[murphy560]

I’ve often heard the defense of “hoarding” money (specifically holding money in a checking or savings account) in a modern day fractional reserve system that is along the lines of: “saving money is good for the economy because when you deposit money into a checking or savings account the bank then loans out a portion of your money for productive purposes.” It seems to me that in a 100% reserve banking system adding to your cash balance vs. investment are two clearly distinct and independent actions, but in a modern fractional reserve system the two seem much less distinct. My question is: in a fractional reserve system, should deposits made by individuals into checking and savings accounts be considered purely an addition to cash balance, purely investment, or some combination of the two?

[jmherbener]

People often have multiple motives for an action. If banks pay interest on deposits and make them redeemable on demand at par for cash, then customers can hold deposit balances for both reasons. It’s not necessary to separate their motives in order to compute the funds devoted to saving-investing and the funds devoted to money holdings.

One can determine the extent of saving-investing in the economy by adding up all the funds spent on producers goods. The sources of saving-investing can be determined by adding up self financed funds and financed funds. Banks contribution to the later can be discovered by looking at their loan portfolios on the asset side of their balance sheets.

One can determine the money stock in the economy by adding up all money proper plus all money substitutes, i.e., all redemption claims to money payable on demand at par.

[murphy560]

Thanks, here’s what I was originally thinking…Since the total money stock must equal the sum of all individual cash balances, and as you said “One can determine the money stock in the economy by adding up all money proper plus all money substitutes, i.e., all redemption claims to money payable on demand at par” then money in checking and savings accounts must constitute only cash balances (assuming they are redeemable on demand at par for cash). Since true savings-investment, at least in the Austrian sense, cannot be immediately redeemable but payable only at the end of a stage of production or the maturity of the investment contract (i.e. a bond or certificate of deposit) it seems to me that it would make sense to say that one’s cash balance is composed of currency, checking deposits, and savings deposits whereas one’s savings-investment is composed of things like certificates of deposit, bonds, etc. It was then my conclusion that, even in a fractional reserve system, checking/saving deposits can not be considered true investment and should be considered as one’s cash balance just as much as money stored under the mattress is. Is this a reasonable line of thinking?

[jmherbener]

Yes, that line of thinking is reasonable. Here’s the True Money Supply as formulated by Rothbard:

http://mises.org/content/nofed/chart.aspx

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