Money: Fractional Reserve Banking Is Fraudulent

[mathias]

Depends upon what you call money. If you mean dollar bills and coins, that money is issued by the Fed. They have it printed/minted and buy either private debt or (mostly) government bonds. But that's only about 10-20% of what counts as money, the other 90% are created by fractional reserve banking (lending money until they have reached the limit of 10% required "reserves" (= Fed paper)). I've heard that this reserve ratio has been lowered, but I have no source for that claim. But whatever the ratio is, the principle remains the same.

First things first I would define the money in ciruculation to be the sum of all the money that people have in their pockets (etc.) and deposited at their banks (i think that there are about four (or something like that)acknowledged ways of talking about money supply, but i think this one does the trick).

And now for my comment.

Am I right in proclaiming the following (you said that the FED buys governmental bonds etc.): at any given time, if there is more money in circulation than at any prior time; this is a result only of people (institutions, etc.) borrowing these sums of money from the Central bank or are taking advantage of fractional reserve banking (which can make money anew in this way). Thus, if this debts are not remade ad infinituum, the amount of money in circulation should decrease over time to its intial amount. To restate it (just to make sure that i am making the smallest amount of sense): did everyone suddenly decide no longer to be indebted in any way (i am referring here only to money in circulation) - and this should include banks, governments and individuals alike; the amount of money in circulation would (probably drastically) decrease and settle at an original level.

[aequalsa]

Another issue that bothers me about fractional reserve banking is the status of the depositors. They are the primary funders of a bank, but, as I understand, the bank has no responsibility to repay them when in financial difficulties. If bankrupt, the bank pays their bondholders first, then their security holders second, and their depositors not at all. This happened during the great depression. All of my, and I am certain most peoples great grandparents lost most of their money this way during the "bank holiday" otherwise known as the day our banks stole the majority of the wealth of the American public. They close their doors, empty all of the accounts, reopen the next day and ask for more deposits and start foreclosing on all of the property that belongs partially to all of the people who no longer have cash and partially to the banks.

I guess this system would be more acceptable to me if they had a big sign on the door under their name which stated that they had no fiduciary responsiblity to let depositors withdraw the money that they deposit. Kinda like an economic surgeon general's warning.

I am not sure what a banks purpose is. It seems like everything they do could be done in a more moral way by an investment house where the money deposited would be called what they really are. Investments.

For My part, I keep only what money I need for operating expenses in banks. The rest invested. Why anyone would buy a cd for 1% return is beyond my ability to comprehend.

[mathias]

Another issue that bothers me about fractional reserve banking is the status of the depositors. They are the primary funders of a bank, but, as I understand, the bank has no responsibility to repay them when in financial difficulties. If bankrupt, the bank pays their bondholders first, then their security holders second, and their depositors not at all. This happened during the great depression. All of my, and I am certain most peoples great grandparents lost most of their money this way during the "bank holiday" otherwise known as the day our banks stole the majority of the wealth of the American public. They close their doors, empty all of the accounts, reopen the next day and ask for more deposits and start foreclosing on all of the property that belongs partially to all of the people who no longer have cash and partially to the banks.

For My part, I keep only what money I need for operating expenses in banks. The rest invested. Why anyone would buy a cd for 1% return is beyond my ability to comprehend.

I couldn't agree more. Basically it just seem to me that the banking (Central banks included and indeed taking the front-row seats) system, such as it is today, is corrupted and designed from the onset to make the richer richer and the poorer poorer. I know it sounds like a cliche but that is just the impression I am getting. And they must be doing an incredibly good job at that (not of the economy though, there I think they're seriously playing with fire)! I wouldn't care probably if I was like really rich, but even if I was this whole monetary fiasco, excuse the expression, would interest me from an academic perspective just as well...

[hunterrose]

If you and 100 million people start exchanging (emmitting) IOUs, there is inflation first (in the short run) as there is new "money", but no new products. The whole thing changes over time as they have to offer products and services to pay their debt.

IOUs might have been a bad example, given the debt thingy. A better example: if I live on a gold standard island that has a total amount of gold of 2 pounds amongst the inhabitants, and I find a literal ton of gold in the ground, it can cause massive (yet ethically acceptable) inflation.

Something isn't improper simply because it causes inflation, is all I was saying.

Uh oh, I started talking debitism again.

My point would be that customers don't ususally think at all...

Caveat emptor? People who don't think usually deserve what reality gives them

As far as I know there is today in circulation more dollars than say 10 years ago. How is this possible (does it all come from banks lending more money than they have)?

Good question. I'm sure Felix knows more about this than I do. I'm not exactly sure how the mechanisms work, but given the creation of non-bill/non-coin money, my question is to what extent can this non-bill/non-dollar money be exchanged by the government by creating new coins/dollars? Government being what it is, I suspect ...

[Felix]

Am I right in proclaiming the following (you said that the FED buys governmental bonds etc.): at any given time, if there is more money in circulation than at any prior time; this is a result only of people (institutions, etc.) borrowing these sums of money from the Central bank or are taking advantage of fractional reserve banking (which can make money anew in this way). Thus, if this debts are not remade ad infinituum, the amount of money in circulation should decrease over time to its intial amount. To restate it (just to make sure that i am making the smallest amount of sense): did everyone suddenly decide no longer to be indebted in any way (i am referring here only to money in circulation) - and this should include banks, governments and individuals alike; the amount of money in circulation would (probably drastically) decrease and settle at an original level.

You got that right. And given that there's only a certain amount of money banks can lend out depending on their reserves, the central bank controls the sum of money in circulation quite effectively.

The point I was making in my famous (or infamous ) debitism thread was that given that this money comes attached with someone having to pay the corresponding debt back plus interest, the sum of money would actually go down if you leave the system alone without new debt and the corresponding money entering the system.

I've also heard (again this is unverified, so don't nail me down on this one) that the Fed has been selling most of the initial gold it once owned and continues to do so. Hence the "original" money, that is: the money backed by goods and not debt goes down further, leaving even less money if the flow of new money should stop.

This trend could be turned back by the Fed selling the debt and buying goods like gold instead. At least in theory. But I don't see it happen.

Also note that this goods-backed money is 20% of the Fed's backing at best. That's 2% (20% Fed backing times 10% of money supply), well at least under 5% of the total amount of money in circulation.

That's maybe enough for the interest payments on the due debt for the rest of the money supply.

If this wasn't so sad, the absurdity would make me laugh.

[Felix]

Another issue that bothers me about fractional reserve banking is the status of the depositors. They are the primary funders of a bank, but, as I understand, the bank has no responsibility to repay them when in financial difficulties. If bankrupt, the bank pays their bondholders first, then their security holders second, and their depositors not at all. This happened during the great depression. All of my, and I am certain most peoples great grandparents lost most of their money this way during the "bank holiday" otherwise known as the day our banks stole the majority of the wealth of the American public. They close their doors, empty all of the accounts, reopen the next day and ask for more deposits and start foreclosing on all of the property that belongs partially to all of the people who no longer have cash and partially to the banks.

I'm not really sure this would happen again. The money we have today doesn't need to be backed by anything. It's "backed" by whatever the Fed buys with it. So in case the banks have a liquidity problem, they can go to the Fed and get money. In theory, this could prevent any crash as the Fed can appear as the lender of the last resort and pump out new money at will which they usually do by buying government bonds on the free market.

[aequalsa]

I'm not really sure this would happen again. The money we have today doesn't need to be backed by anything. It's "backed" by whatever the Fed buys with it. So in case the banks have a liquidity problem, they can go to the Fed and get money. In theory, this could prevent any crash as the Fed can appear as the lender of the last resort and pump out new money at will which they usually do by buying government bonds on the free market.

You are probably right. Otherwise we would have had a 'bank holiday' in 1987 when Clinton and the most of the rest of the people in office at the time, along with owners of the S & L banks stole the $600,000,000,000. So they print the 600 billion to back up the fraudulent FDIC claim and no one's the wiser. Just don't ask why bread costs $3/ loaf instead of a buck. So now the banks still have no responsibility toward depositors. Instead the government does.

[mathias]

I'm not really sure this would happen again. The money we have today doesn't need to be backed by anything. It's "backed" by whatever the Fed buys with it. So in case the banks have a liquidity problem, they can go to the Fed and get money. In theory, this could prevent any crash as the Fed can appear as the lender of the last resort and pump out new money at will which they usually do by buying government bonds on the free market.

I'd tend to agree with you on that one, but wouldn't a liquidity problem (even if saved by the FED) cause like a substantial inflation (which would undermine the assets of people) - given that the FED would probably have to issue a whole lot of additional money? And if so, would the FED want to cause such inflation, even if to save a liquidity problem?

By the way, thanks for the answer as far as the "money in circulation" goes. I'm just not sure wheteher to be plesased to have got it right or be puzzled still more as to what precisely the FED is trying to achieve.

[Felix]

I'd tend to agree with you on that one, but wouldn't a liquidity problem (even if saved by the FED) cause like a substantial inflation (which would undermine the assets of people) - given that the FED would probably have to issue a whole lot of additional money? And if so, would the FED want to cause such inflation, even if to save a liquidity problem?

By the way, thanks for the answer as far as the "money in circulation" goes. I'm just not sure wheteher to be plesased to have got it right or be puzzled still more as to what precisely the FED is trying to achieve.

An unsolved liquidity problem results in a crash. So I guess the Fed would jump in. Given what aequalsa has said, they've already done it once.

But I think our simple "Just keep the money level high enough and rising and the economy will be fine"-model is too simplified. I'd have to do some research on that, but I don't have time for that this month.

What the Fed's goals are is a good question as it operates practically without supervision.

[scott t]

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?

so are you saying that fractional reserve banking is what takes place now...with the federal reserve and commercial banking system??

[C.W.]

so are you saying that fractional reserve banking is what takes place now...with the federal reserve and commercial banking system??

There is a clear distinction between actions by the government and actions by private individuals. While there are similarities between what the Fed is doing and what a private bank could do, the cause and the consequences are different. I assume that you know what the Fed is doing, at least in general terms.

A private bank might offer part of its demand deposit accounts (checking account deposits) as loans. Effectrively, it would increace its demand deposits by loaning money. It would thus have only a fraction of its total demand deposits as deposits of gold. There is still a limit on the amount of funds that can be in the system, the total amount of gold. A bank loaning out part of its demand deposits would need to make clear to all what it was doing, to avoid acting fraudulantly.

That is the effective difference with the current system, in which there is no limit on the amount of made-up money that the Fed can create, which it has done for decades.