Hello,
I am a layperson only recently exposed to the Austrian school of economics. I'm fascinated by it and I'm buying what you're selling. I do have a question:
I've read a few books by Murray Rothbard and he's critical of the fractional reserve banking system. What I do not understand: without fractional resreve banking, how can money be loaned and how could a bank possibly pay me interest? I certainly understand the risk of fractional reserve banking, especially when rerserve requirement is very low but I don't understand what the alternative is.
Thanks.
Don
Thanks for your answer.
But - how do you loan the first dollar? i.e., if, as a bank, all my deposits must be backed, isn't 100% of my money not loanable?
This is an easy answer:
There are a bunch of ways to get money without making fractional reserve loans on deposits that users can claim immediately:
1. Most Common: Issue equity. That is you sell ownership in a bank, normally done through stock holders but can be done through a mutual system. In either case the investors are not contractually obligated to be paid the money back. Understand that if the bank makes more than the interest rates then the investors get more money paid back. There are many more insurance companies that use the mutual system and it has advantages.
2. Contract deposits now for money later. A certificate of deposit is an example. The agreement for higher interest rates means the depositor has limit access to their deposit unlike a checking account or passbook savings. This method includes selling long term bonds.
In all likelyhood there would arise, in a stateless society, two different kinds of institutions.
The first would be a true financial intermediary, who would facilitate the loaning of money. There profits would be the result of arbitrage. For example, person A comes to the bank offering them money for 5% per annum, they would then lend this money at a rate higher than that and (e.g. 6% per annum) and then pocket the difference as a profit.
The second would be more like a warehousing business with whom individuals would conduct a monetary irregular deposit contract. The bank would charge a sum of money in order to guard the gold (or whatever other commodity) and this is how they would make money.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
dmuldoon:how do you loan the first dollar?
You have to get a depositor (or an investor) to allow you to do so. That's what a CD is for example. Remember you only need to maintain 100% backing for demand deposits.
The definitive work on this subject from an Austrin perspective is De Soto's book Money, Bank Credit, and Economic Cycles. It's available online in pdf format here.
Pardon me if I side with the modern Austrian School over the currency and banking schools that cycles are not inherent in a free market.
scineram:Pardon me if I side with the modern Austrian School over the currency and banking schools that cycles are not inherent in a free market.
because competition in 'trustworthiness' and 'sound banking practices' leads to the relative extinction of fiduciary media leaving commodity and full reserves the result?
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Cycles aren't inherent in a free market.
because its an article of faith, or because free markets would suppress the issuing of fiduciary media (continued injections of which cause the Austrian Business Cycle)? (or for some other reason that you guys want to tell me but haven't told me yet?)
Because it will make extensive use of fiduciary media and minimizing the use of the commodity while providing stability.
Look into the differences between fractional reserve expansions under free banking and fractional reserve expansions under a central bank.
I have ?
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Monopsony: Cycles aren't inherent in a free market.
That's 100% correct but that is because FRB would practically not exist. Credit expansion would be severely curtailed to the point that it would be virtually non existent.
If you want to understand how FRB got by (although not at the same level as today) before the Fed, then perhaps The Mystery of Banking would be a good source. It's a quicker and easier intro then de Soto's big volume.
DD5:That's 100% correct but that is because FRB would practically not exist. Credit expansion would be severely curtailed to the point that it would be virtually non existent.
This is what Selgin and White and co deny, despite claiming to be treading *close* to Mises.... When the topic is fiduciary media they think curtail is merely to constrain/cap...but at a significant (dominant) amount, that it limits from expanding beyond all proportions....... but not from steady/significant expansion)
whereas my reading of Mises (and the other 'free banking but frb causes business cycles') is that fiduciary media would be de-facto suppressed by market forces. Even as opposed as I am to positivist methods of conducting economics I would be happy for an experiment to occur to test this theory (since it would mean we would have a free society to experiment on!)
scineram: Pardon me if I side with the modern Austrian School over the currency and banking schools that cycles are not inherent in a free market.
Currency school?? you're confused.
see Monetary Theory and Trade Cycle by F.A. Hayek for why the boom/bust is an inherent feature of FRB. The enevitalbe bust is explained by the Modern theory of the Austrian School. No currency or banking school.
DD5: see Monetary Theory and Trade Cycle by F.A. Hayek for why the boom/bust is an inherent feature of FRB. The enevitalbe bust is explained by the Modern theory of the Austrian School. No currency or banking school.
Austrian Boom/Bust theory has developed considerably since 1933.