In defense of Fiduciary Media

[Rodolphe_Topffer]

In defense of Fiduciary Media

In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are...

According Selgin and White, fractional-reserve banking are more profitable than full-reserve banking. They say that no one accepts full-reserve banking, which means fractional-reserve banking drives out full-reserve banking.
And sometimes I don’t really understand.

Key points :

1. Fractional-reserve banking has never been compulsory. Depositors have always been free to insist on 100 percent reserves.

2. Benefits accrue to bank depositors and noteholders, who receive interest and services paid for by the extra bank revenue generated from lending out a portion of its liabilities. As Mises put it: “Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them.” (which means : money creation gives more revenue).

3. It would be farfetched to account for such behavior by insisting that the depositors had run because they had learned to their horror that their own banks had been holding fractional reserves, but were so naive as to put their money into another set of banks without suspecting them of similar practices. But if such a realization (that their bank held only fractional reserves) had been the typical cause of runs in the nineteenth and twentieth centuries, it would be difficult to explain why runs usually affected only one particular bank or an associated set of banks, and not every single fractional-reserve bank simultaneously. Running depositors who successfully withdrew their money often transferred it to other fractional-reserve banks, thought to be safer, rather than hoarding cash as they would have done if they feared fractional-reserve banks generally.

4. Few people have taken the 100-percent-reserve option because (as Rothbard forthrightly acknowledges) it means foregoing interest and paying warehousing fees instead.
   Most depositors would rather receive (more) interest on their deposits, and consider it more than adequate compensation for the risk involved in fractional-reserve banking. We think it more likely that 100-percent-reserve banking is just not very widely demanded, because of its foregone-interest cost.

5. Hoppe considers but rejects a standard economic argument we accept concerning fractional-reserve banking : that it reduces the resource costs associated with indirect exchange, by partially substituting bank-issued exchange media for commodity money, thereby reducing (inframarginally) the resource costs of producing money.

6. Throughout the silver and gold standard eras, consumers given a choice ordinarily demonstrated a marked preference for banknotes over full-bodied coins as a more convenient medium of exchange for all but the smallest transactions.

7. Did fractional-reserve banking cause the Business Cycle ? No. Business Cycle will occurs only with the Central Bank or Government intervention (inconvertible paper money, legal tender etc.), according both.

8. Banknotes can include so-called “option clauses”. Scottish banknotes bore such clauses before 1765. With an option clause, a bank in effect reserves the right to stop redeeming its notes on demand, on the condition that it must pay interest on the notes during any period of suspension. So long as the interest rate is sufficiently high, option clauses are incentive compatible : they’ll only be invoked when so doing is in the noteholders’ own best interest.
   They had them to protect against note raids, where rival banks would pile up notes and then stage a raid to exhaust a bank’s reserves and put it out of business. Such raids occurred in the early days of Scottish banking. The option clause might have been used to protect against random panics.

If you have any answers…
I would appreciate it.

[Merlin]

@Rodolphe Topffer

1. Fractional-reserve banking has never been compulsory. Depositors have always been free to insist on 100 percent reserves.

I agree.

@Rodolphe Topffer

2. Benefits accrue to bank depositors and noteholders, who receive interest and services paid for by the extra bank revenue generated from lending out a portion of its liabilities. As Mises put it: “Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them.” (which means : money creation gives more revenue).

I agree.

@Rodolphe Topffer

3. It would be farfetched to account for such behavior by insisting that the depositors had run because they had learned to their horror that their own banks had been holding fractional reserves, but were so naive as to put their money into another set of banks without suspecting them of similar practices. But if such a realization (that their bank held only fractional reserves) had been the typical cause of runs in the nineteenth and twentieth centuries, it would be difficult to explain why runs usually affected only one particular bank or an associated set of banks, and not every single fractional-reserve bank simultaneously. Running depositors who successfully withdrew their money often transferred it to other fractional-reserve banks, thought to be safer, rather than hoarding cash as they would have done if they feared fractional-reserve banks generally.

I agree generaly. But there have been many, many exceptions of ‘national’ bank runs.

I agree.

Falacy. The savings in materials is far outdone by the loss from the inflation-driven distortion of interest rates.

@Rodolphe Topffer

6. Throughout the silver and gold standard eras, consumers given a choice ordinarily demonstrated a marked preference for banknotes over full-bodied coins as a more convenient medium of exchange for all but the smallest transactions.

While everyone I know who was alive before 1939 (when Albania switched to fiat) can attest to the contrary: almost no transactions at all where carried out with fiduciary media.

@Rodolphe Topffer

7. Did fractional-reserve banking cause the Business Cycle ? No. Business Cycle will occurs only with the Central Bank or Government intervention (inconvertible paper money, legal tender etc.), according both.

That’s a questionof degree. A fully free-market fractional-reserve system would indeed ‘fraction’ very little. Wether that would suffice to bring about a cycle (Mises strongly disagreed) cannot be settled heoreticaly. I tend to agree that free-banking cannto produce but the mildest and most widely spaced cycles possible.

@Rodolphe Topffer

8. Banknotes can include so-called “option clauses”. Scottish banknotes bore such clauses before 1765. With an option clause, a bank in effect reserves the right to stop redeeming its notes on demand, on the condition that it must pay interest on the notes during any period of suspension. So long as the interest rate is sufficiently high, option clauses are incentive compatible : they’ll only be invoked when so doing is in the noteholders’ own best interest.
   They had them to protect against note raids, where rival banks would pile up notes and then stage a raid to exhaust a bank’s reserves and put it out of business. Such raids occurred in the early days of Scottish banking. The option clause might have been used to protect against random panics.

Let them do as they will. Insurance too is, by definition, a fractional-reserve business. It works fine.

[cret]

can there be fiduciary media with 100 percent reserves?? a set of amount of vaulted-gold to a gold substitute or redeemable note???

wouldnt the not be fiduciary media but the gold that it corresponds to wouldnt circulate. if the gold was redeemed then the not wouldnt circulate???

[ClaytonB]

@Rodolphe Topffer

In defense of Fiduciary Media

http://mises.org/journals/rae/pdf/R92_5.PDF

According Selgin and White, fractional-reserve banking are more profitable than full-reserve banking. They say that no one accepts full-reserve banking, which means fractional-reserve banking drives out full-reserve banking.
And sometimes I don’t really understand.

Key points :

1. Fractional-reserve banking has never been compulsory. Depositors have always been free to insist on 100 percent reserves.

2. Benefits accrue to bank depositors and noteholders, who receive interest and services paid for by the extra bank revenue generated from lending out a portion of its liabilities. As Mises put it: “Fiduciary media tap a lucrative source of revenue for their issuer; they enrich both the person that issues them and the community that employs them.” (which means : money creation gives more revenue).

3. It would be farfetched to account for such behavior by insisting that the depositors had run because they had learned to their horror that their own banks had been holding fractional reserves, but were so naive as to put their money into another set of banks without suspecting them of similar practices. But if such a realization (that their bank held only fractional reserves) had been the typical cause of runs in the nineteenth and twentieth centuries, it would be difficult to explain why runs usually affected only one particular bank or an associated set of banks, and not every single fractional-reserve bank simultaneously. Running depositors who successfully withdrew their money often transferred it to other fractional-reserve banks, thought to be safer, rather than hoarding cash as they would have done if they feared fractional-reserve banks generally.

4. Few people have taken the 100-percent-reserve option because (as Rothbard forthrightly acknowledges) it means foregoing interest and paying warehousing fees instead.
   Most depositors would rather receive (more) interest on their deposits, and consider it more than adequate compensation for the risk involved in fractional-reserve banking. We think it more likely that 100-percent-reserve banking is just not very widely demanded, because of its foregone-interest cost.

5. Hoppe considers but rejects a standard economic argument we accept concerning fractional-reserve banking : that it reduces the resource costs associated with indirect exchange, by partially substituting bank-issued exchange media for commodity money, thereby reducing (inframarginally) the resource costs of producing money.

6. Throughout the silver and gold standard eras, consumers given a choice ordinarily demonstrated a marked preference for banknotes over full-bodied coins as a more convenient medium of exchange for all but the smallest transactions.

7. Did fractional-reserve banking cause the Business Cycle ? No. Business Cycle will occurs only with the Central Bank or Government intervention (inconvertible paper money, legal tender etc.), according both.

8. Banknotes can include so-called “option clauses”. Scottish banknotes bore such clauses before 1765. With an option clause, a bank in effect reserves the right to stop redeeming its notes on demand, on the condition that it must pay interest on the notes during any period of suspension. So long as the interest rate is sufficiently high, option clauses are incentive compatible : they’ll only be invoked when so doing is in the noteholders’ own best interest.
   They had them to protect against note raids, where rival banks would pile up notes and then stage a raid to exhaust a bank’s reserves and put it out of business. Such raids occurred in the early days of Scottish banking. The option clause might have been used to protect against random panics.

If you have any answers…
I would appreciate it.

Maybe Selgin & White are right, maybe not. It’s beside the point. The point is that banks must be held legally liable for the obligations they take on. The degree of fractioning of bank reserves has positively correlated with the degree to which the state protects banks from their legal obligations. The ultimate expression of this is today’s hyper-fractioned system in which the US government has gone so far as to bail out the bankers to the tune of several trillion dollars extracted from the banks’ customers (taxpayers). As long as property rights are protected, the right level of fractioning will occur.

My view is that banknotes would be 99.9999% reserve in a free banking and currency market. The reason for this is that notes would be discounted against commodity money by currency traders. Notes whose backing could not be ascertained would likely be rejected completely by the market. Notes whose backing can be ascertained at 100% would trade above or below par with the backing commodity money on the currency exchanges and this fluctuation would drive the printing and redemption of the bank notes by currency traders looking to profit from arbitrage. Issuers of notes which are fully backed could gain a competitive advantage by printing that right on their notes. This leaves fractional reserve note issuers in the uncomfortable position of either printing nothing about their reserves on their notes or committing fraud. The 0.0001% fractioning would be due to such fraud which would likely be flushed out by bank runs and “ambushes” by the currency “vigilantes”. Ask yourself whether you would prefer payment in notes that say, “This note is a receipt for 1 dollar of gold stored on hand and is redeemable on demand” or just “This note is a receipt for 1 dollar of gold, redeemable on demand”. Since no interest is paid on notes, fractioning notes can only benefit the note issuer and the benefits cannot be pyramided to note holders (in fact, early note holders lose to the issuer and later note holders).

Deposits can be thought of as just a different way to issue bank notes. Instead of giving back notes for money deposited, the banker makes a ledger entry noting the amount of money deposited. If the banker tries to fraction his bank ledger, any bank notes he issues are also fractioned and he runs up against the problem of either having to admit - by omission - that his notes (and deposits) are fractional or commit fraud. Would you rather receive a check written against XYZ Bank which has fully-backed deposits or ABC Bank which has fractionally-backed deposits? Recipients of bank drafts do not receive interest, so the bank cannot entice merchants to accept its checks through pyramiding. While the writers of checks can receive incentives, their checks are only valuable if vendors will accept them. Just like vendors would prefer payment in fully-backed notes, they would prefer payment by fully-backed checks. So, full-reserve banks would have a double advantage over their fractional-reserve cousins in terms of the premium on their notes and bank drafts.

Fractioning can also occur in time, where money is borrowed short and lent long. A similar argument to that which I’ve applied to notes and deposits can also be applied to time deposits and credit. Banks which fraction their time deposits and credit would either have to admit (by omission) that their notes and demand deposits are not fully backed or else commit fraud. The primary role of credit institutions is aggregating small deposits to make large loans. The spread between the interest rate charged by the credit institution and the interest rate paid to depositors is a result of the costs of aggregating funds and issuing loans. Fractional-reserve banks can make this spread appear smaller (central banks can even make it effectively negative) but there is no corresponding, real decrease in the cost of doing business, which should tell us there’s something fishy going on. Banks which fraction their reserves are effectively issuing more credit than they have reserves to back it. If you are one of the creditors of the bank and the bank goes bankrupt, would you prefer to be paid back 1/10th of the money you loaned to the bank or 9/10ths? If the bank fully backs its credit with its own funds and funds it borrows (from its depositors or other banks), then its creditors will be paid back nearly in full in bankruptcy. But if the bank is a 10% reserve bank, even secured creditors will only receive back at most 10% of the money they had loaned the bank. While depositors can be given incentive money for participating in the fractional reserve pyramid scheme, ask yourself whether the 1% or 2% incentive that you would receive from ABC Bank would be sufficient to offset the risk of losing 90% of your assets if ABC Bank goes bankrupt? Or would you be better off foregoing the 1% or 2% incentive money to protect the bulk of your capital in the event of the XYZ Bank’s liquidation?

Clayton -

[DD5]

@Merlin

Let them do as they will. Insurance too is, by definition, a fractional-reserve business. It works fine.

Terrible analogy. Just a basic understanding of what insurance is (or is not) discredits your entire argument for FRB.

[DD5]

@cret

wouldnt the not be fiduciary media but the gold that it corresponds to wouldnt circulate.

Fiduciary media and money substitutes are not the same thing. Fiduciary media corresponds to the amount of circulating notes that were issued beyond the quantity of specie available in the reserves.

[Merlin]

@DD5

Terrible analogy. Just a basic understanding of what insurance is (or is not) discredits your entire argument for FRB.

Fractional reserve bank:

Issues notes/deposits form 1000 USD backed by 500 USD worth of gold. It is thus, inherently bankrupt, at any time, its liabilities far exceeds its assets.

Insurance company:

Promises clients to pay given loses which would be infinitely high, or, at best, capped. It has assets to cover but a fraction of the potential liabilities it incurs. It is, hence, inherently bankrupt. Should enough of its client request ‘payment’ it goes down. “Runs” happen when some natural disaster strikes.

The only difference between the two I can see is that a bank can conceivably be 100% reserve, while an insurance company can never be 100% reserve (whatever that might mean given that most contracts have no cap whatsoever). I myself could use the actuarial techniques I know of to calculate insurance reserves, and apply than to a FRB without changing an iota.

So, why is it that you find the analog wanting?

[Caley_McKibbin]

@Rodolphe Topffer

1. Fractional-reserve banking has never been compulsory.

That is a red herring. The important matter is that state intervention increases the profitibility of FRB. FRB is more profitable… well, duh.

FYI, there are official responses to that article.

[Caley_McKibbin]

.

[DD5]

@Merlin

So, why is it that you find the analog wanting?

You cannot insure the uncertainty associated with human action. This is not an insurable risk. There is human control/influence over the outcome. The insured “risk” must be independent of the existence of the insurance itself. In FRB the situation is even more extreme then the normal business. There is interdependence between failures of loans within a single bank, and also an interdependence between all the banks. This of course is due to the threat of a bank run. If you cannot insure a hot dog stand, you certainly cannot insure Fractional reserve banking.

To use Mises’ terminology, Insurable events fall under the category of class probability while unisurable events fall under the category of case probability. All human action, and most certainly, FRB, fall under the latter.

You should learn more about the nature of Insurance before you make such analogies, and worse, persist with them. These analogies have been made before and they are the most damning proof of the sheer misunderstanding about the very nature of what is being defended.

You should also realize, and I’ve tried to make this point here several times, that FRB is the only type of business that practices what is called maturity mismatching. Any attempt to compare FRB to other normal businesses, again shows a certain level of ignorance about the nature of the practice itself.

[Mtn_Dew]

@Rodolphe Topffer

Key points :

1. Fractional-reserve banking has never been compulsory. Depositors have always been free to insist on 100 percent reserves.

If the state allows for banks to loan out more money than they actually have, banks will do it. Banks that are responsible will be driven out of the market. If the state signs off on fraud in a given industry you’re going to get fraud in that industry. The market punishes fraud, but the state rewards it.

If you read up on how banks should work you’ll see that any bank that did that now would quickly close. It’s just not profitable in our current system to have honest banking.

[Merlin]

@DD5

@Merlin

So, why is it that you find the analog wanting?

You cannot insure the uncertainty associated with human action. This is not an insurable risk. There is human control/influence over the outcome. The insured “risk” must be independent of the existence of the insurance itself. In FRB the situation is even more extreme then the normal business. There is interdependence between failures of loans within a single bank, and also an interdependence between all the banks. This of course is due to the threat of a bank run. If you cannot insure a hot dog stand, you certainly cannot insure Fractional reserve banking.

To use Mises’ terminology, Insurable events fall under the category of class probability while unisurable events fall under the category of case probability. All human action, and most certainly, FRB, fall under the latter.

You should learn more about the nature of Insurance before you make such analogies, and worse, persist with them. These analogies have been made before and they are the most damning proof of the sheer misunderstanding about the very nature of what is being defended.

You should also realize, and I’ve tried to make this point here several times, that FRB is the only type of business that practices what is called maturity mismatching. Any attempt to compare FRB to other normal businesses, again shows a certain level of ignorance about the nature of the practice itself.

Really? How come than that one of the best known and indeed most useful insurance products around the world is Business interruption insurance, which practically covers the loses a firm might incur due to temporary foreclosure? Or how come that liability insurance, by definition dependent on the action of the insured party, works?

And in general, every insured risk is connected and influenced by the insured: in health insurance one’s own actions (going to the gym regularly, regular check-ups, etc) influence massively the risk of incurring sickness. The same goes with precautions with property insurance, cargo and every business line. That is known as Negative Selection in insurance: the fact that the insured had power over the incidence rates of the insured event (multiple-games, or the Bonus-Malus systems are the answer of companies to that risk).

So, you do well to take Mises on this, but you should do even better to pick up some actual insurance book. I work in insurance and I know what I’m talking about. Trust me, if its probabilistic in nature, it can conceivably be insured. If it can be conceivably insured, it is inconceivable tat business could actually work on a 100% reserve.

And than again, you skipped my analogy: why is it that banks are considered to cheat when they promise more than they can conceivably deliver, while insurance companies get to pass that? We can talk all day about fallacies such as one being human action, and the other being non-human events, but the mere fact remains: insurers are inherently bankrupt. If you will, please try to object to this. You will sincerely astonish me.

EDIT:As for mismatching, you should see that assuming a maturity mismatch is nothing but a “speculation in time”, i.e. the way the market has to bring long-term and short-term time preferences in line. It is truly no different than a guy buying in Hong Kong and selling in the US. Its a risk only as far as entrepreneurship is a risk. So what is so special about that?

[DD5]

@Merlin

Really? How come than that one of the best known and indeed most useful insurance products around the world is Business interruption insurance, which practically covers the loses a firm might incur due to temporary foreclosure?

Yes, due to a catastrophe such as fire, flood, earth quake, etc… All natural disasters for which any business can be categorically classified in a pool of similar businesses with similar risks, for which, actuarial probabilities can be calculated. Sure, you can also do calculations for dependent variables, but this just means that other people known ahead of time are going to have to pick up the tab. That’s not Insurance. That’s welfare.

You can’t insure entrepreneurial errors. That’s preposterous!

@Merlin

in health insurance one’s own actions (going to the gym regularly, regular check-ups, etc) influence massively the risk of incurring sickness.

There is no health insurance. There are health care intermediary providers that have long seized to be anything remotely close to insurance due to government regulations. Again yes, you can calculate the costs of people you know ahead of time that are going to need the treatment, and let those who you know ahead of time won’t need it pick up the bill. That’s welfare and not insurance.

Where have you been? Practically every good economic critique about the health care system has pointed this out. From Milton Friedman to Every Austrian that has written about this issue. This isn’t news. And don’t give me examples from other type of insurance industries (If you have any) because you’ll get the same response.

@Merlin

I work in insurance and I know what I’m talking about.

Oh, the usual, “I’m from Russia, so I know Socialism” or “I’m from America, so I know Capitalism and let me tell you, it’s wild!”

@Merlin

And than again, you skipped my analogy: why is it that banks are considered to cheat when they promise more than they can conceivably deliver, while insurance companies get to pass that?

This persistence is why I continue to respond to these type of comments. It may show some clear headed people what kind of erroneous assumptions some people must make to justify Fractional Reserve Banking. Insurance against business errors is indeed one of the worst. There may be people on this forum who are still unsure about this topic, but they would know what I’m saying about Insurance. (I can think of a few). This may show them (again) what terrible arguments are being put forward for this system.

@Merlin

As for mismatching, you should see that assuming a maturity mismatch is nothing but a “speculation in time”

Speculation in time - I like it. The new euphemistic term for [systematic] borrowing short , lending long. I guess “shell game” or “ponzi-scheme” have become all too familiar. Let’s just change the term.

Look, I don’t blame you and most others. This whole global economy is built on this “Speculation in time”, or whatever you want to call it. This is why it is all on the verge of global collapse.

[scineram]

@DD5

Speculation in time - I like it. The new euphemistic term for [systematic] borrowing short , lending long. I guess “shell game” or “ponzi-scheme” have become all too familiar. Let’s just change the term.

That’s a lie. Ponzi schemes are just paying out what has been paid in. Banks have assets and capital earning returns to pay depositors. You are just a bunch of fraudsters.

[Merlin]

I’m sorry to say, but what a wonderfully hollow response. Allow me…

@DD5

@Merlin

Really? How come than that one of the best known and indeed most useful insurance products around the world is Business interruption insurance, which practically covers the loses a firm might incur due to temporary foreclosure?

Yes, due to a catastrophe such as fire, flood, earth quake, etc… All natural disasters for which any business can be categorically classified in a pool of similar businesses with similar risks, for which, actuarial probabilities can be calculated. Sure, you can also do calculations for dependent variables, but this just means that other people known ahead of time are going to have to pick up the tab. That’s not Insurance. That’s welfare.

You can’t insure entrepreneurial errors. That’s preposterous!

@Merlin

in health insurance one’s own actions (going to the gym regularly, regular check-ups, etc) influence massively the risk of incurring sickness.

There is no health insurance. There are health care intermediary providers that have long seized to be anything remotely close to insurance due to government regulations. Again yes, you can calculate the costs of people you know ahead of time that are going to need the treatment, and let those who you know ahead of time won’t need it pick up the bill. That’s welfare and not insurance.

Ok, let me restate my point: in almost every insurance product, and especially for the long term ones, the insured has a great amount of control on whether the insured even will happen. The precautions you take to prevent fires, accidents at work, keep fit and innumerable other variables, depended solely upon the insured’s will. Moral Hazard or Negative Selection: the insured, by knowing he is insured, will take far less (if indeed any) precautions and will increase the incidence rates.

Do not make the mistake of thinking “Well, you can insure yourself against fire, and you cannot bring about fire, so its all right”, because you can influence the probability of your house getting burned down by the precautions you take. This is a very serious problem for insurers because they can’t do sh*t about it. Only the bonus-malus system works. But the point is clear: human variables are always present, and tp a quite large degree, in insurance. Ask everyone working in (private) insurance if you will: I challenge you to find one that denies a very consistent part of human will factor in his lien of business, whatever might that be.

So please, drop that “it’s not a human action variable” because it very largely is!

@DD5

Where have you been? Practically every good economic critique about the health care system has pointed this out. From Milton Friedman to Every Austrian that has written about this issue. This isn’t news. And don’t give me examples from other type of insurance industries (If you have any) because you’ll get the same response.

And when did I speak of government-imposed health insurance? Did the government create health insurance? Or was the market providing it, and the government just screwed it up? I hope you do not doubt that a free market will provide health insurance, as I hoe that you do not doubt that human factor are of the outmost importance in such business. So why do you bring up American ponzi schemes?

@DD5

This persistence is why I continue to respond to these type of comments. It may show some clear headed people what kind of erroneous assumptions some people must make to justify Fractional Reserve Banking. Insurance against business errors is indeed one of the worst. There may be people on this forum who are still unsure about this topic, but they would know what I’m saying about Insurance. (I can think of a few). This may show them (again) what terrible arguments are being put forward for this system.

You skipped it again. Or am I to obtuse to see a response in there? Let me restate my question for clarity.

@DD5

And than again, you skipped my analogy: why is it that banks are considered to cheat when they promise more than they can conceivably deliver, while insurance companies get to pass that

@DD5

Speculation in time - I like it. The new euphemistic term for [systematic] borrowing short , lending long. I guess “shell game” or “ponzi-scheme” have become all too familiar. Let’s just change the term.

Look, I don’t blame you and most others. This whole global economy is built on this “Speculation in time”, or whatever you want to call it. This is why it is all on the verge of global collapse.

Hm, we may or not agree, and I really do not care (as I’m sure you don’t care either that I find this ‘argument’ just medieval ‘just price’-ism), but it really boils down to this: do you believe that under anarchy private arbiters would find it illegal to incur a maturity mismatch? I have no doubt that no one would even think about that.

But we can’t settle this theoretically. My idea, is that just as the professional currency dealers could be denounced as incurring “currency mismatches” (well, duh, that’s the point), so would those who profit form differences in long-term and short-term interest rates incur a “ maturity mismatch”. But again, this cannot be settled theoretically.

[Caley_McKibbin]

@Rodolphe Topffer

5. Hoppe considers but rejects a standard economic argument we accept concerning fractional-reserve banking : that it reduces the resource costs associated with indirect exchange, by partially substituting bank-issued exchange media for commodity money, thereby reducing (inframarginally) the resource costs of producing money.

The problem here as always is the assumption that not everyone is permitted to duplicate the notes. The possibility that anyone who can afford the necessary equipment can duplicate them makes it impossible for non-specific paper notes to become money to begin with and impossible to maintain due to ultra-inflationary expectations the instant a free monetary system is in place. The entire case for fiduciary media in evolutionary perspective works within the boundary of a set of assumptions that small-statists may make and non-statists may not.

[DD5]

@Merlin

Ok, let me restate my point: in almost every insurance product, and especially for the long term ones, the insured has a great amount of control on whether the insured even will happen.

No, if that was the case then Insurance would not exist at all.

I’m not saying that one cannot deliberately burn his house down, or that you cannot deliberately injure yourself and pretend like it was an accident. But such deliberate actions, which are considered fraudulent, are highly unlikely to occur in any systematic and persistent way. The presence of such human deliberate action certainly incurs an overhead cost, but as long as this cost is relatively low compared to the total cost , the Insurance business can still thrive. This is why Insurance companies try to reduce such behavior by discriminatory profiling, and this is why there are specialized trained investigators to detect such fraud. If this problem could not be reduced to a relatively minor problem, the Insurance business could not thrive.

Look, I don’t want to argue about the above anymore. The above is so basic for insurance, that i see no point in pressing on this issue any further. You do what you want with it.

@Merlin

I hope you do not doubt that a free market will provide health insurance, as I hoe that you do not doubt that human factor are of the outmost importance in such business

Free market health insurance would cover only against catastrophic events. Relatively low premium high deductible catastrophic insurance. Nothing more could survive the market. People would be classified into many different risk groups depending on life style, occupation, genetics, etc…

@Merlin

You skipped it again.

I didn’t skip it. You just refuse to accept the crux of my argument. Insurance and Fractional reserve banking are different beasts, yet you are asking me a question on the basis that they are similar. Why one gets away with it is thus, and invalid question if you realize that they operate completely differently.

@Merlin

do you believe that under anarchy private arbiters would find it illegal to incur a maturity mismatch?

No. But they would find Fractional reserve banking practices to be fraudulent. Those are not necessarily conflicting answers.

@Merlin

But again, this cannot be settled theoretically.

Because it just so happens that “free” bankers like to omit important theory just when it suits them.

[Caley_McKibbin]

Insurance companies holding fractional reserves is not an essential principle of insurance. How much reserve they hold does impact the risk. As in banks, the real insurer of insurance companies is the state that will bail them out.

[Merlin]

I understand you might not want to respond, but what the hell.

OK, read my lips: humans influence every insurance product. And NOT by deliberately burning down houses or factories, which would be fraud and indeed checked in a free market, but by taking a given level of precaution, very often far short of maximum (the idea of insurance being precisely to save in preventive costs). If you enter insurance with fixed ideas like “this cannot be so!” you will probably go bankrupt by the 370^th day. The only probabilitarian business which is uninfluenced by human action (in theory) is pure gambling, not insurance. If I (not I personally, an actuary in general) wanted, I could design a reserve PDF function to allow a FRB to get on most of the time. There is no basic difference. Indeed insurance is often available to Guarantees, i.e. assuming the clients financial liabilities if he fails to pay, say his bank. How is that for human action? I can’t convince you any more if I failed up to now.

If I walk 100 meters from my house I find an Austrian insurer who is very eager to sell his Health Insurance covering everything form check-ups to full surgery, no deductible, high premium. And no, it’s not compulsory, nor is it regulated in any way (I should know, I work in insurance regulation)

Even if that applies (it doesn’t) , I doesn’t matter an iota. The argument against FRB is simply that such institutions are, due to their very nature, always bankrupted, as liabilities are always bigger than Assets. The same holds for insurance. Now, what difference would make whether one is driven my Homo Sapiens’s action an the other by some other event? Since you are familiar with Mises’ argument on insurance, you should also keep in mind that Mises was permissive of FRB as logn as it was free market operation. So, what do you find in FRB ( but not insurance!) so denouncable that he didn’t?

@DD5

Because it just so happens that “free” bankers like to omit important theory just when it suits them.

Not even Human Action prescriptions could be defended theoretically (Mises didn’t even try, he just tried to ‘sell’ them as being sensible). What could be defended is just our strong believe that, in a free society, such prescription would come to rule. But theory is not, and indeed cannot, be absolute (at least this is my idea, whether you agree is besides the point right now). So no, I’m not making exception when they suit me.

[Merlin]

@Caley McKibbin

Insurance companies holding fractional reserves is not an essential principle of insurance

It is in the sense that should I tell to an insurer-to-be that a full 100% of his assumed liabilities will materialize (100% of what he insures against will actually happen) he would not even try. Insurance would be dead. In this sense, fractional reserves are a must.

A bank, on the other hand, can, in theory, operate on 100% reserves. This is what I mean.