North Texas Objectivist Society (NTOS) Message Board › The Virtue of Fractional Reserve Banking

The Virtue of Fractional Reserve Banking

Old T.
OldToad
Group Organizer
Dallas, TX
Post #: 1,080
Before entering this discussion (again), I am starting by defining my understanding of the term.

To my understanding, "fractional reserve banking" means this, and only this:

A banker accepts a depositor's money, in general on either an "on demand" basis or for a fixed-term basis.

An "on-demand" account means that the depositor has the right to withdraw any portion of the funds at any time. Examples of this type of account are checking or savings accounts. In contrast, a "fixed-term" account means that the depositor can only withdraw the funds after a term of months or years. An example of a "fixed-term" account is a certificate of deposit ("CD").

Even though each depositor to an "on-demand" account has the contractual right to withdraw all his funds at the same time, both the banker and depositors recognize that--barring extraordinary circumstances--this does not happen. With experience, the banker learns what fraction of deposits that the depositors, as a group, are likely to demand to withdraw at the same time. In other words, the banker learns what "fractional reserve" of the depositors’ money must be on hand to meet typical demands for withdrawals.

Except for this "fractional reserve," the banker and depositors agree that the banker can loan out the depositors' funds. The banker charges interest on the loans, to cover the risks and make a profit.

A portion of the profit on the loans from the depositors accounts is credited to the depositors and a portion to the banker. The portion credited to the depositors can be used for covering or defraying the banking services for the savings or checking account transactions. The allocations of these portions and other terms of the relationship between the depositors and the banker are matters of negotiation and market competition.

The banker's books would normally balance, assuming he generally makes good loans and the few loses are more than covered by the interest charges on the loans and any loan collateral recovered. At any given time, the deposits would equal the fractional reserve plus the loans. Both the banker and the depositors would normally profit.

Fractional reserve banking is not risk free, of course. Safety deposit box services would be safer, but more costly to maintain with no off-setting interest income.

My understanding is that this is how fractional reserve banking began. According to this definition, fractional reserve banking does not require the printing of any paper money. It could be done with only real gold or silver coins and a ledger.

The fraud of issuing money representing gold or silver that had never been deposited and did not exist was added later, which practice is legally institutionalized with “central banking.”

According to this definition, the character of Midas Mulligan in Atlas Shrugged was a "fractional reserve banker."

I think fractional reserve banking can be an honest, productive, and efficient banking system. In other words, fractional reserve banking, according to this definition, is moral.

Discuss!
Scott C.
Scott_Connery
Dallas, TX
Post #: 115
"In other words, the banker learns what "fractional reserve" of the depositors’ money must be on hand to meet typical demands for withdrawals."

This is just another way of selling he lends the same money out more than once at the same time.
Old T.
OldToad
Group Organizer
Dallas, TX
Post #: 1,089
"In other words, the banker learns what "fractional reserve" of the depositors’ money must be on hand to meet typical demands for withdrawals."

This is just another way of selling he lends the same money out more than once at the same time.


I've been trying to think of an analogy that might help.

It occurs to me that I also use "fractional reserve parking."

At my office building, the underground parking garage has about 600 parking spaces. (About 2,000 people can work in the building, so there's not enough for all. The underground parking is coveted--up to a market price.)

The parking garage rents me one unreserved parking space for about $100/month, which gives me the right to park in the garage anytime or all the time, 365 days a year, 24 hours a day, 7 days a week ("on demand parking").

But my understanding is that the parking garage rents about 1,000 unreserved parking spaces on exactly the same terms. (The rest of the people working in the building park elsewhere and walk over or take other transportation to downtown.)

In 15 years of using the building parking, I have never been unable to find a parking space -- though on a few occasions it has been almost totally full.

How can the building management do this? What is the fractional reserve of parking spaces in the building? What would my rights be if I were unable to find a parking place when I wanted it? Tough cookies? Or would I have a right to damages for having to rent parking somewhere else, even at a higher rate, inconvenience, etc.? What if this problem started happening often? All else being equal, what would be my parking space rental cost if it were 100% reserved parking? Is this parking system immoral? Could the building management rent 2,000 parking spaces on these same terms? Why not?

:-)


Powered by mvnForum

People in this
Meetup are also in:

Sign up

Meetup members, Log in

By clicking "Sign up" or "Sign up using Facebook", you confirm that you accept our Terms of Service & Privacy Policy