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> Where there are no false pretences there is no fraud It most certainly would constitute fraud if a bank were to issue gold certificates for more gold than it
by derriz 6y ago
> Where there are no false pretences there is no fraud
It most certainly would constitute fraud if a bank were to issue gold certificates for more gold than it had claim to - whether allocated or unallocated.
What happens during a bank run has no relevance here. A bank run isn't caused by a bank issuing more loans than it has borrowed itself. It's caused by the mismatch between the nature of a bank's liabilities and assets. Much of its liabilities have short terms or even worse - deposit accounts can be demanded from the bank at any time - while their assets which are generally loans which are generally fixed term or at least not recallable at will by the bank.
A bank with $1B worth of depositors money could in theory suffer a bank run even if it has only lent out $1m while holding the other $999m in it's vaults. No excess lending required is required for this to happen.
> If this were true then the only money in circulation would be that created by the Central Bank. Far from accurate.
No, that's certainly not implied by the simple statement of fact that the amount of money a bank loans out is strictly less than the amount of money that the bank has borrowed from others, whether from depositors or other institutions.
The sum of the balances of deposit accounts in the banking system easily exceeds the amount of money created by central bank but that does not require banks to "lend out more than they've raised" - it's a simply a result of simple arithmetic and the fact that loans exist in the system.
- alimw 6y agoSuppose you are a goldsmith and someone makes a deposit with you of two bars of gold, for which you give them two certificates. Now the regulator demands you keep 50% of your assets in gold. According to your way of thinking there is just one way to proceed: lend out one gold bar and stick the resulting IOU in its place on the asset side of your balance sheet. But suppose your would-be-debtor really wanted a larger amount, and in addition thinks she can pay her suppliers in your certificates as easily as in gold. Then you might hang on to the gold, write out two certificates for her and put the resulting IOU against them on the asset side of your balance sheet. Either way the regulator's demands have been met and you remain fully legal and solvent.
- zhte415 6y agoTo add in both sides of the balance sheet in this example: Balance sheet, ignoring Capital (Assets = Liabilities + Capital). In your example: Before IOU lending, the goldmith's balance sheet is: 2 Gold (asset); 2 Gold-equivalent Deposit Certificates (liabilities). 100% backed deposits. Lending 1 Gold: 1 Gold (asset), 1 Gold-loan (asset); 2 Gold-equivalent Deposit Certificates (liabilities). 50% backed deposits, as the regulator asks for. That sounds like a Liquidity Coverage Ratio though, not a capital requirement (as above, ignoring Capital for this). Lending 0 Gold, 2 Gold-like Notes: 2 Gold (asset), 2 Gold-like Notes (asset); 2 Gold-equivalent Deposit Certificates (liability), double-entry required for 2 Gold-like Commercial Paper/Note/Bond Certificates issued (liabilities). As 50% is the LCR, within regulator requirements. Issuing more than 2 Gold-like notes, outside the LCR. Just adding, to make it clear balance sheets always need to balance, I find this makes clarity much.. well, clearer.
- derriz 6y agoYes this is a very good way to think about it. I've had this argument many times - it's seems the web has endless sources erroneously "explaining" how retail banking works that has convinced people that there is shenanigans involved in retail banking. Generally they mix up M2 money supply with retail bank operations. It's very difficult to convince people that they are wrong in this regard as they become convinced they've been let into some huge Matrix-like secret of how the financial system operates and tend to savour such knowledge (wow - money doesn't really exist!!) even in defiance of reasonableness or logic.
- alimw 6y agoI find both zhte415's comments in support of my argument that your initial contention was wrong. It's very strange that you interpret them otherwise. To quote you: > What the author is describing is pure and simple fraud ... The goldsmiths were passing off paper certificates under false pretence that they correspond with real stored gold. ... At no point does fractional reserve banking involve "lending out more than what you have on deposit". Yet that is exactly what happens in the second hypothetical course of action I described. Are we now agreed that it is fine? I will concede that this hastily written statement of mine was ill-thought-through: "If this were true then the only money in circulation would be that created by the Central Bank." I cannot edit it now.