I understand their argument about how it could be legally and morally permissable to allow banks to offer FRB, but does anyone here understand their practical argument? Can someone explain why they think issuing fiduciary media can benefit society as a whole over a long-term time period?
It seems to me it is simply based upon preference, but as Hoppe, Block, and Hulsmann rebut, preference is not indicative of social benefit when the preference is a violation of property rights.
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Juan:Yeah. It would be nice to see a short article explaining the benefits of FRB. A clear, concise and logical article. I doubt such thing exists...or can exist.
Give their paper a read, it's only 30 odd pages and is available on this site.
To the OP I think their argument is Keynesian in nature as highligthed by Huerta de Soto and the economists you mentioned, I believe the essence of the argument is that it allows for credit to expand in response to an increased demand for credit, I also think they make the claim that the holders of credit do not need to hold.
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GilesStratton:it allows for credit to expand in response to an increased demand for credit
without equivalent savings put into the banking system - this would cause a business cycle, yes? I remember them specifically saying their kind of fiduciary expansion would avoid such a cycle. i'll reread it though.
GilesStratton:To the OP I think their argument is Keynesian in nature
I do not remember anything keynesian about it. It just seemed sound reasoning.
GilesStratton:I believe the essence of the argument is that it allows for credit to expand in response to an increased demand for credit
The market is supposed to meet ssupply and demand, right?
GilesStratton:I also think they make the claim that the holders of credit do not need to hold.
Need to hold what? I am not sure, what are you tring to say here.
meambobbo:without equivalent savings put into the banking system
As far as I know banks lend out from deposits. So obviously they are financed from savings.
scineram:As far as I know banks lend out from deposits. So obviously they are financed from savings.
If people deposit specie and receive money substitutes and spend them, then they obviously aren't saving.
I think Selgin and White are arguing that when people demand money substitutes to save rather than spend, the bank is justified in creating more money substitutes than reserves, because there is enough saving to support a lower interest rate. Should the cash start to be spent again, the bank would have to remove it from circulation. But how the bank could ever know such precise understandings of savings rates seems impossible and destined for some quack econometric stuff. Furthermore, if people are saving cash, it most likely means they don't want to be exposed to risk.
And generally, banks lend against reserves rather than lend out deposits. They lend out money substitutes that they create.
meambobbo: GilesStratton:it allows for credit to expand in response to an increased demand for credit without equivalent savings put into the banking system - this would cause a business cycle, yes? I remember them specifically saying their kind of fiduciary expansion would avoid such a cycle. i'll reread it though.
I don't know, both of the critiques I've read (De Sotos, Hoppe/ Hulsmann/ Block) seem to say that it would trigger the business cycle. I think they avoid this implication by equating increasing ones demand for cash with saving, as Keynes does, even if it is ultimately unsuccessful.
scineram: GilesStratton:I believe the essence of the argument is that it allows for credit to expand in response to an increased demand for credit The market is supposed to meet ssupply and demand, right?
With the use of the price system.
The price of limited savings rises -> people are more likely to save -> there is more credit
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GilesStratton:I think they avoid this implication by equating increasing ones demand for cash with saving
They deny this. They say holding money is deferred consumption, hence saving. But increased demand for money is not increased saving. On page 20 of pdf:
3That holding money is one form of saving does not imply that an increase in the demand for money is identically an in-crease in total saving. An increased demand for money may accompany a reduced demand for holding other assets, and not a reduction in consump- tion; hence it may be part of a change in the manner of saving with no change in total savings. If, for example, the public's demand for bank de- posits increases at the expense of the public's demand for bonds, holdingconstant the rate of time preference (or, alternatively put, holding con- stant the planned and expected time-profile of consumption),28 there will be no change in "the" natural rate of interest, viewed as a composite of interest rates on all financial assets. Expansion of the volume of deposits is nonetheless warranted in this case. Assuming rising marginal costs of in- termediation, the equilibrium rate of interest on bank deposits will have fallen, while the rate on bonds will have increased. The increased demand for intermediation raises the "price of intermediation" represented by the spread between the deposit and bond rates. Banks are warranted in ex- panding their balance sheets to meet the increased demand for deposits, until the actual deposit rate falls to the new equilibrium deposit rate. (Meanwhile, the market value of existing bonds falls pari passu with the increase in the bond interest rate.)
scineram:They deny this. They say holding money is deferred consumption, hence saving. But increased demand for money is not increased saving. On page 20 of pdf:
I've been meaning to read the PDF some time, I know both Hoppe and co. and Huerta de Soto address thing, although, I think they point out that in practise they ignore the distinction. I'll read the paper soon.
I've read this pdf at least twice before. I remember searching for the method to their madness, only it is nowhere to be found. I get the logic about what they are saying. Yet, how could a bank practically approach doing this? How do they know whether or not there is deferred consumption? Do they use consumer prices, credit demand, velocity of the exchange of bank deposits? What about the supply of real goods? What about unprofitable production? Just because some goods are sitting on store shelves doesn't mean that people are saving. It means there was business error.
How do they get this data? It seems it could only work in a system without financial privacy. There could be no banknotes - only electronic exchanges, all of which the bank would be aware of.
And how does a bank contract credit once it has been issued? Would the bank have to make extremely short-term loans, retiring its earnings as deferred consumption lessens?
I'm not sure I'm against what they are saying in theory, but I see no practical way to implement it.
An increased demand for banknotes implies a fall in the redemption rate. Then the bank sees it can issue additional notes without additional risk of a bankrun. An increased demand for deposits implies there are fewer withdrawals and cheques written against demand deposits, so again the bank can relatively safely expand the volumes. There is nothing magical about the process.