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Money: Fractional Reserve Banking Is Fraudulent

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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?

The question isnt whether it's moral; it's whether it should be legal. I could write pieces of paper promising to pay people £100000 when the pixies visit me with a pot of gold, and if someone wants to accept one of them from me in exchange for a pint of milk, there is no reason for the state to get involved.

If the bank promises to pay on demand and is then unable to do so, they would be treated as breaching a contract and hammered in court (unless they had a disclaimer like 'assuming we are able to' which the note-users accepted). However there is nothing wrong with them making the promise as long as everyone involved knows what's going on, and is aware of the risks. I assume that the fractional reserve bank would try and give people some incentive to use their notes, since in a straight choice between 'fractional reserve or not' almost everyone is going to choose the latter. But if someone was prepared to make a calculated gamble and accept this incentive, there shouldnt be a problem.

Edited by Hal

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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?

It is perfectly legitimate for an investor to purchase a bond, fully knowing the potential risk of not having his principal returned. The problem with several banks issuing dollars is altogether different. If the dollars of one bank are not fully backed by gold, they will drive down the value of any dollars that are backed by gold. This is Gresham's Law at work. In any case, degrading a currency can happen with or without a government. The Founders did not have to empower Conress to print money. If they had not, banking would have been purely private. But private banks, unless checked by law, can commit fraud just as surely as central banks. The difference is that government does not prosecute its own central bank for flooding the economy with cheap money; rather, it encourages it.

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from the dictionary:

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.

The deception would be to issue fractional reserve dollars that are supposedly the same thing as fully gold backed dollars. It's the same scam as passing bottles of colored water off as Cabernet Sauvignon.

As long as the unbacked currency does not pretend to be fully convertible into 100% gold dollars then there is no problem.

Edited by Tom Robinson

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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.

If the "essential differences" of two bank notes are not apparent, then the value of the notes is indistinguishable.

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Do not forget that even if the banker and the depositors agree to adopt a fractional reserve system, they are still screwing over people not involved with the bank due to money multiplier inflation. If I deposit $100,000 with the understanding that the bank will loan out $90,000 I've effectively "created" an extra $90,000 in the money supply and sellers will adjust their prices accordingly. For people not using the banks this situation brings on inflation they had no part of. Bank interest payments are merely compensation, and poor ones at that, for money multiplier inflation caused when they engage in fractional reserve banking.

Banks as storage houses to protect your money and not lend it out were very valuable in the days of the gold standard because carting around all of your gold or trying to protect it at your own house was risky, cumbersome, and sometimes dangerous. A bank could offer protection for your money and they could offer you paper promissory notes for your deposited gold. The bank could then charge a fee for the protection and a fee for the notes. The money the bank made from fees could then be properly lent out to the benefit of the bank and the loan recipient. This way we suffer no money multiplier inflation. I see no reason why, under a proper economic system where the money is a commodity that is worth something (as opposed to worthless ink and paper), that people would want their bank to loan out their money with no guarantee of getting it back, to create inflation for which they aren't properly compensated (and cannot be properly compensated).

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The only moral way for a bank to use fractional reserves is for them to tell the person putting the gold in their vaults that they may never ever come get more than 10% of their money. And they can only give them bank notes worth 1/10th of the gold they deposits (assuming the fraction of reserves is 1/10th). That way the bank does not inflate the money supply and the person is made to understand what they are getting into.

As for the historical aspect of this. Private banks did cause inflation. And as a result of inflation, and fractional reserve banking is the business cycle. A cyclic occurence in the economy of busts and booms. The money supply goes up, businesses grow and invest. Fractions of reserves get smaller as banks loan out too much, and when they risk a bank crisis, they raise interest rates to get money back in their vaults and stop loaning. This causes expansion and investment to dry up. Money supply contracts and a recession hits.

Without fractional reserves the economy would be on a steady growth. There wouldn't be booms or busts, just growth.

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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."

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

Tom Robinson replied: "If the 'essential differences' of two bank notes are not apparent, then the value of the notes is indistinguishable."

Exactly.

The root of the problem is not that some may willingly risk loss and/or devaulation by fractional reserve practices. The root of the problem is that essential differences (such as gold backing. for example) remain indistinguishable because of a de facto government monopoly on money.

The problems that can arise from fractional banking stem from the fact that the problems are institutionalized via the government money system. But this does not make fractional reserve lending per se fraudulent. Coporate stocks can be inflated and/or deflated, too; this does not make the stock market fraudulent.

Fraction-reserve lending can multiply productivity; the prudent fraction -- and risk and return level -- is up to the market to determine.

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Montesquieu wrote: "Do not forget that even if the banker and the depositors agree to adopt a fractional reserve system, they are still screwing over people not involved with the bank due to money multiplier inflation..."

This is not strictly true, even assuming government fiat money: any adverse inflationary effects are only manifest to the extent the inflated money isn't matched by additional wealth. This can happen, but it doesn't have to happen.

And if we're talking about private money, the there is no issue whatsoever. The soundness/inflation/deflation/reputation of money is just another value that gets reflected in the market price of the money.

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Nimble wrote: "As for the historical aspect of this. Private banks did cause inflation. And as a result of inflation, and fractional reserve banking is the business cycle. A cyclic occurence in the economy of busts and booms. The money supply goes up, businesses grow and invest. Fractions of reserves get smaller as banks loan out too much, and when they risk a bank crisis, they raise interest rates to get money back in their vaults and stop loaning. This causes expansion and investment to dry up. Money supply contracts and a recession hits."

Private banks can only casue inflation of their own money supply.

The business cycle, to the extent that the cycles are exaggerated and destructive, is a result of government control of the money supply -- and its correlative inability to price money correctly (similar to any state-produced good or service) -- not of private money supplies.

Does the US econoomy frequently get catastrophic overages or underages of shoes, televisions, or comic books? No? That's because although any one, or few, producers of such things might miscalculate future demand, it is unlikely that they all will. Despite occasional business failures, it is unlikely that an entire industry will all miscalculate at the same time and destroy an entire industry. The same is true of private money.

A good source for historic info on this subject is Richard Salsman's "Breaking the Banks". I'd bet Andrew West has some good sources too if he happens to catch this thread again.

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First I wanted to acknowledge Tom Robinson's spectacularly incorrect application of Gresham's Law to issuance of banknotes under free banking. Gresham's Law only applies to situations of fiat money with legal tender laws, with the government saying, in effect, that things of unequal value MUST be accepted as payment as if they were of equal value. Under free banking and the gold standard, the government does not force anyone to accept banknotes at any specific value. Historically, banknotes were carefully monitored, and various banks deemed less trustworthy saw their notes trade at discounts to others. for further discussion of Gresham's Law see http://www.columbia.edu/~ram15/grash.html

As for worthwhile readings on the matter, besides the previously mentioned Breaking the Banks, and Gold and Liberty, by Salsman, Lawrence H. White has contributed a number of valuable documents on the subject of free banking and money - here's an essay of his that goes right to the heart of this discussion:

http://www.econlib.org/library/Enc/Competi...eySupplies.html

and here's his page with many links:

http://www.umsl.edu/~whitelh/

I've agreed with most that I've read by White.

And here is a very nice history lesson on the mechanics of free banking, perhaps one of the few worthwhile things the World Bank has ever sponsored:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=620548

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To A. West:

The practice of degrading the value of a gold-backed currency via pseudo-receipts for gold can happen even in a purely private banking system -- just as counterfeiting (which also degrades the value of money) can happen whether or not currency is issued by the government or by a private institution. If monitoring of banknotes is successful, it will prevent financial institutions from treating notes that are not fully gold-backed as equal in value to those that have 100% gold backing. Of course, “monitoring” need consist of nothing more than prosecuting through the law any person or institution who engages in the chicanery of issuing certificates which supposedly represent gold reserves but which in fact do not.

For a demonstration of the inflationary nature of fractional reserve banking see

The Possibility and Feasibility of a 100% Gold Reserve Standard

Edited by Tom Robinson

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TR: "The practice of degrading the value of a gold-backed currency via pseudo-receipts for gold can happen even in a purely private banking system..."

If, by "psuedo-receipts", you mean fraudulent receipts, then, yes, that would degrade the value of that currency. But fractional reserve holding is not inherently fraudulent; a willing agreement between a bank and a customer to the terms of the fraction they are required to keep does not equal a "pseudo-receipt".

If I own stock in Ford Motor, and they issue more stock, it may or may not devalue my current stock. But the point is, unless they have contractually promised not to issue any more stock, they have not defrauded me; I agreed to that possibility when I bought the stock. My stocks aren't "pseudo-stocks".

TR: "...If monitoring of banknotes is successful, it will prevent financial institutions from treating notes that are not fully gold-backed as equal in value to those that have 100% gold backing."

Monitoring? By whom? I assume you mean the government; why would the government need to "monitor" the terms of legitimate contracts between buyers and sellers? Don't you think the market already keeps a pretty close eye on this?

How about: "If monitoring is successful, it will prevent automobile purchasers from treating a rusty 1974 Ford Pinto as equal in value to a 2005 Lexus sedan."

TR: "...Of course, “monitoring” need consist of nothing more than prosecuting through the law any person or institution who engages in the chicanery of issuing certificates which supposedly represent gold reserves but which in fact do not."

If by "supposedly represent gold reserves", you mean that such is explicitly agreed, but then fraudulently flouted, then we agree: fraud should be prosecuted. If, however, you're implying that fractional reserve lending is inherently fraudulent, then you haven't made your case.

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TR: "The practice of degrading the value of a gold-backed currency via pseudo-receipts for gold can happen even in a purely private banking system..."

If, by "psuedo-receipts", you mean fraudulent receipts, then, yes, that would degrade the value of that currency. But fractional reserve holding is not inherently fraudulent; a willing agreement between a bank and a customer to the terms of the fraction they are required to keep does not equal a "pseudo-receipt".

To simplify matters, imagine a bank where there is just one depositor and one borrower. Depositor A places 500 ounces of gold bullion into the vaults of First National Bank and receives in return receipts (notes) for those 500 ounces. The notes represent bearer certificates to the gold in the vault. In this way, Mr. A can trade the notes for the goods he needs. Now suppose First National then issues to Borrower B a loan in the form of receipts (notes) to 300 of A’s 500 ounces of gold, repayable at 10% interest. We now have a situation where two different people have claim to the very same 300 ounces of gold. Unless you believe that two people can both have exclusive title to the same object at the same time (a logical contradiction), then either A owns the gold or B owns it, but not both. To claim otherwise is to maintain a fiction.

If I own stock in Ford Motor, and they issue more stock, it may or may not devalue my current stock. But the point is, unless they have contractually promised not to issue any more stock, they have not defrauded me; I agreed to that possibility when I bought the stock. My stocks aren't "pseudo-stocks".

A corporation cannot legitimately (or logically) sell 25% of its worth to A, 25% to B, 25% to C, 25% to D, 25% to E, and 25% to F.

TR: "...If monitoring of banknotes is successful, it will prevent financial institutions from treating notes that are not fully gold-backed as equal in value to those that have 100% gold backing."

Monitoring? By whom?

I used the term in response to A. West who introduced it to the discussion. He did not specify what form this monitoring would take.

TR: "...Of course, “monitoring” need consist of nothing more than prosecuting through the law any person or institution who engages in the chicanery of issuing certificates which supposedly represent gold reserves but which in fact do not."

If by "supposedly represent gold reserves", you mean that such is explicitly agreed, but then fraudulently flouted, then we agree: fraud should be prosecuted. If, however, you're implying that fractional reserve lending is inherently fraudulent, then you haven't made your case.

In the hypothetical example I gave above, A and B cannot both exclusively own the same 300 ounces of gold, no matter how ardently they agree on the matter.

Edited by Tom Robinson

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TR: "To simplify matters, imagine a bank where there is just one depositor and one borrower. ...etc."

Okay, example is acknowledged. Now let us imagine another example, also simplified:

A depositor, we'll call him Mr. Clampett, walks into a bank with 500 ounces of gold. He asks the banker, whom I'll call Mr. Drysdale, if his gold will be safe. "I'll stake my reputation on the safety of your deposit, Mr. Clampett."

"So my gold will be safe in your vault, and I can come get it any time I want?" asks Clampett.

"Well, no. That's not exactly how it works. You see, when I have your gold, I'm going to use it to fund some business enterprises and other things. I hope thusly to make a bit of money myself. And when those enterprises have succeeded, and they pay back the gold they've borrowed -- your gold -- then it will be available for you!"

"Uh huh. So you're pretty sure these businesses are going to succeed?"

"I stake my reputation -- and my fortune -- on it".

Clampett's becoming concerned. "Do you guarantee that all my gold will be returned?"

"I guarantee that we'll follow scrupulous standards of lending."

Clampett becomes more suspicious: "But do you guarantee my gold will be there?"

Drysdale sighs. "No".

"Then why would I want to put my gold in your bank?"

Drysdale perks up. "Many reasons, Mr. Clampett. Convenience, for one. Safety, too -- our vaults are very strong."

"But you might lose my gold."

"Might. But probably not. In our 75 years in business, we've never been unable to give somebody all their gold when they came in to get it. Unless everyone coincidentally came to get it at the same time. For that reason, we agree upon what I'm able to do with your gold in advance, and then you can reasonably assess your odds of recovering your gold when you want it."

"I guess that sound fair. It'd sound even better if I got a little piece of the action myself, being my gold and all."

"It'll be my gold actually. In consideration, I give you rights to claim the gold back, subject to the conditions we agree on. But you drive a hard bargain, Mr. Clampett, so how about this: I'll give you 3 cents on the dollar, each year, for all the gold you keep in here."

Clampett is interested. "Hmm... okay. It's a deal. Here's my gold, and I wish you the best of luck generating more wealth by using my former gold as capital. I may come back to claim some or all of it from time to time, per the details of our peaceful and voluntary agreement. I understand that my claim is subject to certain limitations and is similar to the claim I have on an airline seat or hotel room, both of whom also issue claims on commodities that are not guaranteed, but are reasonably likely to be delivered, and in that way generate more wealth than would otherwise have been possible. Whooo doggies, Mr. Drysdale, I sure love capitalism."

Drysdale smiles. "Me too, Mr. Clampett. It's a win-win arrangement, and best of all, there's NO FRAUD or CONFLICT OF TITLE involved."

[curtain]

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TR: "To simplify matters, imagine a bank where there is just one depositor and one borrower. ...etc."

Okay, example is acknowledged. Now let us imagine another example, also simplified:

A depositor, we'll call him Mr. Clampett, walks into a bank with 500 ounces of gold. He asks the banker, whom I'll call Mr. Drysdale, if his gold will be safe. "I'll stake my reputation on the safety of your deposit, Mr. Clampett."

"So my gold will be safe in your vault, and I can come get it any time I want?" asks Clampett.

[curtain]

Delightful story, gnargtharst. But I do not challenge the right of gold owners to lend out their wealth at risk and for interest. There is nothing illegitimate about Clampett individually or Clampett through the agency of Drysdale, letting another party borrow Clampett's gold or certificates to Clampett's gold.

However, fiction and inflation come into play when Clampett and the borrower of Clampett’s gold are both issued separate bearer certificates (property titles) to the exact same treasure at the same time. Issuing new gold certificates without any new gold to back them is to create money out of thin air. It does not matter that Clampett and Drysdale have agreed to this arrangement or that Clampett is taking a risk, any more than it matters that a fence who purchases fake $20 bills from a counterfeiter for $5 each is doing so voluntarily and at a risk.

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TR: "...However, fiction and inflation come into play when Clampett and the borrower of Clampett’s gold are both issued separate bearer certificates (property titles) to the exact same treasure at the same time."

I assume you're referring to government-issued dollars. And if you're point is that government renders money fraudulent by legally mandating it (and its inflationary nature), then I agree with you. I think we've all agreed with that.

But the gist of this thread at the beginning was that fractional reserve lending is inherently fraudulent. It isn't. My example demonstrated that. The history of free-market banking demonstrated that also.

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Gnargtharst, good points all around, your example provides a much greater connection to reality than Tom's rationalistic "though experiment" which does not at all resemble any real financial institution in a free market. It's a straw man. In his example, a bank has only one asset, and creates twice as many liabilities. Thus customers appear to be gullible fools, and banks appear to be pyramid schemes. There is no market testing of liquidity or asset quality. In my previous links, there are documents that show that under free markets, both depositors and other financial institutions develop highly efficient methods of ensuring win-win situations.

In real fractional reserve banks in free markets, for every liability a bank creates, it has assets greater than one. Deposits that are not needed, on average, all the time, are invested into less liquid assets that provide economic returns (and thus fund economic growth). This is commonly called financial intermediation on the part of banks. Just as insurance companies couldn't pay off all life policies if everyone was to die at once, banks can't and don't need to pay off all deposits at once. Instead, both invest what is determined to be excess liquidity into longer term business sources. It should be noted that banks also have countervening sources of liquity - time deposits that are deposited for fixed periods of time.

In connection to this idea that every legitimate bank's liability has a contra-asset, I have seen reliabile studies showing that under free (really semi-free) banking, most "bank runs" ended in customers recovering all or most of their deposits after the failed bank's assets were liquidated, with bank shareholders and debtholders taking most of the damage.

I expect Tom to return with something else along Rothbardian lines, but I have no interest discussing this with him. I've completed my task here, providing some thoughts and references that a rational person who reads this thread could use to reach an informed conclusion on the matter.

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Gnargtharst, good points all around, your example provides a much greater connection to reality than Tom's rationalistic "though experiment" which does not at all resemble any real financial institution in a free market. It's a straw man.

It would be a straw man only if everyone on this board agreed that a bank should not issue receipts for gold exceeding the amount of actual gold in its vaults. However, it appears that some here are indeed arguing that such a practice would be legitimate.

In his example, a bank has only one asset, and creates twice as many liabilities. Thus customers appear to be gullible fools, and banks appear to be pyramid schemes. There is no market testing of liquidity or asset quality. In my previous links, there are documents that show that under free markets, both depositors and other financial institutions develop highly efficient methods of ensuring win-win situations.

When a bank issues more receipts than it has actual gold deposits, it is not a win-win situation for everyone. If the number of gold receipts expands without a similar expansion in gold deposits, the result is inflation. And the losers include anyone who lives on a fixed income or who is not able to quickly re-negotiate prices or wages to keep up with the artificially expanding money supply.

In real fractional reserve banks in free markets, for every liability a bank creates, it has assets greater than one. Deposits that are not needed, on average, all the time, are invested into less liquid assets that provide economic returns (and thus fund economic growth). This is commonly called financial intermediation on the part of banks.

A practice is not justifiable for having been widespread. By that logic we would have to defend taxation. A bank cannot logically or ethically have assets greater than the real property that it may justly call its own. Thus if Depositor A has full and uncontested title to his gold reserves, then First National Bank (or its Borrower B) cannot also have full and uncontested title to any portion of what is properly A’s deposit. With both depositor and bank (or borrower) claiming the same assets but for all appearances having separate fortunes, they present a phony picture of having more wealth than there is in reality. This is a case of having your cake and eating it too.

Just as insurance companies couldn't pay off all life policies if everyone was to die at once, banks can't and don't need to pay off all deposits at once. Instead, both invest what is determined to be excess liquidity into longer term business sources. It should be noted that banks also have countervening sources of liquity - time deposits that are deposited for fixed periods of time.

The fraud is not in the failure of the bank to provide redemption in a crisis. The fraud occurs the very moment a pseudo-receipt for gold is created, for issuing two receipts for the same bar of gold is no different than printing a counterfeit bill. Thus, even if there were no runs on the bank, the institution would still be guilty of the deceitful practice of issuing more property titles than there is property to back them.

Edited by Tom Robinson

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Hmm... a long and thorough discussion of this topic just vanished into cyber-limbo. Frustrating.

Oh well, that'll teach me to be succinct. So:

If the terms and conditions of fractional reserve banking are agreed upon by all contracting parties, then such practice is, by definition, not fraudulent (fraud necessarily entailing unilateral changing or hiding of the terms of a contract).

Whether this results in inflation of a currency in a given instance, and whether this inflation is harmful to the currency's holders, are separate issues, but are nontheless issues agreed upon by all those who hold the currency and cannot logically be referred to as "fraudulent".

(If, otoh, we are discussing government fiat currency, then that is indeed fraudulent, but not because of fractional reserve practises, per se.)

A counterexample would have to show defrauded parties and explain the injury they suffered, within a private money scenario, wherein the terms of fraction lending were disclosed and agreed-upon.

And since this can't be done, I hereby end my comments on this matter.

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If the terms and conditions of fractional reserve banking are agreed upon by all contracting parties, then such practice is, by definition, not fraudulent (fraud necessarily entailing unilateral changing or hiding of the terms of a contract).

Whether this results in inflation of a currency in a given instance, and whether this inflation is harmful to the currency's holders, are separate issues, but are nontheless issues agreed upon by all those who hold the currency and cannot logically be referred to as "fraudulent".

I am not a “contracting party” when a counterfeiter starts running off large numbers of $20 bills. But I am certainly victimized when I find that my legitimate twenties no longer have the same buying power when they are chasing the same goods as the phony twenties. The same is true when a depositor’s receipt for one ounce of gold has to compete in a market where other receipts are issued to both depositor and borrower for the very same one ounce of gold. The 100% gold reserve depositor is victimized even though he is not one of the “contracting parties” to fractional reserve banking.

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Okay, I think we hit a wall, and neither of you understand the other. Fractional reserve banking can be moral and not fraudulent. If and only if, the terms are agree upon by the currency holders, and the currency is clearly labeled as only a FRACTION of gold. So that when you put an ounce of gold in the fractional reserve bank, they give you a slip of paper that says worth 1/10 of an ounce of gold, payable upon demand. And maybe they could continually give out more of these 1/10th oz. slips so that eventually the entire 1 oz of gold can be redeemed by the original owner with interest.

Also, if the fractional reserve bank does use a currency that says worth 1 oz of gold, and someone trades that slip to someone else, who doesnt know that that slip is only technically worth 1/10th an ounce of gold, then yes, that is fraudulent, and it does cause inflation.

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Okay, I think we hit a wall, and neither of you understand the other. Fractional reserve banking can be moral and not fraudulent. If and only if, the terms are agree upon by the currency holders, and the currency is clearly labeled as only a FRACTION of gold. So that when you put an ounce of gold in the fractional reserve bank, they give you a slip of paper that says worth 1/10 of an ounce of gold, payable upon demand. And maybe they could continually give out more of these 1/10th oz. slips so that eventually the entire 1 oz of gold can be redeemed by the original owner with interest.

Also, if the fractional reserve bank does use a currency that says worth 1 oz of gold, and someone trades that slip to someone else, who doesnt know that that slip is only technically worth 1/10th an ounce of gold, then yes, that is fraudulent, and it does cause inflation.

That's fine, nimble, but what A. West has outlined is something other than what you describe. He wrote, "banks can't and don't need to pay off all deposits at once." This suggests that a depositor and a borrower can both be issued receipts for the same bar of gold, and that such double-issue is legitimate since the bank need not cover the claims of depositor and borrower at once. I say that any bank that issues separate certificates for the same quantity of gold (and this is what fractional reserve banking is generally taken to mean) is engaging in a fiction, a fraud if you will. For two independent legal claims to the same quantity of gold (or other precious commodity) cannot be reconciled except by awarding ownership to one or the other.

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That's fine, nimble, but what A. West has outlined is something other than what you describe.  He wrote, "banks can't and don't need to pay off all deposits at once."  This suggests that a depositor and a borrower can both be issued receipts for the same bar of gold, and that such double-issue is legitimate since the bank need not cover the claims of depositor and borrower at once.  I say that any bank that issues separate certificates for the same quantity of gold (and this is what fractional reserve banking is generally taken to mean) is engaging in a fiction, a fraud if you will.  For two independent legal claims to the same quantity of gold (or other precious commodity) cannot be reconciled except by awarding ownership to one or the other.

Oh well if that's what he is stating, then yes I am with you on this.

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He wrote, "banks can't and don't need to pay off all deposits at once."  This suggests that a depositor and a borrower can both be issued receipts for the same bar of gold, and that such double-issue is legitimate since the bank need not cover the claims of depositor and borrower at once.
A. West did say (as did I) that bank notes would be backed 100% by assets. In fact, the assets would be more than 100% of the banks notes plus other liabilities.

If a bank-note is represented to be backed by a 100% gold or gold-equivalent reserve, and it is not actually so backed, that is obviously a case of cheating.

The case that A.West and I were describing was different. Example: a bank has issued (say) notes with a face value of $1,000,000. It has $600,000 worth of gold and $600,000 worth of (say) mortgages -- real homes that it can sell if borrowers default. [The $200,000 difference is the bank's capital.]

It is completely legitimate to ask why anyone would accept such a note as being on-par with real-currency. Wouldn't such a bank-note be accepted only at a discount to its face value.

However, if we focus on the moral/legal viewpoint, then I cannot see how this can be considered fraudulent in a context of full-disclosure.

Some reference has been made to the "third-party effects" of such an arrangement: if someone accepts such notes, that devalues the currency held by a legitimate person. Even if we assume that a rational person would discount such bank-notes and treat them as worth less than currency, how can there be a legal claim against an irrational person who acts "foolishly" and accepts them on par. For instance, suppose a U.S. merchant were to tell customers that he will accept Russian Roubles as equivalent to US Dollars. Such a merchant could be accused of irrationality (therefore immorality). Still, holders of dollars would not have a legitimate claim against such a merchant.

What if other merchants followed? What if most merchants -- or almost all merchants did? Would that change things?

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A. West did say (as did I) that bank notes would be backed 100% by assets. In fact, the assets would be more than 100% of the banks notes plus other liabilities.

I don't see a problem with a bank issuing a certificate (or title) backed by Smith's 3-bedroom house or Jones's 1996 Corvette or Robinson's lumber yard -- provided that such certificates state exactly what they represent. We would call them house certificates or car certificates or lumber yard certificates. We would still have to stipulate that house-certificate holder Brown and house resident Smith could not both be exclusive owners of the same house at the same time. In other words, we cannot logically or morally increase titles to houses without increasing houses by a similar amount. Furthermore, we cannot say to Brown that he has a house certificate -- but in reality back his certificate with something other than a house, say, a soccer field. The problem with fractional gold reserve certificates is that they claim to be backed by gold, whereas in fact the gold that they supposedly represent a claim to, has already been claimed by someone else's certificate. This is fraud pure and simple. Furthermore, if a bank claims its certificates are backed by gold but are in fact backed by something else, this too is fraud. Can there be a car title which is actually a title to a boat?

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