you seem to have slipped from paper notes referencing possible gold to gold. switch and bait?
Adam, this is sort of what I was talking about. I think a lot of the criticisms made by opponents of FRB are misguided for exactly this reason. Huerta de Soto (and economist I have huge respect for) goes through this in great detail. Now, whilst he may certainly have a point that where deposits are construed as bailments fractional reserve banking may be fraud, I don’t think he can say the same when a deposit in considered nothing more than a loan. Rothbard writes that when a baker sells bread what he must do is provide a good that is in accordance with the standard definition of “bread” in that particular area. If “bread” were to mean dirt somewhere else and the baker sold dirt under the name of “bread”, he’d be commiting fraud. I don’t think I need to spell out the analogous case when it comes to fractional reserves.
As for the rest of your post, I don’t really have much to add. I think we’re pretty much in agreement.
No, my point was that it is a viable business model to expand the titles to gold upon demand. It is not viable to do the same for houses and land.
oh, i see, they arent titles to gold per se, they are possible titles to gold dependant on the expertise and good management of the title printers. i certainly dont oppose an honest lottery.
No, they’re not even titles to gold. They’re an IOU from the bank, and depending on the terms of the contract the banks can suspend the redemption of these IOUs. And yes, when the bank makes the contract with the individual it is agreed the bank may default on its obligations. But this is no different from other financial intermediaries.
Are the notes given to loan recipients the same IOUs, with the same contracts?
Ermm, that’s not really something anyone can answer a priori. But I’d say no, since they’d presumably have a fixed term.
I guess I misphrased the question. Sorry. Here’s another try.
Say I walk into the First Radical Bank of Stratton (FRB Stratton, for short). I explain to the loan officer that I’m planning on purchasing a new Morgan Roadster, and would like a automobile loan. The manager checks my credit, finds it excellent, and agrees to the loan. I’m then given some sort of note to give to the dealer, or the agreed upon amount is added to my account, allowing me to write the dealer a check.
Would the note given to me, or the funds added to my account, be the same IOUs as you mentioned? Would the same contract apply?
In the case of the IOUs that I mentioned the loan is being extended to the bank, in the situation you mentioned the loan is being extended towards the customer. So, I suppose that’s the major difference. But as I said before, presumably banks to customers would have a defined term and differ in other ways. Either way, we can’t really tell a priori.
But it does illustrate a serious flaw in fractional reserve banking, does it not? What if, on the day I purchase my new Morgan, FRB Stratton experiences a run. Not only will many of the account holders lose their money, but the Morgan dealership, or perhaps their bank, will, as well.
Jack, I’d say three things in response to this. One, your argument proves far too much, insolvency is a threat to any firm, regardless of the nature of their business. if the First Radical Housing Company of Cuyler goes bankrupt and proves incapable of paying back its loans then the same problems occur. The fact that we’re talking about a bank doesn’t have any specific implications as far as I’m aware. On a related note, it’s certainly not the case the 100% reserve banks will never become insolvent either. It’s entirely possible that a financial intermediary in the Rothbardian sense makes bad loans are proves unable to pay them back. In which case exactly the same consequences follow. Finally, I’m going to have to point out that competition would tend to keep banks from going bankrupt. As was the case in Scotland, which was the closest we’ve really seen to free banking. As free banking theorists point out, historically state regulation has acted in a such a way as to increase the likelihood of banks becoming insolvent (and then guess what? they have the solution! FDIC).
Lots of confusion, as always. Two main points :
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Some people just assume that IOUs will be accepted as if they were money ? Why ? Financial magic.
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FRB tends to be conflated with the creation of fiduciary media. Why ? Who knows. Fact is, FRB can work to a probably (very) limited extent without creating fiduciary media. However, so far, none of the inflationists have explained that (and I’m not doing their homework for them).
Markets are a risky place. That just goes with the territory.
Nirgraham, I think you’re argument stems more from contract law - which is political - than from economics.
If your point is that fractional reserve banking is fraud, fine, I don’t know about that but I won’t confirm or deny. That said, it hasn’t been shown why fractional reserve banks aren’t economically superior.
And the contrary hasn’t been shown either. Fact is that this is an empirical matter and I have history on my side.
Ermm, fudiciary media is defined as those notes that aren’t backed by base money. So, yeah, as a matter of definition FRB necessitates the creation of fudiciary media.
I tend to define insolvent as having a negative balance. Am I wrong? If not, it is impossible for a 100% reserve bank to become insolvent. If all deposits are simply stored, and all loans are made from real savings, as 100% reserve implies, the absolute worst possible scenario, barring a bank robbery, is a 0.00 balance. Every account could be closed and every single loan defaulted without a single payment, and the bank would still not have a negative balance. It would lose its savings, but not its customers’ money.
I’m also not sure how you would think competition would help keep FRB banks solvent. As loans are spent by the borrowers, the money will invariably be deposited in other banks, which will demand the funds from the loaning bank. The lower the reserve, the greater the chance of insolvency.
I’m not arguing against FRB from an ethical standpoint (though I do question whether or not it’s fraud to enter into multiple contracts without the ability to fufill them all) but rather on practical grounds. If banking were truely free, I think 100% reserve banks would do better on the market, due to their ability to weather bank runs. I don’t doubt there would still be some FRB, but I doubt those with consistenly lower reserves than their competitors would not be in business very long.
Actually, what theory and history show is that people reject inflated paper unless they are forced to use it at the point of a gun.
Nope. But as I said, I’m not doing your thinking for you.
Sorry, but theory has nothing to say here. This depends on how risk averse the population are and how much they value the interest they earn. Historically, you’re wrong. Simply put people did value the interest they earn on reserves more than they value the extra security from 100% reserves.
Theory explains what is money, what is inflation, what inflation leads to etc. Printing notes has nothing to do with risk and interest - it’s basically counterfeiting.
Also, there’s no special upside to so called credit-money but it causes a good deal of problems. It won’t survive in a real free market.
No I’m not. Inflation is something that can only be maintained using fraud, for a while, and then force.
By the way, is there a special reason for me to pay attention to what you say ? A couple of weeks ago apparently you understood some of the problems caused by fiduciary media. Now you don’t.
Funny.
I think you make some good points here about the banking industry and how it would operate in a free market, as you said, from a practical standpoint. However, from a traditional Austrian School perspective we wouldn’t be focused on the specific operations of particular industries. From a traditional Austrian School perspective, we would be focused on the consequences of not allowing all industries to operate freely.
If we start to get into the specific business practices in a particular industry, then it is hard to stay away from making an ethical argument. Even worse, we might stray from the traditional Austrian School approach and start suggesting the there are specific business practices that can be followed that all people should follow. This is a lot different from the traditional Austrian School approach of sticking to a value-free analysis.