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:So called fiduciary media are money substitutes created out of thin air. As such they cause the same problems that government fiat money creates.
Being created from thin air is not the problem with fiat money per se, so this is illogical.
Juan:The system should be described in terms consistent with so called methodological individualism...not sure what the "market's view" is supposed to mean.
The price individual market participants are willing to pay for the assets.
Juan:That might be more like, just an assertion or wishful thinking, not a logical conclusion ?
Humans can and do err. But there are no special problems for banks making it impossible.
Thedesolateone: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.
One week, one day, one hour , one minute time deposits?
Thedesolateone:Assets are not money, and should not be treated as such.
Which is why they have to be liquidated first to pay out money for depositors.
Thedesolateone: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.
Aviod such banks if you want! Caveat emptor.
I find it highly ironic that there are groups of people on this site that seem unwilling to give alternative viewpoints a fair shot. I don't see such tendencies among the experts who constitute the "Austrian School". And the only reason most people are here to begin with is because they shunned the mainstream views presented to them and sought alternatives.
Also, I find it ironic that some of the biggest debates on this site are about what the market should be forbidden from doing.
...
I would agree that it would be very difficult for someone to try to establish any asset, especially a debt as money. Furthermore, it would result in calculational chaos - assets are not commodities - no one asset should be valued the same as another. It would be similar to using thousands of different currencies.
Banks, however, do establish some random basket of assets as money, by issuing money substitutes against them and offering to exchange the substitutes for a specified amount of some commodity money. It works because the market value of the assets generally exceeds the market value of the commodity money necessary to meet redemption demands.
People can prefer using bank money substitutes for several reasons. For one, they can appreciate against the commodity money. They are also cheap - worn notes or token coins can be replaced cheaper than dilapidated commodity money. People should naturally tend to favor money that retains the highest purchasing power.
As far as the problems - a fractional reserve bank cannot survive a bank run, because it would need to take a haircut on its asset values to sell them off that quickly (at the same time that the price of commodity money increases). As Selgin points out, however, few times in history (especially with free banking) have the public decided to run on sound banks. Most banks that experienced runs had their notes trading for less than par with the commodity they could be redeemed for or were simply not accepted at all. Why? Because some studied the quality of the bank's assets and determined that their assets were not capable of generating enough bank revenue to fulfill its redemption demand. Of course, the result is a bank run. You bring the money substitute to the bank, get gold for it, go into the market and sell the gold for a higher quantity of bank notes, and repeat. It's only a matter of time before everyone catches on. But this is not due to the fractional reserve banking's inability to meet heightened redemption demand; it's due to the poor business decisions of certain banks.
But even the case of bankruptcy does not mean people were fraudulently deprived of their gold. Without limited liability, the bank owners would have to sell their assets for whatever gold they can, and they'd be personally responsible for the difference. If people can take credit and default and that's not fraud, neither should it be for banks who fail to meet their redemption claims.
Wildcat banks were a small problem during America's free banking era. But it seems this was caused by banking regulation rather than the free market. Knowing the risks of fractional reserve banking, few would choose the brand new bank A who offers a Ponzi-scheme high deposit rate when well-established bank B opens a new branch next door. Without branching or other restrictions, the problem should be minimized. And wildcat banking should also be regarded as fraud, like a Ponzi scheme. Technically, there is no difference. New deposits are used to pay redemption demand, rather than the performance of assets.
As far as the business cycle, Selgin points out that if people increase their savings by holding bank money, the lower interest rates caused by issuing fiduciary media are justified by a greater proportion of production to consumption: saving. It is the manner in which the price of real goods cyclicly change due to injections of fiduciary media WITHOUT a change in savings rates that cause the business cycle. In fact, in the case of the business cycle, savings rates decline while interest rates decline.
In a free banking system, banks that operate as above would go bankrupt, as many entrepreneurs who used their low rates to finance long-term projects will likely default. Plus, they would see heightened redemption demand from competing banks. It is only with high degrees of regulation or monopoly grants that business cycles can become severe. Central bank monopoly issuance of notes and coins force banks to inflate together because they can't compete in that regard.
scineram: 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.
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.
Yes, but all this means is that banks can continue to expand credit for a longer period of time before contracting and exposing the phony bubble (bust). The basic 'Austrian' principle still holds, namely that the bubble is not the result of a real demand to expand productive capacity for an increase in future consumption, as determined by the individual time preference. The credit expansion always leads to malinvestment. I agree with the Keynesian analogy. If White claims that credit out of thin air can fuel economic productivity, then he is in the same camp as the Keynesians.
meambobbo:I find it highly ironic that there are groups of people on this site that seem unwilling to give alternative viewpoints a fair shot.
There's a difference between alternative viewpoints, and those who think fraud is OK.
meambobbo:Also, I find it ironic that some of the biggest debates on this site are about what the market should be forbidden from doing.
(a) The free market doesn't do anything(b) There are plently of things individuals on the free market should be forbidden from doing, but these only occur when people violate other people's property (or other) rights
The simple fact is: FRB is usually fraudulent. One commits a great error of understanding and reasoning in stating that FRB can legitimately hold money in assets. Assets have no guaranteed value until they are sold, and it is entirely possible that a fire-sell might result in values less than needed being generated. If the bank signs a guarantee of paying the money out on request, and there is the possibility it might not be able to, it is committing a fraudulent act. You are right that the bankers should then find the money out of their own pockets, but in admitting this, you clearly accept that the bankers have committed a crime - otherwise why would they have to pay restitution out of their own property?
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.
Thedesolateone:If the bank signs a guarantee of paying the money out on request, and there is the possibility it might not be able to, it is committing a fraudulent act.
Any default on a loan is a fraud?
scineram:Any default on a loan is a fraud?
No, it's not.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Selgin: 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.
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.
Please respond to Rothbard's refutation of your above statement:
The Myth of Free Banking is Scotland: http://mises.org/journals/rae/pdf/RAE2_1_15.pdf
This is the heart of the debate. Are you able to refute it?
Selgin: bear in mind than 99.99% of monetary economists and policymakers have no problem with fractional reserves, but dismiss free banking.
bear in mind than 99.99% of monetary economists and policymakers have no problem with fractional reserves, but dismiss free banking.
So? What does that prove?
DD5:So? What does that prove?
I don't think he intended it to prove anything, merely that free banking is more of a pressing issue than FRB is, which is a fair enough point.
scineram: Thedesolateone:If the bank signs a guarantee of paying the money out on request, and there is the possibility it might not be able to, it is committing a fraudulent act. Any default on a loan is a fraud?
Different issue. The bank is storing your money, not borrowing it from you.
The car lot example really hits at the basic problem (I think Walter Block often uses it).
If someone rents out a parking slot to a buyer by giving the impression that he will be able to use that slot whenever he pleases and then, upon finding out the routine of this buyer, gives another person who has a different schedule the same deal, does this constitute fraud? It's certainly possible, and maybe not that unlikely, that the seller of the parking space can go on for long periods of time, maybe forever, without any conflict.
So actually the problem can be split into a couple of questions. If the seller never runs into a conflict has he committed fraud? Or, If the seller does run into a conflict, is it then fraud?
I find it hard to say the second case isn't fraud. In the first case it's tricky. Is it fraud if the person being swindled isn't aware and thus not affected. Or is it objectively still fraud (as de Soto, etc. would argue)? Looked at another way, if a movie theater sells more tickets than it has seats is it unconditionally fraud or only fraud if everyone comes (or never fraud!?).
As for whether people are aware of the fact that there money isn't available, as Selgin argues, I think this is stretching things too far. Just because people "know" we have fractional reserve system doesn't mean they have a clue about what that implies. In fact, I would say hardly anyone understands its implications. Ask any depositer whether he believes his money is available it all times and he will answer yes.
scineram: Juan: So called fiduciary media are money substitutes created out of thin air. As such they cause the same problems that government fiat money creates. Being created from thin air is not the problem with fiat money per se, so this is illogical.
Juan: So called fiduciary media are money substitutes created out of thin air. As such they cause the same problems that government fiat money creates.
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."
A bank isn't a parking lot, so Block's analogy proves nothing. If, on the other hand, people who left their cars in parking lots also were made awar that the cars might be driven in their absence, and that the lot's only obligation was to have their cars on hand when when their owners returned, then the driving of the cars in the meantime wouldn't constitute fraud, would it?
Your last point is simply playing on the ambiguity of the term "available." It's a lawyer's way of reasoning.
But the chief advantage [of FRB] 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.
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