Fractional reserve banking - future money

[Trevor Watkins]

This is a repeat of a debate held on libsa@googlegroups many years ago.

1. Initially Fractional Reserve Banking (FRB) was criticised from the perspective of the person depositing funds with the bank. Since the bank theoretically lent out multiples of their deposit, there is a potential for fraud and loss to the depositor. However, if the bank honours the terms of its agreement with the depositor (your money is available whenever you call for it), there is no fraud or loss.  Bank runs are actually very rare.
   
   

2. Then the debate centred around the dangers to the economy of the bank creating "new" money without full backing. Leon said new money was not created, Dawie said it was. Even Von Mises warned of the dangers. I think it is patently obvious that new money is created when a bank makes a loan in excess of its reserves. However, I no longer think this is a bad thing.
   
   

3. My new insight is that banks are lending "future" money - money which has not yet come into existence, but will as a result of the loan.  Consider this scenario:

1. A builder wishes to erect a block of flats but does not have the necessary capital for materials and labour. The maximum credit period he will get from suppliers and labourers is 30 days. However, his bank will give him sufficient credit for the entire project for 5 years, if it judges him to be a good risk.

2. The bank lends the builder R5 million for 5 years. This loan plus all its others exceeds its reserves (but hopefully by not more than the almost pointless statutory amount). Because the bank's credit is trusted by the suppliers and labourers, the bank makes the money available as a bookkeeping entry in the builders account. (ie, it does not have to produce actual gold or silver to convince people it will honour the demands)

3. This is now "real" money. As soon as the labourer or supplier spends money paid from the builder, it is in the economy doing useful things. But it is only backed by trust in the bank, for now. Because the bank aggregates many deposits and loans, it can meet all demands through judicious management.

4. This ability of the bank to stimulate new production by issuing unbacked loans is wonderful for the economy. It is a form of private Keynesianism. Through a network of trust it persuades and assists people to take risks they might not otherwise take.

5. The builder completes his block of flats and starts receiving rent. He uses this to repay his loan from the bank, plus interest. The loan IS NOW BACKED by the funds and real asset created by the builder. The future money loaned by the bank becomes real money on the banks books. Everyone is happy - the builder has a productive asset, the bank has more money than it started with, the workers and suppliers have all been paid at profit.

Trevor Watkins .. cSASI
bas...@gmail.com - 083 44 11 721 - www.individualist.one

[Stephen van Jaarsveldt]

People tend to mix up two very different and separate topics:

1. Fractional reserves - a private and independent bank lending out the reserves they hold which are unlikely to be withdrawn in the short term. This is not a problem and analogous to a food store not stocking all the food for everyone for the whole month, but only that part they are expecting to sell in the immediate future... or the builder example below. There is nothing bad about this.

2. Reserve (central) banks - a (usually) private but government guided bank with a legalized monopoly on the money supply and interest rates (through being a lender of last resort). This is a problem, since it takes control of money and interest rates out of the hands of private banks and puts it in the hands of the government aka nationalization of money & credit. This is obviously a bad thing.

S.

--
You received this message because you are subscribed to the Google Groups "Individualist Movement" group.
To unsubscribe from this group and stop receiving emails from it, send an email to individualis...@googlegroups.com.
To view this discussion, visit https://groups.google.com/d/msgid/individualist/CAN6K2L%3Dhym-KM8zCrdW91YC73wtT9i1unaUujZ0jEMFBHz3iRA%40mail.gmail.com.

[Sid Nothard]

My Comments in red

 

Sid Nothard cSASI

 

From: indivi...@googlegroups.com [mailto:indivi...@googlegroups.com] On Behalf Of Trevor Watkins
Sent: Thursday, April 3, 2025 3:54 PM
To: Individualist Movement
Subject: IM: Fractional reserve banking - future money

 

This is a repeat of a debate held on libsa@googlegroups many years ago.

1.     Initially Fractional Reserve Banking (FRB) was criticised from the perspective of the person depositing funds with the bank. Since the bank theoretically lent out multiples of their deposit, there is a potential for fraud and loss to the depositor. However, if the bank honours the terms of its agreement with the depositor (your money is available whenever you call for it), there is no fraud or loss.  Bank runs are actually very rare.

2.     Then the debate centred around the dangers to the economy of the bank creating "new" money without full backing. Leon said new money was not created, Dawie said it was. Even Von Mises warned of the dangers. I think it is patently obvious that new money is created when a bank makes a loan in excess of its reserves. However, I no longer think this is a bad thing. Fractional reserve banking enables money to be created out of thin air and enables goods to be chased with virtual money. This means that there is an increased demand for goods, and the price gets driven up. This is how “they” “stimulate” the economy and drive inflation. It is fraudulent.

3.     My new insight is that banks are lending "future" money - money which has not yet come into existence, but will as a result of the loan.  Consider this scenario:

1.     A builder wishes to erect a block of flats but does not have the necessary capital for materials and labour. The maximum credit period he will get from suppliers and labourers is 30 days. However, his bank will give him sufficient credit for the entire project for 5 years, if it judges him to be a good risk.

2.     The bank lends the builder R5 million for 5 years. This loan plus all its others exceeds its reserves (but hopefully by not more than the almost pointless statutory amount). Because the bank's credit is trusted by the suppliers and labourers, the bank makes the money available as a bookkeeping entry in the builders account. (ie, it does not have to produce actual gold or silver to convince people it will honour the demands)

3.     This is now "real" money. As soon as the labourer or supplier spends money paid from the builder, it is in the economy doing useful things. But it is only backed by trust in the bank, for now. Because the bank aggregates many deposits and loans, it can meet all demands through judicious management.

4.     This ability of the bank to stimulate new production by issuing unbacked loans is wonderful for the economy. And not to mention the stock market. People use this virtual money which is usually lent out at low interest rates ”to stimulate the economy” It is then borrowed by speculators who buy stocks with money that does not exist, and drive the prices to unsustainable levels. This entire Ponzi scheme implodes when somebody wants his money back. It is a form of private Keynesianism. Through a network of trust it persuades and assists people to take risks they might not otherwise take.

5.     The builder completes his block of flats and starts receiving rent. He uses this to repay his loan from the bank, plus interest. The loan IS NOW BACKED by the funds and real asset created by the builder. The future money loaned by the bank becomes real money on the banks books. Everyone is happy - the builder has a productive asset, the bank has more money than it started with, the workers and suppliers have all been paid at profit.

Credit expansion with fraudulent fiat money - what a nice business to be in

Trevor Watkins .. cSASI
bas...@gmail.com - 083 44 11 721 - www.individualist.one

--