Rothbardians are quick to criticize minarchists for finding some role for a government, namely in providing a police service and a legal system. Minarchists believe that such services must be provided in order to protect individuals from criminals, and the rich from the angry jealous mob (like the 1848 reign of terror across all of Europe). They also don’t believe that other aggressive states will leave us completely alone if we’re nice. But, such services require some kind of taxation, which they oppose on all grounds, no matter how little the taxation is.
But, at the same time, they believe that Fractional reserve banking must be banned, though it naturally emerged through voluntary and mutually beneficial cooperation. Indeed, people would certainly choose to receive interest on deposits, and have it redeemable on demand, over paying a “storage warehouse” periodic fees. Nor have they been able to show why FRB a priori causes business cycles.
Thus, I have a few questions for Rothbardians:
Why does the market fail when it comes to banking?
Why is this regulation necessary?
What happens when fractional reserve banks emerge naturally, and start popping up everywhere?
Necessary for what? We’re simply claiming that FRB is impossible under the free market. It might be advantageous from a business cycle standpoint and a moral standpoint.
In the same way people would prefer to shop at a wal-mart that offered cheaper goods by stealing from farmers. Such a store will fail.
But the market has chosen fractional reserves, and there’s no logical reason for people to pay storage fees over receiving interest. So is this a market failure? So just to be sure, if the market does choose fractional reserves, you wouldn’t object?
Who’s going to enforce your morals? And why does FRB lead to business cycles? Why did Scotland have free banking with 1% reserves for such an extended period of time (until a similar regulation came a long and caused systemic crises–Peels act)?
No they wont fail. If banks underbid the natural rate of interest, competing banks will begin to hoard notes and seek redemption. Also, if they lend out too many notes, borrowers will notice and cause insolvency. Only about half the amount of savings is required for the production process, that is, if the production process is 6 years long, only 3 years of savings is required (Positive Theory of Capital, pp. 328). As long as the banks don’t lend over and above the demand for cash balances (which doesn’t affect the demand for real capital), there’s no problem.
If we agree that the point is to have a sensitive market rate of interest, which can adjust to changing natural rates, then free banking seems like the most efficient choice, since it’s most sensitive to money demand.
The situation will most likely arise where two separate institutions emerge: a warehouse and a fractional reserve bank. Now, would Rothbardians object to such a scenario?
If the banks dont pretend to be warehouses when they are not, but clearly state that their customers will be receiving lottery tickets in exchange for their gold deposits. lottery tickets which the bank may choose to redeem from time to time as their fancy take them.
p.s. i don’t think casino’s will muscle in on sound banking to a very great extent.
It’s really simple: two institutions emerge naturally, one charges you a fee for storage, and the other pays you interest on savings. If the latter doesn’t deem it necessary to teach their consumers about the nature of fractional reserve banking (historically the case), what happens then?
Its really simple, green grocers don’t have to teach history of agriculture, and bakers dont have to teach history of breadmaking, but they have to actually sell vegatables and bread, and not fakes and poisoned articles.
Look around you? Open a history book about banking?
Exactly. The guy at Burger King doesn’t have to tell me that the burger has a high fat content; likewise, the banker doesn’t have to tell me about fractional reserve banking.
So my question remains: when fractional reserves are chosen by the market, which has universally been the case, what then? As libertarians and anarchists who believe in natural market processes, you certainly can’t object, right?
the sound banks have incentive to educate the populace as to the high fat content of their fractional reserve lottery tickets.
(also if the deposits in exchange for tickets where done whilst the banks misrepresented their tickets as claims to stored commodities in like manner to sound banks then that is fraud.)
Here’s Rothbard: “The nineteenth-century English economist Thomas Tooke correctly stated that free trade in banking is tantamount to free trade in swindling.” Sounds like Rothbard believed in market failures. He also said it should be illegal. Thus, my question still remains. Are you going to dance all day?
So when a bank deceptively creates counterfeit bank receipts, and issues them to the public and tells them that they are backed by 100% gold although they are not, that is somehow “mutually beneficial cooperation”?
Yes there is, because creditors won’t accept bank notes from insolvent banks if they have a choice.
Of course I would, its a bad idea. People could choose to eat cardboard in a free market, it just isn’t likely. But they can do it.
From a moral standpoint, I meant that some people might see the end of FRB as a positive morally because of their views on property rights.
Austrian Business Cycle Theory! But the practical advantages of non-FRB don’t matter much… I’m saying that you can’t have FRB on a free market.
Citation please. The outcome of this argument shouldn’t depend on my offhand knowledge of scottish economic history.
But im not saying that bank runs by customers will cause FRB banks to fail. I’m saying bank runs by other banks will cause them to… the only reason this never happened in the past was because of all the banks were state chartered monopolies.
“and (d) either to enforce 100 percent reserve banking on the commercial banks”
“While the outlawing of fractional reserve as fraud would be preferable if it could be enforced”
Mystery of Banking, pp. 261.
The nineteenth-century English economist Thomas Tooke correctly stated that free trade in banking is tantamount to free trade in swindling."
So do you guys agree with Rothbard or what? Why does the market fail when it comes to banking? And do all anarchists suggest forcing private capitalist institutions from engaging in voluntary transactions? Anyone going to answer?
The 19th-century English economist Thomas Tooke correctly stated that “free trade in banking is tantamount to free trade in swindling.” But under freedom, and without government support, there are some severe hitches in this counterfeiting process, or in what has been termed"free banking."