2 ms·

> "If this is you, you've made an error, and have fallen into the trap of thinking that banks 'lend out the water that I've put inside them'. This also means yo

> "If this is you, you've made an error, and have fallen into the trap of thinking that banks 'lend out the water that I've put inside them'. This also means you've failed to make a distinction between the two forms of money in our society: state money ('water'), and bank money ('promise for water'). And both of these misunderstandings are facilitated by the linguistic glitch we are trying to deprogram." I don't think this clarifies much. Talking about categories like "state money" and "bank money" doesn't make the problem clear. I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. If deposits were timed (like CDs) and the banks could only loan out the money for the time it was tied up, there would be no problem. In fact, there would be no need for a reserve ratio, just loss provisions. A "piece" of money could be loaned out an infinite number of times, in fact. Every bank would just need to show a loanable amount curve over time as well as a loaned amount over time, and you could easily see if a bank was in trouble or not well in advance. Demand deposits could not be loaned, of course. Basically, force banks to borrow long and lend short. This is what I'd like to see tried.

benlivengood 6y ago
> I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. Banks get overnight loans to cover the case where creditors want more money than they currently have access to. There is no single piece of money anywhere anymore. When you deposit a $100 federal reserve note in the bank you are only giving that bank a means to pay taxes or pay back loans from Federal Reserve Banks. If you take a $100 note to a federal reserve bank they will look at you funny. The reason this works is that U.S. currency is so stable that any potential commodity you might desire as currency can be paid for with USD money from virtually any bank in the world. Banks are just an accounting system at this point who barely hold any physical thing of value, and only on a just-in-time delivery model. The rest of the economy satisfies the market for transactions between money and goods. Why doesn't it all fall apart? The federal reserve raises interest rates when there is too much money in circulation, urging banks to pay off their liabilities, thus destroying money.
notahacker 6y ago
Central banks already ensure that if multiple people the money is promised to want to make withdrawals at the same time, they can all have the cash. But if a mortgage requires people to lock away funds for quarter of a century (because the bank can only loan out the funds if someone has the money tied up for that long) then whoever's lending is [i] diverting the funds away from more productive activity [ii] going to expect a very high interest rate because they don't see their money for such a long time and [iii] likely to be richer on average than the current beneficiaries of banking activity. Reducing transfer from productive to unproductive activity and the scale of transfers from poor to rich are desirable: maturity transformation is therefore a feature of the system, not a bug [n.b. if you force banks to borrow long and lend short you've eliminated the fractional reserve mechanism anyway]

benlivengood 6y ago

> I have come to the conclusion that the problem with fractionally reserved money isn't the fractional reservation mechanism at all. Rather, the problem is that banks effectively promise the same money to multiple people at the same time. There is one "piece" of money, but multiple people have claims on it. Banks get overnight loans to cover the case where creditors want more money than they currently have access to. There is no single piece of money anywhere anymore. When you deposit a $100 federal reserve note in the bank you are only giving that bank a means to pay taxes or pay back loans from Federal Reserve Banks. If you take a $100 note to a federal reserve bank they will look at you funny. The reason this works is that U.S. currency is so stable that any potential commodity you might desire as currency can be paid for with USD money from virtually any bank in the world. Banks are just an accounting system at this point who barely hold any physical thing of value, and only on a just-in-time delivery model. The rest of the economy satisfies the market for transactions between money and goods. Why doesn't it all fall apart? The federal reserve raises interest rates when there is too much money in circulation, urging banks to pay off their liabilities, thus destroying money.

notahacker 6y ago

Central banks already ensure that if multiple people the money is promised to want to make withdrawals at the same time, they can all have the cash. But if a mortgage requires people to lock away funds for quarter of a century (because the bank can only loan out the funds if someone has the money tied up for that long) then whoever's lending is [i] diverting the funds away from more productive activity [ii] going to expect a very high interest rate because they don't see their money for such a long time and [iii] likely to be richer on average than the current beneficiaries of banking activity. Reducing transfer from productive to unproductive activity and the scale of transfers from poor to rich are desirable: maturity transformation is therefore a feature of the system, not a bug [n.b. if you force banks to borrow long and lend short you've eliminated the fractional reserve mechanism anyway]