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.
Check my blog, if you're a loser
DD5, you can't derive an empirical fact "praxeologically"--that's what history is for! So of course I can't "prove" theoretically that fractional-reserve banking can survive in a free market--but on the other hand I don't have to! And yes, I know both Rothbard's article and White's response well enough to say that the former is perfectly misleading: in no important respect did the Scottish system depart from genuine laissez-faire; and in it fractional reserve banking emphatically did flourish. No amount of praxeological deduction, or repeated contrary assertions, can alter that truth! Rothbard simply persused the sources for any "dirt" he could find to try and soil the Scottish system with--although he wrote as an economist he was in fact a muckraker down to his toes! But he didn't find much, and what he found he exaggerated or distorted. he said that the Scottish banks relied on the bank of England for last-resort loans, whereas generally they lent to it--and not the other way 'round. (One or two did once borrowed, but not during an emergency--just some normal business.) He claimed the system depended on unlimited liability, whereas the chartered banks, some of the biggest, had limited liability. And so on. (I'm relying on memory but this was the gist of it.) Of course the Scottish system didn't involve pristine laissez-faire. Whatever does? But there's absolutely no evidence to suggest that the public's great confidence in Scottish banks depended on anything save their efficiency and stability over the course of many decades.
But suppose you don't want to take the Scottish case seriously. Then I could say the same of Canada, Switzerland, and numerous other instances of free or relatively free banking. On the other hand, 100-percent reserve banking exists almost exclusively in the minds of about half-a-dozen living econ. Ph.D.s. It was never of much importance historically, because fractional reserve banking clobbered it in the marketplace, and did so without any need for state assistance. Yes, such assistance ended up corrupting it, and very badly. We all agree on that. But the claim that fractional-reserve banking was corrupt all along is just so much mental bilgewater.
there are two distinct questions, whether FRB can persist in a market, and whether its actions breach natural law.
if the contracts are to be made explicit lend to banks on short call with risk of default basis, then as acknowledge FRB can operate in harmony with natural law, it is not to be indicted on moral grounds anymore than any gambling instituion is. and the fact that it is in a freemarket will necessarily dampen its rapacious moneyexpansion to less than one would expect from a socialised banking system, i.e. fed reserve version of it.
so i say there are two forks one can take.
A)suggest FRB is a worthwhile system for entrepeneurs to consider launching, but they must be explicit in their advertising and contracts with customers that the customers are making risky call loans; then there might come to pass legitimate institutions of the gamblebank nature, likely be in competition with weplaysafebanks.
or
B) suggest that FRB is a worthwhile system for entrepeneurs to consider launching, but they can have bizarrely confused contracts, like 'your money is kept safe for you on demand' , 'we pay you interest by lending out your money when you dont demand it' and this is to promote illegitimate contracts, and fraud, etc.
im not sure which of the two FRB supporters are pushing for
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
Selgin:But really, these little quotations are too revealing to pass without comment.
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."
Selgin: DD5, you can't derive an empirical fact "praxeologically"--that's what history is for! So of course I can't "prove" theoretically that fractional-reserve banking can survive in a free market--
DD5, you can't derive an empirical fact "praxeologically"--that's what history is for! So of course I can't "prove" theoretically that fractional-reserve banking can survive in a free market--
Selgin,
The last thing I want is to be dogmatic about the issue.
I didn’t mean for you to derive praxeologically an historical fact. I asked if you can derive praxeologically how such a system can work in theory, in a true free market system.
If you can't provide a theoretical explanation to how FRB can evolve in a free-market, then you don't have a theory at all. That is, in the scientific sense. You cannot simply observe an event in history and deduce from that anything scientifically meaningful. You must be able to explain what you observe. You could have observed a rare coincidental event that appears as though FRB evolved in a free banking system, or more likely, that the system was not as free as you portray it to be.
Here are just 2 examples from Rothbard. I would like to understand what is misleading about them.
According to Rothbard, based on White's own acknowledgement, Scottish banks suspended specie payment when England did. Is this not true? I have no problem of you saying that it isn't if you think that is the case, but please don't tell me that suspension of specie payment is not a departure from genuine laissez-faire.
Also, according to Rothbard: "In fact, in a book that Professor White acknowledges to be the definitive history of Scottish banking, Professor Sydney Checkland points out that Scotish banks expanded and contracted credit in a length series of boom-bust cycles, in particular in the years surrounding the crisis of the 1760s, 1772, 1778, 1793, 1797, 1802-03, 1809-10, 1810-11, 1818-19, 1825-26, 1836-37, 1839, and 1845-47. Apparently, the Schottish banks escaped none of the destabilizing, cycle-generating behavior of their English Cousins"
If the above is true, then doesn't it imply that FRB didn't work? The system was as cyclical in nature as the one in Britain, as expected.
Selgin: But the claim that fractional-reserve banking was corrupt all along is just so much mental bilgewater.
But the claim that fractional-reserve banking was corrupt all along is just so much mental bilgewater.
Hayek use to refer to “forced” savings, as an explanation by some economist as to how FRB can be productive, namely that it is real savings, only it is “forced” because real wealth is still transferred by inflation. He of course, refutes this idea. But doesn’t’ the “forced” imply fraud? How can you justify savings that are forced on individuals?
GilesStratton:To borrow from Kinsella "So what?". Whether or not new technology is used once you understand the rate of interest has been pushed below what it would have otherwise been it is clear that the capital structure is no longer in accordance with consumer preferences. So whilst you may be able to create more physical capital, the value of that capital is less than it would have been without the FRB induced "boom".
Whether or not new technology is used once you understand the rate of interest has been pushed below what it would have otherwise been it is clear that the capital structure is no longer in accordance with consumer preferences. So whilst you may be able to create more physical capital, the value of that capital is less than it would have been without the FRB induced "boom".
On the contrary, people want a bigger economy, which necessitates more capital goods and more innovation. Often, however, they are not willing to make the sacrifices for that kind of economy by saving. FRB is able to side step this problem by funding the long term projects so vital to economic prosperity. Of course, FRB would lead to occassional crises, but these crises would not be nearly as large as anything we've seen recently, since credit expansion would be limited by the market to a great extent and because corrections would last no longer than 9 months, most likely. I doubt that in a free market unemployment would ever exceed 7% either.
Juan: As a matter of fact, I've said more than once that I don't think frb should be outlawed. It's a scam and the best way to get rid of scams is to let scammers try to swindle people.
How is FRB a scam if both parties involved voluntarily agree to participate in it and understand the risks?
Would you mind explaining how creating 'credit' out of thin air (FRAUD) is good for innovation ?
As I've already explained, tech companies are long term projects, low interest rates make long term projects more viable, thus, low interest rates would spur technological innovation. The dot com and telecom bubble in the late 90s and early 00s is an example of this. The dot com/telecom bubble has laid much of the foundation for today's internet. Without the thousands of miles of cables laid down by telecom companies, the internet would be much slower and less efficient.
Political Atheists Blog
Selgin:...fractional reserve banking clobbered it in the marketplace, and did so without any need for state assistance. Yes, such assistance ended up corrupting it, and very badly.
krazy kaju:How is FRB a scam if both parties involved voluntarily agree to participate in it and understand the risks?
As I've already explained, tech companies are long term projects, low interest rates make long term projects more viable, thus, low interest rates would spur technological innovation.
krazy kaju: The dot com and telecom bubble in the late 90s and early 00s is an example of this. The dot com/telecom bubble has laid much of the foundation for today's internet. Without the thousands of miles of cables laid down by telecom companies, the internet would be much slower and less efficient.
The dot com and telecom bubble in the late 90s and early 00s is an example of this. The dot com/telecom bubble has laid much of the foundation for today's internet. Without the thousands of miles of cables laid down by telecom companies, the internet would be much slower and less efficient.
The 90's laid the foundation, perhaps. But not the bubble. The bubble is an over-investment/mal-investment. There was a real growing demand for technology, that is, there was real savings also to fuel this technology growth. But thanks to "credit out of thin air", we over-invested and over-speculated due to artificially low interest rates. Why else would so many technology and .com companies go out of business in less then a year. worthless start-up companies were overvalued due to the speculative boom. cheap money found its way into worthless .com start-ups all because their speculative value was expected to go up despite the fact they had no real product. It was the housing bubble in technology, thanks to central banking and FRB.
Juan:Do they ? Or are you just assuming what you need to prove ?
If I put my money in a bank which I know practices fractional reserve banking, then yes, they do.
Babbling. I suggest you give up Mises.org and join Keynes.org.
I suggest you stop trolling before you get temp banned. What I said was based on Misesian and Bohm-Bawerkian theory of interest rates and capital structure. It is also derived from the unorthodox Austrian economist Joseph Schumpeter.
krazy kaju:If I put my money in a bank which I know practices fractional reserve banking, then yes, they do.
referring back to my post http://mises.org/Community/forums/p/7666/137028.aspx#137028
do you imagine paying into an FRB account of type A or B ?
DD5:The 90's laid the foundation, perhaps. But not the bubble. The bubble is an over-investment/mal-investment. There was a real growing demand for technology, that is, there was real savings also to fuel this technology growth. But thanks to "credit out of thin air", we over-invested and over-speculated due to artificially low interest rates. Why else would so many technology and .com companies go out of business in less then a year. worthless start-up companies were overvalued due to the speculative boom. cheap money found its way into worthless .com start-ups all because their speculative value was expected to go up despite the fact they had no real product. It was the housing bubble in technology, thanks to central banking and FRB.
Of course the bubble was malinvestment. I never denied that. I, in fact, implied it. The amount of cable laid down by telecom companies during the dot com/telecom boom is roughly analogous to the amount of railroads laid down by railroad companies in the late 19th century: waaaaaaaaay too much. Yet in both cases, after the collapse and serious downsizing of dozens of companies involved in their respective bubbles after the bust, this new infrastructure served as the foundation for future economic prosperity.
I am not defending central banking by any means, nor am I defending the distorted banking practices of today. In a truly free market, I believe fractional reserve banking would exist due to its long-term profitability. Banks would not be as overextended in a free market due to the fact that the market would regulate itself - any overextended banks would fail at the slightest chance of an economic contraction. This does not mean that fractional reserve banking cannot exist, it simply means that it cannot exist to the extent that it does today.
nirgrahamUK:referring back to my post http://mises.org/Community/forums/p/7666/137028.aspx#137028 do you imagine paying into an FRB account of type A or B ?
"A," without a doubt. "B" is clearly a violation of contract law.
krazy kaju: If I put my money in a bank which I know practices fractional reserve banking, then yes, they do.
I suggest you stop trolling before you get temp banned.
What I said was based on Misesian and Bohm-Bawerkian theory of interest rates and capital structure.
It is also derived from the unorthodox Austrian economist Joseph Schumpeter.
krazy kaju: I am not defending central banking by any means, nor am I defending the distorted banking practices of today. In a truly free market, I believe fractional reserve banking would exist due to its long-term profitability. Banks would not be as overextended in a free market due to the fact that the market would regulate itself - any overextended banks would fail at the slightest chance of an economic contraction. This does not mean that fractional reserve banking cannot exist, it simply means that it cannot exist to the extent that it does today.
I agree, but due to competitive banks redeeming on each other, and free entry to anyone, I don't believe they could extend credit by more the 5 or 10%. This would hardly be felt.
However, I believe it is still fraud. If caught, they should be held accountable.
This is the way I see it.
It isn't important whether someone is creating money out of thin air. That's not inherently fraudulent. Should I not be able to create a currency and issue as many units of this currency as I see fit? Of course, so long as I don't claim something that's not true in order to market the currency. For example, if I guaranteed its purchasing power, or claimed I held reserves against it and didn't. On the other side of the coin, no one has to accept my currency for use as money.
I don't believe FRB's market themselves as backing their currency with gold. They merely make the claim that they will be able to redeem it for gold on demand. Really, they are backing the currency with the bank's assets. Their liability to redeem it in gold serves several functions. One, it allows a seamless transition for the users of commodity money to start using bank money or vice versa. It also provides a common unit of account. Rather than have hundreds or thousands of bank currencies trading at floating exchange rates, they all trade against gold, allowing clearing houses to function. Finally, it proves the solvency of a bank. Its ability to raise its reserves to meet redemption demand is a testament to the quality of the loans it makes.
This does not mean that bank money must always trade at par with the gold it is a claim upon. It also doesn't mean that anyone has to accept it as though it were gold. This provides a strange outcome. As gold is used less and less as money, its demand falls compared to bank money. Thus, gold bugs find it incredibly strange when they know the supply of bank money is increasing faster than gold, yet bank money still trades at par with gold; and merchants are willing to accept equal amounts of bank money or gold for their products. But this is simply because the market prefers a less scarce good as money, rather than the conclusion that the market is duped into thinking the bank money is a property title to gold and that paper gold is driving down the cost of real gold.
There are logical reasons for this, outside of coercive forces. For example, wear and tear on gold coins are more costly to its holders than wear and tear on bank notes. Being as the notes can be redeemed for gold, it is almost like earning interest - the longer one holds bank money as opposed to commodity money, the more costs are avoided. In other words, bank notes increase purchasing power relative to gold. Also, there is the small change problem. To deal with this using commodity money requires floating prices between them to keep both (or more) in circulation, but then you have multiple units of account. This isn't unworkable, but bank money might be the preferred solution. 100% reserve bank money is another solution; however, this can be costly as well.
Yes, the situation can reverse in a contraction. Should too many people attempt to cash out into gold all at once, the demand for gold skyrockets while the demand for bank notes plummets. But barring a system-wide failure, we shouldn't think that a single bank failure would significantly move the price of gold, and selling its assets to a global pool of investors, including other banks, shouldn't put too much pressure on their price. Given that systemic risk is generally trivial in our current banking system, I would think this would be even less so in an unregulated free banking regime.
...
What trips me up is that I don't understand how it could operate. A bank would start at 100% reserves. People accumulate savings in this bank money, so the bank decides to issue fiduciary media loans and lower the interest rate. Let's say the savings rate then drops to 0. Does the bank then sell off all its assets and retire its fiduciary media, returning back to 100% gold reserves?
It seems more likely that FRB's will simply try to keep reserve ratios safely above what is required to meet redemption demand. I don't think redemption demand is firmly correlated to savings rates, so banks would have no ability to know when and how much fiduciary media to issue or absorb to avoid promoting malinvestments. Compared to using time deposit rates as a pricing mechanism, it would seem arbitrary FRB decisions wouldn't stand a chance at marginal success.
I'm also unsure how a fractional reserve bank could be justified in holding something like 3% reserves. Does this not imply a gigantic savings rate? Or is Hoppe and crew correct when they say that FRB will inherently tend towards infinitely small reserves, pushing banks into a more and more fragile position?
As far as the Scottish example goes, I think the most important thing to look at is the total amount of deposits lost to bank failure. Selgin provides it. It's trivial. It's hard to conclude the Scots were being swindled out of their commodity money and subject to seemingly random bank failures that cost them an arm and a leg. It seems bank money was relatively safe. Now, how much of this can be attributed to government intervention is a good question. Selgin says little to none. Others say differently. I don't know. I'd have to look at it more in depth.