Is Lawrence H. White take on the Gold standard and fractional reserve banking consistent with Austrian theory?
I listened to his speech on the gold standard at: http://blog.mises.org/archives/009578.asp
I was quite surprised by some of the following:
Doesn't necessarily view that fractional reserve banking is fraudulant in its nature.
Doesn't think fractional reserve banking should be illegal since, according to him, the free market prefers fractional reserve banking over 100%, and he thinks that under a free banking system such a system could be maintained and productive
Claims that banks prior to the Fed some banks were doing just fine with a 2% reserve ratio.
I found the remarks to be completely inconsistent with almost everything I have thus far read about the issue. Especially from Rothbard and Mises. For example, Rothbard (and I believe Mises) claimed that a free banking system would lead to a sound near 100% reserve system. The only way that fractional reserve banking can be practiced is by a banking system that evades the free market with government help. Rothbard would also argue that we never had a free banking system, which is why we had fractional reserve banking before the Fed. What also bothered me was that White didn't seem to mention that a fractional reserve banking system, which he claims to be possible under a free banking system, would still produce a business cycle, and ultimately undermine the system as I understand it.
I wonder if anyone has any thoughts on this. I don't think I have misunderstood him.
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Juan:Max, you're at the wrong place. You should be working for the public relations department of lehman brothers....
Tpical Austrian FRB cult, unable to defend your position in the face of reality you result to name calling. Victorious again, you FRB cultists sure know how to take a beating.
Maxliberty:It would be great if just one member of the Austrian FRB cult could demonstrate that for once instead of just a blind assertion. Anyone?
Demonstrate once more?
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Juan:From a strict economic point of view, frb is based on the fantasy that capital can be at the same time available on demand for consumption and saved.
True, but even then. Only to the extent that actors subjectively believe it to be so.
Selgin/White's position
Hoppe, Hulsmann, and Block's rebuttal
To be honest, I don't understand fully Selgin and White's position that fudiciary media can be economically beneficial. It seems to me that the only real way to do it is with options clauses, otherwise you always have an asset liability mismatch in terms of maturity time. But look at what Hulsmann says on option clauses in:
Hulsmann on error cycles look at page 19
"If the market participants left their money in demand deposits covered by options clauses, then there would be no fractional reserve banking at all."
So...I believe Selgin and White are off-base. Interest earned by depositors would be destroyed by inflationary effects on prices, while adding the increased risk of bank failure and "default" on demand deposits. As Hulsmann says, central banking, deposit insurance, options clauses, fiat money, and rigorous banking regulation cannot prevent the risks and distortions inherent in a fractional reserve system -> it can only delay the collapse by creating erroneous new assumptions.
White and Selgin obviously do not support government interventions, such as many of the ones above. They support free banking and would encourage bankruptcy-threatening runs on banks that created too much fudiciary media. This was also Mises's position, I believe. The difference was that White and Selgin believed fudiciary media could be used in certain circumstances without causing a business cycle (or other harm), whereas Mises believed free banking was the best means of eliminating/diminishing the use of fudiciary media, seeing no economic value to it.
I'm pretty sure that Selgin and White don't support blatant inflation, or strongly artificially lowered interest rates. But I fail to understand their economic argument.
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Maxliberty: GilesStratton:FRB is the result of the the blurring of the line between a deposit contract and a loan contract. It would be great if just one member of the Austrian FRB cult could demonstrate that for once instead of just a blind assertion. Anyone?
GilesStratton:FRB is the result of the the blurring of the line between a deposit contract and a loan contract.
It would be great if just one member of the Austrian FRB cult could demonstrate that for once instead of just a blind assertion. Anyone?
What? Do you claim that FRB wasn't created by the governments' step by step "blurring" of the property rights of depositors??? Didn't the original depositors contract say that he could have his gold back at any time, but then the government issued laws and suddenly that contractual right was abolished. If you ask for a "demonstration", I think that there's a huge reading list waiting for you...
It's not fascism when the government does it.
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meambobbo:To be honest, I don't understand fully Selgin and White's position that fudiciary media can be economically beneficial. It seems to me that the only real way to do it is with options clauses, otherwise you always have an asset liability mismatch in terms of maturity time.
Demand deposits become mature when the depositor asks for withdrawal. So maturity times are not necessarily mismatched.
meambobbo:"If the market participants left their money in demand deposits covered by options clauses, then there would be no fractional reserve banking at all."
But there would be still more fiduciary media than reserves, no?
meambobbo:Mises believed free banking was the best means of eliminating/diminishing the use of fudiciary media, seeing no economic value to it.
I am not sure, it seems to me he recognized it as inevitable.
White does lecture at the FEE in "Austrian economics" seminars, so I'm confused. I see he lectures on free banking for example in the upcoming FEE summer seminar: "Advanced Austrian Economics"
First, even Rothbard allowed fractional reserve banking for deposits that were not for immediate demand. These include CDs, equity investments, bonds, etc. So with fractional reserve banking even with under the restriction of contract, there would be some inflation and some banks would have runs.
Rothbard and Mises thought that under a completely free banking system, fractional reserve banking would not be possible. That does not mean that consumers under a completely free banking system would agree with them. Like any forecast, the forecaster can not account for consumer preferences. Under a 100% reserve for demand deposit system, the depositors have to compensate the bank to store the money and use services like check writing etc. As a depositor I would allow them to fraction my deposit if it saved me a laundry list of fees. In fact White notes that the most free banking system known in Scotland was based on silver and gold and had fractions of about 2%.
DD5: White does lecture at the FEE in "Austrian economics" seminars, so I'm confused. I see he lectures on free banking for example in the upcoming FEE summer seminar: "Advanced Austrian Economics"
The confusion being what?
ProudCapitalist: Maxliberty: GilesStratton:FRB is the result of the the blurring of the line between a deposit contract and a loan contract. It would be great if just one member of the Austrian FRB cult could demonstrate that for once instead of just a blind assertion. Anyone? What? Do you claim that FRB wasn't created by the governments' step by step "blurring" of the property rights of depositors??? Didn't the original depositors contract say that he could have his gold back at any time, but then the government issued laws and suddenly that contractual right was abolished. If you ask for a "demonstration", I think that there's a huge reading list waiting for you...
The whole arguement that the Austrian Cult makes is that banks need 100% reserves equal to the amount on deposit. So the question is reserves of what? I can see no reason why a bank could not have reserves of gold, silver, oil, wheat, or any other asset class, including financial assets. Financial assets such as loans which to the bank are assets. Once we realize this to be true then the issue from any person holding a note on the bank is if they so desire how do they redeem the note for something other than the note. In the classic example they redeem the note for gold but I can see no reason that this redemption has to be only for gold and I see no reason why there can not be restrictions on the redemption including the time frame the bank has to fulfill the redemption.
So please demonstrate how financial assets or any other asset should be prohibited from being used by a bank as all of or part of the 100% reserves? Also, demonstrate the inherent fraud of a bank placing time limits on redemption of its notes for the underlying asset class?
Please don't make the arguement why one might be superior than the other, we are only discussing what should be prohibited.
Juan:Tpical Austrian FRB cult, unable to defend your position in the face of reality you result to name calling. Victorious again, you FRB cultists sure know how to take a beating. I don't think it was name calling. I'm saying that the kind of things (fallacies) you believe are just what the banking mafia wants to hear.Also, advocacy of sound money is older than what you call "the austrian cult", so even your name calling is off.
You appear only capable of repeating the mantra without any critical thinking. In my posts I am very specific with my critique of your mantra and I offer specific examples that refute your position. For example, you and Giles said it was impossible to offer interest on 100% gold reserve accounts, I demonstrated you are incorrect.
scineram:maturity times are not necessarily mismatched.
i guess i meant potentially mismatched, from a balance sheet perspective.
scineram:But there would be still more fiduciary media than reserves, no?
Well...I don't think such would technically qualify as fiduciary media. Yes, there would be more claims to money than actual money, but these claims are future claims, not present claims. We cannot make a certain assumption that the bank will be unable to produce the required reserves at that date in the future. Without legal tender law, such instruments may fail to operate at the same purchasing power when used in indirect exchange as actual money or actual demand deposits.
Even with option clauses there can still be a potential asset-liability maturity mismatch. ...But even in this case, the bank can sell some of their loan contracts, or borrow from other banks, to cover their needs.
Maxliberty:In the classic example they redeem the note for gold but I can see no reason that this redemption has to be only for gold and I see no reason why there can not be restrictions on the redemption including the time frame the bank has to fulfill the redemption.
As I mentioned from Hulsmann, using option clauses (allowing exactly what you describe) is not fractional reserve banking. FRB is when the bank holds more present claims to ___ (via demand deposits) than the bank presently holds in ____. The "reserve" asset does not matter.