Fractional Reserve Banking versus Ayn Rand's Ethics

[Thomas M. Miovas Jr.]

This is what happens when one prints out more bank notes that one has commodities to back it up.

Paraguay is the second poorest country in South America, with an unemployment rate pushing 16 percent and more than 35 percent of its population living in poverty. The Paraguay guarani runs about 4,615 to $1.

[prosperity]

All bank balance sheets are inherently runable, regardless of whether time deposits are involved. This most recent crisis had nothing to do with time deposits, and yet the potential to create a panic still exists. You don't resolve that by going to 100% reserves. IN a class at OCON 06 (dont'remember which) I remember the discussion coming up and the general though of the instructor is that you let banks decide. Some will got o 100% and some might not, but the idea that 100% suddenly provides intrinsic safety is a poor one.

One can and should make the case that the level of fractional reserves shouldn't be arbitrarily set by fiat, but that is certainly not the same thing as calling them immoral, per se.

Paul doesn't seem to understand this. btw I tried to listen to the vid, but the incredibly distracting effect of delivering a lecture while driving a car was more than I was willing to stomach. Yes, Paul, you can give a lecture while driving, spinning plates, and rubbing your stomach in a circle....

This is an interesting point because before there was a Federal Reserve, banks operated in an almost free market...and still expanded their money supply. I believe the reason for having a precious metal as a backing and not as the physical money itself was a lot of convenience. The same reason checks used to be used, and now credit/debit cards.

But also...the reason for expansion of the money supply, if my memory serves me correctly, was to reduce the damage caused to a bank by a bank run.

The main difference was that back then they had gold backing their reserves. If too many depositors came to withdrawal too much...they could remain solvent by inflating their currency...now, this also devalued it and the market responded...so you still had to be careful not to seriously inflate your bank notes.

On a local/small scale the system would have appeared to have worked perfectly - or as perfectly as you could expect given human beings are not infallible. The problem was that, by law, no bank was allowed to branch across State lines (aside from the 1st and 2nd United States Banks).

This created a huge problem because it prevented banks from developing clearinghouses and exchanges across what would eventually become the U.S.A.. So...let's say that you live in NY and you do your banking locally (which means that you have locally issued currency). You either spend that money with someone or perhaps you decide to go wagons east...the farther you traveled from the source of issue...you found that your bank notes declined in value due to the fact that there was not an easy way to exchange them for other local currency (and your local bank is not allowed to operate outside of NY).

Another problem was that banks were forced, again by law, to hold Government bonds (State bonds), which were - for all intensive purposes - illiquid investments...no good if you and enough of your buddies want to cash in your banknotes.

...another problem was that banks were forced to hold reserves against their deposits...which you would think is good...but this actually worked against the free flow of money and in some respects added to the liquidity problem.

...I'm sure you can see the problems of the early so-called free banking system. It worked to the extent that Government didn't stick its nose into private banking. The reason for those initial regulations is easily understandable give the fact that banking and the practice of usury has never really been looked favorably upon (thank you religion for instilling that in the people).

A bank with potential liquidity problems is a bank in trouble...customers get nervous if they know that they may not be able to convert their banknotes to "cash", i.e. to gold or some other precious metal.

When more and more serious bank runs began to occur...the Government was called upon to "do something"...and well...here we are today...the details from then till now are just the piling on of more regulations.

It's interesting to note that Canada had a freer banking system than the U.S.. The only restriction was that Canadian banks were not allowed to issue bank notes in excess of their paid-in capital. Eventually this became a problem, but not until about 1908...then the Canadian Government decided that adding more laws would fix the problem...and the rest is history.

So...I mean, all in all...the 100% reserve system doesn't work in the way I think some people think it works. There was expansion of the money supply before the FED...but it actually helped ease bank runs by providing liquidity. BUT, the system worked because of supply and demand. The greater demand for a bank's banknotes, the more they could (and would) issue...up to a point. Obviously there is a plateau. You couldn't expand your money supply arbitrarily the way the FED does now.

I just don't think main issue is - as a lot of folks believe - whether or not there is something backing the currency...which is still necessary to have so that you have some kind of value represented...but it doesn't have to be gold. Just something of value that is homogeneous, divisible, a luxury, and rare. A bigger issue, I think, is that trying to suspend the law of supply and demand caused a major problem. You were suspending the right to property (and the right of those banks to create and use their property - i.e. their banknotes - as they saw fit).

[MissMal]

Ok, given that...your claim was that a bank printing more banknotes than gold reserves causes gold to lose purchasing power. What I said was that this position is entirely unjustifiable, that only banknotes would lose purchasing power, not gold itself. That's why we began to define money, because people were muddying the distinction between money and substitutes for money.

There is no reason to include banknotes in the supply of money, but not include mortgage notes, auto notes, Treasury notes, or corporate notes. We have to get away from seeing notes as money, which isn't easy given the fact that we have always been subject to fiat currency, which is counted as money because of legal declaration.

I think the problem here is that banknotes are not a substitute for money, in the way that realestate or other things of value can be, but a direct representative of money. Though a banknote is not physically 1 oz of gold, it is in essence. Fiat money is money because it is legally declared so, gold backed money is money because it represents real value. This is different than a deed which would be a direct representative of a specific piece of property, making it a subsititute for money and not included in the money supply.

So... if there is only 100 oz of gold in existence, and 200 1oz notes are issued, the market value of the notes is decreased yes. But also, the value of gold is inflated because if you choose not to use notes but actual gold, you must still use it in the market where there appears to be 200 oz of gold (even though there is not), and the value of your actual gold is decreased.

[John McVey]

I do have a question, however, are credit cards countable as money, since they are being used more and more as a means of exchange? I would say probably not, since the credit card represents actual money being transferred from the card holder to the merchant. Basically, credit cards and debit cards are just an easier way of facilitating exchange, but doesn't add more money in circulation.

No, credit cards aren't part of the money supply because a merchant who accepts payment on credit card cannot turn around and use the signed slips as means of payment to his suppliers or employees. Unlike ye olde goldsmith's receipts the slips are non-transferrable (*) claims upon the institutions that issue the cards and cannot circulate, so your initial suspicion is correct.

(* I'm ignoring certain types of financial transactions as complications that don't change anything relevant to this topic)

They might, and I stress might, lead to more demand for goods and services, since those goods and services can be paid for with a credit card instead of the customer having to wait until he had enough savings. ... would you handle such things as credit cards and debit cards under M1 as demand deposits -- i.e. similar to checks?

It wouldn't be dealt with by adding them into the supply of money but noting their effect instead on the demand for money. Their introduction and growth acts to lower the purchasing power of money because the ease of their use lowers the demand for money itself. The ability to make purchases with a credit card enables an individual to get through a personal pay cycle or business through a petty-cash reimbursement cycle with much lower initial and average floats of purchasing power in the form of actual cash. It is that desire for a float of a certain amount of purchasing power that is the demand for money - lower that demand with all else remaining equal and its value drops. The how is that as the use of cards grows people will act to spend away (for either consumption or investment) what they now deem excess purchasing power - leading to more demand for goods and services as you note, pushing up their prices - and will on average keep on getting the actual cash back because of others' spending, until eventually the purchasing power of cash has fallen (ie general prices rises) such that people are content to have the same amount of cash as a float as before which now embodys a lower amount of purchasing power. In the quantity of money equation it is V that increases, not M, because of credit cards.

JJM

Edited November 19, 2008 by John McVey

[John McVey]

Ok, given that...your claim was that a bank printing more banknotes than gold reserves causes gold to lose purchasing power. What I said was that this position is entirely unjustifiable, that only banknotes would lose purchasing power, not gold itself.

I think you're missing the distinction between gold in general and gold-as-money, which is why I will make a point of uing the term specie (as well as it not being gold-specific). Even in a proper economy there would be a difference in value between one 400-ounce standard bar and 400 one-ounce gold coins, even if both are fully certified by a trustworthy body. The reason is that the latter is money while the former is not. The latter are generally accepted by the public as media of exchange, that one individual can pay it to another because that other can take it for granted that a third will too, and so on ad infinitum. No such acceptance exists for bars, and it is unlikely that it ever would even for major B2B transactions. Thus the coins will have a premium in the marketplace that the bars will not, a premium attachable because of their acceptance as media of exchange.

The other uses for gold provide the bedrock for the value of the coins, and make it objective to use gold, but are not synonymous with the value of the coins. What the use of gold as money does is add one more potential use for the bar. The premium for coins over bar exists because the coins possess a separate additional value in their own right - their ready acceptability to others with little or no fuss. This helps pull up the value of gold in general because the mints are additional customers to the suppliers of raw gold. Mints make money by buying bars and minting them, with their buying action helping pull up the value of raw gold but never so that the margin between the bar and the coins is eliminated.

Along comes notes. It is a grave mistake to make the shortcut of going directly saying that notes have value because they're redeemable, of thinking they are merely substitutes for gold. That is wrong - notes have value because they are acceptable as means of payment, which then in turn has an objective basis because they are redeemable for a hard asset. It is the acceptability, not the redeemability, that is the immediate source of their value as media of exchange. Keeping this chain in mind then allows one to keep in mind the importance of information and its spread through a given economy, and thus how acceptability can change in a different pattern to how actual likelihood of redeemability changes.

Now, if more notes are issued than there is coin in reserve, certainly those notes will be hit with a discount against their face value because the likelihood of redemption falling, but, as I said before, unless everyone rejects the practice of fractional reserve banking the acceptability of those notes will not fall all the way required to match the fall in actual redeemability. For example, if there are initially 200 notes issued on 200 coins and then 50 more notes issued the market value of a note may not fall all the way to 80% of face value, but instead to say 85%. In that event, even though the banknotes have indeed been devalued as you note this 5% gap constitutes a net addition to the money supply. If this gap did not exist the fractional issuer would not gain anything by being fractional. The argument in favour of fractional reserve banking depends on that gap existing, new money actually created even after including discount effects, because that is what then funds the extra loans the advocates speak of being forwarded by the fractional issuer.

The money supply is the totality of units that are always accepted by the public as media of exchange - M1 in either way I specify it. An increase in it - whether because of new real gold or an increase in fractional notes - adds nothing to production for reasons I wont go into again, and so cannot do anything other than raise prices in general. Thus if the supply of units of media of exchange is increased even after applying discounts to the face values of some units, the value per unit must go down. The issue of extra fractional banknotes will devalue all notes from that issuer, but unless the discount is large enough the acceptablity-redeemability gap left behind makes for an addition to acceptable-units and will act to dilute the value of what else is acceptable-units - that is, gold coins.

The lowering of the value of gold coins then cuts into the profits of mint operations. They must then cut back on those operations, which includes cutting back on their purchases of gold from the refineries. That in turn then necessarily reduces the total market for gold, causing its value in general to fall, until the profitability of mint operations rises back to an acceptable level at the reduced level of coin output. This will then help mitigate the fall in value of the remaining gold coins in circulation, but it cannot fully do so for so long as fractional reserve banking is still taken seriously and the discount does not fully eliminate the acceptability-redeemability gap.

There is no reason to include banknotes in the supply of money, but not include mortgage notes, auto notes, Treasury notes, or corporate notes.

There are two good reasons why notes are in and debts are out. The first I mentioned when I said that I wasn't much concerned with the higher M's, in that an individual instrument can drop in and out of use as a medium of exchange whereas a banknote is always a medium of exchange. The second relates to the first: banknotes do not possess a maturity. They are presentable on demand for their full face value, with any discount attached to them being attached to compensate for the possibility that the issuer will be declared bankrupt and only pay out yay many cents on the dollar (if any). An interest-bearing instrument is not redeemable at its full face value until on or after maturity, prior to which time it has a separate market value that fluctuates both with the riskiness of the issuer and the general market for interest-bearing instruments of that maturity. A businessman does not make calculation in terms of debts as media of exchange for that reason, while he can and does in terms of banknotes because they can be direct substitutes for specie in the marketplace.

I had another block of text in that original post I made which I withheld, and now wish I hadn't. In that block I noted that debts were indeed nevertheless often used as media of exchange, with the higher the frequency of that use for a given class translating to that class's inclusion in a lower M number - but also that one could keep on going and going such that this could be taken to include any long-lasting item that could conceivably bartered and rebartered to complete strangers a few times over the course of their lives - a used car, for instance, can be offered directly to settle a debt. So, in terms of a literary discussion for understanding the influences of prices their use as media of exchange had to be taken into consideration, even though it is meaningless to try to make numerical measurements of them ("M63 = M62 + used cars of a given quality range"?). A definite cut-off line has to be drawn to delineate what is and is not ready money, and I accept Boyd's - the cut-off line is that only those items that are always media of exchange and tools of calculation are money, which in a free economy are specie and notes that are immediately redeemable for specie from their issuer.

We have to get away from seeing notes as money, which isn't easy given the fact that we have always been subject to fiat currency, which is counted as money because of legal declaration.

I think you have the cart before the horse here. Fiat currency got off the ground because banknotes were money and accepted as such. Over the course of many decades ever more regulations forced the notes of different issuers to become more and more similar in appearance, all the while still being accepted by the public, until eventually it was easy for the Fed to monopolise their issue without making the public endure a massive change in its habits all at once. Fiat money is still money, because it retains the essential feature: widespread acceptability as use as a medium of exchange, which is why it can last despite non-redeemability. The gun can only do so much. Were actual acceptability to fall there is nothing the government could to do stop the matching fall in the value of that currency as people's demand for it begins to fall.

JJM

[agrippa1]

JJM,

Excellent discussion, as usual. I think I've finally found the contradiction in my argument for FRB: that is that the value of other assets can be objectively made in terms of the primary backer of currency. I've been making the mistake of thinking that there can ever be a completely safe margin of value over loan. By keeping depositors accounts stable in terms of currency, while the underlying asset contracts in value, banks invite runs on currency in order to realize an artificial gain in depositors accounts above the value of the underlying assets.

FRB can work in principle, but only if it is explicitly understood that the value of a deposit is de-coupled from gold/currency once deposited, and explicitly linked (on the downside) to the new underlying backer. That means that depositors can expect to earn interest as long as the underlying asset's value is stable wrt to [gold], but that if the underlying asset's value falls, the new value of their deposit will be reduced. If this model were used, one or both of two things would need to happen: Either interest rates would have to rise to account for the additional downside risk, or bankers would have to objectively and explicitly establish the method of risk mitigation in order to keep demanded interest in line with demanded.

The depositors could then pool their requirement for immediate access to cash, with the understanding that the total amount of "cash" in their account at some given time might be less than what they deposited.

[LovesLife]

Wow. Lots of misunderstanding in this thread about what fractional reserve banking (FRB) really is. If it's not understood clearly, how can a moral judgment be made? Key points:

1. Banks don't actually loan money in the same sense as when one person makes a loan to another person. All loaned money is **newly created**. If I deposit $1000 cash with a bank, and they then loan you $900, there will be $1900 in circulation; my original cash will still be at the bank, and you will have $900 in credit money appear in your account. They don't take $900 of my cash and let you use it.

2. Bank-created money is fundamentally different from government-created money. The latter is called "reserves," while the former is "credit money." -- although one can be temporarily transformed into the other (by making a cash withdrawal from loan proceeds, for example).

3. Bank loans are not made from reserves (see point #1).

The reasons that FRB is immoral include:

1. The details of how the system works are not clear to depositors or borrowers (or often even to bank employees)

2. New loans cause inflation, which reduces the value of all outstanding money, by an unpredictable and unknowable amount

3. Holders of currency have not agreed that its value can be arbitrarily reduced according to government or banker's whims

4. Banks pretend to customers that their deposits can be withdrawn in-full at any time, which is not the case

5. Banks do not fully disclose their financial condition to customers, for fear of causing a run

6. The FDIC "insurance" is not funded at a level high enough to pay off a large-scale bank defaults; it's an illusion put in place for the purpose of instilling public confidence

7. Inflation as facilitated by FRB is responsible for the business cycle, as shown by Mises and others; so FRB is responsible for people losing jobs and property and for huge mis-allocations of resources

8. Bank profits are privatized, while losses are socialized -- such as with the Savings and Loan crisis and again with the recent bailouts

9. FRB facilitates interest rate manipulation, which is in turn subject to almost irresistible abuse and fraud

I would actually be OK with a truly private bank that used fractional reserve banking -- because it could never survive on its own! The presence of central banks is a direct requirement of FRB; having a "lender of last resort" is the only way they can survive for any length of time (though in the long run, I suspect they're all doomed).

I made a video that describes how money is created and destroyed. None of the morality stuff, though:

Edited November 22, 2008 by LovesLife

[John McVey]

FRB can work in principle, but only if it is explicitly understood that the value of a deposit is de-coupled from gold/currency once deposited, and explicitly linked (on the downside) to the new underlying backer.

Well, that depends on what you mean by "work".

It can "work" in the sense that the financial system can continue to function without incident indefinitely if the banks et al keep their ratios high and rarely changed. With today's advanced financial systems I imagine that there would not be much in the way of a boom-bust cycle caused by such a low level of practice because what would be a significant boom-bust in one little region would be smoothed out through reinsurance diversifying it throughout the whole economy. Only the active decision against it by a bank's customers, and those customers' own other trading partners in turn, will occasion that bank to put the reserve ratio back to 100%.

But it doesn't work in the sense of its practice conferring a net benefit that would be gained if only the practice were kept to a more modest level. Part of Paul's argument is that the practice takes value from and imposes risk upon third parties (the bank's customers' customers) against their will. That is correct, and Paul only errs in his moral assessment of it. What this consequence does suggest is that rational people will begin to revolt against this simply by discounting sufficiently to eliminate the benefit (zeroing the gap I mentioned) or rejecting payment in fractional notes entirely.

If this model were used, one or both of two things would need to happen: Either interest rates would have to rise to account for the additional downside risk, or bankers would have to objectively and explicitly establish the method of risk mitigation in order to keep demanded interest in line with demanded.

Yes. If fractional banking were to die out, the mechanism would be by the extra costs either in interest payable to depositors or in running the risk mitigation system (ie reinsurance etc) exceeding the interest earned on the extra loans made possible through reducing the reserve ratio. The only way to avoid the costs is to cease being fractional.

JJM

[adrock3215]

.....

John and others: I was wrong. You guys are right about gold losing value if a bank prints too many banknotes. I wasn't grasping the mechanism by which this would happen. On reflection of this point, I now understand that gold loses value because the paper money is substituted for gold, and therefore the demand for gold itself falls.

[dream_weaver]

*** Mod's note: Moved from another topic. - sN ***

It is the accepted system of banking. It has been since long before we left the gold standard. It is called "Fractional reserve banking".

Crime has co-existed in society long before fractional reserve banking - should it too be the accepted system of social interaction?

Edited December 16, 2009 by softwareNerd
Moved notice

[Greebo]

Crime has co-existed in society long before fractional reserve banking - should it too be the accepted system of social interaction?

I think you might want to check your definition of "crime".

I personally am not a huge fan of fractional reserve banking - but it *is* how banking works - and has been for quite some time. It's not a secret, it's well understood by the banking industry, and it isn't criminal.

Whether or not it should be is an arguable topic.

[dream_weaver]

I think you might want to check your definition of "crime".

I personally am not a huge fan of fractional reserve banking - but it *is* how banking works - and has been for quite some time. It's not a secret, it's well understood by the banking industry, and it isn't criminal.

Whether or not it should be is an arguable topic.

Thank you softwareNerd, my apologies for the necessity.

Greebo, seeing you have a vested interest in fractional reserve banking, the fact that something is done, accepted by most, and given go-ahead, does are not in themselves set the standard for an acceptable means of theivery.

Edited December 16, 2009 by dream_weaver

[Greebo]

Thank you softwareNerd, my apologies for the necessity.

Greebo, seeing you have a vested interest in fractional reserve banking, the fact that something is done, accepted by most, and given go-ahead, does are not in themselves set the standard for an acceptable means of theivery.

Perhaps you should read this thread carefully before continuing.

[brian0918]

Not true. In a gold based economy where there is no central currency, a run on a particular bank can destroy that bank, rendering all the notes for that bank worthless.

That would only occur if the bank was leveraged. So that is not a gold standard - ie, every single $1 note is not backed by a given amount of gold. It's backed by a different, unstated, or varying amount of gold. As long as that risk is made clear to the client, there is no cause for concern. Banks can freely disconnect themselves from the true gold standard with leveraging, but they must necessarily take on the risk involved with that. Only in a fiat currency can a bank do extreme leveraging and still be sheltered from the risk thanks to govt. bailouts.

Edited December 16, 2009 by brian0918

[dream_weaver]

Perhaps you should read this thread carefully before continuing.

Ok, so I am not tiptoeing thru the tulip patch.

[Andrew Grathwohl]

John and others: I was wrong. You guys are right about gold losing value if a bank prints too many banknotes. I wasn't grasping the mechanism by which this would happen. On reflection of this point, I now understand that gold loses value because the paper money is substituted for gold, and therefore the demand for gold itself falls.

But losing demand is not the same as losing value. Gold's value only changes when market forces cause there to be a change in gold's supply, inventory, or usage. It's not a question of demand to begin with; demand is infinite. Remember the age-old economic question: How can unlimited wants be satisfied with limited resources?

[softwareNerd]

..demand is infinite. Remember the age-old economic question: How can unlimited wants be satisfied with limited resources?

In economics, "demand" is not a single number. Rather, it is the various amounts of something that a person is both willing and able to pay for at various prices.

[Jake_Ellison]

Greebo, seeing you have a vested interest in fractional reserve banking, the fact that something is done, accepted by most, and given go-ahead, does are not in themselves set the standard for an acceptable means of theivery.

FRB is a well known method of loaning and lending money that does not necessarily involve the use of force or deception. Calling it theivery, especially at the tail end of a thread where that's been explained a million times, is just pointless babble.

[dream_weaver]

FRB is a well known method of loaning and lending money that does not necessarily involve the use of force or deception. Calling it theivery, especially at the tail end of a thread where that's been explained a million times, is just pointless babble.

This was merged in from another thread. So glad to see the complete unity and harmony in the explainations. Calling it money, just because it meets most of the criteria . . .

[Jake_Ellison]

This was merged in from another thread. So glad to see the complete unity and harmony in the explainations. Calling it money, just because it meets most of the criteria . . .

The thread was merged for you to read, if you wish to discuss the subject, just as I took the time to read the main arguments.

And the definition of money is irrelevant to the definition of theft. You're accusing theft, prove theft, don't tell me what you think I should and shouldn't consider money.

[dream_weaver]

The thread was merged for you to read, if you wish to discuss the subject, just as I took the time to read the main arguments.

And the definition of money is irrelevant to the definition of theft. You're accusing theft, prove theft, don't tell me what you think I should and shouldn't consider money.

My statement was made prior to reading the thread. I should probably just withdraw my comments.

The theft is via the value of the money.

The definition of a dollar at one time was: A silver coin of the United States containing 371.25 grains of silver and 41.25 grains of alloy, that is, having a total weight of 412.5 grains.

What is it now?

[Jake_Ellison]

My statement was made prior to reading the thread. I should probably just withdraw my comments.

The theft is via the value of the money.

That's the same argument the Guatemalan peasants make when they claim their soul was taken through a photograph, and procede to machete tourists to death. Assuming you understand what fractional reserve banking is, at what point in the process does one person steal your "value", and by what act of force, threat of force or breach of contract?

The definition of a dollar at one time was: A silver coin of the United States containing 371.25 grains of silver and 41.25 grains of alloy, that is, having a total weight of 412.5 grains.

What is it now?

I don't care. Fractional reserve banking is a specific activity, which involves specific individual steps or possible steps on the part of individual businessmen, and not a one of those steps consists of priniting paper, plastic or baboon fingernail dollars. Stay on the topic of FRB, don't change the subject to what material the Fed is using for US currency. FRB existed before the dollar and the US gov., and it will exist after it, the legitimacy of the practice, when done by private individuals, has nothing to do with the US government's monetary policies.

Edited December 17, 2009 by Jake_Ellison

[dream_weaver]

In which case, fractional reserve banking is precisely what is described. My apologies for trying to tie it to money. The nature of FRB is inflationary, and since it is declared as such, buying into it voluntarily or living in a societly upon which it is thrust upon us, we know what we are getting into. I have no arguement at this point.

[Maarten]

In which case, fractional reserve banking is precisely what is described. My apologies for trying to tie it to money. The nature of FRB is inflationary, and since it is declared as such, buying into it voluntarily or living in a societly upon which it is thrust upon us, we know what we are getting into. I have no arguement at this point.

Is it inflationary, though? The value of the dollar remained roughly constant between the founding of the US and 1913, yet I am fairly sure that FRB was already in use by that time. That doesn't fit with your claim. If it really was inflationary, then why didn't we have any inflation while we still had a private banking system that used FRB to a certain degree?

And banks can take out insurance policies or something like that as well to cover against a higher than expected number of people withdrawing at once. There is no need to fear that, either.

Edited December 17, 2009 by Maarten

[dream_weaver]

Is it inflationary, though? The value of the dollar remained roughly constant between the founding of the US and 1913, yet I am fairly sure that FRB was already in use by that time. That doesn't fit with your claim. If it really was inflationary, then why didn't we have any inflation while we still had a private banking system that used FRB to a certain degree?

And banks can take out insurance policies or something like that as well to cover against a higher than expected number of people withdrawing at once. There is no need to fear that, either.

An Austrian vs. Kantian lens may be coloring the interpretation. (Austrians identify it as inflationary.)

The value of the dollar was striken from this topic, but in short, the definition was lifted in 1913, and severed in 1965.

Edited December 17, 2009 by dream_weaver