In defense of Fiduciary Media
http://mises.org/journals/rae/pdf/R92_5.PDF
According Selgin and White, fractional-reserve banking are more profitable than full-reserve banking. They say that no one accepts full-reserve banking, which means fractional-reserve banking drives out full-reserve banking. And sometimes I don't really understand.Key points :1. Fractional-reserve banking has never been compulsory. Depositors have always been free to insist on 100 percent reserves.2. Benefits accrue to bank depositors and noteholders, who receive interest and services paid for by the extra bank revenue generated from lending out a portion of its liabilities. As Mises put it: "Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them." (which means : money creation gives more revenue).3. It would be farfetched to account for such behavior by insisting that the depositors had run because they had learned to their horror that their own banks had been holding fractional reserves, but were so naive as to put their money into another set of banks without suspecting them of similar practices. But if such a realization (that their bank held only fractional reserves) had been the typical cause of runs in the nineteenth and twentieth centuries, it would be difficult to explain why runs usually affected only one particular bank or an associated set of banks, and not every single fractional-reserve bank simultaneously. Running depositors who successfully withdrew their money often transferred it to other fractional-reserve banks, thought to be safer, rather than hoarding cash as they would have done if they feared fractional-reserve banks generally. 4. Few people have taken the 100-percent-reserve option because (as Rothbard forthrightly acknowledges) it means foregoing interest and paying warehousing fees instead.Most depositors would rather receive (more) interest on their deposits, and consider it more than adequate compensation for the risk involved in fractional-reserve banking. We think it more likely that 100-percent-reserve banking is just not very widely demanded, because of its foregone-interest cost.5. Hoppe considers but rejects a standard economic argument we accept concerning fractional-reserve banking : that it reduces the resource costs associated with indirect exchange, by partially substituting bank-issued exchange media for commodity money, thereby reducing (inframarginally) the resource costs of producing money. 6. Throughout the silver and gold standard eras, consumers given a choice ordinarily demonstrated a marked preference for banknotes over full-bodied coins as a more convenient medium of exchange for all but the smallest transactions.7. Did fractional-reserve banking cause the Business Cycle ? No. Business Cycle will occurs only with the Central Bank or Government intervention (inconvertible paper money, legal tender etc.), according both.8. Banknotes can include so-called “option clauses”. Scottish banknotes bore such clauses before 1765. With an option clause, a bank in effect reserves the right to stop redeeming its notes on demand, on the condition that it must pay interest on the notes during any period of suspension. So long as the interest rate is sufficiently high, option clauses are incentive compatible : they’ll only be invoked when so doing is in the noteholders’ own best interest. They had them to protect against note raids, where rival banks would pile up notes and then stage a raid to exhaust a bank’s reserves and put it out of business. Such raids occurred in the early days of Scottish banking. The option clause might have been used to protect against random panics.If you have any answers...I would appreciate it.
z1235: Merlin:The contact I have in mind as being legit would run along such lines: “the value of the funds shall be payable to the depositor at request”. Now, it might not seem a huge difference, but it is. For when you do this, you are not lying, neither do you break any promise (yet) when you use the funds. As long as you pay them on demand you’re within you contractual rights. So, as long as a Ponzi scheme operator includes the quoted clause he'd be good to go? Btw, I'm enjoying this elucidating exchange. Z.
Merlin:The contact I have in mind as being legit would run along such lines: “the value of the funds shall be payable to the depositor at request”. Now, it might not seem a huge difference, but it is. For when you do this, you are not lying, neither do you break any promise (yet) when you use the funds. As long as you pay them on demand you’re within you contractual rights.
Me to. As for the clause what I can say is that, if such a contract was brought before me as an arbiter by the client who wishes to sue the bank because it has invested the money somewhere, I would turn him down. I believe a free arbitration market would do the same, but that is speculation.
Allow me to furnish my idea as to why I would find nothing wrong with that.
1.”The value of funds” not the funds themselves. This is important, for if I where to promise to deliver the funds themselves it would pretty much go by itself that I would need to hold them in reserve all times, since once lent it is preposterous to think that the very same banknotes can be delivered on demand. On the other hand, the value of fund, means that I’ll deliver equivalent mass of paper (or gold) which implies that the original fund will not be held in reserve.
2. All that I’m promising is that, when you request you funds, I’ll deliver an equivalent sum. So, it seems clear to me that I put myself under scrutiny when and only when the request is actually made. The wording seem to indicate that, short of actually asking for the equivalent sum, I have no business at all with the bank.
This is the idea that I, as some arbiter, would get from the contract.
Merlin:”The value of funds” not the funds themselves.
z1235:Everyone would divide their assets into (1) liquid and (2) investment parts, then store (1) in a vault or a 100% reserve 'bank', and allocate (2) between stocks, bonds, funds, advisors, etc. where title to capital (and exposure to risk/reward) is simple and clear. In such a world, no bank, agent, or institution would be too big to fail, due to the non-existence of any ponzi-like entanglements. Z.
Merlin:A small investor usually prefers to have the cake and eat it too and that’s why I believe FRB would get them: its liquid, profitable and , of course, has a risk degree.
Merlin:Thank you for the fine discussion.
"Fiduciary media and money substitutes are not the same thing. Fiduciary media corresponds to the amount of circulating notes that were issued beyond the quantity of specie available in the reserves."
ok..that makes sense.
this aexcerpt says "To say the same thing in different words, there was full, 100 percent standard-money backing for $42.7 billion of deposits, and no standard-money backing whatever for $6065.5 billion of deposits, which latter constituted fiduciary media."
http://mises.org/daily/3556
the 'standard money' referred to in the above excerpt..is that paper dollars and base metal coins??? current quarters, nickels, pennies and such??? is that the same thing as specie?
paper dollar-fed notes and current coins???
is the fiduciary media spoken of in the above excerpt really a note at all??? or just a ledger entry???
is what occurs in the above excerpt that the rothbard and others claim causes economic harm???
is it now ledger entries in excess of paper-dollar-fed notes???
or was rothbard specifically referring to earlier times when i was told that notes said redeemable in gold/silver but really didnt have any gold/silver to be redeemed with???