I understand their argument about how it could be legally and morally permissable to allow banks to offer FRB, but does anyone here understand their practical argument? Can someone explain why they think issuing fiduciary media can benefit society as a whole over a long-term time period?
It seems to me it is simply based upon preference, but as Hoppe, Block, and Hulsmann rebut, preference is not indicative of social benefit when the preference is a violation of property rights.
Yeah. It would be nice to see a short article explaining the benefits of FRB. A clear, concise and logical article. I doubt such thing exists…or can exist.
Give their paper a read, it’s only 30 odd pages and is available on this site.
To the OP I think their argument is Keynesian in nature as highligthed by Huerta de Soto and the economists you mentioned, I believe the essence of the argument is that it allows for credit to expand in response to an increased demand for credit, I also think they make the claim that the holders of credit do not need to hold.
30 pages for a basic concept ?
I mean, it’s not that reading 30 pages it too much, but it would be nice to have a piece as short as possible so that it’s easier to point out mistakes.
People who advocate inconsistent positions tend to obfuscate things and the longer the paper the bigger the amount of obfuscation…
Anyways…is this one ? mises.org/journals/rae/pdf/rae9_2_5.pdf
without equivalent savings put into the banking system - this would cause a business cycle, yes? I remember them specifically saying their kind of fiduciary expansion would avoid such a cycle. i’ll reread it though.
I do not remember anything keynesian about it. It just seemed sound reasoning.
The market is supposed to meet ssupply and demand, right?
Need to hold what? I am not sure, what are you tring to say here.
As far as I know banks lend out from deposits. So obviously they are financed from savings.
If people deposit specie and receive money substitutes and spend them, then they obviously aren’t saving.
I think Selgin and White are arguing that when people demand money substitutes to save rather than spend, the bank is justified in creating more money substitutes than reserves, because there is enough saving to support a lower interest rate. Should the cash start to be spent again, the bank would have to remove it from circulation. But how the bank could ever know such precise understandings of savings rates seems impossible and destined for some quack econometric stuff. Furthermore, if people are saving cash, it most likely means they don’t want to be exposed to risk.
And generally, banks lend against reserves rather than lend out deposits. They lend out money substitutes that they create.
I don’t know, both of the critiques I’ve read (De Sotos, Hoppe/ Hulsmann/ Block) seem to say that it would trigger the business cycle. I think they avoid this implication by equating increasing ones demand for cash with saving, as Keynes does, even if it is ultimately unsuccessful.
With the use of the price system.
The price of limited savings rises → people are more likely to save → there is more credit
They deny this. They say holding money is deferred consumption, hence saving. But increased demand for money is not increased saving. On page 20 of pdf:
I’ve been meaning to read the PDF some time, I know both Hoppe and co. and Huerta de Soto address thing, although, I think they point out that in practise they ignore the distinction. I’ll read the paper soon.
I’ve read this pdf at least twice before. I remember searching for the method to their madness, only it is nowhere to be found. I get the logic about what they are saying. Yet, how could a bank practically approach doing this? How do they know whether or not there is deferred consumption? Do they use consumer prices, credit demand, velocity of the exchange of bank deposits? What about the supply of real goods? What about unprofitable production? Just because some goods are sitting on store shelves doesn’t mean that people are saving. It means there was business error.
How do they get this data? It seems it could only work in a system without financial privacy. There could be no banknotes - only electronic exchanges, all of which the bank would be aware of.
And how does a bank contract credit once it has been issued? Would the bank have to make extremely short-term loans, retiring its earnings as deferred consumption lessens?
I’m not sure I’m against what they are saying in theory, but I see no practical way to implement it.
An increased demand for banknotes implies a fall in the redemption rate. Then the bank sees it can issue additional notes without additional risk of a bankrun. An increased demand for deposits implies there are fewer withdrawals and cheques written against demand deposits, so again the bank can relatively safely expand the volumes. There is nothing magical about the process.
Fractional reserve banking has many practical advantages, including its ability to keep the supply of real money balances more closely in line with demand in the face of short-run fluctuations of the latter. (The alternative of just letting P adjust is relatively slow and cumbersome, and can result in short-run distortions of relative prices.) But the chief advantage is that it increases the extent of productive investment, by allowing savings that might otherwise be held in the form of gold or silver only to be replaced by claims backed by commercial bank loans. Adam Smith wrote very eloquently about this; as for “short” articles, here is a pair I wrote on the subject for the Free Market News Network a couple years ago:
http://www.freemarketnews.com/Analysis/241/6939/notes.asp?wid=241&nid=6939
http://www.freemarketnews.com/Analysis/241/6949/notes.asp?wid=241&nid=6949
And here is a relatively short piece that makes some other points:
http://www.independent.org/pdf/tir/tir_05_1_selgin.pdf
If I haven’t written more short pieces defending fractional reserves, it’s because I’ve been busy with other projects: bear in mind than 99.99% of monetary economists and policymakers have no problem with fractional reserves, but dismiss free banking. Can anyone blame me (or Larry) for directing most of our work to them, instead of spending still more time trying to convert a small coterie of die-hard 100-percent reserve buffs?
I find it odd, by the way, that some critics of fractional reserve banking refer to it as being practically impossible. In fact, the practice is as old as banking itself, and where it has been allowed to develop without legal interference, that is, where it has been accomopanied by free banking (as in Scotland before 1845 and canada before 1914) it has had an excellent track record. 100-percent reserve banking, on the other hand, has been very rare historically even though there is no evidence that there have every been any laws against it.
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Maybe you should explain that, assuming the audience is mildly retarded. So, ideally, you would explain how FRB would work in a town as small as possible, so that it’s easy to keep track of all exchanges and other decisions and their outcomes.
You write as if I hadn’t attached articles providing details.
Sorry, I didn’t mean to imply that the explanations and details are missing in your articles.
What I was suggesting is that, perhaps, explaining the concept using a less academic style would help to clarify where the disagreement lies.