Can someone point me to an online article (not a book) explaining what full reserve banking is. One that explains how loans can ever get made with such a system. I get the impression that there is very little consensus about a workable system - is that true? Is there such a thing as a von - Mises - approved - “vanilla” system that most Austrians would agree was at least reasonable.
The current wikipedia entry on “full reserve banking” does not state how loans are made. Maybe someone here should go and correct that.
Hmmmm, those don’t quite satisfy my original request. I’d like an article entitled something along the lines of “full reserve banking, what it is and how it works” - or of course you may want to reply “us Austrians can’t agree on a system, there are hundreds to choose from, with no clear front runner”.
Any book? Really? I do know for sure that there are multiple full reserve systems so that can’t possibly be a correct answer.
What I don’t know, and would like to find out from this forum, is if there is a “most popular”, ermmm, “vanilla”, errmmm, “uncontroversial” system that I can use as my reference. I don’t want to spend ages studying a system only to find later that only 1% of Austrians think its any good. Or its the pet theory of the author and nobody else has ever studied it it detail.
"don’t quite satisfy my original request. I’d like an article entitled something along the lines of “full reserve banking, what it is and how it works…”
i dont know where full reserve banking as a banking model took place. in times and economies where a commodity money was lent and repaid (with interest) you would have something along the lines of full reserve banking.
forex…person a has 100 ounces of gold…person a lends 50 ounces of gold to person b on a interest accruing repayment scheme. hopefully person a is repaid by person b.
to the extent that technology could speed-up the commodity-money lending and repayment process, well that shouldnt be to hard to conceive. you are communicating indirectly on this forum.
To the OP, by and large Austrians favour a free market in banking, since they recognise the non neutrality of money what they generally advocate is whatever monetary system comes closest to being “neutral”. This isn’t strictly true since there are those who flat out deny the legality of fractional reserves regardless of the economic consequences of doing. But since those believe FRB to be illegitimate also believe that it would lead to various misallocations of resources in the economy, it comes close to being true.
On the one hand there are those who, in the tradition of Rothbard, favour full reserves in banking. In this situation fractional reserve banking is usually regarded as obviating the price system due to it’s alleged fraudelent nature. A free market in credit creation is generally seen as a free market in swindling, and most here at the LvMI would be associated with this line of thought. These economists see FRB as pushing the market rate of interest below the natural rate of interest and consequently sets in motion the Austrian theory of the business cycle. Some take this further (Block & Barnett) and think that all mismatching of loans is illegitimate and causes the ABCT, although this is not an uncontreversial position.
On the other hand there are the free bankers who support an entirely unregulated banking system and competition in the provision of currency. These economists would argue that 100% reserves in banking would push the market rate of interest considerably above the natural rate due to the fact that the supply of money is unresponsive to the demand for monery. The economic results of this are misallocations of resources and an artificially short structure of production.
There are also what is known as the “the new monetary theorists” (Yeager for example) and those authors who argue along Hayekian lines for competing “fiat” currencies.
Ok, so Austrians have not reached any consensus on which type of banking is best… but my original question was about where to find an article explaining “full reserve banking” in particular. Judging by the responses and some searching on google and wikipedia I am now rapidly coming to the conclusion that no such article exists
Not really, though get the point across (not that I agree with the point). As nothing is a singular noun, the verb should be is not are, and there probably should be a comma in there:
If nothing from reserves is lent out, there is no financial intermediation.
There we go. Still BS, but now grammatically correct BS.
Ok, I’ll give up on my origional request for a online article. I’ll take a reference to anything - a book, an academic reserach paper - anything. But if you suggest a book then please tell me in what chapeter the definition of full reserve banking is given. I just did a search for “full reserve” in the pdf of Rothbard’s “the mystery of banking” and there wasn’t a single hit.
Full reserve banking means that at any time the bank can pay back all legal claims on deposits/savings account. That basically means that maturity of both liabilites and assets must be about the same.
So, the bank is not allowed to lend out what you have deposited on your CD account (as you can withdraw that any time, even without prior notice). You’ll either have to pay something for the safe keeping of the cash, either through paying transaction costs or a fixed monthly amount. Banks may not charge anything, because they like to attract costumers. Also, banks prefer to lend money to its clients, because they see your history (income, spending habbits) etc.
If you want to save money, you will have to open savings account and sign a contract which will define maturity. You will not be able to withdraw money before what you signed in the contract. So bank is now safe. Also, the bank will have to lend money with the same maturity. If you need money prior to that time, you can sell the certificate of your savings to somebody else. Usually that means discounting the value to some extent.
Banks also have an option to raise funds by issuing equity (stocks and the similar). Vvery flexible for the bank, as you cannot reclaim that later (infinite maturity).
And also, bank can raise funds by issuing bonds (bonds have fixed maturity of course).
The idea is to keep you liabilities and assets basically in sync. So, borrow short/lend long - very risky but highly profitable arbitrage is not possible.
Thanks for that… but can you remember how you learned that information in the first place? Getting someone to give me a concrete reference in this forum is like getting blood out of a stone. Surely Austrian economics is not all passed on by word of mouth!
