Dynamics Of A Banking System In a Truly Free Market
Granted I am an Austro-Libertarian Idealist, I found myself debating how a free- market banking system would operate. Well it wasn't exactly that broad, rather it was the nuts and bolts of it all. I expect the majority who read what I'm about to write will call me crazy, but the few who understand the true nature of the coming currency crisis might find this interesting. Okay for the layman I will just outline the broad austrian theory for the general framework of a free banking sysytem.
1) The would be no central bank, thus no fractional reserve banking. For those who don't know a brief example of fractional reserve banking would be as follows: Suppose John Doe comes to me (the bank) and wants to borrow 1m, I would make a 100k deposit with the FED and they would create 900k out of thin air. So in other words fractional reserve banking is the most inflationary instrument out their for the following reason: Lets take Citigroup or some other large money center bank, all the loan losses being incurred than can't be covered by existing capital/retained earninigs, etc is inflationary as it was created by the central bank.
2) A commoditty that is durable, unable to be replicated and relatively scarce as to make it impossible to make a noticable change in the outstanding quantity. This as most people know, and which the free market has chosen for over 5000 years has been gold and silver. The latter for everyday transactions and gold for large denominations. This, however, would not likely be the currency in circulation but rather a paper currency backed 100% by Gold and Silver.
3) This in turn would mean banks make loans from retained earnings or capital raised through equity offereings or something of that nature. This would neccessarily lead to more prudent lending, as this would be shareholders actual wealth at stake. Banks would grow through the interest earned on successful loans AND interest depositors would pay the bank for the service of holding their funds.
NOW THIS IS WHAT PUZZLES ME! I would imagine the interest for holding funds would be in the low single digit %. This would have to be the case because of competition. In a free market anormal profits would cause other entrants into the market. The detail I was debating was the following: would this rate constantly be drawn to near 0?I also was pondering whether the current equilibrium of supply and demand for loanable funds have an effect on this rate? Anyone care to share?