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Money: Fractional Reserve Banking Is Fraudulent

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Even Greenspan supported a fractional reserve banking system, but fraction reserve banking is responsible for the creation of inflation, and it is a fraudulent practice. Does anyone else here have an opinion on this economic issue?

Edited by softwareNerd

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Even Greenspan supported a fractional reserve banking system, but fraction reserve banking is responsible for the creation of inflation, and it is a fraudulent practice. Does anyone else here have an opinion on this economic issue?

I ran across an excellent article on this just today.

One important point the author raises is, a major reason that today's economists and university professors support the Federal Reserve and its false (Keynesian) economic model is that the Federal Reserve uses much of its profits to fund them, as well as other governments that go along with the sham. When the Federal Reserve uses its finanical power to "bribe" the economists in the USA and around the world, it is not surprising that almost every economist, university professor, politician and journalist would accept whatever "drug" the Federal Reserve is pushing (a false economic model). Very interesting point.

The article is at:

http://www.freemarketnews.com/pview/5947/1268/html/index.php

~ zynner

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I don't even care if it is done by a private bank. It is still fraudulent. Loaning out more gold than is in your reserves devalues money and breaks the promise to pay that a banker gaurantees those who he gives his bank notes to. I'm for making sure that no bank loans out more than it has in gold reserves.

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... a major reason that today's economists and university professors support the Federal Reserve and ... is that the Federal Reserve uses much of its profits to fund them, ...

I have not seen evidence of this. Sure the government funds professors. Sure, professors love government financing. However, the chain of causality is almost the reverse of what you state.

It would be incomplete, yet more accurate than your formulation, to say that the government funding is caused by the professors' teaching, not the other way around.

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Apparently, no one likes to talk about economics. I think it's one of the coolest sciences. It is the study of human action/rationality.

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Even Greenspan supported a fractional reserve banking system, but fraction reserve banking is responsible for the creation of inflation, and it is a fraudulent practice. Does anyone else here have an opinion on this economic issue?

Perhaps I don't understand banking that well but....

Let's say for every deposit a bank must maintain some fraction N in reserve. I guess the only N that wouldn't constitute "fractional reserve" would be N = 100%. In this case the entire deposit must be maintained in reserve. So since the bank wouldn't be able to invest it anywhere it wouldn't be able to pay any interest on it. Moreover the depositor would have to pay all the fees required for storage. In essence a bank would only be some sort of fortified storage location for cash.

You are advocating that banks should be some sort of private Fort Knox?

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Perhaps I don't understand banking that well but....

Let's say for every deposit a bank must maintain some fraction N in reserve.  I guess the only N that wouldn't constitute "fractional reserve" would be N = 100%.  In this case the entire deposit must be maintained in reserve.  So since the bank wouldn't be able to invest it anywhere it wouldn't be able to pay any interest on it.  Moreover the depositor would have to pay all the fees required for storage.  In essence a bank would only be some sort of fortified storage location for cash.

You are advocating that banks should be some sort of private Fort Knox?

I won't speak for Nimble, but the only one who can legitimately invest money (lend it out at risk) is the proper owner of that money. The principle we must keep in mind is that two people cannot both be the exclusive owner of the same thing at the same time. Yet fractional reserve banking operates on the theory that Bank Account Holder A and Borrower B can both own the same money at the same time. This practice is just as fraudulent as selling two buyers the same vacation home and giving them both exclusive title to the home (and hoping that they don’t both show up to use it the same weekend). With fractional reserve banking, titles to money are spuriously created, meaning there are more titles to property than there is actual property. In fact, no new money (property) is created, but the number of titles to existing money is expanded. And it is in this manner that the value of the dollar is diminished.

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The current system is fraudulent in the sense that it gives the impression that two people own the same money. The government "insures" checking accounts by saying that it will print money and pay it to the depositor if too many of a bank's borrowers default and the bank goes bankrupt.

In a free-market, it is likely that there will be various types of bank-accounts. Of these, accounts with a 100% reserve would be one type.

However, there may well be accounts where money is deposited with the understanding that a certain amount will be lent out. There may also be private firms that insure banks against a certain extent of loss (and, in turn, impose some rules on what the bank may or may not do). In such a situation, a depositor would have to weigh risk against return (interest rate).

To the extent that a depositor wishes to write checks on the account, he will also have to take into account the acceptance of his checks. Someone might say, "sorry, cannot accept checks from that bank... they are too risky. Give me a check on an AAA account".

Given this, there would probably be a tendency for most people to keep their checking accounts in account types that the vast number of other individuals and firms considered to be safe and acceptable as legal tender. Would this be a 100% reserve account or something slightly less? I do not know.

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I won't speak for Nimble, but the only one who can legitimately invest money (lend it out at risk) is the proper owner of that money.  The principle we must keep in mind is that two people cannot both be the exclusive owner of the same thing at the same time.  Yet fractional reserve banking operates on the theory that Bank Account Holder A and Borrower B can both own the same money at the same time.  This practice is just as fraudulent as selling two buyers the same vacation home and giving them both exclusive title to the home (and hoping that they don’t both show up to use it the same weekend). With fractional reserve banking, titles to money are spuriously created, meaning there are more titles to property than there is actual property. In fact, no new money (property) is created, but the number of titles to existing money is expanded. And it is in this manner that the value of the dollar is diminished.

That is exactly what I mean. You have a man with a "bank deposit note" that says he has a claim to X amount of gold, or whatever the reserve is, and then you have a bank that gives a loan for a fraction of X amount of gold to someone else who thinks they now have some of X gold. So now two people own the exact same gold, and the bank prays that everyone doesnt come back to get their money at the same time. Now if their were some disclaimer saying you were forbidden to come back for X amount of time to get your money, then it would be okay, but then the bank wouldn't be a bank, it would be a investment broker.

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Perhaps I don't understand banking that well but....

Let's say for every deposit a bank must maintain some fraction N in reserve.  I guess the only N that wouldn't constitute "fractional reserve" would be N = 100%.  In this case the entire deposit must be maintained in reserve.  So since the bank wouldn't be able to invest it anywhere it wouldn't be able to pay any interest on it.  Moreover the depositor would have to pay all the fees required for storage.  In essence a bank would only be some sort of fortified storage location for cash.

You are advocating that banks should be some sort of private Fort Knox?

Yes I would like every bank to be a depository, or at least upfront about their policy of inflating the money supply.

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Now if their were some disclaimer saying you were forbidden to come back for X amount of time to get your money, then it would be okay, but then the bank wouldn't be a bank, it would be a investment broker.
Not precisely. A mutual fund may be a closer term.

It is far from clear that 100% reserve accounts will be the favorite in a free market system. Consider this -- so many merchants accept credit cards. What stands behind it? Your personal credit, further insured by the credit card company. The insurance by the credit card company is what makes the credit card work as tender. If merchants will accept credit cards (indeed even pay a fee to have you use one!), it is highly likely that a free-market finance system would produce a type of AAA financial-account which most merchants will accept as cash.

You may not call them "bank" accounts. That will not change their so-called "multiplier effect".

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The current system is fraudulent in the sense that it gives the impression that two people own the same money.  The government "insures" checking accounts by saying that it will print money and pay it to the  depositor if too many of a bank's borrowers default and the bank goes bankrupt.

In a free-market, it is likely that there will be various types of bank-accounts. Of these, accounts with a 100% reserve would be one type.

However, there may well be accounts where money is deposited with the  understanding that a certain amount will be lent out. There may also be private firms that insure banks against a certain extent of loss (and, in turn, impose some rules on what the bank may or may not do). In such a situation, a depositor would have to weigh risk against return (interest rate).

To the extent that a depositor wishes to write checks on the account, he will also have to take into account the acceptance of his checks. Someone might say, "sorry, cannot accept checks from that bank... they are too risky. Give me a check on an AAA account".

Given this, there would probably be a tendency for most people to keep their checking accounts in account types that the vast number of other individuals and firms considered to be safe and acceptable as legal tender. Would this be a 100% reserve account or something slightly less? I do not know.

While I enthusiastically favor allowing the market to develop a variety of monetary and banking options, fractional reserve banking would still be fraudulent even in a laissez faire society. Representing both bank account holder and borrower as owners of the same money at the same time is a violation of the Law of Non-Contradiction. I do not see how any rational or objective legal system could uphold such an arrangement.

Please keep in mind that in contrast to free market contractual agreements, fractional reserve banking is not about voluntary transfers of existing property from one party to another, but instead creates new titles to existing property out of thin air. The problem is not the right of the banker and account holder to create a set of conditions under which the account holder’s gold-backed dollars are kept, but the right of third parties also holding gold-backed dollars not to have the value of their dollars arbitrarily degraded.

Inevitably, a free market would devise a way out of this morass, and that would be to have a two-tiered monetary system, consisting of 100% gold-backed dollars and a separate currency of cheaper fractional reserve specie. This is the only way to prevent Gresham’s Law of bad money driving out good. Of course, fractional reserve bankers would hate this approach because it would expose the deceit involved in creating new money out of nothing. That is why politically connected and unscrupulous bankers have traditionally used government to force the creation of a central bank which imposes by law one (weak) currency on everyone.

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Inevitably, a free market would devise a way out of this morass, and that would be to have a two-tiered monetary system, consisting of 100% gold-backed dollars and a separate currency of cheaper fractional reserve specie.
Tom,

I'm not sure if you're suggesting something different from what I said, when I spoke of "100% reserve accounts" co-existing with "AAA accounts"? Is it the idea that "AAA" will be "cheaper" -- i.e. less acceptable for transactions?

Also, whether cheaper or not, are you saying that a system of "AAA financial accounts" (cheaper or on-par) will be fraudulent under capitalism? I assume you are saying that they will be okay, but I'm not certain that I'm reconciling the first and third paragraph of your post correctly.

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Fractional reserve banking is not inherently fraudulent. If the lender discloses the potential risk (possibility of not redeeming all one's capital because it is being lent against speculative claims), then it can be (and largely is) valid.

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Fractional reserve banking is the ticket to robbing individuals of wealth, hidden taxation and a whole laundry list of fraudulent activities. The history of banking, Pres. Lincoln's 'greenbacks' and the concern about it from the British banksters is described wonderfully in the below excerpt:

From the London Times: ``If this mischievous financial policy [greenbacks]... should become endurated down to a fixture, then that government will furnish its own money without cost. It will pay off its debts and be without debts. It will have all the money necessary to carry on its commerce. It will become prosperous beyond precedent in the history of the world. The brains and wealth of all countries will go to North America. That government must be destroyed or it will destroy every monarchy on the globe.'' qtd. in Search's book.

The Bank of England/Rothschilds (do not be deceived by name, "Bank of England"; Bank of England was/is a *private* bank) issued, and distributed to American banksters, the following document, quoted in part below:

``The Hazard Circular Slavery is likely to be abolished by the war power, and chattel slavery abolished. This, I and my European friends are in favor of, for slavery is but the *owning of labor*, and carries with it the *care of labor*, while the European plan, led on by England, is that capital shall control labor by controlling wages. The great debt that capitalists will see to it is made out of the [Civil] war must be used to control the value of money. To accomplish this, the Government bonds must be used as a banking basis.

``We are now waiting for the Secretary of the Treasury of the United States to make this recommendation. It will not do to allow greenbacks, as they are called, to circulate as money any length of time, as we cannot control that, but we can control the bonds and through them the bank issues. [qtd. in Dr. Search's book]

SLAVERY IS BUT THE OWNING OF LABOR, AND CARRIES WITH IT THE CARE OF LABOR. A "new, improved system" of slavery was being born. Gustavus Myers (a "leftist") corroborates this in his book, *History of the Great American Fortunes*: "...chattel slavery could not compete in efficiency with white labor... more money could be made from the white laborer, for whom no responsibility of shelter, clothing, food and attendance had to be assumed than from the Negro slave, whose sickness, disability or death entailed direct financial loss."

"The perfect slave thinks he's free." That was the "new, improved system" for exploiting labor. (Currently, a further refinement is the use of temporary labor.) Abraham Lincoln was "the man who first proved that government could issue its own paper money, legally, honorably, and rightfully, and make it full legal tender for all debts, both public and private..." Was Lincoln "a dangerous man from the [bankers] point of view? Could they have continued their knavery, trickery, bribery, and destructive work... if Lincoln had lived?" (Dr. R.E. Search)

from: http://www.mega.nu/ampp/corporate.html#metatop

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Tom,

I'm not sure if you're suggesting something different from what I said, when I spoke of "100% reserve accounts" co-existing with "AAA accounts"? Is it the idea that "AAA" will be "cheaper" -- i.e. less acceptable for transactions?

Also, whether cheaper or not, are you saying that a system of "AAA financial accounts" (cheaper or on-par) will be fraudulent under capitalism? I assume you are saying that they will be okay, but I'm not certain that I'm reconciling the first and third paragraph of your post correctly.

I argue that you cannot have a single currency that is backed by gold in some cases but not in others. If you want to have dollars and also, say, "fiats," fine. But when one bank issues dollars fully backed by gold and another bank issues what appear to be identical dollars but which in fact are not backed by gold reserves, then you have a clear case of fraud.

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Fractional reserve banking is not inherently fraudulent. If the lender discloses the potential risk (possibility of not redeeming all one's capital because it is being lent against speculative claims), then it can be (and largely is) valid.

That would be true if lender and borrower were the only parties involved. In fact, they are not. When a bank arbitrarily expands the supply of titles to property without a corresponding increase in the supply of property, it is cheapening the value of all existing titles (dollars). Thus, if my bank fully backs my dollars with gold, but your bank issues identical dollar bills not fully backed by gold, then more dollars will be “chasing goods” and the buying power of my dollars will be artificially diminished. This is the essence of inflation, which is just as much a violation of property rights as taxation.

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Fractional reserve banking is not inherently fraudulent. If the lender discloses the potential risk (possibility of not redeeming all one's capital because it is being lent against speculative claims), then it can be (and largely is) valid.

No you do not get it. Even if the person consents to the possibility to losing the money. The bank has no right to print more currency than it has reserves to back it, because as we all know values do not arise out of thin air. It devalues everyones dollars.

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Wrong.

In a free economy, a fractional reserve bank issues banknotes, not "currency". The banknotes would represent some agreed upon claim on something. These banknotes acquire the characteristics of currency to the extent that it earns that trust from users of its banknotes. The contract, redemption terms, claim, and level of fractional reserves are up to the bank and its customers.

If you don't want to deal with fractionally reserved banknotes, don't accept them for payment, or demand a premium while simultaneously selling for whatever unit you want payment in.

It's important to distinguish the practice of fractional reserve banking from central banking and fiat money. Fractional reserve banking was a natural market-based development, leading to win-win situations and economic progress.

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Wrong.

In a free economy, a fractional reserve bank issues banknotes, not "currency". The banknotes would represent some agreed upon claim on something. These banknotes acquire the characteristics of currency to the extent that it earns that trust from users of its banknotes. The contract, redemption terms, claim, and level of fractional reserves are up to the bank and its customers.

If you don't want to deal with fractionally reserved banknotes, don't accept them for payment, or demand a premium while simultaneously selling for whatever unit you want payment in.

It's important to distinguish the practice of fractional reserve banking from central banking and fiat money. Fractional reserve banking was a natural market-based development, leading to win-win situations and economic progress.

That is all very well as long as the only parties affected are the banker and the bank customer. However, if a fractional reserve bank issues dollar notes that are indistinguishable from the dollar notes issued a bank with full gold backing, then the value of the latter will be driven down by the former. This may be compared to the purchase of a print from a gallery. Suppose you purchase Print #14 of the work “Prometheus Unbound” in a run that you are told is limited to 500. Because there will never be more than 500 prints, your copy is somewhat of a rarity. Now suppose that another gallery starts another printing of “Prometheus Unbound” and produces 500, 1,000 or 5,000 copies. What do you suppose will happen to the value of your copy of “Prometheus Unbound”? If this is not fraud, then I don’t know what is.

As far as private money, you may recall that the residents of Galt’s Gulch had their own currency of little gold coins which they used for trade with one another. But there was no mention of bank notes from Midas’s bank. I wonder why? Do you suppose the Gulchers had a healthy distrust of phony money? Certainly, when our economy starts veering towards high inflation to pay for Bush’s War for Democracy and Bush’s Medicine for the Elderly, private money or e-gold may be a viable option.

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Tom Robinson writes: "...if a fractional reserve bank issues dollar notes that are indistinguishable from the dollar notes issued a bank with full gold backing, then the value of the latter will be driven down by the former."

This statement is self-contradicotry. Two things cannot be simultaneously "indistinguishable", and "distinguishable" by essential differences.

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Tom,

You don't seem to understand banking, its historical development, or my prior observations. Your analogy is an inappropriate one as well. Galt's Gulch also didn't have a government, but Ayn Rand and her philosophy of Objectivism certainly included a role for government. A bank note is a bank note, and a dollar is a dollar, and they are two different things under free banking.

When companies issue bonds, many invest the proceeds and couldn't repay them immediately, is that also innately fraudulent?

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While I enthusiastically favor allowing the market to develop a variety of monetary and banking options, fractional reserve banking would still be fraudulent even in a laissez faire society.

from the dictionary:

fraud:

A deception deliberately practiced in order to secure unfair or unlawful gain.

Where is the deception, assuming all customers know what is involved? You mention that fractional reserve banking "instead creates new titles to existing property out of thin air". However, people would still have the choice whether to accept these titles in any given situation, so it's unclear at what point fraud is committed. If you're going to use notes issued by a bank that works in this manner, then you are choosing to take a risk. Edited by Hal

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If you're going to use notes issued by a bank that works in this manner, then you are choosing to take a risk.
Playing devils's advocate for a moment, I read Tom's point as follows:

1) A bank note is a promise to pay. It is a promise to pay a certain amount of currency (e.g. gold, or gold-backed dollars) on demand.

2) A good bank, working on a fractional reserve system, will have enough assets to cover its liabilities (including its bank notes). However, it will not have liquid assets to cover the bank-notes if they were all to be presented at once.

So, I distill Tom's point to be: how can a bank morally issue bank-notes payable on demand, when many of the assets backing up those notes are not liquid?

Having said that, I agree with you, that if everyone is clear about what is being done there is no fraud. I do not know about the history of private banknotes, or how they would evolve. I wouldn't be surprized if such notes had some type of rating or warning.

The utilitarian (dare I say practical) issue about inflation is another thing to consider; but, I think we should start by addressing the moral and practical viewpoints separately, and only later should we integrate them.

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