary schemes on who will fall the burden in case of damages to minimize these damages will in fact only result in a maximization of such damages.

              • Major_Freedom says:

                “But the analogy is still very strong, despite the contingent nature of the claims made by insurance company clients.”

                That is exactly what makes the analogy weak.

                The very essence of a demand deposit is the absence of contingencies for withdrawal.

                You’re comparing apples and oranges.

              • Major_Freedom says:

                “A “bank run” has a direct analogy in the insurance industry: some huge natural disaster that causes mass claims.”

                That is not a direct analogy at all. An insurance company is not obligated to pay out money on demand. If there is a natural disaster, then while that could bankrupt the insurance company, it doesn’t mean this bankruptcy is analogous to FRB bank run bankruptcies.

                All you’re doing is trying to convince yourself that because non-bank companies can go bankrupt by money payouts, they are therefore all “strongly” analogous to FRB banks.

                Using your garbage logic would have use conclude that Microsoft is just like a bank, because it can go bankrupt if suddenly everyone asked for money from Microsoft, instead of software. That would bankrupt Microsoft, and hence would allegedly be a “strong analogy” to FRB banks.

                Or let’s take it even further. Because war could bankrupt a mom and pop store, due to mom and pop owing money but having no money income, this means that mom and pop stores are “strong analogies” for FRB banks.

                Your equivocating bankruptcy and lumping together all causes for it, just because they all have similar “cash in is less than cash out” attribute.

            • Major_Freedom says:

              “Its reserves normally cover all withdrawals (read: repayment of debts) that arise on a daily basis. When it falls short it simply borrows.”

              They do not cover all of their instantaneous liabilities.

              “Well, duh. You can say the same thing about insurance companies. Yet the insurance industry is not fraudulent.”

              No, because an insurance company withdrawal is contingent upon events that are not subject to choice the way withdrawing from a demand deposit is a choice. You can’t ask an insurance company for a payout at any time, the way you can with demand deposits.

              Bad analogy.

              • Lord Keynes says:

                “They do not cover all of their instantaneous liabilities.”

                All FR bank liabilities are covered by assets, which are reserves plus loans and other assets it owns.

                A FR bank MUST have assets that exceed its liabilities — that is the requirement for a bank to be solvent.

                MF demonstrates his gross ignorance of double entry bookkeeping.

              • Major_Freedom says:

                “All FR bank liabilities are covered by assets, which are reserves plus loans and other assets it owns.”

                No, they’re not. The very reason they’re called fractional reserve banks is because their liabilities exceed their assets.

                “A FR bank MUST have assets that exceed its liabilities — that is the requirement for a bank to be solvent.”

                You’re reasoning from your desired conclusion. You might as well say that there is a unicorn behind the corner, because if there wasn’t, then surely you’d know there wasn’t.

                FRB banks are INSOLVENT, according to generally accepted accounting principles.

                The reason why you’re confused on this score is because you fail to realize that banks are given a special privilege by the government to remain in operation despite being insolvent.

                FRB banks really can’t pay their instantaneous liabilities. The fact that not all liability holders come calling, doesn’t mean the bank is suddenly solvent.

              • Major_Freedom says:

                Further to my last, it is irrelevant that their accounting assets are equal to their accounting liabilities.

                What matters for solvency is not just assets qua assets being greater than liabilities qua liabilities.

                Banks don’t, and can’t, settle their demand deposit liabilities by paying out loan contracts they own. They must pay a specific asset, namely money.

                Since an FRB bank’s liabilities IN MONEY exceed the FRB bank’s assets IN MONEY, it means they are insolvent according to generally accepted accounting principles.

                If Microsoft were to suddenly sign contracts with buyers saying that Microsoft agrees to physically deliver 10,000 DVDs of Windows 8 on demand, but Microsoft actually only has 100 DVDs on hand, and they’re caught, then they could be taken to court by those who were promised a copy, but no copy exists.

                WIth FRB banks, they can’t get taken to court for this. Instead, the government will take money from others and give it to the demand deposit holders (FDIC).

                It would be like the government robbing you of your DVD copy of Windows 8, to give to a current contract holder that was reneged on.

              • Lord Keynes says:

                “FRB banks are INSOLVENT, according to generally accepted accounting principles”

                lol.. what accounting principles? The ones you dreamed up while writing this comment?

                FR banks ARE solvent when assets exceed liabilities.

                You haven’t the vaguest idea what you’re talking about.

              • Major_Freedom says:

                “lol.. what accounting principles? The ones you dreamed up while writing this comment?”

                GAAP.

                “FR banks ARE solvent when assets exceed liabilities.”

                No, they’re not. Banks are insolvent when their money liabilities exceed their money assets.

                You’re clueless.

              • Lord Keynes says:

                “FRB banks really can’t pay their instantaneous liabilities. “

                And what is that supposed to mean?

                That FR banks cannot meet the daily demand for repayment of demand deposits? Utterly UNTRUE.

                Is it supposed to mean that the value of the aggregate liabilities exceeds aggregate value of assets?

                Again, totally UNTRUE.

              • Major_Freedom says:

                A FRB bank cannot settle its demand deposit liabilities by paying loans to the demand deposit holders. They must pay money.

                This is too difficult for you.

              • Lord Keynes says:

                “Banks are insolvent when their money liabilities exceed their money assets.”

                Define “money assets”.

              • Lord Keynes says:

                We will quickly discover you are using a fallacy of equivocation.

              • Major_Freedom says:

                “And what is that supposed to mean?”

                Demand deposits are instantaneous liabilities for the bank.

                “That FR banks cannot meet the daily demand for repayment of demand deposits?”

                No. That they cannot honor the demand deposit obligations. We know this because if everyone exercised their contractual right, the bank would be unable to pay.

                “Is it supposed to mean that the value of the aggregate liabilities exceeds aggregate value of assets?”

                You’re getting closer. It means liabilities in money exceeds its assets in money.

              • Lord Keynes says:

                “A FRB bank cannot settle its demand deposit liabilities by paying loans to the demand deposit holders.

                FALSE. They pay with high powered money, and meet daily demand for liabilities arising from demand deposit. You are clueless.

                They must pay money.”

                They do, fool.

              • James says:

                Major Freedom, you appear to be making up your own definitions of ‘liabilities’ and ‘assets’.

                Show me a typical bank balance sheet in which demand deposit liabilities exceed assets. Or at the very least attempt to explain your argument instead of just stating things which are factually wrong according to accounting as it is practiced in the real world.

              • Major_Freedom says:

                “Define “money assets”.”

                Money is money. Asset is superfluous.

                Money is the commodity with instantaneous purchasing power that absolutely settles a debt.

                Don’t worry, we won’t end up with an equivocation. We’ll end up with you exposed as not understanding money, which is always the case.

              • Major_Freedom says:

                “FALSE. They pay with high powered money, and meet daily demand for liabilities arising from demand deposit. You are clueless.”

                FALSE. They are obligated to pay with money. High powered money is superfluous.

                “They must pay money.”

                “They do, fool.”

                They can’t pay their liabilities in money, with money they have on handm which is necessary in order for a demand deposit to be honored.

              • Lord Keynes says:

                ” It means liabilities in money exceeds its assets in money.

                You mean aggregate liabilities exceed reserves on hand?

                lol.. true but that does NOT mean that FR banks are insolvent.

                A FR bank can borrow against its assets to meet any excess demand for cash or resell its assets in secondary markets.

                Your ignorance soars to new heights.

              • Lord Keynes says:

                “Money is the commodity with instantaneous purchasing power that absolutely settles a debt.”

                In other words, high powered money. Yes, high powered money forms ONE type of asset on asset side of the bank balance sheet. But it is not the only one. The bank’s loans and other financial assets form the rest of its assets.

                The value of a bank’s aggregate assets MUST exceed its aggregate liabilities.

                No doubt you will continue to deny this and evade the fundamental issue.

              • Lord Keynes says:

                “They can’t pay their liabilities in money, with money they have on handm which is necessary in order for a demand deposit to be honored.”

                And they do honour their daily debts arising from demands deposits. It is an empirical fact.

                I expect you’re a headcase who thinks empirical evidence “never proves anything.”

              • Major_Freedom says:

                LK:

                “Do you mean…?”

                “Do you mean…?”

                Hahaha, you seem to want to fight boogeymen instead of arguments presented to you, because you have in your mind a series of statements and responses and that’s all you can deal with.

                I’ll slow this down for you.

                Yes, a bank’s money liabilities exceed its money assets, and this is sufficient for the bank to be insolvent.

                Why?

                Because the liabilities it has are instanteous. It is not the case that it has a series of liabilities each with its own maturity date, with corresponding assets having cash in flows. In this case, it would not be insolvent.

                It’s because the liabilities are instantaneous, that makes FRB banks insolvent.

                “A FR bank can borrow against its assets to meet any excess demand for cash or resell its assets in secondary markets.”

                Notice how you are passing the buck to a new bank, hoping to find an escape hatch?

                Unfortunately, this is not an answer, because those other banks you’re depending on for an escape hatch, also have instantaneous liabilities that exceed their assets.

                You can’t solve the problem of insolvent FRB banks by saving one insolvent FRB bank at the expense of bankrupting another FRB bank. You’re just shuffling the problem to another bank.

                If that other insolvent FRB bank lends to the insolvent FRB bank in question, then it would be in an even worse position, and you would not be solving the problem of insolvent FRB banking.

              • Lord Keynes says:

                They are obligated to pay with money.

                Right.

                High powered money is superfluous.

                LOL!! So banks do not pay in final settlement with cash or high powered money, a sin reserves with the central bank???

                Go from here MF: your genius is wasted here. Go and give the public a 50 hour lecture as a lunatic drunk ranting on a street corner. The world badly needs your brand of insanity.

              • Major_Freedom says:

                “And they do honour their daily debts arising from demands deposits. It is an empirical fact. ”

                Bank runs and FDIC claims are an empirical fact. This disproves your empirically grounded thesis.

                My argument is theoretical, which you have no answer for, because you know you’re wrong.

                The fact that an FRB bank is able to make good on its demand deposits today, or tomorrow, or for years on end, has no bearing whatsoever on its solvency.

                Pyramid schemes of the Bernie Madoff sort can last DECADES. Does the fact that Madoff was able to make good on his promises for that long, make his operation fully legitimate? Of course not, but your logic says I have to regard Pyramid schemes as legitimate, as long as they can remain operative.

                “I expect you’re a headcase who thinks empirical evidence “never proves anything.”

                Empirical evidence can only prove historical events. They cannot prove theory.

                I expect you’re a basketcase who believes there exists constancies in relations in human action, such that observing history is somehow the same thing as observing a theory.

              • Lord Keynes says:

                “Yes, a bank’s money liabilities exceed its money assets, and this is sufficient for the bank to be insolvent.”

                No, they do not.

                A bank’s assets must ALWAYS exceed its liabilities to be solvent.

                Your only tactic here is to re-define the standard definition of “assets” to mean only cash or reserves on hand: a fallacy of equivocation — and the sign of an exhausted and intellectually bankrupt mind, not to mention intellectual fraud.

              • Major_Freedom says:

                “They are obligated to pay in money.

                “Right.”

                Money which they don’t have.

                “High powered money is superfluous.”

                “LOL!! So banks do not pay in final settlement with cash or high powered money, a sin reserves with the central bank???”

                Money is money. High powered money is superfluous.

                Money absolutely settles a debt. If it doesn’t absolutely settle a debt, it isn’t money.

                “Go from here MF: your genius is wasted here. Go and give the public a 50 hour lecture as a lunatic drunk ranting on a street corner. The world badly needs your brand of insanity.”

                You’re having a meltdown I see.

                There there.

              • Lord Keynes says:

                “Bank runs and FDIC claims are an empirical fact. This disproves your empirically grounded thesis.

                A bizarre non sequitur.

                Many FR banks remained solvent for centuries BEFORE deposit insurance.

                All you can do is re-define the definition of “solvent”.

              • Major_Freedom says:

                “No, they do not.”

                Yes, they do.

                “A bank’s assets must ALWAYS exceed its liabilities to be solvent.”

                FRB bank instant liabilities exceed their assets. They are insolvent.

                “Your only tactic here is to re-define the standard definition of “assets” to mean only cash or reserves on hand: a fallacy of equivocation — and the sign of an exhausted and intellectually bankrupt mind, not to mention intellectual fraud.”

                No, your only tactic is to equivocate assets in such a way that any asset can settle any liability.

                The fact that loans are accounted for in money terms, is irrelevant.

                You sound like you’re giving up.

                So soon? We haven’t even taught you about the nature of money yet.

              • Lord Keynes says:

                Money is money. High powered money is superfluous.

                That statement is enough to damn you.

                Superfluous means “unnecessary”.

                You are saying that high power money is “unnecessary” in FR banking.

                A statement of sheer idiocy.

              • Major_Freedom says:

                “A bizarre non sequitur.”

                A non-response.

                “Many FR banks remained solvent for centuries BEFORE deposit insurance.”

                You’re retreating. You’re depending on pyramid schemes staying afloat empirically as a means to prove they’re legitimate.

                It doesn’t matter if even 1000 years passes. A lie can last a long time. In your case, ignorance can last eons.

                “All you can do is re-define the definition of “solvent”.”

                No, I am not redefining it at all. If I have $10,000 in money owed this very moment, but have only $100 on hand, it doesn’t matter if my debtors haven’t yet collected the $10,000.

                Right now, I’m insolvent. It doesn’t matter if my debtors don’t come calling for the next 20 years. I am insolvent.

                You are conflating mere lack of knowledge of something, with the non-existence of that something.

                This is due to your depraved contradictory worldview that is grounded on false a priori claims, and yet purports to be empirical.

              • Major_Freedom says:

                “That statement is enough to damn you.”

                To hell? Hahaha

                “Superfluous means “unnecessary”.

                That’s exactly why high powered is superfluous. Money is money is money.

                “You are saying that high power money is “unnecessary” in FR banking.”

                No, I am saying high powered money is superfluous beside the word money.

                “A statement of sheer idiocy.”

                A sheer, stunning, contemptible, ignorant, moronic straw man. haha

              • Lord Keynes says:

                “FRB bank instant liabilities exceed their assets. They are insolvent.”

                No, they do not.

                A solvent FR bank’s assets ALWAYS exceed its liabilities.

                E.g., imagine a hypothetical FR bank balance sheet:

                Balance sheet
                Liabilities-|-Assets
                $100 debts–|-$100 loans
                $10 equity–|-$10 reserves
                Total: $110-|-Total: $110

                Equity = 110 – 100 = $10

                Such a bank is not insolvent. It can borrow against its assets, if loan calls ever exceed its $10 of reserves. Its assets exceed its liabilities. Too bad you don’t even understand basic principles of double entry bookkeeping and accounting.

              • Lord Keynes says:

                “If I have $10,000 in money owed this very moment, but have only $100 on hand, it doesn’t matter if my debtors haven’t yet collected the $10,000.

                Right now, I’m insolvent. I”

                No, you are not — IF you have more than 9,900 in assets which you can sell or borrow against to meet any cash flow problems.

                FR banks have asset that exceed liabilities.

              • Major_Freedom says:

                “FRB bank instant liabilities exceed their assets. They are insolvent.”

                “No, they do not.”

                Yes, they are.

                If I have $10,000 in instant liabilities, and only $100 in cash, then it doesn’t matter if the debtors haven’t asked for their money at this moment. I’m still insolvent.

                “A solvent FR bank’s assets ALWAYS exceed its liabilities.”

                FRB banks are not solvent.

                “E.g., imagine a hypothetical FR bank balance sheet:”

                No, you’re still equivocating the concept of assets.

                You can’t pay demand deposit holders in loans.

                It doesn’t matter if the bank accounts for their loans in dollars, such that it looks like their balance sheet is, well, balanced.

                “Such a bank is not insolvent. It can borrow against its assets, if loan calls ever exceed its $10 of reserves.”

                Again, you’re only moving the problem to another bank. If another FR bank loans its money to the FR bank in question, then that other FR bank is now even worse off, and even more insolvent.

                You can’t keep passing the buck, because at some point the piper has to be paid. You can’t have 100 FR banks and ask for every bank to borrow from each other to make good their instant liabilities if those liabilities are physically called for.

                “Its assets exceed its liabilities.”

                No, they don’t.

                “If I have $10,000 in money owed this very moment, but have only $100 on hand, it doesn’t matter if my debtors haven’t yet collected the $10,000.
                Right now, I’m insolvent. I”

                “No, you are not”

                Yes, I am.

                “IF you have more than 9,900 in assets which you can sell or borrow against to meet any cash flow problems.”

                No, I cannot pay the $10,000 I owe in loans. I have to pay it in dollars, which I do not have.

                “FR banks have asset that exceed liabilities.”

                No, they don’t.

            • Lord Keynes says:

              “Using your garbage logic would have use [sic] conclude that Microsoft is just like a bank, because it can go bankrupt if suddenly everyone asked for money from Microsoft, instead of software”

              Wrong. And bizarre to boot.

              Nobody said anything about Microsoft — or this bizarre drivel.

              • Major_Freedom says:

                “Wrong. And bizarre to boot.”

                I know. That’s precisely your analogy.

                “Nobody said anything about Microsoft —”

                Nobody said anything about insurance companies either, before you brought them up.

                I see you have no response, because you know your analogy was garbage.

              • James says:

                MF,

                your argument is that if everyone with demand deposits turned up at the bank tomorrow and demanded to withdraw their money, then the bank would be insolvent, because it wouldn’t be able to pay them all at the same time, due to a lack of cash.

                Even on its own terms, this argument doesn’t prove that the bank is insolvent *today*. It only claims that the bank *would* be insolvent if this bank run were to occur tomorrow.

                You are mixing up what might possibly happen in some future scenario, with what is actually the case at present.

              • Major_Freedom says:

                “your argument is that if everyone with demand deposits turned up at the bank tomorrow and demanded to withdraw their money, then the bank would be insolvent, because it wouldn’t be able to pay them all at the same time, due to a lack of cash.”

                No, I am arguing that FR banks are always insolvent, and should everyone withdraw their money at the same time, then that insolvency would only become explicit.

                A pyramid scheme is still a pyramid scheme even before it is made explicit by stockholders withdrawing their capital. If they don’t withdraw their capital, it doesn’t mean the pyramid scheme is suddenly no longer a pyramid scheme.

                You are confused over the difference between reality being discovered, with the reality itself.

                FR banks are all insolvent because their instant liabilities are greater than their instant assets.

    • Russ says:

      I think you’re overlooking an important point; What the bank tells its customers. If Alpha deposits one hundred dollars in to the bank and the bank loans ninety dollars to Beta , Alpha’s monthly statement from the bank is going to say he has one hundred dollars in his account but it should say he only has ten dollars and the bank owes him ninety. So long as the bank tells him his money is there when in actuality they have loaned it out the bank is committing embezzlement.

      If a customer is given a brochure explaining that the bank may not always be able to pay him his money when he wants it because they loan it out and he agrees to this fine but if the bank loans his money AND says it’s available to him then they are committing fraud.

      A loan is a transfer of property rights according to the terms of the contract. I imagine most bank depositors would not say they transferred the property rights of their money to the bank.

      Either the customer chooses to loan the money to the bank or he chooses to deposit it for the bank to store. Fractional Reserve Banking is unnecessary if the bank is being honest about what it is doing and the customer is free to choose between loan, deposit or some sort of combination loan deposit account where the bank loans out only a pre-agreed to portion of the funds.

      Without FRB you don’t pay interest on deposits, you pay the bank a fee to store you’re money. It’s bailment. The bank acts as a money warehouse for demand deposits. Right now if you fall below a minimum deposit you pay that fee to the bank but they still loan out your money.

      So In my opinion it’s not a matter of banning FRB but instead recognizing it as embezzlement and fraud. Either the depositor knows it is a loan or he doesn’t.

      • James says:

        Everyone knows banks lend the money out.

        Banks don’t tell their customers that they have all the money right there in the vault. Your bank statement simply shows your bank balance, it doesn’t say “all this money is sitting in the vault doing nothing”.

        If you honestly don’t know what banks are or how they work, and you can’t figure out that if banks make loans then they must be getting the money from somewhere, then you can always ask a member of the staff and they will very clearly explain to you that a bank’s basic business is to take deposits and make loans. Alternatively you could read the terms and conditions for your deposit account, which will explain that to you. It’s not embezzlement or fraud.

        If you really don’t want your money to be lent out then pay for a safe deposit box or vault space instead.

        • Russ says:

          “Everyone knows banks lend the money out.”

          -Prove that statement. I think it’s far from true.

          “Banks don’t tell their customers that they have all the money right there in the vault. Your bank statement simply shows your bank balance, it doesn’t say “all this money is sitting in the vault doing nothing””.

          -Define the term; Deposit.

          “Alternatively you could read the terms and conditions for your deposit account, which will explain that to you”

          -The only thing in my terms and conditions that remotely comes close to that is it saying that the bank can require 7 days written notice of withdrawal for accounts other than non-interest bearing checking accounts. It says nothing about them loaning my funds out.

          –What does your terms and conditions say?

          As for a teller saying that they loan the money in your bank account out? I highly doubt any teller would say that to a depositor.

          Why do you assume that banks have the right to loan demand deposits out?

          If you park your car in a garage would you say that the garage has the right to rent your car? ‘Everybody knows that’s what a garage does, it takes car deposits and makes car loans?’

          “It’s not embezzlement or fraud.”
          -Actually I think it’s the very definition of the term embezzlement.

          “If you really don’t want your money to be lent out then pay for a safe deposit box or vault space instead”

          -You can’t draw checks and make payments with a safe deposit box which is the whole point of a demand deposit… to have the money on demand.

      • Tel says:

        Alpha’s monthly statement from the bank is going to say he has one hundred dollars in his account but it should say he only has ten dollars and the bank owes him ninety.

        Alpha’s statement merely says that the bank owes him $100.

        At any rate FRN’s are not representitve of anything other than more FRN’s so it’s moot as to whether physical storage is meaningful.

  7. Chris P says:

    I think this video would have been more effective if it didn’t use words like “theft”, “scam”, “stealing” etc. There are plenty of intelligent people who support the system and don’t do so because they are involved in a plot to steal people’s wealth.

  8. Russ says:

    I agree with what Jeremy said on the video trying to differentiate between currency and money. Though I didn’t watch video one I would assume they are using a different definition of money than Mises used. When the video says currency, think money. When the video says money, think commodity money and I think what they’re saying becomes more in line with what your objection.

    As for the constitution they quoted the wrong passage which applies only to the states. They should have quoted Article I, Section 8, Clause 5; “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures”. They specifically said coin, not print even though they had printed Continentals and knew the difference between printing of notes and coining silver. To them bank notes and treasury notes would be the same thing; an IOU. As such the printing of money would be an issuance of debt and covered under clause 2 of the same section which reads”To borrow money on the credit of the United States”. If they meant paper as money then clause 5 would have been (as James Madison might say) nugatory and improper.

  9. Ken B says:

    I can’t read the whole spat. A couple questions for MF and LK:
    During the great depression how many Canadian banks failed? Were they FR banks? Does that seem relevant to your dispute?

    • Lord Keynes says:

      Ken B,

      I do not deny that bank runs can occur and have occurred in the past. But that is very different from what MF is arguing. MF is ignorant of basic concepts from double entry bookkeeping.

      As for Canada, its *relative” financial stability in the GD does not support the free banking position.

      The banking system remained stable because of implicit government guarantees:

      http://socialdemocracy21stcentury.blogspot.com/2012/09/why-did-canada-have-no-mass-banking.html

      And, anyway, by 1934 Canada had a central bank committed to defending its FR banking system.

      • Major_Freedom says:

        “I do not deny that bank runs can occur and have occurred in the past. But that is very different from what MF is arguing. MF is ignorant of basic concepts from double entry bookkeeping.”

        We’ve gone over this. Double entry bookkeeping is not sufficient to understand why FR banks are insolvent. Focusing on double entry bookkeeping cannot disprove the fact that FR banks are insolvent.

        If I have an instant liability of $10,000, but only $100 on hand, it doesn’t matter if I account for my car by valuing it at $9,900. I am still insolvent. I cannot pay the liability with my car. I have to go out and sell the car for money, which of course takes time. In the meantime, I am insolvent.

        • Keshav Srinivasan says:

          By that criterion isn’t everyone in the world insolvent? Even if a bank has money in their vault, it takes time to pull it out of the vault and give it to the depositor, so in the mean time aren’t they insolvent?

          Would fractional reserve banking seem less fraudulent to you if the bank operated under instant sale agreements for all its assets? That is to say, what if they made a contract with a car dealership that if the bank ever needed money in a pinch, the car dealership would immediately transfer money to the bank (maybe the dealership stores a pile of cash in the bank for the purpose of just such a transfer), and the bank would immediately transfer ownership of the car to the dealership? Would it still be a fraudulent enterprise?

          By the way, more broadly, if the depositors and everyone else who dealt with the bank in any way fully understood the nature of fractional reserve banking, and for some reason still wanted to participate in it, would Austrians still view it as fraudulent?

          • Major_Freedom says:

            “By that criterion isn’t everyone in the world insolvent?”

            No.

            “Even if a bank has money in their vault, it takes time to pull it out of the vault and give it to the depositor, so in the mean time aren’t they insolvent?”

            This time delay is not contractual.

            “Would fractional reserve banking seem less fraudulent to you if the bank operated under instant sale agreements for all its assets?”

            What fraud?

            • Keshav Srinivasan says:

              I was under the impression that Austrians see fractional-reserve banking as fraud/illegitimate. Am I wrong about that?

  10. Bob Roddis says:

    I’d like to announce another great victory for the Austrian School as Lord “Fixprice” Keynes has doubled down AGAIN on his ridiculous “fixprice” refutation of the Austrian School.

    The importance of the mark-up over costs form of pricing was seen clearly as well, with variable mark-ups (58%) and constant mark-ups (44%) being the next most accepted explanations. Only 27% of firms accepted the explanation that their prices were primarily determined by customers.” (Greenslade and Parker 2012: F9–F10).

    http://socialdemocracy21stcentury.blogspot.com/2013/10/administered-pricing-in-united-kingdom.html.

    • Lord Keynes says:

      “I’d like to announce another great victory for the Austrian School”

      A victory implies that the post confirms Austrian theory. Where does Austrian price theory say that 58% of UK prices are administered markup prices?

      I expect you can cite me a passage.

      Of course, you can’t and you are speaking rubbish, as usual.

      • Major_Freedom says:

        The victory is due to the contuinued absence of any competitor.

        No, spitballs don’t count.

      • Bob Roddis says:

        When someone says something so ludicrous as “Only 27% of firms accepted the explanation that their prices were primarily determined by customers”. they’ve lost the argument.

        I would hope that an ongoing successful business would know in advance the price that their customers would tend to pay and that it would tend to be above cost of production. The fact that the business anticipates that price and offers to accept that price does not mean that the price was “set” by the business. If McDonald’s suddenly decided to sell $1 McDoubles for $25, I doubt that they would sell very many. The whole concept of “administered prices” is nonsense in relation to Austrian theory which DOES NOT DESCRIBE HOW PRICES MUST BE “SET”.

        That’s it. The End. We’ve been over this so many times before.

        • Major_Freedom says:

          An important point to add here is that LK is overlooking the fact that businesses tend to set prices for the means of production, based in large part on their expectations of the prices they can charge their customers later on.

          If they are wrong, LK believes that the government should print enough money so that previously incorrect expectations, are forced correct after all, even if the consequences of this is to encourage the very malinvestment that generated the “OMG my costs are too high relative to the prices I can charge” problem of calculation in the first place.

        • Lord Keynes says:

          ” The whole concept of “administered prices” is nonsense in relation to Austrian theory which DOES NOT DESCRIBE HOW PRICES MUST BE “SET”.

          Roddis proves he does not understand basic Austrian concepts:

          “There is no reason why prices cannot fall low enough, in a free market, to clear the market and sell all the goods available.
          Murray Newton Rothbard, America’s Great Depression (5th edn, 2008), pp. 56.

          • Bob Roddis says:

            Of course that is true. However, it does not describe how prices are “set” and it does not claim that for any particular firm or individual, “clearing the market” is necessarily a good idea. Profit maximization in terms of money will GENERALLY be the goal but not necessarily. The fundamental point is that people are free to run their business as they see fit to obtain the benefits they seek, whatever that might be. That point necessarily escapes your limited grasp.

            As always, you find that you must take statements completely out of context because you’ve lost the argument.

            • Major_Freedom says:

              You moron. If I bought a means of production for $100, then there is an almighty source of nature that literally forces me to charge no less than $100 for the output. Even if it means I will sell zero goods, the law of fixed prices trumps my own goddamn choice.

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