One would think that someone who posted here would at least be familiar with Austrian theory as you claim you are but have shown no evidence of that fact.
I say this in general and not as a reference to this specific topic.
What, that you are claiming that a demand deposit is a short-term loan and therefore not fraud because it doesn’t function as ‘money’ until it is withdrawn?
What could I possibly refute that with except a whole lot of stuff that has already been posted. Which you chose to ignore.
Oh, and your choice to use semantics to redefine the argument to show how a demand deposit is no different than a term deposit even though it has been shown, on multiple occasions, that this is an imaginary construct you have come up with.
All you do is repeat the same crap over and over and quite frankly it is annoying.
If you truly, honestly want to continue this debate why don’t you define the argument that you are refuting (and not just ‘FRB is fraud’) and show how the Austrians get it wrong from within the praxeological framework.
Lemme throw a bone here by doing a “mental experiment” (caution - I am a newbie and not an economist, still reading the basic stuff):
Lets assume we have a free market (no CB, regulators) and FRB is legal. Then, naturally, banks will tend to use FRB to gain competitive advantage: a bank practicing 95% reserves will be at disadvantage comparing to the one at 75%. They may be doing OK with 75% reserves, but competition will push reserves down (no lower limit), and inevitably banks will start to fail. Our free society will panic, withdraw deposits, and half of banks will go bankrupt. At some point (after few such boom-and-bust cycles) the society will recognize that there is a problem here, and will search for a solution.
I guess there may be several (maybe, many) possible solutions.
The one that we know is the regulation (reserve limits), plus CB for “insurance”.
Another would be to (legislatively) force banks to make a distinction between “money storage services” - a paid service, guaranteed event if bank goes bankrupt, and “money management service” - when investor’s risk is paid as an interest. In short, this “solves” the FRB problem by making FRB illegal.
It seems to me that the core of the problem with FRB is that its not stable when combined with free markets. I wonder if there are other ways (except the two listed) to stabilize it? For example, if reserve requirements are set at 75% (no CB “insurance”, just regulators), how long would it take for this system to go bust? It seems that the higher the reserve requirements, the longer it will take.
As much as I like Austrian solution, it is not obvious to me (yet) that there are no other working solutions.
Perhaps that’s more so a hint that it isn’t a viable business practice? If the banks are careless with their reserves, they will indeed fail. With no one to bail them out, they have every incentive not to be careless. So how, exactly, is it the case that legislation or anything of the sort is needed?
I do not see how. Somehow it seems to me that the bank that provides cheaper depositary service, and higher interest on savings will get more customers. In my (admittedly, imaginary) world customers will not know the danger until it strikes. After it strikes people will become very suspicious … for a while. Then (say, in 10 years, or 20) history will repeat itself, maybe in a slightly different form (e.g. “we use a computer-controlled-money-management-system to guarantee your deposits”). Somehow I do not believe that collective wisdom lasts long.
Bankers are people. If 100% reserve banking is sound, then, to some bankers a 99% reserve system will seem sound. Another one will convince himself that 75% reserve plus his “experience” is sound, etc. My assumption is that it will take a considerable amount of time for a 99% reserved bank to actually fail. I want to see a market mechanism that makes banks to push their reserves up to actual 100%.
Already explained it to you. Banks can either keep high reserves and profit or low reserves and lose their holdings. Who cares if it’s 95% or 99.9%? Unless you signed a contract with a client specifically stipulating that you promise to keep 100% reserves, legal action is out of the question. If you did, then the bank can be prosecuted for fraud.
Not necessarily – these cheaper services/better rates come at a price – higher probability of default. So only people who want to gamble their saving will choose more riskier banks – not all people will want to do that.
Yes, you’re assuming that, but it’s not true. If A owns a full reserve bank, A will make sure that people know that’s the case. So A’s competitors will be forced in turn to explain how they run their banks – they can choose not to disclose the amount of reserves they keep, and people will trust them accordingly. That’s just one mechanism - there are others.
Oh, I misanderstood your “who cares” statement - my bad. Next question then. If (you say) 95% reserve is sound, where is the threshold that makes FRB unsound? 75% ? 50% ?
Are not you saying that FRB is just fine, and free market will find the “right” reserve ratio, probably other than 100%?
There’s no way I could know where the threshold is. I’m not a bank nor am I the market. These kind of things are contingent facts depending on the market’s current circumstances. It’ll be at the level where banks aren’t ravaged by bank runs (it doesn’t take much to cause one…) and consumers are willing to accept a certain level of risk. If consumers want no risk, 100% (or something close to it) will be the dominant type of firm, and it’ll be contractually obligated to keep its reserves at this level, or be prosecuted for fraud. The nice thing is, is that consumers will not be forced to deal with banks that keep say only 10% on hand. And yes, I am basically saying it’s for the market to decide. I don’t think FRB should be illegal, regardless of its wisdom.
So, in a free market economy FRB will die naturally (possibly, after few boom-and-bust cycles). I thought that CB is the inevitable consequence of FRB (as an attempt to “fix” the money crunches). Apparently I was wrong here.
Can you guys recommend any reading on this (monetary policy, theory of cycles)? The amount of literature on this site is somewhat overwhelming…
No, CB is the facilitator of FRB. Not its inevitable consequence. This is a good place to start on all things monetary, especially the bits on the business cycle and books by Rothbard, like The Mystery of Banking.
Well, CB can be regarded as a consequence of FRB in the sense that FR bankers and politicians had to come up with it in order to prop up a flawed system.