I have heard that in Huerta de Soto's Money, Bank Credit, and Economic Cycles he comes to the conclusion that the only remedy to the obsequieous business cycle is to abolish fractional reserve banking (or in other words: prohibit fractional reserve banking).
In Mises' Human Action he addresses the concern of banks perpetually and increasingly issuing credit with the argument that whenever one private bank increases its rate of note issue, it creates a situation where its notes will find themselves in the hands of non-clientelle proportionate with the acceleration of note issue. Meaning, the faster the bank issues credit, the faster the process of non-clientelle redeeming the notes for cash takes place. In sum, a bank cannot expand its issuance of credit indefinitely because the action is self-terminating, granted that there are competitor banks.
If anyone has read HdS's tome, can they tell me if Jesus addresses this point in his declaration on full reserve banking?
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
Yes, he deals with this issue. See the following sections:
- "AN ISOLATED BANK’S CAPACITY FOR CREDIT EXPANSION AND DEPOSIT CREATION" ;
- "CREDIT EXPANSION AND EX NIHILO DEPOSIT CREATION BY A SOLE, MONOPOLISTIC BANK" ;
- "A FEW ADDITIONAL DIFFICULTIES WHEN EXPANSION IS INITIATED SIMULTANEOUSLY BY ALL BANKS".
The basic idea is that individual banks are induced to merge or cartelize in order to be able to expand without decreasing their reserves. Even if they don't cartelize formally, they may also create money provided that they expand at the same pace.
Thanks very much.
It's interesting to hear that Huerta de Soto considers that the banking industry is necessarily predisposed to cartelization, or at least comparatively to other industries.
To be accurate, the relevant words's (relative to mergers, but it holds good for cartels) of Huerta de Soto are
One of the strongest motivations behind the trend toward bank mergers and acquisitions which has always been obvious in fractional-reserve banking systems is precisely the desire to increase k. In fact, the more banks merge and the larger their subsequent market share, the greater the possibility that the citizens who receive the banks’ fiduciary media will be their own customers.
By the way, there are several things that disturb me in Huerta de Soto's treatise. In particular:
1° His arguments to make the free banking unlawful are that this system hurts third's parties rights in several ways, one of which being that credit expansion entails the depreciation of the money held by non-clients. The problem is that, in a free banking and free money system, third parties are not hurt against their will because they can switch to another money.
2° I don't understand at all his conception of the "Ricardo effect". Moreover, in his discussion of this effect, he refers to Mises and Rothbard as if they agreed with him, while these later criticize strongly the very concept of "Ricardo effect".
3° Huerta de Soto repeatedly refers to the banks are doing huge profits through the fractional system. Now, it seems to me the mere possibility to lend deposited funds is not enough to enable the lenders to make durable important profits. Indeed, if the banking industry generated unusually high profits, new firms were induced to enter the field. So the existence of legal barriers to entry is required to give lieu to long term profts -- and, by hypothesis, such barriers don't exist in a free banking system.