Topic: Private banking and fractional reserve (Read 3039 times)

There is nothing wrong with a person lending money to the bank and owning debt, or depositing money in a bank account and owning money that can be withdrawn on demand. But it needs to be clear which the bank customer owns: money or debt, as they are very different things.

Depending on how the contract is constructed, it is possible to avoid any liability.

"This FRB note can be redeemed for 20 ounces of gold, pending availability*."
*Our bank only holds %10 of all outdtanding notes as reserve in gold at any moment.

I would replace executives with owners.  The concept of a corporation to limit liability is one of the biggest frauds out there.  So many people get screwed by someone just walking away from their debt.

In the case of a bank run, bank executives should be held personally liable for funds owed to account holders who are unable to receive them. This debt should be non-dischargable in any bankruptcy.

In a free market, FRB would simply be a form of gambling.  Nothing wrong with that.

If you buy stuff with deposits that doesn't count as a reserve. Obviously a frac reserve bank will have assets, but if we're just talking about showing the reserve that should be in the same form as deposits.

I see this degenerating into a fundamental discussion on the concept of trust.


In a free-market, as it is done under our current system, there are business that make a profit of verifying commercial claims of other business, I think a reasonable measure of trust can be found somewhere amidst of all this


Bitcoin Explorer. Tedious but reliable.

Fractional reserve banking got a bad name thanks to exactly this kind of fraud, and it deserves it. Like you said, the idea by itself would perhaps not be fraud, but the term has taken on the meaning of the wider use of it. I can't think of any regular person who clearly realises that the bank is not even remotely able to fulfil all its obligations if called upon to do so. People know of the term 'bank run' but they think it only happens during 'crashes'. They think the crash is the cause, not the effect.

ok, maybe I'm stupid.
I thought the point of all this was to completely free oneself from the government and regulation in general.
audit/rating agencies hasn't proven to be worth much lately either.

Could you tell me exactly how a user can reliably check the reserve ratio for a bank operating with bitcoins?

What about a bank that says "You can buy some nice stuff from us against your deposits anytime, or give them to someone else, or we can pay you if we have money available"?

Well sure, with bitcoins an audit is cheap and easy. With assorted physical commodities, you need a detailed appraisal. If you want to go through that every day, be my guest.

Pfft, my bank will have free audits daily.

If they can't convince you that they have the reserve they claim then don't use them. Just like you don't go to mechanics or restaurants that suck.

One really easy way to show the reserve would be to publish the reserve bitcoin address and demonstrate control of it periodically.

If I were running a private bank, I would probably agree to undergo up to one audit per year, conducted by any well-known audit agency at the expense of the party requesting the audit.

Is the government the only one who can audit?

And how would you know if they are telling the truth about their reserve?  goverment audits 

This is essentially my point. This is why I said I think it's a problem of semantics, as in a misunderstanding of the meaning conveyed when people say "we are opposed to fractional banking".

No anarchist is suggesting that frac banking be outlawed. It's just a matter of weather you think it's good, would do it, condone it, associate with those doing it. I don't think it's fraud if it's clearly stated.

If you say "You can get your money anytime, we keep a 10% reserve." That's not actually clear and honest. "You can get your money if we have some, we keep 10% around." is pretty good.

I mean a charity is fine. And names don't change reality so a 'bank' that says "We keep no money available for withdrawal, we'll pay you if we have money available." is stupid to use, but not fraud.

I'm not totally sure whether clearing houses are considered 'fractional reserve'. They are an example of the real bills doctrine in action; this is a rather misunderstood doctrine and needs some explanation.

Under the real-bill system, a bank pays for assets delivered with a bill of credit: a bearer note that it promises to accept as a tender for one silver dollar. In fact, the bank may even have some silver dollars on hand and exchange them with notes as a convenience (but doesn't promise this). Because the bank is so widely known and trusted, others are also willing to accept this note. Since all notes are issued in exchange for assets, they can all be honored: in the limiting case, if the bank shuts down and sells all its assets, you will be able to buy them with the notes you are holding. The only risk is that the bank's assets will depreciate so far against silver that they can't cover all their circulating notes, and this is fixable: the bank can divert some of its income to buy more silver or other stable commodities, or simply hold insurance against depreciation.

This has a lot of liquidity benefits for the public, compared to keeping an actual silver dollar on deposit for every note issued. Silver is quite valuable, but not as valuable as the rest of the ownable universe put together; if I wanted to sell a few ounces of, say, antihydrogen, it's doubtful anyone could amass enough silver to pay for it. I'd have to barter it away and then find either a use or a buyer for all the assorted goods I received. I'd much rather receive notes I can trade as if they're silver, because one or more well-known creditors have made a binding promise to accept them as if they were silver.

The real-bills doctrine says that this system will not lead to inflation as long as bills of credit are only issued against true assets (not expenses). This is the case even if the bank holds no silver at all, as long as it is bound to accept its own notes at parity with silver. The Keynesian school agreed with this analysis: the reason the system was dropped was precisely because it was non-inflationary.

It's arguable whether this is really fractional reserve banking, since the bank has enough assets to outweigh all its silver-denominated debts, just not enough silver. But if the assets issued against are accounts receivable (i.e. loans), it looks pretty similar to me.

Sounds like a problem of semantics to me. Makes no sense to have anarchist tendencies and ask for a mere banking tool to be outlawed.


Being opposed as in trying to take down the bank by force? When I read this sentence I just understand that free-market advocates refuse to use banks with fractional reserve policies.