This really belongs in a separate thread.
I meant one concept for an action and another for its consequence. Such as “issuing fiat money” for the action and “inflation” for the consequence (= rise in P).
Using that terminology you’d be forever qualifying different types of price rises with no one word to work with than ‘inflation’ while also forever qualifying causes that are or are not inflationary. I’d rather stick with what I have, it’s much simpler, clearer (if I presented it all coherently), and powerful.
They can call it whatever they please between themselves if there are no third parties involved.
Strangers would have been a better choice of term than third-party. Strangers coming to a transaction and expecting certain things to hold based on what the wording of the contract is the whole point of what I am saying in regard to the word ‘deposit.’ When people are not strangers then (epistemological corruption aside) then yes they are technically capable of using words whatever way they please. However, being a bank-customer is on the stranger side, and I’d much rather have clear-cut objectively defined words in contracts and protected as such by the courts.
What do you mean by “unsecured” ?
It’s a proper term in finance and financial law. Colloquially, being an unsecured creditor means not having legally-recognised dibs on anything in particular if the business goes belly up. Unsecured creditors are down near the end of the line to get their money back, and are generally only ahead of the various shareholders. Secured creditors are people who do have dibs on specific things (eg an IT supplier might have dibs on the computers, which dibs back their accounts receivable from the IT user, and so on), so when those things get sold the secured creditors get paid first. The reference to law changes is the government’s taking a wrecking-ball to this contractually-arranged hierarchy.
Okay, let’s say the bank wants 5% per annum for storing a gold coin, and suppose it can earn 10% on its investments. This means that it needs to charge 50% seignorage. Who’s going to put his gold coins into a bank for such a price?
My lack of insufficient clarity has us talking at cross purposes…
Say a man has some coins in his pocket, and he walks into a bank. Money-wise, he has two main choices: either he can put those coins into an account, OR, he can instead convert the coins to the bank’s notes.
If he puts an ounce of gold into an account, that’s $20 credited to it. He will then pay various account-keeping and transaction fees for that. The bank doesn’t have to do anything more other than keep track of his details. It’s a nice little earner for them just for that alone, just the same way as for specific safety boxes for documents etc, and also as a wider principle as per a number of industries such as lock-up yards and parking garages. The bank does not have to invest a bit of it in order to make a profit, just the same as the parking garage does not need to hire out your car for the day to make money. Further, because the cost of storage is so low compared to the size of the coins, objecting to 5%pa fees is no mere quibble because that much is gigantic! A single coin worth $1000 in today’s money isn’t going to chalk up anywhere near $50 pa worth of allocated shelf-space and security expenses in a vault. Even adding in admin you’d be lucky if the total reached 0.50%pa for a basic savings account, not 5.00%pa. My transaction fees on share trades are only 0.2% or thereabouts, and that fully covers all admin and legal costs involved in making and keeping all the records of who owns what and who owes what to whom.
If instead he wants a $20 note for his coin, he hands the coin over and gets the note back. BUT, this transaction does not have an account associated with it, so in this case the transaction fee is the seignorage (which it would also be if he brought in raw gold to be minted into coins, which is what the term originally referred to). The person involved need not even enter any branch of that bank ever again. Once the exchange is done, their relationship may well be over and done with. Here, precisely because it is a one-off, the cost can be and has to be a much higher percentage of the coin’s value, say 2% or so. To get the $20 note he will have to hand over more than the ounce of gold, say the equivalent of an additional 10 grains of gold. Without fractional reserve banking, the bank puts the coin in the vault (again with very little actual expense for that part), but it gets to keep and invest the extra 10 grains (less admin costs) in whatever way it judges best for its shareholders. It also finds that the use of its note by the customer increases is profile in the market-place, which helps encourage more people to get their notes from that bank, and so even more revenues of 10 grains at a time. Lots and lots of 10 grains at a time adds up to a large amount pretty quickly.
Both of these services also use the front-counter system, which can also be used for a variety of other services. Costs can be kept down through economies of scale, through there being brochures etc available showing the bank’s other services, which are also earners for it (eg loans, sales of investments, financial advice, and so on). That in particular is where the advertising-value of the note comes in handy, and why it is not trivial.
you are way overestimating people’s aversion to keeping their coins at home, and way underestimating their aversion to the small risk that is associated with fractional-reserve accounts, especially if the former is going to cost them money while the latter is going to yield them money.
You are underestimating the size of the riskiness that would attend a bank pursuing fractional reserves far enough for it to be a potentially worthwhile earner. There would be no deposit insurance, central bank or other bailout mechanism for customers if the bank goes under. If a bank practices FRB then the customers with accounts or holding its notes become dependent on the solvency of the bank to keep themselves solvent in turn, which becomes a particularly nasty vicious circle if that bank has lent to those selfsame customers and so depends upon their solvency for its own. Any notable hint of problems and a run is on. The bank may well be technically solvent, but then the bank suddenly becomes unable to pay its debts when they fall due (this meaning pay up NOW, whenever now happens to be, in the case of retail “at call” accounts) when its reserves immediately on hand run out. The quick sales of assets at knock-down prices to get cash in a hurry to meet those demands then actually endangers that bank’s solvency, so more people join the run. The withdrawal of all that cash from those accounts reduces the total money supply because of the credit multiplier being forced into reverse. Less cash circulating then causes total revenues in the entire region to fall, and so contagion spreads because then the assets that ALL banks in the region have backing the accounts are now worth less. In the absence of a central bank, the whole thing spirals out of control because once the run gets started there is NOTHING to stop it until the money supply and hence revenues stabilise somehow - either through all accounts having been emptied and the money supply then just consisting exclusively of the coins or the notes of / cheques from trusted full-reserve banks, or through fractional banks assuaging their customers about their soundness through the shareholders injecting equity plus assets in the form of coins to satisfy the run and so halt the want of withdrawals (which injection then defeats the purpose of running with fractional reserves).
The only real protection that customers have against this is actual legal ownership of the cash in the vaults, which means full reserve plus deposit contracts operating under law of bailment. When FRB remains legally a possibility, it is also in each bank’s interest to keep every other bank honest and maintain high reserve ratios. They will accomplish this through regular redemption of notes and cheques to get real gold back from each other when transactions are settled at day’s end in the clearing house. If any bank over-extends its notes, ie it practices FRB, the others will pile on to convert the notes they receive back for gold in that clearing house (and in daily banking too if it gets bad). Hence a potent weapon maintaining high reserves, likely 100%, is customers engaging in adverse clearing against the non-100% bank. With all that in place, and not despite but BECAUSE there’s no government regulation, such a system is run-proof because the money supply is stable.
And if somebody does decide to store some of his capital in a very safe but completely unproductive form, he will typically want the costs of such storage to be proportional to the amount of time they are stored for. When a bank does safekeeping, it is in the interest of both the bank and the client to make the charges proportional to time.
The storage cost will be trivial compared to the total amount so stored. Again, there is no need for the bank to invest that amount anywhere for it to make a profit.
And, the merits of keeping cash on hand versus investing it somewhere is all taken up by analysis of the demand for money generally. Either a man keeps money on hand (ie in an ‘unproductive form’) for planned immediate expenditure (eg the fortnight’s shopping) and unforeseen immediate expenditure (impulse buys, minor emergencies, etc), or he saves and invests it over whatever time-frame and risk-reward profile suits him. The consideration of time is only in his comparative evaluation of the worth of keeping the money immediately available versus being it tied up in an investment. Whether or not the money at hand is coins, notes, or the content of his cheque account, is of no consequence in this decision, so FRB has no part in it.
There is some risk even if you “invest” your money into a safebox: there may be a big gold rush somewhere in Africa next year, or heavy economic downturn caused by a war, and your very safely kept gold coins might lose 10% of their value. There is no way of storing wealth that is totally risk-free. You weigh the expected returns and the potential downsides of each investment, and choose the one you like best.
That also applies irrespective of the FRB question entirely. If there’s a big gold find or downturn then all investments made will go down in value, irrespective of whether the investment is equity, bonds, bills, or the “investment” of cash in a safe or on hand. Again there is nothing here that lends weight to the merits of FRB.
There is nothing about the nature of a fractional-reserve checking account that should necessarily scare a majority of people away from investing a small portion of their wealth that way. Quite on the contrary, it offers them a convenience that I think would motivate them to hold such accounts in a free, gold-standard economy just like it motivates them to hold such accounts now.
I beg to differ, see above. People today tend to be complacent today because they think the government will bail them out. Attitudes will change quicksmart when they realise the government is not going to do that.
What do you mean by “add to the economy” ? The bank adds something to my wallet in doing so, while also making it possible for me to carry a wallet instead of a big bag of gold. That’s good enough for me!
Adding to the economy means creating net value and putting it up for trade. Inflation - by my definition, monetary expansion by increase in quantity of fiat media or fiduciary media - does not create net value, it merely shifts it around. Real value in this matter would have to be that the customer chooses to relinquish control of the money for the same time-period or greater of the investment in question. A demand-deposit is the exact denial of that reliquishment because the customer can withdraw anything and everything with no notice. If the account can be cleared without notice then if it’s FRB that’s a diminution of the money supply also without notice. That’s what makes the money supply unstable, and eliminates any possible value attached to the provision of credit on the basis of its origin in FRB.
You’re also confusing the issue of where notes come from generally with whether or not there are full reserves backing them. You can get the full benefit of notes without any FRB whatever - and I’d further argue (and history agrees) that the real value of a nominally $20 note from a full-reserve bank is greater than a nominally $20 note from a fractional-reserve bank. When people are free, Gresham’s Law works in reverse to see the good money drive out the bad.
Do you really think people like that would form a tiny minority in our hypothetical gold-standard economy? If the proportion of “suckers” is even only 10%, fractional banking would be a major force in that economy, and X would be quite significantly above 1.
Yes, and the economy would be on thin ice because of it, if the rest of the people did nothing to stop it. On the contrary, if other people accepted notes from a fractional-reserve bank they’d do so at a discount from face-value, which in itself would discourage custom with that bank and by default encourage custom with full-reserve banks. These people would then be much more anxious to redeem those notes at the issuing bank for real coins than they would the notes from a full-reserve bank, partly for the riskiness that gave rise to the discount in the first place but also because a profit might be in the offing. The draining of gold from a fractional-reserve bank like that - ie the adverse clearing - would prevent that bank from lending out to any significant time frame, thus hampering that bank’s ability to earn, in turn both defeating the purpose of FRB and also scaring away its customer base through lower profitability. That effect, and the threat of it, would instead see that X would not go far away from 1 at all.
JJM
