Are there any works by these economists that explain why fractional-reserve free banking wouldn’t cause business cycles? I recall Hayek accepting that it would cause business cycles, but that this was a price worth paying for the economic benefits; is this the general view?
George Selgin, Steve Horwitz, Roger Garrison, Lawrence White, Larry Sechrest are perhaps the most important ones for you to look at. Fellow travelers such as Leland Yeager, Kevin Dowd are also worth checking out.
To answer your question, most free bankers would deny that FRB causes the ABCT.
Nonesense!
If we are talking about “Austrian” free bankers, then the above assertion about most free bankers is not true. All Austrians are by definition for free banking and I don’t believe that most of them would deny that FRB causes a boom/bust cycle. I have yet to see how Garrison fits in the above list. Perhaps Giles can provide some proof of why he thinks Garrison fits with that group.
FRB is inherently inflationary (new money is created out of thin air) and will always cause interest rates to be distorted from their natural free market rate.
I would agree that you should look into some of what George Selgin and Lawrence White are saying. But then you should also look into books like Money, Bank Credit, and Economic Cycles by Jesus Huerta de Soto.
All Austrian economists are by definition for free banking!?! I don’t really know what to make of that statement, although, I can guess we can rule Bohm Bawerk, Menger, Hutt are other early Austrians off of the list for good then. It seems to me that “opposes central banks” is a bit of an odd way to define the Austrian school (especially since one of its methodological tenets is value freedom!).
DD5, the thing is that when you step into debates without an understanding of the terms used, you’re not going to make yourself look particularly smart. Free banking is the term used to describe the group of economists who favour, or do work elaborating upon, a free market in money and finance without any legal restrictions (meaning, they support FRB). Economists in this tradition who identify themselves as belonging to it would be Garrison (he has an essay on his site concerning this very topic), Dowd, Yeager, Horwitz, Selgin, White and others.
As for FRB being inherently inflationary, only if you use the kooky Rothbardian definition that nobody else does (in which case you’re just defining anything that isn’t 100% reserve banking as inflationary and then equivocating). Statements such as “will always cause interest rates to be distorted from their natural free market rate” don’t carry much weight with me, since it’s assertion. If you wish to argue in favour of it, go for it.
I’m tired of your habbit to always resort to authority when justifiying your positions.
The question had to do with FRB and the Business Cycle. You gave what I believe is a misguided answer, and I had to correct that.
You do follow the White/Selgin tradition very well of automatically attacking Rothbard whenever somebody criticizes their crank monetary theories.
The fact remain that you must now start to use mainstream tactics to discredit your opposition like “definition that nobody else does”. let’s see now, what definition do most economist use? A rise in prices!
How many people use your equilbrium inflation defintiion? I think less then the number of people who use the money supply definition.
How do you measure inflation according to your definition? Oh you have to estimate using MV=PQ. Well, are we going to have another debate about this mystical equation? because I’m not interested.
Investments must equal Real savings! Supply of credit in excess of real savings must lower interest rates. If you want to now argue around this point using MV=PQ, then forget it!
OK, there’s no resort to authority here, you made an empirical claim about Garrison not being part of the free banking tradition. My answer was relatively simple, he identifies himself as a free banker. If there was an appeal to authority, it was appropriate. I don’t know how else you wish to assess which economists are free bankers.
You also gave a very strange “definition” of what Austrian economics was, one that would have ruled out not only the founder of the school but his most important disciple and other important contributors to the school. No, this probably doesn’t constitute an argument against your odd claim that central banking is inherently opposed to Austrian economics, but it does shed some light on how strange such a claim really is.
Like it or not, there’s no simply litmus test to decide what is, and what is not, Austrian.
To tell you the truth, there’s not much of a difference between the monetary equilibrium definition and the standard mainstream definition in practise. The only time that there is a difference is when changes in “the price level” are caused by changes in productivity. This is relatively unimportant, but it does makes the life of the monetary equilibrium theorist easier since he doesn’t need to qualify use of the term “inflation” or “deflation”.
As for the relative usages of the definition, the monetary equilibrium usage is that adopted by Mises. To be honest, I think we should always use the definition that most other people do in order to avoid confusion, you seem to think that there is some reason to use the Rothbardian definition, I just think it’s confusing and particularly useless.
You see when you define inflation as a rise in M, every other arrangment besides 100% reserve banking is inflationary. The problem is that it’s hard to be nuanced when talking about the differences between free banking, central banking and other arrangements when they’re all “inflationary”.
Of course, but you’ve yet to prove that FRB causes a supply of credit in excess of real savings.
Isn’t that what FRB is? It’s a fractioning of real savings (reserves) into fiat credit? ratios of 25 to 1, etc… Hence the name: fractional reserve banking
I don’t want to argue about the definition of “free banking”. Free banking and FRB are not compatible because FRB is not productive. Even if allowed and not recognized by the free society as fraud, it would be outcompeted by 100% reserve banks. Why? becasue there would be nobody to bailout the banks when the bust occurs. Why will there be a bust? Because if you save 10 apples for investment but loan out a claim ticket for 100 apples, there is bound to be a problem of misallocation down the road.
Here we go again with the authority. Show me where Mises defines inflation according to the equilibrium definition!
Rothbardphobia!
Actually, the definition is consistent with the accepted view of the neo-classical and later subjective economists of the 19th and early 20th century.
Again, show me where Mises defines inflation according to Equlibrium theory.
There is a multiplier factor. $100 of savings turns into $1000 of credit (for a 10% reserve ratio). I refrain from $100 worth of consumption but investors are somehow demanding $1000 worth of goods to be allocated to them?
The fact that the value of money is changing doesn’t alter the above truth. There is no way you can loan out anything but time deposits without deception. That is, credit that does not reflect the time preference of consumers. There is no magical formula. MV=PQ is a worthless accounting truism.
The Burden of proof is on you to show how loaning out claims for 100 apples despite the fact that only 10 apples were saved, does not cause misallocations.
I’m sorry to get in the middle of this but…
Free banking by definition allows FRB, it being productive is irrelevant. FRB isn’t necessarily fraud at all. There is evidence on both sides of the debate as to which form would dominate… The bank run argument is quite valid, but contracts that stipulate general availability solve that problem.
It being productive or not is extremly relevant. It is at the heart of the debate of whether FRB practice would exist or be eliminated by the market. Your focus on contracts to resolve any claims for fraud I think misses the greater economic debate here. Will FRB cause an artificial boom due to artificial low interest rates that result from credit expansion?
I argue that the answer is clearly yes! Therefore, the bust is inevitable. The depositors will loose their money regardless if there is a bank run or not as soon as credit tightens. I don’t think it will even have to come to this. Banks will never be able to efficiently compete with 100% reserve banks that will not go along with the coordinated credit expansion process.
I think focusing on contracts completely mises this crucial point. You can claim that FRB should be allowed based on “free banking” principles. I won’t agree with you. But claiming that it can thrive in a free market is another issue, as is claimed by the “free banking FRB” crowd, which is simply flat out wrong.
did you mean here that you “won’t disagree with you (Ang.).”?
No wilderness. I don’t agree with him. I think their arguments are weak in this respect also, but I don’t want to divert the debate to the fraud issue, which is what they always do. FRB would not thrive in a free market even if it were legal.
ok. I was making sure I read that correctly cause the next sentence you say, “But claiming that it can thrive in a free market is another issue…”
So I thought “the claim FRB should be allowed…” was issue one and then your next sentence was “another issue” (issue two).
thanks for clarifying, I’m merely lurking.[:)]
Relevant to which will win out, not relevant to a libertarian and its permissibility.
Perhaps it would serve you well to read Lawrence White, as FRB itself doesn’t cause the booms, central banks and government involvement do. As banks have held extremely low reserve rates (even by modern standards) and been quite successful. The low interest rates aren’t artificial, as artificial interest rates are a concoction of government, the interest rates would be the (natural) market rate of interest.
You haven’t argued a thing, you’ve gone from yes to therefore to regardless. Why is credit tightening at all? Are the banks not able to account for such an occurence? Shouldn’t they? Contracts solve the bank run problem. My claim that FRB should be allowed is independent of the economic viability of them, as I’m a libertarian. But history shows FRB banks thriving in free(er) markets.
Why would there be a coordinated credit expansion process without a central bank? Different banks would lend at different reserve rates, with differing interest rates, competition creates stability.
In a free banking system, banks would compete to provide checks/depostits that costumers consider the soundest (i.e, fully redeemable in whatever currency(ies) is selected by the market. Without a FDIC or any banking regulatory powers, costumers would have all incentive to be on the lookout for their respective banks; banks would therefore take this into account in their operation. In respect to fractional-reserve banking, both the demand for sound checks/deposits and the demand for redemption in real currency by other competing banks would serve as a check on the rate of expansion against reserves of any one bank. In other words, with out any central-coordinating banking power or a ‘lender of last resort,’ banks would be forced to conduct conservative banking practices in a competitive environment.
That was not the original question. The question had to do with FRB and ABCT. I was specifically not debating the legal permissibility.
Every FRB free banking proponent I’ve encountered does this. He tells you to go read White or Selgin and then just echoes the same mantras. Even White himself does this. They provide no valid explanation to why credit when created out of thin air in a free market will not be in excess of real savings, but when there is a Central bank it is.
No, I don’t think they can show that it was successful. Their sited examples, such as , clearly show evidence to the contrary. There were boom/bust cycles throughout the whole “free” banking era. They survived also by means of government intervention. And since when is statistical data useful as proof of an assertion, in the absent of a theoretical explanation?
How do you lend out claims for 100 apples when only 10 apples were saved without misallocating resources?
This is clearly what FRB does.
Well, have you read White or Selgin? But I apologize for referring to someone knowledgeable about the subject.
Banks produce money by careful management of its loan portfolio and its reserves not “out of thin air.” Such a claim just shows a relapse into the labor theory of value. The money created is not a “claim” to a good, it is itself good. Its value doesn’t come from some other good or the cost involved in producing it, but in whatever value people assign to it. The very obvious difference between free banking and central banking is that there is no lender of last resort and no legal tender laws, so the banks cannot be reckless with its note issuance or makes too many bad loans, as the currency can lose value and/or not be accepted at all.
Good thing there is a theoretical explanation. Subjective theory of value coupled with market competition.
Are you actually going to answer my questions? I digress…
But to answer your question, the claim, AKA money, is the good itself, as Austrians all know value is subjective and doesn’t necessarily depend on some other backing commodity at any particular reserve ratio. How that automatically equates misallocating resources, but a loan, or apples just sitting in a warehouse doesn’t, is just lacking.
This is sort of a really good example of why I don’t like to be in debates with people who just aren’t knowledgable about the subject. Look, free banking and FRB aren’t just compatible, the term “free bankers” refers to the group of economists (Dowd, Selgin, White, Sechrest, Horwitz, Rockoff, Yeager) who explore, and advocate, complete competition in the financial industry.
Moreover, when you write “if you save 10 apples for investment but loan out a claim ticket for 100 apples, there is bound to be a problem of misallocation down the road”, you’re entirely correct. I don’t know a single Austrian minded free banker who would claim otherwise (and what makes you think Selgin, White and Horwitz aren’t aware of this?). This isn’t where the argument hinges, the point in question is that once we’ve realized that monetary equilibrium (another way of saying that the interest rate is in line with the natural rate) is essentially for preventing the boom bust cycle, how best to ensure that it prevails?
Source: Microfoundations and Macroeconomics
And if we were in the 19th C I would agree with you! But we’re not, the times have changed and with them so have definitions (and in this case, for the good). I’m at a loss to understand how you think you’re going to create any sort of dialogue with mainstream economists when you use terms (important ones at that) in a radically different way for no particular reason. Unless you can provide a good reason why inflation should be defined as an increase in the money supply as opposed to an increase in prices (and I can think of good reasons to the contrary) I think it’d be best to use the term in its conventional meaning.
OK, here’s the thing, you’re not saying anything new. The crux of the argument is that the loan market is the market for time in the form of money (due to transaction costs and the fact that time is not tangible). When the market for money is in equilibrium, so too, will the market for time. It is when the market for time is not in equilibrium (or departs radically from it) that the interest rate follows.
Now, absent price adjustments if I increase the amount of money I am holding, real resources will be freed up for entrepreneurs to use in the investments. In other words, I am increasing my savings. Of course, prices may eventually adjust downwards at which point we will return to the previous equilibrium at a lower price level. However, prices don’t adjust downwards automatically (unless you’re a Walrasian), price adjust downwards at different rates (not governed by the relative scarcities of the good in question) which means that until they have fully adjusted monetary disequilibrium will occur and the capital stock will be artificially shortened. On the other hand, if when people choose to increase their cash balances, the banking system expands money the price level will not have to change, only the interest rate will. It will adjust downwards to indicate that people are now saving more in the form of cash and more resources are available for entrepreneurs.
As for your tirade against MV=PQ, it’s not impressive.
In a free banking system, banks would compete to provide checks/depostits that costumers consider the soundest (i.e, fully redeemable in whatever currency(ies) is selected by the market. Without a FDIC or any banking regulatory powers, costumers would have all incentive to be on the lookout for their respective banks; banks would therefore take this into account in their operation. In respect to fractional-reserve banking, both the demand for sound checks/deposits and the demand for redemption in real currency by other competing banks would serve as a check on the rate of expansion against reserves of any one bank. In other words, with out any central-coordinating banking power or a ‘lender of last resort,’ banks would be forced to conduct conservative banking practices in a competitive environment.
Yes.
Yes, but it doesn’t follow that ,like other goods, an increase in production necessarily must provide some social benefit. Now, you seem to imply that there may be a demand for new money. Fine, but there is no way that you can inject new money into a specific point in the economy and not experience a distortion in prices and an artificial bubble. In the credit markets, it is the interest rate!
Are you serious? Did you just provide any meaningful explanation here?
Why are apples sitting in a warehouse? 10 apples were saved and they can be invested if the saver so wishes it. But he will not
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Claim those 10 apples until the time deposit expires
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The bank cannot lend out 100 apples (with paper claims) on the basis of 10 real saved apples and expect not to misallocate resources.
Yes, money is a good but it has a function of a medium of exchange. It is not perfect. It’s value changes, but it doesn’t follow from this that a bank can somehow create it out of thin air, lend it out, and somehow still maintain the natural interest rate.
How can claims for 100 apples be lent out when only 10 apples have been saved? How do you not violate your own claim that real savings must equal investment. Real savings must amount to real goods that have been previously produced, but not consumed.