What would happen in modern America today if I started a bank and refused to become a member of the Federal Reserve?
In theory, that would allow me to circumvent all manner of laws and regulations which are forced on banks generally by virtue of membership to this body.
Of course, you’d have to perhaps do away with the fractional reserve system within this one bank in order to pull it off and not create a run on your bank, or perhaps at the very least restrict your fraction to say 25% reserves, which is what some free-market banks did before the Fed came into being.
However, I think the law would try to shut such an entity down. Dunno of any examples of this, but would be interesting to hear comments and predictions.
Given that I’m still learning Austrian/free market economics, what would the ideal system be? Would the banks maintain 100% reserves? Surely, compared to the current system, this would “slow” down the the rate of loans given out. However, it would probably increase the rate of return on savings and induce more people to save. I would also imagine that more prudent investments would take place. Feel free to correct or add on to my thoughts.
I dont think a bank that doesnt join the federal reserve brotherhood could compete! How do you expect to hire talent at other bank wages? These bankers are getting paid millions. You wont be able to make much profit at all or gain public willingness to accept the risk of banking with you. One hacker can take your bank. As long as their is a federal reserve bank they have the monopoly.
i think there is one weakness in banking today. I feel my theory/business plan can bring it down, but its my idea and i’m not telling anyone until i do it.
Why couldn’t the non-fed member bank simply ensure their reserves through a PRIVATE insurance company. Those do exist, you know. As for the ability to hire talent, they might have to rely on talent from people that simply believe in what the non-member bank is trying to do; maybe contact the Mises institute to let the community know of its creation and that they are trying to hire like-minded people into their ranks. I know on these forums alone the talent is endless. I would even be willing to bet the talent greatly exceeds that of many, if not most, wall street guys.
Honestly you were never really beaten, it just seems like you gave up. The thing is that battles like the one that you got into are pretty endless, you end up just putting factoids back and forth against one another until someone just gets bored and stops posting. What you need to do is ask this simple question and get down to the heart of the matter:
Why are banks acting irrationally?
Normal companies don’t go crazing with their business practices if they go unregulated, why do banks? I read once that the problem with bubbles is that in many ways they’re a non-answer, or at least the mainstream take on them is. For the most part there’s no attempt to explain why it is that there’s suddenly been this amazing misallocation of resources and risky lending procedures, I.E to analyze the matter in an economic manner, it’s merely assumed that there will be these bubbles due to “Animal Spirits”. Minsky was the only non-Austrian who, to my knowledge, bothered to actually come up with a reasonably sound theory about why busts occur in the first place.
The question should always look at the institution which is in a situation that it doesn’t have to obey market law, or which can give utterly false signals to the market and has no direct incentive to provide a valuable service, I.E the state. Fannie and Freddy gave out huge numbers of loans and the regulatory agencies, of which there are a plethora despite what liberals will tell you, gave the green light to everything. If there had been no state regulatory agencies then after the risky lending started then the public or other private agencies may well have caught on and the stock price would have plummeted and these banks would be bought up by new people who would organize them in a sustainable manner. If the government and regulators hadn’t been cheering on banks in the first place then there probably would never have been such a massive boom in the first place.
It’s perfectly understandable that there may be speculatory bubbles and overinvestment, men are not gods and some are short sited, that is why the market is necessary, but there’s no reason to believe that in the absence of very peculiar conditions, an act of god, or an extra-market mechanism, that there would be multi trillion dollar investments which are so risky and turn out so poorly.
Thats true. Having a private insurance company would have some weight, but do you believe the majority of people would agree? If you walk into a bank see ‘your money is protected by Geico’ would the average American take that over ‘your money is protect by the US government’?
‘rely on talent from people that simply believe’ - thats called charity. Do you really think a kid out of harvard is going to take a 25k salary when JP Morgan is giving out 100k salaries while wearing 4000$ suits and driving 100k cars? No . it simply wont happen. you can probably get away with a ‘mom and pop’ bank, but I dont think you can operate on a national scale. Can a bank like that be able to bring in 250k+ employees by offering lower wages? Can a bank like that continue to operate when the federal reserve decides to lower interest rate way below what you can offer? that action alone can put you out of business. Even if you are a freedom lover at the Mises institute, if you have a family on the way and need a house, are you going to pay extra just to say you are banking with someone that has integrity? or are you going to save $10,000 and start bank BoA?
the banking system would be whatever the free market dictates.
you could have banks that just do warehousing keeping all 100% reserves, competition in different moneys (gold/silver/etc), maybe youd even see some fractional reserve banking which would be unlikely. Youd only see a fractional reserve bank if the banker that runs that bank is really careful with its reserves and makes good investments.
Or a warehousing bank that gets its money from people paying it to store money, and then that warehouse bank takes that money that it is paid to expand/invest in companies/lend to others etc as a side business.
Good points. Thanks, kelvin. It would be whatever works and is profitable. Let the free market decide. As Friedman would say, people would be “free to choose.”
I can guarantee your money will actually be there. I’m sure that’s worth it to a lot of people. You’d charge fee for service and only loan out money people allow loaned out.
I think there’d be a huge market for a no-frills credit card that doesn’t try to screw you with gotchas left and right. Just keep it at say 8% or so, backed by depositor money for those whom want to earn a bit each month rather than pay a fee for value-store.
Though, curiously, this is one of the few areas where Friedman was loath to let people be free to choose, as he was a staunch believer in the necessity of a central banking system to maintain price stability. Nobody is perfect I suppose
Well, to some degree I believe you. The popular perspective is that “there is no guarantee more reliable than the government.” There is some truth to this in that the government COULD theoretically print any money it needs to pay off its debts (i.e. restoring lost money to a member bank). However, we don’t see the government paying off its debt to foreign countries, do we? We also have seen that bonds are not the “great” investment they used to be. They are about as good an investment as a your average bank account these days. They have lowered the interest rates on them over the past few years.
Also, we can look at the issue in terms of real money reserves. If one were to really look at the financial data behind the FDIC compared to other private insurance companies, the FDIC is a joke. They could not compete were it not for their income sources. I know that New York Life and Midwestern Mutual, to name but a couple of private insurance companies, both have reserves greatly dwarfing those of the FDIC. Reserves in the case of insurance companies means roughly the same thing as it does in the banking world. If there were a “run” on the insurance company, so to speak, their reserves reflect their assets compared to their liabilities. Should every policy holder come in at the exact same minute to cash in their policies, then the two companies I have mentioned would both still have tens of billions of dollars leftover. The FDIC cannot say this. But, I will admit, it is difficult to talk in terms of real money when the valuations being used to determine these numbers are based in a currency that is strictly controlled and monopolized by a central bank such as the Fed. Also, I doubt NYL or Midwestern Mutual even insure institutions like banks, (but perhaps they would if the FDIC didn’t exist).
First of all, I don’t really believe in charity, or at least I think it is a superfluous label when we look at transactions among individuals. The term only has any real meaning when we talk about charity in terms of tax-breaks. In a free society, this term would not have any usage other than in casual, non-technical, or non-legal conversation. This is because, from the perspective of a free society, “giving to charity” is just one choice out of many in voluntary trade. When you give, you do so because you believe that giving is the best possible means available to you to achieve your desired end (this is praxeology at its most basic). This does not mean you will gain money or wealth. Perhaps you are religious, so you give “charitably” to your church in return for some kind of heavenly blessing, or you give to a the poor because you believe Jesus wants you to so you give up money in exchange for the good feeling of having helped somebody or from pleasing your God. No matter the case, you valued the money you gave less than the good feelings or blessings you (believe) you will receive form that action.
Government, however, gives the term charity more meaning than it deserves, at least in an analytical sense. They intervene in the economy by making certain transactions (which they call charity) tax advantaged. How they differentiate some transactions as charitable as opposed to others, I do not know; it seems vaguely arbitrary. So in the case of a free-market, I may not have chosen to give $X to Z-charity, but now it may be more profitable to “give my money away” than to keep it. When I use the term “give away” I mean a transaction where one party gives some amount of money to another party without the expectation of receiving any money in return. This math could only have been fathomed by a government: If you keep all of amount $X, you will retain $Y. If you “give away” some of money $X and receive nothing in return, you will retain >$Y. Therefore, if the state has its way, math miraculously changes in interesting ways because now $X = $Y but at the same time <$X = >$Y. It’s a Festivus Miracle!
Now, why do I say all of this? While I understood what you meant by “charity”, my point is that it is in no way a charitable activity for a recent graduate of Harvard to work at bank X for 25k/year over Bank Y for 100k/year. I’ll prove to you why with a thought experiment. Let’s say, on the one hand, you love making clay pots due to the many fond childhood memories you have with your mother making them at home as a fun craft. However, on the other hand, you hate the idea of working with dead bodies due to a severe childhood emotional trauma you had in a graveyard. You graduate from college and are offered 2 jobs: the first at a pottery factory for 25k/year and the second as a mortician at a funeral home for 100k/year.
Well, under your logic, you would be indulging in charitable activities by taking the pottery job. You might then ask me, “Why would I even apply for the mortician job if I hate handling dead bodies?” Well, perhaps you hear the supply of Morticians in your area is unusually low so the wage for this occupation is much higher than that of the amply supplied potter. Despite your disdain for handling the departed, you might be willing to consider this morbid line of work in exchange for the higher wage, or maybe not. Put simply, my point is that salary is not the only consideration for most individuals when they are presented with various job prospects. Ideology, religion, personal ethics, and even just unique tastes for different corporate cultures play a major role.
That being said, you may then exclaim, “But your example is different than the choice between two banking jobs! In your example, I am forced to pick between what I love and what I hate, whereas in mine, both jobs are the same job in a bank.” My reply to you: they are not the same job, at least in a Rothbardian sense. This is because it is a possibility that working for a non-member bank practicing banking methods you believe to be better/more ethical is worth more to you than the $75k pay cut you will accept for doing so.
Additionally, I think your argument is flawed in another, more glaringly obvious way: it is terribly shortsighted. Even if we ignore every point I have made thus far, suppose these banking jobs had been offered to you back in 2005 or 2006. Let us also assume these two salaries are as you have specified. At that time, of course the extra $75k would be of great benefit to you. But if we look at the long run, if you had been a lower-mid level bankster at one of the major member banks (likely the rank one would hold on a mere $100K salary) then come 2008 or 2009, you may not have a job. The people getting laid off were not the top executives at these firms. If you were laid off, you were probably a lower to lower-mid level employee. Now, you are making exactly $0 and that $25k/year salary has started to look real nice. It was due to your poor foresight that you chose a career with a less than dubious firm. Non-member banks practicing the roles of a traditional bank (monetary storage and voluntary loan facilitation) would likely not have been nearly as affected by the housing crash. This does not, however, consider the ill effects that the existence of a central bank will have on anybody holding money, Fed member or otherwise.
Again more choices! Why do you need a house? Wasn’t a major contributor to the housing boom fueled by a largely nonsensical belief that owning a house (thus likely a hefty mortgage debt) was necessary? Why can’t you rent? I think if funds are tight, like in cases where a family is on the way, that might be the best time to be renting instead of amassing giant piles of debt, not to mention the interest included along with that debt. “I have a family on the way, so money is tight and paying a few extra service fees at a bank I believe in both ethically and economically would be unreasonable, however taking out heavy loans many times greater than my annual wage that I must pay over 20 to 30 years seems like a reasonable thing to do.” Not so much.
Plus, if inflation is a worry for you (and it should be) don’t put your money in a bank account. But if you do, then put your money in gold and then in a bank account. This is where a non-member bank would be useful: a secure storage area for your gold. The bank could have U.S. currency on hand to lend out to borrowers should you be willing to risk you savings. I doubt there would be much borrowing from a bank like this, however, because the interest rates would be vastly higher than member bank’s rates. That being said, this doesn’t render the bank totally worthless, as it could still function as a secure storage facility whilst also acting as a draftable checking account.
It’s superficially plausible to think that price stability would prevent the boom bust cycle, but of course that’s not the case. I happen to think that this particular school of economic thought, as opposed to others, gained so much traction because it’s convenient for the government. If price stability is the goal, then obviously you will need price stabilizers. The Fed’s famous “dual mandate” is to keep unemployment low and, you guessed it, to stabilize prices.
Obviously the record of the 19th century indicates what economic development and progress should look like: prices steadily falling over time as capital accumulates, production structures lengthen, and productive capacities increase. This process places a downward pressure on prices as the supply of goods increases. The fact that even while the industrial revolution was going on in full tilt during the '20s, prices were not falling, indicates what “price stability” means in practice: monetary inflation, which robs the consumer of the higher standard of living he otherwise would have enjoyed as a result of the falling prices, not to mention the misallocations of resources and the malinvestments that result.
trigger - first part we are virtually on the same page. when you say its ‘controlled and monopolized by a central bank’ thats what i see as the whole problem. its like your mom and pop grocery store when walmart comes to town. Look at how hard some of the small towns tried to fight off walmart by refusing to shop there. The bottom line is walmart is better at business and provides better goods and services at better prices. Mom and pop shop have two options lower prices to compete then they wont make the profit to keep their previous salaries, rent, wages, or raise prices to keep the profitability. Thats when the customer loyalty leaves when they feel that the company is fixing their prices to make extra profits. Thats with walmart doing nothing immoral and just conducting business. What do you think the banking cartel will do when a rogue bank starts taking their money? If our rogue bank has 100 million dollars in assets thats taking $1 billion out of the federal reserve system. The federal reserve/major banks can dump $900 million in benefits onto our customers and still be able to be $100 million in the black. Obviously large banks dont have the overhead to dump that much money, but i can assure you they will dump as much as they can to put the rogue bank out of business.
anenome - it is worth a lot, but can you honestly say that the general public will choose to bank with private insurance over a guarantee from the people who actually make the laws and print the money? why in the world would the average consumer be willing to pay a private insurance company to insure their money when the fdic will does it for free at other banks?
on the credit card- i think there is a market for better credit cards, but i dont think american express, visa, mastercard, ect are making such obscene profits that you can really undercut their business. i think they are probably pretty good a their jobs and are offering fair prices. Im also almost positive their are a lot of credit cards that offer flat rates. I dont even think they are practicing fractional reserves. I only have one american express credit card my whole life and i really never use it so i dont know a ton about it.
back to trigger - maybe charity isnt the right word. It would be similar to working at a nonprofit organization. If nonprofit organizations could outcompete profitable companies then the largest firms in the world would be nonprofit.
‘if you are religious you might give charity to your church for a heavenly blessing’ - correct, but if you are religious you dont just start working for the church just because of it. You might believe in the Austrian theory/believe banks are stealing our wealth, but youre not just going to work for the free market bank. you might bank with the free market bank, but the second it doesnt meet your ends you will have to bank somewhere else. Isnt the founding principle of capitalism in the fact that the individual knows best how to invest their own money to meet their ends? So how would giving someone else more money be beneficial to you (generally speaking)? If I had the option of a free market bank and a FRB with the latter giving me more money i would choose more money. I know i will be better off with more money in my pocket than with less. i think with a good business model you can find plenty of investors to invest in the infrastructure of a free market bank, but that wont make your business profitable. Its about getting clients, and the only way to do that is being able to outperform the fed system.
i understand your mortician/pottery example, but we have to be realistic. A free market bank and a fed bank are not that different, they are offering virtually the same goods and services. The means on how they produce that service is different. A closer example would be someone looking for a pottery job. They have intense pride in their art and think the most artistic way to cook the pots is at 350 degrees. Well company A is offer 100k, but they cook at 300 degrees. While company B cooks at 350 degrees, but only pays 20k. do you really expect to pull in enough talent by offering that much less to compete with the big pottery companies? Do you really think ppl in the pottery labor force are going to have such strong feelings that they will pay 80k not to work for the big company? Lastly, this is the banking industry. You will be hiring ppl that have already worked in the immoral fractional reserve banks, we already know it doesnt bother them. We already know that kids going through college arent being taught the evils of fractional reserve banking. They are being taught fractional reserve banking IS the banking system, and they are being taught how to make profits in that market. How many bankers are thinking to themselves how awful fractional reserve banking is? Even if there are a ton of them, how are you going to afford to pay them anything if you cant offer as low or lower prices/higher returns to get customers? My little brother worked for a bank, now he is getting his graduate degree, he is being taught that inflation is a REQUIREMENT for our economy to work. He is being taught that stability and deflation of our dollar is immoral. They believe fractional reserve banking IS moral and we the stable dollar people are the immoral evils. I’ve an uncle that is very high up in JP Morgan with literally only a handful of ppl above him, and he believes fractional reserve banking and inflation is a requirement. You might like to believe these banking executives are laughing their asses off in their $30 million homes, but they dont believe what they are doing is wrong. They believe they are the backbone to freedom. They believe that because of them ppl have homes, cars, and have food in their belly when they are out of a job.
haha just read your next paragraph and you actually predicted what i was going to say “its two banking jobs!” Well i went into more detail then simply saying they are the same jobs.
Also to give the fine point difference, yes they are two different jobs (also i gave a point: does the labor even know they are two different jobs?), but you are still offering the similar services to your customers. I dont believe customers will choose to bank with someone that charges more. Look at the outrage that occurred with BoA when they were going to impose a small debit card fee. If the bankers dont even know what they are doing is wrong, how do you expect the general public that know nothing about banking to know its wrong? Thats the bottom line.
I think you make a pretty good argument about being able to get the talent. My question can you get a 250k labor force like JP Morgan? Can you compete on a global scale by offering lower wages? Also who are we hiring? Are we hiring the innovators of the banking industry? Or are we hiring the ppl that are no longer profitable at their previous company? are we hiring the ppl that have been conducting business in an area of the market that has crashed? My best friend was working in commercial real-estate for countrywide (which was a HUGE firm). Of course countrywide went down in a great big ball of fire and his job with it. What good would it be to hire him? The only thing he knows is commercial real estate how would his talents benefit the free market bank? that market crashed and his experience is worthless because there is no longer a market for it. ive got an older brother working at a decently large bank who has been promoted literally every year since the crash because he was working in a market that didnt crash. That is the talent we would want, but how can we draw that talent? How can we draw talent like my uncle who made billions for his company? How can we pay brokers $10 million salaries? Being a stock broker for a fractional reserve bank is no different than being a broker for a 100% reserve bank. The difference is a 100% reserve bank has less money to spend. Yes you can say morals or anything else you want, but these people are already working in a fraction reserve banking industry and have already proven as a fact that they dont care that they do by actually working for them.
last part of your argument: i dont think people actually believed owning a home was necessary. I think they WANTED a home (just reread my post and i said need…whoops…change that to ‘want’ a house because they feel its best for their family, they need shelter, they want to own a home). Why rent when they want to own? As Austrians and protectors of private property we know what it means and feels like to actually OWN something. We know how important it is not just to us, but also for an economy to work. Before the crash funds werent tight, before the crash they could afford the interest rate, before the crash they didnt really understand a fixed and variable interest rate loan. During the housing boom you can either own a home for 150k with mortgage payments at like 1300$ or rent a house just like it for $1800. Toward the end renting became cheaper than owning, but why not pay a couple hundred extra to own because in a few years the price of your home will double! That was the market. We cant blame the consumer for not understanding interest rates, we cant blame the consumer for not predicting the crash, and we cant blame them for wanting to own something. You cant blame ppl for wanting more. If someone gives you 150K$ most people are going to take it.
Just to be clear, I believe in 100% reserve banking. I believe fractional reserve banking is close to one of the most immoral business practices invented, but if we are going to take 100% reserve banking seriously we have to be honest. We have to understand that we live in a fractional reserve world. We have to understand that the banking industry and the government believe in Keynes. We have to understand that they are the ones with the monopoly, and it is not going anywhere. We cant win the fight of proving to the world the immorality of fractional reserve banking. Proof: try and have a conversation with someone about fractional reserve banking who dont care about banking. The general public isnt going to educate themselves. The only way to win is coming up with a banking model that outperforms FRBs and gives our customers better returns. THAT is the only way to win. We must find an area of banking where 100% reserve banks have a comparative advantage and exploit it. We are doing ourselves a discredit if we are believing that we can beat the fed at their own game on their field. Fractional reserve banks will ALWAYS have at the very least 10x more money than the 100% reserve banks. Imagine how fast target can put Walmart out of business if they can just hit a button and multiply their inventory 10x at no cost. Then on top of that power they can hit another button as many times as they like and get more products for free. Thats how difficult it would be to compete with the fed system.
Alex - yes price fluctuation is a good thing and a requirement for a market to function properly. When Austrians talk about ‘price stability’ they are typically talking about the value of the dollar. If price changes because of the value of the dollar it is almost impossible for a business owner to figure out why demand is changing. In order for a business owner to make correct decisions on pricing the value of the dollar needs to be as stable as possible. when the fed talks about prices changes they are talking about the price changes in actual goods. The keynes definition of inflation is the general rise in prices of goods, the austrian definition of inflation is an increase in the money supply (which will cause price of goods to rise because the value of the dollar is less)