(Mises)—When Silicon Valley Bank and other banks failed earlier this year, the debate over the sustainability of fractional reserve banking resurfaced. Under fractional reserve banking, banks keep only a fraction of customers’ deposits in reserve. The difference is bank credit, such as government debt, mortgages, business loans, and many other kinds of loans. This practice leaves the bank open to a run, in which panicky depositors attempt to withdraw their funds from the bank en masse but the bank doesn’t have the cash on hand. The following FRED graph gives an idea of the extent of the mismatch between deposits and reserves.
But we shouldn’t worry about bank runs because the government is here to help. In the US, the Federal Deposit Insurance Corporation (FDIC) insures checking accounts up to $250,000, and the banking system is regulated by a host of agencies, including the Federal Reserve, which also acts as a lender of last resort. These measures are intended to prevent and mitigate bank runs for the benefit of both the banks and their depositors. Though it should be obvious that they only conceal the fundamental problem and disperse the costs.
Murray Rothbard was a detractor of fractional reserve banking. He wrote on the changing legal definition of bank deposits—how they originated as warehousing relationships, or “bailments,” but over time came to represent debtor-creditor relationships. Ludwig von Mises also pointed to bank issues of fiduciary media (the proportion of deposits that cannot be redeemed), which artificially lower interest rates, as the cause of business cycles.
Nevertheless, a faction of Austrian and Austrian-adjacent scholars defends fractional reserve banking, saying that not only can it be sustainable, but it can also be beneficial in maintaining monetary equilibrium. I’m not convinced by this view, but it’s worth taking a closer look at one point that these scholars often make. They say that clear communication between the bank and its customers would solve the hairy problem of bank customers expecting the money at par on demand.
With such an agreement, “fractional reserve free banking” proponents say, depositors would know that they are effectively creditors to the bank and that the bank is therefore a debtor to them. This means that the deposits are technically and legally owned by the bank and that what the depositor has is technically and legally a callable loan to the bank. Clear agreements would mean that depositors understand that there is a chance that they won’t be able to get their money (actually, the bank’s money, in this view) immediately in the event of a bank failure. Of course, central banking and government-backed deposit insurance diminish customers’ expectation of bank responsibility—how much should banks be expected to disclose about the deposit relationship if most of their customers’ deposits are guaranteed by the government anyway?
In line with other fractional reserve free banking proponents, George Selgin argues that modern depositor agreements—the dense legalese most people skip—already establish this transparency.
And he is right. Bank of America does make that disclaimer in its deposit agreement. I decided to take a closer look at other big banks’ fine print to see how standard this language is. What I found is that it isn’t standard and that even when a bank (including Bank of America) does use that language, it is still ambiguous because of other language in the document, especially in regard to the availability of funds. One bank’s fine print doesn’t even mention the possibility of bank failure and FDIC receivership.
Here is what I found.
JPMorgan Chase does not have debtor-creditor language. In fact, in the first section of the agreement, in which common terms are defined, it says that the “available balance” is “the amount of money in your account that you can use right now.” This does not indicate that Chase “owes” its customers the money or that withdrawals could be delayed. Chase explicitly calls its deposit customers “account owners” and say they have “complete control over all of the funds in the account.”
Bank of America describes the deposit relationship as “that of debtor and creditor,” but this language does not appear in its online banking service agreement, which only says that the online “Services may also be affected by your Deposit Agreement.” Bank of America doesn’t say much about the availability of demand deposits but is very clear about time deposits: “When you open a time deposit account, you agree to leave your funds in the account until the maturity date of the account.”
Wells Fargo does not use the debtor-creditor language to describe its deposit relationship. Like Bank of America, Wells Fargo says that account owners have “complete control over all of the funds in the account.”
Citibank very clearly defines its relationship with customers: “Citibank’s relationship with you is debtor and creditor.” But Citi also refers to the customer’s balance as the “‘Available Now’ balance,” even though a critical mass of depositors could run to withdraw their funds and find that the money isn’t so available.
US Bank does not use the debtor-creditor language to describe the deposit relationship. In fact, early in the agreement it refers to the “Owner’s Authority” of depositors, which includes “the power to perform all the transactions available to the account.” US Bank also says that the customer’s funds are available immediately: “‘Available Balance’ means the amount of money that can be withdrawn at a point in time.”
PNC does not use the debtor-creditor language to describe the deposit relationship. It does not even have a section on the possibility of bank failure and the process of FDIC receivership, which is in all the above banks’ deposit agreements.
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So, only two of these six major banks have the debtor-creditor language, and the two that do have it introduce ambiguity by promising at-par-on-demand availability of funds. We are still a long way from clear communication about the status of depositors’ money, if we can call it theirs at all.
About the Author
Dr. Jonathan Newman is a Fellow at the Mises Institute. He earned his PhD at Auburn University while a Research Fellow at the Mises Institute. He was the recipient of the 2021 Gary G. Schlarbaum Award to a Promising Young Scholar for Excellence in Research and Teaching. Previously, he was Associate Professor of Economics and Finance at Bryan College. He has published in the Quarterly Journal of Austrian Economics and in volumes edited by Matthew McCaffrey and Per Bylund. His research focuses on Austrian economics, inflation and business cycles, and the history of economic thought. He has taught courses on Macroeconomics and Quantitative Economics: Uses and Limitations in the Mises Graduate School. He is the author of two children’s books: The Broken Window and Ludwig the Builder. His commentary appears regularly in the Mises Wire and Power & Market.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
