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I don't think fractional reserve banking really counts as a scheme or a conspiracy. It's not secret at all, completely legal and has been widely studied by econ

by ecdavis 11y ago

I don't think fractional reserve banking really counts as a scheme or a conspiracy. It's not secret at all, completely legal and has been widely studied by economists. I think "banks create money out of nothingness" is also a mischaracterization. It's more like currency minted by the private sector. That being said, I think there is something about it that fundamentally offends human sensibilities.

logfromblammo 11y ago
The only thing not quintessentially conspiratorial about it is that everybody knows about it and believes that it is actually happening. It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. If you issue hemp futures, you had damned well better be a hemp farmer and insure your crop, and if you issue hemp scrip, you'd better have some actual reserves of hemp in your warehouse. All that is backed by something, even if it is little more than a believable promise. The promise that backs fractional reserve is that you can have your cake and eat it, too. If you make a deposit, you can withdraw 100% of it at any time, even though they will immediately lend 90% of it to someone else. That someone else will then bid against you for the same goods and services, using exactly the same money you are bidding with. Lets say you deposit $100. You want a doodad from Jack Handy. Joe Blow also wants that doodad, and he has $0. But the bank manager is his brother-in-law, so he can qualify for a loan of any size. Ordinarily, you could get the doodad for $50. But Mr. Blow starts a bidding war with you, using your own money, and the final price is $60. If you win, you write a check for $60, and Jack Handy deposits $60. The bank has the same amount in reserves, and can issue the same amount in loans. If Joe wins, the bank lends him $60 of your money, writes a check for $60, and Jack Handy deposits it. The bank still has the same money in reserves, but has promised to pay the same $60 to both you and Jack. Thanks to the trick, you effectively lost $37.50 (100x60/160) for the doodad you didn't get, Jack effectively lost $12.50 ($50-37.50)--surprise! $60 of lender-inflated bank credit is worth less than the $50 in cash--and Joe is now paying the bank rent on the doodad. | before deposit || after deposit || after Joe buys | | Cash | Credit | Debt || Cash | Credit | Debt || Cash | Credit | Debt | ----+------+--------+------||------+--------+------||------+--------+------| You | $100 | $0 | $0 || $0 | $100 | $0 || $0 | $100 | $0 | Jack| $0 | $0 | $0 || $0 | $0 | $0 || $0 | $60 | $0 | Joe | $0 | $0 | $0 || $0 | $0 | $0 || $0 | $0 | $60 | Bank| $0 | $0 | $0 || $100 | $90 | $100 || $100 | $30 | $160 | The are not creating money out of nothing. They are creating credit out of their own debts, and screwing everyone else over hard in the process. They are literally the only winner in the above scenario.
- dragonwriter 11y ago
  > It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. Well, except in the real world where, before banking regulators stepped in and stopped it, one of the common forms of privately-issued currency was by private banks issuing loans (including in the form of privately-printed banknotes) without regulated reserve requirements.
  - logfromblammo 11y ago
    The parent post was comparing fractional reserve banking to privately issued money, and I interpreted that to be excluding bank-issued currency. That would still include stuff like payroll scrip redeemable only at the company store.

by ecdavis 11y ago

logfromblammo 11y ago

The only thing not quintessentially conspiratorial about it is that everybody knows about it and believes that it is actually happening. It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. If you issue hemp futures, you had damned well better be a hemp farmer and insure your crop, and if you issue hemp scrip, you'd better have some actual reserves of hemp in your warehouse. All that is backed by something, even if it is little more than a believable promise. The promise that backs fractional reserve is that you can have your cake and eat it, too. If you make a deposit, you can withdraw 100% of it at any time, even though they will immediately lend 90% of it to someone else. That someone else will then bid against you for the same goods and services, using exactly the same money you are bidding with. Lets say you deposit $100. You want a doodad from Jack Handy. Joe Blow also wants that doodad, and he has $0. But the bank manager is his brother-in-law, so he can qualify for a loan of any size. Ordinarily, you could get the doodad for $50. But Mr. Blow starts a bidding war with you, using your own money, and the final price is $60. If you win, you write a check for $60, and Jack Handy deposits $60. The bank has the same amount in reserves, and can issue the same amount in loans. If Joe wins, the bank lends him $60 of your money, writes a check for $60, and Jack Handy deposits it. The bank still has the same money in reserves, but has promised to pay the same $60 to both you and Jack. Thanks to the trick, you effectively lost $37.50 (100x60/160) for the doodad you didn't get, Jack effectively lost $12.50 ($50-37.50)--surprise! $60 of lender-inflated bank credit is worth less than the $50 in cash--and Joe is now paying the bank rent on the doodad. | before deposit || after deposit || after Joe buys | | Cash | Credit | Debt || Cash | Credit | Debt || Cash | Credit | Debt | ----+------+--------+------||------+--------+------||------+--------+------| You | $100 | $0 | $0 || $0 | $100 | $0 || $0 | $100 | $0 | Jack| $0 | $0 | $0 || $0 | $0 | $0 || $0 | $60 | $0 | Joe | $0 | $0 | $0 || $0 | $0 | $0 || $0 | $0 | $60 | Bank| $0 | $0 | $0 || $100 | $90 | $100 || $100 | $30 | $160 | The are not creating money out of nothing. They are creating credit out of their own debts, and screwing everyone else over hard in the process. They are literally the only winner in the above scenario.

dragonwriter 11y ago
> It is not like currency minted by the private sector. That would be more akin to futures contracts settled by physical delivery or prepaid service contracts. The private sector has to back up its currency with actual goods or services. Well, except in the real world where, before banking regulators stepped in and stopped it, one of the common forms of privately-issued currency was by private banks issuing loans (including in the form of privately-printed banknotes) without regulated reserve requirements.
- logfromblammo 11y ago
  The parent post was comparing fractional reserve banking to privately issued money, and I interpreted that to be excluding bank-issued currency. That would still include stuff like payroll scrip redeemable only at the company store.