02 Aug 2018

Further Thoughts on Fractional Reserve Banking and Simple Theft

Austrian School, Banking 171 Comments

Again, it looks like I’m loading the deck by saying “FRB is like a mugger,” but that’s not the motivation for this analogy…

If you haven’t already read it, you should check out my previous post, where I set up a thought experiment to work through the mechanics of FRB, and how it might (or might not) cause the boom-bust cycle as described in the Austrian tradition.

Ironically, I created the analogy in that post in order to box Enrico into a corner, thinking he would have to admit that if a simple thief surreptitiously lent gold coins out into the community (without the owner realizing it), then surely this would distort interest rates, and so therefore FRB would do the same, if the depositors acted as if they still had their cash balances available.

However, my attempt didn’t work, because Enrico (understandably) clung to an important difference in the analogy, namely that the rich man in my story didn’t know what the thief was doing, whereas people in the modern world are (at least vaguely) aware of what’s going on with FRB.

To add insult to injury, one of the people on “my side”–namely, Dan–also didn’t find my analogy compelling, since in his mind the important thing about FRB and the boom-bust cycle is that FRB creates new money (which hits the loan market relatively early in its life). Since the thief in my original tale wasn’t creating money, but merely stealing it out of a vault, Dan didn’t see how this could be causing a boom-bust cycle in the Misesian framework.

So, in this post let me try to motivate my original idea. But I’ll have to take a detour first, in order to highlight what I think is so special about FRB.

First, imagine a rich guy is walking down the street with 10 gold coins in his pocket. A mugger comes up, sticks a gun in his belly, and takes 8 of the coins. This is certainly immoral and illegal, but it won’t cause a business cycle. The rich man realizes his cash balances have fallen, and so he changes his behavior accordingly. Resources in the economy get reallocated; they now cater more to the mugger and less to the rich man, compared to the original scenario, but there is no reason for the economy to enter upon an unsustainable boom. If, say, the rich man was about to spend those 8 coins on a stagecoach, while the thief instead spends them on a vacation in Barbados, that will simply change relative prices in the economy.

Even if the thief loans the money out, whereas the rich man would have spent it on consumption, that won’t cause a boom. It lowers the interest rate, but that is “correct” in light of the new distribution of wealth. The thief has a lower time preference than the rich man. The rich man has to reduce his consumption (because he just had a bunch of money stolen from him) and that frees up real resources, so the thief’s lending (and pushing down of interest rates) doesn’t cause the capital structure to get out of whack.

* * *

OK, so far so good, I’m imagining. I think Dan, Enrico, and I are all on the same page. Now let’s change things to a standard story of fractional reserve banking. Starting originally from a position of 100% reserve banking on demand deposits, the commercial banks look at all of their customers’ deposits of gold in their vaults, and take 80% of them, and lend them out into the community. This pushes down interest rates. But the original rich depositors don’t alter their behavior. Somebody who had planned on spending 8 of his 10 gold coins still does that. So aggregate consumption in the community doesn’t drop. Therefore, to the extent that the sudden drop in interest rates induces new investment projects that wouldn’t have occurred otherwise, there is an unsustainable boom that must eventually end in a bust.

* * *

At this point, Dan is still with me, but I believe I’ve lost Enrico. Now let me tweak it yet again. Instead of the commercial banks lending out 80% of the gold coins, instead what happens is that a thief slips into the bank vault, and takes out 80% of the coins. But he’s quiet about it, so nobody realizes what happened. The depositors don’t alter their behavior. So long as they don’t all try to withdraw their coins at the same time, the remaining pile of 20% of the coins is enough to satisfy the vagaries of spending/income imbalances.

If the thief lends the money out, won’t that cause a boom-bust cycle?

* * *

 

I think the thing that’s tripping us all up, is that it’s hard to see what economic function “sterile” money balances serve. In a stable equilibrium of perfect certainty, it’s “wasteful” for a rich guy to hold 10 ounces of gold in his cash balances; he should lend out that money (or use the gold for industrial/consumption purposes) and “put it to work.”

But in the real world, people hold cash balances (partly) in order to keep their options open for future purchases that they can’t know precisely, ahead of time.

So this is why, in my opinion, something is screwy if 100,000 people pool their savings into a common pile, and then they act collectively as if they all still have all of their money available, even though 90% (say) of the pile has been lent out.

Notice how common analogies break down here. For example, the owner of a parking garage can safely sell 1,000 (say) stickers that entitle the buyer to park his or her car in a lot that only has 100 parking spots, if the owner has studied the past and thinks there is only a very small probability that more than 100 people will want to park at the same time. That economizes on society’s scarce resources; it would be foolish to insist on “100% reserves” in such a setting. Let the market do what it will, perhaps with clauses in the contract for what happens if a buyer can’t find a spot. (This is like what happens when airlines overbook, and they have to use an auction to get people to give up their seat.)

But when it comes to cash balances, it seems to me at least that something weird happens if you don’t actually have the cash available. It’s not “wasting” the gold coins for them to be in your pocket even if you’re not spending them in the next 10 minutes, the way it is arguably “wasteful” if there is an empty parking slot with your name on it, even though you have no intention of leaving the house that day.

No, it seems to me that money sitting in your pocket (or in your wallet, your purse, your home safe, your bank vault, etc.) is “providing a flow of services” just by sitting there. It’s not that the money is being wasted until the moment you spend it.

And so in that light, if 1,000 people pool their savings hoping that only 100 of them will want to use them at any moment, that seems economically much different from 1,000 people chipping in to fund a parking garage with 100 spots. The former seems to me that it would cause a mismatch between investment and saving, whereas the latter seems like a clever and efficient leveraging of real estate.

171 Responses to “Further Thoughts on Fractional Reserve Banking and Simple Theft”

  1. Dan says:

    The only hang up I’m having at this point is why loaning sterile money in some situations won’t do the same thing.

    For example, let’s say I have $10,000 sitting in a drawer. Then a thief breaks in and steals $8K and puts it in a CD, while I don’t alter my normal spending behavior at all because I’m not aware my savings has been depleted. So we’d say that will cause a boom/bust.

    Now, let’s take the same scenario with a tweak. I say, “Screw it, I’m tired of earning no interest on this cash sitting in a drawer. I’m going to put $8K in a CD.” But I also decide that I’m not going to alter my normal spending behavior at all because I got a bitchin lifestyle that I’m accustomed to. Why would this not also cause a boom/bust.

    In both scenarios my spending remains the exact same, and $8K of idle money was put in a CD. I’m missing what the substantive difference is between me or a thief putting the $8K in the CD if everything else remains the exact same. Not saying there isn’t a difference, just that I can’t see it yet.

    • Shailesh says:

      Exactly.

      As I commented on the previous post, any increase in the money supply or so-called velocity of money (whether by natural means as increased risk taking by individuals, credit creation with/without FRB, gold discovery or artificial means as money printing, etc; whether fraud or otherwise) should lead to a commensurate ‘boom’ in prices or increase in activity/investments which will help some (eg: creditors) and hurt others (eg: leveraged asset owners).

      Bob seems to erroneously think there is something inherently wrong/immoral or unsustainable with this so-called boom. I disagree and I think this will lead to a ‘bust’ (i.e. these investments will become ‘malinvestments’) only if there is a misallocation due to fraud, imperfect knowledge/judgement OR if there is a part or whole reversal in the money supply for whatever reason. There is nothing inherently wrong with such ‘bust’ either.

      • Dan says:

        Yeah, I think you are clearly wrong though if you think FRB does not cause a boom/bust. I’m not even disagreeing with him. I’m simply turning to the master looking to see if he can help clear up some trouble I’m having on a few specific points. ABCT is clearly true, IMO.

        • Shailesh says:

          To be clear – I do think increased credit creation due to FRB is indeed one of the things that causes a ‘boom’ – just that it is not inherently bad and not necessarily followed by a bust.

          Thanks for the other link you gave me on the other post. Will read it.

    • guest says:

      “I’m missing what the substantive difference is between me or a thief putting the $8K in the CD if everything else remains the exact same.”

      The difference is that when a thief steals from you, and you don’t know it, you’re still economizing your life based on the belief that you still have $10,000 in your drawer.

      That $10,000, to you, means a certain amount or kind of future consumption, and you’re basing your current consumption (and current actions, too, such as planning for the future) on the belief that you still have all of it.

      Businesses must cater to consumer demand in order to make a profit (that is, they can’t just produce anything), and your current consumption and actions bear on the profitability of businesses.

      So, when the thief invests your money, he is making possible projects that do not align (as well as they would have, otherwise) with consumer preferences.

      The thief, in effect, sent false price signals about consumer demand. And to the extent that those projects are based on those false signals, is the extent to which they have made malinvestments.

      The malinvestments are the false boom. The corrections made for those malinvestments will be the bust.

      (Even if the malinvestments are so tiny as to go unnoticed, they still cause a false boom somewhere. As Bob noted in his recent solo video about FRB, if there’s a small malinvestment, there’s going to be a small boom and a small bust.)

      Whereas if you *choose* to invest $8,000, all of your current consumption and planning is based on your understanding that you have less to spend in the immediate future.

      So, no projects *can* be started based on false information about consumer demand, because you have changed your actions and planning to account for the loss.

      • Dan says:

        “So, no projects *can* be started based on false information about consumer demand, because you have changed your actions and planning to account for the loss.“

        No, guest. I explicitly said that I changed nothing. My actions are the exact same in both scenarios. I buy the exact same things, I spend the exact same amount of money. The only difference is whether I or the thief put the $8K in the CD. Literally, nothing else changes.

    • Giovanni P says:

      If your spending remains the same, that will cause a boom-bust cycle, but on average in a population the spending wouldn’t remain the same, that’s why these assumptions don’t matter. I could happen the contraty: you could not have your money robbed or spent, but still alter your behavior as if you did. Again: doesn’t matter.

      So I’ve just said it would cause a boom-bust cycle, but in fact the behavior of one person won’t cause a boom-bust cycle if you define a boom-bust cycle as “a cluster of errors”. People err all the time, people make wrong calculations, malinvestments etc., that’s normal. The problem with business cycles is when a lot of people commit the same kind of errors simultaneously.

      • guest says:

        “… but on average in a population the spending wouldn’t remain the same …”

        And

        “So I’ve just said it would cause a boom-bust cycle, but in fact the behavior of one person won’t cause a boom-bust cycle if you define a boom-bust cycle as “a cluster of errors”.”

        Ah, but only individuals can make errors.

        The malinvestments have become systemic when FRB causes a cluster of businesses to err, that’s true.

        But, consistent with Methodological Individualism, each business within that cluster is making its own errors.

        That’s why I noted that the nature of the business cycle is simply malinvestments and their corrections.

        Individual businesses can suffer from their own isolated “booms and busts” apart from an accompanying cluster of errors, but the cluster is just a bunch of individual businesses erring around the same time – which is not possible without fraud.

        • Dan says:

          “Individual businesses can suffer from their own isolated “booms and busts” apart from an accompanying cluster of errors, but the cluster is just a bunch of individual businesses erring around the same time – which is not possible without fraud.”

          I don’t think that is accurate. For example, lets say aliens are flying by and drop a safe with 1 million gold bars in my back yard. I decide that I’m going to just put it all in a CD. This would lower interest rates without anyone changing their time preferences. You’d literally be expanding the money supply and introducing it directly into the economy through the loan market. No fraud has been committed. Yet, that should result in a boom-bust.

          • guest says:

            “For example, lets say aliens are flying by and drop a safe with 1 million gold bars in my back yard. I decide that I’m going to just put it all in a CD. …”

            “… No fraud has been committed. Yet, that should result in a boom-bust.”

            On its own, that would result in higher prices, but no malinvestments.

            Remember (in my understanding of money, anyway), that the medium-of-exchange value of money proper is derived from leveraging the values people place on the physical properties of gold – it’s use value.

            So, the new gold doesn’t cause people to invest in a direction that is different from consumer demand. The demand for the physical gold will simply adjust, according to Marginal Utility, and the value of any “money certificates” (money backed 100% by gold) will fall in value commensurately.

            The new gold might even result in such higher prices (lower gold value) that it ceases to be useful as money. But people can still express their valuations of one good as against another good by using the next valuable commodity (valuable in trade) as a medium of exchange.

            • Dan says:

              And the reason for that is if you pump a bunch of new money into the economy through the loan market, you’re signaling to businesses that they can lengthen the structures of production, but consumers have adjusted their time preference at all. They’re not saving money to buy these higher order goods that are going to be produced down the line. They’re spending their money the same as they were before. Whereas if the interest rates were lowered by people deciding to consume less and save more you would have a shift in time preference that matches up with a shift to higher order goods. This would not result in an unsustainable boom.

              • Dan says:

                Two things:

                1. This comment was after the “OK, that’s fine…” comment.
                2. That should’ve read “consumer have NOT adjusted their time preference at all.”

          • Dan says:

            OK, that’s fine if that’s your position, but it’s not ABCT. Here’s Mises from Human Action:

            “Everything that has been asserted with regard to credit expansion is equally valid with regard to the effects of any increase in the supply
            of money proper as far as this additional supply reaches the loan market at an early stage of its inflow into the market system.”

            • guest says:

              Continuing your quote:

              “… If the additional quantity of money increases the quantity of money offered for loans at a time when commodity prices and wage rates have not yet been completely adjusted to the change in the money relation, the effects are no different from those of a credit expansion.”

              What’s the difference between that and changes in consumer preferences that now no longer support the prior production structure that was based on the pre-gold-inflation supply of gold?

              I suppose that since both would cause investments to become not in conformity with consumer preferences (consumer preferences changing, rather than investments ignoring consumer preferences), that would technically result in malinvestments, but somehow that seems different to me.

              I’ll concede this point with an asterisk.
              😀

              • Dan says:

                The part of the quote you highlighted is just saying that it’s the same as a credit expansion when it enters the loan market first because other prices have not adjusted to the new supply of money. He’s saying that if the new supply of money had entered the economy through people spending it on goods and services first then price levels would adjust first and you wouldn’t have a boom/bust. But if it enters the economy through the loan market first then it will.

              • Dan says:

                In other words, if a counterfeiter printed up a bunch of money and just went out and bought a bunch of shit, then that would just cause prices to rise, it wouldn’t cause a boom/bust. Yet, if he instead printed a bunch of money and introduced it through the loan market that would cause a boom/bust. Which should be evident when you think about how that would cause businesses to lengthen the structure of production at a time when consumers haven’t changed their time preference at all.

              • guest says:

                “In other words, if a counterfeiter printed up a bunch of money and just went out and bought a bunch of shit, then that would just cause prices to rise, it wouldn’t cause a boom/bust.”

                Hmm.

                I’m with you that an increase of a supply of commodity money that does not enter the loan market will only raise prices and not cause a boom/bust cycle.

                But I think that, since paper can only be a money substitute (money proper has to be a commodity), that all paper “money” is necessarily just a contract *for* real money, and expanding the supply in excess of money proper is, in effect, creating fiduciary media – that is, expands the credit supply, and therefore sets in motion the business cycle.

              • Dan says:

                No, that’s not accurate. Say a society uses 1000 gold coins as money. If some guy invents a way to turn sand into gold and creates another 1000 gold coins, then if he spends them in the economy prices will double, but no boom/bust will occur because it would not impact interest rates. He didn’t loan them out.

                Or if a society used 1000 green pieces of paper as money, and some guy simply printed 1000 more which he spent in the economy, then prices would double, but that would have no impact on interest rates because he didn’t loan them out. No boom/bust there either.

              • guest says:

                “If some guy invents a way to turn sand into gold and creates another 1000 gold coins.”

                I agree that simply spending the 1,000 extra gold into the economy won’t cause a business cycle.

                “Or if a society used 1000 green pieces of paper as money, and some guy simply printed 1000 more which he spent in the economy …”

                See, this is why I brought up the thought experiment with 1,000 gold vs 1,000 notes that was 10% fiduciary media (only 90% of the notes are backed by gold).

                If paper, itself, can’t cause the business cycle, then neither can fiduciary media.

                Because then that would mean that the business cycle was caused by the mere decision to not treat the fiduciary media as if it were money proper.

                That would be a “problem” that could easily be solved by changing your mind.

                That’s it; No need for the money to actually mean something. You just believe – have faith – that the fiduciary media is really money proper and, *poof*, no more business cycles.

                Again, that’s ridiculous.

                My position is that in the thought experiment where people are “using” 1,000 units of paper currency as if it were money, and 1,000 units of paper are added, that the original unbacked 1,000 units are causing the business cycle, and the extra units exacerbate the problem.

              • Dan says:

                “My position is that in the thought experiment where people are “using” 1,000 units of paper currency as if it were money, and 1,000 units of paper are added, that the original unbacked 1,000 units are causing the business cycle, and the extra units exacerbate the problem.”

                Yes, and you are wrong. I gave you an example where I doubled the amount of paper money in the economy but none of it was loaned out at all. It literally had zero impact on interest rates. If you think that could still cause a business cycle then your theory isn’t even in the same ball park as ABCT. It’d be your own theory that has no semblance to Austrian economics.

                You seem to be under the impression that a 100% reserve system where people voluntarily used paper as money, for some inexplicable reason, would cause a boom/bust just for the fact they’re using paper for money. That clearly has nothing to do with ABCT.

              • guest says:

                I appreciate our back and forth, by the way.

                I’ll have to stop after this.

                Good luck to Bob Murphy, on this issue, and also to my other fellow Austrians.

                “You seem to be under the impression that a 100% reserve system where people voluntarily used paper as money, for some inexplicable reason, would cause a boom/bust just for the fact they’re using paper for money. That clearly has nothing to do with ABCT.”

                ABCT has to do with the mismatch between production and consumer preferences.

                Consumers ultimately prefer goods, not money for its own sake.

                So, to the extent that paper money is believed to have a non-speculative valuable above its use-value is *necessarily*, is the extent to which a malinvestment must take place.

                (By “non-speculative”, i mean to include, but not limit the application to, value as a medium of exchange.)

                And since it is impossible for *everyone* to value a medium of exchange *only* because someone else will accept it (its speculative value) – that would be circular logic – what must necessarily be happening with the use of *any* kind of unbacked money is that it must cause losses commensurate with its inability to convey information about subjective valuations for the goods being sold for that money.

                It is logically impossible for pieces of paper to possess the *necessary* link to subjective use-value that would be required for it to convey economically meaningful information – unless, of course, the medium-of-exchange value was being derived from the use-value some people place on paper’s physical properties.

                But, in that case, all pieces of paper of the same size (and quality) would be conveying the same subjective use-values at any given time. And writing different numbers on them wouldn’t change that.

                It’s similar (or, I would say “identical”) to how fiduciary media causes losses.

                I forget which book, “Human Action” or “Man, Economy and State”, contains the specific reference I’m looking for. But, the jist of it is that, by passing along newly printed money, the earlier users of that money are able to pass along the losses that are inherent in accepting unbacked paper.

                Well, if *all* that is being used is unbacked paper, then 1) it’s necessarily causing losses to someone, somewhere, and 2) it, logically, will result in a correction (a bust) – no matter how long the paper has been causing losses.

                (In fact, I would argue that premature deaths as a result of those losses are a form of “correction”, in that the guy who died was forced out of all markets, forever.

                (And anyone who continued to use the money that belonged to the deceased after he died was only able to benefit because the deceased was not able to claim all the resources he had been lead to believe his money would be worth.)

              • Dan says:

                OK, but that’s not ABCT. That’s your own theory. I don’t agree with it. I think Mises was right.

      • Dan says:

        Yes, I’ve come to almost the same conclusion. Although I think it does cause a boom/bust even when done on an individual level, it’s just that it is so relatively small as to not be noticeable. I started reading some Rothbard again on this subject and he had a line that clicked everything back in place for me, unless there is some other nuance I’m missing.

        But the reason these assumptions matter is they help to make clear what exactly is going on during the boom and bust. It’s relatively easy to see on a large scale, but when you start breaking it down to the individual level it gets trickier.

    • trent steele says:

      @Dan

      No new money (interest paid comes out of existing money stock), and you *have* altered your lifestyle. You used to have money secured in your home (less safe?) but very easily accessed. Now you have it in the bank (more safe?) earning interest (so loaned out, so less safe) and less easily accessed (like on a weekend, or when you’re over your withdrawal limit or some such rule that wouldn’t apply at home).

      By definition your spending will adjust to this new reality.

      • Dan says:

        That’s not required by definition at all. I stipulated that my spending didn’t change in the slightest. There is no act of God that forces me to change my spending habits if I move idle money into a CD.

        • guest says:

          One of the things that follows logically from the Action Axiom is that all actions involve choosing and renunciation. That is, you can never be indifferent to choices you act upon.

          What this means is that when you choose to move idle money into a CD, it’s because you, yourself, have concluded that a CD affords you an outcome that you believe icle money cannot.

          If that were not the case, there would be no reason for you to move the money into a CD because the idle money would already be doing what you want it to do.

          So, there’s no need to appeal to an act of god. The logic of your own actions means that you are planning for an outcome that you favor more when your money is in a CD.

          Logically, that means that you would be planning for a different outcome had you left your money idle.

          • Dan says:

            Come on, man. No kidding.

            I responded to him saying “by definition your spending will adjust to this new reality.” THAT is not guaranteed by definition. My spending may adjust or it may not. Since I stipulated in my example that it doesn’t adjust, you don’t refute that by just asserting that it is a fact of reality that it would have to adjust. That’s flat out wrong.

            • guest says:

              It could be that I’m missing some nuance in your explanation.

              But it seems to me, as worded, that you’re stipulating that your example is based on internal inconsistency.

              Logically, it would be impossible for you to keep your actions the same as if you had kept your money idle *unless* you’re not really trying to save, but to prove a point.

              But in that case, you’re not making your decision based on what you believe will be the financial effect of your decision.

              (There would still be other factors on which you would make your decision, and that would differentiate those choices in your estimation.)

              So the financial aspects of your decision would not be a factor for you. (Again, if you expected the same financial outcome from both decisions, there’d be no need to switch to a CD.)

              • Dan says:

                Again, he said my spending would change by definition. That’s simply not true. Watch.

                Example 1: I take $100 that was under my mattress and put it in a CD. I also go spend $500 on an Xbox and games.

                Example 2: I leave the $100 under my mattress. I also go spend $500 on an Xbox and games.

                In both scenarios my SPENDING is exactly the same. This is logically possible. My SPENDING didn’t have to change in either example as a matter of definition. That was clearly not true.

                That doesn’t mean that my goals and actions were exactly identical, though. It just means my SPENDING was exactly the same regardless of why I left it under the matter or put it in a CD.

              • guest says:

                “That doesn’t mean that my goals and actions were exactly identical, though. It just means my SPENDING was exactly the same regardless of why I left it under the matter or put it in a CD.”

                I’m sure he’s not trying to say that, for example, you must necessarily refrain from falling asleep tonight if you put your money in a CD, like you would if you kept it idle.

                I think you might be missing his point.

                Which seems, to me, to be that those acts of planning that are relevant to your intent for your money in a CD are necessarily going to be different from what it would be had you kept it idle.

              • Dan says:

                OK, but then you guys are missing how subtle this shit is. According to Mises, Hayek, and Rothbard ABCT means that if you increase the money supply and introduce it through the loan market then you’ll create a boom/bust. Mises also discusses how you could have this happen in a 100% reserve setting if new money was introduced through the loan market. He just acknowledged it would likely be extremely small because only a small fraction of the new money would enter through loans.

                So, if you have idle money, where prices have adjusted as if the money no longer exists, then by introducing it back into the economy through the loan market it should have the same effect as newly mined gold being loaned out. The effect might be extremely minimal, and there may be some offsetting factors I haven’t considered, but I don’t think you guys are picking up on what I’m saying to begin with. And your business cycle theory is a lot different than ABCT so it’s hard for me to understand what you’re trying to say a lot of times.

              • guest says:

                “And your business cycle theory is a lot different than ABCT so it’s hard for me to understand what you’re trying to say a lot of times.”

                I’m just trying to follow the Action Axiom to its logical conclusion.

                I realize that Rothbard (definitely) and Mises (maybe) would have disagreed with me on it.

                But I believe that, on this point, I hold the view that is consistent with the Action Axiom, and therefore with the real ABCT.

                “Mises also discusses how you could have this happen in a 100% reserve setting if new money was introduced through the loan market.”

                I’m glad you brought this up, again, because it’ll give me an opportunity to make a clarification on my understanding of it.

                It’s not that new [real] money introduced into the loan market causes new projects to be started that are inherently malinvestments.

                Rather, it’s that, because the marginal utility of an increase in the money supply will change, that *existing* projects – ones that were previously going to be profitable – *become* malinvestments.

                I think this clarification might be helpful for my next point.

                “So, if you have idle money, where prices have adjusted as if the money no longer exists, then by introducing it back into the economy through the loan market …”

                I noticed that, in your understanding, you’re thinking of idle money as having no effect on the economy (this is where Selgin is coming from, too).

                But, so-called “idle” money is actually factoring into people’s economic decisions – they put their money in a savings account for a reason, and they’re basing their activities on those reasons.

                That’s how savings affect the economy. Or, rather, that is what savings logicall imply. Savings are the effect of economic planning, not its cause.

                People only ever do anything because they have a felt unease, and they believe that they can alleviate it.

                So, savings imply a targeted end. They cannot be “idle” in the sense that Selgin thinks they are.

              • Dan says:

                “I noticed that, in your understanding, you’re thinking of idle money as having no effect on the economy (this is where Selgin is coming from, too).“

                No, that’s not my position at all. But I’ve already tried to explain my position to you enough. It doesn’t look like I’ll be able to get you to see what I’m saying.

              • guest says:

                There’s only so much one can do, right?

                It was a good discussion for me, and I got to hone the way I present some of my ideas.

                Thanks, again, for the back and forth.

    • Major_Freedom says:

      No such thing as “sterile” money.

      All money is held to store value for future trading. Time horizon subjectively determined.

  2. scineram says:

    “Now let me tweak it yet again. Instead of the commercial banks lending out 80% of the gold coins, instead what happens is that a thief slips into the bank vault, and takes out 80% of the coins. But he’s quiet about it, so nobody realizes what happened. The depositors don’t alter their behavior. So long as they don’t all try to withdraw their coins at the same time, the remaining pile of 20% of the coins is enough to satisfy the vagaries of spending/income imbalances.

    If the thief lends the money out, won’t that cause a boom-bust cycle?”

    What if they do realize what happened, but still do not alter their behaviour? How does that change anything?

  3. LB says:

    I think the thing that’s tripping us all up, is that it’s hard to see what economic function “sterile” money balances serve. In a stable equilibrium of perfect certainty, it’s “wasteful” for a rich guy to hold 10 ounces of gold in his cash balances; he should lend out that money (or use the gold for industrial/consumption purposes) and “put it to work.”

    ===========

    It’s reserves. It’s insurance against people defaulting on their loans resulting in the innocent parties losing their money.

    Instead the shareholders take the hit.

    Reserves are the share holders cash.

    ie. A bank needs to hold shareholders cash to cover their expect losses. The shareholders take the hit, but they get the reward if it works.

    It shouldn’t be the depositor taking the hit.

  4. DMS says:

    I believe the whole anti-FRB argument trips itself up on bad framing. The issue is simply one of liquidity management, not artificial credit.

    Consider a bank’s balance sheet. It has assets of varying duration – reserves and vault cash are immediately accessible, while loans and investments (say treasury bill and bond holdings) have some duration. Similarly, it has liabilities of varying duration – shareholder’s equity and borrowings. The borrowings in turn will also be of varying duration – long-term bonds (many years), short-term bonds (a few years), short-term CDs (a few months) and immediately redeemable CDs (now). The latter we call checkable deposits, but renaming them immediately redeemable CDs obviously has no economic impact, but has the advantage of recognizing them as just another constituent of the liability side of the balance sheet.

    The important framing is to recognize that it is all fungible. Once a dollar comes into the liability side of the balance sheet, it is indistinguishable from all other liabilities, other than as it relates to the duration claim. They are all one large pile of cash and the same is true of the asset side. Again, there is no marketplace distortion. Instead, the bank simply must do two things effectively. One is to ensure that it has sufficient assets relative to liabilities, i.e. manage solvency. The second is to ensure that it has sufficient funds available to meet the duration demands of its various liabilities, i.e. manage liquidity. The fact that it can effectively manage its liquidity without resorting to arbitrarily matching a certain type of asset with a certain type of liability (vault cash/reserves with immediately redeemable CDs) does NOT imply a double-use or double-claim on an asset. Nor does it imply artificial credit creation.

    There is no distorting economic impact from the existence of immediately redeemable CDs, nor from any other type of bank liability of different duration. Indeed, bad liquidity management will cause very real problems in the marketplace, but FRB is not the source. (Note that FRB is a free-market phenomenon, so for those of us who are free-market, this consistency is a positive). Instead, bad banking practices, specifically in liquidity management, compounded by bad regulatory practices (e.g. unit banking, Fed mischief, etc.) conspire to create credit crises, not FRB.

  5. DMS says:

    And directly to Bob – note that ANY entity that borrows short and lends long has the issue you cite. It is not unique to FRB. This is true of households, banks, credit unions, etc. Say I, as an individual, take out a series of six-month loans from my bank, while investing in longer-term assets (say 10-year Treasury bonds). If I don’t manage the liquidity of my assets, I too will experience a “run”. It isn’t screwy for those 100,000 people to think they all have access to their money at the same time – they do! Granted, that will trigger a run, but as I said, ANY entity that borrows short and lends long bears this risk. In a marketplace where some people want to do the opposite, that is borrow long and lend short (typically households – think mortgages and bank deposits), this can only be accommodated with entities willing to borrow short and lend long, i.e. banks. There is simply no way to eliminate the resultant liquidity risk, but the existence of the risk does not imply a market distortion. Indeed, the introduction of a specific type of loan to a bank – the immediately redeemable CD – is a natural free-market solution to a basic economic problem.

    • guest says:

      A business cycle is where businesses decisions are not made in conformity with consumer demand (because businesses need to produce what consumers actually want, in order to make a profit).

      So, to the extent that savers’ actions are based on their belief that they have all of their money waiting for them, at all times, in the bank, is the extent to which projects started with FRB (and without the savers’ knowledge that their savings have been lent out) are not in conformity with consumer preferences.

      Consumer preferences are going one way (based on their belief that they have all of their money waiting for them in the bank), and projects are being started in another way.

      Those new projects are malinvestments because their profitability depends on how well they conform to consumer demand.

      • DMS says:

        This is my point entirely. It is not erroneous, let alone fraudulent, for bank depositors to assume that they have access to their money whenever they want. THEY DO!!! However, that doesn’t necessarily imply the bank must have an equal amount of reserves on its balance sheet, and that is where I think the anti-FRB argument goes off the rails.

        Holders of 6-month CDs assume they will all have access to their funds in 6 months, but why should that imply the bank must have an equivalent amount of 6-month duration assets on its balance sheet to match? Or match the 5-year bonds it borrowed (a liability) with 5-year loans it makes (an asset)?

        Not only shouldn’t the bank be required to do the above, IT CAN’T!! Or at least it can’t and still be a bank and be in the business of borrowing short and lending long.

        My sole point is that all FRB critics seem to view a zero-duration liability (an immediately redeemable CD) as something special or magical, in need of unusual treatment in the form of matched asset duration. Instead, it is all fungible and the liquidity needs of depositors could be handled in a variety of ways:

        – Callable long-term loans in the amount of deposits
        – Emergency borrowing in the marketplace
        – Fed Discount window borrowing
        – Asset sales of highly-liquid assets (e.g. Treasuries)
        – Sufficient solvency to sell illiquid assets below value
        – New share offering
        – Rights offering
        – Or, hold 100% reserves/cash in the amount of deposits

        Holding reserves equal to deposits is only one of many mechanisms that ensures depositors have actual access to their deposits. They don’t have a false belief that they have access, it is a true belief, but one that may be accommodated in ways other than holding equal reserves/cash. FRB is NOT the source of malinvestment.

        • guest says:

          ” It is not erroneous, let alone fraudulent, for bank depositors to assume that they have access to their money whenever they want. THEY DO!!! However, that doesn’t necessarily imply the bank must have an equal amount of reserves on its balance sheet, and that is where I think the anti-FRB argument goes off the rails.”

          You’re still approaching the issue from the perspective of nominal money units, which is why I tried to focus the issue on consumer demand as against investments *in anticipation* of consumer demand.

          It’s not just the nominal money units that “Free Bankers” need to concern themselves.

          To the extent that savers’ current actions and current planning are based on *their own belief* that their money is waiting at the bank for them at all times, is the extent to which lending that money out without the savers’ knowledge causes malinvestments.

          Another way of saying this is that if savers would change their level of current consumption or current acts of planning in any way upon realizing that their savings had been lent out without their permission, that proves that the projects that get started as a result of such lending are not in conformity with consumer demand.

          It’s the mismatch between production and consumer demand that’s the core issue of the business cycle, not the nominal amount of currency units capable of being spent/lent at any given time.

          FRB causes the mismatch because consumer preferences (in this scenario) are going one way *based on the savers’ **belief** that his money is always at the bank*, while projects are being started which do not conform with such consumer preferences.

          • Keshav Srinivasan says:

            guest, is it your position that if everyone understood exactly how FRB works, then FRB would not cause a business cycle?

            • guest says:

              The short answer is “Yes”. But there is a caveat in which the answer still might be “No”.

              If everyone depositing money in a FRB understood that their money wasn’t there at all times, then only to the extent that they still chose to consume and plan as if it were in the bank would the money lent by the bank cause malinvestments.

              But, as Bob noted on his recent solo Rothbardians vs “Free Bankers” video, consumers would tend to save at the banks with the highest reserve ratios, thereby limiting the malinvestments that could be caused by FRB.

              • Dan says:

                Just to clarify, guest. You know according to Mises FRB will always cause a boom/bust regardless of customer knowledge, and you’re just saying you think that’s wrong, right?

              • guest says:

                I don’t know for sure if that’s the case, but I would be comfortable with that since I believe my understanding follows logically from the Action Axiom.

                Consider what would have to be the meaningful economic difference between

                1) an economy with 1,000 gold coins, and

                2) an economy with 1,000 money substitutes, 10% of which were fiduciary media.

                I believe that, unless you hold that the medium-of-exchange value of the gold coins are based ultimately on its use-value

                – that is, those that are using it as money are levereging the values placed on it by those who value it for its physical properties –

                that the only meaningful difference between 1) and 2) is that in the latter case people are just choosing to value 10% less of the substitutes as money proper.

                And if you believe that such is the case, then you are logically obligated to also believe that the business cycle can be solved by simply choosing to believe that the 10% of fiduciary media is really money proper.

                That’s ridiculous.

                To be sure, Mises, at one point makes the distinction between “fiduciary media” and “money”. To me, that suggests that he would ultimately agree with me.

                But there are enough Austrians that do not seem to be willing to concede this point, that it could be that, elsewhere, Mises inadvertently strays from the logic of the Action Axiom.

              • DMS says:

                Ah, that is quite helpful.

                I think I see now where the discrepancy is. You (and Bob, I would argue) emphasize that the depositor’s economic behavior is altered, and the economy distorted, because he believes his money is literally at the bank and available on demand, when it is not.

                I assert that the depositor doesn’t believe his money is just sitting in the vault and does not behave economically as if it does. I don’t assert that the average depositor understands FRB either. However, it is my contention that the average depositor believes he has access to his deposits on demand, and has behavior that is economically consistent with that. And there is no economic distortion because that belief is true, per my other posts on bank liquidity management.

              • guest says:

                “I assert that the depositor doesn’t believe his money is just sitting in the vault and does not behave economically as if it does.”

                I would say that if that was the case, then, no, the depositor’s money cannot cause the business cycle.

                Depositors have to behave as if their money is available to them at all times in order for FRB to cause the business cycle.

                The reason is because consumer demand – however “unreasonable” (or however mistaken about the terms of the deposit) – is what ultimately makes businesses profitable.

                “However, it is my contention that the average depositor believes he has access to his deposits on demand … And there is no economic distortion because that belief is true, per my other posts on bank liquidity management.”

                I saw that you brought up your other posts on this subject, and I took a look and have responded to that where you brought it up.

                To recap, pulling funds from other sources to pay depositors should they all demand their money at once would efffectively convert the deposits into having 100% reserve backing.

                In the case where only some demand their deposits back, the rest of the money loaned without the depositors knowing that it could be, or is, happening is causing the business cycle.

                If a bank is going to definitely pull resources from elsewhere to pay depositors, then it’s not FRB, it’s 100% banking.

                Those from whome they’re pulling the funds to pay the depositors may now be making malinvestments based on the belief that the bank has THEIR money.

                That just pushes the problem back, though.

              • Dan says:

                DMS, one thing you want to keep in mind is that if you’re loaning out demand deposits then you’re signaling to businesses that they can lengthen the structure of production and build up capital. The problem, though, is that consumers time preferences haven’t changed. They still value the old investment-consumption proportions. So the lower interest rate is signaling that they can work on building new homes, but consumers preferences have changed and they just want to keep buying TVs. So when the homes are built the demand for them isn’t there. Nobody was saving for them.

              • Dan says:

                Correction: “but consumer’s preferences have NOT changed and they just want to keep buying TVs.”

        • guest says:

          “Holders of 6-month CDs assume they will all have access to their funds in 6 months, but why should that imply the bank must have an equivalent amount of 6-month duration assets on its balance sheet to match?”

          That’s not FRB.

          In this case, the investors knowingly made a deal with the bank that they will not have access to the invested money for 6 months.

          • guest says:

            To clarify further, if, somehow the investor misunderstood the terms of the CD, and *believes* that he has access to his invested funds at all times – even in spite of the legality of the contract – the invested funds would cause the business cycle because the projects started with it would not be in conformity with consumer preferences.

            Further still, If a bank explicitly told their customers that they were outright stealing some of their money to invest it as they saw fit, and all the customers were aware of it, that *could not* cause a business cycle because consumers won’t (indeed can’t) make decisions without *believing* that they have (or will have) the resources to do so.

            (Or, in the case where they think they might, but are not certain, they have the resources, they have already factored the risk into their decisions.)

          • DMS says:

            I appreciate the engagement, but fear we are talking past each other. Then again, that may be completely emblematic of the whole issue!

            1. I am not asserting ABCT is wrong, only that the Rothbard/Murphy attribution to FRB is wrong. There are several ABCT instantiations.

            2. The anti-FRB stance is wrong because the economic activity related to it is the result of REAL savings.

            3. Real savings by consumers are invested in immediately redeemable CDs (checkable deposits) with a bank-customer contract that stipulates:

            a) the interest (or fees) involved
            b) the right of the depositor to access his funds on demand
            c) the obligation of the bank to liquify its holdings appropriately in order to fulfill part b above

            The notion of “false belief” in the access to one’s deposits is false. The depositor has a true belief that he has ready access to his deposits by contract. However, the contract does not stipulate that the deposits are sitting in vault cash or Fed Reserves. It stipulates that the bank should manage its liquidity properly. There simply is no distortion of economic behavior anywhere in the arrangement.

            • Major_Freedom says:

              >The anti-FRB stance is wrong because the economic activity related to it is the result of REAL savings.

              We know that’s false because the whole reason the fed exists in the first place was to allow it to acquire more real wealth via inflation than their own “real savings” would permit.

              Creating loans out of inflation is not an instance of loans backed by prior abstaining from consumption.

            • guest says:

              “The depositor has a true belief that he has ready access to his deposits by contract. However, the contract does not stipulate that the deposits are sitting in vault cash or Fed Reserves.”

              “Ready access” means that everyone with ready access can go into the bank and get all of their money on demand.

              They can’t all do that unless the bank is holding 100% reserves.

              So, the economic activities made possible by FRB are based on perceived savings, not on real savings.

              • DMS says:

                Go back up a few posts and see where I gave a half-dozen other alternatives to 100% reserves for providing immediate liquidity to all depositors. It is simply incorrect to say that all depositors can’t get their deposits absent 100% reserves – the hydraulics of the bank’s balance sheet allow for numerous alternatives.

              • guest says:

                “Go back up a few posts and see where I gave a half-dozen other alternatives to 100% reserves for providing immediate liquidity to all depositors.”

                And, from the few posts back:

                ” Instead, it is all fungible and the liquidity needs of depositors could be handled in a variety of ways:”

                If the bank is pulling resources from somewhere else to pay depositors what the bank would not otherwise be able to pay, then the bank is converting the deposits into 100% reserves.

                And then either the bank, itself, or those from whom it is pulling the funds to pay depositors, are the ones who have made malinvestments.

                Someone, somewhere, is making malinvestments based on FRB.

        • Tel says:

          This is my point entirely. It is not erroneous, let alone fraudulent, for bank depositors to assume that they have access to their money whenever they want. THEY DO!!!

          Only in a statistical sense, but it won’t work if they all choose to withdraw on the same day… then you get a bank run. Unavoidably FRB creates a risk of bank failure. That’s morally OK if all depositors and shareholders voluntarily accept this risk… people accept risk all the time for various reasons. The problem is that governments pretend they can “guarantee” the banking industry and make the risk go away, which is a lie.

          My sole point is that all FRB critics seem to view a zero-duration liability (an immediately redeemable CD) as something special or magical, in need of unusual treatment in the form of matched asset duration.

          There’s a reason for that, because the zero-duration liability makes it impossible for the bank to guarantee protection against a bank run. For what it’s worth, by law in Australia there is no zero-duration liability, all payments are allowed a maximum of three days for clearance. They had to draw the line somewhere.

          I should point out the same thing happens with any resource. Think of airline tickets, most airlines ask you to book a specific flight, and they get you to confirm that flight the day before. This allows them to efficiently manage the limited resource.

          Suppose you had an airline that sold tickets for customers to hold however long they liked, and then show up at the airport and use the ticket “at call” when they wanted to? The airline isn’t cheating anyone, they sell the same number of tickets as they have seats available, and they make it clear how many flights are leaving each day. Problem is if everyone wants to fly on the same day, some will be left behind. Selling tickets “at call” on a limited resource creates risk of failure, after that it’s a matter of whether the parties understand this risk, and voluntarily accept it.

          Same thing happens with roads, rail, data links, meeting rooms, bathrooms, etc.

          We accept these type of things because we have to, and because it’s easy to understand what’s going on. No one builds a house with 3 bedrooms and 10 bathrooms just to guarantee that the one day a year you invite the family over no one has to queue up to relieve themselves.

  6. Keshav Srinivasan says:

    Bob, at what point would the parking garage example cause an unsustainable boom? Would an unsustainable boom occur if people started selling their parking garage tickets to other people for cash? Would an unsustainable boom occur if people started using parking garage tickets as a medium of exchange?

  7. skylien says:

    “And so in that light, if 1,000 people pool their savings hoping that only 100 of them will want to use them at any moment, that seems economically much different from 1,000 people chipping in to fund a parking garage with 100 spots. The former seems to me that it would cause a mismatch between investment and saving, whereas the latter seems like a clever and efficient leveraging of real estate.”

    At this moment I really don’t see the difference. But it is exactly this place where we need to dig for the answer to find the truth.

  8. Transformer says:

    Bob,

    I have a clarifying question:

    Suppose there was an economy that for many years (say 20) had the following attributes. A fixed money supply , a velocity that stayed constant and FRB banking that always maintained a 10% reserve. Also assume societal time preference remained unchanged.

    Is it your contention that this economy would have lower interests rates (and the possibility of bad investments) for the entire 20 year period compared to an economy identical in every way except with 100% reserve banking ?

    If the answer is yes, then I think I am missing something.

    If the societal time preference is the same in both cases then won’t competition among bankers cause the rate of interest in the FRB case to raise to the same level as the non-FRB case ?

    I think the main difference between the 2 cases would be velocity (and therefor the price level) will be higher in the FRB case as people are motivated by the fact they can earn interest on “idle balances’ to hold less money outside the FRB banking system. But I do not see how interest rates would differ in either case,.

  9. Josef Gether says:

    “But in the real world, people hold cash balances (partly) in order to keep their options open for future purchases that they can’t know precisely, ahead of time.”

    But why can’t they decide to increase their risk slightly to earn some interest and not pay any storage and safe keeping fees? Why would that decision lead to an unsustainable boom? You could even offset the risk by saving a bit more and thereby earn more interest. If the banks get it wrong, then people need to wait for payouts or even lose a part of their savings, that would discipline them well. It sure sounds to me like it is the same mechanisms working as in any other credit business, only with slightly different conditions.

    • Tel says:

      I agree, but even within the context of earning interest, there’s a big difference between a three month term deposit where the bank knows well in advance they need to have the money available on a certain day, as compared with an “at call” account where the bank lends the money out but has no idea which day they will be called upon to pay it back.

      That is to say, it’s low risk for a bank to operate as a broker for loans, being intermediary between the saver and the borrower. It becomes high risk if the bank accepts deposits at a short term and lends at a long term. The bigger the short term / long term mismatch the worse it gets.

      • skylien says:

        Technically I don’t see a difference. If the bank cannot pay-out my demand, then I have to wait. I know that from the initial contract. And if at first I didn’t change my behavious, I now will have to. And I probably will learn for the future.

        It only becomes a problem if the CB steps in and bails out my bank and me, so noone will ever change what they are doing.

  10. skylien says:

    But why can’t they decide to increase their risk slightly to earn some interest and not pay any storage and safe keeping fees? Why would that decision lead to an unsustainable boom? You could even offset the risk by saving a bit more and thereby earn more interest. If the banks get it wrong, then people need to wait for pay-outs or even lose a part of their savings, that would discipline them well. It sure sounds to me like it is the same mechanisms working as in any other credit business, only with slightly different conditions.

    • skylien says:

      I for one do not act as if I own the money in my FRB savings account like the money in my pocket. I know I have lent it to the bank and what consequences that entails.

      • skylien says:

        Acutally I act as someone who knows that he has lent money to his bank with his demand deposit in world of rigged interest rates by CBs while I am assuming most others only will wake up after certain dramatic events that have not yet materialized.

        • Dan says:

          Yes, but your time preferences haven’t changed. While the loan signals to businesses that they have.

          • skylien says:

            No you misunderstand what I have said. I do change my time preference based on the fact if I have my money as cash on hand, or in a demand FR account.

            • Dan says:

              If your time preferences have changed then why haven’t you put the money in a CD. I’ll grant you that you maybe have slightly altered your time preference, but you are sending signals to businesses that you are deferring consumption today in order to buy something more in the future, but you’re not doing that in reality. Otherwise you’d have put your money into an interest bearing account.

              And, sure, maybe we can come up with some convoluted way to explain how one individual was able to accurately signal his time preferences through the interest rate without actually forcing himself to defer his spending in the presence. Maybe we can do that, I don’t know, but that clearly breaks down when we’re talking about society at large. If a bank is loaning out, say, 80% of demand deposits, then that sends a much different signal to businesses than the reality. There’s no way for the bank to replicate the signals of each of their individual depositors by doing that.

              • skylien says:

                Well because I want a mix of both things if possible, and in my view it is possible. Just as with parking. I don’t need to own a parking lot 24/7. I am prepared to have one most of the time if I share it with others.
                I am prepared to have my bank say to me: Dear customer, you put your money into a FR demand deposit, and unfortunately at the moment we are not able to give you the demanded sum, as others have already drawn down the current available amount (like others already filled the parking lot). Please come back later or we notify you when you can get demanded sum.

                -> There is no reason for any default, since my demand claim is conditional. So I HAVE to change my consumption at that moment since it is contractually defined like that.

                But it would actually be a good exercise to write down in what ways people signal their time preference, and how accurate each action actually is.

              • Dan says:

                Exactly. And that’s the problem. The interest rates are signaling that people have shifted more from current consumption to investment, but as you acknowledge, you don’t want to defer current consumption for future consumption. If you did, you’d put it in an interest bearing account and get compensated for that deferred consumption. So the interest rate is sending an incorrect signal.

  11. Enrico says:

    Hi Bob
    Thanks for this new post! [Actually, my objection to the previous one was that “as long as the rich guy is not spending the money in his vault, the loans granted by the thief are backed by real savings”. I’m sorry if I gave you a different impression.]

    1) Quote: “Starting originally from a position of 100% reserve banking on demand deposits, the commercial banks look at all of their customers’ deposits of gold in their vaults, and take 80% of them, and lend them out into the community. This pushes down interest rates. But the original rich depositors don’t alter their behavior”

    It’s true that the depositors don’t alter their behavior, but it doesn’t follow that now the investments aren’t backed by real savings. Here is a counterexample: suppose that the system remains under 100% reserve banking, but that depositors decide to withdraw and lend directly 80% of their deposits. They don’t change their behavior ( –> they are not spending for consumption any amount of that deposited money, as they were not spending it before), but now interest rates are lower. Yet, you don’t think this would cause a boom-bust cycle…right?
    Basically, I’m saying that there is no difference between lending money directly, and lending money through FRB. In both cases, available credit increases by the same amount; in both cases, interest rates decrease by the same amount; in both cases, the savers have to save (=not to spend) the same amount of money. So, how is it possible that this two cases have different outcomes?

    2) Quote: “The depositors don’t alter their behavior. So long as they don’t all try to withdraw their coins at the same time, the remaining pile of 20% of the coins is enough to satisfy the vagaries of spending/income imbalances. If the thief lends the money out, won’t that cause a boom-bust cycle?”

    Based on what I wrote in point 1), I don’t think that there’ll be a boom-bust cycle. To further clarify, let us consider three cases:
    2-A) I keep 10 gold coins under my bed for 1 year, except spending 2 of them in the meantime.
    2-B) I lend 8 gold coins for 1 year, and spend 2 coins in the meantime.
    2-C) I deposit 10 gold coins in a FRB system, withdrawing 2 of them in the meantime.
    I guess Bob would say that case 2B would be OK, even if the interest rates are lower than in case 2A; note that my behavior is no different in the two cases, because I just spend 2 coins along the year and save the remaining 8 coins. But if case 2B is OK, why isn’t 2C? The interest rates are the same, because they depends on supply and demand of credit: supply increases by 8 coins in both cases, and the demand curve is the same.

    3) Quote: “people hold cash balances (partly) in order to keep their options open for future purchases that they can’t know precisely, ahead of time”

    I agree. That’s why “free bankers” are in favour of private banknotes (reedimable in gold or, more generally, in base-money) emitted by banks. Hoarded banknotes allow people to keep their options open, without reducing the credit supply below the real level (the one corresponding to the amount of real savings).

    • Major_Freedom says:

      This whole thing can be settled by realizing Murphy’s analogy works if we also take into account the fact that for the “distortions” Austrians argue takes place because of FRB cannot be resolved with just the knowledge that banks are engaging in FRB.

      It’s not enough to ensure that the capital structure tends towards temporal coordination.

      WE CAN’T SEE the effects of FRB on interest rates because WE CAN’T SEE the non-FRB interest rates as a baseline with which to compare.

      With FRB, the *extent* of any distortions are NONOBSERVABLE. We can’t go by the single set of empirical data that exists everyday in our FRB world and say aha, this won’t be as bad or even comparable to a thief taking gold coins because we know that without FRB interest rates would be R(t), so we can counter-act the Fed and “undistort” the rates.

      That isn’t possible because the only way we could in principle know what prevailing non-FRB rates would be is if and only if the world was in fact non-FSB.

      It’s no rebuttal to this to say OK, but then how do we even know rates are being distorted? Why? Because we already know the Federal Reserve System’s existence has an effect on rates as compared to a world without it. It would be stupid and silly to suggest that the Fed’s targeting of rates for decades and decades never happened, that it had no effect on rates. The supporters of the Fed claim that one purpose is to affect rates.

      The phenomena of “division of labor” is complex and deserves more consideration. Billions of individuals working in a division of labor CANNOT know what a non-existent counter-factual world will look like. This is why Mises knew there is no middle of the road possible, it’s either private ownership or state ownership in the long run. We can’t separate the world into two.

      • skylien says:

        The distortion of a CB can be described. The distortion of FRB cannot.

        The difference is that CBs distort it by ever expanding the money supply. FRB cannot do that. It stays at a certain level more or less constant. And since the actual amount of money (incl. fiduciary media by FRB) in the system doesn’t really matter, also interest rates should be unaffected.
        It is expanding the money supply (beyond expectations btw) that distorts interest rates. If the CB stops with expanding the money supply (stops enabling private banks to ever expand it) then interest rates start to go to real market levels.

        So yes prices of goods and capital might be higher with FRB but interest rates should stay the same because FRB banks cannot ever expand without a lender of last resort.

        • Dan says:

          The distortion of a FRB can be described. What happens is when the banks start loaning out demand deposits they lower the interest rate, but consumers time preferences haven’t changed. So instead of continuing to pump out more TVs, businesses lengthen their structures of production and start building new homes. Unfortunately, when the new homes are built they find that there is no demand for them because consumers still value the old investment-consumption order and just want TVs.

          • skylien says:

            Yes when you switch to FRB, then interest rates will fall because the money supply expands at the start, but this cannot alst very long.

            So I grant that when you switch there might be a swing into phase. Or would you argue that each time it starts, a wash out of bad debt would reduce the money supply back to 100%?

            • Dan says:

              I’m not sure what would happen exactly after the bust off the top of my head. I’d have to think more on it. But, if we’re talking about a commodity backed FRB with, say, gold as the currency, then you’d always have an expansion of the money supply entering the economy from gold miners. So that new money would get deposited into bank accounts which are then loaned out, pushing interest rates down while consumer time preferences haven’t changed. This would result in a boom/bust.

              • skylien says:

                well gold miners increasing the money supply pushes down the interest rate as well. That was going to be my next argument…

                Just as it would be a problem if all of a sudden a very big gold mine would be found doúbling the money supply in a very short time. Just as it was a problem when spain imported huge amounts of gold from the new world.

                The market isn’t a super precission machine, I think it is rather rough and quite robust and can deal with small unexpected changes in the money supply.

              • Dan says:

                Increasing the supply of money only would cause boom/bust if it was introduced through the loan market. If the miners were just spending the coins then it would just raise the price level but not cause a boom/bust. But with a FRB all that new money would be hitting the loan market as soon as someone deposited any of it. That’s the difference.

              • skylien says:

                Sorry for late reply, don’t know if you still will read this, but I owe.

                Yeah I know what you mean but at the first point where money enters the market just has the biggest effect there. But a doubling of the money supply will also have a lowering effect on the interest rate. The tide pushes up (or down in terms of interest) all the boats.

                People who get more income due to increases in the money supply will be willing to lend out the same amount of money for less interest… So that is only a differene of degree not of substance.

              • Dan says:

                As of right now, my feeling is that if miners loan out new gold early enough then that would cause a business cycle. I’m open to arguments on why this wouldn’t be the case, but that’s my position at the moment. Although, the boom/bust would likely be minimal as not all the new money would be loaned out. Much of it would just be spent and slightly drive up prices. And we’re not likely to see a doubling of the money supply, either, which I think would be much more damaging.

                OTOH, FRB would mean that all new money as soon as it was deposited would be loaned out. All of it would impact interest rates every time. This would be much worse.

                So at best you’re just telling me my preferred system wouldn’t be perfect, but acknowledging that if I’m right then FRB would certainly make it worse.

              • skylien says:

                “So at best you’re just telling me my preferred system wouldn’t be perfect, but acknowledging that if I’m right then FRB would certainly make it worse.”

                You are right.

              • Dan says:

                Yeah, Mises acknowledged that you could have a business cycle in this way with a 100% reserve system. He just said it would be very small as only a small proportion of the new money would enter the economy through loans for various reasons.

      • Enrico says:

        @Major_Freedom
        I’m making thoughts experiments in order to bypass the “non-observable problem”.
        For example – with respect to my previous comment – do you agree that case 2B won’t cause any boom-bust cycle? Do you agree that interest rates in case 2B are lower than in case 2A? Finally, do you agree that interest rates in case 2C are equal to interest rates in case 2B? Suppose that there is no Central Bank in all three cases.

        • guest says:

          “But if case 2B is OK, why isn’t 2C?”

          Because in 2C, your level of consumption and acts of planning for the future are factoring in your *belief* that the 8 gold coins you deposited are always waiting for you.

          Businesses need to produce in conformity with consumer preferences – they can’t just produce anything they want at a profit.

          Your consumption and planning are affecting demand one way, while your savings that have been invested without your permission are necessarily going another.

          Another way of saying this is that if you would alter your consumption or acts of planning (as opposed to only planning in your head) for the future upon learning that your money had been lent out without your permission, that proves that the projects that were based on such lending are not in conformity with consumer preferences.

          “The interest rates are the same, because they depends on supply and demand of credit: supply increases by 8 coins in both cases, and the demand curve is the same.””

          The demand curve wouldn’t be the same if you’re basing your consumption and acts of planning on the belief that your money is always waiting for you at the bank.

          • Enrico says:

            In both 2B and 2C scenarios, I consume the same amount of money (2 gold coins) in the same amount of time (1 year) while saving the same amount of money (8 gold coins). Thus, my consumption and saving levels are the same. By the way, in FRB I am giving my permission to the bank.
            The demand for credit curve is the same, meaning that if someone is willing to pay x% interest rate on an 8 coins loan in case 2B, the same person is willing to do it in case 2C as well. There is no reason for the same person to change idea.

            Maybe you are suggesting that in case 2C I could withdraw more than 2 coins? That’s another case scenario, let’s name it 2D. But if the bank has no additional reserves, then it goes bankrupt. Then I have to wait for getting back my money. Thus, I cannot increase my consumption – I am “forced to save”.

            • guest says:

              “By the way, in FRB I am giving my permission to the bank.”

              Ok, in that case, there can be no business cycle because you are not economizing your resources based on what would be a mistaken belief in necessarily readily available funds in the bank.

              But, as Bob noted in his debate with Selgin, I don’t think that’s technically FRB because FRB is based on obscuring the fractional nature of what would otherwise be demand deposits.

              Again, though, to the extent that you are knowingly allowing the bank to lend out your money, your “deposits” cannot cause the business cycle.

              “But if the bank has no additional reserves, then it goes bankrupt. Then I have to wait for getting back my money. Thus, I cannot increase my consumption – I am “forced to save”.”

              The waiting is the bust. And the waiting changes consumer spending such that investments made under the previous levels of spending are turned into malinvestments (commensurate with the change in spending).

              But also, in the short term, others are made richer at the expense of the depositors the bank chooses not to repay.

              • Enrico says:

                Quote: “the waiting changes consumer spending such that investments made under the previous levels of spending are turned into malinvestments”

                Consider Bob’s example: “imagine a rich guy is walking down the street with 10 gold coins in his pocket. A mugger comes up, sticks a gun in his belly, and takes 8 of the coins”. Then the spending plan of the rich guy changes, and yet Bob says there is no boom-bust cycle.
                In my 2D scenario, the depositor spending plan changes, but (again) that is not an indicator of a boom-bust cycle.

        • Major_Freedom says:

          You’re totally missing Murphy’s point.

          • Enrico says:

            Sorry about that, but still you could have answered my questions…

    • Giovanni P says:

      “But if case 2B is OK, why isn’t 2C? The interest rates are the same, because they depends on supply and demand of credit:”

      For that exact reason the interest _cannot_ be the same, as in 2-C there will be more credit supply than in 2-B.

      • Enrico says:

        The credit supply is the same: 8 (additional) gold coins for both 2B and 2C cases.

    • Dan says:

      Enrico, the difference between 2-B and 2-C is a matter of time preference. In 2-B your time preference is pushed out further, you’re willing to forgo all current purchases with that money for something better in the future. In 2-C you’re unwilling to forgo the chance to spend that money if you see something you like or if you feel you need it. So you have different time preferences in both those scenarios but you’re sending the same signal to businesses through the interest rate. On an individual level the impact will be barely noticeable. But when you start adding in millions of people the problem becomes clear. When banks loan out demand deposits they’re lowering the interest rate signaling to businesses that they can lengthen the structures of production and focus on higher order goods. This is a false signal though because consumers haven’t shifted their own consumption/investment value scale. So you have consumers operating off their same time preferences, but businesses be misled to think that their time preferences have shifted.

      • Enrico says:

        @Dan
        In my opinion, it doesn’t matter what a person think; it matters what he does. Businesses do their investment plans not on the basis of what I think (because they can’t possibily know it!) but on the basis of what they can see: consumption and investments levels. In both 2B and 2C cases, there are the same consumption and investment levels (2 and 8 coins, respectively).
        If the consumption and investment levels in case 2B do not cause a boom-bust cycle, I don’t see how ther could cause one in case 2C. The world outside is exactly the same; my consumption and saving levels are exactly the same; the interest rates are exactly the same; etc.

        Maybe could you make a practical example of what would go wrong in case 2C?

        • Dan says:

          So you think it doesn’t matter if people want to consume goods like TV’s, but the interest rate is signaling to businesses that people are saving to buy new homes? If the consumers time preferences are not driving the interest rate then businesses are going to plan for things consumers aren’t saving for. If they were saving for those higher order goods they’d put the money in a savings account and earn interest. They’d get something for deferring current consumption.

          • Enrico says:

            I think only the amount of real savings matters. As long as interest rates depend on such amount, investments are sustainable.
            BTW, businesses can never know what I’m saving for – even in a 100% reserve banking system.

            • Dan says:

              I understand businesses can’t know exactly what you’re saving for, but that doesn’t mean that a bank loaning out demand deposits is sending accurate signals. If a bank is loaning out 80% of demand deposits, while consumers time preferences haven’t changed at all, businesses are going to lengthen the structure of production based on the lower interest rates. But, they’ll find out that the lower interest rates were incorrectly signaling that consumers consumption-investment proportions have changed when in reality they haven’t. You don’t want to signal to businesses that they should be focusing on building homes if people are looking to buy TVs.

              It’s a very different thing if I put money into a CD because my time preference changed, than if a bank loans out my demand deposit when my time preference hasn’t changed at all. In the first instance businesses would be getting the right signal to lengthen the structure of production based on my new time preference. In the other they’d be getting an incorrect signal to lengthen it while my preferences didn’t change one iota.

              • Enrico says:

                Quote: “they’ll find out that the lower interest rates were incorrectly signaling that consumers consumption-investment proportions have changed when in reality they haven’t”

                Time preferences in cases 2A and 2B are (or, at least, can be) the same, but the interest rates are different. Thus, if I start lending out the money under my bed, am I sending incorrect signals?

                Another example. Suppose that, under 100% reserve banking, I lend 8 coins to my bank for 1 month. If I don’t claim the money back at the end of the month, the loan is automatically renewed. The bank can thus lend the money (and lower the interest rates). Is this sending bad signals? Is it any different (from a practical point of view) from fractional reserve banking?

                Back to your statement: if there are 8 coins available for 1 year, and the bank lends them for 1 year, I think businesses get the correct signal: there are 8-coins-worth of savings available for 1 year. They don’t know for future years, but statistically they can expect to have a similar level in the next year. The same happens in case 2B.

              • Dan says:

                “Back to your statement: if there are 8 coins available for 1 year, and the bank lends them for 1 year, I think businesses get the correct signal: there are 8-coins-worth of savings available for 1 year. They don’t know for future years, but statistically they can expect to have a similar level in the next year. The same happens in case 2B.“

                Sure, if you ignore that consumers haven’t adjusted their time preference, but interest rates are signaling that the investment-consumption proportions have changed when in fact they haven’t. If you ignore that then, yeah, totally the same thing.

                “Suppose that, under 100% reserve banking, I lend 8 coins to my bank for 1 month. If I don’t claim the money back at the end of the month, the loan is automatically renewed. The bank can thus lend the money (and lower the interest rates). Is this sending bad signals? Is it any different (from a practical point of view) from fractional reserve banking?”

                Yes, it’s different from FRB. In order to loan money the bank has consumers defer current spending for future spending. The changing interest rates signal that the consumer’s investment/consumption proportions have shifted, and in fact, they have shifted.

                “Time preferences in cases 2A and 2B are (or, at least, can be) the same, but the interest rates are different. Thus, if I start lending out the money under my bed, am I sending incorrect signals?”

                This is tougher for me to see. I believe they would, and I can’t see why they wouldn’t, but I’d need to get back into studying this stuff to really feel confident saying that. Although, it would be on such a small scale, being done on an individual level, that it would probably be unnoticeable. Also, it’s not likely that you’d move idle money into an investment if you haven’t altered your time preference.

  12. Tel says:

    Notice how common analogies break down here. For example, the owner of a parking garage can safely sell 1,000 (say) stickers that entitle the buyer to park his or her car in a lot that only has 100 parking spots, if the owner has studied the past and thinks there is only a very small probability that more than 100 people will want to park at the same time. That economizes on society’s scarce resources; it would be foolish to insist on “100% reserves” in such a setting. Let the market do what it will, perhaps with clauses in the contract for what happens if a buyer can’t find a spot.

    No it is never “safe” to do this, it is always an understood risk.

    If you only sold 100 stickers, the price of each sticker would be higher, therefore people are judging the trade off between a cheaper sticker and a guaranteed parking space.

    It gets more interesting if the parking garage refuses to say exactly what sticker to space ratio they are running at, and then lobbies City Hall for a written “guarantee” such that should the parking lot ever fill up, the local police will come around and direct the vehicles to park on people’s lawns around town.

    • Andrew says:

      I agree. I think this analogy actually works a lot better than Bob would like to admit. FRB is a lot like and overbooked flight. The difference is that a bank run is much more serious than someone getting bumped from a flight.

      Personally, I no longer believe that FRB is the menace that many Austrians claim. I can see how it distorts the market, but I think the much larger problem is the policies of governments and central banks to lower interest rates and promote certain high risk loans. I think the risks with FRB could be largely alleviated with increased transparency and advertised policies that prevent depositors from making a withdrawal that would reduce the bank’s reserves below a minimum threshold.

      Then again, it is hard to say what impact increased transparency would have on the behavior of depositors. Would being able to see your bank’s deposit to reserve ratio make you more likely to withdraw your account? Would people continue to eat FRB sausage if they saw how it was made?

  13. Charles DuBois says:

    Maybe I am reading it wrong, but this discussion seems to be based on a false premise – that banks lend out deposits or reserves. That’s not possible at the overall level. When the banking system makes a loan, its assets increase (the loan) and its deposits increase (the deposit from the loan). This occurs out of thin air with no reference to deposits and reserves. If, after the fact, a bank did need more reserves (not generally an issue these days), it would obtain them from another bank, or, if necessary, the Fed would supply them. Loans create deposits, not the other way around. It’s always been that way.

    Since loans expand the private sector balance sheet, they do create a potential boom-bust scenario, consistent with Austrian beliefs, as occurred during the 2007-09 period. Mainstream economists missed the whole thing because they thought banks intermediate savings. Thus, in their view, the banks were just moving money from one entity to another – not a big deal. In reality, as noted, the private sector balance sheet was expanding, leaving it vulnerable to the ensuing decline in the value of the underlying collateral.

    • guest says:

      “Since loans expand the private sector balance sheet, they do create a potential boom-bust scenario …”

      I’m going to go out on a limb, here and say you’re an MMT’er!
      😀

      I totally pegged you based on the debate Bob had with an MMT’er.

      *Pats self on the back*

      P.S. You can’t loan what you don’t have.

      • Charles DuBois says:

        Hi Ha! Very good! Yes, I am quite familiar with MMT . Hpwever. I am not an MMTer as, among other thinga, they don’t seem to recognize that it is private sector investment which drives productivity and wealth – not goverment deficits. Also disagree with their policy prescriptions.

        I’d be interested in that debate. I might learn something. Do you know which one it was? Thx.
        ——————————————-
        How banks make loans is not a theory. It’s just reality whether we like it or not. I don’t like it but it is what it is. For example, if banks did not create all those housing loans out of thin air we probably would have avoided the GFC.

        And it is nothing new, e.g.,

        Robert B. Anderson, Treasury Secretary under Eisenhower, said t in 1959:

        “When a bank makes a loan, it simply adds to the borrower’s deposit account in the bank by the amount of the loan. The money is not taken from anyone else’s deposits; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.” (Time magazine, June 1959)
        ————–
        The Bank of England noted it in the spring of 2014, writing in its quarterly bulletin:

        “The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

        Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
        ——————————
        For proof, just read the articles where a bank analyst actually took out a loan and tracked what happened to verify.
        —————————–

        Actually, anyone can create money with a loan. For example, I could give you an an I.O.U for $100 out of thin air. You could use it as money – but only if others accepted it as payment and believed totally in my credit worthiness. Banks do the same thing. The difference is that dollars which show up in bank accounts are accepted. by others when we pay our bills, etc. At least that is my humble understanding.

        Thanks.

        • guest says:

          “Hpwever. I am not an MMTer as, among other thinga, they don’t seem to recognize that it is private sector investment which drives productivity and wealth – not goverment deficits.”

          Ok, I stand corrected.

          It seemed to me that you were saying that expanding the private sector balance sheet creates the boom/bust cycle (as opposed to increasing debt, which causes sustainable growth, in their view), which I understood to be what MMT’ers believe.

          “I’d be interested in that debate. I might learn something. Do you know which one it was? Thx.”

          Yeah, sure. It took place on the Tom Woods show, with Tom Woods moderating (even-handed moderator, by the way):

          Ep. 1116 Debate: Bob Murphy and Dylan Moore on Modern Monetary Theory (MMT)
          [www]https://tomwoods.com/ep-1116-debate-bob-murphy-and-dylan-moore-on-modern-monetary-theory-mmt/

          “For proof, just read the articles where a bank analyst actually took out a loan and tracked what happened to verify.”

          My understanding is that it is in the interest of banks to make people believe that they are creating [real] money out of thin air, and the quotes you provided would not be inconsistent with that view.

          I understand that people behave as if they have more money as a result of the bank loaning it out of thin air, but my view (and, I would argue, the Austrian view) is that they are merely creating claims to nothing that are passed of as being claims to real goods.

          That other people accept these unbacked claims, to me, just means that the banks have found a sucker to rob, and that sucker must find yet another sucker to pass the claim on to in order to profit or at least not lose as much.

          “Actually, anyone can create money with a loan. For example, I could give you an an I.O.U for $100 out of thin air. You could use it as money – but only if others accepted it as payment and believed totally in my credit worthiness.”

          In my understanding, IOUs cannot be money, even when people accept them in the belief that they are.

          To me, money enables a coincidence of wants between two people who would otherwise not choose to trade what the other wants to sell.

          But money can only convey the valuations people place on consumer goods if it leverages the use-values of those goods.

          There’s no necessary link between a piece of paper and the use-value someone places on a given good, so any value placed on the paper would have to be contrived – it’s real value being zero.

          Whereas with a commodity money – and yes, I realize there is no such thing as intrinsic value – someone has a value for the commodity’s physical properties that is more than they value that which you want to sell, but that is also worth less to you than what you’re willing to accept in trade (for another good) for the thing you’re selling.

          We can’t all value something because someone else will accept it, because that would be a circular argument. Someone has to lose in that arrangement.

          Such fraudulent arrangements can last as long as people are willing to believe that the paper can convey real (albeit, subjective) values. But the real value of the paper is zero.

  14. Charles DuBois says:

    Yes, I was saying that unsustainable increases in private debt can create boom/bust cycles. Increases in private debt and the associated malinvestment were key to the past two recessions. Yes, this is one MMT proposition. But it is not a unique idea and, as I understand it, it is key to the Austrian school as well. For example, the Austrian school got more recognition after the GFC because they, unlike most economists, pointed out the important role which credit expansion plays in the business cycle and how it ultimately can become unsustainable.
    —————-
    Thanks for the link! Will check it out.
    —————–
    I don’t disagree with your commentary on banks creating loans out of thin air. You are, in effect, explaining the possible implications and misperceptions which it can create. Agreed. All I was attempting to do is to explain what actually happens when a bank makes a loan – for better or worse. So if I go to the bank and get a loan for $1000, the bank will mark up its loans by $1000 and also its deposits by $1000.(if necessary, it will also move some excess reserves into required reserves). That’s what happens. The implications I think are a separate issue.
    ——————
    Thanks for the thoughts on the I.O.U. I agree with your comments. Sorry for the diversion. I was responding to your comment “You can’t loan what you don’t have”. Well, banks apparently do (at least in terms of accounting – perhaps not in reality as you note) and I was just attempting to use an analogy to explain. But a poor one and I withdraw it. Thanks.

  15. Transformer says:

    If I normally buy a bag of apples each week for $10 but one week I lend it to you instead I have clearly foregone consumption so this is genuine savings.

    If I lend you the $10 but stipulate that if I change my mind then i want the money back immediately to buy the apples , but it turns out I don’t change my mind then this still is genuine savings.

    If I do change my mind and want the money back then either you are unable to give me back the $10 so I have still saved albeit unwillingly (and you may have committed fraud), or else you find the $10 from another source and I buy the apples as usual and my savings is cancelled out.

    I do not see why any of the above scenarios would lead to over-investment. All loans come out of real savings, even if occasionally savings that is forced.

    If I don’t buy the apples but ask (or pay) you to look after my $10 for a while and keep it safe then I have clearly saved $10. If you fraudulently lend it out anyway then I cannot see how it is not the case that real savings are being lent out even if the saver is unaware.

    The difference between the case where the money is stored as asked and where it is fraudulently lent is the effect this has on the economy. In the money is lent and spent then market clearing prices will be (marginally) higher than when it is stored. As long as prices adjust instantly this is unimportant. But if prices are slow to adjust then if money previously stored and not in circulation starts getting lent out and spent (and if interest rates adjust faster than other prices) then bad investment may be possible as people are fooled by the lower than equilibrium interest rates into ultimately unprofitable projects.

  16. Enrico says:

    @Dan
    Sorry for the late reply!

    I said: suppose that, under 100% reserve banking, I lend 8 coins to my bank for 1 month. If I don’t claim the money back at the end of the month, the loan is automatically renewed. The bank can thus lend the money (and lower the interest rates).
    You replied that this scenario is different from FRB, since I am deferring current spending for future spending.

    My point, however, is that you could imagine the same scenario with 1-day or even 1-hour automatically-renewable loans. Thus, at every day/hour, I could get back my money from the bank – as in FRB. I thought this conclusion to be “evident” even with 1-month periods. To repeat:
    – in my scenario, I could wake up every morning and decide not to renew the next 1-day loan to the bank (thus withdrawing my money);
    – in FRB, I could wake up every morning and decide to withdraw my money from the bank.

    I don’t see why FRB is not OK for you, while my scenario (as I understant) is OK.

    • Dan says:

      If those two scenarios result in the same exact results, then you concede that FRB will surely never happen in a true free market, right? Why would any customer choose a FRB when they can choose a 100% reserve bank that offers 1 hour loans that automatically renew and pay them interest.

      • Enrico says:

        They are basically the same, though FRB is (a little bit) more convenient: you can withdraw your money at every second. If FRB were to be banned, I think banks would shift to short-term automatically-renewable loans.
        Ps: FRB deposits pay interests, too.

        • Dan says:

          If the two scenarios result in the same loans, in your mind, same interest rates, etc. then there is no incentive to risk bank runs. People and banks could completely eliminate any risk of that, have very short term loans that pay interest, and demand deposits for cash they want to spend immediately. There is nothing about FRB that is preferable for the customer since you believe that 100% reserve system can offer the same thing without risking bank runs.

          • Enrico says:

            Actually, bank runs can happen also in the short-term-loans scenario. Since I am lending money to the bank, the latter obtains the property of the money. Thus, the bank can lend that money to somebody else for whatever amount of time (e.g. 1 year). If I don’t renew my loan to the bank before the 1 year expiration date, and if I’m the only lender, the bank has no reserves to pay back its debt toward me – as in FRB.

            This scenario can be successfully applied only by pooling a lot of short-term lenders (as in FRB). Somebody may not renew his loan to the bank, but the rest will likely do. Thus, by keeping a sufficient amount of reserves, the bank can satisfy the not-renewed loans.

            • Dan says:

              Sure, banks can make stupid investments like borrowing money for one hour and loaning it out for 1 year, but that’s not the same thing as a bank run. It’s not the same thing as FRB. The market would wipe morons out of banking very quickly. It might even be fraud at that point, but I’d have to think more on it.

              “This scenario can be successfully applied only by pooling a lot of short-term lenders (as in FRB). Somebody may not renew his loan to the bank, but the rest will likely do. Thus, by keeping a sufficient amount of reserves, the bank can satisfy the not-renewed loans.“

              If you’re asking me if you loan out demand deposits but call them timed deposits, playing some semantic game, if that would be any different, then my answer is, no. Changing the name of fractional reserve banking isn’t sufficient to stop the problems. Calling demand deposits, very short term timed deposits, doesn’t change anything. And borrowing short and loaning out long without having anyway to meet your obligations if the borrowers decide against rolling over their loans sounds like fraud to me.

              • Enrico says:

                Quote: “It’s not the same thing as FRB”
                Are you saying that my scenario doesn’t have the same outcome of FRB? To repeat:
                – in my scenario, I could wake up every morning and decide not to renew the next 1-day loan to the bank (thus withdrawing my money);
                – in FRB, I could wake up every morning and decide to withdraw my money from the bank;
                – in both cases, the bank can go bankrupt if it doesn’t keep a sufficient amount of reserves.
                I just don’t see how they are different.

                Quote: “Calling demand deposits, very short term timed deposits, doesn’t change anything”
                At least, do you agree that demand deposits are short term time deposits, i.e. short term loans?

                Quote: “borrowing short and loaning out long without having anyway to meet your obligations if the borrowers decide against rolling over their loans sounds like fraud to me”
                I disagree. A lending contract doesn’t necessarily specify what the borrower will do with the money received. The borrower could spend the money, or lend it through short term loans, or lend it through long term loans. It doesn’t matter: the contract is not a fraud if the lender and the borrower know the rules. Unless there is a specifi rule for that, the borrower can do whaterver he wants with the borrowed money.

              • Dan says:

                “I just don’t see how they are different.”

                Yeah, it’s kind of hard to see based on how convoluted the scenario is. I think it’s either fraud, or it’s just you playing semantic games and calling a FRB, a 100% reserve bank.

                “At least, do you agree that demand deposits are short term time deposits, i.e. short term loans?”

                No, I completely disagree with that. Demand deposits and timed deposits are not the same thing.

                “I disagree. A lending contract doesn’t necessarily specify what the borrower will do with the money received. The borrower could spend the money, or lend it through short term loans, or lend it through long term loans. It doesn’t matter: the contract is not a fraud if the lender and the borrower know the rules. Unless there is a specifi rule for that, the borrower can do whaterver he wants with the borrowed money.”

                OK, you’re literally describing a situation where a bank has a fraction of the reserves on hand to meet their obligations, but insisting it is a 100% reserve bank. That, to me, would be fraud. If you’re saying you’d be upfront that you are a FRB, but you’d call your demand deposits a different name for semantic reasons, then I’d probably not say it’s fraud, but it’d still cause the boom/bust.

  17. Enrico says:

    @Dan
    It’s not a “semantic thing”. I am comparing the following situations.

    1) A FRB system with demand deposits. By the way, free-bankers like me consider demand deposits as loans (by depositors to the bank) without fixed maturity dates.
    2) A system without FRB, where there are only two possibilities: either 100% reserve deposits, or loans to the bank.

    When I grant a loan to somebody, the latter is not obliged to keep as reserves any fraction of the money received. It’s not a fraud: the borrower obtains the property of money, thus he can legitimately do whatever he wants with that sum of money.
    Specifically, I never said that lending money to the bank in the second scenario is a 100% reserve deposit. I said it to be a loan: not a FRB deposit, nor a 100% reserve deposit, but simply a loan.

    The point of such comparison is to show that we can obtain the same outcome of FRB even in a scenario without FRB. Instead of having demand deposits, a bank can simply ask savers to lend money through very short-term automatically-renewable loans. The outcome and the risk of such operation are basically the same of FRB, but the contract is different due to tha fact that there is a fixed maturity date.

    • Dan says:

      Yes, I understand fully what you’re saying. I’m saying that system is absurd. There’s no chance I’m loaning you $100 for an hour if you’re turning around and loaning it out for a year. How would you pay me back if I want my money now? How would you pay me interest every hour? Are you arguing that banks would borrow $100 that they have to pay interest on every second, hour, or day, and then loan out, what, $10 that they’ll get interest on in a year? It’s an insane system.

      The more people it takes on the more insane it gets. If a 100 people loaned the bank $100 each for 1 hour automatically renewable loans, and you turned around and loaned out all of their money for a year, you can’t even pay the interest for the first hour. So you’d have to loan out less than what you borrow, and then pay interest with the customers own money. Pure craziness.

      Plus, this would cause you to have to charge higher interest rates on your loans to make up the money you’re losing by enticing people into your crazy scheme. If I have a $100 that I want to put into a bank, and I have the option to put it in Bank A which offers me a regular checking account, with 100% reserves, where I can spend my money any second of any day, or I can put it with Bank B who wants to borrow the $100, forcing me to call in the loan and wait up to an hour every time I want to spend my money, then the only way I’m going with Bank B is if they pay me a healthy dose of interest. This in turn means that Bank B must charge higher interest rates on what it loans out in order to pay the customers for these short term loans. Whereas Bank A simply matches up borrowers with lenders with the same time horizons and makes it’s money by paying slightly less interest to the lenders than it charges the borrowers. Bank A doesn’t have a scheme to borrow short and loan long that it has to account for. Bank A doesn’t have the risk premiums to account for. A lot of people would be willing to loan for short terms to Bank B because they are paying higher than market rates on short term loans, but almost nobody would be willing to borrow from them because they were charging higher than normal interest rates. It’s a crazy system that could never work in a free market.

      So, you’re right back to having to operate a FRB, and loan out demand deposits which will cause the business cycle.

      • Enrico says:

        In a real-world scenario, there are a lot of savers. However, the problem is that they cannot exactly foresee all their future spending. This feature limits their willingness to lend (at least, a big part of) their savings. Banks solve this problem by pooling all individual savings, and keeping as reserves only the amount of money actually needed for unforeseen spending. Not only this approach makes sense by reducing the amount of idle savings, but it is also profitable for both savers, banks and borrowers.
        Without FRB, the same system can be built up based on short-term loans as those described in the previous comments. Let’s now review your concers about it.

        Quote: “How would you pay me back if I want my money now?”
        Since there are many short-term lenders, a fraction of their money can be kept as reserves by the bank. The bank has only to estimate a safe amount of reserves; such amount can eventually be adjusted, if it is found to be too mach prudent or too much risky.
        So, the bank would pay you back by using its reserves. As in the current FRB system.

        Quote: “How would you pay me interest every hour? […] you can’t even pay the interest for the first hour”
        If the annualy interest rate is 1%, the hourly interest rate is:
        (0.01 / 24) / 365 = 0.000001 = 0.0001 %
        The bank can pay the interests only at the end of the year, or only every six months, or in whatever way it is reasonable. The contract between the lenders and the bank can simply specify these details.
        In the current FRB system, there is already a similar way for calculating and paying the interests. Moreover, the point is that interests paid by borrowers pay the interests for depositors (plus pofits for the bank). The same thing can be applied to this scenario.

        Quote: “this would cause you to have to charge higher interest rates on your loans to make up the money you’re losing”
        Absolutely not. The bank will pay interests only when the lender decides to withdraw his money, and only based on the time passed from the starting loan – as described in the previous paragraph.
        To repeat: this scanario is desined to mimic FRB in everything, except that it is based on short-term loans instead of deposits (which are loans without fixed maturity date). Which is basically not a great difference. Thus, the same interests charded in FRB can be charged in also this scenario.

        Quote: “If I have a $100 that I want to put into a bank, and I have the option to put it in Bank A which offers me a regular checking account, with 100% reserves, where I can spend my money any second of any day, or I can put it with Bank B who wants to borrow the $100, forcing me to call in the loan and wait up to an hour every time I want to spend my money, then the only way I’m going with Bank B is if they pay me a healthy dose of interest.”
        You have to pay for the 100%-reserve checking account, while the “short-term lending account” pays you. Every small interest is suficient to convince you into choosing the short-term lending account.

        Quote: “Bank A simply matches up borrowers with lenders with the same time horizons”
        But that is the problem with 100% reserve banking. You need a double coincidence to work like that: the saver has to be willing to lend exactly the same amount of money needed by the borrower, for the exact same period of time needed by the borrower. Lots of investment opportunities can be lost. Pooling the savers is the only way to maximise the amount of investments based on the available savings.
        FRB is the best way for pooling the savers. If FRB were to be banned, a similar system – like the one described above – would take its place.

        • guest says:

          “Lots of investment opportunities can be lost.”

          You can’t lose something you don’t own. So, there’s no such thing as lost investment opportunities as a result of so-called “idle savings”.

          It’s not there *to be* lent, so there are no investment opportunities, there.

          Nobody is entitled to invest other people’s money.

          FRB causes the business cycle by creating a mismatch between production and consumer demand.

          Producers need to produce what consumers want, otherwise consumers won’t buy their products.

          This is why investments need to be made in conformity with consumer demand.

          If consumers plan their lives around expecting that their savings remain in a bank, not being lent out, then lending that money out necessarily causes the business cycle.

          • Enrico says:

            Quote: “You can’t lose something you don’t own”
            That’s not the meaning of my statement.
            If the Government rises the minimum wage, there will be fewer job opportunities than there would be otherwise. Even if the “lost jobs” don’t exist yet, it makes sense to say that “they are lost” due to Government intervention. Similarly, it makes sense to say that reducing opportunities for investments causes an investments loss.
            Without FRB or similar schemes, there are savings that are not used for investments. With FRB or similar schemes, those savings are used for investments. That’s the meaning of my statement.

            Quote: “Nobody is entitled to invest other people’s money.”
            In fact, nothing like that happens in FRB. Depositors give the property of their money to the bank for an undefined amount of time, thus the bank is investing its own money.

            Anyway, in order to avoid any discussion on the nature of deposits, I proposed an alternative system based on short-term loans. Instead of depositing money in a FRB system, let’s imagine to lend money to the bank for a very short period of time. Such loan can be automatically renewed if the lender doesn’t claim the money back. Thus, the bank is the only owner of the money received, and it can rightfully lend it to other people.
            Now the question is: does such system (which is entirely based on fixed maturity loans) cause the business cycle?

            • guest says:

              “If the Government rises the minimum wage, there will be fewer job opportunities than there would be otherwise. Even if the “lost jobs” don’t exist yet, it makes sense to say that “they are lost” due to Government intervention.”

              You’re thinking in nominal terms, rather than in economic terms.

              In both cases, the jobs are not “lost” in any economically meaningful sense.

              For example, we could increase the number of jobs, tomorrow, by outlawing the use of complex machines, and resorting to excavation using only shovels.

              It’s only the economically meaningful jobs that matter.

              The minimum wage forces workers to offer work at a higher cost to employers than is justified by the amount of income desired by the employer.

              The employer goes into business to make a profit off of consumers, but is limited by how much the consumer is willing to pay for his product.

              His costs (such as labor) can only reduce, never increase, that amount.

              So, the economically meaningful features of jobs aren’t their nominal number, but whether or not they enable the producer to make more profit than if he didn’t hire, and whether or not the worker believes he will have a better standard of living than not being hired.

              Both have to be true in order to be economically meaningful.

              You cannot look at the number of jobs, alone, and determine whether or not they’re economically meaningful.

              And the same is true with money and loans.

              The fact that there are savings not being loaned out is no indication that they are “idle” in any economically meaningful sense.

              “I proposed an alternative system based on short-term loans. … Thus, the bank is the only owner of the money received, and it can rightfully lend it to other people.”

              As long as both parties understand that it’s a loan and not a deposit, then there cannot be a business cycle.

              I can’t find it, but Bob Roddis has posted, several times, a four-point criteria for determining whether a banking system is legitimate (I’m not describing it, well, but that’s the jist).

              • Enrico says:

                Quote: “It’s only the economically meaningful jobs that matter”
                I don’t want to fight on this, but minimum wage laws kill meaningful jobs. That is: jobs that would be profitable if no minimum wage law were enacted.
                Back to the main point, you are saying that savings that not used for investments are not “idle” – which, of course, depends on the definition of “idle”. Anyway, I was stating that -without FRB or similar schemes – they are not used for investments. It can be a good thing or a bad thing, but at least we should agree that they are not used for investments.

                Quote: “As long as both parties understand that it’s a loan and not a deposit, then there cannot be a business cycle.”
                OK, that’s the point I was looking for.

              • guest says:

                “OK, that’s the point I was looking for.”

                High five.

                But just to clarify, what I’m saying is that a loan (to the bank) cannot cause the business cycle because the lender has zero expectations that he will have access to it at all times.

                The moment he plans around the money being there, and the bank isn’t willing to give him his money on demand – for any reason (right or wrong) – is the moment that the bank’s lending of someone else’s money causes the business cycle.

        • Dan says:

          “In a real-world scenario, there are a lot of savers. However, the problem is that they cannot exactly foresee all their future spending. This feature limits their willingness to lend (at least, a big part of) their savings. Banks solve this problem by pooling all individual savings, and keeping as reserves only the amount of money actually needed for unforeseen spending.“

          Yeah that causes the business cycle. See Mises. That’s like a counterfeiter saying “There are a lot of savers, but they don’t know their future spending, causing them to lend less than 100% of the money they save. I solve this problem by just printing money and loaning it out to as many people that ask for a loan. Problem solved.”

          “Since there are many short-term lenders, a fraction of their money can be kept as reserves by the bank.”

          Yeah, like I said, you’d have to only loan out a small fraction of what you borrow, using borrowed money they don’t loan out to keep the lights on, pay employees, pay lenders that want their money back, etc. It’s a crazy system. Whereas Bank A just charges customers a small amount to store their money and give them immediate access to it any time they want, and they can offer cheaper loans because they’re not running a crazy scheme trying to mimic FRB in a way less competitive way.

          “Absolutely not. The bank will pay interests only when the lender decides to withdraw his money, and only based on the time passed from the starting loan – as described in the previous paragraph.
          To repeat: this scanario is desined to mimic FRB in everything, except that it is based on short-term loans instead of deposits (which are loans without fixed maturity date). Which is basically not a great difference. Thus, the same interests charded in FRB can be charged in also this scenario.“

          No, they can’t. It’s not the same thing at all. I can go to my bank right now and pull my money out whenever I want. If they wanted me to put it in a CD that continually rolls over every hour, where I have to call in the loan and wait up to an hour every time I want to spend my money, you’d have to pay me more money to do that. Plus, I’d want a premium on top of that because your bank would be way riskier because they’re borrowing short and loaning long, whereas Bank A has none of those risks. I don’t think I’ve ever heard of a more convoluted form of banking.

          Alright, that’s all for me. This shit has gone off into the land of absurdity.

          • Enrico says:

            Quote: “That’s like a counterfeiter saying…”
            You are implying that banks are doing something illegal, while they don’t (in any possible way).
            Anyway, the objection is fallacious. Something can have a positive effect even if it is done illegally. I’m not saying that the end justified the means, I’m just noting that the objection doesn’t contradict my previous statement.

            Quote: “you’d have to only loan out a small fraction of what you borrow”
            Do actual banks loan out only a small fraction of what is deposited in them? No. So neither a system based on short-term loans.
            Again: my scheme works exactly like a FRB system, the only difference being the contract between the bank and the depositor/lender. A bank in a FRB system pays the bills through the interests gained by its lending activity. There is no reason why a bank in the “short-term loan” system couldn’t do the same.

            Quote: “I can go to my bank right now and pull my money out whenever I want”
            You could do the same also in my scheme. If you want to stress the fact that you would have to wait one hour (at maximum), we can change the scheme to a 1 minute or 1 second contracts. The general concept is the same.

            Quote: “your bank would be way riskier because they’re borrowing short and loaning long”
            Banks do it already in the real world with FRB. Thus, the interest in my scheme would be no different than the interest already existing (imagining no interference from the Central Bank).

            In practice, I put you in a corner because your only critique to FRB involves the belief that demand deposits are not loans. Such belief is wrong, but I said: “OK, let’s circumvent the problem by substituting deposits with short-term loans”. Then I demonstrated that the outcome of such system would be exactly the same of FRB. Now you have no argument for criticizing such system, because it is based on loans. And since the outcome is the same of FRB, you can’t sustain anymore that FRB causes boom-bust cycles.

            • Dan says:

              “Do actual banks loan out only a small fraction of what is deposited in them? No. So neither a system based on short-term loans.”

              Actual banks don’t borrow money for a month and loan it out for a year. Yes, you’d have to only loan out a small percentage in order to meet the demands of the lenders who want their money back. Just as FRB would have much higher ratios with with a central bank and other government regulations. Most free bankers tend to believe that free market FRB would have very high reserve ratios. It’d be much higher with a crazy scheme like you’ve come up with.

              • Enrico says:

                Quote: “Actual banks don’t borrow money for a month and loan it out for a year”
                In fact, it’s even “worse” for them. Actual depositors can withdraw their money any time, without waiting for 1 month (at maximum). Thus, if actual banks don’t loan out a small fraction of their deposits, neither banks in my scheme would do it.

                Quote: “FRB would have much higher ratios without a central bank and other government regulations”
                I can agree on that. But you are not proving that the outcome of my scheme would be different from the one of FRB.

            • Dan says:

              “If you want to stress the fact that you would have to wait one hour (at maximum), we can change the scheme to a 1 minute or 1 second contracts. The general concept is the same.”

              Yes, I know. This is why I said this is just a matter of semantics. As soon as push comes to shove and you see the absurdity of having people have to close out a loan and wait up to an hour to get their money, you just eliminate the wait time and make it exactly the same as a FRB but say it isn’t one.

              The truth is that whether we discuss you’re crazy scheme or a standard FRB it’s all the same. They both have a fraction of the reserves on hand to meet the the demands of the depositors. You just play semantic games with the terminology.

              Also, I don’t even care about making FRB illegal, so this whole conversation is pointless. I think it surely causes the business cycle, and I think it will surely be out competed in a free market, but I don’t care whether we make it illegal or not.

              “In practice, I put you in a corner because your only critique to FRB involves the belief that demand deposits are not loans.”

              Haha, what? No, that’s not my only critique to FRB. Have you ever read Mises, or much on ABCT?

              “OK, let’s circumvent the problem by substituting deposits with short-term loans”. Then I demonstrated that the outcome of such system would be exactly the same of FRB. Now you have no argument for criticizing such system, because it is based on loans. And since the outcome is the same of FRB, you can’t sustain anymore that FRB causes boom-bust cycles.”

              Seriously? I said it would be the exact same thing as a FRB, and would still cause the business cycle from jump street. I said this was just a semantic game. I said you were literally describing a bank that has only a fraction of the reserves on hand to meet it’s obligations, but insisting on calling it a 100% reserve bank. You simply don’t know what you’re talking about. It’s painful at this point.

              • Enrico says:

                Quote: “This is why I said this is just a matter of semantics”
                You stil don’t get it. My scheme is based on real loan contracts. It’s not semantics. You may not like the fact that are very short term loans, but still you can’t deny that they are loans.

                So either you are forced to say that a business cycle can arise from simple loans with fixed maturity date (something that Mises never said) or you are forced to admit that FRB doesn’t generate business cycles – since FRB and my scheme have the same outcome. I’m happy in both ways.

                Quote: “insisting on calling it a 100% reserve bank”
                I already debunked such claim, but maybe you didn’t understand it. Thus, I’ll repeat: “I never said that lending money to the bank in the second scenario is a 100% reserve deposit. I said it to be a loan”. Hope to have it clarified for good.

                Quote: “that’s not my only critique to FRB”
                I didn’t see any other critique of FRB from you that I didn’t already disproof. If you want to add other ones, you are welcome.

              • Enrico says:

                BTW, you can learn here ( https://mises.org/wire/Fractional-Reserve-Banking-and-money-creation https://wiki.mises.org/wiki/Fractional_reserve_banking https://mises.org/library/faults-Fractional-Reserve-Banking ) that the “Austrian issue” with FRB regards property rights on the deposited money. Since property rights are clearly defined in fixed maturity date loans, such critique doesn’t hold against my scheme. In fact, to my knowledge, Mises never said that borrowing short through loans and lending long would cause a business cycle.

              • Dan says:

                “You stil don’t get it.”

                Ha, yeah that’s the problem. Your position is complicated to understand. It’s just dumb. No bank would do it because they couldn’t compete.

                Regardless of the economic impacts, your idea for how to run a bank is absurd. The bank pays compound interest every second for any money they borrow. They can only lend out a small percentage of it. They also need to use a portion to pay their bills, employees, etc. It’d be like using a credit card that charges compound interest every second to run a business. That’s insane.

                Plus, you’d have to charge higher interest on your loans to cover all these extra costs and risks a normal 100% reserve bank wouldn’t have. A normal bank would always be able to offer lower interest rates on their loans because they aren’t paying compound interest on deposits (they’re making money on them), and they’re able to loan out 100% of the money they borrow because they aren’t running a crazy scheme where they’re at risk of bank runs.

                Your bank is paying compound interest every second on 100% of everything it borrows, but only making interest on a small percentage of that money that it is able to loan out. Get real.

                Here’s a scenario for you.

                You have 10 customers. They all loan you $100 each because you are paying compound interest every second that they keep their money with you. So you have $1000 and you loan out $100 for a year.

                Then I come along and see you’re trying your crazy scheme and decide to blow it up. I go in and deposit $10,000, and you loan out $1000 of that for a year. Then I decide to pull all my money out the next day. What do you do?

              • Dan says:

                Edit: Your position is *not complicated to understand.

              • guest says:

                “Here’s a scenario for you. …”

                “… Then I decide to pull all my money out the next day. What do you do?”

                Thank goodness you offered a scenario!

                Cuz this would have been harder – even if entirely do-able – with thought experiments.

                “You have 10 customers. They all loan you $100 each because you are paying compound interest every second that they keep their money with you.”

                I simply see the risk and, instead of entering into this arrangement in the first place, I make sure I choose to do business with some customers that I can charge for deposits (warehousing) so that I can cover the more risky arrangements.

                And, were I to carry out the scenario, I would lose business to the banks that *did* cover their risks as I described.

                As Bob Murphy keeps saying (in his recent videos), banks are perfectly capable of making money and competing with other banks *without* engaging in FRB.

  18. Enrico says:

    @Dan
    You keep using “objections” which are already answered by reality. Why don’t you look at how fractional-reserve (FR) banks already work, before asking how could short-term-loans-based (STLB) banks do the same things already done in real world?
    – If customers tipically withdraw only 10% of their deposits every year, a FR bank can lend nearly 90% of their deposits. A STLB bank could do the same.
    – FR banks pay interests only when money is withdrawn, depending on the number of days passed between the deposit and the withdrawal. A STLB bank could do the same.
    Etc. As I already wrote, the contract between a STLB bank and its ST lenders can adress such trivial issues in order to mimic the already existing FR contracts. So why are you still wondering about it? Mistery.

    Back to your question: “I go in and deposit $10,000, and you loan out $1000 of that for a year. Then I decide to pull all my money out the next day. What do you do?”
    By loaning out 1000$, I got an IOU from the borrower. I sell the 1000$ worth IOU, plus I give you the other 9000$ that I kept as reserves. As simple as that. Maybe I can’t do it in just one second, but the contract can contemplate a possible delay of (let’s say) 1-2 days for getting back all the money. Something similar already exists for FR banks.
    By the way, FR banks works by pooling a big number of savers (“big” meaning much more than 11 customers). Again: STLB banks would do the same. It’s another example of how you are asking things that are already answered by real world cases.

    To summarise: my scenario (the STLB system) is designed to show that the same outcome (interests, reserves, investments) of a FRB system can be obtained through loans instead of deposits – thus avoiding the usual “orthodox Austrian” objection to FRB.

    • Dan says:

      “By loaning out 1000$, I got an IOU from the borrower. I sell the 1000$ worth IOU, plus I give you the other 9000$ that I kept as reserves. As simple as that.”

      OK, so when I deposit $10K in the bank and you loan out $1000, you have $9000 of my money in reserve + $900 from the other deposits. This is excluding all the money you’d have to subtract from those reserves to pay the bills and everything else to stay in business. Regardless, you then sell the $1000 loan to someone else for something less than $1000 since they have to defer consumption for a year, and then give me my $10K back. Now you have less than $900 in reserves. I was able to reduce the amount of money you have in reserve by simply letting you borrow money for a 1 second loan, and then withdrawing the funds a day later. Plus you owe me interest, further reducing the reserves. You literally lost money on the deal. I can do this over and over until you have nothing in reserve. This is a stupid system.

      And you keep saying that your system is the same, but it’s not. You’re system is dealing with a fixed supply of money. FRB are expanding the money supply. I can’t bankrupt a FRB by simply repeatedly loaning and withdrawing my money everyday like I can with your absurd bank.

      • Enrico says:

        Quote: “you then sell the $1000 loan to someone else for something less than $1000”
        Absolutely not. I’m selling a $1000 loan that will pay interests to its owner. Since the buyer will gain the interests in exchange for his deferred consumption, he’s willing to pay $1000 for it.

        In the end, I will have $900 reserves, as I did before your loan&withdrawal attempt. Moreover, since FR banks make customers pay for opening a deposit, a STLB bank could do the same: you would actually lose money to me. You could continue like that, making me even richer. I would thank you, of course. So, your attempt seems to be counterproductive.

        Quote: “FRB are expanding the money supply”
        FRB simply increases debts (and, of course, credits) of banks. The same process happens in my scheme. If the definition of “moneys supply” includes the debts of the banking sector, money supply increases also in my scheme. No difference.

        • Dan says:

          “Absolutely not. I’m selling a $1000 loan that will pay interests to its owner. Since the buyer will gain the interests in exchange for his deferred consumption, he’s willing to pay $1000 for it.”

          Seriously? You think selling CD’s on the primary market and selling CD’s on the secondary market prior to the date of maturity gets you the same return? Is your bank in some fantasy world, too?

          “FRB simply increases debts (and, of course, credits) of banks. The same process happens in my scheme. If the definition of “moneys supply” includes the debts of the banking sector, money supply increases also in my scheme. No difference.”

          Do what? FRB increase and decrease the actual money supply, not “money supply” with the air quotes. The money supply as in money proper + money substitutes. They increase it and decrease it based on people putting money into the bank or pulling it out of the bank. How are you discussing this issue and you don’t even know this?

          • Enrico says:

            If someone pays $1000 today in exchange for $1005 after 1 year, there is someone else willing to pay more than $1000 today in exchange for $1005 after less than 1 year. Can’t you grasp even basic logic? Jesus.

            Apart from the fact that there are several way of defining the money supply ( http://lexicon.ft.com/Term?term=m0,-m1,-m2,-m3,-m4 ), you seem to ignore that bank deposits are bank debts. They are used for payments (–> money substitutes) only because they are immediately reedimable in base-money. Guess what? Also short term loans such as those described in my scheme are immediately reedimable in cash. Again: no practical difference between FRB and STLB systems. A FR bank can take $100 in deposits and lend $90; a STLB bank can take $100 in short term loans and lend $90. Money supply increases in both cases.

            Is it really necessary to teach you these things?

            • Major_Freedom says:

              depends on risk

              • Enrico says:

                @Major
                Of course, but in this context we are referring to the same IOU (–> same risk).

            • Dan says:

              “If someone pays $1000 today in exchange for $1005 after 1 year, there is someone else willing to pay more than $1000 today in exchange for $1005 after less than 1 year. Can’t you grasp even basic logic? Jesus.”

              Enrico, there is a secondary market for things like CD’s in the real world. It isn’t as simple as your mind makes it out to be. Many factors determine how much you can get for a CD you sell on the secondary market. But if you think you can sell a CD for equal or more than you paid for it, the day after you got it, then I don’t know what to tell you other than that’s not how the real world works.

              “Guess what? Also short term loans such as those described in my scheme are immediately reedimable in cash. Again: no practical difference between FRB and STLB systems.”

              Cool. Then it also causes a boom/bust cycle with the only difference being semantics. Timed deposits are not immediately redeemable for cash. You’d have to pay a penalty to redeem them early. If I give you $100 and you loan out $20, but I still have access to the entire $100 while the other person has access to the $20, you’re causing the business cycle. Whatever stupid scheme you want to come up with won’t change this fact.

              • Enrico says:

                Quote: “Many factors determine how much you can get for a CD you sell on the secondary market”
                Therefore, you shouldn’t be so sure that the price will be lower than in the primary market. Since you are mentioning other factors, you may also acknowledge that tipically investors buy in the primary market in order to sell in the secondary market at a higher price. You know, in order to make a profit. Banks do it every day: they grant a mortgage, then sell it in the secondary market ( https://www.investopedia.com/terms/s/secondary_mortgage_market.asp ).

                Quote: “Timed deposits are not immediately redeemable for cash”
                They are redeemable after the time period agreed between the bank and the saver. If the time period is very short, you get my scheme. Hence the question: do time deposits with very short maturity cause business cycles? If no, then my scheme doesn’t cause boom-bust cycles. If yes, how long should be a maturity in order to avoid a business cycle?

              • Dan says:

                Banks aren’t taking a CD from Joe Blow and turning around and selling it on the secondary market for the same price. Nobody in their right mind would pay the same amount of money to have a CD backed by some random dude when they could get the same deal for a CD backed by a bank or large institution with a ton of money to guarantee the loan. That is the crazy scenario you setup. It’s stupid.

                “do time deposits with very short maturity cause business cycles? If no, then my scheme doesn’t cause boom-bust cycles. If yes, how long should be a maturity in order to avoid a business cycle?“

                Depends. With your scheme they would. If you are borrowing short and loaning long it’s no different than loaning out demand deposits. It has the same effect. If I loan you $100 for 1 second or 1 day or 1 month, and you loan out a portion of that for 1 year, then as soon as my money is redeemable then we are in the exact same situation as if you simply loaned out a regular old deposit without the crazy convoluted scheme.

    • Dan says:

      And just so it’s clear. You can start your bank with enough customers where you have a billion in reserves. It’s still going to be the case that I can continually reduce your reserves by loaning you money for 1 second, and then withdrawing the money as soon as you loan out 10% (or whatever reserve ratio is). I used a bank with 10 people simply to make this absurd feature of the bank you imagine easier to see. A FRB doesn’t have this issue at all. They expand or decrease the money supply based on how much money people deposit. They don’t have a fixed supply of money that can be siphoned out of there bank by simply repeatedly loaning and withdrawing your money.

      • Enrico says:

        I didn’t notice this statement of yours: “They don’t have a fixed supply of money that can be siphoned out”. It’s plain wrong. FR banks have base-money reserves, which are reduced by withdrawals and by bank transfers to other banks. In fact, bank deposits are redeemable in base-money. If there is no sufficient amount of reserves to satisfy redemption claims, the bank goes bankrupt. You could bankrupt a bank, if it had no reserves and if nobody were willing to buy its assets (e.g. mortgages). Of course, such scenario is not reasonable. Instead, bank failures are due to other factors, like bad investments: in those cases, they can’t sell their asset at a good price.

        • Dan says:

          That’s not what I was referring to when I said that. Obviously, banks can go broke.

    • guest says:

      “To summarise: my scenario (the STLB system) is designed to show that the same outcome (interests, reserves, investments) of a FRB system can be obtained through loans instead of deposits …”

      To be sure, it’s not a FRB system unless the bank is lending a fraction of their customers’ *savings*.

      Loan accounts do not have a fractional reserve nature.

      (Although, I suppose loaning more than the bank has agreed to could be a sort of fractional reserve system, in which case that would cause the business cycle.)

      • Dan says:

        Guest, his system is completely different than a FRB. His system is dealing with a fixed money supply. Loaning the bank money doesn’t expand the money supply in his system. He’s simply loaning out a small fraction of what he borrows because he’s turning around and loaning it out for a much longer duration. It’s an idiotic way to run a bank, for sure, and could easily be made to go bankrupt, but it’s nothing like a FRB. For some reason he doesn’t think the expanding and contracting the money supply aspect of FRB is an important feature, and that his bank could mimic it without that feature.

        • guest says:

          “His system is dealing with a fixed money supply.”

          Ok, that’s helpful.

          “Loaning the bank money doesn’t expand the money supply in his system.”

          I’m with you that loaning money that is intended to be savings, rather than a loan, does expand the money supply.

          Or maybe it would be more helpful for him if we were to say that it expands the credit supply, which is used *as if* it were money.

          “For some reason he doesn’t think the expanding and contracting the money supply aspect of FRB is an important feature”

          Maybe this quote from Mises’ Human Action will help:

          “While the quantity of money-certificates is indifferent, the quantity of fiduciary media is not. The fiduciary media affect the market phenomena in the same way as money does. Changes in their quantity influence the determination of money’s purchasing power and of prices and—temporarily—also of the rate of interest. …”

          “… The term credit expansion has often been misinterpreted. It is important to realize that commodity credit cannot be expanded. The only vehicle of credit expansion is circulation credit.”

          He goes on to say that there’s a caveat, but I understand that caveat to reduce to the idea that only fiduciary media can cause credit expansion (and therefore the business cycle.

          The reason this is relevant is that lending out other people’s savings (without their knowledge) – even with a fixed money supply – effectively turns that lent money into fiduciary media.

          • Dan says:

            “He goes on to say that there’s a caveat, but I understand that caveat to reduce to the idea that only fiduciary media can cause credit expansion (and therefore the business cycle.”

            OK, but that’s your interpretation of Mises, not what he actually says. Again, here is Mises in the same book,
            “Everything that has been asserted with regard to credit expansion is equally valid with regard to the effects of any increase in the supply of money proper as far as this additional supply reaches the loan market at an early stage of its inflow into the market system.”

            • guest says:

              I get that, but I think there’s an important difference with money proper.

              As it is being spent by the borrowers, the demand for its use as a commodity (money proper must necessarily – firstly – be a commodity) adjusts according to Marginal Utility along with the demand for its perceived value as money.

              (Its value as money cannot be separated from its link to its value as a commodity for long, because an increase in the money supply is also an increase in the supply of a commodity.)

              New loans will be factoring in the new supply to interest rates, so that only to the extent that borrowers cannot anticipate the fall in value of the increasing amount of money proper will they do so in a way that will not conform to future consumer demand for money.

              Another way of explaining this would be to say that if an increased supply of money proper were loaned out all at the same time, only projects that were based on the old pre-increase interest rate would become malinvestments.

              My point is that this does not seem to be essentially different from an increase in the supply of anything else that is demanded by consumers, except that there’s a time element with loans.

              Instead of a producer increasing his capacity to produce what consumers want and gaining market share at the expense of other producers, a bank gets to benefit from an increase in the supply of money proper.

              Same thing, essentially. There’s a temporary mismatch between investment and consumer demand, but that happens all the time.

              I’m agreeing with you and Mises, here, but I’m hoping to convince everyone that while the malinvestments created by fiduciary media can be systemic, those created by an increase in the supply of money proper cannot.

              • Dan says:

                “I’m agreeing with you and Mises, here, but I’m hoping to convince everyone that while the malinvestments created by fiduciary media can be systemic, those created by an increase in the supply of money proper cannot.”

                No, guest, you’re not. You’re denying the plain English of what Mises said, and pretending he meant what you said. He “EVERYTHING that has been asserted” and “is EQUALLY VALID”. You are denying this to be true. That’s fine, but stop acting like you’re saying the same thing as Mises. You’re not. You’re not. You’re not. You have a different theory. You should own it. Maybe Mises is wrong. Maybe your theory is right. But they’re not the same theory.

          • Dan says:

            But I am glad you pulled up that quote because it confirms what I said to your earlier about how printing money and spending it straight into the economy without loaning it out won’t cause the business cycle. It has to be introduced through the loan market. Here’s Mises,

            “If the amount of fiduciary media previously issued has consummated all its effects upon the market, if prices, wage rates, and interest rates have been adjusted to the total supply of money proper plus fiduciary media (supply of money in the broader sense), granting of circulation credit without a further increase in the quantity of fiduciary media is no longer credit expansion.”

            • guest says:

              “… printing money and spending it straight into the economy without loaning it out won’t cause the business cycle.”

              Here, also, I think there’s a nuance that is not being considered.

              I would say that this is true for an increase in the supply of money proper, but not for printing fiduciary media.

              Printing fiduciary media *is* credit expansion – it’s an IOU, a promise, for something, debt. An increase in the supply of promises for something that doesn’t exist.

              The reason that Mises says that granting circulation credit that is comprised, partly, by fiduciary media won’t cause the business cycle in *this* case, is because values for the money substitutes have already adjusted to their marginal utility in terms of money proper.

              (If everyone finally becomes aware that there is twice the amount of money substitutes than money proper, then they will treat the substitutes as half a unit of money proper.

              (So that, going forward, when people borrow based on this double supply of substitutes – the supply having not increased since the doubling – they will have already discounted the substitutes according to the supply of money proper.)

              • Dan says:

                That’s fine if that’s your theory, but it’s not what Mises wrote. Mises was very clear.

                So, if you have a different theory than the Austrians like Mises, Hayek, and Rothbard, and different than free bankers like Selgin, White, and Horwitz, then you should create a blog or book and spell out your theory. Let it stand on its own.

        • Enrico says:

          @Dan
          Previously, about my scheme, you said “it would be the exact same thing as a FRB”. Now, instead, you say that it “is completely different than a FRB”.
          You can’t say one thing and its opposite: you have to decide one of the two. Let us know which one.

          • Dan says:

            Yes, it took awhile to pin you down because you kept adjusting the parameters based on my objections. It was to tell if you were suggesting they could expand the money supply or not based on your scenario.

            Now that I understand you to be saying they can’t expand the money supply, then my position is your bank is not like a FRB, and I could bankrupt it by simply loaning and withdrawing money every day.

            • Enrico says:

              The definition of money supply includes bank deposits (that is, the debts of all banks). In my scheme, the debts of each bank increases as deposits do in FRB. There is no difference.

              You are right in saying that you couldn’t bankrupt a FR bank. In fact, if the bank were low in reserves, it could simply sell its mortgages. It’s the same reason why you couldn’t bankrupts a STLB bank. Quite the opposite: due to standard costs for opening an account, you would actually make the bank richer.

          • Dan says:

            Edit: It was *hard* to tell….

      • Enrico says:

        @guest
        Quote: “Loan accounts do not have a fractional reserve nature”
        In my scheme, customers lend money to the bank, while the bank use part of that money to finance other loans. It’s not FRB, since there are no deposits, but loans.

        However, there is no practical difference between my scheme and FRB. In both cases, customers give their money to the bank, and the bank loans out a part of them. In both cases, customers can withdraw money on demand (since, in my scheme, they are lending for very short time periods). Therefore, the outcome is the same.

        Here are the conclusions:
        – since my scheme is based on loans, it cannot generate a business cycle;
        – since my scheme has the same outcome of FRB, the latter cannot generate a business cycle.

        Objecting to such conclusions requires either demonstrating that my scheme has a different outcome from FRB, or that a scheme based on loans can generate a business cycle.

        • Dan says:

          “Objecting to such conclusions requires either demonstrating that my scheme has a different outcome from FRB, or that a scheme based on loans can generate a business cycle.”

          What are you talking about? ABCT is a theory that says the business cycle is created through the loan market. What makes you think that loans can’t cause it. They are THE cause of it. And, yes, a scheme that mismatches loans will cause the business cycle. It will distort the investment/consumption ratio. Consumers will be operating under a non-changed investment/consumption ratio, or slightly changed if they had to defer consumption for like an hour or day based on your crazy scheme, but the businesses would be getting signals that the investment/consumption ratio has shifted much more and would support lengthening the structure of production based on your bank loaning out the money for longer terms and lowering the interest rate.

          Look, the only thing your crazy bank is doing is muddying the water. It’s irrelevant to the discussion, as nobody here cares whether FRB is fraud or not. We care about whether FRB causes the business cycle. And, yes, mismatching loans in the way you describe will cause a business cycle, but we could just use a real world example to demonstrate that instead of trying to reinvent the banking sector under some convoluted system.

          • Enrico says:

            I already provided 3 links to “Austrian” official webpages, each of them stating that the FRB problem is the nature of bank deposits. I suggest you to read them. According to the Austrian orthodox point of view, savers put their money into bank deposit accounts, which (supposedly) are not loans to the bank itself. That’s (supposedly) a problem. If savers were to lend money to the bank, no problem would arise. Again: to my knowledge, Mises never said anything about borrowing short through loans.

            As I already proved, banks (both in FRB and in STLB systems) can lend out only real savings. Thus, investments financed through bank loans are backed by real savings. Thus, interest rates – without Central Bank distortions – reflect the true investment/consumption ratio.
            I already told you that businesses can’t read people minds. They can only look at the amount of available savings. If there is a huge amount, they can use it (also) for long term projects.

            • Dan says:

              “I already provided 3 links to “Austrian” official webpages, each of them stating that the FRB problem is the nature of bank deposits. I suggest you to read them.“

              I’ve read a ton of books on Austrian economics. Even took a course taught by Dr. Murphy on ABCT. It’s a complex topic, and some things still trip me up, so it’s not surprising you’re struggling with it if your knowledge is based mainly of some articles.

              “According to the Austrian orthodox point of view, savers put their money into bank deposit accounts, which (supposedly) are not loans to the bank itself. That’s (supposedly) a problem. If savers were to lend money to the bank, no problem would arise.”

              Mises and Rothbard would all argue that you could cause a business cycle simply by introducing new money directly through the loan market. You wouldn’t even have to deposit a single penny. Kinda blows a hole in your interpretation, doesn’t it? I can’t believe you’re discussing this issue with such confidence when you think what you wrote down is the orthodox view.

              There’s no shame in being wrong, I was making incorrect arguments on the last post about this stuff and it took me a couple days to think through what Murphy was saying to me for it to start to sink in. Heck, I’m sure I’m still making some errors, although I’m much closer to the truth than you are, and I look forward to closing up some gaps in my knowledge as Murphy writes more about this topic. So you shouldn’t feel defensive because you’re wrong. You should try to learn from it. At least get to a point where you can accurately state what the Austrian view is even if you don’t agree with it. Try reading Money, Bank Credit, and Economic Cycles for starters.

              • Enrico says:

                Quote: “I’ve read a ton of books on Austrian economics.”
                Yet, you didn’t find any passage (in a book or article) to disproof my statement. It’s the second time I’m basically encouraging you to do it. If the topic were so clear in Austrain economics literature, it should be simple to quote something. No?

                Quote: “Mises and Rothbard would all argue that you could cause a business cycle simply by introducing new money directly through the loan market”
                Thanks for the reminder, but I already knew this. In fact, all my examples were made by assuming no fiat money creation. If we are discussing FRB, we have to consider it alone from Central Bank interventions. Again, it’s basic logic.
                So, yuo didn’t reply anything to my statement: “If savers were to lend money to the bank, no problem would arise”.

              • Enrico says:

                To further clarify what I meant: if I lent (LEND, not DEPOSIT) $1000 to my bank for 1 year, Mises would be OK with that. He would say that I’m giving away the property of my money to the bank, and that my contract with the bank is not immediately redeemable in cash.
                But of course I could sell my loan to somebody else, basically “redeeming” my contract for money. Still, that wouldn’t be a problem for Mises. The money I receive is paid by somebody else, thus the bank is just switching one saver/creditor for another one. Everyone’s happy.

                Bank deposits are different in the sense that I wouln’t need to sell the contract to somebody else: I could just take the money directly from the bank. Mises was not OK with that. In my opinion, he was wrong. The money I’m taking from bank reserves is coming from the savings of somebody else, so the outcome of such scenario is exactly the same of the one above. In the end, the bank is (again) switching one saver/creditor for another one.
                Anyway, Mises blamed bank deposits.

                Now: economic principles don’t change for a number in place of another. If no boom-bust cycle arises from 365-days loans, no boom-bust ccycle arise from 30-days loans, nor from 1-day loans, etc. The functioning principle is the same in all cases. That’s why I challenged you with very short term loans: they are included in the first scenario of this comment, the one Mises would be OK with.
                That’s why I challenged you (in a previous comment) by asking how long should be the minimum maturity of time deposits in order to be OK from your point of view. To show you how absurd it is to think that longer loans / time deposits are inherently different from shorter loans / time deposits.

              • Dan says:

                “In fact, all my examples were made by assuming no fiat money creation. If we are discussing FRB, we have to consider it alone from Central Bank interventions. Again, it’s basic logic.
                So, yuo didn’t reply anything to my statement: “If savers were to lend money to the bank, no problem would arise”.”

                I literally said nothing about a central bank or fiat. Here’s Mises, “Everything that has been asserted with regard to credit expansion is equally valid with regard to the effects of any increase in the supply of money proper as far as this additional supply reaches the loan market at an early stage of its inflow into the market system.”

                “Any increase in the supply of money proper”, that has nothing to do with fiat. So if that new money enters the economy through the loan market then it will cause a boom/bust. That’s not talking about FRB or central banking. That’s saying that this would occur even with a 100% reserve bank if new money – again, not talking fiat- enters the economy through the loan market. That’s literally the scenario you’re saying can’t cause problems according to Mises. He says otherwise. You should read him.

              • Dan says:

                Also, I shouldn’t even have to quote Mises for you. Dr. Murphy gave you a scenario where a guy simply stole gold and loaned it out. No FRB, no central bank, no fiat. That was the exact scenario, from an Austrian economists, on this very blog.

                It’s cool that you think you understand ABCT because you read a couple articles, I think extreme confidence in one’s self is a good thing for life, in general, but your confidence is very misplaced on this topic.

  19. Enrico says:

    @Dan
    Quote: “Banks aren’t taking a CD from Joe Blow and turning around and selling it on the secondary market for the same price”
    I said that banks sell loans (e.g. mortgages) in the secondary market all the time. I’m sorry, it’s a real world fact – and I gave you a link about it ( https://www.investopedia.com/terms/s/secondary_mortgage_market.asp ). Do me a favour and read it before further comments on the subject. Then, if you want to deny reality, I’ll reach my goal.

    Quote: “If you are borrowing short and loaning long it’s no different than loaning out demand deposits”
    At least, this is a consistent position – though I don’t agree with it.
    So I ask you: what if a bank gathers 10 people, each one willing to save and lend $100 for only 1 of the following 10 years. Joe is willing to lend $100 for the first year, John for the second year, and so on. Thus, the bank grants a $100 loan for 10 years to someone else; the loan is alternately backed by the 10 savers. Such system is based on borrowing short / lending long scheme. Do you still think it’s generating a boo-bust cycle?

    Quote: “Everything that has been asserted with regard to credit expansion […] into the market system”
    Mises was referring to bank deposits. You can read the full text here ( https://mises.org/library/human-action-0/html/pp/818 ). At the very beginning, he wrote: “deposits payable on demand can also be used as a device of credit expansion” and “all that refers to credit expansion is valid for all varieties of credit expansion no matter whether the additional fiduciary media are banknotes or deposit”. Thus, you literally demonstrated that Mises’ case was against demand deposits – as I already wrote, BTW. No reference to short term loans backing long term loans.
    You should read more carefully. Did you use the same inattention while reading the other supposed tons of books?

    Quote: “Dr. Murphy gave you a scenario where a guy simply stole gold and loaned it out”
    And I replied, if you read above.

    Quote: “you read a couple articles”
    Never said that I read only a couple of articles. I basically said that, if you read carefully at least those 2-3 articles, you would have avoided being refuted so easily.

  20. Enrico says:

    @Dan
    Quote: “Banks aren’t taking a CD from Joe Blow and turning around and selling it on the secondary market for the same price”
    I said that banks sell loans (e.g. mortgages) in the secondary market all the time. I’m sorry, it’s a real world fact – and I gave you a link about it ( https://www.investopedia.com/terms/s/secondary_mortgage_market.asp ). Do me a favour and read it before further comments on the subject. Then, if you want to deny reality, it’s fine for me.

    Quote: “If you are borrowing short and loaning long it’s no different than loaning out demand deposits”
    At least, this is a consistent position – though I don’t agree with it.
    So I ask you: what if a bank gathers 10 people, each one willing to save and lend $100 for only 1 of the following 10 years? Joe is willing to lend $100 for the first year, John for the second year, and so on. Thus, the bank grants a $100 loan for 10 years to someone else; the loan is alternately backed by the 10 savers. Such system is based on borrowing short / lending long scheme. Do you still think it’s generating a boo-bust cycle?

    Quote: “Everything that has been asserted with regard to credit expansion […] into the market system”
    Mises was referring to bank deposits. You can read the full text here ( https://mises.org/library/human-action-0/html/pp/818 ). At the very beginning, he wrote: “deposits payable on demand can also be used as a device of credit expansion” and “all that refers to credit expansion is valid for all varieties of credit expansion no matter whether the additional fiduciary media are banknotes or deposit”. Thus, you literally demonstrated that Mises’ case was against demand deposits – as I already wrote. No reference to short term loans backing long term loans.
    You should read more carefully. Did you use the same inattention while reading the other tons of books? It seems so, since orthodox critique of demand deposits is quite clear. Mises et al. thought that opening a demand deposit equals to having that money in your pocket; however, since the bank is lending the same amount of money, it’s like “doubling” the quantity of money. The situation is different if you lend money to the bank: you don’t have the money in your pocket until such loan expires. No “doubling” occurs.

    Quote: “Dr. Murphy gave you a scenario where a guy simply stole gold and loaned it out”
    Apart from the fact that I replied to his post, the third example is just another version of demand deposits.
    To summarise, the orthodox ABCT regards either base-money expansions (e.g. Central Banks and counterfeiting) or credit expansion through demand deposits.

    Quote: “you read a couple articles”
    Never said that I read only a couple of articles. I just noted that reading carefully (at least) those 2-3 articles would have you avoid being refuted so easily.

    (NB: if this comment appears twice, please delete one of the two, possibly the first version)

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