The only think that stops them is redemption demand from other banks. If there was only one bank, it could start with no money at all. The first depositor would form the reserves. If someone deposited $100 in the bank, it could loan out, say, $900 (everyone seems to assume 10% reserve requirement). Where do you think that $900 comes from, if not from thin air?
Sorry I only got to this now.
Let’s get things straight, fudiciary media qua fudiciary media is never forced upon anybody. You’re conflating and doing an injustice to honest debate to claim that’s the case. Now, fiat money is (sort of) forced upon the populace by decree (although Selgin has a superb paper on what other factors are involved). Even Hayek’s “fiat type” currency isn’t really fiat money properly considered, it may not convertible but it isn’t used simply as a result of decree.
Now, you talk about how what I describe can’t function as money. First of all, this is just not true empirically, there have been plenty of instances of successful arrangments of free banking and fractional reserves in monetary environments that lack a central bank. To cite just a few: Scotland, Switzerland and Canada. Secondly, all that is required for money to function as money is some belief that it will be accepted by sellers or other banks, that’s the main reason fiat currencies persists today in spite of the fact that they are not backed by anytihng. In fact, one good case study would be Somalia where the currency has quite literally been depreciated to the extent that each piece of paper is worth the paper, ink and labour required to produce it. Nevertheless, the paper is accepted and used in small transactions simply because the general expectation is that people will accept this money (for larger transactions US dollars are used, I believe). Whilst I’ve not read the work in question, Georg Simmel has written on this in his Philosophy of Money. To the extent that people believe their money will be accepted and that their banks are functioning people will continue to hold it (and it’s reasonable to assume that in a free banking environment there would be advanced secondary markets for bank notes, meaning that the moment speculators saw anything wrong the notes would begin to trade below par, telling holders to take their money from the bank). Banks may further cultivate this trust with certain arrangements such as clauses allowing the bank to withhold redemption for a certain period of time (allowing them to call in and receive loans) whilst incurring interest costs in the meantime. Another measure that could be taken is that banks could stipulate that in the face of a bankrun money won’t be given out on a first come first served basis but rather they will be given some of their money depending on the amount they have deposited.
The thing is, you’re making an unwarranted assumption that people are risk averse to the extent that the returns from interest will always be outweighed by the small probability that the bank defaults. But historically this isn’t true, people have chosen to hold fiat money despite the possibility that the bank may default. It just seems odd for you to say that the free market “disagrees” (whatever that actually means) and that “pieces of paper” never “evolved into money”. Not only is this at odds with history but it confuses the important issues, I presume what you mean is that fiat money cannot emerge on the market (true), but you’re confusing outside and inside money. The point isn’t that only gold (or some other commodity) can emerge on the market but that once gold (or some other commodity) has evolved how will the market deal with inside money? In the Rothbardian world inside money would take the form of bank notes used for convenience that are fully backed, in the fractional reserve world inside money would take the form of banknotes and deposits that aren’t fully backed. The fact of the matter is that Kevin Dowd has edited a volume (albeit one I’ve not read) covering all of the cases of free banking that have existed historically, as well as White’s impressive work on Scotland’s free banking era. I haven’t seen anything comparable coming from advocates of full reserves. If you wish to cite claims where banking has taken the form of 100% reserves and support it with sufficient detail you have grounds to make such claims, otherwise you’re on poor ground.
Now, you also write that FRB causes boom - bust cycles. I’ve addressed this argument above and as far as I can tell there are numerous posts of mine that have gone unresponded to. If you wish to respond to them, go ahead, otherwise please refrain from making such comments as “FRB causes boom-bust cycles” because I can only assume that you don’t really have an answer to the criticisms of full reserve banking that I’ve made. Also, the idea that FRB causes business cycles isn’t enough to prove that it won’t be adopted by the market. It may very well be adopted by the market even if it did causes boom-bust cycles (I don’t believe it does) because it’s rational for individual actors to patronise fractional reserve banks given the preferences concerning risk and the marginal utility of money.
You’ve sort of made my point for me. I mean, the fact that there is some limit to the amount a bank can issue due to competition between banks sort of implies that the money isn’t just “being made out of nowhere”. No, it’s the rational response to increase/decreased consumer demand that any profit seeking business would take.
Big claims, care to support any of them?
I don’t know why I’m still wasting my time with this. Look, first you claimed that every macroeconomic textbook covers a concept that we would consider to be the regression theorem you then went on to saying that one economic, Greg Mankiw, claimed that money has traditionally arisen in the form of gold. Let me be clear here, the notion that gold was the original form of money is an empirical statement not a concept like you original claimed “any intermediate macroeconomics textbook” would cover.
If you really want to help yourself, provide quotations from the book. Look, I’m not wont to accuse people of lying etc. but when you throw around the words “liar” and claim people are “talking shit” you open yourself up to this sort of this.
Which paper is that? Available online?
It’s on JSTOR if you have access, I think the title is somewhere along the lines of “On Ensuring the Acceptibility of a New Fiat Money” although I could be slightly wrong.
It’s not competition between banks that gets in the way – at least, not in the sense I think you mean: competition for customers. Each bank wants to expand as much as it can, and to do that it needs the greatest reserve fund it can get, so it will demand immediate redemption from other banks in order to move the real-money reserve from that other bank to itself. But the total money issue by all banks is still 10 times as much as has been deposited (or 40 times as much, or whatever, depending on the actual reserve requirement) – the limit on one bank doesn’t apply to the whole system. You haven’t answered the question as to where you think the extra $900 is coming from?
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Still babbling nonsense, Giles dear ? Why are you so confused ? Maybe you think your pseudo scientific rants make you look clever and learned, like all those other wise ‘doctors’ ?
Of course it’s competition for customers! Where else do you think it gets the reserves from? Clearly there is a limit to how much a bank can expand, if it expands too much then its notes are redeemed too often and it seems its reserve continuing to fall. Eventually it goes bankrupt, it’s just not true to say that it makes money out of “thin air” because if the money wasn’t meeting consumer desires then it would be returned and the bank would promptly go out of business.
Look, here’s an analogy. Imagine a cinema in which there are no seats only standing places. The owner originally sets the price because given the elasticity of the demand curve any further reduction in price would imply losses to the cinema.Suddenly the owner thinks preferences will change and that he can maximise profits by lowering the price. Now, in this situation it doesn’t make sense of him “creating cinema tickets out of nowhere” because if that were the case he either couldn’t do or he would make losses in doing so. In both situations physical resources and consumer preferences set a limit to how much a bank can expand.
Giles, maybe you should drop the didactic tone - you really don’t know what you are talking about.
As far as I’m concerned this debate is over. Just look at some of the comments by the 100% reserve side:
Insults, questioning of motives, crankish rants, etc. BTW, what living people do you (100% reservists) believe are “true” economists?
Thank you all for providing those links. Giles, I found a lot of interesting stuff by Selgin on JSTOR. Thank you for the tip! I will make it my priority (aside from my education career) to read this and take notes on the different arguments. Perhaps in the future I will present my definitive view on the subject. I agree with Jake on the fact that a lot of the insulting is baseless and unnecessary, and I admit that the arguing on both sides was relatively weak (even, probably, my own). I think that I will agree to disagree for the time being, and just read the works of people who obviously know more than I do. At this present time, I don’t think anybody is going to agree on anything.
Thank you all for the stimulating discussion though!
Thanks.
If this is to address my claim of the gold standard being un-libertarian, then its correct. However, I think you missed it my point, its unlibertarian because it is pushed onto or with government, like the Currency school. I never meant for you to infer that a voluntary adoption of of a gold standard, full reserve or not, was un-libertarian. Its pretty hard to deny that many libertarians do want to outlaw FRB, etc…
Here is Selgin and Whites reply
Do you think you could actually support one of your claims? You said I’m a liar “who makes shit up” - I quote Mises directly. You say I made the numbers up - I gave a link to the book. Crickets You say the quotes don’t support fiduciary media by leaving some inconvenient words - I point that out. crickets You say hes merely addressing Adam Smith - I carefully explain why hes agreeing with him. Crickets You say I mined parts of quotes from different parts of the book - I ask where. Crickets You say that I am chopping up passages and putting them together hoping that you won’t notice - I ask for evidence. crickets You say I’m for backing currency with nothing - I say liquid assets will do * crickets*
Forget about all the unanswered questions and points. How about you stop with the lies, insults and mischaracterisations, and read the damn book.
Angurse, still waiting for you to read the pertinent chapter of Human Action…
Aww poor Jake. If you can’t take the heat maybe you should stay out of the kitchen ?
We’ve been over this.
…
So, basically, you invoked Mises because there’s one paragraph that supports your position, but you dismiss everything else. And you don’t provide any argument. Mises is wrong…because you say he’s wrong.
Mises is right, if he agrees with you, and is wrong if he doesn’t. Hmm. Makes a lot of sense.
We’ve had multiple pages explaining and defending FRB and fiduciary media. How you can say I have provided no argument is just astounding, as you wrote equilibrium and demand for money off as “babble.”
Honestly, what are you talking about?
I was defending fiduciary media and equilibrium, and Mises was right in his defense of fiduciary media and his definition of equilibrium. His later want of a government enforcement of a full-reserve, gold standard, is wrong for multiple reasons, which we’ve already gone over.
If Mises later became a full-fledged Marxist, that wouldn’t change the importance of the contributions he made in the slightest.