Doesn’t necessarily view that fractional reserve banking is fraudulant in its nature.
Doesn’t think fractional reserve banking should be illegal since, according to him, the free market prefers fractional reserve banking over 100%, and he thinks that under a free banking system such a system could be maintained and productive
Claims that banks prior to the Fed some banks were doing just fine with a 2% reserve ratio.
I found the remarks to be completely inconsistent with almost everything I have thus far read about the issue. Especially from Rothbard and Mises. For example, Rothbard (and I believe Mises) claimed that a free banking system would lead to a sound near 100% reserve system. The only way that fractional reserve banking can be practiced is by a banking system that evades the free market with government help. Rothbard would also argue that we never had a free banking system, which is why we had fractional reserve banking before the Fed. What also bothered me was that White didn’t seem to mention that a fractional reserve banking system, which he claims to be possible under a free banking system, would still produce a business cycle, and ultimately undermine the system as I understand it.
I wonder if anyone has any thoughts on this. I don’t think I have misunderstood him.
Yeah Lawrence White, and his student Selgin, amongst other Austrians (actually Huerta de Soto denies that the latter is still an Austrian, not so sure about the former) support fractional reserve free banking. If you want a decent refutation of their views there is 40 or so pages devoted to them in the Money, Bank Credit and Economic Cycles by the author previously mentioned. Others that come to mind would be Dowd and I think Horwitz, although I’m not entirely sure on the last one.
I can’t be sure about the views of White but from what I know of Selgin’s views I will outline some of Huerta de Soto’s points (you’d probably be best off looking at it yourself, it’s the end of chapter 8). Essentially Selgin commits the same fallacy as Keynes in that he views and increase in the demand for cash as identical to an increase in savings. Which is not true since the savings rate is determined by the demand for future goods relative to the demand for present goods, following this is the choice of individuals concerning the quantity of cash they will hold. Moreover, Selgin does not acknowledge the fact that the increase in demand for fudiciary media will set of the business cycle due to the fact that the money is granted in the form of loans. Since it is granted in the form of loans they will have to push interest rates down below what they were, thus triggering the cycle as described by AE. Moreover he believes that his fractional reserve free banking will make demand for fudiciary media equal to its supply. However he ignores the fact that the banks may not necessarily wish this to be the cash and may take advantage of the situation to expand loans to a greater extent than this, thus once again causing the business cycle. In fact, all of this grants the somewhat silly notion of “demand for fudiciary media”, which I do not believe exists.
Well, in that case he is wrong. A demand deposit is exactly that, it is a contract in which the depositor makes a contract with a bank to safeguard the goods with which he entrusts them, whilst possibly providing other services (cashier services, for example), part of this contract is that the bank must provide these goods on demand, which is essential since it means that present goods are not being exchanged for future goods. A loan on the other hand entails the exchange present goods for future goods, however a loan must have a term and interest paid. As you can see these are two distinct contracts. If the bank treats the demand deposit as a time deposit it is commiting an act of misappopriation.
At time Mises and Hayek both favoured fractional reserve banking, but by the end both of them favour full reserve free banking.
I don’t know if you could say that it has to have government help, although most certainly banks have always had the help of the government (which is logical, since the government is always in need of money). However, it does require the violation of property rights by its very nature.
How can it be consistent with AE for the government to illegalize FRB, given that the depositors are informed about the conditions (the first-come-first-serve and the percentage fraction actually available)?
I cannot see, though, how FRB could be “productive”, no more than how gold mining could be productive (when gold is priced as money rather than as decoration).
The most amazing thing to me with FRB accounts is that they pay so low an interest rate! If the banking system multiplies my money deposited, ten or more times, how come I still only get one or two percent real interest rate, if even that? Shouldn’t it rather be someting 10% or 20% considering that FRB multiple? And the huge risk of loosing all savings. I mean, what motive for FRB on a free market could there be if not to offer depositors much higher interest rate in return for taking the risk of FRB?
FRB is the result of the the blurring of the line between a deposit contract and a loan contract. So what I meant was that in the sense that they realise they’re not entering into a deposit contract it is not fractional reserve banking. The contract will likely be void for other reasons, and the bank will not likely be at all solvent.
Well, that may be true from the legal point of view. From a strict economic point of view, frb is based on the fantasy that capital can be at the same time available on demand for consumption and saved.
Demonstrate that even a fiat dollar can’t be both saved and available on demand ? The problem Max is that you reject the very basic foundations of thought - logic.
Most banks right now aren’t even practicing FRB as you define it so you are basically talking about a fiction. Most banks don’t claim to offer demand deposits. What you and your Austrian cult cannot deal with is reality. The banks are not doing what you say they are.
Tpical Austrian FRB cult, unable to defend your position in the face of reality you result to name calling. Victorious again, you FRB cultists sure know how to take a beating.
To be honest, I don’t understand fully Selgin and White’s position that fudiciary media can be economically beneficial. It seems to me that the only real way to do it is with options clauses, otherwise you always have an asset liability mismatch in terms of maturity time. But look at what Hulsmann says on option clauses in:
Hulsmann on error cycles look at page 19
“If the market participants left their money in demand deposits covered by options clauses, then there would be no fractional reserve banking at all.”
So…I believe Selgin and White are off-base. Interest earned by depositors would be destroyed by inflationary effects on prices, while adding the increased risk of bank failure and “default” on demand deposits. As Hulsmann says, central banking, deposit insurance, options clauses, fiat money, and rigorous banking regulation cannot prevent the risks and distortions inherent in a fractional reserve system → it can only delay the collapse by creating erroneous new assumptions.
White and Selgin obviously do not support government interventions, such as many of the ones above. They support free banking and would encourage bankruptcy-threatening runs on banks that created too much fudiciary media. This was also Mises’s position, I believe. The difference was that White and Selgin believed fudiciary media could be used in certain circumstances without causing a business cycle (or other harm), whereas Mises believed free banking was the best means of eliminating/diminishing the use of fudiciary media, seeing no economic value to it.
I’m pretty sure that Selgin and White don’t support blatant inflation, or strongly artificially lowered interest rates. But I fail to understand their economic argument.