Fundamentals of Banking

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Paul Schneiderman, Ph.D., Professor of Finance & Economics, Southern New Hampshire University ©2008 South-Western.
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Fundamentals of Banking Rothbard on banking types ECO 473 - Money & Banking Dr. D. Foster

Rothbard – Loan Banking Banks as intermediaries for lending Funds come from investors (savers). Counts as bank “equity.” Rothbard Bank example… MS is unaffected by bank’s actions. The funds will always end up in someone’s pocket! They cannot be inflationary! Grow by selling bonds and CDs. Borrowed funds. Examples …

Rothbard – Deposit Banking Banks as warehouses Convenient & safe place to store gold. Ownership receipts issued. Receipts are redeemable “on demand.” Receipts start getting traded for one another. Stored gold is a “bailment” not a loan. Historically – goldsmiths. Problem – nobody ever has to pick up the gold! Unlike grain, the gold doesn’t get consumed. Goldsmiths can print receipts and start lending!!

Rothbard – Fractional Reserve Banking Modern banks serve both functions Collect deposits & issue loans. Courts have ruled deposits as bank debt. Deposits are owned by the bank! If 100% reserves, then no effect on MS. With fractional reserves come trouble ... Create money = inflation. Banks are always “insolvent.” [Not bankrupt.] Contraction of credit = recession/depression. Bank notes gave way to Demand Deposits.

Fundamentals of Banking Rothbard on banking types ECO 473 - Money & Banking Dr. D. Foster

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