Financing the navy

Graydon wrote:

PeterZ wrote:The House of Qwentyn can lend all its wealth just as it did after the SoS. It can accept borrowed gold as payment and lend it out again. Those borrowed funds can be lent out again and again.

That quote from RFC

the provisions of the Writ which forbid debasing the currency have always been interpreted to mean that while paper notes may be issued by a bank, a nation, an archbishopric, or Mother Church herself, the issuing institution cannot issue notes for more bullion than it has actually on hand.

So if I come home from a busy and eventful few years with Charisian privateers and take my nice stack of pay and profits, all 5,000 marks of it, handily in gold, and deposit it with a bank for safekeeping -- I'm going to do something boring ashore, privateering involves way too many cannon and far too much screaming in terror -- how much have I increased that bank's loan capital?

As I understand the above, 5,000 marks. The bank can issue notes for up to the 5,000 marks I've just deposited.

If the bank loans my deposit as gold, it obviously can't loan more than the 5,000 marks. The bank equally obviously can't issue notes against the gold it has loaned out; that gold isn't "on hand", safely in the vault. If people come back and re-deposit their loans in gold as gold, the bank still never gets above 5,000 marks in gold from my deposit.

The bank can't receive notes and issue loans backed by those notes. The only way to issue notes is to have gold on hand, and notes aren't gold. (Or, rather, they represent gold, but they're only allowed to do it once, and they already have.)

In a proper fractional reserve system, the restriction on notes being backed by gold on hand wouldn't be there. The bank could issue notes against the value of deposited notes, because the system doesn't care what the material representation of the money happens to be. (It has better not; most of our money is electrons.)

In such a system, a reserve requirement of 20% (Baron Ironhill is a cautious man, but not too cautious) that 5,000 mark deposit can create another 20,000 marks worth of "bank money" in the form of loans by cycling through depositing and being-re-issued up to 80% of the deposit value. (I'll be forgiven if I don't try to exhume some very dusty math skills and sum the series?)

All 20,000 created marks go away as the loans are paid off, but the interest paid to the bank doesn't, that's the money that expands the economy.

Only on Safehold that's a heresy; Holy Writ says you can only issue notes for gold that's in your vault. Even Father Paitr would be upset with you. (And Baron Ironhill. And the bank. Though probably not in a way that involves dying horribly. Just lots and lots of penance.)

While a bank can't use deposited notes as the basis to issue more notes, while, more specifically, you're required to have bullion on hand as the basis of your bank notes, you can't have fractional reserve banking. Your money supply is fundamentally limited by your stock of whatever the backing substance is. (In this case gold. Lots of things have been used.) This keeps money from turning into the abstraction of economic activity you really want when industrializing.

TN4994 wrote:

Graydon wrote:That quote from RFC

the provisions of the Writ which forbid debasing the currency have always been interpreted to mean that while paper notes may be issued by a bank, a nation, an archbishopric, or Mother Church herself, the issuing institution cannot issue notes for more bullion than it has actually on hand.

So if I come home from a busy and eventful few years with Charisian privateers and take my nice stack of pay and profits, all 5,000 marks of it, handily in gold, and deposit it with a bank for safekeeping -- I'm going to do something boring ashore, privateering involves way too many cannon and far too much screaming in terror -- how much have I increased that bank's loan capital?

As I understand the above, 5,000 marks. The bank can issue notes for up to the 5,000 marks I've just deposited.

If the bank loans my deposit as gold, it obviously can't loan more than the 5,000 marks. The bank equally obviously can't issue notes against the gold it has loaned out; that gold isn't "on hand", safely in the vault. If people come back and re-deposit their loans in gold as gold, the bank still never gets above 5,000 marks in gold from my deposit.

The bank can't receive notes and issue loans backed by those notes. The only way to issue notes is to have gold on hand, and notes aren't gold. (Or, rather, they represent gold, but they're only allowed to do it once, and they already have.)

In a proper fractional reserve system, the restriction on notes being backed by gold on hand wouldn't be there. The bank could issue notes against the value of deposited notes, because the system doesn't care what the material representation of the money happens to be. (It has better not; most of our money is electrons.)

In such a system, a reserve requirement of 20% (Baron Ironhill is a cautious man, but not too cautious) that 5,000 mark deposit can create another 20,000 marks worth of "bank money" in the form of loans by cycling through depositing and being-re-issued up to 80% of the deposit value. (I'll be forgiven if I don't try to exhume some very dusty math skills and sum the series?)

All 20,000 created marks go away as the loans are paid off, but the interest paid to the bank doesn't, that's the money that expands the economy.

Only on Safehold that's a heresy; Holy Writ says you can only issue notes for gold that's in your vault. Even Father Paitr would be upset with you. (And Baron Ironhill. And the bank. Though probably not in a way that involves dying horribly. Just lots and lots of penance.)

While a bank can't use deposited notes as the basis to issue more notes, while, more specifically, you're required to have bullion on hand as the basis of your bank notes, you can't have fractional reserve banking. Your money supply is fundamentally limited by your stock of whatever the backing substance is. (In this case gold. Lots of things have been used.) This keeps money from turning into the abstraction of economic activity you really want when industrializing.

What happens if the ex-privateer wants some of his gold back?
Does the bank say: "Sorry, but we've wrote these lines of credit?

Tanstaafl wrote:

And here we have the beginning of a bank run.
If the bank has lend all the gold she has in deposit and can't borrow from another bank, it is finished.

This is why you need deposit insurance and a lender of last resort and all the other things that make modern banking so complex.

Banking should be safe and boring.

But as long as the currency is gold, modern banking is out of the question. With independent economies and a single currency wave after wave of depressions are highly likely. Perhaps not in Charis, where Owl can suggest a policy that keeps the economy balanced, but surely in the rest of Safehold.

TN4994 wrote:What happens if the ex-privateer wants some of his gold back?
Does the bank say: "Sorry, but we've wrote these lines of credit?

PeterZ wrote:The velocity of money doesn't increase the actual money supply so much as increase the size of an economy that can be supported by any given monetary base. Fractional reserve banking in depository institutions simply accelerates the velocity of money more effectively than other forms of financing.

Graydon wrote:
Permit me an analogy.

The effective money supply is a function of the size of the money supply, the velocity of money, the distribution of the money (80% of the money is in 20% of the hands is very different from 80% of the money in 75% of the hands...) and probably some other stuff depending on how you want to model it.

Similarly, the lethality of an army battalion is a function of the number of rifles, the standard of training and thus accuracy of the troops, how prepared/dug in/well dispositioned they are, and so on.

Velocity of money is like the training standard; if you're talking about the British Army's Old Sweats in 1914, they are more lethal than their numbers would suggest because they're all such excellent shots. A high training standard is still, in the end, no substitute for there being more of them, and fractional reserve banking increases the size of the money supply; it's reinforcements. (In the modern form, it's Lord Kitchener's Armies and mass mobilization.)

(Securitization is a bit like inventing the machine gun.)

PeterZ wrote:

Tanstaafl wrote:

And here we have the beginning of a bank run.
If the bank has lend all the gold she has in deposit and can't borrow from another bank, it is finished.

This is why you need deposit insurance and a lender of last resort and all the other things that make modern banking so complex.

Banking should be safe and boring.

But as long as the currency is gold, modern banking is out of the question. With independent economies and a single currency wave after wave of depressions are highly likely. Perhaps not in Charis, where Owl can suggest a policy that keeps the economy balanced, but surely in the rest of Safehold.

If the bank keeps sufficient reserves to accommodate withdrawals, there isn't a problem. Deposit insurance isn't really necessary. One might argue that by shifting risk to third parties, one encourages banks to engage in riskier behavior since their depositors are protected. At least that would be true for mandatory deposit insurance. If such insurance is optional, banks with sufficient capital and reserves can offer safety at a much lower cost. If default insurance is mandatory, the additional risk adds up to higher defaults and higher overall costs of default.

The lender of last resort would be helpful. Banks that face short term liquidity issues can borrow enough to satisfy an unusually large withdrawal without adversely impacting the bank's operations.

Tanstaafl wrote:

And here we have the beginning of a bank run.
If the bank has lend all the gold she has in deposit and can't borrow from another bank, it is finished.

This is why you need deposit insurance and a lender of last resort and all the other things that make modern banking so complex.

Banking should be safe and boring.

But as long as the currency is gold, modern banking is out of the question. With independent economies and a single currency wave after wave of depressions are highly likely. Perhaps not in Charis, where Owl can suggest a policy that keeps the economy balanced, but surely in the rest of Safehold.

PeterZ wrote:
If the bank keeps sufficient reserves to accommodate withdrawals, there isn't a problem. Deposit insurance isn't really necessary. One might argue that by shifting risk to third parties, one encourages banks to engage in riskier behavior since their depositors are protected. At least that would be true for mandatory deposit insurance. If such insurance is optional, banks with sufficient capital and reserves can offer safety at a much lower cost. If default insurance is mandatory, the additional risk adds up to higher defaults and higher overall costs of default.

The lender of last resort would be helpful. Banks that face short term liquidity issues can borrow enough to satisfy an unusually large withdrawal without adversely impacting the bank's operations.