I was reading Rothbard and others debating fractional vs full reserve banking, and wondering if a hybrid system wouldn’t satisfy opponents in the debate.
I realize it could not be done with a common currency. But this article suggests that a hybrid would be possible if multiple currencies existed and legal tender laws were eliminated:
If a hybrid system were possible, wouldn’t this eliminate a lot of rancor between the two sides, and allow each person to use the type of banking system he preferred? And wouldn’t this allow us to join with our supposed opponents in fighting the real enemy, government coercion including legal tender laws?
A hybrid system of both fractioned and 100% reserve demand deposits is absolutely likely. In a free system where consumers and banking service suppliers could enter and exit at will then you will see a wide ranges of banking services using different types of money and different types of reserves. All of this would be in constant flux as fickle consumers will constantly change what they want in banking services.
As for joining together fight for freedom, I do not see this as likely. Both sides are making pointless arguments about what is an optimal banking system whey they both know that the optimal banking system is one where consumers and banking service providers enter the market and exit it freely where there is no bureaucracy using violence on the participants.
I think Bogart summed it up well. I would add that the system would have to be truly “free market”, no intervention no matter what happens. Because, what would happen is this: The fractional reserve system would create malinvestment, along with the boom bust cycle. The fractional reserve banks would go bust, and the fractional reserve depositors would lose most if not all of their money. The “howls” from the crowd must be ignored no matter how painful. The market participants would learn their lesson (I think quickly), as they see the 100% reserve banks standing strong. Sure, I can see the market choosing fractional reserves along side 100% reserves, but the fractional reserve depositors must lose their money when the system fails. Otherwise, it’s back to intervention (and we know how that story ends).
EDIT: Of course, we are talking about a fractional reserve system with no central bank in the discussion above.
Honestly, if fractional reserve banking were banned, then consumers would find a way around the problem. What would probably happen would be that banks would create a market for CDs similar to the market for bonds, stocks, etc. Thus, consumers would be able to buy and sell long-term CDs, making them able to enter and withdraw their money whenever they feel like it at a low cost and relatively safely.
From article: "As long as the FRB currency provider is up front about it’s reserves and folks willingly patronize them, no one, you, me, or anyone else has a say in the matter."
This suggests a clause of the type that Selgin proposed.
Nobody has a problem with such a system. The free banking proponents who say otherwise are misrepresenting or misunderstanding the 100% reserve position.
However, such a system as proposed in the quote, doesn’t constitute a fractional reserve banking system. It is the free banker’s mistake if he thinks it does. I will argue that the case has never been made based on economic theory to as how such a system could possibly evolve.
But the CD’s based on fractional reserve banking would not be safe. When the system breaks down (and it would), the “investors” in CD’s would suffer a loss. I don’t understand the “relatively safely” part your statement.[^o)]
Why not? CDs issued by fractional reserve banks are exactly the same as CDs issued by full reserve banks.
I’m not talking about CDs issued by fractional reserve banks, but CDs issued by full reserve banks and traded in a CD market in order to replace traditional demand accounts.
No shit Sherlock. But believe it or not, any bank could fail, if its assets perform worse than expected. This also explains this:
It really wouldn’t. The only difference from the “traditional” bond market would be that a CD market would have “bonds” issued directly by banks and probably easily available to consumers via banks (in other words, you wouldn’t have to go to a broker to buy a CD).