Any ABCT agnostics out there?

[krazy_kaju]

Thanks, Alex. I can’t find a direct quote from Rothbard at the moment, but here is Block parroting Rothbard on the issue.

[amatchneer]

Also, regarding Rothbard outlawing fractional reserve banking:

““Fraud” is a harsh term, but an accurate one to describe this practice, even if not recognized as such in the law, or by those committing it. It is, in fact, difficult to see the economic or moral difference between the issuance of pseudo receipts and the ap propriation of someone else’s property or outright embezzlement or, more directly, counterfeiting. Most present legal systems do not outlaw this practice; in fact, it is considered basic banking procedure. Yet the libertarian law of the free market would have to prohibit it. The purely free market is, by definition, one where theft and fraud (implicit theft) are illegal and do not exist.”

[Ivan_Ivanov]

@krazy kaju

However, no free market bank would be able to issue loans in excess of reserves, since they would quickly be forced to fail in a run (see, for example, the Panic of 1792, when Alexander Hamilton intervened to prevent a bank run).

The difference this century is that banks are legally prevented from using 100% of their reserves. Instead, they are required to hold 10% of their reserves. So before, when subsidized by government, banks used over 100% of their reserves, which caused bubbles and panics, now, when legally restricted by government, banks don’t use as much of their reserves as they could.

Woah, what?

First of all it’s very easy to show how using less then 100% reserves can make you fail in a run, and secondly how is it even possible to use more then 100% of reserves? I mean, people simply spending the money you loaned them would be enough to bankrupt you.

Rothbard claimed that fractional reserve banking was not consistent with property rights, so it should be illegal. He supported mandatory full reserve banking. I disagree with Rothbard’s view from a property rights point-of-view since it is possible that a depositor can agree to a contract with a bank that allows the depositor to withdraw his money at any time, while allowing the bank to lend that money out.

That’s because Rothbard has seen deposits as… well, deposits. Free Bankers see them as loans which you can liquidate at will, with no penalty.You’re using a different definition, so your objection to Rothbard’s views simply don’t apply.

By the way, could you elaborate on price deflation preventing the market for loanable funds from clearing? I just can’t get my head around that.

(Nevermind, you answered as I was writing this post)

[Laughing_Man]

@krazy kaju

You stated it yourself. If fractional reserve banking is a form of fraud or embezzlement, then it must be illegal from a natural rights point of view.

1. I am not Rothbard. Therefore you saying Rothbard demanded mandatory full reserves is now a lie unless you can show he explicitly said that.

2. I think it won’t survive a free market. If there is a bank that engages in it and a depositor comes put in his/her money then the next day wants all of it back and doesn’t get it, then I think there is a fraud committed. If I give you a $20 dollar bill and say "Hold on to this for me for 24 hours’ and in 24 hours you give me back the bill, then no fraud has been committed. However a fractional reserve bank cannot by its very nature survive for a long period of time if it makes contractual agreements in which the redemption of money is immediately required.

@krazy kaju

It’s rather well known that Rothbard believed that full reserve banking should be legally mandatory. I’ll find a citation for you later.

That’s what I have heard before from free bankers like Giles. ‘Rothbard wants to regulate the banking industry! He’s just crazzzy!’

Banking and the Business Cycle

I believe this is the lecture in which he says fractional reserve banking CAN’T survive, not that we should make sure it doesn’t through regulation.

[krazy_kaju]

@Ivan Ivanov

First of all it’s very easy to show how using less then 100% reserves can make you fail in a run

If you have less than full reserves, then yes, you can fail in a full-out bank run. In a system of free banking, such bank runs would be uncommon, unless associated with outside real events that would devastate the economy (e.g. natural disasters). My points are:

1. Fractional reserve banking is consistent with property rights and is not fraudulent, as opposed to Rothbard’s claims.
2. FRB (in the modern sense of the term) is stable, as long as there aren’t any major bank runs. The only thing that could cause a bank run in a true free market would be natural disasters or other real events that could harm the economy.

secondly how is it even possible to use more then 100% of reserves? I mean, people simply spending the money you loaned them would be enough to bankrupt you.

In the 19th century, it wasn’t uncommon for banks to take in, say, $100 worth of gold reserves, print $1000 worth of gold certificates, and lend the gold certificates out. As long as no one seeked to redeem their gold certificates, the banks were a-ok. There are three problems with this:

1. This makes the banking system extremely unstable, as a small minority of people seeking to redeem their certificates would cause a bank run.
2. This creates economic bubbles (which make bank runs ultimately inevitable), as it expands the supply of credit beyond the supply of savings.
3. This is inconsistent with property rights, since the bank is claiming to have more money than it actually has.

In the modern era, however, such practices are no longer used. Not only are banks not able to lend above 100% of their reserves, they are not even able to lend above 90% of their reserves. Plainly speaking, this is wrong and a violation of the bank’s property rights (not to mention the property rights and welfare of bank depositors).

Many people claim that credit expansion does occur with modern FRB and they point to the money multiplier as evidence. The problem is that economists double count, triple count, quadrouple count, etc. when they calculate money multipliers.

[amatchneer]

@krazy kaju

Many people claim that credit expansion does occur with modern FRB and they point to the money multiplier as evidence. The problem is that economists double count, triple count, quadrouple count, etc. when they calculate money multipliers.

What do you mean double or triple count? If I deposit $100 in the bank, it’s not like I’ve decreased my “cash balance”. I now have $100 in the bank that can now be conveniently used in money transfers if I pay someone with a check and all sorts of other transactions, so my cash balance is the same. But now the bank lends out, say, my $100 to someone else, who now has $100 dollars to spend on whatever, while I still supposedly have $100 to withdrawal, transfer via check, etc. The money supply has doubled. How is this double counting?

[Ivan_Ivanov]

@krazy kaju

If you have less than full reserves, then yes, you can fail in a full-out bank run.

People taking out 10% of their money is hardly what I’d call “full-out”, but ok.

1. Fractional reserve banking is consistent with property rights and is not fraudulent, as opposed to Rothbard’s claims.

Yes, if you use a different definition of “deposit” then Rothbard, but if you do that, you have not proved that Rothbard was wrong.

2. FRB (in the modern sense of the term) is stable, as long as there aren’t any major bank runs. The only thing that could cause a bank run in a true free market would be natural disasters or other real events that could harm the economy.

That would only be true if bankers would know their depositors’ time preference with 100% accuracy. That’s not the case, and the problem with FRB is that all the mistakes/inaccuracies compound making the system extremely unstable.

In the 19th century, it wasn’t uncommon for banks to take in, say, $100 worth of gold reserves, print $1000 worth of gold certificates, and lend the gold certificates out.

That’s still a 10% reserve ratio.

3. This is inconsistent with property rights, since the bank is claiming to have more money than it actually has.

Not really, at least if we go with your definition of a deposit.

Each certificate is simply an IOU. It’s not a claim that you have a given amount of money, it’s a promise to pay a given amount of money on demand.

Many people claim that credit expansion does occur with modern FRB and they point to the money multiplier as evidence. The problem is that economists double count, triple count, quadrouple count, etc. when they calculate money multipliers.

Actually, it’s the banks that do the double, triple, quadruple counting. At least I never seen then amount of money on my checking account go down, when the bank has loaned it out.

@krazy kaju

In other words:
The real interest rate at which the loanable funds market clears is 3%.
The price level is falling at 5%.
Thus, to bring the loanable funds market to equilibrium, lenders would have to charge -2% nominal interest rates.

Thus, it is more profitable and less risky for lenders to simply withhold their money from the market, causing a shortage of loanable funds, which increases interest rates, reduces the productivity of saving, and lowers economic growth.

You’d simply get an immediate price deflation of more then 2%, leaving the price deflation for the rest of the year at less then 3%, which would allow for a positive interest rate.

[krazy_kaju]

@Laughing Man

I am not Rothbard. Therefore you saying Rothbard demanded mandatory full reserves is now a lie unless you can show he explicitly said that.

Maybe you should stay on top of the thread better, before resorting to calling other mods liars. From Alex M:

Also, regarding Rothbard outlawing fractional reserve banking:

““Fraud” is a harsh term, but an accurate one to describe this practice, even if not recognized as such in the law, or by those committing it. It is, in fact, difficult to see the economic or moral difference between the issuance of pseudo receipts and the ap propriation of someone else’s property or outright embezzlement or, more directly, counterfeiting. Most present legal systems do not outlaw this practice; in fact, it is considered basic banking procedure. Yet the libertarian law of the free market would have to prohibit it. The purely free market is, by definition, one where theft and fraud (implicit theft) are illegal and do not exist.”

@Laughing Man

I think it won’t survive a free market. If there is a bank that engages in it and a depositor comes put in his/her money then the next day wants all of it back and doesn’t get it

Banks under a free banking system would never loan 100% of their reserves for precisely this reason. They would most likely loan out 90-98%, if we look at historical numbers (e.g. IIRC, Selgin and White often refer to Scottish free banking practices).

In other words, banks would keep enough reserves on hand to meet the day-to-day demands of depositors. This would avoid bank runs during normal times.

@Laughing Man

then I think there is a fraud committed.

Let’s test your commitment to this statement: Agree or disagree with the following statements?

1. If a full reserve bank is robbed and cannot meet the day-to-day demands of its depositors, then it commits fraud.
2. A fractional reserve bank that keeps enough deposits on hand for the day-to-day demand of its depositors does not commit fraud.
3. A full reserve bank branch in one city keeps most of its reserves in a vault in another city. There is a bank run and the full reserve bank cannot repay all of the depositors immediately. The full reserve bank commits fraud.
4. A business or individual, who we shall call Bank, borrows money from another individual, who we shall call Depositor. Bank cannot repay Depositor, so Bank files for bankruptcy. Bank commits fraud.

In any case, let’s take your statement two in full:

@Laughing Man

I think it won’t survive a free market. If there is a bank that engages in it and a depositor comes put in his/her money then the next day wants all of it back and doesn’t get it, then I think there is a fraud committed

This is a contradiction. Only because something cannot survive in a free market does not mean it is fraudulent.

In any case, I’ve already shown that fractional reserve banking can survive in a free market, as long as it keeps enough cash on hand for the day-to-day need of depositors.

I’ve also shown that fractional reserve banking is consistent with property rights. It is perfectly consistent with property rights, afterall, to lend someone $10 with the caveat of being able to withdraw said $10 at any time. This, in essence, is the relation of depositors (lenders) to fractional reserve banks (borrowers).

@Laughing Man

However a fractional reserve bank cannot by its very nature survive for a long period of time if it makes contractual agreements in which the redemption of money is immediately required.

Why not? Do you envision 100% of deposits being withdrawn on a day-to-day basis?

Most people who deposit money in banks do so to keep that money there for longer periods of time (say, at least a few weeks or months). They also do so to have that money at hand in case of an emergency (as opposed to an illiquid CD or a low-paying, liquid T-bill). The banks increase the productivity of saving by lending out most of their reserves, but keeping just enough to meet the ordinary demands of depositors.

@Laughing Man

I believe this is the lecture in which he says fractional reserve banking CAN’T survive

To put it simply - he is wrong. He confuses FRB of certain periods during the 19th century, which is more aptly named NRB (negative reserve banking), with actual fractional reserve banking of the modern era.

FRB does not expand the credit supply beyond the supply of savings, so it cannot create economic booms and busts.

FRB is sustainable, since by its very nature, it keeps enough deposits on hand to be able to meet day-to-day demands of depositors.

not that we should make sure it doesn’t through regulation.

One does not negate the other. Only because Rothbard claims that fractional reserve banking cannot survive on a free market does not mean that Rothbard didn’t believe that fractional reserve banking shouldn’t be outlawed. You yourself stated that fractional reserve banking is “fraudulent.” It is well known that Rothbard held the same belief. Rothbard, like every other good propertarian, believed that fraud should be illegal. Thus, it naturally follows that Rothbard believed that fractional reserve banking (a form of fraud in his view) should be illegal. It is also well-known that Rothbard explicitly believed that fractional reserve banking should be illegal. That is, we don’t need to use inference to judge Rothbard’s beliefs. Alex M already quoted Rothbard on the matter.

[krazy_kaju]

Rothbard explicitly argues for the criminalization of fractional reserve banking in Chapter 7 of The Case Against the Fed.

[krazy_kaju]

@Alex M

What do you mean double or triple count? If I deposit $100 in the bank, it’s not like I’ve decreased my “cash balance”. I now have $100 in the bank that can now be conveniently used in money transfers if I pay someone with a check and all sorts of other transactions, so my cash balance is the same. But now the bank lends out, say, my $100 to someone else, who now has $100 dollars to spend on whatever, while I still supposedly have $100 to withdrawal, transfer via check, etc. The money supply has doubled. How is this double counting?

It’s double counting because the money supply hasn’t actually doubled. If a bank keeps 5% reserves, then it follows that it lends out 95% of its reserves. That means that for every dollar a depositer puts in the bank, 95 cents will be loaned to someone else. So 5 cents is kept by the bank in vaults and 95 cents are loaned out. The money supply has expanded by exactly 0 cents or, in other words, it has been multiplied by exactly 1.

If you write a check using your account, withdraw money from your account, close your account, etc., then no additional money is being created. The bank uses money it stored in its reserves to cover your checks, withdrawals, transfers, closings, etc.

Ultimately, any fraction of money kept in reserves by banks constitutes unproductive savings. It is savings that just sits there, waiting for depositors unproductively. It doesn’t fund any projects and it doesn’t help any consumers attain goods or services they desire. It is productive only in the sense that it is used eventually by depositors.

In a perfect world, banks would be able to lend out exactly 100% of reserves, which would mean that finally the economy would be brought to exactly it’s PPF. Unfortunately, the nature of scarcity and economic restraints require that not only at least some reserves exist, but that some money is always held rather unproductively by the population (e.g. the money in your wallet). It simply is impossible to make fruitful loans that are repaid in only a few seconds, minutes, hours, or days.

[Physiocrat]

@krazy kaju

In a perfect world, banks would be able to lend out exactly 100% of reserves, which would mean that finally the economy would be brought to exactly it’s PPF. Unfortunately, the nature of scarcity and economic restraints require that not only at least some reserves exist, but that some money is always held rather unproductively by the population (e.g. the money in your wallet). It simply is impossible to make fruitful loans that are repaid in only a few seconds, minutes, hours, or days.

That is absurd since at all points in time money is held by someone and therefore at all points must be unproductive. This and your statement an ideal situation of lending 100% reserves shows the complete absurdity of the so-called “free banking” school.

[Selgin]

Your recollection is faulty. I can assure you that Rothbard approved of “anti-fractional reserve” vigilante squads and such., This was , after all, consistent with his view that fractional reserve banking was, not merely a source of instability, but a form of fraud.

[Catalan]

Jesús Huerta de Soto, although an anarcho-capitalist, assumes the existence of a State in his book, Money, Bank Credit and Economic Cycles. His greatest fear, I believe, is that fractional-reserve banking may naturally lead to the creation of a Central Bank, at the pleading of the banks which have not defaulted.

Although I disagree with him that fractional-reserve banking may necessarily be fraud (although, there were some good arguments on here that it is fraud for the thirdy party [the person who’s money is now worth less]), I do agree that it would not survive in a free-market. I tried to present my case in a blog entry. I do not believe that a bank could solve the issue of multiple claims on the same deposit by responding to increases or decreases in the demand for money, because the loan may not be repaid before the demand for money has increased. I do not believe that there is a method of calculating these changes in preference by a bank (especially by one with hundreds or thousands of clients).

I also note that these historical circumstances that Selgin and White have pointed to are not perfect examples of free banking. Pro-fractional-reserve free-banker Larry Sechrest, in Free Banking, has critiqued White, and so has Rothbard. Professor White did suggest for me to read Kevin Dowd, ed., The Experience of Free Banking, but I still have not had a chance to pick it up.

[Ivan_Ivanov]

@Physiocrat

That is absurd since at all points in time money is held by someone and therefore at all points must be unproductive. This and your statement an ideal situation of lending 100% reserves shows the complete absurdity of the so-called “free banking” school.

Yeah, lending out 100% reserves is absurd, because if only a single depositor takes out as much as a penny, then the bank is toast.

But I wouldn’t call the Free Banking school absurd. George Selgin’s lecture on private coinage makes a good case for the feasibility of FRB in at least some areas.

[Laughing_Man]

@krazy kaju

Banks under a free banking system would never loan 100% of their reserves for precisely this reason. They would most likely loan out 90-98%, if we look at historical numbers (e.g. IIRC, Selgin and White often refer to Scottish free banking practices).

The Myth of Free Banking in Scotland

@krazy kaju

This would avoid bank runs during normal times.

Bank runs are now predictable occurrences? They have “normal times”? I think not.

@krazy kaju

If a full reserve bank is robbed and cannot meet the day-to-day demands of its depositors, then it commits fraud.

Your asking if someone steals property from a bank, if the bank is committing fraud against its customers? Is this a serious question?

@krazy kaju

A fractional reserve bank that keeps enough deposits on hand for the day-to-day demand of its depositors does not commit fraud.

If the bank does not have the funds on hand to meet all demands of the their customers, then someone will be defrauded. It is merely a matter of who is the last person in line. You honestly cannot deny this. You can skirt the issue and say ‘Oh well that will never happen’ but that is not your right of choice since it is not your property. By depositing money into a bank I am not transferring the right of that property over to the bank itself unless explicitly stated and agreed to in contract.

@krazy kaju

A full reserve bank branch in one city keeps most of its reserves in a vault in another city. There is a bank run and the full reserve bank cannot repay all of the depositors immediately. The full reserve bank commits fraud.

If it is not in the wishes of the consumer to move his/her property to other locals then yes, it is fraud.

@krazy kaju

A business or individual, who we shall call Bank, borrows money from another individual, who we shall call Depositor. Bank cannot repay Depositor, so Bank files for bankruptcy. Bank commits fraud.

The individual or business owes exactly what they borrowed from the individual plus compensation for damages.

@krazy kaju

This is a contradiction. Only because something cannot survive in a free market does not mean it is fraudulent.

I’m saying that it cannot survive on the free market period. If it is or isn’t fraudulent is an different issue under banking practices.

@krazy kaju

Why not? Do you envision 100% of deposits being withdrawn on a day-to-day basis?

Whether all deposits or no deposits are withdrawn in a day is a non-issue. Simply put it is the property of the individual. If they want to give away a certain amount of their money then its their choice. However, if they deposit it with the expectation that it is there and will always be there, then making it not there is fraud.

@krazy kaju

FRB does not expand the credit supply beyond the supply of savings, so it cannot create economic booms and busts.

If FRB does not expand credit BEYOND the current demand deposits then why all of this talk about how 100% reserves are never taken out therefore there is nothing to worry about. Such a statement implies that the bank itself lends out more then it can produce if 100% demand is expected.

@krazy kaju

FRB is sustainable, since by its very nature, it keeps enough deposits on hand to be able to meet day-to-day demands of depositors.

See here you are again. You don’t say you have enough deposits to cover 100% demand, thereby proving disproving your statement that credit supply doesn’t go beyond savings, but you say only enough is keep for day-to-day demands.

[sthomper]

“In a truly free economy, banks would only be forced to keep the amount of reserves they stipulate in their contracts”

in which case that wouldnt be fraud if the contract was adhered too.

as i have been told…with frb, real money (and often credit) enters a demand deposit account. real money is then lent and a portion of real money is kept in account while the bank creates credit (claims on money to be repaid) in place of the loaned money. the credit is created post-loan to make the account seem as it was.

(if what i have been told is true) the money and credit tend to circulate with each other and as i understand it, are called the same thing – the " $ " is the credit “$” the same as the dollar “$”? i expect there is a difference and i dont know if current bank contracts say so or not. i dont use banks.

as fas as how the the increases in credit and money influence business cycles, rising prices above wages or bad investments, i am not sure.

[scineram]

@Laughing Man

If the bank does not have the funds on hand to meet all demands of the their customers, then someone will be defrauded.

No, but what if it does? As is almost always the case.

[Catalan]

@Laughing Man

The Myth of Free Banking in Scotland

The best critique of Larry White’s history of Scottish banking is probably Larry Sechrest’s, since it comes from a free banker himself.

[DD5]

@krazy kaju

tend to agree with the free bankers. I see no problem with taking money out of irregular deposits and lending it out. It doesn’t actually expand the money supply (unless you double count) and it increases the efficiency with which saved resources are used and invested.

Of course it expands the money supply. White/Horwitz tries to justify it on the basis of demand to hold cash. They don’t deny the expansion of the money supply with free banking.

[DD5]

@Scott Jefferies

Mises and Hayek viewed the inflation that starts the boom as defined by an increase in the money supply exceeding the demand for money

This is inaccurate! Mises in almost every one of his writings considered inflation as an increase of the money supply! There may be 1 or 2 quotes (If I recall in “The theory of Money and Credit”) that have to do with demand, and even then, he does not necessarily imply that bank notes can relieve such a demand.

Hayek in “Monetary Theory and Trade Cycle” clearly identified the expansion of bank notes that result from FRB as the cause for the business cycle.