The Kirtland Bank

[wenglund]

In this thread, the question is whether the KSS failed for similar reasons that hundreds of other banks of that time and place failed, or whether it failed because Joseph Smithâ??s enemies deliberately decided to wipe out their own personal fortunes in order to take down the anti-bank.

I, for one, am not looking at the question in this binary way (either/or). To me, the question of the thread can reasonably be answered as "both". No sense ignoring portions of the historical evidence simply because it doesn't fit in your black/white box.

Thanks, -Wade Englund-

[AndyOne]

I suppose that were the officers of the KSS and their non-LDS legal counsel to have the benefit going in of your current hindsight, then you may have a point. They didn't, and so you don't. Rather, they had but the conventional wisdom of the day regarding reserves, which they exceeded by nearly 8%. Is it any wonder that the significance is a little lost on you? It would be lost on anyone suffering from a serious case of Monday quarterbacking.

Thanks, -Wade Englund-

Wade - maybe worth cutting down on the hyperbole. Look, starting a bank in 1837 with limited actual capital may have made sense to those who founded it, which included JS. It was a risky venture, most historians seem to agree with that - check the BYU Studies paper I reference on an earlier post - and was part of a culture of risk-taking in a very scattered and incoherent banking system. The charge that this proves JS was not a prophet stems from the view by some that his prophetic role should have entitled him to some special foresight regarding what was about to occur. I DO NOT believe that he should have. However, there was certainly a more conservative approach that could have been taken, one taken by many of those banks that survived the crisis - including through choice of non-specie assets, lending relationships with other banks, etc. That others in the day made choices that were equally or more imprudent (and this is a point I've already made) doesn't someone make the KSS a wise business to start. I believe the KSS failed because it was doomed to fail from the very start in view of what came later - I am NOT one of those saying that JS should have anticipated the full crisis, but maybe should have considered better safeguards. It was risk-taking, others did it to, but that doesn't mean it wasn't an imprudent thing to do. Look at the fate of US investment banking in the current crisis - they engaged in practices with respect to which they simply should have been more careful, and could have been at the time. Even without a crystal ball, blindness to the potential for severe damage (even if things are worse than what anyone would have imagined anyway) was a huge part of the problem.

[wenglund]

Wade - maybe worth cutting down on the hyperbole. Look, starting a bank in 1837 with limited actual capital may have made sense to those who founded it, which included JS. It was a risky venture, most historians seem to agree with that - check the BYU Studies paper I reference on an earlier post - and was part of a culture of risk-taking in a very scattered and incoherent banking system. The charge that this proves JS was not a prophet stems from the view by some that his prophetic role should have entitled him to some special foresight regarding what was about to occur. I DO NOT believe that he should have. However, there was certainly a more conservative approach that could have been taken, one taken by many of those banks that survived the crisis - including through choice of non-specie assets, lending relationships with other banks, etc. That others in the day made choices that were equally or more imprudent (and this is a point I've already made) doesn't someone make the KSS a wise business to start. I believe the KSS failed because it was doomed to fail from the very start in view of what came later - I am NOT one of those saying that JS should have anticipated the full crisis, but maybe should have considered better safeguards. It was risk-taking, others did it to, but that doesn't mean it wasn't an imprudent thing to do. Look at the fate of US investment banking in the current crisis - they engaged in practices with respect to which they simply should have been more careful, and could have been at the time. Even without a crystal ball, blindness to the potential for severe damage (even if things are worse than what anyone would have imagined anyway) was a huge part of the problem.

Hey Andy, it may help to cut way back on the irrelevant verbosity. I am not questioning the riskyness of the venture, nor have I claimed that Joseph was entitled to "some special foresight". What I am suggesting is that our judgments about the choices that were made, if we wish to be fair, ought to be based on what was known by the decision-makers and what was the conventional wisdom at the time, and not on what may be known and deemed wise after the fact. The things you suggest are all well and good in considering how to improve decision-making for the future, but not in condemning good-faith choices made in the past.

Thanks, -Wade Englund-

[Pahoran]

But not quite as fun and easy as it is to say that the anti-bank was well-capitalized and run in a prudent manner by well-qualified professionals, and only fell because of a coordinated attack by Church enemies, and fraud by an apostate.

And yet, "fun and easy" as that might be to say, no-one has actually said it.

Funny, that.

Getting in some straw man practice are we "Analytics," or did you just have an attack of the jaybears?

Regards,

Pahoran

[AndyOne]

Hey Andy, it may help to cut way back on the irrelevant verbosity. I am not questioning the riskyness of the venture, nor have I claimed that Joseph was entitled to "some special foresight". What I am suggesting is that our judgments about the choices that were made, if we wish to be fair, ought to be based on what was known by the decision-makers and what was the conventional wisdom at the time, and not on what may be known and deemed wise after the fact. The things you suggest are all well and good in considering how to improve decision-making for the future, but not in condemning good-faith choices made in the past.

Thanks, -Wade Englund-

The overselling of CDS without adequate capital to pay out was an imprudent practice by many - even if those the overall increase in risk profile of corporate and housing markets was not fully understood until it was too late for formerly venerable institutions. Committing large amounts of capital to PE firms for prospective LBOs on skimpy terms, premised on the ability to sell off exposure and retain fees, was an imprudent practice, even though the impact of the liquidity crunch was not fully understood until it was too late for those stuck in their positions - culminating in a number of high profile civil suits when financial institutions sought to back out. However, it's not Monday-morning quarterbacking to look back at the time those decisions were made and determine that there was a fair amount of imprudence and lack of appropriate risk management at the time - even if the full impact couldn't have been anticipated. In the same way, a prudent businessperson may very well have identified, and mitigated against, the risks faced by the KSS. Perhaps by not being so trigger happy in issuing notes in its earliest days, as one example; ensuring the potential to raise capital against non-specie assets, as another. I think we can absolutely find flaws in the KSS prior to the crisis - in the same way that we see them now in relationship to modern-day failures.

[Analytics]

What you are describing is leverage, not reserves. It is easy to confuse the two.

Thanks, -Wade Englund-

I would suggest you be more careful to double-check things outside of your area of expertise before you say embarrassingly wrong things like this.

I, for one, am not looking at the question in this binary way (either/or). To me, the question of the thread can reasonably be answered as "both". No sense ignoring portions of the historical evidence simply because it doesn't fit in your black/white box.

Thanks, -Wade Englund-

Rejecting allegations that aren't supported by the historical evidence shouldn't be conflated with black and white thinking.

And yet, "fun and easy" as that might be to say, no-one has actually said it.

Funny, that.

Getting in some straw man practice are we "Analytics," or did you just have an attack of the jaybears?

Regards,

Pahoran

Central points of Mr. White's arguments were that "Joseph Smith's and Sidney Rigdon's management was sound" (page 5), and that "No one starting a bank in Kirtland, 1837, would have had any more knowledge of how to do it than Joseph Smith and Sidney Rigdon." (transcript)

If you'd like to argue that Joseph Smith and Sidney Rigdon didn't run the bank in a prudent manner and weren't well-qualified to be running a bank at all, I'll happily listen to your arguments.

[wenglund]

The overselling of CDS without adequate capital to pay out was an imprudent practice by many - even if those the overall increase in risk profile of corporate and housing markets was not fully understood until it was too late for formerly venerable institutions. Committing large amounts of capital to PE firms for prospective LBOs on skimpy terms, premised on the ability to sell off exposure and retain fees, was an imprudent practice, even though the impact of the liquidity crunch was not fully understood until it was too late for those stuck in their positions - culminating in a number of high profile civil suits when financial institutions sought to back out. However, it's not Monday-morning quarterbacking to look back at the time those decisions were made and determine that there was a fair amount of imprudence and lack of appropriate risk management at the time - even if the full impact couldn't have been anticipated. In the same way, a prudent businessperson may very well have identified, and mitigated against, the risks faced by the KSS. Perhaps by not being so trigger happy in issuing notes in its earliest days, as one example; ensuring the potential to raise capital against non-specie assets, as another. I think we can absolutely find flaws in the KSS prior to the crisis - in the same way that we see them now in relationship to modern-day failures.

I suppose that most any human decision can be found wanting when scrutinized from the vantage point of 20/20 hindsight--particularly when viewed through the unsympathetic lense of hyper-criticism and personal prejudice. Even the non-experts and those not really in a position to judge can weigh in with their overly negative and uncharitable opinions.

For my part, I don't see much value in looking backwards and nit-picking the 170-year-old distant past that can't be changed, except in finding ways to improve the here-and-now and not repeat the mistakes of the past.

But, then, I am not out to beat up on the Church and its deceased leaders. I am just a guy wishes to judge others in like manner to which I hope to be judged in 170 years.

To each their own.

Thanks, -Wade Englund-

[wenglund]

I would suggest you be more careful to double-check things outside of your area of expertise before you say embarrassingly wrong things like this.

When that happens, I will be sure and do just that.

Rejecting allegations that aren't supported by the historical evidence shouldn't be conflated with black and white thinking.

They weren't.

Next!

Thanks, -Wade Englund-

[Analytics]

When that happens, I will be sure and do just that.

Let's review what we are talking about. ERayR said,

It is not anything about adequacy of reserves it is that 15% reserves was normal. In todays banking world it is much lower. I have not kept up with it the last few years but it was 10%. This means that a bank can make loans for 10 dollars for every dollar they hold in reserve. In essence a bank creates money everytime a depositor deposits 1 dollar they issue a loan for 10 dollars.

Now he is correct in the implication that a fractional reserve banking system creates money, and he was getting the correct result using the money multiplier formula, but he is absolutely wrong in describing how it works: he said that with a 10% reserve requirement, every time somebody deposits $1 the bank can loan $10. That is flat-out wrong. With a 10% reserve requirement, every time somebody deposits $1 the bank can loan 90 cents. The banks assets and its reserves are two different things.

To clarify how fractional reserve banking systems create money, I provided a numerical example thusly:

If somebody deposits $1.00 in the bank and the bank has a 10% reserve requirement, then the bank can only lend out $0.90 (ninety cents), holding the dime (10%) as reserves. When it lends out the 0.90, money is created in the sense that the person who deposited the $1.00 still has a dollar (in the sense that the $1.00 he deposited is his), but the person who borrowed the $0.90 also has ninety cents in the form of the cash he took from the bank when he borrowed it.

If the $0.90 is then deposited, the bank could then issue a loan for $0.81 (10% of $0.90), etc., so that it eventually $10.00 exists, but at that point the bank would have $10.00 in assets, one of which is the original $1.00 that was deposited. However, at that point it would have lent out $9.00.

Compare to this and this.

You said I was describing leverage, not reserves, and condescendingly informed me that it was easy to confuse the two.

Could you clarify your point, dear professor? When I said, "If somebody deposits $1.00 in the bank and the bank has a 10% reserve requirement, then the bank can only lend out $0.90 (ninety cents), holding the dime (10%) as reserves," in what way was I describing leverage, not reserves?

[William the Conqueror]

I just wanted to call everybody's attention to the transcript that has been posted at FAIR of McKay White's excellent presentation on the Kirtland Bank (aka the Kirtland Safety Society), which has often been used by critics to attempt to paint Joseph Smith as corrupt:

http://www.fairlds.org/FAIR_Conferences/2009_The_Kirtland_Safety_Society.html

Well now Daniel,

I'll bet Alexander Campbell, living in Kirtland about that time, had nothing to do with the Safety Society. He most likely banked elsewhere in Kirtland, not trusting the renegade Campbellite Sidney Rigdon. I laughed when I read Campbell's assessment of Joseph Smith in 1831, "..as ignorant and impudent a knave as ever wrote a book..."

Could we paraphrase that to say, " as ever started a bank"?

[Daniel Peterson]

Well now Daniel,

I'll bet Alexander Campbell, living in Kirtland about that time, had nothing to do with the Safety Society. He most likely banked elsewhere in Kirtland, not trusting the renegade Campbellite Sidney Rigdon. I laughed when I read Campbell's assessment of Joseph Smith in 1831, "..as ignorant and impudent a knave as ever wrote a book..."

Could we paraphrase that to say, " as ever started a bank"?

You could.

In fact, you just have.

It's not much of an argument, though.

Am I supposed to care what Alexander Campbell thought? Please advise.

(I do, though, appreciate his testimony that Joseph was "ignorant." That makes the miracle of the Restoration all the more impressive. You laughed, and so did I. Thanks!)

[AndyOne]

I suppose that most any human decision can be found wanting when scrutinized from the vantage point of 20/20 hindsight--particularly when viewed through the unsympathetic lense of hyper-criticism and personal prejudice. Even the non-experts and those not really in a position to judge can weigh in with their overly negative and uncharitable opinions.

For my part, I don't see much value in looking backwards and nit-picking the 170-year-old distant past that can't be changed, except in finding ways to improve the here-and-now and not repeat the mistakes of the past.

But, then, I am not out to beat up on the Church and its deceased leaders. I am just a guy wishes to judge others in like manner to which I hope to be judged in 170 years.

To each their own.

Thanks, -Wade Englund-

This is really quite an amazing post. This discussion was incited as a result of an apologetic that looked back those 170 years to blame everyone but JS for the KSS failure. Heaven forbid that one should object. If you don't want objections, don't extend the invitation and then complain when someone actually shows up. It's quite clear to me that you are not seriously capable of engaging on the underlying issues, but don't care enough about the point to try and prove that. Analytics has done enough. I have consistently stated that I don't believe that this issue is germane to the prophetic role of JS, and your reply to my post is, quite frankly, insulting.

[AndyOne]

(I do, though, appreciate his testimony that Joseph was "ignorant." That makes the miracle of the Restoration all the more impressive. You laughed, and so did I. Thanks!)

And, IMHO, if it were true (which I don't believe it was generally - but maybe as to banking), provides a solid basis for discounting the KSS as some blight on the prophetic mission of JS, which I believe should be the case.

[ERayR]

Let's review what we are talking about. ERayR said,

Now he is correct in the implication that a fractional reserve banking system creates money, and he was getting the correct result using the money multiplier formula, but he is absolutely wrong in describing how it works: he said that with a 10% reserve requirement, every time somebody deposits $1 the bank can loan $10. That is flat-out wrong. With a 10% reserve requirement, every time somebody deposits $1 the bank can loan 90 cents. The banks assets and its reserves are two different things.

You say I am wrong. A bank is reauired to hold 10% reserves. As long as they hold $1 they can loan $10. Your example has them only holding .10 as reserve. As long as the hold the dollar they can have loans for 10 times as much.

[AndyOne]

You say I am wrong. A bank is reauired to hold 10% reserves. As long as they hold $1 they can loan $10. Your example has them only holding .10 as reserve. As long as the hold the dollar they can have loans for 10 times as much.

They can lend against all but 10% of whatever they take in. $1 means that 0.90$ of that can be loaned to others. Subsequent transactions (i.e., check written on the 0.90$ means that 0.81$ can be loaned out, and so forth) can yield the result that you state - I agree with that. The first transaction doesn't allow it - but through additional transactions, $1 can, in fact, turn into lending up to $10.

[Analytics]

You say I am wrong. A bank is reauired to hold 10% reserves. As long as they hold $1 they can loan $10. Your example has them only holding .10 as reserve. As long as the hold the dollar they can have loans for 10 times as much.

It seems you are confusing assets with reserves. If I started a bank and the first deposit was $100, I could then loan out $90 and maintain a 10% reserve. So, I would have liabilities of $100 (the $100 that was deposited), and assets of $100 ($10 in cash (serving as the reserves) and $90 in the loan). A 10% reserve requirment means that 10% of their assets needs to be cash. While $1 is approximately enough reserves to support a $10 loan, they can't make a $10 loan unless they have $10 to loan.

They can lend against all but 10% of whatever they take in. $1 means that 0.90$ of that can be loaned to others. Subsequent transactions (i.e., check written on the 0.90$ means that 0.81$ can be loaned out, and so forth) can yield the result that you state - I agree with that. The first transaction doesn't allow it - but through additional transactions, $1 can, in fact, turn into lending up to $10.

To quibble, $1 can turn into a total of $10, but only $9 of which would be eligibile for lending--the tenth dollar would be the reserves. Right?

[AndyOne]

It seems you are confusing assets with reserves. If I started a bank and the first deposit was $100, I could then loan out $90 and maintain a 10% reserve. So, I would have assets of $100, liabilities of $90, and reserves of $10. A 10% reserve requirment means that 10% of their assets needs to be cash. While $1 is approximately enough reserves to support a $10 loan, they can't make a $10 loan unless they have $10 to loan.

To quibble, $1 can turn into a total of $10, but only $9 of which would be eligibile for lending--the tenth dollar would be the reserves. Right?

When you stretch it out through subsequent transactions, you find that reserve shrinking.

1 deposited = 0.90 lent = 0.10 reserve

Borrower writes check for 0.90 and deposits to bank

0.90 deposited = 0.81 lent = 0.09 net reserve

And so on and so forth.

[Analytics]

When you stretch it out through subsequent transactions, you find that reserve shrinking.

1 deposited = 0.90 lent = 0.10 reserve

Borrower writes check for 0.90 and deposits to bank

0.90 deposited = 0.81 lent = 0.09 net reserve

And so on and so forth.

But the ten cents reserve from the first loan is still a reserve, so after two cycles the total reserve is .19, after three cycles it is 0.271 and eventually approaches $1.00. Likewise, the total amount lent is originally .90, and then 1.71, and then $2.439, eventually approaching $9.00.

[ERayR]

It seems you are confusing assets with reserves. If I started a bank and the first deposit was $100, I could then loan out $90 and maintain a 10% reserve. So, I would have liabilities of $100 (the $100 that was deposited), and assets of $100 ($10 in cash (serving as the reserves) and $90 in the loan). A 10% reserve requirment means that 10% of their assets needs to be cash. While $1 is approximately enough reserves to support a $10 loan, they can't make a $10 loan unless they have $10 to loan.

To quibble, $1 can turn into a total of $10, but only $9 of which would be eligibile for lending--the tenth dollar would be the reserves. Right?

They can make the loan regardless of what they have . They just have to maintain the proper reserve. What do you think FDIC and Federal Reserve Banks are about. FDIC insures that if depositors want their deposits back before the bank gets its loans paid back the depositors are covered. If a bank has sufficient assets they simply borrow from Federal Reserve Banks and don't have to default. Some banks fail every year because the value of their assets are not sufficient. Then FDIC steps in to cover the depostor.

[wenglund]

Could you clarify your point, dear professor? When I said, "If somebody deposits $1.00 in the bank and the bank has a 10% reserve requirement, then the bank can only lend out $0.90 (ninety cents), holding the dime (10%) as reserves," in what way was I describing leverage, not reserves?

That wasn't the specific part of your post that I was referring to. The part I was referring to was where you were describing leverage. This is as much as I wish to clarify for you, having wasted too much time with you in the past having to explain things to you to the N-th degree, only to be dismissed with an insipid quip. Besides, the point is so minor as to warrant less interest than you demand.

Thanks, -Wade Englund-

[AndyOne]

But the ten cents reserve from the first loan is still a reserve, so after two cycles the total reserve is .19, after three cycles it is 0.271 and eventually approaches $1.00. Likewise, the total amount lent is originally .90, and then 1.71, and then $2.439, eventually approaching $9.00.

Gotcha

- A deposits $1 to bank

- Bank now has $1

- Bank loans B $0.90

- Bank has $0.10

- B pays C $0.90

- C deposits $0.90 to bank

- A's account = $1, B owes $1, C's account = $0.90, Bank has $1.00

- Bank lends $0.81 to D

- D pays E $0.81

- A's account = $1, B owes $1, C's account = $0.90, D owes $0.81, E's account = $0.81, Bank has $0.19 as against $1.90 of deposits

[AndyOne]

That wasn't the specific part of your post that I was referring to. The part I was referring to was where you were describing leverage. This is as much as I wish to clarify for you, having wasted too much time with you in the past having to explain things to you to the N-th degree, only to be dismissed with an insipid quip. Besides, the point is so minor as to warrant less interest than you demand.

Thanks, -Wade Englund-

Some mothers go to great lengths to assure their children that they are special. I'm sure, in some cases, it works.

[Analytics]

They can make the loan regardless of what they have . They just have to maintain the proper reserve. What do you think FDIC and Federal Reserve Banks are about. FDIC insures that if depositors want their deposits back before the bank gets its loans paid back the depositors are covered. If a bank has sufficient assets they simply borrow from Federal Reserve Banks and don't have to default. Some banks fail every year because the value of their assets are not sufficient. Then FDIC steps in to cover the depostor.

Are we talking past each other? Here's a little quote from msmoney:

Banks basically take your money, lend it to your neighbor, charge her a steep interest rate for the use of the loan, keep most of the interest for themselves, and then pay you what little is leftover.

Are you really saying you disagree with that?

[Analytics]

That wasn't the specific part of your post that I was referring to. The part I was referring to was where you were describing leverage. This is as much as I wish to clarify for you, having wasted too much time with you in the past having to explain things to you to the N-th degree, only to be dismissed with an insipid quip. Besides, the point is so minor as to warrant less interest than you demand.

Thanks, -Wade Englund-

I wasn't describing leverage, unless you idiosyncratically refer the mainstream economics theory of monetary creation as â??leverageâ?.

[Analytics]

They can make the loan regardless of what they have . They just have to maintain the proper reserve. What do you think FDIC and Federal Reserve Banks are about. FDIC insures that if depositors want their deposits back before the bank gets its loans paid back the depositors are covered. If a bank has sufficient assets they simply borrow from Federal Reserve Banks and don't have to default. Some banks fail every year because the value of their assets are not sufficient. Then FDIC steps in to cover the depostor.

Seriously, if a bank has $1,000,000 of capital and can use that as reserves to make $10,000,000 in loans without even needing $10,000,000 of depositors money to loan, why would they even bother to accept deposits? Wouldn't it just be easier to loan the money they create out of thin air and not worry about pesky depositors that might want their deposits back?