Is fractional reserve banking a form of fraud?

[thephysicsman]

The current banking system allows the banks to lend out their money up to (approximately) ten times, while still allowing all deposits to be withdrawn upon demand. This is called http://en.wikipedia.org/wiki/Fractional-reserve_banking" (FRB). One consequence of FRB is that the money supply increases when people take up new loans. New money is printed out of thin air, since the banks only need to back up a fraction of the loans that they grant.

Since the banks are allowed to print new money (that is, in most cases digital money) from their reserves, they are eager to get new depositors, and they tempt them with high interest rates. The borrowers are also winners, because they pay a lower interest (since the bank has less to lose). Everyone seems to be winners. So where does the fraud come in? Who are the losers?

The losers are all the other guys - those who are forced to accept this new money as payment for their goods and services. Why? Because increased money supply means that the price of goods and services should rise. But that does not happen instantly. Those who accept the new FRB money as payment therefore sell their goods and services cheaply. In addition, the value of their savings are dilluted due to the new money that has entered the economy.

In my opinion this system rewards consumers and penalizes consumers. I think it is fraudulent that we are forced by law to accept FRB money like US dollars for any debt.

http://onarki.no/blogg/2011/01/how-does-fractional-reserve-banking-work/"

 

[WhoWee]

The current banking system allows the banks to lend out their money up to (approximately) ten times, while still allowing all deposits to be withdrawn upon demand. This is called http://en.wikipedia.org/wiki/Fractional-reserve_banking" (FRB). One consequence of FRB is that the money supply increases when people take up new loans. New money is printed out of thin air, since the banks only need to back up a fraction of the loans that they grant.

I'll assume you are aware that cash is held in a variety of different accounts. These accounts include individual savings, checking, and money market accounts. They also include CD's (certificate of deposit) held for specific time periods. On the business side, checking accounts (some with overnight lending attributes), as well as a wide variety of escrow accounts are quite common.

When funds are deposited with a promise of interest - it is understood the funds will be loaned to someone else - but guaranteed by the bank and the FDIC. If you don't want you funds to be loaned to someone else - deposit them in a safety deposit box for safe-keeping.

 

[WhoWee]

Since the banks are allowed to print new money (that is, in most cases digital money) from their reserves, they are eager to get new depositors, and they tempt them with high interest rates. The borrowers are also winners, because they pay a lower interest (since the bank has less to lose). Everyone seems to be winners. So where does the fraud come in? Who are the losers?/QUOTE]

Do you have any support for these statements?

 

[WhoWee]

Since the banks are allowed to print new money (that is, in most cases digital money) from their reserves, they are eager to get new depositors, and they tempt them with high interest rates. The borrowers are also winners, because they pay a lower interest (since the bank has less to lose). Everyone seems to be winners. So where does the fraud come in? Who are the losers?

The losers are all the other guys - those who are forced to accept this new money as payment for their goods and services. Why? Because increased money supply means that the price of goods and services should rise. But that does not happen instantly. Those who accept the new FRB money as payment therefore sell their goods and services cheaply. In addition, the value of their savings are dilluted due to the new money that has entered the economy.

In my opinion this system rewards consumers and penalizes consumers. I think it is fraudulent that we are forced by law to accept FRB money like US dollars for any debt.

Please support these statements - my bold.

 

[thephysicsman]

If you don't want you funds to be loaned to someone else - deposit them in a safety deposit box for safe-keeping.

I have no problem with the bank investing my money. My criticism is that others are forced to accept infllationary FRB money as payment for their goods and services.

 

[WhoWee]

What do you think?

I 'd like to hear your alternative ideas - rather than generalizations and crtitcism.

 

[WhoWee]

I have no problem with the bank investing my money. My criticism is that others are forced to accept infllationary FRB money as payment for their goods and services.

You still haven't supported your description of "infllationary FRB money". Most businesses in the US accept Dollars. Vendors in some of the larger international cities might accept foreign currencies as well.

BTW - do you have the same sympathy for vendors that need to accept credit cards?

 

[thephysicsman]

they tempt them with high interest rates

http://en.wikipedia.org/wiki/Supply_and_demand" . Since the banks can lend out the deposited money many times, they take less risks in doing so, and can offer higher interest rates to the depositors.

they pay a lower interest (since the bank has less to lose)

Supply and demand again. Since the bank has several borrowers per deposit X, it's not a crisis if a few of them default on their loan. Therefore the bank can offer lower interest rates or lower capital adequacy requirements.

forced to accept this new money as payment for their goods and services.

A person or a company must accept http://en.wikipedia.org/wiki/Legal_tender" .

 

[WhoWee]

they tempt them with high interest rates

http://en.wikipedia.org/wiki/Supply_and_demand" . Since the banks can lend out the deposited money many times, they take less risks in doing so, and can offer higher interest rates to the depositors.

they pay a lower interest (since the bank has less to lose)

Supply and demand again. Since the bank has several 10 borrowers per deposit X, it's not a crisis if some of the customers default on their loan. Therefore the bank can offer lower interest rates or lower capital adequacy requirements.

forced to accept this new money as payment for their goods and services.

A person or a company must accept http://en.wikipedia.org/wiki/Legal_tender" .

Your post seems to indicate it might be possible to borrow funds at a low rate and deposit them across the street at a higher rate?

 

[WhoWee]

forced to accept this new money as payment for their goods and services.

A person or a company must accept http://en.wikipedia.org/wiki/Legal_tender" .

The business can raise their prices - if necessary.

 

[thephysicsman]

I 'd like to hear your alternative ideas - rather than generalizations and crtitcism.

I think people should be free to use whatever banks they like and to pay with and accept any currency they like. Personally I would have chosen a currency that has a relatively stable supply. I don't want the value of my savings to be dilluted every time someone takes up a loan.

You still haven't supported your description of "infllationary FRB money".

When new money is created, the money supply expands. This eventually causes prices to increase unless the economy grows even faster.

BTW - do you have the same sympathy for vendors that need to accept credit cards?

There's no real difference. When you pay with credit cards, you pay with US dollars too.

 

[WhoWee]

There's no real difference. When you pay with credit cards, you pay with US dollars too.

The currency a credit card pays the vendor with depends upon the location. That aside, the vendor is charged a fee for the transaction - is it fair for the customer to use a credit card - knowing the vender has to pay a fee? Why shouldn't the consumer share the cost with the vendor?

 

[WhoWee]

When new money is created, the money supply expands. This eventually causes prices to increase unless the economy grows even faster.

Support?

 

[WhoWee]

I think people should be free to use whatever banks they like and to pay with and accept any currency they like. Personally I would have chosen a currency that has a relatively stable supply.

Are you prohibited from using the bank of your choice? Have you ever taken the initiative to trade in a different currency? Which currency meets your description of "relatively stable supply" - if not the US Dollar?

 

[thephysicsman]

Your post seems to indicate it might be possible to borrow funds at a low rate and deposit them across the street at a higher rate?

Yeah, in essence that's what's happening! In a fractional reserve system, the borrower's new cash is only backed by a fraction of its nominal value. In this system, money is therefore primarily debt. The borrower promises to produce values and pay back this debt once in the future. So when the producer of a goods or a service accepts this new money, only a fraction of the money's nominal value exists! What the producer is doing is actually to issue a loan to the borrower, accepting the borrower's promise to work and produce values to cover the rest once in the future. Nothing wrong with this in itself, but the problem is, he gets no interest on this loan! This makes him the loser.

 

[WhoWee]

Yeah, in essence that's what's happening! In a fractional reserve system, the borrower's new cash is only backed by a fraction of its nominal value. In this system, money is therefore primarily debt. The borrower promises to produce values and pay back this debt once in the future. So when the producer of a goods or a service accepts this new money, only a fraction of the money's nominal value exists! What the producer is doing is actually to issue a loan to the borrower, accepting the borrower's promise to work and produce values to cover the rest once in the future. Nothing wrong with this in itself, but the problem is, he gets no interest on this loan! This makes him the loser.

Can you please provide support - perhaps demonstrate the transactions you've described?

 

[thephysicsman]

The business can raise their prices - if necessary.

Can they? That will make the business less competitive in the market, right?

 

[WhoWee]

Can they? That will make the business less competitive in the market, right?

Under your scenario - everyone will need to raise prices - correct?

 

[thephysicsman]

the vendor is charged a fee for the transaction - is it fair for the customer to use a credit card - knowing the vender has to pay a fee? Why shouldn't the consumer share the cost with the vendor?

The vendor has paid for the installation of the transaction system, and the customer can insist that the vendor shares the transaction fee if he wants. What takes place between the vendor and the customer is a voluntary trade, and there's nothing unfair with that. What is unfair is that the government forces people to accept a certain medium of exchange.

Support?

Supply and demand again. Here's what I wrote:

When new money is created, the money supply expands. This eventually causes prices to increase unless the economy grows even faster.

When new money is poured into the economy and people start to spend it, cash will become more available, i. e. the supply of money increases. An increase in supply means lower price relative to other goods and services. Since the nominal value of the money is constant, the effect of this mechanism is that the price of other goods will gradually increase as new money is added to the economy (all other factors being equal).

 

[WhoWee]

The vendor has paid for the installation of the transaction system, and the customer can insist that the vendor shares the transaction fee if he wants. What takes place in between the vendor and the customer is a voluntary trade, and there's nothing unfair with that. What is unfair is that the government forces people to accept a certain medium of exchange.

The vendor needs a terminal - either purchases or leases. Some vendors pay a fixed fee on every transaction and/or a "discount" - perhaps 3% of the transaction. Some vendors require a minimum purchase, but typically need to agree not to pass charges on to consumers. Their option is to raise all prices and give a discount for cash purchases.

When you state the "customer can insist that the vendor shares the transaction fee if he wants" - please explain?

 

[WhoWee]

thephysicsman - please note - I've requested support for you statements 5 times thus far - and you have not offered a single link. Are you familiar with the rules?

 

[thephysicsman]

thephysicsman - please note - I've requested support for you statements 5 times thus far - and you have not offered a single link.

I think you have slightly misunderstood the concept of support. I have provided you with a perfectly logical explanation. What more can you ask for? Links are only valuable when you've acquired a minimum of understanding of the topic (e.g. the theory of supply and demand), and you are searching for specific data that are hard to find.

I could provide you with tons of links, but I prefer appealing to your reason and not to your laziness. I want you to understand, and not to accept claims on blind faith or base your views on the presumption of the authority. Economics is actually a science that can be understood using common sence. So instead of drowning you in links (which would make sense if we debated climate change or quantum physics), please be as specific as possible about which part of the argument you disagree on or don't follow, and I'll try as best as I can to help you understand.

 

[Borek]

I guess this is the most problematic statement:

New money is printed out of thin air

 

[WhoWee]

I think you have slightly misunderstood the concept of support. I have provided you with a perfectly logical explanation. What more can you ask for?

It's not an adequate criticism to say that a particular views isn't supported by links or isn't the way the way you were thought in school. The fact that a view is foreign to you (or to the authorities, for that matter) has no bearing on its truth.

I could provide you with tons of links, but I prefer appealing to your reason and not to your laziness. I want you to understand, and not to accept claims on blind faith or base your views on the presumption of the authority. Economics is actually a science that can be understood using common sence. So instead of drowning you in links (which would make sense if we debated climate change or quantum physics), please be as specific as possible about which part of the argument you disagree on or don't follow, and I'll try as best as I can to help you understand.

Well, I certainly do not want to impose my laziness on you. While under no no presumption of authority, I certainly do not wish to take a blind leap of faith either. Accordingly, I'll again ask you to support your posts as per the Forum rules we've both agreed to follow.

 

[Pengwuino]

I think you have slightly misunderstood the concept of support. I have provided you with a perfectly logical explanation. What more can you ask for? Links are only valuable when you've acquired a minimum of understanding of the topic (e.g. the theory of supply and demand), and you are searching for specific data that are hard to find.

Logic is meaningless if you're applying it to a concept that may or may not even exist. You have to actually give an example as to what the situation is in the first place before attempting to give any discussion on it. And please read the forum rules instead of constantly referring back to some 5th grade level economics terminology.

 

[thephysicsman]

I guess this is the most problematic statement:

Yes, that's a problematic statement for many. Unfortunately (but hardly incidental) the government's monetary policy isn't taught in our government schools. Ask ten people on the street what happens when you go to the bank to get a loan. Most of them will be clueless.

But ask yourself this: How come the nominal prices of commodities are so much higher today than they used to be, when the economy has grown (i.e., there are more goods available to be bought and sold)? Surely, new money must have come into existence somehow. And the answer is that brand new money is created every time a new loan agreement is signed!

For those who are interested in going into depth on the subject, I can provide you with a free http://mises.org/Books/mysteryofbanking.pdf" . You can read about FRB from page 94 on. Happy reading!

 

[thephysicsman]

The vendor needs a terminal - either purchases or leases. Some vendors pay a fixed fee on every transaction and/or a "discount" - perhaps 3% of the transaction. Some vendors require a minimum purchase, but typically need to agree not to pass charges on to consumers. Their option is to raise all prices and give a discount for cash purchases.

Now I could chew the rag and ask for "support", but this is a perfectly logical argument, so I'll drop it.

When you state the "customer can insist that the vendor shares the transaction fee if he wants" - please explain?

I meant the credit card transaction fee. The customer could say "If you don't share the credit card transaction fee, I won't buy your goods". That would be perfectly fine.

 

[BilPrestonEsq]

The math involved here is so painfully simple. When you double the money supply you cut it's value in half. This is lowering the demand for the dollar. This creates higher prices. The only way to pay back the debt is with more production or with the creation of more money. It is that simple. When you have a 10% reserve requirement(which we do) then the money supply is nearly doubled(90% instead of a 100% allowed to be loaned out).
Taking your money to another bank doesn't matter, all banks operate under these laws.

Originally Posted by thephysicsman
Yeah, in essence that's what's happening! In a fractional reserve system, the borrower's new cash is only backed by a fraction of its nominal value. In this system, money is therefore primarily debt. The borrower promises to produce values and pay back this debt once in the future. So when the producer of a goods or a service accepts this new money, only a fraction of the money's nominal value exists! What the producer is doing is actually to issue a loan to the borrower, accepting the borrower's promise to work and produce values to cover the rest once in the future. Nothing wrong with this in itself, but the problem is, he gets no interest on this loan! This makes him the loser.

WHOWEECan you please provide support - perhaps demonstrate the transactions you've described

http://en.wikipedia.org/wiki/reserve-requirement" Not sure about the part in bold? The loser is everyone holding a dollar. Which I explained above. Again this is really simple math.

Putting your money in a safe does not add to or take away from the problem in anyway whatsoever. Unless of course everyone put their money in a safe.

Originally Posted by thephysicsman
When new money is created, the money supply expands. This eventually causes prices to increase unless the economy grows even faster.

WHOWEE Support?

I posted the page on reserve requirements above that supports that statement. I am going to expain this again anyways.

To make this easier to understand I am going to use 4 people and 1 bank.

Each person has 100 dollars. They deposit that money into a checking account at the bank.
Because this is a checking account this money is always available on demand meaning that it is still part of the total money supply in circulation.
The reserve requirement is 10% meaning that 90% can be legally loaned out by the bank.
That amount is 360 dollars. That is the amount the bank can legally loan out.
If all that money is loaned out then there is now 760 dollars in circulation.
Because of this new supply of money the demand for the dollar drops raising the prices of goods available.
This means that the total income for businesses drop.
The loans still need to be payed off by these businesses with interest.
Say the loans are all 15 year loans with 7% interest
This would bring the total debt to 738 dollars
There is only 760 dollars in circulation
The ability to pay back this debt will need to come from more production or more money.
This is the most simplified way I can describe it.
Now if the reserve requirement were 100% there would be no money to loan out in this scenario as the money was deposited in checking accounts
If however the money was put in a CD that money would then be removed from the total money supply in circulation as it is not available on demand. Loaning money that was deposited in a CD would not increase the money supply.
This is the problem with fractional reserve banking it is fundamentally flawed.

 

[WhoWee]

Now I could chew the rag and ask for "support", but this is a perfectly logical argument, so I'll drop it.

I meant the credit card transaction fee. The customer could say "If you don't share the credit card transaction fee, I won't buy your goods". That would be perfectly fine.

I can support my description of standard merchant account practices.
http://www.bankofamerica.com/small_business/merchant_card_processing/
This link to Bank of America gives a brief overview.

If you'd like a little insight as to the competitive nature of the business watch this link (warning - it's a little "loud")
http://www.break.com/usercontent/2011/1/20/credit-card-processing-equipment-and-merchant-cash-advances-news-1988496

As for the transaction fees - the store owner pays the credit card processing company a trasaction fee - it the fee were to be "shared" with the retail customer it would increase the cost of the item sold and might be in violation of the merchant agreement.

 

[WhoWee]

I posted the page on reserve requirements above that supports that statement. I am going to expain this again anyways.

Isn't this your first post in this thread?

 

[Borek]

Isn't this your first post in this thread?

He posted earlier in his own post.

 

[thephysicsman]

Putting your money in a safe does not add to or take away from the problem in anyway whatsoever. Unless of course everyone put their money in a safe.

Exactly. If you try to store cash, its value will still diminish. What you can (and in my opinion should) do is to store a significant amount of your valuables in gold and silver. Remember, in an FRB system, everyone's money doesn't exist.

Because of this new supply of money the demand for the dollar drops along with the prices of goods available.

You mean the prices rise?

WhoWee: I'm sure your links can support all your claims, but it's a little OT

 

[BilPrestonEsq]

Exactly. If you try to store cash, its value will still diminish. What you can (and in my opinion should) do is to store a significant amount of your valuables in gold and silver. Remember, in an FRB system, everyone's money doesn't exist.



You mean the prices rise?

WhoWee: I'm sure your links can support all your claims, but it's a little OT

Yes, that's what I meant (geez..) The prices rise. Sorry about that, way to confuse my own post! Thanks for pointing that out!
That is what creates the lower income for businesses, because people are less likely to spend when prices go up
This also raises the costs to run the business

 

[WhoWee]

WhoWee: I'm sure your links can support all your claims, but it's a little OT

I am prepared to support any "claims" posted. Please note - I mostly asked questions.

 

[turbo]

Since the banks are allowed to print new money (that is, in most cases digital money) from their reserves, they are eager to get new depositors, and they tempt them with high interest rates. The borrowers are also winners, because they pay a lower interest (since the bank has less to lose). Everyone seems to be winners. So where does the fraud come in? Who are the losers?

Can you direct me to this fictional bank? My wife and I have several accounts with our credit union and with a large investment bank and none of them pay more than 1% on savings or money-market accounts.