Victoria Grant explains Fictional-Reserve Banking and why everything is crashing

[phorensic]

http://youtu.be/Bx5Sc3vWefE

"...the government gave the banks the ability to loan out money that doesn't exist."
"...they don't actually give you money.  They click a key on a computer and generate the fake money out of thin-air."

Seen on ZeroHedge - http://www.zerohedge.com/news/12-year-old-girl-crushes-canadian-and-american-dream

[hazek]

No matter the circumstance, fractional reserve banking is fraud in it's purest form.


facts:

• when a bank loans more than the amount of it's deposits, it creates money(currency, promissory notes, certificates) out of thin air
• when anyone in an economy creates money out of thin air they effectively steal goods and services from everyone else holding the same money
• not only does a bank steal by charging interest on money created out of thin air, they also steal goods or services pledged as collateral after an increased number of people default when an inevitable bubble fueled by their money creation pops
  

These facts do not magically go away if there is no state mandated fractional reserve banking. They hold true even in free market fractional reserve banking. It's nothing but a scam and if people ever want to live in peace and be truly free and prosperous you better wake up to these facts.

Adam Kokesh:

If I have one Bitcoin and I want to loan out ten and actually give people something effective to use, I can’t just create more Bitcoins and hand them more Bitcoins in the way that a bank doing fractional-reserve can effectively just create an account and create some money in it because they say that they have the reserves to back it up at a fraction or whatever is approved by the government. I can only issue certificates and promissory notes and say “Here’s a promissory note for one Bitcoin and if you bring this back, I will redeem it for a Bitcoin”. Then it’s based on the credibility of my institution and me as an individual, not on special privileges granted by government.

No, no, no, no and no.

Even if they can't actually loan money they are still stealing from those holding their certificates or promissory notes. Granted under such circumstances the inevitable problems that would arise as a consequences of this fraud would play out on a much smaller scale but the facts would nevertheless remain the same: The bank is committing fraud.

I mean where is the difference if a bank is stealing from holders of dollars or holders of a private certificates or promissory notes? Stealing is stealing, period. If I'm wrong, please show me how placing fractional reserve banking somehow removes the above stated facts.


Example:

Someone who agreed to a bank fractionally lending it's certificates or promissory notes payed me with the notes for my goods. I now own the financial instrument for which I know I can go to the bank and the bank will redeem it for the underlying asset. I also know I can trade this promissory note to someone else willing to accept it.

Just where exactly in the above example did I give my consent for the bank to rob me of my purchasing power if I instead decide to save or trade this financial instrument instead of redeeming it? No where.

Someone came to me, gave a note that was a promise to pay and all I need to accept is the trust that the bank will pay or the trust that someone else will accept this note.

But not only that, the bank is also without consent robbing people who hold the underlying asset because they are creating representations of this asset making it appear there is a greater supply of it than there actually is. A good example is what LBMA banks do to gold with allegedly issuing paper gold and manipulating the price of the underlying asset physical gold.

Did I give them my consent as a physical gold owner for them to do so?




One more time, the facts of fractional reserve banking are inescapable and it's, dare I claim this, impossible to get consent to these facts by everyone involved.




It's pure fraud, period.

[FreeMoney]

What if someone said "Hey, I'm making up numbers and writing them in this book". Fraud?

[Dalkore]

Funny how it takes a 12 year old to actually get some attention on this subject.   

[phorensic]

This is probably the 10th video I have seen where someone explains how banks create money out of thin air.  I just had a conversation with my mom and it went a little like this:

"When you buy a house for, say $200,000, the bank doesn't go into their vault and pull out $200,000 worth of gold or bills and give it to you.  They just type $200,000 and press ENTER on the computer and *POOF* it is magically created in the system."....  "If I have a bunch of credit card debt, why can't I just go *POOF* here I created all the money to pay off my debt, take it."..."How come the banks can do that and we can't?"

[hazek]

"How come the banks can do that and we can't?"

Legitimized(legalized) fraud forced upon us by the monopoly on violence that is the state. Rest assured in a society with a few consistent and mandatory rules (some call it anarchy) this kind of practice would not be tolerated.

[phorensic]

hazek, yes you are exactly right.  Legalized fraud with violence to back it up.  I know exactly what you are talking about.  The first time I heard someone explain how we have to follow laws because of the fear of violence thrust upon them by government I had no idea what they were talking about.  Now I understand exactly what they mean.

[hazek]

I'm glad I can broaden people's horizons

[evoorhees]

What if someone said "Hey, I'm making up numbers and writing them in this book". Fraud?

+1 

I'm opposed to fractional reserve banking, but I don't think it's fraud if it's disclosed as such. A bank should be free to act however it wishes, so long as it doesn't lie about what it's doing. If you don't like fractional reserve banks, don't use them. It's a shame that under the current regimes globally, we've all been forced to.

Thank goodness for Bitcoin.

[hazek]

What if someone said "Hey, I'm making up numbers and writing them in this book". Fraud?

+1 

I'm opposed to fractional reserve banking, but I don't think it's fraud if it's disclosed as such. A bank should be free to act however it wishes, so long as it doesn't lie about what it's doing. If you don't like fractional reserve banks, don't use them. It's a shame that under the current regimes globally, we've all been forced to.

Thank goodness for Bitcoin.

You are very close to the truth so let me help you get all the way there.. If I counterfeit money is it not fraud if I tell everyone what I'm doing (if my counterfeited notes indistinguishable from real notes)?

FRB robs savers by lending money to borrowers that doesn't exists effectively transferring purchasing power from savers to borrowers without their consent but not only that the bank also artificially increase the supply of loans which lowers the available interest rates on loans even further punishing savers. It's fraud, disclosed in a free market or not.

Can you see that now?

[westkybitcoins]

What if someone said "Hey, I'm making up numbers and writing them in this book". Fraud?

+1 

I'm opposed to fractional reserve banking, but I don't think it's fraud if it's disclosed as such. A bank should be free to act however it wishes, so long as it doesn't lie about what it's doing. If you don't like fractional reserve banks, don't use them. It's a shame that under the current regimes globally, we've all been forced to.

Thank goodness for Bitcoin.

You are very close to the truth so let me help you get all the way there.. If I counterfeit money is it not fraud if I tell everyone what I'm doing (if my counterfeited notes indistinguishable from real notes)?

FRB robs savers by lending money to borrowers that doesn't exists effectively transferring purchasing power from savers to borrowers without their consent but not only that the bank also artificially increase the supply of loans which lowers the available interest rates on loans even further punishing savers. It's fraud, disclosed in a free market or not.

Can you see that now?

You make an interesting point, and I'm actually rethinking my stance on free-market fractional reserve banking because of it.

Even if a counterfeiter tells everyone that his notes are counterfeit, what about the people who then hand his notes to others? In a world where non-FRB was the norm, this would definitely seem to be fraudulent. About the only way I could see it NOT being so would be if (1) every bank issued their own notes (for gold, bitcoins, dollars, etc.) and (2) the FR banks clearly indicated on the notes (and on the checks, etc.) that they used fractional reserve banking.

Food for thought....

[realnowhereman]

I'm with evoorhees.  As long as it's disclosed, it's fine.

For those calling depositors "savers"?  I assume you mean that they savers in the hope of earning a return.  Please explain to me then how, other than by some degree of FRB, you expect banks to pay interest on savers' deposits?

When the bank goes "poof, here's $200,000" you are ignoring the other side of the accounting equation.  For every asset there is a liability.  When they create $200,000 of asset (e.g. a loan to let you buy your house) they also create $200,000 of liability (which is what an account in credit is).  It's nonsense to argue that the bank gets all of that asset.  It's also nonsense to suggest that it is magic that creates it, it is the willingness of someone to sign away their future earning power to servicing that loan that makes the asset an asset -- banks can only create up to what people are willing to borrow.  What the bank gets to keep is the spread between the interest they charge and the interest they pay.

FRB isn't evil; it's what banks are for.  You might disagree with the level at which it is done, but pretty much no one thinks they should pay the bank a fee to hold their money for them.  Therefore they do want FRB.

The failure was not FRB.  The failure was the government creating or allowing to be created an environment were the risk of failure were transferred to the taxpayer.  The banks should be careful about who they lend to (but were ordered not to be by the governments of the world), to minimise defaults.  The cost of defaulting individually should be uncomfortably high so that people aren't "willing to borrow" infinite amounts.  The spread that the banks earn is intended to be in exchange for vetting lenders, chasing defaulters, insuring against defaulters, and buying the big vaults to keep some liquidity on hand for when the savers want to buy groceries.  When there are more defaulters than the spread can absorb, then we get a financial crash (oh look, that's exactly what happened).

I really don't want a world were people can't buy a house because there is no FRB system to let the previous generation lend to the next generation at a profit.

[hazek]

About the only way I could see it NOT being so would be if (1) every bank issued their own notes (for gold, bitcoins, dollars, etc.) and (2) the FR banks clearly indicated on the notes (and on the checks, etc.) that they used fractional reserve banking.

Food for thought....

Yes, but who would take a note that has on it the disclaimer that hey: "This private promissory note is redeemable for 10BTC oh and btw we might print way more than we actually have reserves of, hold it at your own peril!"

I can't imagine people willing to receive payment with such a financial instrument if it can be called that at all.

[lonelyminer (Peter Šurda)]

Based on the Austrian approaches to property rights and the title transfer theory of contract (Rothbard, Evers, Hoppe, Kinsella):

You are very close to the truth so let me help you get all the way there.. If I counterfeit money is it not fraud if I tell everyone what I'm doing (if my counterfeited notes indistinguishable from real notes)?

It is not fraud similarly as copying is not fraud if the buyer knows it's a copy and the seller does not misrepresent it. If the concept of IP is invalid, as Kinsella argues in Against Intellectual Property, then creating "counterfeit" money is also not fraud. Manufacturing of "counterfeit" money does not violate anyone's property rights, unless the material used in the process was stolen. Passing the result while misrepresenting it's context, however, can be fraudulent, similarly as trying to sell a photocopy of Mona Lisa while claiming it was painted by Leonardo (except noone would fall for this one).

FRB robs savers by lending money to borrowers that doesn't exists effectively transferring purchasing power from savers to borrowers without their consent but not only that the bank also artificially increase the supply of loans which lowers the available interest rates on loans even further punishing savers. It's fraud, disclosed in a free market or not.

In the Austrian School, there are no property rights in values (see Block, Hoppe, Kinsella) or purchasing power, even though some of the Austrians use the redistributive element of FRB to argue it's illegitimate. I maintain that in the absence of legal restrictions, the redistributive effects of manipulations of the money supply are an externality, since the act of A creating more money, or even the act of B and C using this money in trade has no effect on the physical integrity of the property of another guy, D. Similarly as if I figure out how to create oranges out of nothing, the other producers would take a huge loss even though their property rights were not violated. The only exception is in case of legal restrictions, for example, if A has a monopoly on production, or if he can force D to use the money in some context.

Yes, but who would take a note that has on it the disclaimer that hey: "This private promissory note is redeemable for 10BTC oh and btw we might print way more than we actually have reserves of, hold it at your own peril!" I can't imagine people willing to receive payment with such a financial instrument if it can be called that at all.

This can be disproved empirically by showing substitute money which is not a legal claim. For example, mutual credit, which is pegged yet there is often no direct convertibility. Even Mises argued that there is no requirement that money substitutes have a foundation in legal obligation, it is sufficient that they are functionally exchangeable.

The reason why people accept all kinds of instruments in payment is that they provide something which the original does not. deSoto mentions, for example, ledger keeping. Gold does not have a ledger, and if someone wants a ledger, this can shift his order of preference so that even riskier instruments (e.g. fractional reserve current account) rank above gold.

Edit: furthermore, since substitutes which have reserves are associated with costs (e.g. storage), the issuer of them needs to compensate for this somehow. He can charge the users (e.g. demurrage, transaction fees), or he can use the reserves for some other purpose (e.g. loans or financial markets). All other things being equal, a user would choose the one where he does not have to pay. This makes a full-reserve unlikely on a free market. If there is a demand for substitutes, the market forces will lead to fractional reserves.

[hazek]

I'm with evoorhees.  As long as it's disclosed, it's fine.

For those calling depositors "savers"?  I assume you mean that they savers in the hope of earning a return.  Please explain to me then how, other than by some degree of FRB, you expect banks to pay interest on savers' deposits?

When the bank goes "poof, here's $200,000" you are ignoring the other side of the accounting equation.  For every asset there is a liability.  When they create $200,000 of asset (e.g. a loan to let you buy your house) they also create $200,000 of liability (which is what an account in credit is).  It's nonsense to argue that the bank gets all of that asset.  It's also nonsense to suggest that it is magic that creates it, it is the willingness of someone to sign away their future earning power to servicing that loan that makes the asset an asset -- banks can only create up to what people are willing to borrow.  What the bank gets to keep is the spread between the interest they charge and the interest they pay.

FRB isn't evil; it's what banks are for.  You might disagree with the level at which it is done, but pretty much no one thinks they should pay the bank a fee to hold their money for them.  Therefore they do want FRB.

The failure was not FRB.  The failure was the government creating or allowing to be created an environment were the risk of failure were transferred to the taxpayer.  The banks should be careful about who they lend to (but were ordered not to be by the governments of the world), to minimise defaults.  The cost of defaulting individually should be uncomfortably high so that people aren't "willing to borrow" infinite amounts.  The spread that the banks earn is intended to be in exchange for vetting lenders, chasing defaulters, insuring against defaulters, and buying the big vaults to keep some liquidity on hand for when the savers want to buy groceries.  When there are more defaulters than the spread can absorb, then we get a financial crash (oh look, that's exactly what happened).

I really don't want a world were people can't buy a house because there is no FRB system to let the previous generation lend to the next generation at a profit.

Please consider that you might be wrong. I believe last night when I went to bed and while trying to fall asleep mulled this weird situation over where we have so many market regulated by consumers(a free market) proponents confused defending FRB if there is no monopoly on violence forcing people to accept it and I believe I figured it out why it's so hard to see and accept that it is fraud.

Frederic Bastiat - That Which is Seen, and That Which is Not Seen !!

The fraud does not happen with what is seen in FRB it happens with what is unseen:

• Savers lose purchasing power because of inevitable higher prices due to an artificially higher supply of money (and this happens precisely because money is fungible)
• Savers lose purchasing power because of artificially increased supply of loans artificially decrease the available interest rates on loans

You see it's the unseen purchasing power of savers that gets robbed through FRB and this fact is inescapable. Please please, stop supporting this evil which is the cause of so much destruction and suffering in the world.

[hazek]

In the Austrian School, there are no property rights in values (see Block, Hoppe, Kinsella) or purchasing power, even though some of the Austrians use the redistributive element of FRB to argue it's illegitimate.

If Austrians really argue this then that's simply retarded. If this is true, why shouldn't I be able to counterfeit money?

Example:

I have 10BTC and one day it takes me 0.1BTC to buy a loaf of bread, one week later because of someone doing FRB it suddenly costs me 0.2BTC, was I not robbed of 0.1BTC in this example?! It's 0.1BTC that I could have kept if no one did FRB.. how is that not theft?!

[Kluge]

Good luck getting consumers to pay the ~2-3% banks pay annually on deposits for customer services (+ a generous service charge so the bank can profit).

Though, in Bitcoin, we've simply dropped the idea of demand deposit schemes entirely (with Pirate being a partial exception). Interest-bearing demand-deposit schemes don't work without huge deposit volume spread among many people (that is, your local bank is probably multitudes more likely to run into a liquidity problem if someone makes a large deposit, which is probably a contributing factor to why banks have become so consolidated and perhaps why central banks are popular). CDs work well, but they're not popular for fiat currency (becoming difficult to even find a bank offering them), at least in the US -- banks generally give unreasonably low rates on them (~1% annually with multi-year commitments -- extremely favorable rate for the bank considering the costs and risks of demand deposit money), though, which don't often justify keeping the money locked away like that. I'd guess if FRB & free savings accounts were done away with, though, CDs would make a comeback, and banks would probably be scrambling for funds, creating competition and more reasonable rates of ~2-3% annually.


Which reminds me... Why do libertarians always call money creation fractional-reserve banking? Forcing banks to keep full reserves would stop the beneficial effects of central banks creating money to lend to commercial banks, but why not just be against money creation instead of FRB???

[lonelyminer (Peter Šurda)]

If Austrians really argue this then that's simply retarded. If this is true, why shouldn't I be able to counterfeit money?

Maybe you can start by rereading my post. For further information, maybe you can start with Against Intellectual Property by Stephan Kinsella.

[hazek]

If Austrians really argue this then that's simply retarded. If this is true, why shouldn't I be able to counterfeit money?

Maybe you can start by rereading my post. For further information, maybe you can start with Against Intellectual Property by Stephan Kinsella.

Oh I see, sorry I skimmed through your posts.. So you're saying the mere act of creating counterfeits is not fraud but spending them as if they were real money is. Ok, I agree with that. But how is spending counterfeits any different from spending a loan created out of thin air?!

[lonelyminer (Peter Šurda)]

Oh I see, sorry I skimmed through your posts.. So you're saying the mere act of creating counterfeits is not fraud but spending them as if they real money is. Ok, I agree with that. But how is spending counterfeits any different from spending a loan created out of thin air?!

Trading "counterfeits" may be fraudulent, but there is no necessity. If I put a sticker on a piece of rock saying "orange", and sell it, it also may or may not be fraud, depending on the context.