A key question in the debate over fractional reserve banking is the extent to which people know that banks lend their deposits out to others. People must accept that if they all went to get back their deposits, the banks would not be able to pull in all the money they have lent on, and the system would collapse. The fact is that not all people want their money back at the same time, so the scheme works and allows interest to be paid. I have always held that people would be horrified if they knew what was actually done with their money. In the absence of any empirical data, the Cobden Centre commissioned a group of students at ESCP Europe working under our Founding Fellow, Dr Anthony Evans, with the market research company ICM, to survey the views of 2000 people. Anthony has written an informative and useful summary. The report considers the key questions of solvency and liquidity, and concludes that “by reasonable auditing standards, high street banks are insolvent”.
My take is that people are confused. 74% think they own their money, when of course they do not, the bank does. 15% want safe keeping and 67% want easy access. Easy access implies safe keeping to me as there is no access if you have a bank run. I do feel that clarity, more so than ever, is required to start the clearing up of this mismatch of understanding between what a bank actually does and what people think it does. This can only be resolved by a change in law as mentioned in this article. At the same time, our fractional reserve free banking colleagues may take comfort from our finding that 61% of those surveyed do not mind having their money lent out so long as the lending isn’t reckless. This strengthens the position of allowing FRFB between consenting adults. The debate will roll on. We hope this will add an empirical edge that will sharpen the focus of some of the best thinking Austrian economists.
I am minded to return at a later date and commission a further survey that helps spell out to the public the actual bank credit creation multiplier as this is not brought out by our questions, and see what the empirical data throws back at us. I suspect that hairs will stand up on the back of necks, with a general sense of horror, but these are my prejudged views and I would be interested to see the evidence.
In the meantime, I recommend this video of Anthony’s presentation of our findings to the Liberty 2009 Conference:
That question on ownership of money in the bank is deeply flawed. Of course if we are the bearer of a bank note we own the note, and in this sense we own the money, which consists of the claim on the bank. In the case of a bank account, the customer owns the account and the balance in it, which balance is money to the customer concerned. The bank account balance is a kind of property known as a chose in action, being a dbt owed by the bank to its customer. If a customer deposits outside money to a current account with a bank, he is exchanging one form of money for another. He still has and owns money, but its form has changed.
I’m left wondering what the question in the survey could mean, and what it was intended to discover. In a way you would be right to answer it either way. The real question to ask is what is the bank’s function in accepting demand deposits: a credit institution that is borrowing the money but engaging to repay the money on demand, or a storage institution that is engaging to hold the money both separately from its own funds and not for interest bearing investments?
Thank you David,
The question(s) you suggest is a better question for sure. ICM (the polling compnay) advised us people when asked did not understand this at all and asked us to “dumb down” the question! If we revist, which we hope to do, we must find some way of making this point very clear.
Thank you for taking the time to read.
People don’t mind that banks lend their deposits because they don’t know three things:
– every new loan creates new money and this new money devalues the original depositors money.
– depositors would earn a higher interest rate if banks couldn’t create money. Borrowers would bid up the interest rate on the fixed amount of money
– government banking insurance requires all taxpayers to support this fraudulent system, adding yet another financial penalty.
As Harry Browne pointed out, a depositor with 100 dollars in his account who expects to purchase two items for 50 dollars a piece could be outbid by someone offering 60 dollars for the item, and that someone borrowed the money that original person deposited. The bank funded the person’s competitor. That will make you think twice before giving your money to current banks!
Some might wonder whether the interest rate compensates higher prices. For the above scenario, the interest rate would need to be at least 20 percent to allow the person to buy two items, but the 20 percent would still only come at the end of one year.
For point number two, people also don’t realize they would earn a higher interest rate on their money if the bank could not create money. As many people always mention, bank credit would shrink without fractional reserving, but interest rates would rise and this would benefit savers. The NY times recently wrote an article about how low interest rates harm savers, especially retired individuals on fixed incomes.
The banking crooks created government bank deposit insurance to calm those who might be concerned about fractional reserving. Why worry about the bank lending out your money if the government is going to cover the deposit? People may or may not realize that they’re paying for the losses of other depositors.
One final point is that many people think it’s “neat” that banks can exist with only two percent reserves. They don’t realize the banks are stealing their purchasing power with every new loan.
If we can inform the public that fractional reserving devalues their paycheck and their savings, drives up prices, and reduces the interest paid on their savings, they will demand laws that prevent banks from creating new money.