Galt's Gulch

Central Banking and Fractional Reserve Banking

Posted by Vinay 9 years, 3 months ago to Economics
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Central banking and FRB are not the same, and pro and con arguments for & against each should be kept separate.
SOURCE URL: http://www.thesavvystreet.com/central-banking-fractional-reserving-and-legal-tender-laws/

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  • Posted by freedomforall 9 years, 3 months ago
    Agreed with your initial comment to this topic. Still have to make time to thoughly read and digest the article.

    We now have the worst of all legally established banking worlds. Private banksters printing legal tender from nothing for personal gain at the expense of the economy/market as a whole.
    Instead of being legalized as it has over the past 101 years, this practice should be a felony with penalties similar to treason.

    I'd much prefer dozens of currencies with backing by things of value, and independently rated and trackable on public internet. Fractional Reserve Banking of legal tender is intolerable and should be banned.
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  • Posted by term2 9 years, 3 months ago
    Just goes to show how complicated the government has made the whole subject of money. No wonder we have allowed the politicians to manipulate things so much that we have periodic "crises" without even understanding what happened. We need to stop our government from affecting the money supply and its value- PERIOD. Otherwise we will wind up like Venezuela or Russia
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    • Posted by dbhalling 9 years, 3 months ago
      The powers that be do not want people to understand. I remember studying FRB is my economics class and I understood it okay. But what really made it clear to me was learning the history of money and banking.
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  • Posted by helidrvr 9 years, 3 months ago
    While you are correct that as a matter of semantic precision the two are not synonymous, they must nevertheless be viewed as two sides of the same coin (is there a pun in here?) in that in practice they both exist to create fraudulent currency out of thin air. Where they differ is a) that CB is a priori coercive while FRB is not and b) While this is not true in practice, CB could at least theoretically remain honest and 'value agnostic' if rigidly tied to a money commodity (gold being the historically most reliable one), while FRB ('lending' fictitious checkbook currency) is by its very nature criminal fraud. In practice they are therefore both harmful to society.
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    • Posted by dbhalling 9 years, 3 months ago
      And so does the bond market and the stock market. It is incorrect to conflate a CB with FRB. In today's world they have been tied to each other, but the are not the same. A FRB backs its currency assets other than gold and silver, just like a bond or a stock. If a FRB makes bad decisions the currency goes away, just as bonds and stocks disappear if they do not back solid assets. This is totally different than a Central Bank, especially one that has the cover of legal tender laws.
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  • Posted by $ jdg 9 years, 3 months ago
    I don't see that either is necessarily harmful, but central banking leads to cronyism and too little competition with the banks. At least our central bank is privately owned; I'm sure the problem is worse in places where it isn't.
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    • Posted by Robbie53024 9 years, 3 months ago
      ALL power lends itself to cronyism. There will always be those who choose to leach off of others rather than to produce themselves. I think it is inherent in the human condition.
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    • Posted by dbhalling 9 years, 3 months ago
      Central banks are not part of a free market, so I would say they are always harmful. A perfectly run central bank at best would give the same results that a free market would give.

      FRBs are part of the free market and eliminating them would be devastating for the economy.
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      • Posted by freedomforall 9 years, 3 months ago
        I assume your acceptable FRB's are free market disclosed (not legalese small print) and in competition with many others, none of which are legal tender. Personally I would also require a currency to have multiple independent private ratings as to their fraction of reserve and liquidity. I would suggest that any company rating a currency must have no dealings with that bank or in that currency, but that is my personal choice not a proposal for government regulation.
        You can be certain that the kind of people that are banksters today will game any new economic system in order to cheat others. Yes, cheat, as they are producing nothing and stealing from others.
        It may not be objectivist, buut I view money as a tool and the system that creates it needs to be as fair to all parties as possible. I would consider legislation that requires severe restitution penalties to anyone gaming the system. I recognize that any such legislation would have great difficulty dealing with innovation and would likely impair it. Competition in such legislation (regionally or by state, for example) would allow free market innovations to occur.
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        • Posted by Robbie53024 9 years, 3 months ago
          If the currency is made of a valued commodity (gold, silver, platinum, copper, etc.) or redeemable for such, with sufficient reserves required to be held in order to redeem 100% of the outstanding currency, then there is no need for a private rating of the currency. All you need is to be able to verify the purity and amount of the coinage and reserves.
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  • Posted by amhunt 9 years, 3 months ago
    If a bank has reserves (gold, silver, mortgages, ...) that cover all of the notes that it has issued, how can it be called a "fractional" reserve bank? This would make a mockery of the meaning of "fractional".
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    • Posted by dbhalling 9 years, 3 months ago
      "DEFINITION of 'Fractional Reserve Banking' A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties." From http://www.investopedia.com/terms/f/frac...
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      • Posted by amhunt 9 years, 3 months ago
        I see. This is yet another example of a definition that is at best misleading. However it does clarify the remark about M. Rothbard being wrong about FRB being a form of counterfeiting.
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        • Posted by dbhalling 9 years, 3 months ago
          Rothbard is wrong. The only point he may have is that point that FRBs should have to disclose that they are FRBs.. FRBs do not counterfeit anything. What they do is no different that issuing a bond.
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          • Posted by amhunt 9 years, 3 months ago
            My interest was peaked because I thought it curious that he would make such a mistake. But as you point out FRB does not necessarily imply that.
            So when the FDIC steps in and grantees the deposits it would be the FDIC doing the counterfeiting and not the FRB?
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  • Posted by Robbie53024 9 years, 3 months ago
    You are correct, and neither requires the other to be enacted or cause harm.
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    • Posted by Vinay 9 years, 3 months ago
      Central Bankng is always harmful. In that,I agree with the author here. However, while FRB should not be banned, merely disclosed, I am not a fan of FRB.
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      • Posted by Robbie53024 9 years, 3 months ago
        Central banking is not inherently harmful. It is not inherently corrupt, it merely becomes so. I'm not defending it, merely identifying that most anything can be corrupted, so CB isn't any different than most things.
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        • Posted by Vinay 9 years, 3 months ago
          CB is itself corruption, the bastaridization of interest rates based on the quackery of Keynes and his predecessors and successors in fraudulent scholarship..
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    • Posted by mec4cdlic 9 years, 3 months ago
      Are we speaking of a central bank in concept, or a central bank for the United States of America? If the former, the key problem is that it becomes a political tool (but what that the government does, does not become politicized?) If the latter, the big issue is that it is not authorized under the constitution. Of which central bank is this discussion, please?
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      • Posted by Robbie53024 9 years, 3 months ago
        Well, one could rationally argue that the authority to coin money inherently authorizes a national bank. How else would the money be distributed into the economy? You can't just hand it out.
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        • Posted by helidrvr 9 years, 3 months ago
          Both money and currencies (receipts for money) are created spontaneously by the market and require no (coercive) "authority". Government authority cannot create money, it can only create currencies. The only purpose for coercive currencies is to create a platform for fraud.
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          • Posted by Robbie53024 9 years, 3 months ago
            I agree that money is caused to exist by creating value in excess of costs to convert raw materials into goods (this is called wealth, with money being a medium to exchange wealth between different entities). That certainly is organic. Currency, on the other hand, and particularly fiat currency, does not necessarily have to have any relationship with wealth. In a rational system, currency has some direct relationship with wealth. When it doesn't, look for a financial collapse.
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        • Posted by mec4cdlic 9 years, 3 months ago
          Typically, coining money is done by a mint. In the case of the U.S., the U.S. Mint. It would be distributed thusly: miners take ore to the refiners; from there to the mint; the mint makes coinage to return to the owners (miners, in this case), keeping a portion to pay the costs of minting; the owners invest in their chosen projects with coins or deposit the coins in a bank for interest and the banks loan the coins to borrowers at a slighly higher rate than the savings rate. Now, as capital increases, paper is useful for many transactions to reduce the cost of handling the bullion and coins - commercial paper - not fiat currency. Modern times would use debits and credits through electronic transfers if encrypting and security were developed to handle it without excessive costs. In a small community, like the Gulch, the coins are enough with Midas' bank being the central repository - like a swap meet, or central market.
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          • Posted by helidrvr 9 years, 3 months ago
            Mints do not have to be owned or operated by any government agency. Worldwide, the vast majority of mints are private business enterprises. Even in the US there are a number of highly respected private mints, the "Franklin Mint" being one of the better known ones.
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          • Posted by Robbie53024 9 years, 3 months ago
            But even your description acknowledges that the Midas bank created the "money" and is the central control of same.
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            • Posted by helidrvr 9 years, 3 months ago
              No, it is absolutely critical that one maintain semantic precision by not conflating "money" with "currency".

              Money is a commodity which spontaneously evolves in the market. It cannot ever be created by fiat. Currency in its honest form is a bearer receipt for money which can be created by the holder of money..

              The Midas bank cannot create money, it can only create a currency (i.e the FRN in the USA). If that ability is limited by government coercion then yes, Midas bank will have central control (by threat of violence)..
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