Central bankers often remark that Central Banks were formed due to inumerable bank panics before their formation, when a free banking system reigned. I am sure this is an incorrect account of history, but I do not have the time to do my research. So, maybe someone can tell me if this is a true account of history or not.
Also, Austrians say that no bailouts should have taken place during the 2008 crisis. I don't refute this, but what would have happened if the banks were let collapse?
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Vladimir Ulyanov:Central bankers often remark that Central Banks were formed due to inumerable bank panics before their formation, when a free banking system reigned. I am sure this is an incorrect account of history, but I do not have the time to do my research. So, maybe someone can tell me if this is a true account of history or not.
It's true there were panics before the Federal Reserve, but it is completely false that "a free banking system reigned." There was plenty of government influence and intervention.
http://wiki.mises.org/wiki/Financial_crisis#History
The debt would have been liquidated, the institutions would have gone bankrupt and all the assets would have been used to make as many creditors whole as possible, essentially meaning there would just be new owners of those assets....just like when any company goes bankrupt and the normal procedure is allowed to happen.
And what would have happened to peoples savings? Would they have been lost too? I am aware that their savings are essentially being lost through the bailouts, but would all cash deposited in bad banks disapear overnight, and would the ATMs turn off the following morning like the politicians said they would.
P.S. How do you get the cool quotes or in your case a reading list at the bottom of each comment.
Vladimir Ulyanov:And what would have happened to peoples savings? Would they have been lost too? I am aware that their savings are essentially being lost through the bailouts, but would all cash deposited in bad banks disapear overnight, and would the ATMs turn off the following morning like the politicians said they would.
Not all of the savings would disappear, as the banks still had a lot of assets, but yes, depositors would lose money. That's what fractional reserve banking is all about. If every depositor of the bank wants all of their money at the same time, it's not all going to be there. That's what a "run on the bank" is all about. It's a risk you take by putting your money in a fractional reserve bank (as, that's literally what it means...the reserves only account for a fraction of the total deposit liabilities).
However, in our current system, the FDIC insures depositors for up to $250,000...meaning your deposits are guaranteed for up to that amount...(meaning if your bank fails the FDIC will pay you back.) In reality this guarantee removes a large part (and for most people all) of the risk of putting your money in the bank. It has been argued that this distorts the market because where people would normally be interested in what their bank was doing with their money (i.e. how risky the bank was being and what it was investing in), in today's world no one cares what their bank does, because their deposits are guaranteed anyway.
This is what is referred to as a "moral hazard", in that risk that you would normally incur is removed, at no cost to you. This alters behavior, and in this case, means that banks are free to be more risky because their customers don't care.
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Thanks, I must agree with Rothbard's solution. Give debentures to the bank so they can lend your money or else it's fraud it's fraud.
You might also check out the alternative...
Free banking
(many notable advocates maintain a blog at freebanking.org)
Yes, I advocate a free banking system. However, is it not possible to have a fractional reserve banking system while at the same time having a free banking system.
Also, some people advocate a free banking system where the value of money is tied to a basket of goods. However in a growing economy should we not have falling prices (money excluded). Does this not mean that any goods in this basket would essentialluy become money, and be fixed in value (assuming sound money of course).
Vladimir Ulyanov:Yes, I advocate a free banking system. However, is it not possible to have a fractional reserve banking system while at the same time having a free banking system.
Then you're an "advocate" of something which you don't really know what it is. At least read the Mises Wiki article that I linked to.
Are those supposed to be questions?
A good example of a banking panic before the advent of a central bank is the Panic of 1907. However, there was hardly a free-banking system in the United States during that time.
People mistakenly - or deceptively - attributed this panic to "a lack of money and credit", when in actuality it was caused by rampant fractional-reserve banking. The Federal Reserve System was established as an attempt to insure fractional-reserve banking against bank runs. By 1929, this attempt had failed.
Vladimir Ulyanov:Also, Austrians say that no bailouts should have taken place during the 2008 crisis. I don't refute this, but what would have happened if the banks were let collapse?
It would've been a disaster for the powers that be. Many, if not most, of their assets would've been found worthless or even downright fraudulent.
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Yes I have read the Mises Wiki article. I have also read Hayek's 'The Denationalisation of Currency', but I fail to see why you cannot have a fractional reserve banking system aswell as a free banking system.
Vladimir Ulyanov:I must agree with Rothbard's solution. Give debentures to the bank so they can lend your money or else it's fraud it's fraud.
Vladimir Ulyanov:I advocate a free banking system. However, is it not possible to have a fractional reserve banking system while at the same time having a free banking system.
Vladimir Ulyanov:I fail to see why you cannot have a fractional reserve banking system aswell as a free banking system.
Vladimir Ulyanov: Yes I have read the Mises Wiki article. I have also read Hayek's 'The Denationalisation of Currency', but I fail to see why you cannot have a fractional reserve banking system aswell as a free banking system.
Free banking is not antonymous to fractional reserve banking. Perhaps you mean full reserve banking?
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
No. I'm just saying that it is possible to have a free banking system which also maintains a fractional reserve. I'm not saying that that's what we should have I'm just saying that it is possible. I am making the exact point you are. Although it is possible to have both a free banking system and a fractional reserve banking system, I would prefer a fully reserved free banking system.
I was trying to say that a free banking system is not enough; and that banks should only lend out our deposits if we give them permision via debentures.