Larry Sechrest's Free Banking: Live Blog Prelude

It's been several weeks since receiving a complementary copy of Larry Sechrest's Free Banking to live blog about, and high time to get started on the task.

A few preliminary notes: my main task in this venture is to gain a greater understanding of the Rothbardian charge against fractional reserve banking (FRB) as inherently fraudulent. My interest in the subject of government interference in banking and money was initially piqued when, at the 53rd and Lex Barnes and Noble some time in 1997, I randomly picked up a copy of Ayn Rand's Capitalism: The Unknown Ideal and happened upon Greenspan's "Gold and Economic Freedom." I began to understand the issues a couple of years later after reading Rothbard's The Case Against the Fed and What Has Government Done to Our Money? I found his attack on FRB to be highly convincing and seductive; but came to think, after a bit of delving and discussion, that it might be a far more complex subject than Rothbard and Rothbardians have treated it. My own position as I write this is: I think might be ipso facto fraudulent; but I also think the "free banking" camp (Sechrest, also Selgin, White, Humel, Henderson, Dowd, etc.) may be right. My general impression of the free banking position is that it amounts to a large body of circumstantial evidence against the charge of fraud: not a decisive defense, but a compelling one, and one that I feel deserves serious consideration. I'm not prepared to condemn FRB as fraudulent beyond a reasonable doubt; but I'm also not prepared to dismiss the charge on a presumption of innocence.

When I wrote to Jeffrey Tucker expressing interest in live blogging a mises.org title, I suggested Free Banking as a good means to this end. His own enthusiasm, expressed as the belief that Sechrest's book deserved some attention and exposition, confirmed my choice. Hopefully I'll do Dr. Sechrest some justice in this endeavor, however amateurishly.

While I'm generally comfortable with the subject of mathematics (as far as I learned it in my formal schooling at least, i.e., basic calculus), I'm not versed enough in the language to feel able to treat those more mathematical portions of the book (e.g., chapter 2) as confidently as I'd like. For those portions, I expect that I'll be spending my energies trying merely to understand rather than to critique. With that in mind, I may gloss over them and focus on the more "verbal" sections, revisiting the mathematical sections afterward, if at all.

Published Mon, Apr 27 2009 6:08 PM by Andrew Taranto
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Comments

Tuesday, April 28, 2009 12:11 PM by Carlos Novais

# re: Larry Sechrest's Free Banking: Live Blog Prelude

"Free banking" to be honest require that banks that issue notes and accept deposits of a commodity (let´s say gold and silver) to be absolutely clear about the service and contract provided.

Bank "100% reserve" could say something like: "This note is a receipt of a gold coin deposit" or "You balance in you demand deposit current account is covered 100% by gold deposits"

Bank "20% partial reserve" could say: "this note or balance in demand deposit is a claim/IOU of gold coins covered at demand by at least 20% of gold"

So, the free banking argument is valid in the sense taht each issuer is perfectly clear about the contract established.

The thing that the "free banking" argument misses is that:

- notes/deposits from diferent issuers will not be in anyway fungible

- in a free market with an honest Free-Banking, Good Money will drive out Bad Money... just imagine an arbitrage between asking credit in a partial reserve bank (that wil expand it´s money supply wiht the new credit) and "buying" notes/deposits in a 100% reserve bank.

The partial reserve bank will trade at discount sooner or later.

The discount will also appear if you think yourself making a deposit of 100 gold coins that you are adding to your hoarding. In a partial reserve bank, in the moment that you deposit 100 coins, you are receiving notes/deposits that will be exchanged for sure at discount.

Tuesday, April 28, 2009 2:27 PM by Andrew Taranto

# re: Larry Sechrest's Free Banking: Live Blog Prelude

Great comments, Carlos. You're making points I've been thinking about myself lately, particularly the possibility of arbitrage between banks maintaining different reserve ratios. My tentative hypothesis: FRB is not fraudulent, per se; but I think there's reason to believe that smaller reserve ratios correlate to shrinking competitive advantage, all else equal, for the reasons you cite (i.e., the possibility of bank note arbitrage in particular). A bank might have to resort to fraudulent means in order to reduce or eliminate this shrinkage.

In other words: where Rothbard claimed FRB IS fraud, perhaps it's more accurate to say it's "market-unfriendly" by encourage fraud (i.e., cooking the books), where it doesn't simply lead to poorer business results.

I believe Sechrest counters this point -- or at least provides grounds for a counter, if he doesn't make it explicitly -- by claiming that the risk of bank runs in a free banking scenario is or would be smaller than is commonly suspected. I'll get to that part soon enough, I hope.