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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Fractional reserve banking has many practical advantages, including its ability to keep the supply of real money balances more closely in line with demand in the face of short-run fluctuations of the latter. (The alternative of just letting P adjust is relatively slow and cumbersome, and can result in short-run distortions of relative prices.) But the chief advantage is that it increases the extent of productive investment, by allowing savings that might otherwise be held in the form of gold or silver only to be replaced by claims backed by commercial bank loans. Adam Smith wrote very eloquently about this; as for "short" articles, here is a pair I wrote on the subject for the Free Market News Network a couple years ago:
http://www.freemarketnews.com/Analysis/241/6939/notes.asp?wid=241&nid=6939
http://www.freemarketnews.com/Analysis/241/6949/notes.asp?wid=241&nid=6949
And here is a relatively short piece that makes some other points:
http://www.independent.org/pdf/tir/tir_05_1_selgin.pdf
If I haven't written more short pieces defending fractional reserves, it's because I've been busy with other projects: bear in mind than 99.99% of monetary economists and policymakers have no problem with fractional reserves, but dismiss free banking. Can anyone blame me (or Larry) for directing most of our work to them, instead of spending still more time trying to convert a small coterie of die-hard 100-percent reserve buffs?
I find it odd, by the way, that some critics of fractional reserve banking refer to it as being practically impossible. In fact, the practice is as old as banking itself, and where it has been allowed to develop without legal interference, that is, where it has been accomopanied by free banking (as in Scotland before 1845 and canada before 1914) it has had an excellent track record. 100-percent reserve banking, on the other hand, has been very rare historically even though there is no evidence that there have every been any laws against it.
Selgin:But the chief advantage is that it increases the extent of productive investment, by allowing savings that might otherwise be held in the form of gold or silver only to be replaced by claims backed by commercial bank loans.
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."
You write as if I hadn't attached articles providing details.
So the bank walks this line by balancing its deposit rate, its loan rate, and its redemption rate?
Dr. Selgin, thanks for posting. I believe I now understand your argument.
The money substitutes are indeed money substitutes; however, they are not property titles to gold - they are more properly titles to a share of the bank's assets. Being contractually redeemable into a scarce commodity gives the bank money calculational value in terms of the commodity money, which it requires to function as money. However, it is not a title over property but a debt.
As bank money becomes more popular, it is not that counterfeit titles to gold are diluting the purchasing power of gold by falsely increasing the supply, but that the demand for bank money over gold money reduces the demand for gold.
...Now I have to go read the rebuttal to this view again...
Selgin:(The alternative of just letting P adjust is relatively slow and cumbersome, and can result in short-run distortions of relative prices.)
But it's also what we do for every other market.
If there aren't real savings backing the money, then it isn't money. It is fraudulent. It is non-contractual. It is inflationary, and makes any business cycle much worse (or begins it).
The demand for savings for investment is infinite, relative to its supply. The price system regulates this interaction. This is "how it goes" in every other market. Why not this one (arguably the most important)?
The difference between libertarianism and socialism is that libertarians will tolerate the existence of a socialist community, but socialists can't tolerate a libertarian community.
scineram:The market is supposed to meet ssupply and demand, right?
When you increase supply and demand stays the same, you lower prices. When you lower prices, demand increases. So the price increases you and you increase supply again. Repeat multiple times until you achieve hyperinflation.
That said, I think fractional reserve banking should be allowable in a free society because it is... well, free. Schumpeter had a point when he said that new credit created by fractional reserves promote innovation. Over the long run, I believe that fractional reserve banking could increase economic growth much more than just full reserves.
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krazy kaju:Schumpeter had a point when he said that new credit created by fractional reserves promote innovation.
Thedesolateone:If there aren't real savings backing the money, then it isn't money. It is fraudulent. It is non-contractual. It is inflationary, and makes any business cycle much worse (or begins it). The demand for savings for investment is infinite, relative to its supply.
Juan:Is this idea that inflationary, un-backed credit is a good thing being seriously advocated ?
That is a pure mischaracterization of their argument. Fractional reserve banks' money substitutes are backed by their assets, which are partially liquid reserves (gold) and partially debts. The million dollar question is if their assets are worth enough gold in the market's view to meet redemption of all their notes. Selgin and White conclude that under an unregulated free banking system, most banks would have no problem meeting this challenge.
meambobbo:That is a pure mischaracterization of their argument.
Fractional reserve banks' money substitutes are backed by their assets, which are partially liquid reserves (gold) and partially debts.
The million dollar question is if their assets are worth enough gold in the market's view to meet redemption of all their notes.
Selgin and White conclude that under an unregulated free banking system, most banks would have no problem meeting this challenge.
meambobbo:The million dollar question is if their assets are worth enough gold in the market's view to meet redemption of all their notes.
No, that's not the question, because it requires a time-lag. This is acceptable for time deposits, but not for demand deposits, which is what we are talking about. Assets are not money, and should not be treated as such. Therefore, they cannot be "held as reserves" in lieu of money - because they just aren't of the same liquidity.
I have nothing as such against banks holding debt. I only have a problem with it when they have created the debt by counterfeiting against my money they contractually must hold in reserves.
krazy kaju: scineram:The market is supposed to meet ssupply and demand, right? When you increase supply and demand stays the same, you lower prices. When you lower prices, demand increases. So the price increases you and you increase supply again. Repeat multiple times until you achieve hyperinflation.? That said, I think fractional reserve banking should be allowable in a free society because it is... well, free. Schumpeter had a point when he said that new credit created by fractional reserves promote innovation. Over the long run, I believe that fractional reserve banking could increase economic growth much more than just full reserves.
When you increase supply and demand stays the same, you lower prices. When you lower prices, demand increases. So the price increases you and you increase supply again. Repeat multiple times until you achieve hyperinflation.?
I'm going to have to ask the obvious question, how?
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