Re: Hummel Inquiry

["John B. O'Donnell" <jackodonnell@xxxxxxxx>]

James R. Olson, jr. wrote:
>
> At 11:29 AM 10/11/97 -0700, John B. O'Donnell wrote:
>
> >I went a few rounds with Warren on this issue on one of the
> >newsgroups a while back without his convincing me of his
> >position. This is how things look to a banking practitioner, but
> >I still believe that it is a legal requirement that a bank have
> >funds to lend before it actually makes a loan. I also have no
> >doubt that Warren is correct that any bank worth its salt can and
> >will find funds to fulfill any loan promises it makes.
>
> Reserve banking has been around since the Middle Ages.  It started when the
> banks noticed that people were trading letters of credit rather than the
> coins they represented, and realized that they could write letters of
> credit that weren't backed by actual coins on deposit.  It was a dicey
> proposition, though, and they needed to keep a certain amount on deposit to
> cover the letters that were redeemed, since being unable to redeem a letter
> of credit would lead to people considering all their letters of credit
> worthless, which, of course, would mean that they were worthless.  This
> amount kept on deposit was the "reserve" in reserve banking.

Your confusing the liquidity conservative bankers maintain to
avoid panic demands from depositors with or without the existence
of a central bank with the required reserves the U.S. central
bank imposes as a restraint on credit expansion.
[Non-conservative bankers, also known as gamblers, who ignore
such niceties are the go-go types that so often collapse with
great gnashing of teeth and such sundry accompaniments.]

The liquid resources to meet depositor demands range from vault
cash [the most liquid asset] through various investments
[treasury securities, etc.] to callable loans and marketable
loans to the least liquid asset, required reserves, which only
become available by reducing assets that have legal requirement
for reserves.

None of this, however, has anything to do with the ability of
banks to make loans with or without having sufficient cash on
hand to fund the loan.

			-- jbod
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