David R. Henderson  

Henderson, Rothbard on Fractional Reserves

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In my fire in 2007, I lost almost all my files, including the ones under the letter "R." For that reason, I thought I had lost my correspondence with Murray Rothbard. But I came across some files in my home office that were categorized differently.

Here's my correspondence with Murray Rothbard on fractional reserve banking. It was just after we had both returned from the Mont Pelerin Society meetings in Hong Kong, the first such meetings I attended.

September 14, 1978

Dear Murray:

I'm glad we had that discussion of fractional reserve banking at the MPS meetings Tuesday night. I had difficulty with your position that it was fraudulent and had argued with a number of libertarians till I was blue in the face about that issue. I was glad to hear you say that there is nothing necessarily fraudulent about fractional reserves. You insisted that I allow you and other vigilantes to publicize the "fractionalness" of fractional reserves. There's no issue there. I believe in freedom of speech. However. I suspect you'd be too busy enjoying yourself in a free society to bother.

Love,


David R. Henderson
Assistant Professor

DRH:cmm

MURRAY N. ROTHBARD
4341 Miranda Avenue • Palo Alto, CA 94306
(415) 941-XXXX [I left out the last 4 digits on purpose: DRH]

September 21, 1978

Dear David:

It was good seeing you in Hong Kong, and at least most of your valuables were at last returned.

I still think fractional-reserve banking is fraudulent, since it involves the issue of fake warehouse-receipts, thereby leading more than one person to think that they own the same amount of cash. If you think that people really know that the money isn't there, then you should favor converting demand deposits to certificates of deposit, which are truly time deposits, which no one can get confused about, and which are not, in my view, truly part of the money supply. All I conceded is that it is theoretically possible to issue notes or deposits which clearly warn the holder that the money probably isn't there. But fractional reserve banking as we have come to know it, past and present, is definitely fraudulent. Agreed?

As ever,


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CATEGORIES: Monetary Policy , Money



COMMENTS (28 to date)
AE writes:

Rothbard's position seems to put very little responsibility on people to realize that banks are paying them interest for a reason.

vikingvista writes:

An amazing concentration of falsehoods in just that first sentence of Robard's reply. This most definitely falls into the category of 'how can someone so smart be so dumb'.

It is important to note that although less explicit and less repetitious than Rothbard, Mises was essentially in agreement with him.

trent steele writes:

@vikingvista

This is one of my internet pet peeves. WHAT in the (not first, unless you're arguing that it was not good to see him, and that his valuables were not returned) second sentence is false, and why? That would really make your reply useful.

@DH

I'm very sorry to learn of your misfortune and glad that you were able to find some items thought lost or destroyed.

David R. Henderson writes:

@trent steele,
Thanks.

vikingvista writes:

tent steele,

"not first, unless you're arguing that it was not good to see him, and that his valuables were not returned"

I recommend you read Professor Henderson's letter above. It makes clear that Rothbard's reply begins with "I still...". And although language ambiguity surely permits "reply" referring to the entire text starting with "MURRAY N. ROTHBARD", I find it peculiar if not revealing that anyone would struggle to discern which meaning is intended.

"WHAT ... is false, and why"

My apologies. I assumed everyone here was aware of the extensive debate among Austrians (and perhaps former Austrians) on this issue. My best advice is for you to first read what Rothbard wrote, and if that isn't enough to persuade you of his absurd position, continue over to freebanking.org for a list of authors. If you want specific writings or quotes from either side, I can provide those as a shortcut, if you think you need them. Regarding the first sentence of Rothbard's reply...

(1) Fractional reserve banking (as fractional reserve banking), both in theory and practice is not now, never has been, nor likely ever could be fraudulent. But the malicious and false fraudulent claim surely casts aspersions against, with the intent of harming, both innocent people in particular and free markets in general.

(2) Fractional reserve banking does not, and never has, made use of warehouse receipts either fake or real.

(3) Therefore it cannot lead anyone to think money that isn't "there" is "there". On the contrary, anyone at all interested in knowing the most basic functioning of banks (i.e. as lending intermediaries), has no trouble at all finding out. Anyone else if they exist (e.g. who doesn't know what "interest" payments or "safety deposit boxes" are, or who doesn't know what "on deposit" as opposed to "in storage" means, or who believe it typical that businesses pay customers to use their services) is simply choosing to be profoundly ignorant with their own money, unlike most people who use banks, and those people should be permitted to be left alone to do so.

Three falsehoods in one sentence is quite a concentration, wouldn't you agree? But then in his second sentence he adds another falsehood (or at least mystifying misunderstanding):

"converting demand deposits to certificates of deposit, which are truly time deposits"

Of course, a demand deposit *is* a time deposit of exceedingly short renewal interval. That is, a CD with a renewal period of 1 day hardly differs from a demand deposit. And, of course, no renewal interval removes the risk of deposit loss upon bank default, since the fundamental purpose of banking remains to loan out those deposits. So now Rothbard must decide at which renewal interval bank deposits become "fraudulent". Fortunately, unbeknownst to Rothbard, free individuals have long ago solved that problem with variable interest rates and fractional reserves.


"This is one of my internet pet peeves."

It is a pet peeve that people on the Internet disagree with you?


Sorry for the length of the post. It was however to your ever so polite request.

Greg G writes:

Well done viking.

Mark V Anderson writes:

I think I can answer for for trent, and he can tell if I am wrong. I believe his pet peeve was people making strong statements of opinion without explaining what they are talking about. I am pretty sure that's what he meant because I felt the same way about your posting. It was very "inside baseball," that is, talking to a small group that knew what you meant in a public forum. It isn't my pet peeve, but it was annoying. I am surprised that you thought most folks would know what you meant.

I am a commenter writes:

While I agree with the post in general,

(2) Fractional reserve banking does not, and never has, made use of warehouse receipts either fake or real.

It's arguable that Italian FRB evolved from goldsmiths whose depositors weren't informed that deposited gold was being loaned out.

English banking, which developed independently, seems to have never had that problem. [citation needed]

MikeP writes:

I must concur that believing that fractional reserve banking "fraudulent" is exceedingly odd. Regardless, if the reasonable man truly does not know that his deposited dollar may not be there because it was loaned to someone else, he can be made quite aware by signing an Understanding of Fractional Reserve Banking when he opens a deposit account.

I also must assume that if Rothbard really thought fractional reserve banking fraudulent, then he must also have thought limited liability corporations fraudulent. "I deposit a dollar with you yet you reserve the right to pay me back less than a dollar if necessary" and "You owe me a dollar yet you reserve the right to go bankrupt and pay me back less than a dollar if necessary" are completely identical. That one implies the money supply while the other is pretty much the only way people are willing to establish enterprises does not make a whit of difference.

I am a commenter writes:

As it happens, Rothbard was against limited liability, but not because share ownership is the same as a deposit, as you might be suggesting. Either way, I wouldn't say the two positions are necessarily tied together.

MikeP writes:

I don't mean share ownership.

A limited liability corporation's liability is limited in that its customers, suppliers, creditors, etc. understand that if the corporation fails to come through with money, goods, or services due to bankruptcy, they cannot go after the owners.

Identically, a fractional reserve bank's liability is limited in that its depositors understand that if the bank fails to come through with money due to a run, they cannot go after the owners.

Interestingly, Wikipedia's article on limited liability quotes Rothbard, and it sounds like he is completely for it:

It should be clear from previous discussion, however, that corporations are not at all monopolistic privileges; they are free associations of individuals pooling their capital. On the purely free market, such individuals would simply announce to their creditors that their liability is limited to the capital specifically invested in the corporation, and that beyond this their personal funds are not liable for debts, as they would be under a partnership arrangement. It then rests with the sellers and lenders to this corporation to decide whether or not they will transact business with it. If they do, then they proceed at their own risk.

So why in Rothbard's thinking can't banks simply announce to their depositors that their liability is limited to the specific fraction on reserve?

David Friedman writes:

If Rothbard's argument is that the FR bank might be unable to fulfill its obligation, that applies to an insurer as well—did he ever argue that insurance was inherently fraudulent?

Does "But fractional reserve banking as we have come to know it, past and present, is definitely fraudulent" imply that he was unaware of the option clause on some 18th c. Scottish bank notes?

Peter St Onge writes:

Vikingvista,

"(2) Fractional reserve banking does not, and never has, made use of warehouse receipts either fake or real."

Bankbooks.

"a demand deposit *is* a time deposit of exceedingly short renewal interval"

No, "on demand" means "instant." "One day CD" means "one day."

I am a commenter writes:

It is a very old practice for "demand deposits" to be made under an agreement that the bank has the option of delaying payment a few days. I'm actually not aware of any specific case of a bank offering guaranteed "instant" redemption at all times, and at least in the US, I don't think it has ever been normal to make such a blanket offer. Naturally, banks almost never invoke this right since it might be bad for business. But you could probably see it in action by going to a small branch office an hour before closing and trying to withdraw the funds of an extremely large account. A standard response amounts to, "you should notify us in advance if you ever want to make such large withdrawals."

trent steele writes:

@vikingvista

Thank you for taking the time to put your objections into writing.

Now: The FIRST definition Google provided for "demand deposit" reads: "Funds held in an account from which deposited funds can be withdrawn at any time without any advance notice to the depository institution. Demand deposits can be "demanded" by an account holder at any time."
I'm sure by reading that you can now see the difference between a CD and a demand deposit (though you clearly already know, as you state that they are "hardly different," meaning that you recognize them to be "different.")

I won't spend my day typing to someone who refers me to FreeBanking.org, so I'll just end by saying that if you are arguing that something isn't "something," then you should use words that mean what you think you are saying.

If you want to say that FRB isn't fraudulent because they pay interest on very short-term (ALMOST demand) deposits, and that they are explicit about this, then fine. But neither you nor the lending institution (yes, I've heard that banks lend!) can call them what they aren't, i.e. demand deposits. They are not available on demand.

If banks want to call them demand deposits (Rothbard nor I care what YOU personally call them, Mr. Vista, unless you're my banker) then they must be available on demand. If they want to lend them out, and restrict access to them to permit this, then they are some form of time deposit.

I just wonder why the banking community and their Stockholm Syndrome apologists insist on calling them demand deposits when their own arguments prove that they don't consider them to actually be DEMAND deposits. Well, I don't wonder why banks do it... Perhaps they call them that, instead of what they are, to mislead...?

trent steele writes:

@David Friedman

I think the insurance argument, that I first heard from Dr. White, misses a crucial point. Insurance companies do not offer redemption of claims "on demand." It would be a pretty strange insurance company that did! They are insuring against events that neither they nor the customer control. In fact, if the customer was seen to be "withdrawing on demand," i.e. intentionally causing the event against which he was insured, I think we could all agree (as would the courts) that the CUSTOMER was clearly committing fraud.

Also, as I pointed out to Mr. Vista, if a note has an explicit clause barring (or potentially barring) redemption on demand then it is not a demand deposit. Why in this one area (banking) must people be so attached to using a word which clearly isn't applicable? Especially when the use of the word in the context is very misleading, and is in fact the crux of a huge argument.

MikeP writes:

Why in this one area (banking) must people be so attached to using a word which clearly isn't applicable?

It appears to me that the only people who are attached to the term "demand deposits" as opposed to "deposits" are those arguing against fractional reserve banking.

If the issue is that banks are legally allowed, encouraged, or mandated to use that term to mean all deposits are instantly available on demand, I doubt you will find much argument supporting that position here.

But if the term -- if and when it is used -- comes with the obvious explicit, implicit, or reasonably deducible caveats, then there is no fraud.

trent steele writes:

@MikeP

"Demand deposit" and "time deposit" are two different things. So I ask again, why do some insist on using one when they mean the other, then building vast arguments on the wrong word, nullifying all of their own points? Can we not agree to all speak one language in the 'debate'?

I especially refer to: "But if the term -- if and when it is used -- comes with the obvious explicit, implicit, or reasonably deducible caveats, then there is no fraud." That is like saying that when people sell cats should be explicit that they are in fact dogs. Well, I ask, why not avoid the potential confusion (fraud??) and advertise them as dogs to begin with?

And your "reasonably deducible caveats" seems to be a new legal standard. "Your honor, no one should have believed the English definition of the word used in the contract, but instead should have reasonably deduced that a caveat nullifying the entire meaning of the word in question was implied!"

As to FRB, it is inherently fraudulent because of what it is, i.e. holding only a fraction of what is meant to be available on demand. For if a bank made loans only out of what it had taken on as a time deposit (of any length, even one day!) and then structured its loans based on this timing, then they would not be holding a "fraction," they would be holding 100% of what was due on demand and 0% of what was not yet due. This is banking, and I'm always blown away when I hear the claim that anti-FRB is anti-banking in and of itself.

Once again, I refer to the standard anti-anti-FRB confusion, presented helpfully by Mr. Vista: "Of course, a demand deposit *is* a time deposit of exceedingly short renewal interval. That is, a CD with a renewal period of 1 day hardly differs from a demand deposit."

A demand deposit *is not* a time deposit. It is a demand deposit. A time deposit has a *time* when the deposit matures and is contracted to be available; a demand deposit does not. If someone doesn't understand this, or the implications thereof, then they couldn't possibly understand ABCT etc., and I guess I wouldn't expect them to understand why this is even an important issue - beyond signaling that you don't like Rothbard (which often seems to be an end in itself).

As an aside, even the "free" checking accounts are going the way of the dodo. When they do (and, to the extent you've got to keep a minimum balance, they already have) will the anti-anti-FRBers revise and then declare that we should actually pay for the right to have our demand deposits not be available on demand?

MikeP writes:

trent steele,

Perhaps I went too far with "reasonably deducible caveats" in trying to imagine all the ways the withdrawal on demand might be limited, but it is most definitely not a new legal standard. The reasonable person is part of longstanding common law.

Nonetheless, while the reasonably deducible caveats may be obvious to me, who knows something about banking and banks, they might not be obvious to a man on the street or twelve members of a jury. You have a fair point.

But there is nothing fundamental or economically interesting here. The entire perceived problem is solely an issue of disclaimer.

...will the anti-anti-FRBers revise and then declare that we should actually pay for the right to have our demand deposits not be available on demand?

If that's the service that they are selling and they are explicit about the limitations, then yes.

trent steele writes:

@MikeP

I think you missed my "humor" at the end, there. I was referring to a situation where a person pays for a service/good with the knowledge that they will not receive the service/good (i.e. a premium paid for a demand deposit, which is explicitly stated to not be redeemable on demand). I strive not to be, but I am apparently a humorless jerk on the internet. My sincere apologies, and I appreciate your engagement.

As an aside, re: your "reasonable person," here is a fun one.

But finally, if you see nothing interesting about fluctuations in the money supply caused by FRB then I would direct you to, at least, Austrian Business Cycle Theory. I find it pretty interesting, and even topical!

MikeP writes:

My fault in missing the sarcasm. Given the Coase Theorem as well as the enduring effort of the Fed to stay at zero-bound, I should have assumed you wouldn't turn a matter of degree into an error of kind. My apologies.

And I don't deny that there isn't something economically interesting with regard to money supply due to fractional reserve banking, only that there isn't something economically interesting with any likelihood of fractional reserve banking appearing fraudulent.

Peter St Onge writes:

@David Friedman, very interesting point on insurers. On reflection, they would be committing fraud if they had not pre-arranged sufficient credit facilities to cover their worst-case obligations. This is recognized by the re-insurance industry.

To argue otherwise would be to claim that an insurance contract was not a contract, but simply asked a good faith effort.

I think this actually takes us deeper to the fundamental fraud ensconced in "limited liability."

vikingvista writes:

Peter St Onge and trent steele,

Missing the point on the arbitrariness (not to mention insignificance) of a day, perhaps (but doubtful) you will recognize it by instead kindly explaining to me *ANY* difference experienced by *anyone* between a demand deposit on one hand, and a time deposit with a 1 nanosecond renewal period on the other.

The difference between a demand deposit and longer duration time deposits is obviously in degree, not in kind. There is no magical cutoff in that gradient at which the transaction suddenly (or even gradually) becomes fraud. Regardless of the renewal period, from zero on up, there is always some risk, because risk is an inherent property of a loan (you know, those things that pay “interest”). The extent of that risk is managed by adjusting the interest paid to the lender (i.e. the depositor) and the amount of reserves held.

trent steele,

“I won't spend my day typing to someone who refers me to FreeBanking.org”

I’m just offering it up, in case you ever want to spend a day away from the ridiculous.

“I'll just end by saying that if you are arguing that something isn't "something," then you should use words that mean what you think you are saying.”

Huh?

“If you want to say that FRB isn't fraudulent because”

Fractional reserve banking isn’t fraudulent, because there isn’t deceit in the practice of fractional reserve banking. You could, on the other hand, argue the Rothbard was fraudulent as an economist, since he surely was spreading misinformation about the long understood and widely used basic functioning of commercial banks, and it is impossible to believe that a PhD economist from a prestigious university could get the basics so wrong.

“they pay interest on very short-term (ALMOST demand) deposits”

You keep going on and on revealing how you missed a very simple point regarding demand and time deposits. Fractional reserve banks pay interest on REAL demand deposits, just as they do all time deposits. They do it countless times everyday and have so for centuries. Truly on demand. Just try it yourself, and you’ll see. That’s why it came to be called “on demand”.

It is the essential innovation of predicting the flow of funds through a bank and establishing a corresponding reserve for a desired degree of risk, that permits the pricing of all such loans including time deposits from very long duration to very short and even zero duration, and even permitting acceleration of all loan (i.e. deposit) types. This is probably the single most important financial innovation of modern times, as it permits efficient redistribution of widely dispersed decentralized capital to more productive ends, at almost miraculously low risk to small lenders (i.e. depositors), even with the countless disruptive and occasionally disastrous interventions of central planners.

And it is the same process, same business model, same basic idea whether using demand deposits, long term time deposits with acceleration options, or long term time deposits without acceleration options.

But nobody will ever be able to remove default risk from loans, no matter how long the renewal interval. Risk of future events can only be managed, never eliminated. Loans can always fail. Even your (INTEREST-PAYING) loan to the bank.

“If banks want to call them demand deposits (Rothbard nor I care what YOU personally call them, Mr. Vista”

I’ve no idea what you’re going on about. I call them what every non-Rothbardian calls them--”demand deposits”, because that is the evolved term of art, and it is nicely descriptive one too, given that is literally how they work.

“If they want to lend them out, and restrict access to them to permit this, then they are some form of time deposit.”

I see. So suddenly it isn’t fraudulent if a bank issues 1 nanosecond time deposits instead of demand deposits. Got it.

vikingvista writes:

The idea that to not be fraudulent a bank must give a lesson on the centuries-old basic notion of commercial banking to prospective customers is another ridiculous notion stemming from this false claim of fraud. It isn’t fraudulent if you hire an electrician who doesn’t give you a basic lesson in electricity. It isn’t fraudulent if go to a baker who doesn’t give you a lesson in basic baking. If you go to a bank, it behooves you to first know what a bank is. It isn’t hard to figure out if you truly care. Despite Rothbard’s absurdly silly claims to the contrary, it is no secret that banks lend deposits, that interest is something you are paid for lending, and that loans can always default.

trent steele writes:

@vikingvista

Ugh. "because that is the evolved term of art."

As long as we agree that you are being "artistic" rather than literal, I think we've found the source of your error.

"I’m just offering it up..."

I don't like conversations where I say what I think, and then you say "go read what other people wrote!" I have. If you like an argument that is made there, make it yourself.

"Demand" deposit doesn't mean "time" deposit, or they wouldn't have those two words. Even a nano-second makes a difference. Or why did they build that fiber line from Chicago to New York? smh. You try to deny basic logic and language with snark, and even fail miserably there. Not that it was even ever a serious charge ("A cat is so much like a dog it's not a lie to knowingly sell a cat as a dog!").

Again, if you are so confident that a time deposit and a demand deposit are the same thing, why not use only the word that actually describes the thing? Why so vehemently defend an obvious misnomer? Why not call them "nano-second time deposits"? Obviously because then customers would expect to have unfettered access after one nano-second, and that would mean the deposit would have to be available after one nano-second, and then the bank wouldn't be able to lend it out until they had secured it for another length of time, or they would be defrauding the depositor!

(As a quick aside: Do you accept that there was ever a thing called a "demand deposit" as opposed to a "time deposit"? If so, why have you morphed them into the same word? And if you don't believe that there was ever a reason for both words...)

I mean, really, thank you for proving my point that there is a functional difference between a demand deposit and a time deposit of any length of time. Not seeing that difference must take great mental effort.

I understand why bankers do it, I just don't get what vikings get out of it. But I'm sure it feels good, when so many of the cool kids are saying it... Perhaps this post by Friedman will explain why you tenaciously hold to a view that wouldn't stand critical scrutiny.

I'm happy to have exchanged with you, but please don't ask me to sign any contracts with you.

trent steele writes:

@vikingvista
"Despite Rothbard’s absurdly silly claims to the contrary, it is no secret that banks lend deposits, that interest is something you are paid for lending, and that loans can always default."

Time deposits, or demand deposits?

You just say "deposits," which again shows how incredibly sloppy your thinking is, and how you still have no idea what the issue is. There is truly no point in arguing with someone in the English language who doesn't understand the meaning of words and who uses words with plainly different meanings interchangeably - especially when the point of the argument is about the meaning if a word!

Take care, viking. I'll give you the last word - I just won't be able to be sure what you mean by it.

vikingvista writes:

“As long as we agree that you are being "artistic" rather than literal”

You seriously don’t know what is meant by “term of art”?


“I don't like conversations where I say what I think, and then you say "go read what other people wrote!" I have. If you like an argument that is made there, make it yourself.”

Clearly disingenuous given that (1) I did make some myself, and (2) I offered to provide more specifics upon request. Since you didn’t request, your “don’t like” can’t be taken seriously.


"I have."

So it's a comprehension issue then. Surprise surprise.


“"Demand" deposit doesn't mean "time" deposit, or they wouldn't have those two words. Even a nano-second makes a difference. Or why did they build that fiber line from Chicago to New York?”

The density of Rothbardians never ceases to amaze me. Juxtaposing a day with a nanosecond wasn’t dramatic enough to put you on topic, so how about a femtosecond? How’s this, you pick the lowest renewal interval that YOU think is significant, and then divide it by 10^6. Now, tell me how that literal time deposit differs in any significant way from a demand deposit. Of course, I hardly expect you to ever actually address, or even grasp, the point.


“You try to deny basic logic and language with snark”

First you try to divert the discussion from deposits to equities, now you try to further divert it into discussions of hypocrisy.


“Again, if you are so confident that a time deposit and a demand deposit are the same thing”

How could I be confident of that, when my posts to you make it clear that I don’t even believe it to be true? Please explain.


“Why not call them "nano-second time deposits"? Obviously because then customers would expect to have unfettered access after one nano-second, and that would mean the deposit would have to be available after one nano-second, and then the bank wouldn't be able to lend it out “

So you actually believe that fractional reserve banking doesn't apply to 12 month CDs? You truly think that a bank always has the cash in the local vaults for 100% of its 12 month CD renewals, just in case? Even when in the entire decades or more long history of the bank only, say, <20% of 12 month CD holders ever withdraw when the CD is due? You really believe this nonsense? Consider this, what do you think it would do (1) the financial security of the bank, and (2) your interest payments, if banks really waste funds this way?


“Do you accept that there was ever a thing called a "demand deposit" as opposed to a "time deposit"? If so, why have you morphed them into the same word?”

You bankingisfraud cultists truly do live in your own world--compete with blinders and earplugs. As my posts to you make clear, this is an absurd characterization of my views. I use the terms just as most people do. You simply do not or will not grasp the point being made.

Okay. I like pounding cement, so let’s try another iteration. Consider a term (and actual instrument class) called “(x)deposit”, where “x” is any nonnegative real number referring to the time interval during which the deposit cannot be accelerated without penalty. A (0)deposit is commonly called a “demand deposit”. An (x)deposit with x>0 is commonly called a “time deposit”. Now x varies along a continuum (literally the mathematical continuum) from 0 on up. As x so varies, the functionality of the (x)deposit also varies continuously. So, there is always an epsilon so small that (epsilon)deposit is not significantly different from (0)deposit, but since epsilon>0, (epsilon)deposit is by definition a time deposit.

Now what varies in the bank’s business model as x varies along the nonnegative real number line? Well, for a given profile of both the depositor and bankloan pools, as x varies from 0 on up, the bank maintains a certain desired level of risk by varying (1) the interest paid on the (x)deposits, and (2) the amount of reserves maintained (simplified for clarity).

That’s right. The ONLY difference in banking between time deposits and demand deposits, are what reserves and interest rates the bank must set to maintain the same level of risk. And that varies the same way whether going from demand deposits to 1 week time deposits, or from 3 month time deposits to 12 month time deposits. But regardless of x, it must reserve something (or else your deposit is at substantially greater risk), and it must pay some interest (or you will never loan your money to the bank). It is fractional reserve banking *regardless* of x.


ME: it is no secret that banks lend deposits
DU: Time deposits, or demand deposits?

So much for common knowledge. As has pretty much always been commonly known, banks lend deposits, whether time deposits or demand deposits. That’s simply what banks were created to do.

[html for less than symbol fixed--Econlib Ed.]

vikingvista writes:

** The following paragraph posted incompletely above... **

So you actually believe that fractional reserve banking doesn't apply to 12 month CDs? You truly think that a bank always has the cash in the local vaults for 100% of its 12 month CD renewals, just in case? Even when in the entire decades or more long history of the bank only, say, LESS THAN 20% of 12 month CD holders ever withdraw when the CD is due? You really believe this nonsense? Consider this, what do you think it would do (1) the financial security of the bank, and (2) your interest payments, if banks really waste funds this way?

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