The Economics of Fractional Reserve Banking | Joseph T. Salerno

[@MrMikeTheMan89]

In Sweden, they even have a "post FRB system" with 0% reserves. This entitles the central bank to changes the interest rate overnight, just as they wish. Currently they even have negative interest rates... then the swedish currency is completely fiat based without any real value whatsoever. Add to the equation that there only are 3 public banks big enough to talk about, cash almost getting eradicated from society and ridiculously high taxes, and you get the picture...

[@WhereDoGangstersgo]

Hey hey hey, we do have a Alcohol-standard. Just like the old gold/silver/copper-standards. But our money is basically alcohol based. The state promises us the possibilityto buy alcohol from them (and only them). :)

[@SleekMinister]

That just means they wish to shrink the money supply.

[@ChaplainDaveSparks]

I remember when we used to have what I would call "quasi banks". It was back when the Federal Reserve set maximum interest rates on deposits. (Was it "Regulation Q"?") There were outfits that would sell you an UNINSURED note or something resembling a CD at interest rates higher than you could get at a commercial bank, savings and loan, or credit union. As I recall, they were issued by companies in the business of lending money on consumer installment loans, etc. This was closer to the Rothbardian model, IMO.

[@1KMPLX]

I think I'm going to share this on Facebook... I don't actually expect that anyone will watch it though. lol... Buuut just in case.

[@wasifsamin2056]

Best explanation of this lame system yet

[@byebyebirdie2368]

Great talk! Thank you Mises Institute for sharing.

[@CODScumBags]

pretty much, I've shared dozens of misesmedia videos; I'm willing to bet that only 2% of my friends have been watched any for some period of time and

[@thebakedtaco2879]

So it’s illegal to advocate for people to take their money out of the banks, but is it illegal to advocate for people to not put their money in banks?

[@Minder777]

I love Joe so much!

[@se7ensnakes]

if you are truly interested in what banks do read the excerpt from a lecture. it is nothing short of amazing "I will tell you key points about banks. In case you thought banks lend money, they take deposits and lend money. You are wrong . Banking was developed, modern banking was developed, in the United Kingdom in the 17th century and the legal facts are very clear but not very well known. Banks do not take deposits and banks do not lend money. That's a fact. How is that possible. How is that possible. Well, legally they do not take deposits. They borrow from the public, because your money at the bank is not on deposit. Its not held in custody, it's not a bailment. What is it legally? You have lent money to the bank. So the expression in banking are designed to mislead what's really happening. Who is the owner of this money? It is the banks, you are just a general creditor. Which is very different from the impression given when we use the term deposit. What about lending surely banks lend money? No they don’t. No bank has ever lent any money. How is that possible? What does a bank do? Banks purchase securities and they don’t pay up. That's what they do. How is that? Well if you go to the bank and you borrow money you sign a loan contract. Very crucial. Your signature creates the money supply. Because the bank legally will consider the loan contract a promissory note. And that is what is considered legally, is a promissory note. Just like the bank of England Note, central bank money, paper money, is a promissory note from the central bank. And the bank purchases this contract. That is what they do, they purchase the loan contract. Now they owe you money. You say I dont care about the mechanics, give me the money. The banker will say we will put it in your account. You will find it in your bank account. Well what is a bank account? It is not a deposit. Its a record of the bank's debt to the public. It is a record of the bank's debt to the new borrower, and they show you the record of how much money they owe you. That is it, they don’t pay up. And this is how the money supply is created. So lets go in sequence: Step one: You go to the bank and you sign the loan contract, say a thousand pounds. This will be recorded in the bank balance sheet as an increase in bank assets. The bank, will then, record its debt to the borrower. But it will do some accountant trick. It should really say this is an accounts payable item. Something that the bank has to pay but it has not yet paid. But it wont record as an accounts payable. If you talk to an bank's accountant they are horrified “No you cannot use an expression like accounts payable in a bank” And do you know why? Because they recorded it as customer deposit. They show it on the bank's liability side as a customer deposit. But nobody has deposited it, the customer has not deposited for sure. The customer is borrowing it. The bank has not deposited either. It is added to the money supply, and this is how 97% of the money supply is created out of nothing on the basis of a signature and of course on the credit of the borrower. That is money creation. So no money is transferred from any where else to the borrowers account. Economist RICHARD WERNER

[@SleekMinister]

Put simply, the banks are acting on behalf of the Grand Exchequer.

[@Alfie-ni7lx]

@@CigEconomy Alan green span wrote alot about a gold standard and why its important. Then he became fed chair. Some people sell out but you can still learn from them

[@se7ensnakes]

@@CigEconomy Richard Werner, Steve Keen, Michael Kumholf are valid economist that are telling you the truth and modeling a real economy. What they saying is empirically correct. The QE is to prevent rapid money contraction. All of these economist dont want to use the word "conspiracy" but behind close doors they know what is happening. The mises institute on the other hand is feeding you a bunch of bullshit that was debunked empirically decades ago

[@se7ensnakes]

@@CigEconomy Except his papers on money creation are very anti-bank. Either you don't know his writings or you are a shill

[@se7ensnakes]

@Jambi Love The Mises institute are still jabering about Fractional Reserve lending but that was debunked decades ago. If you needed to defend yourself against a bank foreclosure dont depend on the Mises institute because their data is not complete

[@pgplaysvidya]

It's being shared on V for Voluntary right now (12 am ET sept 08 2013)

[@cyberjunk2002]

It seems like even without banks, it'd be possible to increase the money supply via bonds. Anyone able to verify? More specifically, if someone lends something to a friend, they normally have to actually transfer that thing to the friend. For example, letting someone borrow a book, your lawnmower, or some cash. What you get in exchange is a promise to pay it back. If we want to make it all official, that could be called a bond. If the bond was written such that it wasn't specific about who to pay back, then that would be debt which could be purchased/exchanged. so if you had that bond in your hand worth $1000 (after letting someone else borrow $1000), in theory, someone else would be able to accept that as payment (for good or services) as long as they trust the bond will be repaid. If that's true, hasn't the effective money supply just increased by $1000, because this bond get circulate in the economy while the original $1000 borrowed by a friend would also continue circulating?

[@StephanieHughesDesign]

Premise of primarily increasing money supply is through FDIC regulated banks and use of fractional reserve banking which operates exclusively in the US. To increase money supply, Fed will purchase bonds from banks, which injects money into the banking system who then in turn use fractional to increase M1, M2 and the multiplier effect via the economy culminating in GDP growth. To decrease money supply, Fed will sell bonds to banks, removing capital from the banking system. Majority of money supply is created by commercial banking system in the form of bank deposits.

[@batguerra]

So if everyone in a country withdrawaled their savings banks could only redeem their clients at best 10% of their assets?

[@BobWidlefish]

Bruno Pacheco exactly.

[@connorism69]

@AnaisMartane I wouldn't say it's intrinsically worthless, but it's certainly true that it has no intrinsic worth. Whatever its worth actually is is completely subjective, since it is not anchored to anything. Might be worth something as lousy toilet paper :D.

[@gergenheimer]

Your interpretation of Salerno seems to be that the form of deflation that occurs during bank runs and other periods of "panic" is a neutral counter-balance to the inflation of the money supply created by FR banking. If so, this is a significant misunderstanding of Salerno (and Austrians in general). There are temporal factors to be considered. In other words, the harmful effects of the initial inflation can't simply be undone by any subsequent deflation of the money supply.

[@noveltycross1]

Can someone explain how raising the money supply increases prices. I understand the concept and have heard resource constraints. Can someone expand on that ? Go into my detail on resource constraints?

[@Jacob-gj8hz]

So the basic idea is that increasing the amount of money in a system decreases the purchasing power of businesses that need to purchace for continued operations, so when their purchasing power is decreased they need to raise prices to recover whatever small margins of profit they had to begin with, or risk going out of business.

[@johnpeterson4213]

Suddenly I have a desire to play Monopoly and hoard some cash!

[@firstgenchevelleman]

Someone has to go into debt in order for someone to get out.

[@gergenheimer]

I don't know the in-depth history of the Austrian School well enough to tell you definitively who was the first. Also, there is a spectrum of opinion even within the Austrian School on the nature of FRB. Many Austrians would allow FRB, as long as the practice was chosen by the market (however unlikely that would be). I (and other Austrians) disagree with this stance - even under laissez faire, fraud is a violation of basic ethics and should be prohibited.

[@ChaplainDaveSparks]

Great video. I'm not sure I'd say that fractional reserve banking was "fraudulent" ... *IF* ... that fact is disclosed in advance. Banks could then compete on safety, reserve ratios, etc. A different way to look at fractional reserves is to use an analogy of our highways and power grid. Theoretically, anyone can hop in his car and drive down the freeway (or turnpike). There is NOT enough capacity, however, for everyone to do it AT THE SAME TIME. You'd have a horrendous traffic jam! Most houses (around here) have a 100-200 amp capacity electrical panel connecting them to the utility. Whatever that capacity is, I can draw that much current without tripping my main breaker. But the utility does NOT have sufficient capacity for everyone to do that at once. To which I'd add, both analogies are also indicative of insufficient "reserves", at least around here. Growth of demand has consistently exceeded supply. But 100% reserves?

[@se7ensnakes]

Please pay attention. I has been maintained that fractional reserve banking and its multiplier effect does not exist. Fraudulent or not is irrelevant because that is not what the banks are doing. Please stop commenting on irrelevant subjects

[@repCanada]

Your metaphors are not useful and additionally the Fed ended the reserve requirements in 2020 so you are clearly trying to understand these topics through an incorrect frame of reference

[@donstacy7012]

It is shameful but not surprising the State outlaws anti-fractional reserve banking civil disobedience (advocating organized mass bank withdrawals).

[@mariofierro9994]

If someone were successful in organizing such a thing the public would be told that person is an economic terrorist responsible for their misfortune and not that the banks have been robbing all of the U.S. since 1913 and all of Europe for centuries.

[@wegreenall]

*just as the money is created when he is lent...

[@donnlayne]

we are either going to borrow money as a society or we are not going to borrow money...we are either going to earn interest as a society or not ...if we are going to earn interest and borrow money ...then there will be risks ...right?..this can ALL be accomplished without a central bank..but that is another discussion

[@wegreenall]

Why do you think borrower default destroys the money? In fact, just as he is lent the money, when he pays it BACK he is destroying it. Read about debt deflation. In fact, cancelling the loan and allowing the person to NOT pay it back could be considered a stabilising measure.

[@rykelkharg2903]

Joseph Salerno clearly does not understand banking, and is the last person you should listen to if you wish to gain such understanding. He is profoundly mistaken if he thinks that commercial banks lend out their deposits (which is what he claimed in the early part of this talk) -- they do not!

[@jyoung5256]

Actually we do

[@AustrianDuration]

Kind of late, but banks do create deposits when they lend. And I am a critic of Salerno. That's what he said when he started. Banks don't lend reserves, but it is used as a simplification.

[@TheMraptor]

This is not how Banking work.. the thing about FED is correct, but Deposit has no constraint on how much bank can lend, the constrain is the Capital of the bank. The current system is not Fractional-deposit, but Fractional-capital banking.. and the capital-ratio is calculated like this : Capital-ratio = (Assets-Liability) / Risk-weighted-assets or simplified : Capital-ratio = Equity / Loans currently this capital-ratio is ~8%. Deposit ratio is 3-10%, but only impact Deposits not Loans. Deposits play secondary role.. and have almost no impact on how much a Bank can lend. What I'm saying is that the system is still Fractional but how much customer deposits there does not impact Loan origination (i.e. money creation). When Loan is originated, the Bank just creates two entries one in Asset and one in Liability. The borrower give the money to the Seller. And when the Seller deposit it there is transfer of reserves from Borrower-bank to Seller-bank to cover the withdrawn deposits.

[@Nate1185]

"Deposit ratio is 3-10%, but only impact Deposits not Loans." So the 3-10% is a ratio of deposits to ______ ? They originate loans, like you said, by simply debiting a loan receivable and crediting reserves. They can only credit reserves to the point where they make up 3-10% of their loan portfolio. How can you say deposits have no effect on how much a bank can lend if the deposit RATIO is what constrains their ability to make new loans...? Saying the deposit ratio affects deposits makes no sense, what is the purpose of the ratio if there is no relationship between the numerator (deposits) and denominator (loans)?

[@TheMraptor]

I said it almost does not have impact of the cash reserves they have, as long as they are profitable they can buy capital to back the loan even if they dont have too much cash deposits. The important thing is capital-reserve ratio, rather than deposit-reserve-ratio. DRR is important mostly for cash-availability. Look at this paper for more details... (or google it). Money creation in the modern economy - Bank of England : www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CCAQFjAA&url=http%3A%2F%2Fwww.bankofengland.co.uk%2Fpublications%2FDocuments%2Fquarterlybulletin%2F2014%2Fqb14q1prereleasemoneycreation.pdf&ei=pdagVNSvFpDcgwST54OQBA&usg=AFQjCNEC40I_RsLixV-7vqDH8EnIWMnFzw&sig2=IWoegvpapLBs91fHIT75Cg&bvm=bv.82001339,d.eXY

[@afroblack1000]

nice one

[@saraahmad5236]

Economics suffers badly from the fact that it is a science that lacks the protection from the prestige gained from aging, as is the case with physics which results from repeating experimentation every time which emphises the foundations of that science in different, varied, and surprising ways. And all reinforce that science. The author Walid Ahmed Kamal Al-Hababi, in his book "The Economic Risk Theory" (the Islamic Macroeconomic System), deals with achieving maximum benefit, detailing the new economic system, which is called the "risk" system in which wealth is distributed to everyone, as it is a stable and more efficient system than the system of free market. In his book "The Theory of Economic Risk" (The Islamic Macroeconomic System), the author believes that the basic idea of ​​this book is to clarify the idea of ​​how to use the principle of time preference in imposing taxes, in order to motivate everyone to invest and raise productivity through tax. He also touched on the state's duties regarding its implementation and the extent of its participation in the market accurately. The author spoke of the zakat banks as the state budget, while the state budget remains the most controversial point among policy makers in countries. At the same time, the writer believes that while economic writings are scarce from a total point of view, there is no writer who spoke about a holistic Islamic economy as a previous system; So this is the only writing, up to the moment. You cannot change a system by fighting the existing truth, as Muslim economists always do, but to change something, you must create a model that makes the current system an outdated system. If we know that this system achieves the highest rate of spending in a country without need for economic resources - without taxes or anything else - thus we can see that we are facing unique writings. Whereas, it lays out clear features for the Islamic economy that distinguish it completely from the socialist and capitalist economies, and not a fabrication to be similar to either of them. And he affirms that with this system, other systems will not be able to catch up with our economic progress, no matter what efforts are made, except to implement it. On the other hand, he believes that we will not be able to catch up with the West economically with the current systems, no matter what we try. Finally, the author asserts, that economics is the only thing that clarifies the purpose of Islamic customs and rituals apart from their devotional meaning in human life. So that it can be proven without doubt that it is indispensable for a person to perform it such as Hajj, Zakat, prayer ... etc. He also confirms that all of this is found in the book (The Theory of Economic Risk) in this book issued by the House of “Yemeni Books” for printing, publishing and distribution within 305 pages and distributed in three main chapters, that this Islamic macroeconomic system is; He is the one who will bring us the maximum benefit يعاني علمُ الاقتصادِ بشدةٍ من أنه العلمُ الذي يفتقدُ إلى الحمايةِ التي تُؤمنها الهَيبة المكتسبة من تقادم العمر، كما هو الحال مع علمِ الفيزياءِ الناتج عن ترسيخ التجربة المتكررة في كلِ مرة للأسس بطرقٍ مختلفةٍ، ومتنوعةٍ، و مدهشةٍ. وجميعها تعززُ مكانة ذلك العلمِ. وتناول المؤلف وليد أحمد كمال الحبابي، في كتابه" نظرية المخاطرة الاقتصادية" (النظام الاقتصادي الكلي الإسلامي) تحقيق المنفعة القصوى، إيراد تفاصيل النظام الاقتصادي الجديد ، والذي يسمى نظام "المخاطرة" والذي تتوزع فيه الثروة على الجميع ، باعتباره نظاماً مستقراً أكثر كفاءة من نظام السوق الحر. ويرى المؤلف في كتابه" نظرية المخاطرة الاقتصادية" (النظام الاقتصادي الكلي الإسلامي) تحقيق المنفعة القصوى، أن الفكرة الأساسية لهذا الكتاب تكمنْ في توضيح فكرة كيفية استخدام مبدأ التفضيل الزمني في فرض الضريبة، وذلك لتحفيز الجميع على الاستثمار ورفع الانتاجية من خلال الضريبة. كما تطرق الى واجبات الدولة بخصوص تطبيقه ومدى اشتراكها في الأسواق بدقه . وتحدث المؤلف عن أن مصارف الزكاة تعتبر هي موازنة الدولة، فيما تظل موازنة الدولة هي النقطة الاكثر جدلا بين صانعي السياسات في البلدان. وفي الوقت نفسه يرى الكاتب أنه فيما تندر الكتاباتُ الاقتصاديةِ من ناحيةٍ كلية، ولا يوجد كاتبٌ تحدث عن اقتصادٍ إسلامي كلي كنظام سابقًا؛ وبالتالي فهذه هي الكتابة الوحيدة، حتى اللحظة. ويضيف لا يمكنك تغيير نظام بمحاربة الحقيقة القائمة، كما يفعل ذلك الاقتصاديون المسلمون دوما ، ولكن لتغيير شيءٍ، يجب عليك وضع نموذج يجعل النظام الحالي نظام عفا عليه الزمان؛ فإذا علمنا أن هذا النظام يحقق أعلا معدل إنفاق في دولة بلا موارد اقتصادية_ دون اللجوء إلى ضرائبٍ، أو غيرها_ فحينها يمكن أن نرى أننا أمام كتاباتٍ فريدةٍ من نوعها؛ حيثُ أنها تضع للاقتصاد الإسلامي ملامحًا واضحةً تميزهُ تمامًا عن الاقتصادين الاشتراكين و الرأسمالين، وليس تلفيقًا ليشابه أحدهما. ويؤكد أنه بهذا النظام لنْ تتمكن الأنظمةُ الأخرى من اللحاقِ بتقدمنا الاقتصادي مهما بذلت من جهود سوى تطبيقه. وعلى الجانب الآخر يرى أننا لن نتمكن نحنُ من اللحاق بركب الغرب اقتصاديًا بالنظم الحالية مهما حاولنا. وأخيرًا يجزم المؤلف، إن الاقتصاد هو الشيء الوحيد الذي يوضح الغرض من العاداتِ والعباداتِ الإسلامية بعيدًا عن معناها التعبدي في حياة الإنسان؛ بحيث يثبت بما لا يدع للشكِ أنه لاغنى للإنسان عن القيام بها من حج، وزكاة، وصلاة... الخ. كما يؤكد أن كل ذلك نجدهُ في كتاب ( نظريةُ المخاطرةِ الاقتصاديةِ) في هذا الكتاب الصادر عن دار "الكتب اليمنية" للطباعة والنشر والتوزيع ضمن 305 صفحة وموزع على ثلاثة أبواب رئيسية ، أن هذا النظام الاقتصادي الكلي الإسلامي؛ هو الذي سيحققُ لنا المنفعة القصوى.. .. ,,لتنزيل نسخة مجانية من الكتاب www.mediafire.com/file/tvpyra7ojgvocbc/الاقتصاد+الكلي+الاسلامي.pdf/file لمشاهدة لقاء مع المؤلف حول موضوع الكتاب يرجى زيارة الرابط التالي kzbin.info/www/bejne/fZ-piJp6od-KqpI ... . . And thank u. V. Much...

[@samahn32]

It is wrong to compare money supply to wealth. US net wealth is about 80 trillion and M2 is about 10 trillion. It is meaningless to compare the two. Money is necessary as a means of transaction, and not all the wealth out in the market. Increase of money means wealth is transforming its shape. Money is the medium of transformation. Suppose you have a house with no encumbrance. You borrow money by encumbering the house. Now, part of the house is liquidated into new money in the economy. You buy a machine with the money. This prompts manufacturing of another machine. Nobody know whether this specific transformation would end up with increased wealth or decreased wealth. But we view this with positive eyes because all the transformation of this kind combined will create new wealth in normal states. Inflation does not happen because of money supply. It happens when all the transformations combined, involving money creation, result in general failure to pay back the borrowed money or to maintain at least the wealth at the time of the borrowing.

[@gpain616]

+Sam Ahn sam the money supply does cause inflation. when the banks are expanding credit prices rise. asset prices go higher because banks lend money for them thats why real estate and stocks and bonds are all in bubbles now. your last sentence is backwards, when the debts grow out of proportion to the assets ability to repay the loans DEFLATION occurs the debt deleverages. fractional reserve banking STEALS wealth by always expanding. people are producing economic activity, banks gain interest and wealth for the meer fact that they can sell money to the producers. Also inflation comes from the interest expense incurred in the process of money supply expansion, the interest costs get passed on to consumers for goods.

[@aminelkholy6180]

@@gpain616 it only causes inflation if there is no spare capacity to produce the goods or services it will seek to buy. If there's capacity and not enough money supply in the hands of people who will spend it on that capacity it could lead to permanent closure of such capacity. In that situation the scarcity of money leads to capacity going off steam and thus can also create inflation. It isn't automatic that increased money supply is either bad (good) for the economy or automatically raises (lowers) inflation. If there is an objection it is typically that you can't trust government not to print too much money, but at least in theory its best to keep money supply in line with transactions in the economy to avoid either excessive inflation or deflation, neither of which is good. Whether the banks can be trusted to do that is at least as equally questionable as the government! There is often too much panic about inflation when there is no evidence of it and capacity utilisation is way below full. That's not rational.

[@se7ensnakes]

In order to understand the economy you cannot have a religion. You have to sift through MMT. You have to sift through Austrian Economics, through the END the FED readings such as that propose by Ron Paul. You might end up with some studies by Richard Werner, Michael Kumhof and Steve Keen but these only give you half the story. In the end you will realize that there is a tax on the money we are force to use. It is not called a tax. It is called interest. and in the next 30 years these banks are going to extract 30 Trillion dollars from the economy approximately. These banks dont create anything but computer databases. They dont make cars or houses. They only offer digital paper. They get a free vital inventory. Not one of these aforementioned systems address that fact

[@deuteriumjones]

But he is missing the most important part! while It's true that one "new" dollar in the system /could be/ up to 10 in loans/reserves (though he admits that it's closer to 2, even in heady times). Bankers /only/ make loans if they believe they will be repaid. That means the borrower has some real wealth or the loan isn't made. And if the lender is wrong the borrower default destroys the "created" money. So the money "created" by loans tracks with real wealth only. Printing is bad. Banking is fine

[@PiranhaPT]

Fractional Reserve Banking does NOT create inflation (in the austrian definition of inflation). What it does is allocating money that would be stored in vaults (and not inflating prices) to people that are willing to spend it now at the expense of the future (increasing prices through increased demand for goods). The bank doesn't "create" money; it uses money of the depositors to lend at interest. If you have trouble understanding this, try to imagine what would happen if a bank with fractional reserve had a bankrun: there would simply be 1/R times more people claiming money to the bank than there actually was in the vaults, but the quantity of money in the economy would not have changed.

[@dwaindibley4137]

What's really funny is that; the mises.org crew not only preaches the fiction of the 'money multiplier' or 'fractional reserve lending', they get the fictional tale wrong. So, let's say you deposit $100 cash with the bank, the bank puts the $100 in their vault and credits your account with the amount, they don't loan out $90 of the hundred keeping $10 as reserves, that's just stupid talk, what they do is, they promptly loan out $900 for a total of $1,000 in new credit created. That's how the fiction is supposed to work, the banks create credit in multiples of deposits made. But as I said, both versions are just fictional tales followed by idiots who depend upon hearsay to formulate their beliefs. There is no factual evidence to support the 'money multiplier' pseudo-theory, regardless of which version you choose to follow.

[@SleekMinister]

...and.. BASEL III says you can.

[@TheUpphouse]

This is not a Mises institute assertion alone, it's what was in the Money and Banking books at University...

[@se7ensnakes]

This video is completely wrong. FRACTIONAL RESERVE BANKING refers to CREDIT TO THE BANK and not CREDIT FROM THE BANK. This is misinformation. There are two sides to a bank: 1)Savings and 2) credit. Savings is credit to the bank and savings is credit from the bank. When we deposit money in a bank we are actually making an unsecured loan to the bank. What this video is doing is confusing the two. VERY BAD VIDEO!