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Mises University 2011 made me interested in reading Free Banking theory.

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Isaac "Izzy" Marmolejo Posted: Mon, Aug 1 2011 11:58 AM

quite funny actually, I was known as 'that kid with the long hair that supported fractional reserve banking.' :) The article that made me really interested in it was this article by White and Selgin and of course talking to Roger Garrison about it as well. (I did not know Garrison was a free banker until these last few days).

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Then The Theory of Free Banking by George Selgin is a must read.

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Yup, im reading that, good book so far...  Selgin is a smart guy and is very overlooked here

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If you happen to think the Austrian framework is the most sound, keep in mind that Selgin himself doesn't consider himself an Austrian (he's an "eclectic"), and a lot of his propositions are based on Friedmanite doctrines that most Misesians consider fallacious.

"the obligation to justice is founded entirely on the interests of society, which require mutual abstinence from property" -David Hume
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well also keep in mind that Mises was for fractional reserves, after reading the majority of 'Theory of Money and Credit' I find it odd to consider Mises an anti- frac reserves person or a person that leaned towards having 100 reserves than having FRB, which if you wanted a person that considers himself Austrian that agrees that Mises was for FRB from the Mises Institute, I would suggest giving  Garrison an email. Hans Sennholz was also for FRB. In the book, "Man of Principle," White has an article titled, "Mises on Free Banking and Fractional Reserves," which the book was a gift to Sennholz on his 70th birthday. (he is the 'man' of principle.)

So i do think that FRB is very consistent with Austrian framework. I cant speak for Selgin, but I would consider him Austrian...He gave the Austrians justice in the recent Hayek-Keynes debate at LSE...

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What part of TMC gives you that impression?

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If you are equating Mises' support for unregulated banking with support for fractional reserves, you are mistaken.  Mises wanted unregulated banking so that fractional reserves/fiduciary media would be minimized or eliminated via competition.  See this quote from Human Action:

 

"...freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."
 
People may uphold the opinion that banknotes are more handy than coins and that considerations of convenience recommend their use. As far as this is the case, the public would be prepared to pay a premium for the avoidance of the inconveniences involved in carrying a heavy weight of coins in their pockets. Thus in earlier days banknotes issued [p. 447] by banks of unquestionable solvency stood at a slight premium as against metallic currency. Thus travelers' checks are rather popular although the bank issuing them charges a commission for their issuance. But all this has no reference whatever to the problem in question. It does not provide a justification for the policies urging the public to resort to the use of banknotes. Governments did not foster the use of banknotes in order to avoid inconvenience to ladies shopping. Their idea was to lower the rate of interest and to open a source of cheap credit to their treasuries. In their eyes the increase in the quantity of fiduciary media was a means of promoting welfare."
 
Banknotes are not indispensable. All the economic achievements of capitalism would have been accomplished if they had never existed.
 
Mises here is obviously favoring the notion of fiduciary-media fostering banknotes being reduced or eliminated by virtue of competition among unregulated banks, and obviously disagrees with the notion that an increase in the quantity of fiduciary media can promote welfare.
 
Furthermore, Mises' entire macroeconomic corpus stresses the maladjustments that fiduciary media cause, and nowhere does it endorse the Fisher/Friedman "equation of exchange"/"money velocity" or "monetary disequilibria" doctrines that Selgin et al rest their case on.

 

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And how did I know a guy named "Izzy" with an anarchy symbol as his avatar had long hair? 

 

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Actually I take part of that back.  He may have endorsed the notion of monetary disequilibria, at least in 1912.

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Can you actually substantiate your claims, Daniel?

Mainly,

"and a lot of his propositions are based on Friedmanite doctrines that most Misesians consider fallacious."

Can you name the economists who don't think Selgin's method is sound?  Just because he doesn't call himself an Austrian doesn't mean he thinks Misesian economics is useless.  Funny enough, before he publicly said that the Mises Institute was VERY fond of Selgin.  Politics, oh how I hate thee.

What does most Misesians mean?  Internet posters?  Or austrian macroeconomists?  I know of more modern day Austrians who support free, fractional reserve banking with no central banks.  Garrison, Horwitz, Lawrence White, Mises, Yeager, Selgin (his monetary framework is very-much inspired by Mises/Hayek macro), Jerry O'Driscoll, Mario Rizzo, Kevin Dowd, and Richard Ebeling, off the top of my head.  I know of plenty Rothbardians who support regulated 100% reserves banking, but most aren't macroeconomists

 

 

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Worth reading:

http://www.coordinationproblem.org/2010/05/mises-and-free-banking-why-is-there-a-debate.html

http://www.coordinationproblem.org/2010/05/reply-to-salernos-four-propositions-on-mises-and-the-free-banking-school.html

http://www.coordinationproblem.org/2009/09/my-final-word.html?cid=6a00d83451eb0069e20120a5b7aa88970c

“Therefore the dangers of credit expansion were not very great as long as the credit expansion was the business of private banks and private businesses subject to commercial laws. As long as the surplus banknotes could be returned to the bank of issue for redemption, there was a check on credit expansion, and there couldn't be credit expansion of any considerable extent.”

"The quantity of fiduciary media in circulation has no natural limits. If for any reason it is desired that it should be limited, then it must be limited by some sort of deliberate human intervention -that is by banking policy.

Of course, all of this is true only under the assumption that all banks issue fiduciary media according to uniform principles, or that there is only one bank that issues fiduciary media. A single bank carrying on its business in competition with numerous others is not in a position to enter upon an independent discount policy. If regard to the behaviour of its competitors prevents it from further reducing the rate of interest in bank-credit transactions, then - apart from an extension of its clientele - it will be able to circulate more fiduciary media only if there is a demand for them even when the rate of interest charged is not lower than that charged by the banks competing with it. Thus the banks may be seen to pay a certain amount of regard to the periodical fluctuations in the demand for money. They increase and decrease their circulation pari passu with the variations in the demand for money, so far as the lack of a uniform procedure makes it impossible for them to follow an  independent interest policy. But in doing so, they help to stabilize the objective exchange-value of money. To this extent, therefore, the theory of the elasticity of the circulation of fiduciary media is correct; it has rightly apprehended one of the phenomena of the market, even if it has also completely misapprehended its cause."

-

Ludwig von Mises

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z1235 replied on Tue, Aug 2 2011 7:26 AM

In a free market, nothing would distinguish a "bank" from any other firm or individual. Both a "bank" and your neighbor would be free to issue promisory claims to property to be valued (discounted) by the free market. The language and content of the current Full/FracRB debate is based on the premise of a prince giving special privilege/subsidy to a cartel of firms called "banks" -- yes, even during the so called periods of "free banking". 

 

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I cant access Mises's'Theory on Money and Credit'... I read it at the Mises library but im getting my copy shortly... also  this quote from human action:

"...freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."

is not representing Mises's views... If one reads the things before the quote Mises says:

"It is a mistake to asscioate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tokke..." ( your quotation on Human Action is what Tokke said, which does not represent what Mises views)

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Selgin replied on Tue, Aug 2 2011 1:41 PM

Folks, a banknote isn't a property claim, no matter how many times Rothbardians state otherwise.  The words "X promises to pay the bearer Z dollars on demand" indicate a promise to pay, and nothing more.  The language is that of a debt contract, not a bailment.  And such has been the understanding of common-law courts since as long as banks have been around (for the English history in particular see my SSRN paper "Those Dishonest Goldsmiths").

And no, I don't call myself an Austrian, or a Misesian, or a Friedmanite, or anything else. I prefer just being a Selginite or Selginian (or whatever) and trying to get everyone else to be one.  Of course, if you also ike thinking for yourself you will refuse to join my school, or any other.. 

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Question: Is (was) this a debt contract? If not, what is (was) it?

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
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John James:

And how did I know a guy named "Izzy" with an anarchy symbol as his avatar had long hair? 

I know right, how ironic :P

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Selgin replied on Tue, Aug 2 2011 1:58 PM

Not an ordinary one, because it includes extra language that goes beyond a mere promise to pay something on demand.

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DD5 replied on Tue, Aug 2 2011 3:04 PM

Selgin:
Folks, a banknote isn't a property claim, no matter how many times Rothbardians state otherwise.  The words "X promises to pay the bearer Z dollars on demand" indicate a promise to pay, and nothing more. 

This could be said about any property claim/title on the market.  So according to your line of reasoning, there need not be any property claims on the market, but only debt contracts.  The market is an exchange system of debt contracts.

 

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Selgin replied on Tue, Aug 2 2011 3:25 PM

Does it really, DD5?  Does your car title say that the seller "Promises to pay you one car on demand"?   Does it not expressly declare that you are the true "owner" of particular car X?  Why don't you run out to your car and see.  

I anxiously await your report. 

 

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DD5 replied on Tue, Aug 2 2011 3:32 PM

Isaac "Izzy" Marmolejo:

I cant access Mises's'Theory on Money and Credit'... I read it at the Mises library but im getting my copy shortly... also  this quote from human action:

"...freedom in the issuance of banknotes would have narrowed down the use of banknotes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of banknotes in France. I want to give everybody the right to issue banknotes so that nobody should take any banknotes any longer."

is not representing Mises's views... If one reads the things before the quote Mises says:

"It is a mistake to asscioate with the notion of free banking the image of a state of affairs under which everybody is free to issue banknotes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tokke..." ( your quotation on Human Action is what Tokke said, which does not represent what Mises views)

 

 

Yes, you've posted the same out of context quotes just a couple of weeks ago, and the response is the same although you are probably not interested in it.  Mises advocated free banking for the same reason that Rothbard advocated for free banking as a 2nd best solution, (see Mystery of Banking).  That's not exactly a "free banker" according to the Selgin/White "tradition".  In fact, since Selgin moniors these discussions, why not ask him  directly why he thinks Mises advocated for free banking.

 

 

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DD5 replied on Tue, Aug 2 2011 3:42 PM

Selgin:

I anxiously await your report. 

 

It's only because I have the car that it sounds silly.  But what if I trade this title with you for $5000? I did not trade this car according to you but only a promise to pay up the moment you actually show up at my driveway to pick it up.   I'm just saying that I can then give you the same argument:  The title is a promise to actually give you my car keys the moment you bring it.  

 

 

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Selgin replied on Tue, Aug 2 2011 3:59 PM

Sorry, DD5, but I don't get it: a genuine "title" indicates ownership; an ordinary banknote doesn't.    That's all there is to it.  If a bank gave out pieces of paper saying "We certify that the bearer of this note is the true owner of X ounces of gold stored at our premises," or something like it, then the paper could properly be termed title or claim to X ounces of gold, and the bank in turn would be guilty of fraud if it did not actually have X ounces on hand for each such claim.  But if the paper merely says that the bank "will pay the bearer X ounces of gold on demand," it is a debt obligation only.  Rothbardians seem generally to share your confusion regarding the standard language courts settled on long ago for distinguishing a title from a promissory note (of which banknotes are a specific type), and so have been arguing, foolishly, that fractional reserve banks have been cheating their customers, when in fact they haven't. 

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DD5 replied on Tue, Aug 2 2011 4:31 PM

Selgin:
Rothbardians seem generally to share your confusion regarding the standard language courts settled on long ago for distinguishing a title from a promissory note (of which banknotes are a specific type), and so have been arguing, foolishly, that fractional reserve banks have been cheating their customers, when in fact they haven't. 

 

 

I wouldn't want to argue with you about what the customer in the unhampered free market would actually  understand as "will pay the bearer X ounces of gold on demand", I mean would it matter if the term "redeem" is used instead of "pay"?  

But I think you're missing the point.  The "Rothbardian" is not confused. He is remaining consistent about what it means to demand money, that is, like every other commodity, the individual is paying for attaining and possessing that commodity. The only value of the bank note is its function as a money substitute for the specie deposited. They are holding notes and deposits because they are equivalent to holding money. Otherwise, they would be worthless. No matter how you slice it and what you call these deposits or notes on some contract, the end result of your contract always makes multiple people demand the same amount of specie which results in a insoluble conflict.

Economically, the money cannot be working twice (or even multiple times). If holding money has its own yield, it cannot also be invested in capital goods.

 

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If you happen to think the Austrian framework is the most sound, keep in mind that Selgin himself doesn't consider himself an Austrian (he's an "eclectic"), and a lot of his propositions are based on Friedmanite doctrines that most Misesians consider fallacious.

I'm actually writing an article contra monetary equilibrium theory (specifically, the "problem" of deflation caused by an increase in the demand for money).  Bagus sort of beat me to the punch, but I had originally proposed this article about six months ago -- w/e, it will build on what Bagus says.  Fwiw, I don't think MET is needed to see the merit in the microeconomic theory of free banking.

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Selgin replied on Tue, Aug 2 2011 4:47 PM

I don't see what this has to do with the claim that banknotes are really "claims" or 'titles." 

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well no... Mises didnt advocate FRB as a second best option, he advocated it because as he says in human action: Free Banking is the only method available for the prevention of the dangers inherent in credit expansion." People like  Horwitz, White, and Garrison would say, i agree with them, that Mises advocated 100 reserves as a second best option

But i wouldn't say that Rothbard would have been or was tolerant of free banking banks. didnt he advocate for the abolishment of FRB on the basis that it is fraud?

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DD5 replied on Tue, Aug 2 2011 5:05 PM

Selgin:

I don't see what this has to do with the claim that banknotes are really "claims" or 'titles." 

 

You don't deny that people demand bank deposits for the sake of demanding money.  I mean, it's not like you're saying that people deposit money in banks because they want to loan it out, i.e., because they demand IOUs.  No, you maintain that indeed people demand money for its own yield.  Well, it's difficult to make a logically consistent argument for demanding money for its own sake and not either demonstrating that one must have in his possession the actual physical money or at minimum a property title or claim to some money safely deposited in some "warehouse".   There is no other way to demonstrate demand.

 

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Due to its inherently risky nature, one can logically deduce that a bank that engages in fractional reserve banking has to offer some extra benefits compared to benefits offered by full reserve banks to attract customers.

With that in mind, I believe that if one is willing to accept the inherent risks of a fractional reserve bank and is also willing to sign a contract containing such logical absurdity such as two people being the full owners of a single thing, in exchange for some benefits, I don't see how this individual would refuse to engage in a contract with a bank that is part of a central banking scheme, as this would actually protect this individual.

Therefore I think that if fractional reserve banks were to exist in a free market, central banks would soon emerge as a consequence of their existence, and I don't need to explain what central banks do.

And seeing how fractional reserve banking theorists enthusiastically give advice on what the FED should do, I don't think they would even dispute that hypothesis.

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Free banking seems very profitable. I could establish a firm that deposits a lot money into a FRB bank, then short the bank's stock, and then cause a run on the bank by pulling my money out.

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
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Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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z1235 replied on Tue, Aug 2 2011 9:14 PM

Selgin:
But if the paper merely says that the bank "will pay the bearer X ounces of gold on demand," it is a debt obligation only. 

Whether such paper was issued/signed by a "bank" or by your broke neighbor Joe, its value (discount to actual X ounces of gold) will reflect the market's perception about the amount of such paper and the "bank's"/Joe's actual gold available for payout on demand. As I said, the free market would treat the broke "bank" just like it would treat broke Joe. The only way FracRB "banks" could receive full (par) valuation for their paper notes by the market, is if the prince and his thugs enter the picture -- hence, a central bank and legal tender laws.

Both theoretically (logically) and empirically, the inherently unstable FracRB inevitably converges to either (1) a central bank, or (2) FullRB. I believe this was Mises' conclusion, as well. 

 

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Selgin replied on Tue, Aug 2 2011 9:36 PM

Another tedious characteristic of Rothbardians is theirfondness for repeating false arguments even after they have been rebutted again and again.  But for the sake of anyone reading this who isn't a die-hard Rothbardian, and therefore incapable of being swayed by logic or facts, centuries of experience show that banknotes are perfectly capable of circulating at par despite being backed with only fractional reserves, and without any propping-up by the state of any kind.  Scottish banknotes fir the bill, for instance, despite tiny reserve ratios.  And don't even think of bringing up Rothbard's supposed "proof" that Scotland dependent on the Bank of England: it's been tried many times on this same forum, and bringing it up again only serves to reveal either ignorance of or willful refusal to recognize White's thorough rebuttal of Rothbard's arguments in the 2nd ed. of Free Banking in Britain. 

As for what Mises may have thought, it doesn't impress me, and ought not to impress anyone,  if it is contrary to a wealth of evidence.   (Oh yeah, another Rothbardian habit: never refer to evidence if you can cite a passage in Mises instead.  Remind you of any other group?)

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Selgin:
[...] for the sake of anyone reading this who isn't a die-hard Rothbardian, and therefore incapable of being swayed by logic or facts[...]

I don't think you meant that.

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Daniel can you name any people who you would call "die-hard Rothbardians" that also support the historical evidence of free banking's success?

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Re-read the passage I quoted.

EDIT: He said that those reading his thread who aren't die-hard Rothbardians are incapable of being swayed by logic and facts. But I don't think that's what he meant.

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Oh lord.  My mistake.  Forgive me hahaha I still can't believe I missed that.

 

Well, after reading it again, it could be the other way around, but I could see where the confusion comes from.

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It's certainly confusing. Also, I don't think Selgin proofreads many of his posts, which could lead to misunderstandings.

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Selgin replied on Wed, Aug 3 2011 3:48 AM

Indeed, my syntax leaves a lot to be desired.  I ought to have written  "and who therefore isn't incapable of beng swayed by logic" etc.  Sorry!

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z1235 replied on Wed, Aug 3 2011 6:51 AM

Selgin, for someone claiming to be no X-ian you sure love throwing loads of Y-ian labels around. While I disagree with Rothbard on many things, I think he's spot on regarding FracR banking. As I've said before, I have no pony in this race other than my selfish enlightenment. Like you, I'm mostly z1235-ian.

White's "rebuttals" in Ch.3 of his 2nd edition are so poor that the reader is often left wondering about the side he's actually defending. I invite anyone interested to read it (pg.45-62) and judge for themselves. 

I'll let your tedious referrals to your non-existent rebuttals speak for themselves, as well.

 

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Selgin replied on Wed, Aug 3 2011 7:17 AM

Much bluster and bravado, but no argument.  I hope readers will take up your suggestion that they read White, for there they will see just how misplaced Rothbard's claims about Scotland were.  For example, they will find that there is absolutely no truth to his claim that Scottish banks relied on the Bank of England as a lender of last resort. 

Whether you regard yourself as one or not, it takes a devoted Rothbardian to conclude that Rothbard knew more about the Scotttish banking system, or was a more meticulous and responsible scholar, than Larry White.

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What is more important, legal precedent and definition of instruments or the actual 'mechanistic' function of the instruments?

I think you are splitting hairs with words and definitions. Under any fractional reserve system, by whatever legal definition of the instruments involved, how can you deny that a fraud is being committed when the facts are if everyone who held the notes issued in excess of the reserves cannot collect on demand what they have a claim to?

With that said, I would agree that there is no fraud if all parties involved understand the risk involved in fractional reserve banking, that they may not be paid on demand, but the problem is that the layman has no clue how fractinal reserve banking really works.

Would fractional reserve banking exist if enough people actually understood how it really works?

 

 

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