Full Reserve Banking

[C0ckney]

But to cover all the credit that is being given out, the government would have to pretty much issue billions of new dollars every month.

yes, perhaps; though clearly it would depend on the situation. but why would this be a problem? this money is being created anyway. the government would simply be doing what private banks do at present, but replacing personal loans, credit cards, overdrafts etc. with other forms of money creation.

Also, mr. x pays more for the TV, for being able to have it sooner. He can always wait for n amount of months until he has the money.

yes he could. however, i'm simply describing a common situation, how it could be done differently, and what the effects would be.

[C0ckney]

What you're saying is like saying the Treasury doesn't physically create dollar bills, the guy cutting the paper does. The guy cutting the paper is only doing what government has decided should be done. Banks are taking deposits and loaning out money, but within the bounds (and at rates) dictated to them by government policy.

no it isn't, and this poor analogy merely shows your lack of understand of what is being proposed. i suggest doing some research.

They only could do it because government regulations changed to allow them to reach those multiples, and government policies/laws promoted it. You're not getting the money supply any more into the public domain, because it's already there. (Though, as they should, they tend to listen to the market about where to set it.)

What you're doing is changing who is actually doing the nitty gritty details such as who gets what money when. Not who is deciding how much money is in circulation. Governments are notoriously bad at determining who should get what and when, and can already distribute massive amounts wherever they decide if they want to. A $trillion+ to replace Saddam with ISIS ... while the veterans we're maiming in the process can't even get decent healthcare. That's the kind of track record our government has at those nitty gritty details of who gets what when.

you keep asserting that governments are bad at this and that, and while it's true that governments can make poor decisions, it's also true that businesses, charities, and individuals can and do make poor decisions. so saying that it about as worthwhile in the context of this debate as saying that humans can and do make poor decisions.

leaving that to one side though, yes it is about deciding how much money is created, and who gets it. or, to put it another way, whose interests are served by the way money is created and distributed.

[Aeson]

no it isn't, and this poor analogy merely shows your lack of understand of what is being proposed. i suggest doing some research.

It's an apt analogy. The guy cutting the paper bills is doing his job as described to him by government. He's "creating" paper bills that he's been told he can. He's not deciding how much total paper bills there will be. The Treasury decides that.

The same thing with banks. They accept deposits and give out loans. While they can leverage to "create" money, they can only do so within the bounds set for them by government. Government is the one deciding how much money is out there, not banks.

Your own system of preference relies 100% on government's ability to make such decisions.

you keep asserting that governments are bad at this and that, and while it's true that governments can make poor decisions, it's also true that businesses, charities, and individuals can and do make poor decisions.

If my bank makes a poor decision, I can go to another bank. All the banks are competing with each other for my (and other's) business. If a bank fails due to bad decisions, it generally doesn't take the entire economy down with it. I have accounts at several different financial institutions. As a bonus, those accounts are for the most part guaranteed by government backing in case of a bank failure. I can go to a store or ATM and get money. If I don't have money right now, I can get credit as long as a bank thinks I'm good for it. This is a god-send in emergencies, and helpful in day to day life in many cases.

I have only one government , and getting another would be far more difficult than changing banks. The government I have doesn't have any real competitor. This is how they can get away with atrocious decisions like spending $trillion+ to replace Saddam with ISIS, or make everyone wait for hours to get some paperwork done that could be filled out online in seconds. If they **** up, there's no alternative to switch to without a huge upheaval in 300+ million lives.

I am not saying government is worse than business at everything. Some things government is better at. I wouldn't want banks setting interest rates without any oversight. I wouldn't want to have to go to government to get credit to buy some groceries. I certainly wouldn't want to have to go hungry because some government employee screwed up the paperwork again.

or, to put it another way, whose interests are served by the way money is created and distributed.

The people running the show will be much the same. Look at the Fed and Treasury. They're populated by people from and/or headed back to the financial sector. They answer to politicians who mainly care about who's giving them the most money to get re-elected. Change to full reserve banking and that's not going to change. Give them political license to pass out $trillions and it's a pretty safe bet they're going to try to get as much of it as they can to their buddies and backers.

[Fake Boris]

Well almost (N3st0r) and quite (Elok), which is why I don't understand what OB is on about when he says we are being cheated.

Most depositors are depositing the money created by the multiplication effect. Only physical cash handed over will contribute to the money multiplier. So, given that ability to money multiply isn't really provided by a depositor, but by the cash reserves held by the bank, it becomes even more obscure.

Think of "being cheated of your money" as a broad term to say the privilege of monetary creation should be public. There's no benefit for virtually anyone to have it private.

[Fake Boris]

Agree.
This is not necessarily the result of fractional reserve banking. The fact that most money goes into land and buildings reflects the preferences of the people to consume land and buildings. There is no reason for this to change because of a change in the banking system.

Asset inflation is one consequence of fractional reserve banking. It takes the following pattern:

- All money is created as credit
- But the interests are not created with the loan
- Thus, I need to find new money to pay for the interests on my loan
- That money will necessarily have been created as credit
Thus:
- loans are only ever repaid with loans (either yours, or someone else's)
- this is the source of asset inflation through credit bubbles

[Fake Boris]

Anyone who says full reserve banking is not deflationary doesn't know what they are talking about.
Right now, if you deposit $1 then based on that $1 deposit the bank can lend out $20 (most will do less leverage but let's go with this example to illistrate the deflationary problem). That is $20 worth of credit and financing made. Under full reserve banking with a $1 deposit the bank could loan a MAX of $1 but since the bank has to pay it's expenses, have cash on hand to give people who make withdrawals, etc... Really the bank can only lend some fraction of that $1. Probably less than 50% but certainly more than 10%; to make the numbers easy let's go with 50%. That means for every $1 in deposits the bank can only loan $0.50.

Do you see the big difference between $20 in loans and credit granted and $0.50 in loans and credit granted? In this example you only get 1/40th as much credit in the economy so forget about having a credit card, forget about financing a new car, forget about getting a mortgage to buy a home, even businesses would find it difficult to finance their operations because there would be a massive credit crunch preventing anyone but the most wealthy with perfect credit from getting access to credit and even they would have to pay much higher interest rates.

In short, it would destroy the financial system and virtually eliminate access to credit for the vast majority of the population. This without question would crash the economy thus decreasing demand and causing prices to go down as suppliers desperately tried to compete for the few people who still have either cash on hand or access to credit. That is deflation by definition.

This has been addresses already - by the OP, and by Cockney on page 4.

Short answer is that the money supply is increased mainly by funding public spending. This money will find its way to markets.

[Dauphin]

What about margin investments? e.g., your broker only requires you to have a margin account, rather than the full cash value. Will this still exist in the new world order?

[Fake Boris]

What about margin investments? e.g., your broker only requires you to have a margin account, rather than the full cash value. Will this still exist in the new world order?

I guess this is OK, as long as the margin is backed by a legit loan or bond.

[Aeson]

Asset inflation is one consequence of fractional reserve banking. It takes the following pattern:

- All money is created as credit
- But the interests are not created with the loan
- Thus, I need to find new money to pay for the interests on my loan
- That money will necessarily have been created as credit
Thus:
- loans are only ever repaid with loans (either yours, or someone else's)
- this is the source of asset inflation through credit bubbles

Once created, money can be used in more than one transaction.

[Fake Boris]

Once created, money can be used in more than one transaction.

I'm not sure what you're trying to say, but there's a hard cap on transactions. It occurs when a dollar is being transferred to the bank, either as an interest or principal repayment. Both effectively take money out of the money supply. A new loan has to be issued to compensante or risk deflation.

[C0ckney]

It's an apt analogy.

no it isn't. the person in your scenario is specifically ordered to cut a certain amount of a paper by the mint. on the other hand the central bank, to use the obvious example, will raise or lower interest rates, thus altering the conditions under which the banks create money through credit.

i am somewhat puzzled by your second section, which seems to conflate several different ideas and tries to fashion an argument out of them. the idea that your ability as a consumer to choose between different banks has anything to do with the issues around fractional reserve banking is especially bizarre.

The people running the show will be much the same. Look at the Fed and Treasury. They're populated by people from and/or headed back to the financial sector. They answer to politicians who mainly care about who's giving them the most money to get re-elected. Change to full reserve banking and that's not going to change. Give them political license to pass out $trillions and it's a pretty safe bet they're going to try to get as much of it as they can to their buddies and backers.

this whole debate (like most if not all economics debates) is really about interests and power, so let's examine it from that point of view.

in the current set-up let's imagine a banker at a private bank who deals in credit. his interest, i.e. the reason he is employed, is too create as much profitable credit for the bank as he can. he most likely also has a personal financial interest (bonuses etc.) in his issuance of such credit. when he acts, he will therefore act in the bank's and his own interest. of course there are rules and regulations meant to protect the public interest, but to our banker these are secondary or ancillary considerations; and often not even that.

a central banker's job on the other hand is to target inflation and economic growth at level set by the government. his personal interests, both of repute and perhaps financial are served by meeting these targets.

so even though they may come from the same background, our two subjects will act in different ways because both the interests of the organisations they work for and their own dictate that they will do so. now of course you might argue that the public interest can be subverted, and that is true as far as it goes. however it's better to have the public interest as the starting point and centre of the interests of those creating money, rather than an ancillary and often ignored one.

[Dauphin]

I guess this is OK, as long as the margin is backed by a legit loan or bond.

Then you will still have asset inflation through money created as credit. Margin accounts act as a form of fractional reserve.

[Fake Boris]

Then you will still have asset inflation through money created as credit. Margin accounts act as a form of fractional reserve.

I'm not sure it would in a full reserve system, since:

- the money that backs the margin account is not credit money;
- no credit money can be created to buy back the assets held by the margin buyer

By "credit money" I mean money created as debt by private interests in a fractional reserve system

[Dauphin]

I'm not sure it would in a full reserve system, since:

- the money that backs the margin account is not credit money;
- no credit money can be created to buy back the assets held by the margin buyer

By "credit money" I mean money created as debt by private interests in a fractional reserve system

If you need a 10% margin, the other 90% is just part of an IOU trading agreement between brokerage houses, also known as clearing. No real money required, except at the end to settle any net positions.

[Aeson]

no it isn't. the person in your scenario is specifically ordered to cut a certain amount of a paper by the mint. on the other hand the central bank, to use the obvious example, will raise or lower interest rates, thus altering the conditions under which the banks create money through credit.

Government determines the amount of money out there. You call this "altering the conditions", but the reality is it alters what is in the bank's best interests, and will guide their actions. It's a guide like a luge track, not a map or directions.

This is before considering hard limitations that can be (and have been in some cases) set by law.

In fact, your whole proposal is reliant on government's ability to tell the banks exactly how much money they can create. You want them not creating money at all. How are you going to get there if government can't dictate that to banks? Since we both know that government can dictate that to banks, all money creation via banks has to be considered as "at the will of government". It's by government's leave, it's guided by government's policies. Government is the one setting the money supply. (Government's guide is the market in general, if they want to do it right. Governments have been known to do stupid things of course.)

Banks are simply doing the leg work. Which is good, because they're more efficient at it than government. And it's good government is setting the money supply as addressed below.

i am somewhat puzzled by your second section, which seems to conflate several different ideas and tries to fashion an argument out of them. the idea that your ability as a consumer to choose between different banks has anything to do with the issues around fractional reserve banking is especially bizarre.

Your claim was that government screwing up was perfectly analogous to a business screwing up, and thus the argument about government not being suited to the task was a non-factor. The reality is that government screwing up has far more potential for harm than any given business screwing up.

this whole debate (like most if not all economics debates) is really about interests and power, so let's examine it from that point of view.

in the current set-up let's imagine a banker at a private bank who deals in credit. his interest, i.e. the reason he is employed, is too create as much profitable credit for the bank as he can. he most likely also has a personal financial interest (bonuses etc.) in his issuance of such credit. when he acts, he will therefore act in the bank's and his own interest. of course there are rules and regulations meant to protect the public interest, but to our banker these are secondary or ancillary considerations; and often not even that.

a central banker's job on the other hand is to target inflation and economic growth at level set by the government. his personal interests, both of repute and perhaps financial are served by meeting these targets.

so even though they may come from the same background, our two subjects will act in different ways because both the interests of the organisations they work for and their own dictate that they will do so. now of course you might argue that the public interest can be subverted, and that is true as far as it goes. however it's better to have the public interest as the starting point and centre of the interests of those creating money, rather than an ancillary and often ignored one.

It's not just about the interests of those determining the amount of money. It's about the efficiency of the system and how it provides for the interests of everyone.

There are good and bad bankers both in the public and private sector. People who would build, people who would just profit. You are right that government is slightly more reliable to care about the interests of the common person than a banker. What you aren't accounting for though is that government is far worse at being efficient than a private business. No private business if run like the US government could be considered solvent. Not even close. They can't just collect taxes to pay for their "losses". They have to be more efficient than government, or they wouldn't still be in business.

My interests are that I can rely on taking on debt if I really need to, but not being made a welfare case from the get-go. I want alternatives if something fails me, and a backstop if I fail, and to make it on my own if I can. I don't want to be reliant on government deciding to send me $X this month, especially because there's no way they can know for sure how much I'll need. I may not need anything one month, the next I may have to pay for a car wreck. No one can know this, so relying on pre-set payments with not other options isn't going to cut it. It will lead to waste most of the time, and shortfalls when it's really needed.

Dealing with banks isn't always fun, but at least if they don't live up to expectations they can be dumped for another. Dealing with government is invariably a hassle, with long waits and pointless exercises even to accomplish simple tasks. Your system, there's money from the government, and if it's not the right amount in the right time-frame you're ****ed because there's no alternatives. I'm thinking that's a poor horse to bet on, and am very glad there doesn't seem to be much chance we'll be implementing it anytime soon.