Was Rothbard opposed to fractional reserve banking in its entirety or is he only against fractional reserve banking by a state central bank? There’s a lecture by Jeff Hummel entitled “Why fractional reserve banking is more libertarian than the gold standard”. Is the disagreement just with technicalities(fractional reserve banking with a state versus without a state) or is there a real conflict between gold standard and fractional reserve banking among libertarians?
My take from reading some Rothbard was that he was only against fractioning demand deposits or deposits that confer on the depositor the right to immediate withdraw. In this situation the institution holding the deposit is always insolvent as they are betting their depositors will not rush in and withdraw their money. He had no problems fractioning bonds, CD or other non-demand deposits, until such time as they become demand deposits.
I do not see a conflict between fractional reserve banking and a gold standard. A gold standard only locks the central government from creating or electronic money beyond the conversion ratio. So under a gold standard or better yet a free market determined form of money, the central government will not be able to insure or backup fractioned deposits as they do today. The lack of a government institution backing up fractioned deposits is much more stable as bankers can not burden the tax payers with the risk of default.
The only stable solution to the worlds banking problems is the destruction of central banking and the elimination of legal tender laws. Then private institutions will create their own currencies. In this situation if one of these institutions makes too much currency or has too many fractioned deposits then the market will brutally correct the situation.
FRB is fraud. No other way to spin it. 2 claims on 1 asset is not correct. Committing a crime cause you might not be caught doesn’t make it moral.
I don’t understand what is so difficult, I must be missing something.
Fraud? Why is that? I deposit 1000 grams of gold in my bank, and get a checkbook for that, while the bank also loans 800 gr., also under the form of a checkbook, to some guy. Now, how could you sue the bank for issuing claims on you money? How do you know its your money, and not Andy’s? I’m afraid nor arbiter would award you damages (just a guess though). Fractional Reserve Banking is cool as long as bankruptcy is unimpeded. Mises held this position that a Free Banking System would be, in practice, almost identical to a 100% reserve requirement. With two major differences. 1)A Rothbardian 100% reserve requirement stink of statist legislation and, 2) A Rothbardian 100% reserve requirement would be unenforceable in practice
the bank tell you that you have a checkbook for 1000 grams AND tells the person B he has a checkbook for 800 grams
therefore the bank is pretending to have 1800 grams when it has 1000, therefore it is lying, therefore it is committing fraud.
Preventing fraud is not statist legistation
It indeed is fraud BUT, and that is major but, who can sue the Bank? Not you, as you have no way to prove that the 800 gr. loaned are your funds, and not the recipient of the loan, as it would be easier not to take any loans at all than sue the bank over that. So, no arbitration on this is possible, as none has the right to sue the bank over issuing fictious substitutes to money in general. But if the issue cannot be resolved through arbitration, than saying that “I advocate strict 100% reserve requirements” means you advocate legislation.
The latter.
Money lent out from the bank from the funds of a depositor would be “stored” at the bank as a CD, where withdrawal is limited to time intervals, most likely coinciding with the loan termination date. This way, there is fractional reserve banking going on.
On the contrary. It is legislation that grants banks the special privilege to operate with Fractional Reserves. A privilege that no other business enjoys. To advocate for 100% is actually to advocate for the removal of legislation.
For the above in yessir’s example not to be fraud, person A and B would have to contractually agree to risk the liquidity of their deposits, and the checkbook money itself (or banknotes) cannot conceal the nature of the deposit backing them so that person C (third party) is fully aware of what he is accepting as money.
But they do. Every time you transact with anyone, you assume some risk. The very same thing happens with banks. If the owner is stupid enough to loan out funds which might be retrieved anytime, well, that’s his call. He’ll go bankrupt, his reputation will be forever stained, and every client will have to assume that risk.
Imposing a 100% reserve requirement, apart from enforceability issues, would force people to chose among a liquid account with little to no interest at all, and an immobilized account with relatively high interest. What if I want a middle solution? What if clients prefer some interest rate and some liquidity? Note that a bank that engages in (limited) fractional reserve operations offers a higher interest rate on deposits, yet a lower liquidity rate due to a higher risk of default. Deposits come to resemble some sort of investment. Why would we deny the public this middle choice? Who are we to presume we know better than they?
I know most would say “as long as they put it in the contract, its fine”. But how can this be put on a contract? “I retain the right to retrieve my deposit, unless the Bank ends up with no fund, in which case I give up my claim”? Well, that is exactly what is implied while transacting with a limited liability company. Thus, legally speaking, the bank owner is within his most perfect rights when engaging in fractional reserve banking.
I say, let every bank transact under whichever terms it chooses too, and give the customers, and the customers alone, the right to press charges should any perceived aggression against their property ensue.
Doesn’t fractional reserve banking inevitably lead to credit expansion–>inflation–>business cycle?
What risk? There’s no sense of risk in bank deposits today due to government grantees.
It is his call, but it’s not just stupidity. If the owner was obligated by contract to redeem specie on demand, then he has also committed fraud when he lends out the moeny. The depositor would have to contractually agree to forgo the option for liquidity on demand.
I know, but this doesn’t refute the possibility of fraud.
Because the idea of investing without the sacrifice of saving is attractive, so we shouldn’t impose anything against it?
If you invest , you are by definition forgoing liquidity for a temporary amount of time so that somebody else can use it. You are trading present goods for future goods. If you want to deposit your present goods not for a definite amount of time like a regular time deposit, then all I am saying is that the contract cannot define the deposit as available on demand. That is an impossible contract.
This is just “free banker” rhetoric who are trying to make their case by appealing to emotions. There is no middle ground.
From the individual’s perspective either you’re holding the money or you’r investing it. It is logically impossible to be in the middle. Any financial instrument looses its liquidity once it becomes a “sort of investment”. It must be sold to retain liquidity. There is always one person giving up liquidity and one person gaining liquidity. In your case, both people magically retain liquidity. This is impossible without fraud.
Why is a demand deposit for money any different then a demand deposit for oil, wheat, or anything else.
And you fail to realize that it is precisely legislation that prevents the above by allowing banks to evade this check.
It is only fraud if they can not pay you at the time you demand your money. At any other time it is merely a risk for the bank.
What I don’t understand is why is it fraud if everything is spelled out in advance? All parties know in advance what they are getting into, no one is being duped. So where is the fraud?
No. Business cycles are the result of differences between the natural rate of interest and the market rate. The difference occurs only when the reserve rate is increased without a prior increase in demand for money.
What of credit expansion and inflation?
The whole theory rests on demand for fiduciary media, and not just money. If you store your money under the mattress, there is nothing the banks can do to respond to that even according to your own monetary equilibrium theory.
What of it?
Arbitrary over-expansion of credit leads to inflation, a free banking system would be “regulated” by the market.
But doesn’t fractional reserve banking require and facilitate credit expansion and inflation?
Fiduciary media is money (in the broader sense), I don’t see any point. Money stored under the mattress wouldn’t be considered as in increase in the demand for money as it couldn’t generate interest and couldn’t be loaned out (namely it doesn’t alter real savings whatsoever). The banks shouldn’t respond to that.