For those who think Fractional Reserve Banking is evil incarnate...

... I have a challenge for you.

Bank A is a new bank that has just started. Bank A takes deposits from three customers B, C, D.

B- $10,000
C- $20,000
D- $30,000

for a total of $60,000.

Question is how does the bank
a) Pay it's staff?
b) Pay for it's premises?
c) Pay it's customers interest on their savings?
d) Pay it's shareholders profit's?

all without using FRB.

Now I may be wrong about this and there may be a way I hadn't thought of but I'm willing to stick my neck out and see if it gets chopped off.

You have 5 minutes to answer (not really )

 

Answer to a ) through d)

By charging interest on loans made to sound investments.

 

Numerous businesses are able to generate profits to support their operations and reward shareholders...without having to create money out of thin air (or just by a few strokes on the keyboard in the case of loans). Fractional reserve banking puts the money of depositors at risk, and the jobs of banks employees at peril when borrowers don't make good on their loans. It's a system that's gravely abused to enrich the top of the financial pyramid.

 

I guess they could invest the savings and use the profits for a-d.

If we use state-owned banks instead of privatized then we might get away with lower ceo wages and bonuses, and we could get rid of the need for share-holders profits.

FRB in the retail banks aren't my main gripe. I'm more pissed off at having the reserve bank create our nation's currency for us and then lending it to us at interest. They back it up with nothing. We and our grand kids are then enslaved to pay off this debt through taxes. We accept all the risk on our side. They can make terrible business decisions but are deemed to big to fail so we bail them out with the sweat of our great-great-great grand kids.

Our gov should borrow our currency from ourselves at zero interest, they can then on-sell it to the retail banks. Public works projects could also be funded with zero interest loans from ourselves.

 

+1

(btw, a bank with only $60k deposits should not need too many staff )

 

Economics in 1 lesson... it's free and will answer all your questions and more...

http://www.hacer.org/pdf/Hazlitt00.pdf

 

Thanks for the link.

well presented.

 

First of all, if the bank has shareholders, the shareholders all bought shares at a price. This money becomes capital that can be used for a - e.

e) The bank can also loan that $60,000 to lenders who then pay more interest than the bank pays to those 3 account holders.

 

Easy.

They take out a loan.

 

If I was running the bank I'd use the funds from investor B to pay investor C and C to pay D.

As word got around bout my great returns, and more people put their money in, I'd use that new money to pay the earlier investors and keep the process going as more people flooded into my...my...scheme... forever ...and all without anyone having to take on any risk or effort! Mwhahah!

 

Any business apart from a bank makes money by SELLING THINGS!.

What can the bank sell? It has nothing to sell.

If the bank makes loans using the depositors money that by definition is FRB. The bank can no longer pay out all the money to depositors if they all come looking for their money.

The reality is that FRB was the best solution to all these problems. There is no perfect solution. Through evolution, FRB came out on top. That's not to say it's perfect, obviously it's not, but no human construct is perfect.

 

They have capital to begin with, but you need cashflow. If they get a business loan, how are they going to pay it off?

The point is that any other startup business makes things or provides a service which people pay them money for. This doesn't happen with banks.

 

I have less of a problem with Fiat currency than I used to. I might start another thread and discuss Fiat more, I think the main problem is one of education. People just don't understand the system. It's actually quite elegant but there is a lot of misconceptions and misunderstandings and it can and is abused by those in power.

Bailouts are totally wrong.

 

What you have described is FRB.

 

They make their money off fees, charging you a premium for holding your moolah.

Slam

 

They make huge amounts of money by being reckless and levering up to insane levels with the active consent and encouragement of govt.

However, this can also be due to an intense demand from the public for easy credit (low interest rates) which we have witnessed fairly recently. The general public have no idea what is required to maintain the low interest rates but demand them anyway or "off with their heads". The politicians/central bankers do whatever they have to to accommodate this. Bit of a vicious circle really.

 

That's FRB.

http://en.wikipedia.org/wiki/Fractional-reserve_banking

eg. Man deposits $10,000
Bank lends out $9,000 to second person as you describe above.
Second person then deposits $9000 in another bank.

There is now $19,000 of money in the system.

You can actually do this with friends, yes, you two can do FRB and "create money out of thin air"!

You lend one friend $10. He then lends another friend $9 of those dollars.

One person has a $10 iou, the other has a $9 iou for a total of $19 in iou's for only $10 actual dollars.

The key here is that unless you have the cash in your hand, you have an iou. If you have $2000 in the bank, you don't HAVE $2000 in cash. The bank OWES you $2000. You have a $2000 iou.

 

For all the complaining about FRB, I'm still waiting for someone to provide a solution that isn't FRB.

 

You mean you're an evil banker? I knew there was something wrong with you....

Well, the thing is as I see it if you have so called Full Reserve Banking then no money is available for loans.

The other way you could do it is matching maturities but who wants to put their money away for 20 years and have no access to it?

FRB is the only way to go as far as I can see and it isn't creating money from thin air which is the popular thought.

 

That wasn't the question asked. You asked how it could be done without FRB, and that's how banks operated before FRB.

That's why congress gave into the Federal Reserve system after a number of calculated bank runs by the founding directors of the US Federal Reserve Bank (Morgan, Rothschild Rockerfeller)... outside of organised bank runs, the system works fine. The Reserve Bank system was the equivalent of a shotgun wedding forced on the financial world.

I wouldn't agree it's the best solution, I would say it's the worst solution, except for all the others. Sure it free's up a lot of capital to invest, but is now being proven to be just as open to corruption and mishandling as the 'Full Reserve' system. How is the wealth destruction and calamity of a FRB caused global Depression any different to the wealth destruction and calamity from a global depression caused by bank runs?