My question has to do with the divide between free banking (white, timberlake etc) versus 100% reserves (rothbard). Since the foundation of capital expansion is savings, an economy can't grow with artifical credit in circulation in being printed out of thin air (thanks to our holy masters at the fed). The problem that I have with free banking is that since more banknotes than specie in reserve can circulate, this can lead to a run on the bank. In this case, would the bank have some sort of insurance to guard the depositors savings in this type of event? Therefore I am opposed to "certificates" because it is a form of paper credit and at best sort of a false reassurance that the money that I am using is sound.
The case of 100% reserves is more interesting since the interest rate is far more clear (my opinion) since credit is greatly restrained based on each depositors balance being fully backed by the same amount of specie in reserve. Therefore, businesses have an incentive not to expand too quickly or go deeper into debt.
Thanks.
Keep in mind that free banking can, at least in theory, be done with 100% reserves. The problem, as I see it, isn't with free banking vs. 100%-reserve banking - it's with 100%-reserve (or full-reserve) banking vs. fractional-reserve banking. Fractional-reserve banking, with its distinction between "inside money" and "outside money", is IMO a form of fraud, as it involves equivocation over what constitutes "money". More explicitly, money can't be both an asset and a liability at the same time.
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Autolykos, by that logic, full reserve warehouse receipts (which can begin to circulate as money substitute) are also fraudulent. The issuance of inside money doesn't require fractional reserve banking: there is a difference between money certificate and fiduciary media, both of which are inside money (one fully backed by its value in outside money and the other not fully backed).
What makes inside money a liability to the issuer, though, is the fact that it is redeemable and will at some point circulate back to the originating bank. Outside money is not a liability to the bank, because if it's withdrawn then the bank has nothing to do with any longer. There's nothing fraudulent in the nature of money substitute itself, even if you see fiduciary media to be fraudulent.
Jonathan M. F. Catalán:Autolykos, by that logic, full reserve warehouse receipts (which can begin to circulate as money substitute) are also fraudulent.
I take it you're considering the warehouse receipts to be liabilities against the reserves of the account-holder in particular or the bank in general? Do you see any logically consistent way to view those as assets instead? (That's not a loaded question, I assure you.)
Jonathan M. F. Catalán:The issuance of inside money doesn't require fractional reserve banking: there is a difference between money certificate and fiduciary media, both of which are inside money (one fully backed by its value in outside money and the other not fully backed).
Just so we're clear, you're associating "money certificate" with "full-reserve banking" and "fiduciary media" with "fractional-reserve banking"?
Jonathan M. F. Catalán:What makes inside money a liability to the issuer, though, is the fact that it is redeemable and will at some point circulate back to the originating bank. Outside money is not a liability to the bank, because if it's withdrawn then the bank has nothing to do with any longer. There's nothing fraudulent in the nature of money substitute itself, even if you see fiduciary media to be fraudulent.
Unless there's a logically consistent way to view money substitutes as assets instead of liabilities, I'll have to agree with you and stand corrected on this point. In fact, if I may be so bold and try to predict your answer, viewing money substitutes as assets would essentially multiply the amount of assets. Therefore, it makes sense to consider money substitutes as liabilities (claims) against the actual money commodity/ies.
So my question at this point is, what sound economic basis is there for fractional-reserve banking?
The warehouse receipts are a liability to the bank, not the holder. The warehouse receipt is an asset to the holder. It's similar to the notion that debt is both an asset and a liability at the same time -- asset/liability is an accounting relationship.
Yes.
So my question at this point is, what sound economic basis is there for fractional-reserve banking
Whatever it is, it is not banked on whether or not money is an asset or a liability to the bank. The notion of assets and liability describes an accounting relationship. Outside money is an asset to the bank, inside money is a liability because it basically represents debt.
That's all fair enough. I had forgotten that asset/liability is an accounting relationship. So I stand correct on the points you made.
The respondent is correct that it is not between "Free" and "100% Reserve" banking. There is no such thing as "Free Banking" because every single country on the planet there is some sort of banking regulation. The big debate between most folks on this web site is between 100% Reserve banking and some fraction of 100%.
It is not correct to say that a fractional banking system is fraud as you could as a free bank offer depositors a contract where you would lend some fraction of their deposit for a higher interest rate thus making the deposit behave like a bond. Of course most bank regulators prohibit the bank from writing such a contract to lend a fraction of their reserves as the central banks want to have their members lend to the limits of the banking system credit.
My personal preference is for completely free banking where the banking institutions will have competition from anybody and everybody else. And the executives of every banking institution would be responsible to their depositors by contract and not from some set of rules on high.
Bogart: a contract where you would lend some fraction of their deposit for a higher interest rate thus making the deposit behave like a bond
If it behaves like a bond then it cannot function as a fractional reserve bank. The whole point of fractional reserve banks is that the new issued depoists act as money, thus, operating on "fractional reserves", i.e., only a fraction of the money is kept in reserves while the rest is loaned out, implying that these new deposits are considered to be money. The issued deposits must be exchanged on the market as money.
The whole issue of a fractioned deposit is that at the same time the depositor and the borrower have a ownership claim to part of the deposit at the same time. Instead of having this mess where depositors believe they have a title to money that in fact they do not, just simply write a contract where the depositor loses temporary title to the fraction of the money loaned out until the bank can rebuild reserves to cover the deposit. Banks have through out the centuries delayed payments when they ran out of reserves and were waiting for loan payments. I do not see how this contract destroys the fractional reserve process as there could be in the contract some point where the bank must pay back the fractioned part of the deposit at which time it would have to use other reserves to pay the depositor. The same amount of new money is created in either case and there is the same amount of risk in the system.
Bogart: just simply write a contract where the depositor loses temporary title to the fraction of the money loaned out until the bank can rebuild reserves to cover the deposit.
voluntarily surrendering the tittle of your money temporarily is called a loan. That's when your demand for money falls, not rises. That's not a fractional reserve bank but some type of a loans bank. It is just typical of frb advocates to obfuscate this difference also. Just like the "inside" and "outside" money terminiogy obfuscates the difference between wearhouse receipts and fiduciary media.
In your world, people are both holding cash and not holding cash at the same time. You do not see how this contract destroys....? You see only what you want to see.